Drafting objective and mechanical escrow release conditions

Most difficulty in an escrow arrangement is not difficulty about money. It is difficulty 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.

Conditions that work

• Joint written instruction. The cleanest of all. Both parties sign, 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. Entirely mechanical.
• A defined event evidenced by a defined document. Not the event itself, but the document that evidences it. Completion is not a release condition. A completion certificate signed by both parties is.

Conditions that do not work

• 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 a fact. A dispute in the abstract is not.
• In accordance with the sale and purchase agreement. This imports the entire commercial bargain into the agent’s obligations, and it is more common than it should be. The escrow agreement should be capable of standing alone.

The conflicting instruction problem

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.

Parties occasionally resist including this, on the basis that it signals an expectation of dispute. That is the wrong instinct. The clause costs nothing when it is not needed, and the alternative is that the position is worked out under pressure, by parties who have already fallen out, with the money sitting still while they argue about what the agent should do.

Two smaller points that come up repeatedly

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 matters most on 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. Deducting fees from held funds without express authority is not something an agent should do, and being unpaid for three years is not something an agent should accept. Better to price the full fundholding period at the outset and to say so in the agreement.

Outside the role

Titanium will review a draft release mechanic and say whether it is one it can operate, and would rather do that while the sale agreement is still in negotiation than after signing. 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.

For those drafting these regularly: how many of your escrow agreements import obligations from the main transaction document by reference, and could the agent apply them without asking you what they mean? Send us the mechanic and we will tell you whether we can operate it.