The term “Escrow” refers to monies deposited by a buyer to a trusted third party (the “escrow agent“) that will be disbursed to the seller once the obligations of the seller have been met. The Escrow mechanism is used to allay fears that buyers and sellers might have regarding payment by functioning in the following way:
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- Sellers generally fear that a buyer hasn’t got the means to pay for goods and services being contracted for – often sellers are unwilling to bear such credit risk. The buyer allays the seller’s fear of not being paid by placing the agreed sum of money with the escrow agent – i.e. they place the money into the escrow agent’s “escrow account”.
- Buyers generally fear that if they hand over money directly to a seller, they may not receive goods or services that meet the sellers obligations. The escrow agent allays the buyers fear of losing their money without receiving the goods or services contracted for by agreeing not to disburse the money from the escrow account to the seller until the seller has fulfilled their obligations under the sales contract.
- Depending upon the agreement that the buyer and seller have with the escrow agent, the escrow agent may act in the capacity of arbiter to resolve disputes between the parties, although arbitration is generally restricted to issues relating to the disbursement of funds.
