These are the conditions under which a ‘full
release’ of everything held in escrow to you as the software user is
triggered. These will definitely be included in the escrow agreement, but they
are so important that they deserve to be covered independently in this
guide.
| Condition |
Notes |
| Bankruptcy of vendor. |
The bankruptcy process is clearly defined in
every jurisdiction. Note that some jurisdictions allow a ‘protection from
creditors’ stage such as Chapter 11 in the United States. The vendor may
be in this state for several months or years while they reorganize and seek to
emerge from bankruptcy. Existing contractual obligations may also be waived
under this arrangement.
In short, you need to look at the bankruptcy
statutes in the country of incorporation of the vendor. This may be neither
your country of incorporation nor the country of jurisdiction of the escrow
agreement. |
| Vendor ceases trading. |
A ‘cease trading’ or ‘cease
operating’ condition can be very difficult to define. Several factors
could be used in evidence:
1) Vacates premises: In other words, the vendor
has no remaining physical office space. The only way to contact the vendor is
via the Internet or a shared registered office.
2) Loses personnel: A group
of key personnel could suddenly leave the vendor. Or the vendor loses all
employees and the remaining executives (directors, company secretary etc.) have
no substantial further role in running the business.
3) Becomes difficult to
contact: The vendor stops responding adequately to your emails, letters and
phone calls. |
| Vendor breaches terms of a license or support
agreement. |
This can be fairly easy to define, although most
software vendors will have a problem with a blanket inclusion. This is not
unreasonable. They could be concerned that you use a relatively minor breach of
an agreement (e.g. their response to your calls to their helpdesk falls
temporarily below an agreed service level) to ‘steal’ their source
code. |
| Change of ownership or structure at the
vendor. |
The vendor could be acquired by another
organization that you would prefer not to do business with e.g. a key
competitor to your business or another software vendor with whom you have prior
bad experience. Or the vendor reorganizes such that their domicile moves to a
jurisdiction with which you would rather not be associated. It is difficult to
know in advance which new controlling party/structure is likely to give you
concern. The vendor is unlikely to accept a blanket clause that triggers escrow
release for any change in their organization which you simply ‘do not
like’. |
| Vendor discontinues software. |
The vendor can continue trading, but allocates
no/few resources to the resolution of problems with the software and it’s
ongoing development. This is not unusual. Most software reaches
‘end-of-life’ and goes into minimal maintenance mode. The vendor may
switch resources to a new-generation product that they expect you to license
separately. |
The core purpose of a software escrow process is
comparable to disaster recovery. The intent is not that you should use it as a
weapon to obtain access to proprietary source code during normal business
negotiations/disputes that might arise in future. You can expect vendors to
listen to your reasonable concerns. After all, they want to win and keep your
business. But you can not expect them to give you a negative veto over
significant aspects of their current/future business.
Some of the trigger conditions (bankruptcy, breach of
license agreement) can be defined relatively objectively. All the others are
much more difficult to define - which is precisely why vendors may have
problems with them.
One option is to deliberately leave the wording quite
vague in the escrow legal agreement. For example, “.. a material change
in the ownership/structure of the vendor .... the vendor substantially ceases
trading..”. Then both parties agree to be bound by a dispute
resolution process that seeks to clarify if a change is ‘material’ or
‘substantial’. Commercial arbitration is such a process. I am a huge
fan of it as a reasonably priced alternative to expensive legal
proceedings.
