Escrow Agreements: The Basics

20 July, 2016

Companies with business critical software which can’t be easily replaced may rely heavily on their chosen software provider. If that software provider becomes insolvent, the company could be left with an unsupported system that they can’t change or update without significant cost and/or disruption. Having access to the software’s source code allows companies to do this themselves, or appoint another software provider to take over.

 

What is a software escrow agreement?

Under a software escrow agreement, a software provider will supply an up-to-date copy of an application’s source code to a trusted third party agent (familiar names include NCC, Iron Mountain and SES, but there are lots out there). That agent is then given instructions to release the source code to the customer in the event that the developer is no longer able to fulfil its contractual obligations because of external factors such as insolvency.

 

Do I need a software escrow agreement?

Escrow agreements can be appropriate in certain circumstances, particularly when:

  • the customer has grounds to believe that the supplier will have difficulties in maintaining the product in the future;
  • the customer will not be able to migrate easily to new software; and
  • the customer has a strong team of technical staff who will be able to work with and maintain the released source code.

 

What are the potential issues with a software escrow agreement?

While escrow agreements can provide some security for customers in the event that their software provider becomes insolvent, they do have their drawbacks:

  • the customer will need to pay upfront and annual fees (usually over £2,000 and £1,000 respectively) to the escrow agent (and verification fees if the customer wants to be sure the source code deposited is effective), as well as increased licence fees from the software provider;
  • depending on how the agreement is drafted (while each escrow provider will have a standard contract, these will differ, and won’t be tailored to a customer’s requirements without additional work and fees), there may be prolonged and costly disputes over the conditions on which the source code will be released;
  • the agent and the customer will need to have a system in place to ensure the source code deposited is always up to date; and
  • the customer can often lack the required expertise to successfully utilise the released source code.

As such, customers considering whether an escrow agreement is worthwhile should review their options carefully to ensure in their particular situation that the benefits outweigh the costs.

 

Conclusion

While software escrow agreements can provide a useful level of protection for large businesses that have invested heavily in expensive software, they are only useful in a relatively small number of scenarios. Any business seeking the protection of an escrow agreement should seek legal advice before entering into one.