Should Your Business Use Software Escrow to Protect Its Software?

If your business relies on third-party software, planning for scenarios where your supplier may become insolvent or fail to provide necessary support is crucial. Such situations can lead to substantial operational disruptions and costly problems for your business. Software escrow arrangements can offer a safeguard by ensuring your business can continue to use and maintain the software even when the relevant supplier cannot fulfil its obligations. This article will explore software escrow, why your business should consider it, and the commercial and practical factors to remember.

What is Software Escrow?

When you use third-party software, you typically only receive the object code. While this code lets you run the software, users cannot easily read, understand, or modify it. Your business will depend on the relevant software provider to maintain and support it, which can be risky when software is critical to the company.

Software escrow is a practical arrangement that typically involves your business, the software supplier, and a third-party escrow agent. The supplier deposits essential software materials (e.g., the source code and supporting documentation, such as operating manuals) with an independent escrow agent.  If specific triggers occur (most commonly, supplier insolvency), the agent releases the materials for your business so you may use them.

Access to these critical software materials is essential for maintaining, supporting, and developing the necessary software. However, verifying that the deposited materials are complete and usable is crucial. Deposits should include the source code and all necessary tools and instructions to ensure the software can be compiled and run successfully.

Should Your Business Consider Escrow?

Escrow is not always necessary, but your business should carefully evaluate whether it provides the protection you need.

For instance, you may wish to consider these arrangements when:

• the software is critical for your operations, and losing access could have serious consequences; or
• there is a risk that the supplier will face insolvency or fail to meet their obligations.

While insolvency is a common reason for releasing the source code, the agreement must explicitly define what constitutes insolvency to avoid ambiguity and disputes. 

What are the Benefits of Software Escrow?

Software escrow arrangements may offer you practical and commercial advantages. 

Your business gains access to the source code and other materials necessary to maintain the software independently, reducing your reliance on the supplier. This can help ensure operational continuity in the event of supplier insolvency or non-compliance. 

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What are the Commercial and Practical Considerations?

While escrow can be a highly effective insurance mechanism and safeguard, it does come with challenges your business should think about before proceeding:

• costs are a crucial factor – as your business will incur fees for the escrow agent and regular updates to the deposited materials;
• negotiating an escrow setup and agreement can also be time-consuming, as it requires clarity on these various factors. Suppliers may push back on these arrangements, so you should be prepared for thorough negotiations; and
• disputes can arise over whether a triggering event has occurred. 

How Can a Lawyer Help With Your Escrow Queries?

In practice, understanding how best to protect your software can be challenging.

A lawyer can help by guiding you on how to protect software, how escrow could help you, and how to make sure your escrow agreement works for your business.

They can also help draft an escrow agreement that clearly defines release triggers (such as supplier insolvency or failure to provide support) and ensures these terms are enforceable. A lawyer can also ensure that the agreement includes all necessary materials, such as the source code, operating manuals, and tools required to use or maintain the software.

Key Takeaways

Your business should consider escrow if the software is critical to operations, particularly where the software is bespoke. Access to source code ensures your company can maintain, support, and adapt the software independently, even if the supplier becomes insolvent or fails to meet its obligations. Escrow agents can facilitate access to the materials and manage the release process. However, you must evaluate factors such as the costs and risks before committing to an escrow arrangement. 

Remember to consider the practical challenges and risks of escrow, including your ability to use the materials and the potential for disputes. If you need support understanding how to protect your software, you should seek legal advice.

If you need advice on escrow and how it can benefit your business, 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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