Software Legalities Part 2 - Software Escrow

Saturday, May 3, 2008

Source Code License.
The agreement should include a license grant to the licensee in the event of release of the code, which outlines how the licensee:

  • may use the code (for maintenance only).
  • should handle the code (keeping it confidential, etc.).

Licensor Warranties.
The agreement may state that the licensor warrants that the source code deposited is the correct code and that, as deposited, it will correctly compile into the software.

Force Majeure.
An escrow agreement should also contain a force majeure clause. This clause means that in the event of war, acts of God, weather and other uncontrollable forces, the parties are excused from performing. The licensee will want to exclude or limit this clause to be sure that it is not used to avoid obligations by the licensor or agent.

Indemnification and Liability Limits.
The Escrow Agent will usually require that the parties indemnify the agent and that there is a liability limit on the agent's risk. Indemnification of the agent means that if any party to the agreement or third party sues the agent, the parties agree to jointly pay the costs of such litigation.

To the extent that there is an exclusion in this section for the agent's negligence or willful behavior, this is reasonable given the low income the agent receives from storage. However, these exclusions are important -- without them, there is no way for the parties themselves not to end up paying if one party has to sue the agent for loss or misuse of the code or other acts.

A liability limit for all parties to the agreement is a provision that generally protects all parties to the contract, and the agent's request is reasonable given the low income the agent receives from storage. It is important, however, to be sure that the liability limit covers at least the value of the software source code.

If you are a licensor, software escrow will be a necessary part of your business requested by licensees. In many circumstances, licensees do not understand the process, or why they're making the request, and sometimes some discussion of the business goals can help. For example, if there is no maintenance agreement for the software, or the software is leased through an ASP model with no time commitment for provision by the licensor, there is no reason for software escrow.

If you're a licensee purchasing expensive and vital software to be maintained and used over a long period, escrow can be very helpful. Keep in mind, though, that if the software can be recreated at a relatively low cost, or maintained or substituted by another software company, escrow may not be a logical request given the costs in time and money of the escrow and the contract.