Software escrow under Dutch law: does it survive a bankruptcy?

Software escrow protects you if your software supplier goes bankrupt or stops maintaining its product: an independent agent holds the source code and releases it to you when an agreed event occurs. Under Dutch law, it only works if the arrangement is a three-party agreement and your licence to use the source code is granted in advance, not on release.

You hold the executable code and a licence; the supplier holds the source code, the build tools and the knowledge. Below we explain how to set up escrow so that it holds under the Dutch Bankruptcy Act (Faillissementswet, Fw).

What is software escrow and which risk does it cover?

The supplier deposits the source code and supporting materials with an independent third party, the escrow agent. The agent keeps them until a defined event occurs, and then releases them to you so that you can keep the software running.

The risk is continuity, not ownership. A company that runs its order processing or production planning on one supplier’s product needs months to migrate, usually with help from the outgoing supplier. Escrow buys you time to leave in an orderly way. Three situations matter.

• Insolvency. The supplier is declared bankrupt, a trustee (curator) is appointed, staff leave and support stops. This is the scenario escrow is written for, and the one where Dutch law plays the biggest role.
• Discontinuation. The supplier withdraws the product, stops supporting your version, or is taken over by a company with no interest in your installation. This happens more often than bankruptcy, and is often missing from the release clause.
• Persistent failure to maintain. The supplier still exists and still invoices, but no longer fixes defects, issues security patches or keeps the product compatible with the systems it depends on.

Should you choose a two-party or a three-party arrangement?

Choose a three-party arrangement. Only then is the release carried out by a solvent third party under its own contract, rather than by a bankrupt supplier.

A two-party arrangement is a promise in the main contract that the supplier will hand over the source code if a defined event occurs. It is cheap but weak. Nobody independent checks whether anything was deposited or kept up to date. More importantly, after a bankruptcy you are asking the trustee to perform an obligation of the bankrupt estate, and the trustee is not obliged to do so.

A three-party arrangement adds the escrow agent as a party to the contract. The agent takes custody of the deposit, checks it, keeps it and owes you a direct obligation to release it. The agent also decides whether a release event has occurred. That takes the decision away from a trustee who has no reason to help you.

What should the deposit contain?

Much more than the source code alone. Source code without build instructions and a list of dependencies may take weeks of reverse engineering before it produces working software, and you do not have that time when your system is already unsupported.

Incomplete deposits are the most common failure in practice. The table below lists what a useful deposit contains.

Add an obligation to update the deposit. A deposit made once at signing is out of date after one or two releases. Link deposits to the release schedule, for example every major release or a fixed interval, and ask to be notified when a deposit is late.

Which level of verification do you need?

For most customers, a completeness and documentation review is the right standard. Choose a full build and run test only where an outage would threaten your business.

• File check. The agent confirms that the deposit is readable, free of viruses and matches a file list. It proves that something arrived, not that it works. On its own, it offers little protection.
• Completeness and documentation review. The agent checks the build instructions and dependencies against the deposit and reports gaps. It catches the common problems, such as missing build steps, undocumented dependencies and components you have no right to use, at a fraction of the cost of a full test.
• Full build and run test. The agent compiles the deposit in a clean environment and runs it with test data. This is the only level that proves the deposit works, but it is slower, more expensive and must be repeated as the software changes.

How do you draft release events that cannot be disputed?

Make each event verifiable from a document or the passage of time, not from a judgement about the supplier’s conduct. The escrow agent must apply the clause under pressure and without legal advice.

Two further points do most of the work. First, put the burden of objection on the supplier: you notify the agent with evidence, the supplier has a short fixed period to object, and if it does not object, the agent releases. Second, agree the dispute procedure in advance, such as binding advice by an expert or arbitration on a short timetable. An objection then costs days rather than months.

What happens to escrow if the supplier goes bankrupt?

The trustee may refuse to perform the supplier’s active obligations, such as maintenance and updates, but cannot revoke a licence granted to you before the bankruptcy. Whether your arrangement actually works therefore depends on how it was structured before the bankruptcy.

What can the trustee refuse?

Under Article 37 Fw, you can give the trustee a reasonable period to state whether it will perform a mutual contract that neither side had fully performed at the time of the bankruptcy. If the trustee does not confirm in time, it loses the right to demand performance from you, and you are left with a claim in the bankruptcy.

Article 37 Fw does not terminate the contract. The trustee can decline maintenance, support, updates, hosting and further deposits: active obligations that cost the estate money, and you should expect it to refuse them. The real question is whether it can also stop you using what you already have.

How has the Supreme Court dealt with rights of use in bankruptcy?

For about a decade, the answer was uncertain. In Nebula (Supreme Court, 3 November 2006, ECLI:NL:HR:2006:AX8838), the Supreme Court (Hoge Raad) held that bankruptcy does not itself end existing agreements. It added, however, that a party with a right of use could not continue to exercise it against the trustee as if no bankruptcy had occurred. Many read this as allowing a trustee to set aside an existing right of use, which worried licensees.

That reading did not last. In ABN AMRO/Berzona (Supreme Court, 11 July 2014, ECLI:NL:HR:2014:1681), the Supreme Court held that bankruptcy has no effect on existing mutual agreements or the obligations arising from them. The trustee has no powers beyond those given by the law or the contract; it cannot, for example, terminate a lease that is still running.

The position was settled in Credit Suisse/Jongepier q.q. (Supreme Court, 23 March 2018, ECLI:NL:HR:2018:424). The trustee may decline to perform. Bankruptcy does not, however, give the trustee the power to undo a performance the debtor rendered before the bankruptcy, or to end a continuing performance in so far as it consists of tolerating or refraining from something.

That last point is decisive for software. A licence is in essence the rightholder’s undertaking to tolerate use that would otherwise infringe copyright, which is a continuing performance of tolerating. Under the current case law, a licence validly granted before the bankruptcy survives it, and the trustee cannot revoke it. The trustee can refuse everything active, but cannot switch off a right of use you already hold.

What does this mean for your arrangement?

Two things follow. First, place the release obligation on the escrow agent, not on the supplier. The agent’s release is its own performance under its own contract, and the trustee’s position under Article 37 Fw concerns performances owed by the estate. A two-party promise, by contrast, requires performance by the estate, which the trustee can decline.

Second, grant the licence in advance rather than on release. This is the most important drafting point, and we deal with it below.

In a restructuring under the Act on Court Confirmation of Extrajudicial Restructuring Plans (WHOA), rather than a bankruptcy, Article 373 Fw restricts reliance on clauses that allow a counterparty to change, suspend or terminate a contract merely because a restructuring procedure has started. How that provision affects a release trigger in a three-party escrow arrangement has not been settled in case law. Do not rely on the start of a WHOA procedure as your only release event; combine it with events such as bankruptcy, discontinuation and persistent failure to maintain.

How should the licence be structured?

Grant the licence in the contract now, subject to a condition precedent, so that it takes effect on a release event. A licence that is only promised on release may never come into existence if the supplier goes bankrupt.

Escrow gives you a copy of the source code, not the right to do anything with it. Source code is protected by copyright, and compiling, modifying and running it are acts that require the rightholder’s permission. Without a licence covering those acts, a released deposit is a folder you may not use. Combine the escrow with a licence that expressly allows you, on release, to use, compile, modify and further develop the source code, and to have a third party do this for you. In practice, you will rarely do the work yourself.

Timing is the weak point. If the release event is the bankruptcy itself, a licence granted on release would have to be granted by a debtor who, from the date of the bankruptcy order, can no longer dispose of assets in the estate (Articles 23 and 35 Fw). The trustee will not grant it for you. Credit Suisse/Jongepier protects a licence you already have, but it cannot protect a licence you never had.

Under a licence granted subject to a condition precedent, the right exists from the date of the contract; only its effect is postponed. Dutch law is generally receptive to this structure. In Rabobank/Reuser q.q. (Supreme Court, 3 June 2016, ECLI:NL:HR:2016:1046), the Supreme Court accepted that where a conditional right had been created before the bankruptcy, fulfilment of the condition after the bankruptcy took effect without any further act by the debtor. That case concerned a conditional transfer of goods and a right of pledge on the conditional right. Applying it to a conditionally granted copyright licence is supported in the legal literature, but the courts have not yet ruled on it.

Also confirm in the contract that using the released material requires no further consent from the supplier or its trustee, and that you may grant a sub-licence to a successor developer.

What does a SaaS or cloud arrangement need?

More than source code. If the supplier’s platform goes offline, you lose the application, the environment it ran in and your data, and source code only restores the first of these, slowly. A continuity arrangement for a service must therefore cover three more things.

• The operational environment. Container images, infrastructure-as-code definitions, configuration, network and security settings and runtime dependencies: enough to rebuild the platform elsewhere.
• Your data. Regular exports of your own data in a documented, non-proprietary format, with the data schema. These exports should run throughout the contract, not only on release, because data you cannot read is of little use.
• The hosting relationship. A way to take over the supplier’s contract with its hosting provider, or an arrangement under which you may take over the account and pay the provider directly.

Are there alternatives to escrow, and who pays?

For standard products, where you are one of many customers and the real risk is discontinuation rather than failure, lighter options often offer better value. The cost of escrow is normally borne by the customer.

Three alternatives are often more useful. A data exit right, with periodic exports in a documented format tested at least once, covers much of the risk at little cost. A right to a running copy, a deployable image you may run for a transitional period, restores service much faster than rebuilding from source code. Direct payment to the hosting provider keeps the environment running while you migrate; it is the cheapest form of cloud continuity and the one most often overlooked.

If you do use escrow, expect a one-off set-up fee, an annual custody fee and separate charges for each verification, depending on its depth. The costs usually lie with the party that wants the protection, normally the customer. A supplier that offers escrow as a selling point may bear them. An arrangement covering several customers of the same product spreads the costs and is often the compromise when a supplier resists. Require the agent to notify you if the fees are not paid, with a right to pay them yourself.

What should you check as a customer?

Review the escrow proposal together with the main software contract. The licence clause and the release events decide whether escrow works after a bankruptcy.

• Is it a genuine three-party arrangement, with an independent agent that owes you a direct obligation to release?
• Is the licence to use, compile, modify and further develop the source code granted now, subject to a condition precedent?
• Does the deposit include build instructions, dependencies, licence keys and documentation, updated with each release?
• Can each release event be established from a document, such as the insolvency register or the KvK trade register?
• For SaaS: are the environment, your data and the hosting relationship covered, or only the code?
• Must the agent notify you if fees are unpaid, and may you pay them yourself?

What should you check as a supplier?

Escrow touches your copyright and trade secrets. Limit the release and the licence to what the customer needs for continuity.

• Limit the licence to maintaining and continuing the customer’s own use, without a right to commercialise the code.
• Include a confidentiality obligation for the customer and any successor developer.
• Agree a short objection period and a fast dispute procedure, so that a wrongful release can be stopped.
• Agree a deposit schedule you can actually meet, linked to your release cycle.
• Check who pays the set-up, custody and verification fees.

What can we do for you with software escrow?

We advise on software contracts, licences and escrow as IT lawyer for customers and suppliers.

• We review the escrow agreement and the main software contract as one package.
• We draft the conditional licence and the release events.
• We negotiate the deposit content and the verification level with the supplier and the escrow agent.
• We add data exit and hosting takeover clauses to SaaS contracts.
• We send the notice under Article 37 Fw and deal with the trustee after a bankruptcy.
• We advise on the release procedure and any objection by the supplier.

Summary

• Escrow secures continuity if your software supplier fails, but only with a deposit that includes build instructions, dependencies and documentation.
• Choose a three-party arrangement, so that a solvent escrow agent carries out the release.
• Under Dutch case law, a licence granted before the bankruptcy survives it; the trustee can only refuse active performances.
• Grant the licence now, subject to a condition precedent, and not only on release.
• For SaaS, also secure the operational environment, your data and the hosting relationship.

Frequently asked questions