# Escrow arrangement

Source: https://contracko.com/glossary/escrow-arrangement

# Escrow arrangement

A neutral third party holds money, documents or source code, released on agreed conditions.

## Definition

An escrow arrangement places assets such as funds, deeds or software source code with an independent escrow agent, who releases them only when defined conditions are met. In software contracts a source-code escrow protects the licensee by allowing release if the supplier goes bankrupt or fails to maintain the software. The release triggers, verification and continuation rights must be set out clearly in the escrow agreement.

## Example

> A SaaS contract includes a source-code escrow released to the customer if the vendor enters bankruptcy.

## Why this is a business risk

An escrow arrangement that is not kept up to date provides false security. Source code deposited once and never updated becomes worthless as the software evolves. Release triggers that are poorly defined can block the licensee from accessing the code precisely when it needs it. For financial escrow, an agent with inadequate safeguarding arrangements or unclear release conditions creates execution risk at the moment of the triggering event.

## How to manage it

- Define the release triggers precisely: bankruptcy, insolvency event, material breach of maintenance obligations or cessation of the product.
- For source-code escrow, require the vendor to update the deposited materials on each material release and to verify the deposit annually.
- Choose an established escrow agent with a clear safeguarding structure and defined liability for the deposited assets.
- Specify verification rights: the licensee or an independent expert should be able to test that the deposited code compiles and matches the production system.
- Track the escrow deposit update obligations and annual verification dates alongside the main software contract renewals.

### How Contracko helps

Contracko tracks escrow obligations extracted from software and licensing contracts, including deposit update requirements and annual verification dates, alongside the main contract in the repository. Reminders ensure these obligations are not overlooked between contract renewals, keeping the escrow protection current.

## Legal references

- [BW 7:600 Dutch Civil Code: safekeeping Dutch law](https://wetten.overheid.nl/BWBR0005290)

Unless marked otherwise, references are to Dutch law (Burgerlijk Wetboek, the Dutch Civil Code); EU instruments such as the GDPR apply across the EU. This is general information, not legal advice. Other jurisdictions treat these concepts differently. Verify the current text and your situation with a qualified lawyer.

## Relevant for

[Software & SaaS](https://contracko.com/industries/software-saas)[IT Services](https://contracko.com/industries/it-services)[Financial Services](https://contracko.com/industries/financial-services)

## Related clauses

- [Intellectual Property Clause](https://contracko.com/clause-library/intellectual-property)
- [Exit / Transition Clause](https://contracko.com/clause-library/exit-clause)

## Related terms

- [Bank guarantee](https://contracko.com/glossary/bank-guarantee)
- [Deposit agreement](https://contracko.com/glossary/deposit-agreement)
- [Bankruptcy](https://contracko.com/glossary/bankruptcy)
- [Vendor lock-in](https://contracko.com/glossary/vendor-lock-in)

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## Frequently asked questions

Common questions about this term.

- **Q:** What is a source-code escrow and why is it used?
  **A:** A source-code escrow is an arrangement where the software vendor deposits the source code with a neutral agent. The licensee can access it if the vendor becomes insolvent, ceases to maintain the software or fails to fulfil key obligations. It protects business continuity when the licensee cannot operate without the software.

- **Q:** How often should escrowed source code be updated?
  **A:** Best practice is to update the escrow deposit on every major release and at least annually. The escrow agreement should specify the update schedule and what happens if the vendor fails to update.

- **Q:** Is a financial escrow different from a source-code escrow?
  **A:** Yes. A financial escrow holds money (e.g. a purchase price, a deposit or an earnout payment) pending a condition such as completion or dispute resolution. A source-code escrow holds intellectual property. Both use the same principle of a neutral third party holding assets pending a trigger.

- **Q:** Can the escrow agent be held liable if it releases assets incorrectly?
  **A:** Yes, the escrow agreement typically specifies the agent liability for incorrect release. Choosing a reputable agent with professional indemnity insurance and clear procedural rules reduces this risk.

- **Q:** What rights does the licensee have after the escrow is released?
  **A:** The licensee typically receives a licence to use the source code for its own internal purposes (continuation rights), usually limited to maintaining and operating the existing system. The licensee does not generally receive a right to commercialise or redistribute the code.

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