What is an 'Escrow Agreement'

An escrow agreement is a legal document that outlines the terms and conditions between parties involved in an escrow arrangement. An escrow agreement defines the arrangement by which one party deposits an asset with a third person (called an escrow agent), who, in turn, makes delivery to another party if and when the specified conditions of the contract are met.

BREAKING DOWN 'Escrow Agreement'

An escrow agreement must fully detail the conditions of the escrow arrangement between the parties. It normally includes such information as the identity of the appointed escrow agent, definitions for any expressions pertinent to the agreement, the escrow funds and detailed conditions for the release of these funds, the acceptable use of funds by the escrow agent, the duties and liabilities of the escrow agent, the escrow agent's fees and expenses, and the jurisdiction and venue in the event of a legal action.

Practical Uses of Escrow Agreements

In the context of a business transaction, there may come a time when it is in the best interest of one party to move forward only if it knows with absolute certainty that the other party is able to fulfill its obligations. This is where the use of an escrow agreement comes into play.

For example, a company purchasing goods internationally wants to be certain that its counterpart has the capacity to deliver the goods. Conversely, the seller wants to ensure that it gets paid if it sends the goods to the buyer. To resolve the issue, the parties can put an escrow agreement in place. In this agreement, they can agree that the buyer will deposit the funds in escrow with an agent and give irrevocable instructions to disburse the funds to the seller once the goods arrive. The escrow agent, likely an attorney, is bound by the terms of the agreement.

In the securities industry, stocks are often the subject of an escrow agreement, in the context of an initial public offering or when they are granted to employees under stock option plans. These stocks are usually in escrow because there is a minimum time limit that needs to pass before they can be freely traded by their owners.

Escrow Agreements and Real Estate

Escrow agreements are frequently used in real estate transactions. Title agents (in the United States), notaries (in civil law countries) and attorneys (elsewhere in the world) routinely act as escrow agents so the buyer can perform due diligence, such as an inspection, on his potential acquisition while assuring the seller of his capacity to close on the purchase.

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