How Escrow Services Underpin Financial Transactions

What is an Escrow Agent?

An escrow agent is a natural or juridical person who holds funds or assets in custody, until two or more parties have finalized a transaction or resolved a dispute. The role of an escrow agent is often represented by an attorney. The escrow agent is responsible for the safeguard of funds or assets entrusted in their care, and ensures that the obligations of an underlying contract are honored upon the occurrence of predetermined events. Escrow agreements can govern the relationship between buyers and sellers in M&A contracts, real estate sales and purchase agreements, cross-border trade, greenfield investments, and stock exchange transactions. Parties can use escrow agreements in any situation where capital passes from one party to another. Money, securities, and titles to real estate can be held in escrow.

Parties can retain a law firm to provide escrow services, which permits the use of agents to act as neutral intermediaries to hold and disburse funds in a commercial transaction. Generally, the existence of an escrow agreement is conditional on and ancillary to an underlying obligation (e.g., a sales and purchase agreement).

Parties have the option to choose a bank as an escrow agent through the Commercial Banking Act of 1962 S.9: “A commercial bank may accept deposits of money subject to withdrawal at the end of a specified period by issuing a certificate of deposit”.

Escrow agreements are contracts formed between two or more parties whereby each agrees that a third party should hold an asset on their behalf until their transaction is finalized. The escrow agent’s responsibility is to secure the assets or funds until it receives confirmation or until the predetermined contractual obligation has been satisfied.

Duties of an Escrow Agent

The involvement of an escrow agent in a commercial transaction offers foolproof protection to all parties. Typical duties of the escrow agent are as follows:

1.   The escrow agent must deposit the buyer’s funds with a financial institution.

2.   In a real estate transaction, the escrow agent must inform the appropriate land office in writing of the escrow arrangement. The land office is required to acknowledge the existence of the escrow agreement and restrict the filing of transfer of title of the relevant property until the appropriate office receives a written confirmation of the finalization of the arrangement from the escrow agent.

3.   In domestic as well as cross-border trade transactions, the escrow agent acts as a risk mitigator and ensures that both the seller and the buyer comply with underlying contractual obligations, transferring funds or securities upon presentation of a complying demand for payment.

4.   In mergers and acquisitions, the escrow agent may be retained to complete thorough (legal and financial) due diligence as a necessary condition for the transfer of the funds at closing, often providing post-closing assistance and maintaining, upon request, sureties throughout a pre-determined warranty period.

5.   The funds cannot be transferred or altered unless predetermined conditions occur, or both parties have reached an agreement, or a court has issued an order.

Figure 1. Typical duties of an escrow agent.

Advantages of using an Escrow Agent

Having an escrow agent is an added layer of protection and security to any transaction. Buyers and sellers become vulnerable to one another in that they trust the other party to honor their obligations. Escrow services are provided by neutral parties who can safeguard funds. An Escrow Agreement outlines the duties of an agent to ensure the performance of obligations of two or more parties, which are governed by an underlying contract.

Escrow agents act in favor of both the buyer and the seller in structuring safer financial transactions—for instance, in a commodity sales transaction, the buyer will receive the agreed-upon goods, resting assured that quality and quantity will perfectly match the contract terms, while the seller will be paid in a timely fashion for the delivery of the goods. One major advantage of using a law firm to manage escrow accounts is that additional steps can be performed to ensure that minor discrepancies are uncovered. Law firms often work with third parties who specialize in areas such as quality control to make sure the goods or services provided are up to contract standards. Any discrepancy found is disclosed to the parties, who will ultimately be able to decide the best course of action. The escrow agent will produce written evidence of all money deposits and notify both parties of any transfers that take place. Escrow agents are bound to the conditions of an escrow contract and, unless the contract stipulates otherwise, they are also able to prohibit the transfer of money or property if there is an ongoing contractual dispute. This is a further assurance that the funds will be safeguarded unless the parties reach an agreement, or their dispute is dealt with in court. Often, this additional layer of security will provide companies with non-judicial remedies that will save them time and money.

The main benefit of an escrow account is the protection it offers buyers and sellers alike. The buyer’s funds will remain in a safe place until the contract conditions are met, and the seller will have the assurance that payment will be made in a swift manner. Having an escrow agent oversee this process will have the additional benefit that conditions, quality control, and contractual due dates will also be monitored by a neutral party. This is especially desirable in international trade, where qualified escrow agents will be able to overview the transaction each step of the way.


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