What can a customer do when its supplier of business critical software is unable or unwilling to continue supporting that software?
If the software has been created for the customer by its supplier, then (depending on the terms of any agreement between the customer and supplier) the customer may own the intellectual property rights in the software, in which case it will be entitled to use, modify and support it in the manner that it chooses.
However, often a customer will be using proprietary software owned by the supplier, in which case it is unlikely to own the intellectual property rights in the software and will only be granted a licence to use it. In this case, if the supplier were to become insolvent, or for any reason could or would not support the software, then any continued use of the software without support would create a business risk for the customer. If the software were then to fail, the customer could be placed in a position where it is unable to continue its live operations.
One way that the customer can manage and minimise this risk is to require the software source code to be placed into escrow. In this article, we consider what is meant by the term "escrow", and what is usually involved when software source code is placed into escrow.
What is Escrow?
Escrow generally refers to the placing of property (which could be money, property title deeds, software source code or other intellectual property) into the hands of a third party for safekeeping. This property is then released from escrow when a specific event triggering that release occurs.
What is Software Source Code?
Usually, software is created in source code and object code versions. Object code is computer readable code that only a computer can understand (and which you use when you purchase "off the shelf" software). Source code is human-readable programming code, which cannot be read by a computer. The object code is created by "compiling" the source code, in effect converting it from human-readable to computer-readable form. If software needs to be modified for any reason (for example to fix any bugs or viruses), the source code will need to be amended so that the object code can run differently.
So if a particular piece of software is only provided to a customer in object code, then all modifications to that software can only be made by its creator or another person with access to the source code.
When the supplier of software agrees to place its software source code and any related technical material such as documentation (source materials) into escrow, the parties will generally agree to enter into an escrow agreement with an escrow agent appointed by them that records the terms of this arrangement.
Escrow agreements generally contain a number of key terms, including:
- A requirement for the supplier to deposit the source materials with the escrow agent within a specified period from signing the agreement, and to keep the source materials current by depositing updated source materials with the escrow agent when it modifies or updates the software (and therefore the source materials).
- A requirement for the escrow agent to maintain a register of the source materials, including all deposits and releases made.
- A list of events that will trigger a release of the source materials to the customer. Typically, these events will include the supplier's insolvency and material breach of its obligations to provide support and maintenance in respect of the software, but may also include other material breaches of the agreement between the supplier and customer. Of course, suppliers will always attempt to ensure that these trigger events are as precisely defined and limited in scope as possible, while customers will want to ensure that they are as broad as possible.
- The circumstances in which the source materials will be returned to the supplier (this will frequently be upon the termination of the master agreement).
- Details of the fees to be paid to the escrow agent (including who will be responsible for the payment of these fees).
Typically, escrow agents have standard form agreements. While they are sometimes reluctant to accept changes to these agreements, they may allow changes upon payment of a fee.
The number of escrow agents providing escrow services in New Zealand is limited. One provider of these services is the New Zealand Computer Society (through its subsidiary company, Software Escrow (NZ) Limited) (SENZ). Further details of the services provided by SENZ can be found at http://www.nzcs.org.nz/activities/escrow.
It is clear that escrow can offer significant comfort to customers if their software suppliers are unable or unwilling to continue supporting their software. However, suppliers can also benefit, as they can use escrow to assure their customers that, in the future, their customers will be always be able to continue using the software in the manner that they require (while only having to deliver their source materials to the customer in restricted circumstances).
The escrow agreement will record the terms upon which the source materials are placed into escrow, and both the customer and supplier will need to ensure that the terms of this agreement are carefully prepared and negotiated so that they provide an appropriate level of protection for both parties.