Audit by the Other Party
Contract Type:
Generic Contract
Jurisdiction:

The Other Party shall have the right to audit the Company's compliance with its obligations under this Agreement. The Other Party may conduct audits on [7] days' prior written notice, during normal business hours and subject to any security or confidentiality procedures reasonably imposed by the Company. The Other Party shall have access to any premises, personnel, documents, records or systems reasonably required to conduct such audit. The Company shall provide all reasonable cooperation and assistance to the Other Party in relation to any audit. The Other Party shall not be entitled to audit any period more than [6] months following the end of the relevant period to which the audit relates.

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Explanation

Here is a plain English explanation of the Audit by the Other Party clause:

This clause allows one party (the Other Party) to audit the other party (the Company) to check if they are meeting their obligations under the contract.

The Other Party can do an audit if they give at least 7 days written notice. The audit must be during normal business hours and follow any reasonable security rules of the Company.

The Company must let the Other Party access any premises, people, documents, records or systems needed for the audit. The Company must provide full cooperation and assistance.

The Other Party can only audit a period within the last 6 months after that period ends. For example, they could audit March in September of that year.

In simple terms, this clause allows one party to inspect and review the other party's compliance with the contract terms. The party being audited must cooperate fully but audits are limited to recent periods.

History of the clause (for the geeks)

Audit clauses have long been a fixture of contracts to verify performance, but their prominence in data protection agreements grew substantially in the digital era.

Audits originally served a financial purpose in accountancy, allowing validation of monetary transactions and bookkeeping. With the rise of complex business deals and outsourcing in the 20th century, audits expanded to confirming operational compliance between two parties.

In the 1970s-80s as computing advanced, privacy advocates realized data security safeguards needed auditing. Data protection laws like the 1984 UK Data Protection Act empowered regulators to audit data controllers and processors.

However, by the mid-1990s regulations still lacked comprehensive audit procedures and individual audit rights. Realizing this deficiency, the 1995 EU Data Protection Directive strengthened audit powers for regulators and data subjects.

With growing digitalization in the 2000s-2010s, contractual audit clauses then became critical between controllers and processors to verify security and compliance beyond just regulators. GDPR Article 28 codified processors’ duty to enable controller audits.

Including strong audit rights in contracts is now seen as an essential accountability and transparency mechanism for proper data governance. As data processing and cyber risks grow, thorough independent audits are vital to enforce legal duties and prevent violations.

Contractual audit clauses operationalize this while apportioning liability between parties.