Documents required to be disclosed under audit clause
TRANSPORT FOR GREATER MANCHESTER v THALES [2012]
The Court considered the extent to which a supplier must disclose information pursuant to an audit clause under a contract for the supply of goods and services.
Facts:
- TGM, entered into a contract with T relating to the provision and operation of a new tram system in Manchester. T lodged claims for increased costs and extensions of time under the contract based on allegations of failure by TGM to provide information or instructions on a timely basis and a general lack of cooperation on the part of TGM. This caused major disagreements.
- TGM then made various requests for information under the contractual audit provisions which provided that T had to make available "such other information, records or documents as TGM may reasonably request …and which relate to the Records”. ‘Records’ were defined as “records relating to Thales' obligations under this Agreement”.
- The contract then went on to provide that “[TGM] shall be entitled, on giving reasonable notice and at all reasonable times, to inspect and make copies of such [other] information, records or documents in the Supplier's possession or control relating to: (i) the supply of the Deliverables; or (ii) the carrying out of any of the Supplier's obligations under this Agreement; in each case as [TGM] may reasonably request for the purpose of auditing any information supplied to [TGM] or verifying the Supplier's compliance with its obligations under this Agreement” .
Decision:
- The Court largely found in favour of TGM, granting an order requiring T to disclose most of the document categories TGM had sought. It was common ground that TGM was only entitled to request documents in order to audit information supplied to TGM or to verify T's compliance with its obligations under the contract. The Court decided that, on the facts, TGM had established that the requests had been made for these purposes.
- Documents dealing with costs:
- Documents that recorded the cost of labour, materials, plant, sub-contractors, suppliers and similar documents had to be disclosed. This was because they were documents ‘which related to the performance of obligations’ within the meaning of the document maintenance and audit clauses of the contract. T had argued that, because the contract was a fixed-price contract, documents that related to cost were immaterial and should not need to be disclosed.
- The Court rejected that argument. It said "Cost has in one sense become a barometer or a reflection of performance, not only because Thales has put this forward as the basis of its [costs claim] but also because a substantial excess of expenditure over contract allowances can on projects such as this demonstrate or underpin how good or bad performance has been”.
- Accordingly the Court took the view that it was irrelevant that the contract was a fixed-price contract. Documents relating to cost could not be withheld on that basis.
- Documents based on original contemporaneous records:
- As a matter of construction, the words "relating to the performance of the supplier's obligations" extended to other documents, produced subsequently, which related to performance. It followed that documents, such as reports or internal audits, which addressed previous events or matters recorded in earlier documents could not be withheld from disclosure. So, an internal report created some months later which commented on performance would also be discloseable because it ‘related to the carrying out of T’s design obligations’.
- Documents which are commercially sensitive or which contain confidential information:
- The commercially sensitive or confidential nature of documents was not a legitimate basis for T withholding disclosure.
- Board minutes of the company:
- The Court rejected T's objections to the disclosure of "Thales UK and project-specific board minutes relating to the contract". The Court held that such documents ought to be disclosed insofar as they consisted of project-specific board meeting minutes relating to T itself.
Points to Note:
- If a party does not wish to provide information relating to its costs, an audit clause should specifically exclude all items relating to cost and expenditure (of it and its subcontractors) from the scope of discloseable information. This might be appropriate in contracts where pricing is fixed or the pricing does not use ‘open book’, ‘time and materials’, or ‘cost-plus’ pricing models.
- Similarly, if there are other categories of information that a party is unwilling to disclose, these need to be addressed explicitly as a carve-out. Otherwise it is clear from this case that the Courts may give an extremely broad interpretation to records which are deemed to ‘relate to performance’ in the widest sense.