How to Deal With an Insolvent IT Supplier

Author:Mr Lloyd Lemmon
Profession:Pinsent Masons

As the slump in the technology market continues and the recession begins to affect some of the major players within the software market, companies need to start asking what will be the impact on their business if their software supplier goes bust and how best can they protect themselves?

The main problem facing a purchaser if its software supplier is made insolvent/bankrupt is that they may no longer be able to have support, error corrections or modifications carried out on the software. Generally a software licence will only grant use of the object code (i.e. that part of the software which is translated into a computer readable form) and without the source code (i.e. that part which of the computer program written in a form comprehensible to a human being) a user will be unable to correct errors or modify the software. Although an EC Directive as implemented by the Copyright (Computer Programs) Regulations 1992 allows a user of software to copy or adapt software for the purpose of correcting errors in it, this right is limited and can be excluded under the terms of the software licence granted to the user.

When purchasers procure a new software system they often conduct a fairly exhaustive investigation into the software supplier's financial strength and the suitability of the product for their purposes. As part of this they often ask to talk with existing customers before concluding an agreement. However, in the current climate a prudent purchaser should also consider other ways to reduce the risks.

There are three main questions a company should be asking a software supplier in order to safe guard against the supplier becoming insolvent, these are:

Have you placed a copy of your software (source code) with a third party escrow agent?

Have you licensed any third parties to provide support and maintenance for your software?

What is the likely impact upon the smooth running of your business if you replace the software with a competitor's software at short notice? (and an internal question - is there another software product which is available?)

Escrow Agreements

An escrow contract is a tripartite agreement entered into between the purchaser, the software supplier and the escrow agent. The supplier deposits the software source code and supporting technical information with an escrow agent. The agent agrees to make the source code available to the customer if the supplier breaches its contractual support and maintenance obligations or...

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