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WorldEscrow N.V./S.A.
Your Business Continuity, our Service.

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Worldescrow N.V.
Graaf van Egmontstraat 15 bus 1
2800 Mechelen
Belgium
Tel +32 (0)15 20 44 50

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Legal Advice on IT and the added value of Software Escrow

Corporate legal counselors having to deal with Corporate Governance issues in general or Business Continuity and Risk Management matters more specific, whether working as an internal or an external adviser, as soon as IT comes in the picture, software/IT escrow could and maybe should be a part of their advice. The organization they work for is either supplying or buying business critical applications. The risk of doing business implies a dependency on the technology purchased, and the need for a contractual and technological relevant continuity solution. The most obvious one is called software escrow. The continuity problem stands, no matter if custom mission critical software, a cloud solution, in house development or even generic IT-solutions are involved: implementing the right type of technology escrow ensures your customers’ business continuity and thus your service being impeccably complete. Escrow services protects software users and buyers by assuring their business continuity, from simple depositing to extensive testing of transfer-ability .

Software Escrow is a contractual arrangement where a supplier or distributor of software gives the source code of said software in custody with an escrow agent, acting as a trusted third party. As a trusted third party, being independent and neutral, the escrow agent keeps the deposit in custody as a “prudent man” caring for the deposit most diligently. Should certain predetermined events occur or should certain conditions be met, the escrow agent will release the deposit to the users of the software, the so called beneficiaries of the agreement. The business logic behind this: when a supplier no longer can, or wants, to fulfill his obligations with regards to the development, maintenance and functioning of the software, this may cause business-disrupting problems for the users. In order to guarantee these problems are limited to the absolute minimum for the users, user and supplier agree to deposit an exact copy of the relevant materials most notably the source code and documentation with a professional IT escrow agent. This agreement allows the escrow agent to release the deposit to the beneficiary  under very strict circumstances  allowing the beneficiary to maintain the software  by himself or under license with a third party. However, the agreement also includes guarantees to the supplier, so that he remains sole owner of the intellectual property. A good software escrow agreement is a guarantee for business continuity with both supplier and its client.

Procuring software usually means obtaining a license on the software – the right to use the software, not actual ownership of the software. This means that a user usually only receives the compiled version of the software, with which only a machine can work. In order to maintain and alter the software, one would need the original source code and user documentation of the program. These materials are mostly the intellectual property of the supplier and are rarely delivered to the user(s), which is the reason for maintenance agreements between users and suppliers. In these instances, the supplier takes on the responsibility of keeping the software up to date and maintaining the performance. This is even more pronounced with SaaS or Cloud solutions, where the connection between actual application and user is nothing else but a license agreement, and the user is dependent only on the well-functioning of the supplier and its surroundings. A user has very little to protect him or herself against ill functioning of the supplier, and is obliged to consider alternate business continuity measures, including software escrow.

At the same time, a software escrow arrangement is an excellent exercise in knowledge management, in favor of all parties. At reception of every deposit, a verification on the quality of the deposit is executed. Completeness, content overview, presence of passwords, encryption keys, trace-ability and recovery of third party software are among the elements that are always checked. The code can be compiled, certain critical issues can be tested in depth if so demanded, after which all findings are documented and reported, creating significant added continuity value.This last aspect makes an escrow exercise even valuable within internal, custom made IT-projects, simply because most continuity-critical issues are investigated, documented and safeguarded in a structured and transferable way. The moment the project team dissolves and the knowledge is distributed/starts dissipating, there’s still an escrow deposit with all key documentation on the process and resulting software. 

 

Software Escrow : When is it recommendable ?

When the software is of vital importance to the users’ business operations

When replacing the software would take substantial amounts of time

When converting the software would obstruct the business operations’ continuity

When switching or replacing the software requires a significant financial investment

When the current software has required significant financial investment

When replacing the current software would cause significant financial losses

 

Software Escrow: Goal and Purpose

To offer continuity in the use of software where this would be impossible without escrow provisions.

To secure and affirm the underlying business processes

To protect investment (in the software, but also the accompanying hardware)

To facilitate trust between parties

As a part of the Corporate Governance Policy, e.g. Business Continuity Management, Risk Management and Knowledge Management

Software Escrow, an additional safeguard for the supplier

Escrow is the most useful way of offering a complete support to the beneficiaries without having to fear for intellectual property infringements. The Intellectual property of the deposit remains with the supplier, even after release of the deposit. Escrow is an additional safeguard for the supplier as a knowledge deposit. Should – for any reason – knowledge of the product be lost at the supplier, this knowledge can be recuperated from the deposits at the escrow agent. The deposit may be useful in conflicts regarding intellectual property – even within the supplier’s organization. Depositing the software at an escrow agent may serve as a quality check of the product by an external party, allowing the supplier to improve the product itself in later iterations.

Software Escrow and the professional Escrow caretaker

Two inseparable elements are of vital importance for a solid software Escrow settlement: the technical aspect and the legal aspect. A professional Escrow agent has to be capable of providing an ironclad cover on both with an in-house (and thus totally independent) legal and technical staff. The technical staff needs to be capable of, on top of the standard coverage, delivering additional verification's and disaster tests on the deposit, which requires very specific expertise.The technical aspect entails the quality of the deposit, which is assessed by these factors:

The data on delivered media can be read

The material, referred to in the contract, is present and complete

The deposit is free of viruses

The deposit is well documented

The deposit is up to date – which causes us to request at least an annual update

The legal aspect concerns the escrow agreement itself: a solid and well balanced contract has to offer a proper protection for both parties. For the supplier, the main focus is the protection of the intellectual property and knowledge recovery. For the beneficiary, the primary focus is business continuity. Release of the deposit never implies the transfer of any intellectual property right, only the right for actual utilization.

The Escrow agency, who needs to be totally independent, is not to be seen as a IT company nor as a Legal office but as an tech-assurance partner providing added value to both Legal Counselors and Software Application developers’ services portfolio.