Money set aside to answer claims, and the terms that determine whether it is ever released.
Esshaki Legal Media TeamCurrent as of November 2023
An escrow holds part of the purchase price with a third party to secure the
seller’s post-closing obligations. A holdback achieves the same with the buyer
retaining the funds, which is cheaper and weaker from the seller’s perspective.
Amount and duration. Sized against the indemnity cap and the survival
period, with a release schedule that may step down at intervals.
Release mechanics. Automatic release on the anniversary of all amounts not
subject to a pending claim, with pending claims described in a notice meeting
stated requirements. Vague claim notices designed to hold the escrow open are a
recurring problem, and the agreement should require a good faith estimate and a
description of the basis.
The escrow agreement is a separate contract with the agent, whose duties are
ministerial and who will not adjudicate anything. It should provide for joint
instructions, a final non-appealable order, and interpleader if the parties
deadlock.
Exclusive remedy. Whether the escrow is the buyer’s sole recourse, or merely
the first, is the central commercial term. Sellers want exclusivity subject to
fraud; buyers want recourse beyond it for fundamental representations.
Tax and interest. Who is treated as the owner of the escrowed funds and who
reports the income should be stated, because the default answers are not
intuitive.