The short version
- An escrow is a three-party arrangement: the party depositing, the party who may become entitled, and a neutral agent holding the asset under instructions it did not write.
- The agent is a fiduciary as to custody but has no discretion as to outcome. It follows the release condition literally, and where the condition needs judgement, it does nothing.
- A release condition works when a stranger holding only the escrow agreement and a document can say yes or no. "Satisfactory completion" is not that; "the buyer's signed acceptance certificate, or no written rejection within ten business days" is.
- Where the parties give conflicting instructions the agent can interplead — deposit the stake with a court under 28 U.S.C. § 1335 or Rule 22 and step out — which resolves the deadlock at the price of a lawsuit neither party planned.
Three parties, and only one of them is neutral
An escrow puts an asset — usually money, sometimes a deed, a share certificate or a copy of source code — into the hands of a third party who holds it under written instructions until a stated event happens. There are always three roles: the depositor, the party who may become entitled, and the agent.
The agent is where the misunderstanding starts. It owes fiduciary duties to both sides as to custody: safeguard the asset, keep it segregated, follow the instructions with care. It owes no duty to work out who deserves the money. An agent that exercises judgement about the merits has stepped outside its instructions, which is the thing that makes it personally liable. So it reads the condition, and if the condition is not plainly met on the face of what it holds, nothing moves.
The release condition is the whole document
Everything else in an escrow agreement allocates risk between the parties and the agent. Only the release condition decides where the asset ends up. The test for whether it is drafted well is mechanical.
The test a release condition has to pass
Give the escrow agreement and one document to a stranger with no knowledge of the deal. Can they say yes or no?
Yes — the document decides it
A signed certificate, a recorded deed, a filed return, a dated test report, the absence of a written objection by a date. The agent releases without asking anyone.
No — it depends what you mean
"Satisfactory completion", "the work is finished", "no material issues remain". The agent cannot act, so the fund sits until both sides sign a joint instruction or a court orders otherwise.
The failure is almost never bad faith. The parties wrote the condition in the language they negotiated in, full of shared context, and handed it to an institution with none. Two fixes cover most of it: name the document that proves the condition, and give silence a meaning.
| Vague, as usually drafted | Testable, as it should read |
|---|---|
| On satisfactory completion of the works | On delivery to the agent of the architect's certificate of practical completion |
| When the buyer accepts the deliverable | On the buyer's signed acceptance form, or on the eleventh business day after delivery if no written rejection with reasons has been served |
| If a warranty claim is made | On a notice of claim in the form of Schedule 2, served before the survival date, stating the amount claimed |
| When the sale completes | On the agent's receipt of a copy of the recorded deed bearing the recorder's stamp |
| If the supplier fails | On a certified copy of the bankruptcy petition, or a statement of the licensee that support has not been provided for 30 days, with no counter-notice from the licensor within 10 days |
The deemed-acceptance device in the second row does the heaviest lifting. Without it, a party who simply stops responding controls the money indefinitely, which is the same failure that undermines badly written milestone schedules — the mechanics are set out in the guide to deposits and milestone payments.
Escrow agreement clause checklist
The clauses an escrow agreement has to settle — parties and agent, the asset, release conditions, notices, fees, interpleader and termination — with what each one decides.
What the rest of the document is for
The remaining clauses are worth one read: two of them will be used and the rest never will.
An escrow agreement, region by region
A three-party escrow agreement
On fees, the convention is a split — half each, or borne by the buyer as a transaction cost — but it is a convention, not a rule, and the amount is not trivial on a small deal. Get the fee schedule before you agree who pays, and read three lines: the annual minimum, which applies whether or not anything happens; the per-claim charge, which turns an active dispute into a running cost; and who pays the agent's legal costs if it interpleads — usually the parties, jointly and severally, out of the fund.
When the parties disagree, the agent leaves
Conflicting instructions are what escrow agreements are actually built for. The buyer says the condition failed; the seller says it was met. The agent will not choose. What it can do is interplead: name both claimants, pay the stake into court, and ask to be discharged.
In federal court there are two routes. Rule 22 lets a stakeholder facing double or multiple liability require the claimants to interplead. Statutory interpleader under 28 U.S.C. § 1335 reaches further — $500 or more at stake, two adverse claimants of diverse citizenship, and the money deposited with the court or a bond posted. State courts have equivalents.
The cheaper alternative is a tie-break inside the agreement: an expert determination clause naming a category of expert and making the determination final and binding on the agent. It converts a lawsuit into a paid opinion, and the agent will treat the determination as a release instrument if the agreement says so.
Where escrow genuinely earns its cost
Four uses account for most escrow agreements, and each has its own drafting habit.
- Property deposits. The deposit sits with a neutral holder between exchange and completion, released against a recordable event. The rest of the conveyancing paperwork is covered in the guide to property sale paperwork.
- Business sale holdbacks. A slice of the price secures the buyer's indemnity claims. Deal studies put typical holdbacks in the high single digits to low teens as a percentage of price, held for around twelve months, with the release date tied to the survival period for the warranties.
- Source-code escrow. The licensee gets access to source and build materials if the vendor fails. Structure matters more than people expect — see below.
- Freelance and agency milestones. The client funds a stage before work starts and it releases on acceptance. Useful across borders or with a new counterparty; excessive within a working relationship.
Source-code escrow deserves its own paragraph because the obvious trigger is the weak one. Section 365(e)(1) of the Bankruptcy Code bars terminating or modifying an executory contract solely because the counterparty became insolvent or filed, so a release keyed purely to the vendor filing is fragile. What does the work is § 365(n)(1): a licensee whose licence is rejected may elect to retain its rights under the contract and under any agreement supplementary to it — which is the route to the escrowed material. So the licence must grant source rights explicitly, the escrow must be expressed as supplementary to it, and the deposit has to be verified or the licensee inherits a copy that will not build. Whether the licence says any of that is a question about the development contract.
When escrow is overkill
Escrow is the most expensive form of payment security and the slowest to arrange. It earns its cost when the sum is large relative to the deal, the counterparty is unknown or offshore, or the money has to be visibly outside both parties' control. Between businesses that already trade with each other, it is friction bought at a price.
Payment security, cheapest rung first
- Nothing
Pay on invoice
The supplier funds the work and carries the credit risk. Fine with a customer you know.
- Nothing
Deposit before start
Covers cancellation cost and tests intent, provided the figure reflects a real loss.
- Drafting time
Staged payments on acceptance
Neither side is exposed by more than one stage. Needs a testable acceptance step to work.
- Nothing, but the client holds it
Holdback of the final tranche
Simple and one-sided. The party holding the money wins any stand-off by default.
- Set-up plus annual minimum plus claim fees
Third-party escrow
The only option where neither party controls the asset. Buy it for the neutrality, not the security.
Move up a rung when the amount at risk exceeds the cost of the rung above.
The middle rungs are where a well-drafted service agreement does the same job for nothing: staged fees, an acceptance test with a deemed-acceptance window, and a suspension right if a stage goes unpaid. Where the worry is proof rather than solvency, a payment receipt against each stage settles what was paid and what it was applied to.
If you take one thing from the document
Read the release condition aloud to someone who was not in the negotiation and ask what they would do with it. If they ask a follow-up question, the agent will have the same question and will not ask it — it will simply hold. A fund held pending agreement is worse than no escrow at all, because the party who wanted the money now needs the other side's signature to get it. That is what a settlement agreement has to unwind, at more cost than drafting the condition properly would have taken.
Sources
General information, not legal advice. This guide explains how these documents and rules generally work. Law varies by jurisdiction and changes, and none of it is applied to your circumstances here. For anything consequential, consult a licensed attorney where you are.
Frequently asked
Who chooses the escrow agent?
Whoever has more leverage, in practice. Banks and specialist escrow companies are the usual choice for money; law firms hold funds in client accounts for smaller transactions; specialist providers handle source code. What matters is that the agent is genuinely independent of both sides and has a published fee schedule, so the arrangement cannot be characterised later as one party holding its own money.
Can an escrow agent release funds if only one party instructs it?
Only where the agreement lets it. If the release condition is documentary and the document has been produced, the agent releases on that alone. If the agreement requires a joint written instruction, one party's demand achieves nothing however clearly right that party is. Which of the two you have is a drafting choice made months before anyone needs it.
What happens to interest earned on money in escrow?
It depends on the agreement, and it is frequently left silent, which is a mistake on any material sum held for a year. Specify who is entitled to interest, whether it is added to the escrowed fund or paid out periodically, and which party receives the tax reporting for it. Some agents credit interest against their own fees by default.
How long should a business-sale escrow last?
Tie it to the survival period of the representations and warranties it secures rather than picking a round number. If general warranties survive twelve months, an escrow releasing at twelve months lines up; one releasing at six leaves the buyer unsecured for half the period, and one releasing at twenty-four holds seller money for a year after the claims it secures have expired.
Is an escrow agreement the same as a deposit held by a lawyer?
Functionally similar, legally distinct. Funds in a lawyer's client account are governed by the professional conduct rules of that jurisdiction, and the lawyer usually acts for one of the parties, which limits how neutral the arrangement can be. A dedicated escrow agent has no client and is bound only by the instructions in the agreement.