Application of Escrow

Application of Escrow Escrow is a common law term used in civil and commercial practices. Because it enhances trust among trade dealers and secures the performance of contracts, the term is not only widely used, but has been greatly developed as a complete legal system. Its core contents are: Party A deposits documents, deeds, currency, securities or other assets to an independent third party (generally known as "Escrow Agent") who, upon satisfaction of stipulated or mandatory legal conditions, hands the said assets over to Party B. It means that the transfer cannot occur until stipulated conditions are satisfied (documents signed or payment cleared or cargo delivered, etc.), or certain legal conditions are met (e.g. a certain person died or lost legal status for liability), or the assets shall be returned to Party A. For instance, a real estate developer requires a contracted construction company to pay a quality deposit fee. The construction company then requests that a bank manages the deposit fee so that the developer can use the fee only after it has paid the construction commission to the construction company. In this case, the condition for the bank (Escrow Agent) to deliver the deposit fee to the developer is that the developer will begin to pay construction commissions to the construction company. Below are several Escrow applications that are used most often in international commerce and which have begun to be introduced to China in recent years: 1. Escrow Account An escrow account is the most used application of escrow in business transactions. It refers to the bank account established by Party A, for example, or the Escrow Agent. Savings on the account can be delivered to Party B when conditions are satisfied, or returned to Party A. One of our clients, the developer of a large real estate project, for instance, applied for a syndicated loan from foreign banks. The lenders required that the borrower establish an escrow account at an accredited bank (in Hong Kong, usually the account of the law firm appointed by the lender). The borrower shall deposit all benefits from related contracts under the programme into the account, and shall not withdraw any money without the lender's written consent except when payment (loan, interest, fees, etc) is complete or when the total amount of the account exceeds the borrower's prospective payment for the next term. 2. Escrow Letter of Credit An Escrow Letter of Credit (L/C) is a new form of L/C applied in international trade since World War II. It was designed by some countries to improve their international balance sheet. In China, it is translated as "conditional payment L/C," which means pursuant to the Escrow L/C clause stipulated by the importer's bank as L/C issuer, the exporter signs a draft which shall only be negotiated or paid at the importer's bank. Then the foreign currency shall not go to the account of the exporter in his home country, but to a Private Import Escrow Account at the importer's bank. Settlement transaction is allowed only when the exporter imports goods from the importer's country and needs to pay, with small room for adjustment. 3. Escrow contract The Escrow contract here refers to a common storage contract for computer software's original code. Because the original code is the basis of software programming, if clients control the owner's original code, copying, rewriting and updating is very easy. That's why owners are reluctant to provide the code during software permit negotiations. However, the code is necessary for the client in daily technical support. To solve the dilemma, an Escrow contract is used: The software owner deposits the original code to an Escrow Agent (usually a professional agent) who keeps the code a secret. Only when the owner fails to or becomes unable to provide the service listed in the contract does the Escrow Agent inform the client of the code. In recent years, Chinese legal scholars have