Those involved in technology deals express differing views on source code escrow. These views range from resignation that the supplier won’t agree to it to the view that even if we do get it, it will only be available on the provided non-negotiable terms or a fear that even if we could get our hands on the code, we wouldn’t know what to do with it. In our experience, the position is not quite as black and white on any of these points. There is an extra aspect to think about in relation to technology offerings which include software as a service and traditional source code escrow may not always be appropriate here. Public disputes on escrow arrangements are few and far between and that’s why a recent English High Court case is worth a read. The decision in the case, Filmflex Movies Limited and Piksel Limited can be accessed here.
The parties agreed a Master Services Agreement (the MSA) covering provision of software development services for a platform to enable delivery of video broadband content. The MSA included a clause requiring the supplier to put certain source code materials into escrow with the nominated escrow agent. The parties agreed to enter a three way escrow agreement and it was that agreement which was the basis for the dispute. Specifically the dispute related to the “Release Events” – the circumstances which result in the release of source code to the licensee. The release events in the escrow agreement covered insolvency, cessation of business and material breach. However, they did not correspond to the trigger events listed in the MSA, which included any termination, change of control of the supplier and where the licensee brought a third party in to provide the services.
The latter scenario did arise. The licensee sought access to the source code directly from the supplier (it was accepted that the escrow agent couldn’t be forced to provide it as only the more limited release events applied to it). The supplier refused on the basis that the more limited release events in the escrow agreement applied.
The supplier argued that the MSA contemplated a future escrow agreement and once that was entered into it superseded the escrow release events set out in the MSA.
The Court didn’t agree with this and interpreted the provisions in the MSA as requiring the supplier to bring about the release of the source code i.e. as the supplier agreed the release event under the MSA, it was obliged to require the escrow agent to release the code. The court said the release provisions in each agreement were not inconsistent, they were just different.
The case illustrates:
- the importance of properly considering, and where necessary negotiating, escrow arrangements and particularly release events;
- the risks in agreeing to agree the escrow later (on the basis it is just a standard form document to sign); and
- the importance of ensuring various documents that make up a technology transaction are drafted in a co-ordinated way to avoid risk of conflict between them.
It also shows that good escrow is worth the effort.