The Importance Of Commercial Escrow Services

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The Importance Of Commercial Escrow Services

The term "Escrow" refers to the holding of funds or assets by a neutral, jointly-appointed party for two contracting parties. An escrow account, in si

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The term “Escrow” refers to the holding of funds or assets by a neutral, jointly-appointed party for two contracting parties. An escrow account, in simpler terms, is a bank account that has specific conditions for the “release of funds”. The word is etymologically derived from the French word “escroue”, which means a scrap of parchment or paper that was used as a writing instrument that could be sent to another person until the future condition was met. The ‘escrow agent’ is a neutral third-party intermediary whose job is to make sure that all parties to a transaction do what the agreement or contract requires.

Escrow can be used to provide security and comfort for both parties to a transaction. It can also be used to transfer money or property. Escrow is a great way to reduce risks associated with the non-performance by your counter party.

You might consider an commercial escrow services to assist with certain transactions:

Important considerations

  1. Timing – Escrow terms should be completed as soon as the underlying facility documentation is complete. This will give them the best chance of encapsulating all finalised terms and complying with KYC requirements. To avoid delays after completion, it can take some time to agree on the terms of the Escrow. It is possible that the terms of an escrow service that was established too soon might need to be changed once the transaction documentation has been finalised.
  2. Segregated accounts – Escrow funds should always be kept in separate accounts to prevent any funds from being mixed with trustees’ assets or other parties’ assets. It may be wise to keep funds separate from each other if there are multiple obligations that the escrow agreement covers.
  3. Jurisdiction of courts – An Escrow Agreement often provides for dispute resolution through arbitration in the country where the agent is located. This is usually an alternative to traditional court proceedings. Because the public and media might be interested in disputes involving a significant asset, arbitration is preferred.
  4. Responsibility for loss – It is often difficult and frustrating to determine who should be responsible for the loss when funds are stolen by the escrow holders. The person who caused the hardship has usually disappeared or become bankrupt, so the two sides to the transaction must fight over the funds. In such cases, an equitable solution is unlikely as both parties are generally innocent of any wrongdoing. One party will suffer a significant loss, while the other will still benefit from the deal.
  5. Absolute clarity is required – Any ‘milestones’ that should trigger a settlement or transfer must be set with absolute certainty. There can’t be any room for interpretation. These actions should be able to be executed immediately or, if not, within a predetermined time period. Both the counterparts to the underlying contract and the escrow agent should agree on the consequences of missing a milestone.
  6. Limitation of liability – Liability should be limited to the specific, named agreement. And if possible, a total limit should also be applied together with adequate insurance coverage.

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