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Software audits – why vendors’ clauses may not be as strong as they think

Michael Wigley | June 21, 2016
Vendors frequently undertake software audits that are problematic for CIOs, writes IT lawyer Michael Wigley.

The licensor required an audit under this clause in the licence agreement:

"[The licensee] undertakes and agrees with [the licensor] that it will... permit any duly authorised representative of [the licensor] on reasonable prior notice to enter into any of its premises where any copies of [the database] are used, for the purpose of ascertaining that the provisions of this Agreement are being complied with."

That's not a lot of detail. In particular, the clause was silent or uncertain around the following:

  • How wide could the audit go, given there was confidential information the licensor shouldn't see? The agreement didn't expressly deal with this.
  • What could the licensor do with what it obtained on the audit? Again, the agreement was silent.
  • Could the audit deal with sub-licensing in breach of the licence? No said the court, controversially in our view, given that was one of the key terms in the licence.

Courts can fill gaps by (a) implying terms in the agreement (e.g. limiting the scope of the audit right to what is necessary and reasonable); and (b) adding further details as machinery to make the agreement work. But the courts can only go so far in plugging the gaps and it wasn't prepared to do that here. In this case, the brief detail was too sketchy. So the licensor didn't get orders requiring the licensee to facilitate the audit.

Even if the audit terms were detailed enough, the court would have refused to make the enforcement orders for two other reasons:

  • Just because there are clear contract terms, it doesn't follow that the terms are certain and clear enough for enforcement orders to be made (usually these are specific performance orders but they can be injunctions too).
  • In any event, if getting damages is an adequate remedy, the courts usually won't make such specific performance or injunction orders.

This English case was for an interim type of judgment called summary judgment and so it is not the final word, but it indicates that vendors will sometimes struggle to force their customers to allow audits.

While each case is fact specific and often differ from the clause here, typical software audit clauses are relatively short form and therefore raise similar issues of interpretation. In some cases, the courts will refuse to fill the gaps. They may also not require the customer to allow the audit, despite what the contract says. This English judgment provides some helpful angles to consider as part of formulating the strategy for responding to a software audit.

 

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