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Should I Allow My Customer Audit Rights Under a Contract?

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When entering new contracts with business customers, you may encounter situations where customers seek to negotiate various rights to protect themselves from risk. Depending on the nature of the project, customers may request audit rights in a specific clause. Audit rights enable a customer to verify whether you, as a supplier, are complying with certain terms in the agreement. While contract audit rights and tools can be crucial for a customer to ensure your accountability and compliance, you should approach these rights cautiously. This article will explore whether you should grant customer audit rights under a contract.

Why May a Customer Seek to Negotiate Audit Rights?

The purpose of contract audit rights is to grant a party the authority to ensure that the other party complies with the terms of the agreement. For example, you can inspect the supplier’s offices, records, systems, processes, and other critical information. Both parties in the commercial agreement must agree to these rights, and they should be clearly stated in the contract to ensure compliance with confidential information, contractual provisions, and regulatory requirements.

A customer could expect audit rights to cover various scenarios. For instance, a customer may wish to inspect your systems and processes to verify your compliance with mandatory rules. For example, to ensure your compliance with the UK General Data Protection Regulation rules if you are processing personal data on their behalf. Or the right to audit how you manufacture specific, bespoke products on their behalf to ensure they are satisfied with your services and production lines.

The type of audit rights a customer requests will depend on the nature of the project you are undertaking and the associated risks. This means that the audit rights clauses you need to negotiate may vary from customer to customer. Service providers should proceed with caution when agreeing to audit provisions in any contract and evaluate the necessity for audit rights on a case-by-case basis.

Should I Allow Audit Rights?

Whether you should grant a customer audit rights will depend on several factors. 

For instance:

  • are audit rights reasonable under your contract?;
  • are audit rights mandatory for your customers to comply with data protection laws or other regulatory rules?;
  • what is your bargaining power?; and
  • what are the risks associated with audit rights?

You must carefully assess the relevant project risks, the customer’s requests, and whether audit rights are suitable and acceptable. Commercially, you should also consider the project’s value and importance. For instance, could denying your customers audit rights mean they walk away from the deal?

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Key Issues to Consider When Negotiating Audit Rights

If you agree to grant your customer audit rights, you should carefully consider how the relevant audit rights in your contract are drafted.

For instance, you should consider the following key issues surrounding audit rights: 

Scope of Rights

Set clear parameters around which types of audits the customer may conduct. Ensure your contract defines what the customer can audit – for instance, your books, records, or premises. Should the customer only be allowed to access relevant records related to the services you provide? What will the audit process look like in practice, and are you comfortable with the access rights requested?

Frequency of Audits and Notice Requirements

Ensure you are comfortable with how many times a customer can exercise their audit rights. Also, ensure that the customer gives you plenty of notice before informing you they will conduct an audit. How much notice do you require? Will audits on short notice disrupt your business operations?

Fairness and Procedure

Consider who will attend the audits. For fairness, should an independent third-party auditor conduct the audit? How will you protect your own business-sensitive data during the audit process? This may be particularly important if the audit findings could lead to customer issues. For instance, if the customer seeks remedies if they are unhappy with the audit findings.

Who Will Pay the Costs?

Audits can be burdensome and require extensive work. Should the customer bear the costs if they exercise audit rights? This will be a crucial negotiation point. 

You also need to consider the audit’s purpose and results carefully. For instance, what happens if the customer is dissatisfied with the audit results? How will this affect the rest of your contract? The customer may seek termination or refunds if an audit reveals you have breached your obligations as the supplier. Therefore, audit rights should be considered in the context of the entire contract.

In summary, audit rights require careful attention and consideration. If you are uncertain how to negotiate audit rights with a customer, you can seek assistance from a commercial solicitor. They can advise you on when audit rights are appropriate and which safeguards you should negotiate to protect your business from risks.

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Key Takeaways

As a supplier, customers may seek to negotiate audit rights to protect themselves from risk. For instance, they may request various rights to check you comply with the terms of your agreement with them. Audit rights can be intrusive and onerous, and you should approach audit clauses with great care and attention. Whether you decide to grant audit rights will depend on several factors. For instance, the reasonableness of the rights, the bargaining power of the parties and whether audit rights are crucial to secure the customer contract. If you need help negotiating audit rights, you can work with a commercial solicitor to support you. 

If you need advice on customer contracts, contact our experienced contract lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page

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Sej Lamba

Sej Lamba

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