Attorney escrow is frequently used in transactions to ensure the secure and reliable performance of contractual obligations. It is particularly relevant where one party must provide a sum of money (e.g. the purchase price or part of it), certain documents, financial instruments, or securities (such as executed transfer documents, statements, or shares), but the counterparty should only receive them at a later point in time once specified conditions have been fulfilled.
In such cases, the money, documents, financial instruments, or securities are placed in escrow and kept secure by the attorney until the agreed conditions are satisfied. Once those conditions occur, the escrow is released to the entitled party in accordance with the escrow agreement.
This structure is commonly referred to as a performance escrow deposit held by an attorney, and is hereinafter referred to simply as attorney escrow.
Nature of Attorney Escrow
Impartial role. Escrow is essentially based on trust, and the parties require an unbiased escrow agent. Escrow services are usually provided by the attorney representing one of the parties in the transaction, who in this capacity acts strictly impartially as escrow agent. This is commonly accepted by the parties because the Hungarian attorney escrow relationship provides sufficient comfort.
Importantly, the attorney escrow agent is not acting as a fiduciary in the common law sense (not a trustee). The attorney escrow agent’s role is confined to the execution of the escrow agreement, without substantive discretionary power.
Regulation and supervision. Attorney escrow services are strictly regulated by the law as well as by professional regulations, and are continuously supervised by the bar association. The bar association can, and regularly does, audit attorneys’ escrows, and there are mandatory disciplinary sanctions, civil law consequences, and even criminal sanctions for misuse.
Efficient and flexible. While unbiased, regulated and supervised, attorney escrow services are often more cost efficient, more flexible and quicker to arrange than other professional escrow management services.
Major Rules and Practice Points
Here is a summary of the major general statutory rules and regulations of attorney escrow, together with selected practice points.
Written escrow agreement. A key factor for an effective attorney escrow is a professional escrow agreement, which should be comprehensive, clear and precise. Practice shows that the escrow agreement should regulate all foreseeable events specific to the respective transaction to ensure predictability and smooth performance throughout the entire escrow relationship.
The attorney is allowed to accept any money, documents, financial instruments or securities in escrow exclusively after signing a written escrow agreement with all parties.
The escrow must be managed (kept, returned, or released) in accordance with the terms of the escrow agreement, and in compliance with the law and the regulations of the bar association.
Registration and reporting. Once accepted, the escrow must be registered in the attorney’s own deposit register and must also be reported to the bar association. Each subsequent change in the escrow, such as any additional deposit or release (or return), must also be registered and reported without delay.
Separation of assets. The escrow must be kept separate from the attorney’s (or its office’s) own money or securities, and the attorney must not use the escrow except as expressly allowed in the escrow agreement.
Money and dematerialised securities must be kept in a bank account opened solely for escrow purposes. The individual escrows are usually also kept separately, i.e. a separate escrow account is designated for each individual escrow. The details of the escrow account and the respective bank must be indicated in the escrow agreement.
Documents and printed securities must also be kept separately and safe, either in the attorney’s office or at a safe service provider, as specified in detail in the escrow agreement.
Managing the escrow. In the interest of all parties and the escrow agent, the rules of managing the escrow must be outlined very clearly in the escrow agreement within the applicable legal framework.
Payments to third parties from the escrow. In some cases, the parties provide in the escrow agreement that certain payments shall be made from the escrow to third persons, sometimes in a different currency. In such cases, the escrow agreement must address if and how the escrow currency is to be exchanged to the transfer currency, and how the escrow is to be managed if a third party returns funds (potentially in a different currency) back to the escrow.
Triggering events. Release or return. In the interest of all parties, each triggering event – i.e. events triggering the release or return of the escrow – must be listed and regulated precisely in the escrow agreement. In relation to the specific release (and return) events, it is practical to determine the form and contents of the documents to be submitted to, and to be accepted by, the escrow agent to establish whether a release (or return) event has occurred.
It is essential to understand that the escrow agent is authorised and obliged to release (or return) the escrow exclusively according to the terms of the escrow agreement, i.e. if a specific release (or return) event listed in the escrow agreement occurs. This rule is taken very seriously, meaning that on the one hand the escrow agent must release (or return) the escrow if a triggering event is met, and on the other hand must not release (or return) the escrow otherwise.
Joint instruction as a triggering event. In practice, triggering events often include the joint instruction of the parties, which may overrule or supplement any other release (or return) event. Therefore, if an escrow agreement contains a joint instruction clause, the parties may effectively modify or amend the triggering events and the rules of release (or return) originally specified in the escrow agreement. The attorney cannot rely on oral instructions. Joint instructions must be in writing and signed by all parties.
Scope of duties. The escrow agent is not obliged to coordinate or mediate between the parties to facilitate a triggering event or a joint instruction. Nor is the escrow agent required to examine whether a triggering event is fair, lawful or valid. If the parties require such coordination services from the escrow agent, such services need to be specifically agreed in the escrow agreement. Nevertheless, this may significantly increase the escrow agent’s activity and related fees.
If there is a dispute and it is unclear if the conditions of release (or return) have occurred, the attorney escrow agent is obliged to deposit the escrow with the competent court.
AML and bank transparency. Attorney escrow is subject to anti-money-laundering regulations, which must be completed before signing the escrow agreement. Accordingly, the attorney must conduct client due diligence on all parties and identify their ultimate beneficial owners (UBOs). Suspicious transactions must be reported to the competent authority.
In practice, the banks which keep the attorney escrow account may have additional transparency requirements, which must be satisfied by the attorney. This may cause additional work for the attorney managing the escrow, and require the co-operation of all involved parties.
Fees and costs. The parties must agree which of them will bear the fees and costs of the escrow agent. Fees and costs are usually paid monthly or upon termination of the escrow.
Set-off from the escrow. The parties sometimes specify in the escrow agreement that the escrow agent is authorised to set off its fees against the money escrow when the money escrow is released or returned. Such set-off is possible only if this is expressly agreed in the escrow agreement. Otherwise, the escrow agent attorney cannot deduct fees from the escrow.
Termination. The attorney performance escrow agreement cannot be unilaterally terminated by either party, unless specifically stipulated in the escrow agreement.
Most often, the escrow terminates when it is released or returned upon a triggering event. Usually, the escrow also has a final date, upon which (if anything remains in the escrow on that date) the escrow or the remaining part of it must be released or returned to the party specified in the escrow agreement.
If the parties specifically agree, the escrow agent may also be required to destroy a document escrow on the final date.
If the escrow agent cannot determine to whom the escrow should be released or returned, as a last resort, the escrow agent deposits the escrow with the competent court. As a result, the attorney escrow terminates, and the court then holds the deposited assets until a final decision is rendered regarding their release.