July 15, 2020

What's next | Escrow arrangements

Continuing our What's next?' series, this article discusses the standard assumptions made by both the Licensor and the Licensee under an escrow arrangement and considers how they might change in the new Covid-19 environment.

Software plays a crucial role in the day-to-day operations of many organisations. Organisations that rely heavily on the use of software leave themselves at risk should access to that software ever be compromised. Escrow arrangements can be an important part of an organisation’s technology risk management strategy and are likely to be even more so during and after the Covid-19 crisis.

Typically, an owner of software (Licensor) will provide software to its customers (Licensees) in object code form that is installed on, and directly executable by, each Licensee’s computer environment. This is a form of the software that only a computer can understand. The object code is created using source code, which is human-readable software code that is created by programmers. Source code cannot be executed directly by a computer and is considered the “crown jewels” of the Licensor, which the Licensor will be keen to be kept a trade secret and protected against disclosure. Source code is required to support, maintain and develop the software.  

It is common for the Licensor to support, maintain and develop software for its Licensees in return for payment of a support fee and therefore Licensees do not need access to the source code. However, a Licensee may legitimately need to access the source code if, for example, the Licensor fails to provide support and maintenance, or becomes insolvent. To protect the Licensee in these situations,the Licensor may agree to place the source code in escrow with an escrow agent,which is an independent third party entrusted to hold the source code and release it to the Licensee if certain release events occur such as a material breach by the Licensor of its support and maintenance obligations or the insolvency of the Licensor. This is commonly known as an escrow arrangement, which is governed by a tri-partite agreement entered between the Licensor, the Licensee and the escrow agent.

 Traditionally a Licensor and a Licensee will be seeking to address certain issues in escrow arrangements:

  • The Licensor may be reluctant to enter an escrow arrangement but may be required to do so to secure the business of the Licensee.The Licensor will want to limit the events that trigger the release of the source code and ensure that it can object to the escrow agent to the release of the source code. If the source code is released, the Licensor will want to limit how that source code is used by the Licensee.
  • For the Licensee, it will want to be able to access the most recent version of the source code in use and ensure that the trigger events are broad enough to give it access to the source code when it needs it. It will also want to ensure that the Licensor cannot make it difficult for the Licensee to access the source code by making unreasonable objections to the escrow agent preventing its release. The Licensee may want to have broad rights to use the source code to support, maintain and further develop the software.  

This article also addresses escrow arrangements for Licensees that use cloud-based software that is not installed on computers at their premises.

An escrow arrangement provides a Licensee with some assurance that it can access the source code for software used in its organisation if certain events occur. It also provides a Licensor with comfort that any release of its source code is managed by an escrow agent. In the Covid-19 environment, where businesses are arguably more vulnerable to failure that ever, many Licensees will be assessing whether they need, or have, access to source code for software that they need to operate their businesses.    

Traditional  assumptions for an escrow arrangement may need to be reconsidered, as Licensees seek to have appropriate and potentially easier means of accessing source code under escrow arrangements. In the Covid-19 crisis, it may be that a ‘new normal’ also applies to escrow arrangements.

Get in touch with either Edwin Lim or Simon Martin for more on this topic or the other areas we have covered in this series.

Social media credit: Markus Spiske

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