Do you use bespoke software? What to look out for

In today's day and age and due to the technological advancements in the IT industry more and more businesses are reliant upon third parties to supply bespoke software for their needs and to provide a maintenance service for the same. We need to consider what would happen in the event that the Licensor (software provider) ceases to exist, fails to provide its services in a timely manner or defaults in any other way that may result in a disruption to your business.

The above scenario is resolved through the use of an escrow agreement.

Before we discuss what an Escrow agreement is it is important that we understand what the term 'Escrow' means. 'Escrow' is a legal term which means 'money, goods or a written document, held by a trusted third party, pending the fulfilment of some condition'.

Whilst we all have a software licence agreement for the software we use we need some form of software insurance in case things go wrong or certain events take place.

In a typical Software Escrow Agreement the owner the Licensor of the software provides a copy of the database content, website, instructions/ support manuals, other Intellectual Property ('IP'), source code (instructions/ statements written in eye-readable form in programmer's language and capable of being compiled into object code and an object code being a computer code that a computer can understand) to an escrow agent (a trusted third party, 'Third Party'). The source code is the formula of any software programme.

The agreement sets outs certain events under which the above can be released to a licensed user of the software ('the Licensee'). For example if the Licensor goes into bankruptcy or liquidation, a merger or acquisition takes place, or fails to properly maintain the software or perform under the Licence Agreement.

Why should a typical Licensor consider placing source code in Escrow?

Placing source code in Escrow will help market the software and a Licensors' services better. The Licensee will gain confidence in the business and will feel safe in the knowledge that if one of the events discussed above occurs then he will be safe. The Licensee will be able to take the source code to any other software designer/ programmers and with this code they will be able to add and amend, fix, any issues and essentially have the Licensee up and running in little time, therefore ensuring continuity of business.

Having said that software developers take pride in their ingenious work and invest a great deal in order to design something bespoke for a client and to gain the competitive edge of others in their field/ industry. It is therefore understandable that they will be reluctant to release the source code to a Licensee.

A compromise to this is the Software Escrow Agreement.

If you are involved in the development/ licensing or simply use of software or other bespoke technology then you would need the protection afforded by the use of such an agreement. A Licensee should evaluate how critical the software, programme etc is to his business to put into context the importance of this agreement.

For further information please contact the authors of this article - Lawdit Solicitors