Software Escrow Agreements Explained

Software escrow, also known as “software escrow agreements” or S.E.As, is a legal binding between two parties to safely store intellectual property rights relating to software code and/or data related to source code and/or data for the duration of a specific period in time. Software escrow agreements are typically used by companies that either develop, sell and/or license software code and/or data either as a service or in physical goods such as CD-ROMs, DVDs, hard drives etc. 

Software escrow has both advantages and disadvantages to the original parties involved. The main advantage of an S.E.A is essentially insurance against future risks and uncertainties that may impact the outcome of a legal dispute. For example, if you are purchasing software code from a third party (referred to as vendor or licensor) and that vendor’s source code is used in your product, you may need a license for their software to legally manufacture/sell those products. 

The biggest disadvantage is that it leaves both parties exposed to certain risks and uncertainties unless the agreement clearly states what is expected of both parties. For example, if your licensing contract for a third-party’s software code suddenly stops working then you may need to have a S.E.A in place so that you can recover all their source code or at least be able to use it again after the license is reinstated.

From a customer’s point of view, if you have purchased software code from any party and wish to receive regular updates then a S.E.A might be beneficial to you in the event that the third-party company becomes insolvent or goes into liquidation. In this instance, shares would usually be transferred to another company if the original company goes into liquidation or becomes insolvent. However, without a S.E.A in place, you would not necessarily receive updates to your software product and may have to buy a new product from another third-party seller instead of receiving regular updates for the original product you purchased.

Other advantages are that it enables all parties to work on maintaining competitiveness, if there are specific restrictions in the contract then all parties must stick to these restrictions. This may be useful for companies that develop software code as they can ensure that competitors do not gain access to their proprietary source code or data. 

Also from a legal perspective, it is easier for both parties involved to see what they are required to do. This will allow parties that develop software code, mainly in the case that their source codes contain secrets and/or confidential data and it is stored securely under an S.E.A so it is easy for them to see who has access to this information, and also when they may be given back the escrowed intellectual property

Finally, it is clear to both parties what are acceptable or not under the S.E.A and it also saves time from arguing about specific clauses that may be open to different interpretations. In an S.E.A, each party must stick to their roles and responsibilities, if they do not then all of the agreed terms are breached and the S.E.A is nullified as neither party fulfilled their responsibilities.

However, some disadvantages are that with an S.E.A in place, it may limit a customer’s right to take legal action and/or challenge the original provider if they violate terms of the contract or leave certain clauses open to interpretation such as the time and duration of the contract.

A software escrow agreement can be beneficial in many ways especially if the terms are very clear on both parties’ responsibilities under the agreement. It may also save time from arguing over specific clauses as it is all agreed beforehand, however depending on individual circumstances, an S.E.A may not always be necessary or beneficial in a specific case.

Anyone who is uncertain about the benefits of an S.E.A or how it may affect their business should seek legal advice first before deciding whether an S.E.A is right for them. If you have any questions regarding software escrow agreements then please contact a lawyer to discuss your concerns.

 

The article above only briefly describes a possible arrangement. It does not take into account all the variations in circumstances and intentions of parties to an agreement, nor does it attempt to predict how disputes might be resolved. The author specifically disclaims any liability relating to errors or omissions in this article.

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