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Escrow Agreements for Information Technology

Friday, 5 April 2013

Escrow agreements are used for a wide variety of commercial purposes and they have a specific benefit to information technology businesses. Generally escrow agreements are designed to protect transacting parties by depositing something of value with a third party agent, which may only be released if certain obligations are fulfilled or if certain events occur.

What is an Escrow Agreement in the Context of Information Technology?

An escrow agreement is a three-party agreement between a supplier such as a software developer, an escrow agent and end user or licensee, normally a person that has commissioned work. The purpose of such an agreement is to preserve the secrecy of developers’ proprietary information; primarily source code, while protecting the end user’s ability to update software following events such as the developer’s insolvency or breach of contract.

The escrow agent is obliged to release the source code or other information to the end user who commissioned software only in circumstances set out in the escrow agreement. That way a compromise is achieved between protecting developers’ assets and protecting end users’ investment in software.

Effective Use of Escrow Agreements for Information Technology

An effective escrow agreement should set out:

  • A description of the subject, e.g. source code, which is to be placed with the escrow agent.
  • A detailed description of the circumstances (conditions) pursuit to which a source code may be released.
  • The rights of the licensee should they become proprietors of the source code.
  • Agreed dispute resolution procedures.

The conditions upon which source code may be released usually include an unpreventable force majeure event such as terrorist attack, a software vendor’s bankruptcy or their sale of business, and a software vendor’s unsatisfactory performance which amounts to a breach of the licence.

The release procedure generally requires the licensee to provide the escrow agent and the licensor with notice if the licensee believes a condition for release of the work has taken place. The rights of licensees on receiving the source code may include fixing bugs in the software or making modifications to it.

Advantages and Disadvantages of Escrow Agreements

For licensees, escrow agreements protect business applications and lower risk. Suppliers or licensors benefit from having source code securely ‘stored’ with a third party; this removes the potential need to transfer it directly to the licensee.

The disadvantage of escrow agreements lies in the cost - there is a fee payable to the escrow agent, and in their enforceability. Disputes are common when identifying whether or not certain circumstances set out in the agreement have occurred.

Rollingsons has lawyers experienced in dealing with information technology issues. If you require more information about escrow agreements please contact James Crichton via e-mail or by telephone on 0207 611 4848.