Opinion ID: 5054
Heading Depth: 1
Heading Rank: 4

Heading: payment of the audit

Text: In addition to permitting a certified accountant to audit PSI's books, Paragraph 6 of the Royalty Compensation Agreement states: Childers shall bear the expense of such audit or review, unless such independent certified public accountant agrees that the Royalty Earned during the quarter or quarters for which revenues have been reviewed, have been understated by more than 3%, in which event [PSI] shall pay for the expense of such review. The district court ruled Childers must pay for the AY audit, and Childers appeals. The AY audit analyzed PSI's royalty payments for the five-year period from May 1981 through April 1986. We find it impossible to determine how much PSI understated royalties because we hold the contract is ambiguous and the contract interpretation of the method of calculation must be determined before the district court can decide the percentage of understatement to assess the costs of audit. Upon remand and determination of the percentage of understatement, the district court can then decide who bears the cost of the audit. A subordinate issue as to payment of the audit also is raised by Childers. The Royalty Compensation Agreement states that PSI must pay for the audit only if PSI has understated the royalties by more than three percent during the quarter or quarters for which revenues have been reviewed. In the present case, Childers requested an audit of a five-year period. Childers asserts 3 In determining the parties intent, the district court should bear in mind that Childers never objected to PSI's method of computation prior to this lawsuit. Childers' acquiescence is not a waiver of its complaint, but it is at least some evidence of the fact that the royalty was calculated in accordance with the parties' intent. that if the audit determines that PSI understated royalties by more than three percent during any quarter, PSI must pay for the audit. Childers, however, requested a five-year audit, and if over that five-year period, PSI understated royalties by less than three percent, then it is irrelevant that for any quarter or quarters PSI understated royalties by more than three percent. Had Childers requested an audit of a time period in which PSI had understated royalties by more than three percent for that entire time period, then the agreement would require PSI to pay for the audit. Further, the Royalty Compensation Agreement makes no provision for prorating the audit cost so that PSI pays for the proportion of the audit representing the quarters in which it understated royalties by more than three percent. Thus, when the district court determines the amount of the underpayment of royalties based upon the proper method of calculating royalties, it must assess the cost of the audit to Childers if PSI understated royalties by less than three percent for the entire period for which Childers requested the audit.