Audit right died when contract was terminated, agrees First Circuit

Suppose that a contract gives one party the right to audit the records of another party. The audit provision, though, doesn’t specify that the audit right will survive termination of the contract.

In that situation, if the contract were to be terminated, then the audit right might die with it. That’s what happened in New England Carpenters Central Collection Agency v. Labonte Drywall Co., No. 14-1739 (1st Cir. July 31, 2015) (affirming district court’s judgment). As summarized by the appeals court:

Plaintiffs-Appellants, the trustees for a group of union-related benefits funds and their collection agency, filed this action against Defendant-Appellee Labonte Drywall Company (“Labonte Drywall”) seeking enforcement of an agreement that required the company to allow an audit of its records.

After a one-day bench trial, the district court found that Labonte Drywall had terminated the pertinent agreement, and, hence, plaintiffs had no legal right to conduct the requested
audit.

We affirm.

Id., slip op. at 3 (extra paragraphing added).

Drafting tip: Be clear how long audit rights will survive in the event of termination of the Agreement. I’m revising the audit-rights provision in the Common Draft contract-clause desk book to make it explicit that audit rights will survive for the duration of the specified “Audit Request Period,” a new defined term, which I’m thinking should default to the term of the Agreement plus 90 days.

(Another issue in the case was the defendant’s assertion that a letter it sent was sufficient to constitute a notice of termination under the agreement. The district court held that on the facts of the case, the letter did constitute a notice of termination; the appellate court agreed. See id., slip op. at 14-16. More on that in a later post.)