Software escrow is important but what are the pitfalls? In many IT contract negotiations, one of the main questions is around who has rights and or has been granted a license to the source code of the particular piece of software. From the vendor’s viewpoint, there is a reluctance to hand over any source code, because the source code is, in essence, the “family jewels”. This is where source code escrow can work well.

When is Software Escrow a good idea?

Depending on the application in question, this is sometimes a valid concern and at other times not. In fairly generic software applications, it is probable that someone with sufficient skill, in the particular language that the application has been written in, could utilise the source code to derive some benefit. In other instances, where, due to the nature of the application and the complexity thereof, someone in possession of the source code would not be able to do anything productive with the code, because they lack a particular type of experience, knowledge and skill-set.

From the licensee’s perspective, they very often do not want to spend time and money investing in an application that, should something happen to the vendor or their relationship with the vendor, the investment into the particular application could be rendered a nullity.

Access to source code

While parties to IT contracts don’t always agree about the inherent value of access to source code, it is still a much sought after item in such negotiations.

Very often, the parties reach a type of compromise whereby they agree that the source code, along with any updates or modifications, will be placed in escrow with a reputable escrow agent.

At this point, the parties often expect that the issue of access to the source code is resolved and that the only further potential issue of contention is about who pays the cost of the escrow.

Parties must clearly agree on the Release Events

You must carefully consider and agree on the trigger events for release of the code placed in escrow in your escrow agreement with the escrow agent.

Otherwise, as a licensee wishing to gain access to the code in escrow, you might find yourself in the frustrating position of merely fighting with the escrow agent for access to the source code as opposed to the vendor…the role of gatekeeper being passed along with no key really being granted.

The escrow agent may be liable to the vendor in the event of granting premature or erroneous access to the code held in escrow and is, therefore, sometimes reluctant (in the case of any ambiguity as to whether or not a trigger event for release has occurred) to release any code.

A good escrow agreement for Software Escrow is important

The moral of the story? The decision to place code in escrow is just the start of the source code negotiations, not the end. The devil really is in the detail in this case and the parties need to specifically think about clear rules for release of the code held in escrow. Ultimately, such clear rules will ensure that the specific needs of the licensee are catered for and the agreement is drafted so explicitly that there is no room for doubt in the minds of any of the parties to the escrow agreement as to whether or not the code may be released.