Guard-IT Software Escrow: The Escrow Advisor

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Negotiating Release Conditions

As mentioned in our previous e-letter, escrow release conditions are perhaps the most commonly negotiated part of an escrow agreement. While general release conditions apply to most escrow agreements, there are times when more involved negotiations occur. Because of the fundamental differences in the Parties' interests as seller (Developer) and buyer (Licensee), negotiations can swing either direction before final terms are agreed upon.

To successfully negotiate these important terms, both the Developer's and the Licensee's interests must be considered.

"In my experience during escrow contract negotiations, various Developers have objected to wording that would trigger escrow release upon their insolvency or bankruptcy," says Michael A. Davis Jr., intellectual property law partner in the Austin office of Haynes & Boone, LLP. "Developers may argue that, even upon insolvency or bankruptcy, they might still comply with their support and maintenance obligations so that the Licensee is not damaged and the escrow release is not triggered."

"Conversely, Licensees may argue that the escrow release should be triggered upon the Developer's insolvency or bankruptcy, because it places the Licensee in a higher risk position in which the Developer is more likely to breach its support or maintenance obligations or is more likely to transfer these obligations to a successor who is unknown and perhaps unacceptable to the Licensee," Davis adds.

Even though release conditions can be a sensitive subject and negotiations can see-saw, there's no need to fear stalemate.

The key to negotiating and defining mutually beneficial and agreeable escrow release conditions is focusing on the underlying purpose of the escrow agreement: To provide a mutually beneficial contingency plan that helps to secure the Parties' license agreement or business contract. Like other good-faith negotiations, these often result in better rapport and mutual respect in the business relationship.