An escrow is the process by which a document, real estate, money, or securities are deposited with a neutral third party to be delivered upon fulfillment of certain conditions. The neutral third party is known as an escrow agent or depositary. In the creation of an escrow, there must be a depositary with instructions from the parties. Instruments are deposited with a depositary by an agreement between the parties. Instructions to the depositary constitute the law governing an escrow agreement. An escrow agreement is different from the instrument placed in escrow. It contains conditions agreed upon by the parties. A depositary accepts an instrument upon the terms of the agreement[i]. A valid escrow agreement requires that the proposed escrow agent know of and agree to perform the function of receiving a deposit. Essential elements of a valid escrow arrangement are[ii]:
- A contract between the grantor and the grantee agreeing to the conditions of a deposit;
- Delivery of the deposited item to a depositary; and
- Communication of the agreed conditions to the depositary.
The depositary of an escrow must be a third person. A grantee can be made an agent of the grantor for the purpose of transmitting escrowed property to a depositary. However, a grantee cannot be made a depositary of an escrow[iii]. A depositary is not an agent of the grantor or grantee. A depositary is a trustee of an express trust[iv].
The rights and duties of a depositary are determined by the escrow agreement[v]. A depositary’s duty is only to fulfill the terms of the escrow agreement. Moreover, title of the escrowed property remains with the depositor. The depositor surrenders property to the depositor. When all conditions of the escrow are accomplished, a depositary delivers the property[vi]. A depositary has a fiduciary duty to the escrow parties to comply strictly with the party’s instructions. The holder assumes a fiduciary duty by agreeing to execute the escrow. Usually, a depositary undertakes the following duties under an escrow[vii]:
- to exercise reasonable skill and diligence in carrying out the escrow instructions; and
- to comply strictly with the depositor’s written instructions.
Moreover, a depositary is under a duty to communicate to the principal any knowledge acquired in the course of escrow. The knowledge so acquired must be with respect to material facts which might affect the principal’s decision as to a pending transaction[viii].
When a depositary acts negligently, s/he is ordinarily liable for any loss occasioned by breach of duty. However, no liability attaches to the escrow holder for his/her failure to do something not required by the terms of the escrow. Additionally, a depositary is not liable for a loss incurred while obediently following escrow instructions[ix].
The escrow agent will deliver the document to the benefited party when the conditions of the contract are met. The depositor has no control over the instrument deposited in escrow. Upon performance of the condition, the grantee or obligee is entitled to delivery of the escrowed property. Delivery can be enforced by a decree of court. When a depositary refuses to deliver, the remedy is not against the other party to compel specific performance of the escrow contract. Action can be brought against the depositary to obtain possession of the instrument. When a depositary refuses to make the delivery and claims the escrow, the depositary can be held liable for conversion[x].
When an instrument is deposited in escrow, the instrument passes beyond the control of the depositor. A depositor cannot recall it. Upon the performance of the condition, the depositary must deliver the property to the grantee. A deposit in escrow amounts to a conditional delivery. For a valid escrow, the conditions agreed between the parties must be communicated to the depositary[xi].
An escrow is not invalidated by the death of a depositor prior to performance of the condition of the escrow. The parties can substitute another depositary for the same purpose. A substituted depositary will be bound by the terms of the original contract.
[i] Kennedy v. District-Realty Title Ins. Corp., 306 A.2d 655, 657 (D.C. 1973).
[ii] Johansson v. United States, 336 F.2d 809, 815 (5th Cir. Fla. 1964).
[iii] Cincinnati, W. & Z. R. Co. v. Iliff, 13 Ohio St. 235 (Ohio 1862).
[iv] Foulkes v. Sengstacken, 83 Ore. 118, 128-129 (Or. 1917).
[v] Marathon U.S. Realties v. Kalb, 244 Ga. 390, 392 (260 S.E.2d 85) (1979).
[vi] Roberts v. Porter, 193 Ga. App. 898, 900 (Ga. Ct. App. 1989).
[vii] Kangarlou v. Progressive Title Co., Inc., 128 Cal. App. 4th 1174, 1179 (Cal. App. 2d Dist. 2005).
[viii] Axley v. Transamerica Title Ins. Co., 88 Cal. App. 3d 1, 9 (Cal. App. 4th Dist. 1978).
[ix] Axley v. Transamerica Title Ins. Co., 88 Cal. App. 3d 1, 9 (Cal. App. 4th Dist. 1978).
[x] Angle v. Bass, 169 Okla. 120, 122 (Okla. 1934).
[xi] Lechner v. Halling, 35 Wn.2d 903, 912-913 (Wash. 1950).