Drafring an escrow agreement

Drafting an escrow agreement 

Whether funds, source code, shares, or sensitive documents are placed in escrow, the purpose is always the same: to create a safe and neutral mechanism that guarantees obligations are met before assets change hands. Escrow structures introduce trust into transactions where timing, risk allocation, or information asymmetry make immediate performance impossible.

A familiar example is technology escrow, where a software vendor deposits source code with an independent agent. The code is only released if a predefined trigger event occurs, such as the vendor’s insolvency, a failure to provide support, or the discontinuation of a critical service.

In M&A transactions, escrow is even more widespread. A portion of the purchase price is often held in escrow to bridge the gap between signing and closing. The funds are released only once all closing conditions have been fulfilled, think regulatory approvals, third-party consents, corporate authorisations, or the confirmation of financial statements. Escrow can also operate post-closing, for example as security for warranty or indemnity claims during a holdback period. This gives buyers comfort that remedies will be available if issues surface later, while giving sellers a clear and predictable framework for the eventual release of funds.

Escrow agreements are not specifically codified under Belgian law, but are recognised as atypical contracts based on contractual freedom. They must comply with the general contract law principles, fiduciary obligations of the escrow agent, AML/CTF rules (if applicable).

Key elements

1. Specify purpose and scope: whether it secures purchase price adjustments, warranty claims, closing conditions, regulatory approvals, or for instance the release of sensitive information. The scope should also specify the nature of the assets placed in escrow (funds, shares, documents, IP) and the circumstances under which they may be released.

2. Role and duties of the escrow agent: A central element is the appointment of an independent, neutral escrow agent (often a bank, notary, or specialised service provider). Outline the agent’s responsibilities, the standard of care expected, to whom the agent owes duties, communication requirements, and the conditions under which the agent may rely on written instructions. Limitations of liability and indemnities for the agent are also commonly included.

3. Funding and deposit mechanics: For monetary escrows, this includes payment instructions, currency, account details, and any KYC requirements. For non-cash assets (such as shares or source code), the method of transfer, verification, custody standards, and evidence of deposit must be documented.

4. Release conditions: A core component is the detailed description of the events or conditions that trigger release of the escrowed assets. These may include the fulfilment of closing conditions in M&A transactions, mutual written instructions, the expiry of a specified period (e.g., warranty period), or the occurrence of a defined (default) event (such as vendor insolvency in software escrows). The more precise the conditions, the lower the risk of disputes.

5. Interest, investment rules, and fees: If funds are held, the agreement should specify whether the escrow account bears interest, how interest is allocated, and whether funds may be invested. The allocation of the escrow agent’s fees and expenses, often split between the parties, is also addressed.

6. Dispute resolution and blocking mechanisms: To manage conflicting instructions or contested release claims, the agreement should include a clear procedure. This may involve maintaining the assets in escrow pending settlement, court order, arbitration decision, or expert determination. A “no-fault” mechanism helps protect the agent from liability when parties disagree.

By combining independence, conditionality and transparency, an escrow arrangement provides transactional stability, making it a valuable tool across M&A, technology deals, and other high-stakes commercial relationships.. At act legal, we assist clients in tailoring escrow agreements that match the commercial realities of their transactions.