Technology transfer agreements as well as investment agreements are often accompanied by source code escrow agreements used to secure the IP rights to the software.
The key of programs and software is the source code. It is the fundamental component of a computer program that is created by a programmer. The source code should be written using a human-readable programming language – usually plain text. The main goal of it is to set exact rules and specifications for the computer that can be translated into the machine’s language.
What is source code escrow?
Sometimes it happens that even if special software tailored to one’s needs is created by a professional company, problems may arise. The investor needs to make every effort to protect company in the event that the contractor’s company ceases to exist, for example because of its bankruptcy or liquidation. In such cases, the solution to secure the transfer of ownership of the source code is to put in place source code escrow agreement. This is a service that helps protect all parties involved in a software licence by having a neutral, independent third party escrow agent hold the source code.
Main principles of source code escrow
When drafting source code escrow the parties should keep in mind that the source code is safely stored pending release conditions. Pre-agreed terms of issue specify precisely the situations in which the escrow agent may issue the code to the licensee. This assures the parties that material will not be released unless mutually agreed situations occur. Another thing is that if the product evolves the escrow must be updated. In the event that the software license expires the materials may be returned to the software vendor or destroyed, depending on the wishes of the software vendor.
License to use
The source codes are not made available to the user of the software because they constitute the author’s work protected by copyright law as a work. The use of and access to such source code is then subject to the license granted.
Basic assumptions and contractual conditions
The first important element to include in the contract is the subject matter of the contract. There should be information which system and operation it relates to and for which purposes the system will be used. In this part it should be mentioned that the contract concerns the storage of software source codes.
Another stage is the rules for implementing the agreement. Usually it includes information that the contractor is obliged to provide the contracting authority, as part of the remuneration, with a deposit of source codes for the software in the version corresponding to that installed at the contracting authority’s site and to deliver them after each software update, together with a version card describing the list of changes made to the software. Then agreement refers to all other materials that the contractor provide to the client, for example the detailed compilation procedure, technical documentation of the database containing a full description of the database, tools for preparing installation versions of the developed software, tools for the installation of the developed software together with the installation documentation, etc. It is also worthwhile to include a point on the training of the contracting authority’s staff by the contractor.
One of the most important elements of the agreement is also the part concerning the acquisition of source codes and the license to use them. Here the contractor authorizes the Purchaser to take over and decrypt, and grants in such further specified non-exclusive license to use the deposited source codes deposited in the event of various fixed contingencies. This includes events such as the contractor permanently ceasing operations, the Contracting Authority giving notice of the contractor’s permanent withdrawal from the industry, the Contracting Authority withdrawing from or terminating the Main Contract for reasons attributable to the Contractor, etc.
The following phase will talk about the duration of contract. It states that the deposit is surety for the duration of the license.
The additional contractual condition are penalties jointly established. It is worth taking precautions in case the premises agreed by the parties come true. It concerns such cases as, for example, the ordering party opening an envelope with keys to the archives or using the source codes in a manner other than that specified in the contract. The amounts of money required to be paid in the event of non-compliance with the provisions of the contract should be determined.
A summary of the contract may include a provision on the legal form of the contract and how the parties will proceed if no agreement is reached.
If the entrepreneur intends to introduce internal software in the company – he will not do without escrow agreements for the acquisition of source codes and licenses for their use. Therefore he will need professional assistance of an IT law firm. The advantage of a precisely made escrow agreement is that it safeguards the interests of both parties, client and contractor. It contains conditions for cooperation and mentions solutions in case of occurrence of the eventualities specified in the contract.