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SOFTWARE ESCROW AGREEMENTS – KEEPING YOUR CODE SAFE

An escrow agreement may be used to protect parties who rely on other parties to provide ongoing support.  This may be the case when software developers have agreed to provide maintenance and support to their clients. In this example, a software escrow will arise if the software developer provides its source code to an escrow agent who then holds the source code for the benefit of the parties. The source code is released when a triggering event occurs, such as when the developer ceases to trade after becoming insolvent. Other examples of triggering events include software developers failing to provide adequate technical support or where the software developer has been in breach of its service agreement with you. In that instance, the source code will be released to the customer who may then work with the source code as and when required. Software escrow agreements therefore provide a mechanism through which the licensee can access the source code and use it to develop and upgrade the software to meet their ongoing needs.

If the parties are satisfied by the proposed escrow, an agreement will be drawn up that binds the software developer, licensee and escrow agent. Having all three parties bound by the agreement is important to the licensee, as it may need to enforce its rights against both the software developer and the escrow agent should a dispute over the release of the source code arise.

A key feature of software escrow agreements is the trigger event. A trigger event is a defined incident or set of circumstances listed in the agreement, the occurrence of which will ‘trigger’ the release of the source code to the licensee. Any number of trigger events may be included in the agreement.

Should a trigger event occur, the licensee can contact the escrow agent with a demand for the release of the source code and related materials. The escrow agent will then contact the developer and notify them of the licensee’s demand. The developer can either consent to the request, in which case the escrow agent will release the code and documents to the licensee, or contest it.

The possibility of a software developer contesting a demand for release highlights the need for a comprehensive dispute resolution clause to be included in the escrow agreement. Alternative dispute resolution can provide a swift resolution to a dispute, ensuring minimal delay in the release of the source code to the licensee business and therefore decreased disruption to its operations.

Another vital item to include in the agreement is a procedure to follow if the escrow agent becomes bankrupt. The licensee needs to ensure that the agreement contains a clause requiring a new escrow agent to be appointed, otherwise any claim it may have had to the source code will be lost.

However, not all businesses will need a software escrow agreement. For software that is incidental to the running of the business, such as a word processing program, an escrow agreement would probably not be necessary. An alternative word processing application would be available off-the-shelf and could replace existing software with little disruption to a business.

In situations where software is critical to the current and future running of a business, a well drafted software escrow agreement audited by a legal advisor can provide a relatively inexpensive risk management mechanism.

If you have any specific or general questions in relation to this article, please do not hesitate to contact us.