What is an Escrow Agreement and What Does It Mean for Your Business?

What may happen if your business relies on critical software if your software provider suddenly goes out of business or cannot continue supporting it? Software escrow agreements can help protect your business from the significant risks of using key software. This article explores escrow agreements, how they work, and how they can help protect your business from risk. 

What is an Escrow Agreement?

An escrow agreement is a legal contract in which an independent third party, the escrow agent, holds an asset (such as software source code) until specific conditions occur. When these conditions arise, the escrow agent releases the asset to the designated party. This usually means your business, the software provider, and the escrow agent will enter the agreement. 

In software arrangements, the escrow generally involves source code, which developers write. Since software owners often guard this source code as a crucial intellectual property asset, they restrict access to maintain competitive advantages and prevent misuse. The escrow agent keeps this source code securely and only releases it under the terms agreed upon in the contract. Clearly define these terms to help ensure clarity and avoid disputes.

Why Does Source Code Matter for Your Business?

When you purchase software, your business typically receives only the object code. Object code enables the software to run on your systems, but users cannot easily read, understand, or modify it. This situation makes you dependent on the software provider, which can become problematic if they fail to maintain, support, or update the software.

The risk increases if your business uses bespoke or highly customised software. Access to the source code is necessary for your business to avoid significant disruption and costly delays while you search for alternatives. 

By placing the source code in escrow, you gain greater confidence that even if the software developer ceases operations or cannot uphold their obligations, your business will still have what it needs (e.g., maintaining the relevant software, fixing issues, etc.).

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How Can a Software Escrow Agreement Help Your Business?

A software escrow agreement typically includes contractual obligations and provisions to help safeguard your business, especially when you have concerns about the software provider’s long-term viability. 

If the developer becomes insolvent or fails to fulfil support obligations, you can access the source code and continue maintaining the software. Businesses often view using source code from escrow as a measure of last resort. However, it is an effective risk management tool for those relying on custom-built or sophisticated software.

Critical Business Considerations for a Software Escrow Agreement

Here are some critical considerations for your escrow arrangement and terms:

• Choosing an Escrow Agent: You should select an independent escrow agent with a strong reputation for securely managing technical assets and who you can rely upon. 
• Defining Clear Release Trigger: Your contract should specify the exact conditions that require the escrow agent to release the source code, such as the developer’s financial failure. The triggers should be clear and precise to avoid disputes. 
• Keeping Source Code Up To Date: You need to ensure the source code in escrow stays up to date and gets tested regularly. 
• Including All Necessary Materials and Documentation: You should ensure the escrow deposit includes all necessary source code, design documents or specialised tools required to use or modify the software.

Are There Potential Complexities with Escrow Agreements?

While escrow agreements provide critical protection, entering them could pose challenges. Disputes can occur over whether the release conditions have been met, and escrow services often involve significant costs. Software licensors may well only enter escrow arrangements if there are very compelling commercial reasons to do so. Before deciding on an escrow arrangement, consider the costs and potential complications. 

Given the complexity of Software Escrow Agreements, you should seek professional legal advice when drafting and negotiating these agreements. Specialist IT lawyers can help draft contracts that protect your interests, address the key risks, and negotiate favourable terms to help protect your business from risk. 

Key Takeaways

A Software Escrow Agreement can offer critical protection if your business relies on bespoke or essential software. It can help to ensure you can access source code if the developer cannot continue providing support. With an escrow agreement, you reduce the risk of severe operational disruptions regarding critical software. However, these agreements come with challenges, and you should seek legal advice if you need more clarification. 

If you need help with a Software Escrow Agreement, our experienced IT lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

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