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Audit clauses may force disclosure of financial information to clients

Broad audit provisions can now be found in many contracts with public bodies, potentially forcing contractors to reveal sensitive financial information to clients. Contractors should beware and seek to narrow the drafting of these clauses to limit their applicability.

Construction contracts with public bodies, such as PFI contracts, increasingly include extensive audit provisions. These may oblige contractors to provide significantly more commercially sensitive documentation than they would usually expect.

This was demonstrated in the recent case of Transport for Greater Manchester v Thales Transport and Security Limited.

Claim and counter-claim

Thales supplied a new tram operating system for the Manchester Metrolink for a contract price of more than £22m.

After severe delays and overwhelming additional costs, TGM made a potential liquidated damages claim of up to £36m, while Thales advanced an extension of time claim of 43 months and an additional cost claim of £42.3m.

To support their possible claim, TGM commenced proceedings to force Thales to disclose extensive documentation under audit clauses in the contract.

Wide range of documents disclosed

The court held that Thales was obliged to disclose a very broad range of documents and that it was irrelevant that such documents were confidential.

The disclosure obligation under the contract went beyond simply contemporaneous documents recording what Thales had done. It included:

  • Cost records for labour, materials, plant, subcontractors and suppliers. The court rejected an argument that, as it was a fixed price contract, reports about cost were immaterial.
  • Internal reports and audits created after the events in question.
  • Reports created by Thales’ external auditors.
  • Copies of Thales’ subcontracts.
  • Project-specific board minutes.
  • Reports and advice given by external consultants in respect of the project. The court rejected an argument that such documentation was protected by litigation privilege.

Beware of broad audit clauses

It is easy to see how this required Thales to disclose a substantial amount of information that it would rather have kept to itself. This documentation may have contained a number of candid assessments of Thales’ performance and potential recovery or exposure.

“Contractors would be well-advised to seek to narrow the drafting of audit clauses to limit their applicability”

The court held that providing this information was not inherently unfair or non-commercial, particularly when set against the ability of Thales to adjudicate at the drop of a hat.

While this case, of course, revolved around the specifics of a wide-ranging audit clause, contractors should be wary of treating such provisions as ‘boilerplate’ to be agreed without a second thought.

Contractors would be well-advised to seek to narrow the drafting of such clauses to limit their applicability.

Steven Carey is head of construction and engineering and James Worthington is a senior associate in the construction and engineering team at Speechly Bircham

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