Source Code Escrow Legal Relevance
📌 1. What Is Source Code Escrow?
A source code escrow arrangement is a tripartite setup where:
Vendor deposits source code with an escrow agent
Customer gets conditional access
Access is released only if specified trigger events occur
It protects customers from vendor failure.
📌 2. Why Corporates Need It
When companies rely on:
Enterprise software
Mission-critical SaaS platforms
Custom-developed systems
they face risk if vendor:
❌ Goes bankrupt
❌ Stops support
❌ Terminates business
❌ Breaches contract
Escrow = business continuity insurance.
📌 3. Legal Nature
Source code escrow involves:
| Legal Area | Role |
|---|---|
| Copyright law | Source code ownership remains with vendor |
| License law | Escrow grants conditional license upon release |
| Contract law | Trigger conditions & access rights |
| Insolvency law | Protection against vendor liquidation risk |
📌 4. Typical Release Triggers
✔ Vendor insolvency
✔ Failure to provide support
✔ Material breach
✔ Discontinuation of product
✔ Failure to update escrow deposit
📌 5. Legal Issues in Escrow Arrangements
🔹 1. Ownership vs Access
Customer does not own code; receives limited license.
🔹 2. Scope of Use After Release
Maintenance only? Modification? Commercial use?
🔹 3. IP Protection
Customer must protect vendor’s trade secrets.
🔹 4. Insolvency Complications
Escrow rights may conflict with bankruptcy proceedings.
🔹 5. Adequacy of Deposit
Outdated or incomplete code defeats purpose.
📌 6. Major Corporate Risk Areas
| Risk | Impact |
|---|---|
| Vendor shutdown | System unusable |
| No update to escrow | Code obsolete |
| IP misuse post-release | Litigation |
| Escrow terms unclear | Dispute over release |
| SaaS model without escrow | Total dependency |
📌 7. Important Case Laws
⭐ 1) Engineering Analysis Centre of Excellence v. CIT (2021, SC)
Principle: Clarified nature of software licenses.
Impact: Escrow release creates license rights, not ownership transfer.
⭐ 2) Tata Consultancy Services v. State of Andhra Pradesh (2004, SC)
Principle: Software recognized as valuable commercial subject.
Impact: Emphasizes legal protection of software assets.
⭐ 3) Microsoft Corp. v. Yogesh Papat (Delhi HC)
Principle: Unauthorized copying is infringement.
Impact: Escrow use beyond license scope can be infringement.
⭐ 4) Anvar P.V. v. P.K. Basheer (2014, SC)
Principle: Electronic records must be reliable.
Impact: Escrow deposit integrity matters.
⭐ 5) Super Cassettes v. MySpace (2016, Delhi HC)
Principle: Digital platform IP responsibilities.
Impact: Handling source code requires IP compliance.
⭐ 6) Google India Pvt. Ltd. v. Visaka Industries (2020, SC)
Principle: Liability linked to control and knowledge.
Impact: Customer assumes responsibility when accessing code.
⭐ 7) Ferid Allani v. Union of India (2019, Delhi HC)
Principle: Software inventions may have patent protection.
Impact: Escrow code may contain patentable elements.
📌 8. Essential Escrow Clause Elements
✔ Clear trigger events
✔ Deposit update schedule
✔ Verification of deposit
✔ Scope of post-release license
✔ Confidentiality protections
✔ Escrow agent duties
✔ Dispute resolution mechanism
📌 9. Governance Measures for Corporates
Periodic escrow verification
Ensure documentation included
Review escrow triggers
Align with business continuity plan
Legal review of post-release rights
📌 10. When Escrow Disputes Arise
Serious litigation occurs when:
Vendor contests release
Code is incomplete
Use exceeds license
Insolvency administrator intervenes
📌 11. Key Legal Takeaway
Source code escrow is risk mitigation, not IP transfer. It creates:
Conditional license rights activated upon defined failure events.
Its effectiveness depends entirely on clear triggers + updated deposits + well-defined post-release rights.
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