When your in-house team receives services from service providers and contractors, you will receive contracts to sign for the provision of these services. In these contracts, there will almost always be clauses dealing with: 

  • confidentiality;
  • dispute resolution; and 
  • audit rights.

Although these clauses are often considered to be ‘boilerplate’ clauses, you should not skim them over. They provide companies with preventative protection and can help to ensure your company derives great benefits from the contract.

This article will explain: 

  • what these clauses mean;
  • why it is important that they are well-drafted; 
  • what position general counsels should take when reviewing them; and 
  • the common issues that arise in these clauses.

Confidentiality Clauses

A confidentiality clause should protect the confidential information your company and contractors share. Confidential information could include:

  • financial information;
  • business plans; or
  • information about company assets.

It is important to determine from the outset whether your company, during the course of the agreement, will be: 

  • disclosing confidential information; 
  • receiving confidential information; or
  • both. 

You must ensure the confidentiality clause aligns with this. If you are not receiving confidential information, ensure that the confidentiality clause is ‘one-way’ so that you do not have unnecessary confidentiality obligations. If you are disclosing confidential information, ensure that the clause sets out that the recipient will not disclose this information unnecessarily, and will only use it for specific purposes directly related to the services they are providing. 

For example, a third-party customer relationship manager (CRM) provider may have access to your client list. It should specify in your contract that the CRM provider and its employees or contractors will not disclose this information.

Confidentiality clauses also need to contain: 

  • a clear definition of confidential information;
  • clear obligations upon the recipient; and
  • how long the obligations of confidentiality continue for. Often, an appropriate amount of time will be the duration of the agreement and a period after. 

Dispute Resolution Clauses

dispute resolution clause sets out how the parties will approach disputes if one arises. Usually, dispute resolution clauses will take a multi-tiered approach, where either party must take reasonable steps to resolve the dispute before taking a more extreme response, like proceeding to litigation.

All dispute resolution clauses should state that the parties will seek, in good faith, to resolve the dispute.

This clause may state that a party cannot commence court proceedings without first attempting to resolve the dispute by contacting or meeting with the other party. It should state that if, after this initial communication, the parties cannot resolve the dispute, they should proceed to mediation.

If your company is contracting with an overseas supplier, arbitration should apply rather than mediation. In this case, the dispute should be referred to an appropriate arbitration centre, such as the Australian Centre for International Commercial Arbitration. The clause should also state where the arbitration will be conducted. It should outline that the determination of the arbitrator will be final and binding.

Disputes clauses (along with the governing law clause) should specify the: 

  • country and state where the mediation or arbitration should take place; and
  • law which governs the dispute.

Disputes clauses will specify how the costs of mediation or arbitration will be split. Often, the costs will be shared equally.

A dispute resolution clause is important because it sets out an amicable way to resolve the dispute and it prompts the parties to not immediately proceed to litigation, which can be costly.

Audit Rights Clauses

If your company is receiving services, you may want to see an audit rights clause in the contract. This clause should state that your company can audit the service provider’s: 

  • books;
  • records;
  • files;
  • invoices; or 
  • other relevant information.

In doing so, you can ensure they are complying with their obligations under the contract.

An audit rights clause will require that the service provider: 

  • keeps accurate records about their performance of the services;
  • provides those records on your request; and 
  • keeps the records up to date for a specified period of time after the agreement ends.

It will specify that either your company or a third-party auditor may inspect the information and that the service provider must give the auditor access to the information.

The audit rights clause may outline the scope of the records which will be subject to auditing. Ensure that this scope is right for your needs and that you have the right to audit all relevant records. An audit rights clause should be ‘one way’ as your service provider should not need to audit your files, and the contract should not allow for them to do so.

Key Takeaways

When your in-house team receives contracts including confidentiality, dispute resolution and audit rights clauses, you need to ensure that they are clearly drafted and unambiguous. Simply because these are ‘boilerplate’ clauses does not mean they should be skimmed over when reviewing. They can have an effect on whether:

  • your company’s confidential information is protected;
  • your company’s preferred disputes process is followed; and 
  • you actually have the right to audit your service providers.

When reviewing these clauses, consider your company’s position, and then see if the clause aligns with how your company operates. If you need assistance with contracts for your in-house team, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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