The Hindu Business Line : Three to tango

What do United Bank of India, Andhra Bank, Allahabad Bank, Bank of Maharashtra, and Punjab & Sind Bank have in common apart from being nationalised entities? All these banks in their recent tenders for customised software have insisted that the software developer place the source code in escrow.

(Escrow here is a third party agent on whom both the seller and buyer rely, to hold the source code in safe custody. Should something happen to the selling company, the escrow can release the source code to the buyer so that the latter's interests are protected.)

Today banking has become a 24x7 business fuelled by information technology and communication networking systems, where software is customised to meet the needs of each bank. This customised software is then licensed by the software developer to the bank.

Under the Software License Agreement, the developer usually has contractual obligations to maintain, enhance or further develop the software licensed. The risk arises when in future the software developer shuts down, or fails or refuses to abide by contractual obligations.

Some banks insist on Performance Bank Guarantee as a risk mitigating procedure; however the licensee (bank) would incur additional cost in getting third parties to redevelop the customised software, in addition to jeopardising business continuity. In such situations performance guarantees would be totally inadequate. This was the point of contention in a recent case between "iBilt Technologies Ltd Vs Telecommunications Consultants India Ltd" decided by the Delhi High Court on the grounds that TCIL had cancelled the tender awarded to iBilt on account of the inadequacy of the Performance Guarantee provided by iBilt.

A bank can protect itself against such contingent events, if it can get access to the all-important source code, whereby it can engage the services of a third-party software developer. On the other hand, a software developer tends to be sceptical that the intellectual property of its source code would be infringed should it provide the same to the licensee at the first instance itself. Software escrows provide an appropriate solution in such situations.

The Reserve Bank of India in 1998 appointed the `Committee on Technology Upgradation in the Banking Sector' to examine and suggest steps to facilitate implementation of the spirit of the recommendations of the Narasimham Committee-II. In the Committee report brought out in 1999, Chapter 4 relating to outsourcing of technology and services by banks, says that there exists "the need to get the entire source code for the software that is outsourced. An escrow arrangement for the software outsourced may prove to be an ideal solution". In Chapter 9, the Committee explicitly recommends that "The entire source code should be obtained, if need be under an escrow arrangement".

Software escrows are widely used the world over. Such escrows are initiated by signing a tripartite agreement called the Software Escrow Agreement between the licensor, licensee and the Software Escrow Agent. The agreement defines the duties, responsibilities and liabilities of all the parties entering into it.

Once the Software Escrow Agreement is signed the source code of the software licensed, called the deposit material or the escrow material, are placed in the secure custody of the escrow agent. In the event of a pre-defined contingency called "the release condition" the deposit material is released to the licensee. The release conditions are decided by the licensor and the licensee at the time of entering the agreement.

In case of a dispute, the Software Escrow Agent abides by the arbitration order or court order. Software escrow agents also provide technical verification services to ensure the completeness, functionality and performance parameters of the source code.

Through the software escrow arrangement a licensee can protect its interests and rights accruing out of the Software License Agreement; it also provides the licensor with a unique USP to market its software products by addressing the critical issue of business continuity of the licensee.

(By Sudhir Ravindran, Clive Caldeira and Arun Mahadevan

The authors can be reached at info@escrowtech.in.)