Drafting objective and mechanical escrow release conditions

Most difficulty in an escrow arrangement is about whether a condition has been met, and it is drafted into the agreement months before anyone notices.

The test for a release condition is worth applying to every draft. Could a person who knows nothing about the commercial bargain, holding only the agreement and the documents produced, decide whether the condition is met? If the answer requires knowing what the parties meant, the condition is not drafted for an agent to apply.

Which release conditions can an agent apply?

• Joint written instruction. Both parties sign and the agent releases. The drafting work is in naming the authorised signatories and specifying the form, including whether an electronic signature is acceptable and whether scanned copies suffice.
• A named document from a named issuer. A certificate of incorporation, an updated commercial register extract, a title deed, a certificate from a named expert. The agreement describes the document and says who issues it. The agent checks that what is produced answers the description.
• A date. Release on a stated date, or on a stated date if no notice has been received before it. The agent applies the date.
• A defined event evidenced by a defined document. The condition is the document that evidences the event. A completion certificate signed by both parties is one the agent can apply.

Conditions an agent cannot apply

• Satisfactory performance. Satisfactory to whom, and assessed how. This asks the agent to adjudicate.
• Upon completion of the transaction. The agent does not know when the transaction completed and has no way to find out other than asking the parties, which is a joint instruction wearing a different hat.
• Subject to no dispute having arisen. The agent cannot determine whether a dispute exists. A notice of dispute delivered in a defined form to a defined address is something the agent can check.
• In accordance with the sale and purchase agreement. This imports the entire commercial bargain into the agent’s obligations. The escrow agreement should be capable of standing alone.

What happens if the instructions conflict?

Every escrow agreement should say what the agent does when it receives instructions that conflict. The workable position is that the agent holds, notifies both parties of what it has received, and continues to hold until it receives a joint instruction or a determination it may act on in the form the agreement specifies.

The clause costs nothing when it is not needed, and it avoids having to settle the position after a dispute has arisen.

What else the agreement should cover

The first is the longstop. If no release condition is satisfied and no instruction is received, the funds should not be held indefinitely. A date and a defined destination avoid a dormant account and a later argument about entitlement. This applies to the deferred payment structures that run for years.

The second is fees. If the arrangement runs for years, the agreement should say how fees are met and from where. An agent should not deduct fees from held funds without express authority. The full fundholding period should be priced at the outset and stated in the agreement.

Where the agent stops

Titanium will review a draft release mechanic while the sale agreement is still in negotiation and say whether it is one it can operate. That is a mechanical review of whether a condition is capable of being applied. It is not legal advice and it is not a substitute for the parties’ own counsel. Titanium does not determine whether a condition precedent has been satisfied, does not adjudicate a dispute between the parties, and provides no legal, tax or investment advice.

The related question is who checks the agent can apply the mechanic before it is signed, which is one of the things counsel settle at appointment.

Send us the mechanic and we will tell you whether we can operate it.

Common questions

Can a release condition refer to the sale and purchase agreement?

It can, but the agent cannot apply it. A condition has to be capable of being applied by someone holding only the escrow agreement and the documents produced.

What does Titanium do if it receives conflicting instructions?

It holds, notifies both parties of what it has received, and continues to hold until it receives a joint instruction or a determination it may act on in the form the agreement specifies.

Will Titanium review a mechanic before signing?

Yes. That is a mechanical review of whether the condition can be applied. It is not legal advice and is not a substitute for the parties’ own counsel.