Escrow
An escrow is a deed, bond or other engagement delivered to a third party to take effect upon a future condition and not till then, to be delivered to the grantee.
Escrow accounts are commonly used as holding accounts for construction project funds. They are usually set up by a representative or solicitor acting on behalf of one of the parties to an intended contractual agreement (usually the employer). The terms of the agreement or payment notices will state that payments must be protected, so as to provide security to the other party in the event of a payment default.
Escrow arrangements impact negatively on the employer’s cash flow since they must put funds aside in a designated account. However, this has the benefit of providing security to the contractor, and it will continue to earn interest for the employer throughout the course of the project. It will be paid out at a pre-agreed point, sometimes on practical completion, but usually on settlement of the final account.
If there is an interim payment made by the employer out of the escrow account they are obliged to top it up again. Failing to do this may give the contractor the right to suspend performance or to determine the contract.
It is very important that the escrow account agreement is drafted correctly with appropriate professional advice if required. It is particularly important to consider whether the payment provisions are valid as part of a construction contract. In the case of JB Leadbitter & Co. Ltd. v Hygrove Holdings Ltd. (2012), a payment clause in the escrow agreement was found by the Technology and Construction Court to be ineffective because it was a ‘pay-when-paid’ clause. This type of clause had been outlawed by the Housing Grants, Construction and Regeneration Act 1996.
The Chartered Institute of Procurement & Supply (CIPS) Glossary of procurement terms, states: ‘In the context of computer software, an escrow agreement involves the supplier placing a copy of the software source (original and updated) code (i.e. the raw form of the software design) with a third party. If the software supplier ceases trading, the purchaser will then be provided with the source code, which will enable them to continue to use and, where necessary, adapt and update the software (provided that they can appoint appropriately skilled personnel to do so).’
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