Escrow accounts and escrow agreements

The following Construction practice note provides comprehensive and up to date legal information covering:

  • Escrow accounts and escrow agreements
  • What is an escrow account?
  • Why have an escrow account?
  • The escrow agent
  • How does the escrow account work?
  • The escrow agreement
  • Escrow agreements and the HGCRA 1996

Escrow accounts and escrow agreements

This Practice Note examines why parties involved in a construction project may enter into an escrow agreement (or escrow deed) to set up an escrow account. It looks at the benefits of paying funds into escrow, how an escrow account operates and the provisions typically found in an escrow agreement.

One of the principal concerns of a contractor/sub-contractor on a construction project is that it will not get paid. One way of addressing this concern is for the contractor/sub-contractor to enter into an escrow agreement with its employer and to set up an escrow account.

An escrow agreement may be entered into, and an escrow account set up, between a contractor and employer, a contractor and a sub-contractor or indeed wherever, on a construction project, one party has obligations to pay another for works/services. For simplicity, this Practice Note refers to an arrangement between an employer and contractor.

On a construction project, an escrow account is principally used in order to give confidence regarding the financial security of the paying party and so that the party to be paid has certainty of payment.

Although there is some administration involved in negotiating an escrow agreement (also referred to as an escrow deed) and in the setting up of the escrow account—this is usually outweighed by the benefits of such an arrangement. Once set up, an

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