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How cool is escrow

Written by Michael Coyle on 09 November 2012

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A Suitable Case for Escrow?

A recent High Court Case highlights the urgent need for third party escrow agents.

Psychometric Services Ltd (“The Claimant”) v Merant International Ltd (“The Defendant”) [2002]  F.S.R. 8

What do we learn from this case?

1. What is Source Code?

“A computer functions in response to a set of electronic signals supplied to it. The software is  the combination of data and instructions, which controls the computer. The software which directly  controls a computer is written in a language which computers understand but which is  incomprehensible to humans. It is said to be a low-level language. It is called object code.  Pursuant to the agreement between the parties, XX has been supplied by YYYY with the software in  object code. As YYY acknowledges and asserts, XXX has access to that code but cannot read or  change it. It is, therefore, of little use to XXX in relation to its desire to rectify defects and  to further develop it. However, computer programs are, in large part, written by or under the  control of humans. The authors, that is to say the computer programmers, have to understand what  they are doing in order to refine any software and to correct any defects in it. A computer  programmer must be able to understand the program, appreciate which parts control which functions  and so on. For these reasons the software will be created in a form known as source code. It is a  high-level language which is comprehensible to humans (or at least a group of suitably trained  ones) ”.

2. The terms of the Contract are essential.

2.1 Ensure that all object and source code ‘matters’ are properly defined. Distinguish between the  two and do not simply refer to ‘ works.’ 2.2 Always use Escrow Agents, i.e. independent third parties who hold the software and will only  release it in accordance with the escrow agreement.

The Facts

In 1999 The Claimant decided to carry on its marketing and recruitment business business via the  Internet and for this purpose required the design of websites which would allow users to enter  answers on-line, software was designed and the Defendant was contracted to carry out the same. It  was agreed that the fees to be charged by the defendant would be capped at £195,000 plus VAT.

It soon became clear that the Claimant faced significant problems with the software. It would have  been a market-leading and highly profitable business. However, the current position was that its  Internet sites were not operating perfectly and that its three existing clients had repeatedly  complained about the software. Towards the end of 2000, the Claimant paid the Defendant £200,000  to enable a software audit to be carried out by a third party. According to the Claimant this  revealed that most if not all of the problems with the software were attributable to the  substandard fashion in which the Defendant wrote it and that none of the three products worked  satisfactorily. As a result of these and other problems the relationship between the parties had  broken down.

The Claimant now wanted to put his hands on the software as time was running out, and that it was  vital to its current and future business that the software be corrected and that the websites  function properly as soon as possible. It sought access to the source code to enable a third party  to carry out the task of perfecting and further developing the software.

The Claimant asserted it was entitled to the source code under the agreement with the Defendant  and brought an application for a mandatory injunction requiring the Defendant to hand over the  source code. The Claimant asserted that unless the source code was handed over it would suffer  unquantifiable loss because it was likely it would lose its existing clients, future orders and  would very likely go into liquidation. The Defendant denied the Claimant's right to access to the  source code and claimed that the Claimant had no realisable assets and no cash with which to pay  any part of the amount it owed to the Defendant and the application was an attempt by the Claimant  to get hold of the software without paying for it.

Held, ordering delivery up of the source code:

(1) What was sought was really no more than an order for delivery up and involved the more or less  mechanical task of making a copy of the source code and handing it over to the Claimant. If the  Claimant was refused the relief it sought its Internet business would collapse and it was likely  it would go into liquidation. This would be an enormous injustice if at the end of the trial the  Claimant was found to be right. Even if the Claimant was able to find a backer, the overwhelming  likelihood was that it would lose its existing clients and would lose its leading position in the  market. These heads of damage were not only unquantifiable but were also potentially very large.

(2) If the injunction was not granted, the Claimant would almost certainly go into liquidation in  which case the Defendant's loss would be £ 960,000. It would suffer no additional loss if the  injunction was granted and, in fact, was likely to have a greater chance of recovering what moneys  were due to it if the injunction were granted and the Claimant survived.

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