Legal documents that set out the terms and conditions between parties involved in an escrow, essentially arranging for one party to deposit an asset (e.g., money) with a third person (called an escrow agent), who delivers the asset to another party if and when the specified conditions of the contract have been met. Another way to think of an escrow agreement is a trade between two parties that relies on a neutral third party to ensure that both sides uphold their obligations. Attorneys and notaries commonly serve as escrow agents.
Escrow agreements are perhaps most commonly associated with real estate offers. The buyer writes a check and submits it into escrow, while the seller submits the deed to the property. This protects the deal while the buyer gets an inspection and performs other due diligence. Once the deal is closed, the escrow agent releases the deed and the funds and makes the exchange.
These agreements are also commonly used in the securities industry, especially for stocks that need to be held for a certain period of time before they can be traded.
In short: A legally binding arrangement in which two parties to a contract agree that payment will be handed over to a third party, who will only release that payment once certain conditions have been met. Usually those conditions involve the other party performing his or her side of the contract.
Basically, imagine this extremely unlikely but salient example: person A and B agrees that A will pay $100 for B’s newest artwork. For reasons beyond the scope of this example, A is worried that B won’t produce the artwork if he gets paid before completing it; and B is worried that he won’t get paid after he hands over the artwork (zero trust in this relationship). A and B can use an escrow agreement if their trust issues are irreparable.
In terms of an escrow agreement, A will pay $100 to a mutually trusted person, C. C will agree to only pay the $100 to B once the artwork has been handed over. Now A can rest assured that B will produce the artwork (if he doesn’t, he won’t get paid) and B can paint away knowing that A’s payment is already in safe hands.
And there you have it. Escrow agreements: an elaborate solution to trust issues.
Long story short: try to build trust. If that doesn’t work, there’s always escrow.
Company A wants to buy products from Company B. The purchase is large and neither company has been in existence long enough to build a reputation of reliability. They enter into an escrow agreement whereby Company A submits payment to the escrow agent and Company B submits the products. When each side is satisfied that the other has abided by the agreement, the assets are released from escrow.