Escrow Services, Agreements, Definition and Software

Escrow Definition

Escrow is where one party to an agreement deposits goods or money with an independent trusted third party, known as an escrow agent, who holds them until the terms of escrow agreements have been performed. If the terms of the agreement are fulfilled then the goods are released to the other party. If the other party fails to meet its obligations then the goods are returned to the original party.

Why is Escrow Important?

Businesses often depend on assets they do not own or control, such as software packages, productivity applications or e-commerce solutions. Escrow Services allows you to access these critical assets if the supplier becomes unable or unwilling to provide its services under the terms of a contract, thereby allowing your business to continue without significant disruption.

Escrow Services

Lawdit provides escrow services to leading software providers and a number of household brands. Our expertise in escrow services is renowned in the industry, as demonstrated by our international client base. Lawdit's team of escrow agents and solicitors can advise and assist your business in relation to escrow, whatever your needs may be.

We are able to draft escrow agreements and to act as an escrow agent by storing material. Lawdit can also advise you on the terms of escrow agreements that have been drafted by others and can negotiate terms on your behalf.

Lawdit offers escrow services in relation to:

• Data Escrow
• Database Escrow
• Source Code Escrow
• Software Escrow
• Website Escrow

Escrow Agreements

A business seeking to rely on a third party for the supply and maintenance of bespoke software will want to protect its investment by ensuring a developer meets its obligations. An escrow agreement gives force to these obligations under a separate contract and sets out clear consequences for a developer's failure or inability to perform its duties.

Under the terms of an escrow agreement, a developer will deposit the source code that makes up a program with the escrow agent, together with any instructions, support manuals and intellectual property rights needed for the program to operate. The escrow agreement will set out certain events under which the escrowed material will pass to the licensed user of the software or database.

Typical events that trigger the release of escrowed material are the licensor having bankruptcy/liquidation proceedings brought against it or its failure to perform proper maintenance in accordance with the terms of the licence agreement. The release of source code and other material will allow a licensee to commission another developer to work on the software and to fix issues that the original licensor was either unable or unwilling to deal with.

A licensor will also benefit by offering to place its work in escrow, as this will help to market its software and services. Licensees will have confidence in the business and will be afforded a sense of security by knowing their investment will be safe, should an unforeseen event arise.

Escrow Accounts

An escrow account is a special bank account set up by an escrow agent for the sole purpose of holding escrow funds. No other money moves in or out of the account and the escrow agent assumes full responsibility for the funds while they are in its possession. The agent will typically have an insurance policy in place as a further security measure and the parties to the transaction will not have access to the escrow account at any time.

Any transfers will be made by the agent in accordance with the escrow agreement. Interest will accrue on the funds while the agent is holding them and the parties will need to state in the escrow agreement whether this is to be returned or to pass with the bulk of the funds.

Where goods or documents are being held in escrow, these will be stored in a secure environment by the agent to ensure their safe keeping. The terms of the agent's insurance policy will cover their storage, so as to minimise any risk to the parties.

Escrow Fraud

Escrow fraud occurs where one party to a transaction, unbeknownst to the other party, is also dishonestly operating an escrow service. The innocent party will be unaware they are sending funds to the other party, believing the escrow agent to be an independent third party. Upon receipt of the escrow funds, the fraudulent party will withdraw them without fulfilling its obligations under the agreement.

A common variation on traditional escrow fraud is where a third party is known to the fraudulent party, but is represented as being neutral and independent. Like the first type of escrow fraud, the funds will be withdrawn without any obligations being fulfilled, with the fraudulent party to the contract often blaming the escrow agent, so as to appear innocent to the defrauded party.

The risk of escrow fraud can be mitigated by ensuring a reputable escrow agent is used. Professional practitioners, such as solicitors, are heavily regulated by their professional bodies and this will provide a good degree of security for the parties. The Law Society of England and Wales provides a comprehensive list of both solicitors and law firms on its website against which details of solicitors acting as escrow agents can be checked for peace of mind.

Escrow Payments

An escrow payment is the payment made to a party by the escrow agent once it is satisfied that the terms of the agreement have been fulfilled. The agent will turn over the money being held in escrow, usually by way of a secure bank transfer.

The escrow agreement will often stipulate an inspection period where a document or other goods held in escrow can be inspected to ensure they are satisfactory. The recipient will then communicate to the escrow agent whether they are happy for the funds to be released to the seller. The agreement will also state which party is responsible for paying postage, packing and escrow fees and which party is entitled to the interest accrued on the money held by the agent. The escrow payment will take these factors into account.