A depositary is a person with whom parties to a contract deposit escrowed property in an escrow. The duties of a depositary are generally defined in the escrow agreement. Any deviation from the agreement without the requisite authority is unreasonable and cannot be done with reasonable prudence[i]. A depositary’s duties are fixed and limited according to the terms of the agreement. The depositary must carry out the terms of the agreement as intended by the parties. S/he cannot perform acts with reference to handling the deposit, or its disposal, not authorized by the escrow agreement[ii].
A depositary is not entitled to interpret or construe a contract where s/he has a duty to perform. The depositary must be guided in his/her duty by what the contract says. S/he is not authorized to ignore one part of the contract on the basis that another part of the escrow omits such features as to time and date[iii].
A depositary has a fiduciary relationship of trust and confidence to the parties to the escrow[iv]. A depositary must perform the responsibilities with scrupulous honesty, skill, and diligence[v]. The duty of a depositary to act with scrupulous honesty, skill, and diligence includes the duty of taking reasonable efforts to ascertain the identity of the named parties to the transaction[vi].
The escrow relationship gives rise to two specific fiduciary duties:
- to comply strictly with the terms of the escrow agreement; and
- to disclose facts that a reasonable depositary would perceive as evidence of fraud committed on a party to the escrow[vii].
In the case of deposit of funds, the depositary is a trustee of funds deposited in escrow and must be guided in his/her duty by what the escrow agreement says and must act strictly in accordance with the escrow instructions[viii].
As the duties of a depositary are governed by the terms of the escrow, care is to be taken in drafting depositary instructions. An escrow agreement must include the names of the parties submitting the instructions and the name and address of the depositary. Agreement shall include the date of the instructions. A list of the items or documents deposited or to be deposited with the depositary must be included in the agreement. Conditions for the delivery of the escrow property are to be included in the agreement. Additionally, default provisions can also be included in an escrow agreement. An escrow cannot be invoked without the consent of all the principals to the agreement. Moreover, indemnity provisions can also be included in the agreement. Certain agreements include the acceptance by a depositary.
Primary duties of a depositary are:
- A depositary shall disclose to the parties all information which is necessary to prevent a loss to the party[ix].
- A depositary can keep escrowed property till conditions are performed. S/he must then deliver the property to the grantee[x].
- When the prescribed condition is performed the depositary is obliged to deliver the property to the grantee. However, s/he must redeliver the property to the grantor, when the condition is not performed[xi].
The general rule is that a depositary is to act according to the terms of the agreement[xii]. In the case of a breach of an instruction that is contracted to perform or of an implied promise arising out of the agreement, the injured party acquires a cause of action for breach of contract. Moreover, when a depositary acts negligently, s/he will ordinarily be liable for the loss occasioned by breach of duty[xiii].
However, an escrow holder has no general duty to police the affairs of its depositors. A depositary’s duty is limited to faithful compliance with instructions[xiv].
Although an agent is liable for negligence in failing to perform his/her duties in accordance with the escrow agreement, s/he has no duties or liabilities to the parties until a deposit is made with him.
Although exculpatory provisions do not enjoy special favor in the law, such provisions can be included in an escrow. However, they are not effective as to breaches of trust committed in bad faith or intentionally or with reckless indifference to the interest of the beneficiary[xv].
[i] Miller v. Craig, 558 P.2d 984, 987 (Ariz. Ct. App. 1976).
[ii] Gomez v. Huntington Trust Co., 129 F. Supp. 2d 1116, 1123 (N.D. Ohio 2000).
[iii] Federal Deposit Ins. Corp. v. First Nat’l Bank & Trust Co., 496 F. Supp. 294, 296-297 (W.D. Okla. 1980).
[iv] Maganas v. Northroup, 135 Ariz. 573 (Ariz. 1983).
[v] Berry v. McLeod, 124 Ariz. 346 (Ariz. 1979).
[vi] Maxfield v. Martin, 217 Ariz. 312, 315 (Ariz. Ct. App. 2007).
[vii] Burkons v. Ticor Title Ins. Co., 168 Ariz. 345 (Ariz. 1991).
[viii] Webster v. Uslife Title Co., 123 Ariz. 130, 133 (Ariz. Ct. App. 1979).
[ix] Lane v. Oustalet, 873 So. 2d 92, 96 (Miss. 2004).
[x] Jackson v. Jackson, 67 Ore. 44, 52 (Or. 1913).
[xi] Howlin v. Castro, 136 Cal. 605 (Cal. 1902).
[xii] Rianda v. San Benito Title Guarantee Co., 35 Cal. 2d 170 (Cal. 1950).
[xiii] Amen v. Merced County Title Co., 58 Cal. 2d 528, 531 (Cal. 1962).
[xiv] Schaefer v. Manufacturers Bank, 104 Cal. App. 3d 70, 77 (Cal. App. 2d Dist. 1980).
[xv] Axelrod v. Giambalvo, 129 Ill. App. 3d 512, 517 (Ill. App. Ct. 1st Dist. 1984).