Escrow comes in to play when two parties hand over something valuable (money, contracts, software etc) to a trusted third party (who acts as the agent) to release the valuable item when certain conditions are met. In the context of software, databases which this short article will focus on, escrow acts as an assurance against the software, website or database developer in this relationship going out of business, or even against it providing a poor service. In contrast, it can equally be used by the provider to safeguard payment for software development etc in the event that it completes the work and the clients is not in a financial position to pay for it or for the software, website or database developer to provide its clients with some comfort as to its credibility and the safeguards it has put in place for the benefit of the client.

Some of the common types of Escrow arrangements used in the IT sector:

Software escrow:

The majority of software code is written in source code and then compiled into object code. What most customers receive to run their applications is the object code (also known as the front end). The source code is kept by the software developer and is often proprietary to it. Because source code is human readable it has a value in that it is required by any fellow professional software developer to modify and adapt the object code. Obviously if the original software developer is consulted and engaged in making alterations and changes to form and function of a website as and when a client requires, then he can charge for that. Is it normal for a software developer to retain the source code? much depends on what was agreed by the parties at the outset, failing which the default position may well be that it resides with the developer. Also when developing software some software developers may subsidise part of the cost of the project by developing the software at a lower price so that they can utilise the underlying source code for other projects. This is quite normal in the industry.

To alleviate the concerns of the client, the source code can be put in escrow and given certain circumstances the client can have access to that source code. The circumstances that would often trigger a release of the source code relate to the developer going out of business or being taken over and the new entity not wanting to modify, adapt or support the software held in escrow, general failure to maintain the software etc.

Website Escrow:

Website Escrow often relates to the storage of the source-code that makes up a website and the functionality of it in order to protect the owner of the website if the website designer goes out of business or fails to live up to the terms of their development or maintenance and support agreement. Website escrow is of crucial importance for those website owners that value the website as an integral part of their business. Imagine if your website was inaccessible or you could not update or maintain it because the firm that originally designed it and potentially hosted it for you is now no longer in business.

If you do not have the source code to your website and you cannot live without your website as a source of marketing and sales (including leads/ enquiries) then you need to enter into a website escrow contract with your website developer. Website escrow protects your business by storing the source-code with an agent for safe keeping to cater for the eventualities outlined above.

Database Escrow:

Database Escrow refers to the storage of database software made by a software development firm for the protection of the businesses using that database software. Databases often contain a lot of valuable information which businesses have built up over the years and businesses are heavily reliant on them working properly. These databases are often integrated and form part of other key systems in an organisation and if the databases were to fail, this is likely to result in the contents of the databases to be unavailable and key information inaccessible. The end result of this to a business could be catastrophic.

In these circumstances database escrow could assist in alleviating some if not all the concerns of the client business reliant on the developers who built the databases and assisted in compiling it.

If the database developer goes out of business, sells the database software to another party, or fails to live up to agreements relating to support or maintenance, database escrow services can provide for business continuity.

Escrow services are no substitute for (where permissible) your own regular backups.

Escrow services are run by someone independent, trustworthy and reliable and includes, amongst others, solicitors and lawyers highly skilled in this area.

Izaz Ali (izaz.ali@lawdit.co.uk). Izaz Ali is a commercial lawyer who specialises in information technology law and intellectual property law with an emphasis on IT, escrow and buying and selling online businesses.