As a SaaS supplier you may want to consider offering escrow agreements to your customers, particularly if you run  SaaS applications which are critical to your customer’s business.

What is Escrow

Escrow refers to a third party holding a copy of the SaaS software source code on behalf of the customer and the supplier.

What is an Escrow Agent

An escrow agent is a third party who stores a copy of the SaaS software source code. The escrow agent will release a copy of the source code to the customer if any of the events set out in the escrow agreement occur.

Why use Escrow

This is usually a customer driven requirement resulting from the fact that the source code for the SaaS software, the expertise to implement it and rights to the SaaS software are only licensed to, and not owned by, the customer for the term of the SaaS agreement.

Customers are concerned that the supplier may:

• fail to maintain the software;
• transfer ownership of intellectual property rights in the SaaS software;
• become insolvent; or
• become unable to carry on supporting and maintaining the software for some other reason.

By having an escrow agreement in place the customer has the right to continue to use the software, if the supplier is in default of its obligations under the SaaS agreement.

Advantages of an Escrow Agreement

Having an escrow agreement in place protects all parties involved in the development, supply and use of business critical SaaS applications. It provides customers with peace of mind for securing long-term availability of a critical SaaS application by enabling customers to update software and fix any bugs even if the supplier is no longer able to support them.

Disadvantages of an Escrow Agreement

Having the right to use the software under an escrow agreement is in reality of little use if the customer does not have the know-how and resources to actually use, maintain and support the source code itself.

Also, the costs of setting up an escrow agreement and maintaining it are relatively expensive. Escrow costs are usually paid for by the customer.

Help

Irene Bodle is an IT lawyer specialising in SaaS agreements with over 10 years experience in the IT sector. If you require assistance with any SaaS, ASP, software on demand contracts or any other IT legal issues contact me:

irene.bodle@bodlelaw.com
www.bodlelaw.com

To register for my newsletter click here

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Other related articles:

• SaaS, ASP Agreements – Essential Elements
• SaaS, ASP Agreements – FAQs – Escrow
• SaaS, ASP Agreements – FAQs – Security
• SaaS, ASP Agreements – FAQs – Confidential Information
• SaaS, ASP Agreements – FAQs – Software Licence
• SaaS, ASP Agreements – FAQs – Source Code and Object Code
• SaaS, ASP Agreements – FAQs – Data Protection
• SaaS, ASP Agreements – Data Protection and Safe Harbor, Issues with German Customers
• SaaS, ASP Agreements – SLAs Explained – Essential Elements
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If you decide to use a local partner to resell your SaaS software to customers outside of the countries in which you are based, you will need to have a distribution/reseller agreement in place between yourself and each distributor/reseller.

What is a Reseller/Distributor?

A reseller is the same as a distributor. A reseller/distributor purchases the supplier’s SaaS software and services under the terms of a reseller/distribution agreement. The reseller/distributor then resells the SaaS software and services to its own local customers in the territory using its own terms and conditions (and SLA). The SaaS supplier has no legal relationship with the reseller/distributor’s customers. Customers enter into a SaaS agreement with the reseller/distributor directly.

Why use a Reseller/Distributor?                                          

Most SaaS suppliers use distributors to enable them to sell their software and services to customers who would not otherwise purchase the SaaS software, due to the Supplier’s:

• lack of physical presence in the customer’s country
• lack of sales channels and contacts in the customer’s country
• inability to speak the local language
• inability to provide customer support in the local language
• inability to provide customer support within the customer’s local business hours
• terms and conditions not being written in the customer’s language, or subject to local laws and regulations

By using a distributor/reseller the above problems are resolved as the distributor sells the SaaS software directly to customers, in the local language, pursuant to local law, with local support as if the SaaS software was his own software.

Advantages

The main advantage of using a reseller/distributor is that the SaaS supplier will have no liability to customers – as there is no contract or legal relationship between the customer and the SaaS supplier. For example, any implementation issues or software errors that the customer encounters when using the SaaS software will be the distributor’s problem. The distributor will be liable to the customer and will be obliged to resolve such issues directly with the customer.

Disadvantages

The main disadvantage of using a reseller/distributor is that the SaaS supplier has no control over the sales process and in particular of the choice of customers. Also, the terms of the agreement itself will be subject to local anti-competitive laws and regulations.

Is an Agent the same as a Distributor?

Agents are often confused with distributors, but there are clear legal differences. An agent is a person or company who acts on behalf of the SaaS supplier to find leads and/or assist with sales of the supplier’s SaaS software to local customers in the agent’s territory.

The agent has no legal relationship with the customer – the agent has no contract with the customer.  The supplier enters into a SaaS agreement, with the customer using the supplier’s terms and conditions and SLA and the supplier is liable to the customers for issues and errors that may arise during use of the software.

Help

Irene Bodle is an IT lawyer specialising in SaaS agreements with over 10 years experience in the IT sector. If you require assistance with any SaaS, ASP, software on demand contracts or any other IT legal issues contact me:

irene.bodle@bodlelaw.com
www.bodlelaw.com

To register for my newsletter click here

______________________________________________________

Other related articles:

• SaaS Agreements – Distributor or Agent – Is There a Difference?
• SaaS Agreements – Distributor/Reseller – Terms to Include
• SaaS Agreements – Essential Elements
• SaaS Agreements – Essential Elements – SLAs Explained
• SaaS Agreements – FAQs – Security
• SaaS Agreements – FAQs – Software Licence
• SaaS Agreements – FAQs – Source Code and Object Code
• SaaS Agreements – FAQs – Escrow
• SaaS Agreements – FAQs – Confidential Information
• SaaS Agreements – FAQs – Data Protection
• SaaS Agreements – Jurisdiction – Info made Available on Internet
• SaaS Agreements – Data Protection – The Patriot Act
• SaaS Agreements – Data Protection – Data Commissioner – UK Fines
• SaaS Agreements – Data Protection -  Sub-Contractors,  Model Clauses
• SaaS Agreements – Data Protection – Liability for Loss of Backup Tapes
• SaaS Agreements – Data Protection – Safe Harbor, German Customers
• SaaS Agreements – Data Protection – Transfer of Data Outside the EEA
• SaaS Agreements – Need for an NDA Prior to Signing a SaaS Agreement
• SaaS Agreements, Software on Demand – Confused?