Escrow agreement

An escrow agreement is a contractual instrument that is frequently used in the IT industry in particular. It serves to balance the interests of software manufacturers and users with regard to access to the source code of software. The term “escrow” comes from the English and means “trust” or “deposit”. In an escrow agreement, the source code of a software is deposited with a neutral third party (the escrow agent), who releases it to the software user under certain conditions.

Functionality and participants:

1. software manufacturer: develops the software and owns the rights to the source code.

2. software user: He receives the right to use the software, but initially has no access to the source code.

3. escrow agent: an independent third party, often a specialized escrow service provider, who keeps the source code safe and releases it to the user when certain events occur.

Trigger for the release of the source code (release events):

1. insolvency of the software manufacturer
2. discontinuation of further development or support for the software
3. breach of maintenance or support obligations by the manufacturer
4. change of control over the manufacturer (e.g. sale of the company)

Advantages for the software user:

1. protection of the investment: the user can still use and maintain the software even if the manufacturer is no longer able to do so.

2. avoidance of vendor lock-in: Dependence on the original manufacturer is reduced.

3. possibility for further development: With access to the source code, the user can adapt the software to his specific needs.

Advantages for the software manufacturer:

1. confidentiality: The source code remains protected as long as no release event occurs.

2. competitive advantages: The offer of an escrow agreement can be a selling point to customers.

3. limitation of liability: Liability for damages arising from the use of the source code by the customer may be limited.

Legal aspects:

1. copyright: The escrow agreement must be compatible with the rules of copyright law. In particular, the software manufacturer must be legally able to grant the user the necessary rights to use and modify the source code.

2. contract drafting: The escrow agreement should precisely define the release events, the rights and obligations of the parties and the liability rules.

3. insolvency law: It must be ensured that the source code can also be released in the event of the manufacturer’s insolvency.

4. international context: In the case of cross-border escrow agreements, questions of private international law and choice of law must be considered.

Challenges and limits:

1. costs: Setting up and managing an escrow agreement involves costs that can be a hurdle, especially for smaller companies.

2. update: The stored source code must be updated regularly in order to remain synchronized with the delivered software version.

3. limited usability: Even with access to the source code, the maintenance and further development of the software can be a challenge, especially if specific know-how is required.

4. confidentiality: Despite the deposit with the escrow agent, there is a certain residual risk to the confidentiality of the source code.

Conclusion:

Escrow agreements are an important instrument for minimizing risk and balancing interests in the IT industry. They offer software users additional protection and can therefore increase the acceptance of software solutions. For software manufacturers, they can be a competitive differentiator. The decision for or against an escrow agreement depends on a variety of factors, including the criticality of the software, the market position of the manufacturer and the specific risks and requirements of the user. In any case, the design of an escrow agreement requires careful consideration of the legal and practical aspects as well as a clear and balanced contract design.