What is an escrow service?

What is a software escrow service, and how can a contract template help?

A common question which clients ask is “What is an escrow service, and what do they do?” The concept of an escrow service is both simple, and quite complicated.

Put simply, an escrow service is a third party who holds onto source code when you have a software licencing situation.

But what does all that actually mean?

If we imagine a public transport company – Alpha Busses – has licensed software for its ticketing system. This means it doesn’t own the software, but pays to use it on an ongoing basis. Part of the terms of the license will be that the software company – let’s call them Beta Software again – has to provide ongoing maintenance and support, including regular updates and new releases.

But what happens if Beta Software can’t, or won’t, provide that support?

That is why the source code for the program needs to be held in escrow. In basic terms, the source code is the part of the code which is written by the developer and can be understood by humans. The object code, which comes from the source code, is read by the computer.

What is held in escrow is typically the source code, any documentation to help a new developer work with the program, and a list of third-party tools which the software uses to run.

These are lodged with the escrow agent shortly after the license agreement is signed. The escrow agent then keeps them either in a safe, or on a secure computer network which is not connected to the internet.

The three parties - Alpha Busses, Beta Software, and the escrow agent, then sign a contract which stipulates a number of things:

  • How often the source code held by the escrow agent needs to be updated (typically every three to six months.)
  • Who can have access to check the code, and how often that can happen.
  • How the code will be verified, and under what conditions.
  • Who pays the cost of the escrow agent.
  • Under what conditions will the source code be released to Alpha Busses.

However, if our public transport system is only one of a number using Beta Software’s program, they may sign onto a list of customers with an existing escrow arrangement. There is very little negotiation that can be done with an existing multi-party agreement.

So back to our question – what happens if Beta Software can’t provide support?

This could happen due to a number of events:

  • Beta Software goes out of business.
  • Beta Software changes regions – for instance moving offshore.
  • Beta Software is neglecting to supply Alpha Busses with their agreed support and maintenance.

In these circumstances a number of steps will be followed to confirm whether support really has been withdrawn, and then the source code will be released to Alpha Busses so they can engage a different software developer.

However, there are still stipulations on the source code – it may still be under license, and Alpha Busses is restricted to using the code for the system they have in place, they cannot get a whole new system developed from Beta Software’s source code.

  

In basic terms, that is what an escrow agent is and does. IT Contract Templates have sections dedicated to the use of escrow agents, including clauses around what needs to be held by the escrow agent and how the source code held there needs to be maintained. This will allow businesses to effectively engage the services of an escrow agent and make sure they are not left high and dry if a software company goes bust or stops providing updates.


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