If your business is heavily reliant upon specialist software, a software escrow agreement might just be the safety net you never knew you needed.
Escrow agreements
Virtually all of us use software of some description in carrying out our business activities and, in today’s world, increasing numbers of businesses find themselves heavily reliant upon a particular provider for specialist or bespoke software, without which the business would struggle to function. Software is supplied under a licence, often accompanied by a support or maintenance agreement with the licensor, to keep things running smoothly and ensure the software remains up to date.
Something that it can be easy to overlook when everything is ticking along nicely is what would happen if the provider of business-critical software became insolvent, or defaulted on its obligations under a maintenance agreement? Would the businesses who use the software under license still have access to it? What about essential updates and maintenance? It may not be possible for a third party to take over maintenance of the software without access to its source code (the particular programming language used by the developer to create the software itself), and it may not be easy or cost-effective to switch to alternative software, which is where the reassurance provided by a ‘software escrow agreement’ can come into its own.
In simple terms, a software escrow agreement is a means of insurance against the failure of the software provider to continue supporting, maintaining or developing its software. It typically takes the form of a three-way agreement between the software licensor, the licensee and an independent escrow agent. Depending on the type of software escrow agreement entered into, the licensor will agree to deposit with an independent escrow agent either:
- a copy of the software’s fundamental source code, to which access is required in order to make updates to, or fix bugs within the software;
- access credentials to get into its production environment; or
- a mirror image of its production environment and the software source code.
In each case the aim is to greatly increase the likelihood that the licensee will still be able to use and have the benefit of the relevant software, avoiding a scenario in which its business-critical processes grind to a halt. The escrow agreement will specify the strict conditions under which the deposited material can be released to the licensee.
There will inevitably be a fee to pay in consideration for the protection offered by a software escrow agreement, which usually is directly or indirectly borne by the licensee. However, for a business which is reliant upon complex or specialist software that cannot easily be substituted, a software escrow agreement can represent a shrewd investment.
We provide advice to clients who may be considering entering into such an agreement, or who have already done so. Common pitfalls include entering into a software escrow agreement that is not sufficiently clear, which thereby increases the risk of a dispute as to whether the conditions for release have been met. Alternatively, an agreement that is drafted in clear terms, but which doesn’t cover all the necessary eventualities may fail to offer the reassurance it was intended to provide.
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