What Is an Escrow Agreement?
Escrow agreements are financial instruments that outline the terms and conditions between the parties involved in an escrow arrangement. When two parties are in the process of a transaction, they may enter into a contract whereby one of them, called a depositor, deposits an asset with a third person, called an escrow agent, until the transaction is over. The escrow agent will hold the asset on behalf of the parties and deliver it to the other party, the beneficiary, when instructed to do so or when specified contractual obligations are fulfilled. The assets held in escrow may be money, securities, funds, stocks, and so on.
Although escrow agent agreements are frequently made in real estate transactions, they are useful in the context of any business transaction where one party is to move forward only if there is an absolute certainty that the other party will comply with their obligations. For instance, when a company purchasing goods internationally wants to have a guarantee that the seller can deliver the goods. Equally, the seller wants to ensure that the buyer is going to pay for the goods. The solution is for the parties to formalize an escrow agreement. In this contract, they can agree that the buyer will deposit the funds with an escrow agent and provide irrevocable instructions to disburse the funds to the seller once the goods are delivered to the buyer. The escrow agent, who most likely is an attorney, is bound by the terms of the escrow agent agreement.
How to Draft an Escrow Agreement?
An escrow agreement must detail the terms and conditions of the escrow arrangement. In general, all escrow agreements must include the full name of the appointed escrow agent, definitions for the expressions used in the agreement, escrow funds and detailed terms for the release of the funds, the acceptable use of funds by the escrow agent, escrow agent’s duties and liabilities, escrow agent's fees and expenses, and the jurisdiction and venue, as well as the governing law, in the event a legal action is taken.