We have been involved with a series of escrow arrangement the past weeks.

An escrow is an arrangement made under contractual provisions between transacting parties, whereby an independent trusted third party receives and disburses money and/or documents for the transacting parties, with the timing of such disbursement by the third party dependent on the fulfillment of contractually-agreed conditions by the transacting parties.

The word derives from the Old French word escrow, meaning a scrap of paper or a roll of parchment; this indicated the deed that a third party held until a transaction was completed.

In my experience escrow arrangements were usually entered into between two parties and an escrow agent in terms of which the escrow agent is keeping software source code in escrow (in trust) and to make it available to the user -party in the case for instance of liquidation of the provider party.

Escrow arrangements have branched out beyond the keeping of software source codes on behalf of parties as an independent party.

In almost all investment structures you will find an escrow arrangement in respect of funds and the release of funds by an independent escrow agent.

It’s also used very effectively to mitigate settlement risk and also to mitigate counterparty risk.

Importers also consider escrow arrangements instead of Letters of credit, because of the costs involved with obtaining and managing terms of Letters of Credit.

The role of the escrow agent can be complex, especially with regards to off-shore structures, the role of the tax authorities and financial surveillance.

24 October 2011