Escrow

An escrow is a transaction in which one person in a contract with another delivers a written instrument, money, evidence of title to real or personal property, or other thing of value to a third person to be held by such person until the happening of a specified event.  The third party or the neutral person with whom the property is kept in trust is known as an escrow agent or a depositary.  The principal parties are the grantee and the grantor.  The property given in trust for deposit is known as escrow property.

The transaction in which an escrow is created can be sale, transfer, encumbering, or leasing of real or personal property to another person.  Securities, funds, and other assets also can be held in escrow.  On happening of the specified event, the property is to be delivered by the third person to the grantee, grantor, promisee, promisor, obligee, obligor, bailee, bailor, or any agent or employee of the grantee.  The funds are held by the escrow service until it receives the appropriate written or oral instructions. In financial escrows, the fund is held until obligations are fulfilled.  The property is to be redelivered to the other party to the transaction upon performance of the specific condition/conditions in the agreement.

For an escrow to be valid there must be:

  • a binding contract between the parties to a transaction, and
  • conditional delivery of transfer instruments or money to a third party

Generally, there are two or more underlying transactions, and two or more related escrows in an escrow transaction.  An escrow agent is a limited agent of the parties to the transaction.  His/her position is like that of a trustee.  The primary duties of an escrow agent are:

  • duty to follow the escrow instructions;
  • duty to use good faith and reasonable skill; and
  • duty to redeliver goods on the completion of conditions.

Delivery before the performance of the condition or happening of a contingency is unauthorized.  Moreover, prior delivery is a violation of the depositor’s rights[i].  Delivery of a deed by a grantor to a third person with unconditional instructions to keep the deed and delivered to the grantee upon the grantor’s death is a valid delivery.  However, there must not be reservation by the grantor of dominion over the deed[ii].  Prior to closing of an agreement, an escrow agent is the dual agent for both parties.  After closing, an escrow agent is an individual agent for each party.  Escrow instructions are written directions to an escrow agent which state the duties of the parties and the escrow holder.  An agent or an attorney of grantor or grantee cannot act as an escrow agent.

The selection of the escrow holder is normally done by an agreement between the principals.  Principals can use an escrow holder who is competent and experienced in handling the type of escrow at hand.  An escrow agent who breaches duties to the parties to the escrow agreement can be held liable in tort and for breach of contract[iii].

[i] Griffin v. Gay, 223 Ill. App. 420, 432 (Ill. App. Ct. 1921).

[ii] Turner v. Mallernee, 640 S.W.2d 517, 521 (Mo. Ct. App. 1982).

[iii] Commercial Escrow Co. v. Rockport Rebel, Inc., 778 S.W.2d 532 (Tex. App. Corpus Christi 1989).


Inside Escrow