What counsel should confirm before appointing an escrow agent

The questions transaction counsel ask before appointing an escrow agent have converged on a short list. They are sensible questions, the answers are not always what people expect, and each one has a drafting consequence, so it is worth setting them out.

1. Under what authority is the money held

Titanium Financial Ltd holds a Financial Services Permission from the Financial Services Regulatory Authority of Abu Dhabi Global Market for Providing Custody and Providing Money Services. The permission and the firm’s status can be checked on the ADGM public register without asking us, and we would rather counsel checked it than took our word for it. That is what a public register is for.

Note the wording, because it matters in drafting. The permission is stated as Providing Custody and Providing Money Services, and that is the form to use. An agreement reciting the agent as the holder of a dedicated escrow permission is reciting something that does not exist in this jurisdiction.

2. What happens to the funds if the agent fails

Client money is held separately from the firm’s own money under the applicable client money arrangements, rather than as a matter of internal practice. That separation is the substance of the answer, and it is the practical difference between an authorised holder and an unauthorised one.

3. Will the agent decide whether the conditions have been met

No, and counsel should not want it to. The agent applies the release conditions recorded in the agreement. Where release is against a joint written instruction, it acts on the instruction. Where release is against a document, it checks that the document produced answers the description in the agreement. It does not assess whether a party has performed its obligations (an agent with discretion is an agent a disappointed counterparty will sue for exercising it wrongly).

This has a practical consequence at drafting stage. The release condition has to be capable of being applied by someone who knows nothing about the commercial bargain. If a condition requires the agent to know what the parties intended, it is drafted wrongly.

4. How long the arrangement takes to put in place

The agreement itself is short. Ask any proposed agent whether it works from a standard form, how much comment that form usually attracts, and whether it can contract with one side alone where only one party is instructing it. The constraint is rarely the drafting. It is onboarding on the parties, and that cannot start until the agent knows who they are.

Where counsel bring us in early, the account is typically ready once onboarding clears. Where we are approached in the last week before completion, the timetable is tight and occasionally it does not work.

5. What the agent needs from the parties

The list is short and it is always the same:

• Corporate and identification documents for each party, and for the ultimate beneficial owners.
• The amount to be held and the currency.
• The number of deposits in and the number of releases out.
• Whether any manager’s cheques will be issued or deposited, and the mechanics if so.
• Whether release is against a joint written instruction or against a defined document or other objective condition.
• Where the money is going on release. A single account is one instruction. A distribution to a seller register is a different exercise with its own timetable.

With those items we can revert with a fee quote. Without them any number would be a guess.

The question counsel ask least often

What happens if the parties fall out. The agreement should say what the agent does when it receives conflicting instructions, and the answer is that it holds, notifies both parties, and continues to hold until it receives a joint instruction or a determination it may act on in the form the agreement specifies. Parties sometimes assume the agent will take a side. It will not, and a well-drafted agreement makes that explicit rather than leaving it to be discovered in the middle of a dispute.

Outside the role

Titanium does not determine whether a condition precedent has been satisfied, does not adjudicate between the parties, and does not provide legal, tax or investment advice. It acts on valid authorised instructions, or on documentary evidence expressly specified in the agreement.

For counsel who have used escrow on a UAE matter this year: which of these did the arrangement address in the drafting, and which did you find out about afterwards? Tell us about the transaction and we will say what we can hold and how release would be documented.