EscrowArrangements

An escrow arrangement is a financial mechanism in which an independent third party, the escrow agent, holds funds, assets, or documents on behalf of two or more parties until specified conditions are satisfied. Escrow arrangements are used to reduce counterparty risk, ensure performance, and facilitate transactions that involve future deliverables, complex contingencies, or jurisdictional differences.

In a typical escrow, the buyer deposits consideration into an escrow account or delivers assets to the escrow agent. The agent verifies receipt and holds the items until contractual obligations are fulfilled by the seller or other conditions are met. Upon verification, the escrow agent releases funds or assets to the applicable party. If conditions are not met, funds may be returned, or disputes are resolved per the agreement or through mediation or arbitration.

Common forms include cash escrow accounts, title or document escrow in real estate, stock or share escrow in mergers and acquisitions, revenue escrow for ongoing royalties, and intellectual property escrow for source code or licenses. Uses include real estate closings, business acquisitions, online marketplaces, and cross-border deals. Escrow agents can be financial institutions, law firms, or specialized escrow companies, and the terms govern duties, fees, release criteria, and dispute resolution.

Regulation and risk: Escrow arrangements are subject to fiduciary duties and applicable trust or licensure requirements in many jurisdictions. Parties should specify release conditions, verification procedures, fee structures, and rights in case of dispute. Risks include misappropriation by the agent, misinterpretation of conditions, and legal enforceability concerns.

See also: trust account, letter of credit, performance bond.