Software Escrow Guide

Introduction Escrow services Escrow contents Release conditions Escrow lawyer Summary

Software escrow release conditions

These are the conditions under which a "full release" of everything held in escrow to you as the software user is triggered. These will definitely be included in the escrow agreement, but they are so important that they deserve to be covered independently in this guide. Some possible trigger conditions are:

1) Bankruptcy of vendor. The bankruptcy process is clearly defined in every jurisdiction. Note that some jurisdictions allow a "protection from creditors" stage such as Chapter 11 in the United States. The vendor may be in this state for several months or years while they reorganize and seek to emerge from bankruptcy. Existing contractual obligations may also be waived under this arrangement. In short, you need to look at the bankruptcy statutes in the country of incorporation of the vendor. This may be neither your country of incorporation nor the country of jurisdiction of the escrow agreement.

2) Vendor ceases trading. A "cease trading" or "cease operating" condition can be very difficult to define. Several factors could be used in evidence:
a) Vacates premises: In other words, the vendor has no remaining physical office space. The only way to contact the vendor is via the Internet or a shared registered office.
b) Loses personnel: A group of key personnel could suddenly leave the vendor. Or the vendor loses all employees and the remaining executives (directors, company secretary etc.) have no substantial further role in running the business.
c) Becomes difficult to contact: The vendor stops responding adequately to your emails, letters and phone calls.

3) Vendor breaches terms of a license or support agreement. This can be fairly easy to define, although most software vendors will have a problem with a blanket inclusion. This is not unreasonable. They could be concerned that you use a relatively minor breach of an agreement (e.g. their response to your calls to their helpdesk falls temporarily below an agreed service level) to "steal" their source code.

4) Change of ownership or structure at the vendor. The vendor could be acquired by another organization that you would prefer not to do business with e.g. a key competitor to your business or another software vendor with whom you have prior bad experience. Or the vendor reorganizes such that their domicile moves to a jurisdiction with which you would rather not be associated. It is difficult to know in advance which new controlling party/structure is likely to give you concern. The vendor is unlikely to accept a blanket clause that triggers escrow release for any change in their organization which you simply "do not like".

5) Vendor discontinues software. The vendor can continue trading, but allocates no/few resources to the resolution of problems with the software and it's ongoing development. This is not unusual. Most software reaches "end-of-life" and goes into minimal maintenance mode. The vendor may switch resources to a new-generation product that they expect you to license separately.

The core purpose of a software escrow process is comparable to disaster recovery. The intent is not that you should use it as a weapon to obtain access to proprietary source code during normal business negotiations/disputes that might arise in future. You can expect vendors to listen to your reasonable concerns. After all, they want to win and keep your business. But you can not expect them to give you a negative veto over significant aspects of their current/future business.

Some of the trigger conditions (bankruptcy, breach of license agreement) can be defined relatively objectively. All the others are much more difficult to define - which is precisely why vendors may have problems with them.

One option is to deliberately leave the wording quite vague in the escrow legal agreement. For example, ".. a material change in the ownership/structure of the vendor .... the vendor substantially ceases trading..". Then both parties agree to be bound by a dispute resolution process that seeks to clarify if a change is "material" or "substantial". Commercial arbitration is such a process. I am a huge fan of it as a reasonably priced alternative to expensive legal proceedings.

Site © 2015. Advertise Here?.