Please guard the source code for us

When a software supplier grants another company a software license, such supplier shall, in most cases, also provide the company with maintenance and support for such software. The more the company depends on the software, for example in case where the software is unique and constitutes an important part of the company’s product, and the less stable and steady the supplier is, the larger is the exposre due to the risk that the supply will not be able to provide maintenance and support for the software.

The source code is the heart of the software and is required for the maintenance and support of the software. Without hold of the source code, the company will not be able to maintain and support the software in the event that the supplier cannot do so.

Since the source code is usually a main part of the supplier’s business, in most cases the supplier will not agree to provide the code to the company to begin with. For the same reason and, in many cases, due to software already being pledged in favor of those providing financing to the supplier (such as banks), the company cannot receive a charge on the software and source code. Further, since the supplier typically wishes to provide the maintenance and support to the company, the supplier has no interest to enable the company to maintain and support the software independently by providing the source code to the company from the beginning.

The customary solution to the situation above is an agreement between the company, the supplier and an escrow agent, according to which the source code shall be held by the trustee for the company and the supplier until release to the company in cases where the company may find itself without maintenance and support from the supplier, as detailed in such escrow agreement. Such solution mediates the exposure of the source code while providing the company with certain protection against the aforesaid risk. On the other hand, such solution may raise complex legal issues in case of insolvency proceedings regarding the supplier and provides for extensive protection to the escrow agent against liability towards the other parties.

The aforesaid solution may suit additional situations, such as research and development projects where there is risk for the project to end prematurely and for non-software technologies.

10 tips for your source code escrow agreement

Please find below a list of 10 tips for source code escrow arrangements.

1. Elect an escrow agent that is known and experienced.

2. The conditions for the release of the source code may include, among other things, insolvency proceedings regarding the supplier, discontinuation of supplier’s activity, end of service for the software by the supplier and breach by the supplier of the service contract between the company and the supplier. Define the release conditions as accurately as possible.

3. Defined the release conditions as accurately as possible. In most cases the arrangement shall provide, among other things, that if the escrow agent will not, within a defined time period, receive from the supplier an objection to a request by the company to release the source code to the company; and that in case such objection is delivered thereto, the escrow agent shall continue to hold the source code until receipt of other directions under the dispute resolution mechanism specified in the escrow agreement. Thus the great importance of an accurate specification of such mechanism.

4. Accurately define the license granted to the company in case of release of the source code. Such license may apply, for instance, to use for the repair of bugs, all maintenance and support needs or development purposes.

5. Define the escrow period and the mechanism for the replacement of the escrow agent in cases where he will not be able to continue with its duties.

6. Specify the escrow agent fees and which party will pay it.

7. As the company – have a detailed escrow agreement upon signature of the license agreement.

8. As the company – well define the escrow materials, such that they include updates and upgrades of the software and all of the source code documentation and any other item required for the use of the source code.

9. As the company – make sure deposits of the source code and the updates and upgrades are made as soon as possible.

10. As the company – ensure a clear mechanism allowing the escrow agent to verify the source code, as requested by the company from time to time.

 

What do you think of source code escrow arrengments? What additional provisions would you include in such agreements? Is there any substitute for such agreements?

 

An Hebrew version has been published with TheMarker (StartIsrael) today –http://www.startisrael.co.il/Article/319/%D7%A9%D7%9E%D7%95%D7%A8+%D7%A2%D7%9C+%D7%94%D7%A7%D7%95%D7%93%3A+10+%D7%98%D7%99%D7%A4%D7%99%D7%9D+%D7%9C%D7%94%D7%A1%D7%93%D7%A8+%D7%A7%D7%95%D7%93+%D7%9E%D7%A7%D7%95%D7%A8+%D7%9E%D7%95%D7%A6%D7%9C%D7%97#.UzLboKiSyP0

 

* It is hereby clarified that this post does not constitute or replace legal advice.