The clause usually arrives late, buried in the draft master agreement: “Vendor shall hand over the complete source code of the solution to the Customer upon delivery.” Nobody mentioned it in the pilot. Nobody mentioned a price. And it would quietly turn your product into the customer’s property.
It is rarely malice. It is a template written for bespoke development, now being applied to a product.
What is the short answer on pushing back against a source code transfer clause?
Separate what you are selling. A licensed product, with its background IP, stays yours. Customer-specific deliverables can be assigned, and a real continuity concern can be met with source code escrow, release conditions and step-in rights. If the customer truly needs full ownership of the code, price it as a separate, paid transfer, not as a free line in the legal draft.
The rest of this post gives you the argument, the alternatives and the wording to propose.
Why do Indian enterprise procurement teams ask for the code?
The request nearly always comes from one of three worries: what happens if the vendor shuts down, what happens if the vendor stops supporting the product, and what happens if the customer wants to switch providers. Legal and IT-risk teams reach for the strongest remedy they know, which is ownership of the code.
Once you see that, you can answer the worry instead of defending the clause.
What does Indian law say about who owns software built for a customer?
Ownership depends on the contract. Under the Copyright Act, 1957, the author is generally the first owner, with exceptions such as work made in the course of employment, and an assignment must be in writing. Section 19 sets default rules where an assignment is silent on duration or territory, which makes careless drafting costly for both sides. See this overview of assigning copyright in commissioned works and the Pine Labs v. Gemalto case summary.
The practical lesson is to say precisely what is assigned, what is licensed, for how long and where. This is general information, so have your counsel review the final wording.
What should you offer instead of a free code transfer?
Offer the continuity the customer actually needs, in a form that does not give away the product. There are four standard options, from lightest to heaviest.
| Option | What the customer gets | What you keep |
|---|---|---|
| Perpetual licence to the deployed version | Right to keep using the version they paid for if the relationship ends | Source code and all future versions |
| Source code escrow | Code held by a neutral agent, released only on defined triggers such as insolvency or abandoning support | Ownership; the code is never released in normal operation |
| Step-in and transition rights | Assisted handover, documentation and a transition period | Core IP, with a paid transition services rate |
| Paid source code licence or assignment | Full code access, priced as a separate commercial item | Negotiated: usually a field-of-use limit or a retained right to keep selling |
Escrow is the compromise most vendors and buyers can live with. This guide to source code escrow agreements explains how deposits, verification and release triggers work.
How do you split background IP from customer-specific work?
Background IP stays with you
Define the platform, its modules, tools, models, documentation and anything built before the contract or independently of it as your background IP. The customer receives a licence to use it, never ownership.
Foreground IP can be assigned, narrowly
If you build something paid for and specific to the customer, such as a report template or a custom integration, you can assign that deliverable. Keep the right to reuse your general know-how, methods and generic components, and make sure the assignment never reaches into the core product.
Write the licence-back
If anything is assigned, take a licence back so your platform can keep depending on it. This protects you from accidentally giving away something your product needs to run.
What is a good way to say it in the negotiation?
Lead with the concern, not the refusal. A line like this tends to land well: “We understand the requirement is business continuity. We can offer escrow with release on insolvency or discontinued support, a perpetual licence to the deployed version, and a transition plan. A full transfer of the code base would be a separate commercial item.”
- Ask which risk the clause is meant to cover, and write it down.
- Map each risk to an alternative from the table above.
- Put a price on anything beyond that, including the value of the IP you are giving up.
- Escalate to the business sponsor if legal will not move, since they care about continuity, not code.
When should you walk away?
Walk away, or at least reprice, when the customer wants unrestricted ownership of your core product at the price of a licence, with no limit on resale or reuse. At that point you are selling the company, not a subscription.
If you do agree to a transfer, price it on the lifetime value of the IP, restrict the field of use and make sure support and updates are separately charged.
References and Further Reading
- Assignment of copyright in commissioned works (Law.asia)
- Pine Labs v. Gemalto Terminals India: case summary (Legitquest)
- All you need to know about source code escrow agreements (iPleaders)
- Technology escrow agreements (Licensing Executives Society)
- Limitations and exclusions of liability in B2B contracts in India (CMS Expert Guides)
Frequently Asked Questions
Can an Indian enterprise legally demand ownership of vendor source code?
They can ask, and a contract can assign it, but nothing in Indian law forces a product vendor to do so. Ownership is decided by the agreement, so the question is commercial. If you agree, make the scope, duration and territory of the assignment explicit and price it.
What is source code escrow and will Indian buyers accept it?
Escrow places the code with a neutral third party that releases it to the customer only on agreed events, such as insolvency or ending support. Many enterprise buyers accept it because it answers their continuity worry without handing over the product. Offer it early, with clear release triggers and verification of the deposit.
Should I charge for a source code transfer?
Yes. Handing over the code gives away revenue you could earn from other customers and removes your control of the product. Price it as a separate item reflecting the value of the IP, restrict how the customer may use it and charge separately for support and updates.
Conclusion
A source code clause is a continuity request wearing legal clothes. Find the worry behind it, answer it with escrow, a perpetual licence or transition rights, and treat any full transfer as a priced, restricted commercial decision. You keep your product and the customer keeps their peace of mind.
This article is general information, not legal advice. Have your counsel review contract language.
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