When negotiating a SaaS agreement you may come across the term escrow. What is escrow and is an escrow agreement necessary?
SaaS and Escrow
Under the terms of a SaaS agreement you do not own and only have very limited rights to use the software (which includes the source code) that you are accessing. This is usually not an issue until technical problems arise, i.e. unexpected service interruptions, downtime, loss of application functionality and loss of data. Such problems can add significant costs to your business and you are dependent upon the supplier to resolve these issues, unless you have an escrow agreement in place.
An escrow agreement sets out the terms on which the software source code will be held by a third party – an escrow agent – on behalf of the customer and the supplier. The escrow agent stores a copy of the software source code and will release this to the customer if any of the events set out in the escrow agreement occur (e.g. the supplier fails to maintain the software, there is a transfer of intellectual property rights in the software or the supplier becomes insolvent). Thus the customer has the right to continue to use the software if the supplier is in default. However, having the right to use the software and actually being able to use the source code are very different.
Limitations of Escrow Agreements
The following should be considered by customers before entering into an escrow agreement:
- is the software business critical, if not, do you really need an escrow agreement?
- the cost of setting up the escrow agreement and the ongoing renewal fees;
- do you have the technical know-how to understand and use the source code in the event of an escrow release?
- do you have programmers who can in the long term update and enhance the software to stop it becoming outdated?
- will you need to engage a specialist software consultant to deal with the source code?
- is there alternative SaaS software which could simply be used instead?
There is no point having access to the source code if you cannot actually use and understand it, as access alone will not ensure business continuity.
Types of Escrow Agreement
If you decide to enter into an escrow agreement you will need to choose between a multi-licence or a single licence agreement.
Many suppliers have multi-licence escrow agreements for their source code already in place with recognised escrow agents. The customer can quickly be added to pre-existing agreement as a licensee. The advantage of multi-licence agreements is that they are relatively inexpensive (compared to a single licence agreement). The customer simply pays a fee to join the existing multi-licence agreement and usually an annual renewal fee. The disadvantage of a multi-licence agreement is that only the basic source code will be held in escrow, no customisations will be stored.
If the customer has any source code customisation that they are accessing it is worth considering having a single licence escrow agreement. This will ensure that the customer’s source code version is held in escrow. The disadvantage of this is that the single licence agreement will need to be set up and the fees are much higher.
For assistance with any escrow matters, SaaS, ASP, software on demand contracts or any other IT legal issues contact me at:
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