What Does “Audit Rights” Mean in a Contract?
The contractual right to examine another party's records to verify compliance with agreement terms, particularly financial calculations.
Detailed Explanation
Audit rights allow verification of royalty calculations, usage-based fees, or compliance with financial terms. They specify who can audit, how often, what records are covered, and who pays audit costs.
Most agreements require advance notice and limit audits to once per year. If the audit reveals underpayment beyond a threshold (often 5%), the audited party typically pays audit costs.
Example in a Contract
“Licensor may audit Licensee's records once per year upon 30 days' notice to verify royalty payments. If audit reveals underpayment exceeding 5%, Licensee shall pay audit costs plus underpaid amounts with interest.”
Why It Matters
Without audit rights, you're trusting the other party's calculations. If you're owed variable payments (royalties, usage fees), audit rights provide verification ability. Balance this against the burden of being audited.
Related Terms
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