10 September 2009 | John Skelton

If your software supplier failed, how would it affect your business? John Skelton looks at how an escrow agreement can protect both a vendor's source code and your investment

Given the current economic climate, users of third-party software may wish to consider the risk to their business should their software supplier become unable or unwilling to support and maintain the software. The use of escrow agreements has the potential to mitigate this risk but should also be considered in the wider context of prudent contingency planning.

Escrow accounts offer a form of protective insurance by requiring the supplier of software (the licensor) to deposit the source code into an account held by a third-party escrow agent. There is a tri-partite arrangement between the escrow agent, the licensor and the user of the software (the licensee) whereby the source code will be released to the user if certain trigger events occur.

These events can include the licensor becoming insolvent or failing, or refusing to maintain and support the software as required. The escrow agent will then retain the materials until either a 'release event' occurs, or the escrow agreement is terminated.

The benefit of an escrow agreement is the comfort that should a trigger event occur, the user can access the source code in order to support and maintain the software. This is especially important if the software is critical to the user's business.

However, users need to be aware that the benefit of an escrow agreement is limited by the integrity of the source code retrieved and its ability to interpret the code. Most major software programs are subject to a constant cycle of development, requiring frequent changes to the source code. Possession of an out-of-date copy of the source code is of little practical use.

Furthermore, possession of the source code is only of use if there is someone available with the technical ability to interpret and utilise the source code in order to maintain and support the software. As such, any escrow agreement will need to be carefully monitored in order to provide a practical and suitable solution.

So what are some of the issues users should be aware of?

The source code needs to be kept up to date, checked at regular intervals and accompanied by whatever design documentation is necessary to enable a reasonably skilled programmer to understand it.

The release events need to be clear and capable of exercise without the consent of the licensor. Furthermore, consider whether or not your particular concerns or requirements are covered by the escrow agent's standard release events.

In deciding whether to use an escrow account you should consider what would happen if the software could no longer be maintained by the supplier. Could maintenance be obtained from a third party at a comparable cost? Could the software be replaced?

You should also consider the cost of transferring to new software. If the answer is that the alternatives are unavailable or too expensive, an escrow agreement may provide your business with an attractive form of protection.

* John Skelton is a senior associate at Pinsent Masons