An escrow account is a facility frequently used in transactions to provide comfort that funds are available to satisfy any moneys that become payable after completion of the transaction. Escrow accounts are most commonly used in the context of share purchases, but can also arise in asset purchases. They are often used where sums may become payable to a purchaser by a vendor arising out of warranty or indemnity claims or where post-completion adjustments to the purchase price may apply Moneys are deposited into a deposit account and held for a specified period, with an approach agreed between the parties as to what circumstances moneys may be released and to whom.

Why use an escrow account?

Common drivers for an escrow account are:

• A purchaser has concerns in relation to the financial ability of the vendor to satisfy any claims arising (for example, warranty claims),
• The nature of the parties means that an escrow account simplifies the discharge of post-completion obligations; an example of this is a transaction with multiple vendors where recovering sums from each vendor may be difficult, and so an escrow account with an agreed approach for apportionment of the liability among the vendors is preferable,
• A vendor is not based in Ireland, so recovering money from them may be made more difficult.

Who should act as escrow agents?

An escrow account is frequently a joint account opened in the names of the vendor’s solicitor and the purchaser’s solicitor. An escrow agreement is often put in place between the vendor and purchaser and their respective solicitors governing how the account will be operated.

Acting as escrow agent can be an administrative burden for a solicitor, particularly in circumstances where moneys are to be released from the escrow account in several tranches. A solicitor should consider carefully the level of work anticipated in acting as escrow agent, the fees that they may charge for doing so, and any risks involved in so acting before agreeing to act as escrow agent.

If acting as escrow agent, a solicitor should ensure that an escrow agreement is signed by all of the parties and includes the following elements, among others:

• Circumstances in which moneys are to be released– the agreement should be very clear as to what instructions the vendor and purchaser will give to trigger a release and the form of instruction the escrow agents are to give to the bank. No discretion should be left to the escrow agents as to how or when to distribute the escrow moneys.
• Cap on liability of the escrow agents – the escrow agreement should include a waiver from the vendor and purchaser to the escrow agents in relation to any claim arising out of the performance by the escrow agents of their duties (though the vendor and purchaser will want to carve out circumstances such as fraud on the part of the escrow agent). The escrow agents can also seek an indemnity from the vendor and purchaser in respect of any liabilities arising out of the escrow agents performing their obligations under the escrow agreement (including any legal costs in the event of a dispute arising in connection with the operation of the escrow account).
• Fees payable to the escrow agents – frequently, the vendor’s solicitor’s fees are paid by the vendor and the purchaser’s solicitor’s fees are paid by the purchaser.

Due to the administrative burden and conflicts of interest that may arise, a solicitor may not want to act as escrow agent and, in many cases, may be reluctant to do so, especially for larger and more complex transactions. In such circumstances, or where the parties to the transaction would prefer to use a third party, a third-party escrow agent may be engaged. Foreign international banks frequently provide this service, and Irish banks may also be prepared to do so in certain circumstances. When it is intended that a bank will act as escrow agent, it is important that this is factored into the timing of the transaction. The bank will want AML documents from the vendor and purchaser. The bank will also normally want to use its own standard form escrow terms. The parties will need time to review and, where necessary, negotiate any changes to these standard form terms to ensure that the parties are comfortable with the terms and that the terms work with the transaction documents.