A deposit of an item by a first party with a third party known as an ‘Escrow Agent,’ who is contractually required to turn over the escrowed item to a second party in certain circumstances, and typically return to the first party if those circumstances do not transpire within a defined period of time. Any sort of item within reason can be escrowed, including money, software, data, title deeds, signed but undated assignments, shares, etc. Where an escrow of funds is made, it serves as an effective guarantee to a counterparty that the funds are available to pay any agreement.
Escrow agents usually charge a fee, which can be based on the monetary amount escrowed, or the class of asset; for long term escrows of items like source code that fee may be on an annual basis, while interest may be payable on long-term monetary escrows. Escrow clauses should normally specify which party is responsible for paying any escrow fees and it may be useful to include the agent’s proposed escrow agreement as an appendix to the agreement, with an agreement to use an escrow agreement in substantially the same form.
To give typical examples of escrows:
- a party making a purchase of real-estate, a business or another asset for cash will, on execution of the purchase agreement make a deposit of the purchase price into escrow pending completion of the overall transaction;
- a company purchasing software may request that a copy of the software source-code and documentation be deposited with an Escrow Agent (a source code escrow), who has instructions to turn it over to the buyer if the vendor goes bankrupt or defaults on maintenance obligations.
- In another arrangement, where parties are seeking to settle a dispute in a manner, that requires the second party to do a series of things, and the first party to then pay funds, the first party might escrow the funds subject to the condition that they be paid to the second party when it has completed its side of the settlement;
- alternately executed documents may be placed with the Escrow agent, to be released to one party or the other in specified circumstances.
Escrow arrangements are often used in the United States, particularly in real estate sales.