Escrow is a form of contract which entails the activation and maintaining of a trust account, designed to collect funds between accounts and serve specific purposes, defined in a contract. The system was created in the United States in the the twentieth century.
Escrow account is used in conjunction with various types of commercial transactions, mainly for remote transactions. And these may involve running of construction projects, purchase of companies, technological lines, etc. It is also often applied in the purchase of tradable, but individually manufactured goods.
One use relates to the protection of transaction funds in the primary real estate market. Through the escrow account, a financial institution may lend funds to buyers and also manage them on their behalf, ensuring timely payment of housing units.
And in this way the buyer’s funds are protected against potential loss, if the developer goes bankrupt. Escrow is also commonly used online on sites that are involved in crowd sourcing activities or freelance marketplaces.
A trustee is a natural or legal person who oversees an escrow fund in terms of a trust decree, ensuring that funds are handled in a prescribed manner to avoid any compromising actions by the parties involved.
The first step to establishing an escrow account concerns choosing a common trustee. The trustee (middleman) must be a person of good standing and trustworthy, accepted by both parties. After the conclusion of the contract the buyer sends the funds to the trust account. Or in the case of deferred transactions related to the purchase of such property, relevant contributions in accordance with the agreed timetable are disbursed.
The fee for use of the escrow amounts to about three percent of the transaction. The trustee shall inform the seller of the freezing of funds before fulfilling its obligations. Money is paid to the seller in installments in accordance with the progress of implementation of the agreement upon confirmation of compliance by the buyer of the goods or services ordered.
The purpose of escrow is to increase the certainty of transactions between the contractors by guaranteeing that the prescribed conditions have been met prior to releasing payment. Otherwise, the bank returns the deposit.
Benefits of service include financial protection for buyer and seller. Maximum level of security with relatively inexpensive, effective international payments, compatible with existing commercial practices as well as rapid implementation of the transaction.
Escrow is also recognized in the judicial context, escrow funds are usually employed for dispensing funds from a cash settlement. Thus the defendant is not in charge of dispersion of judgment funds to the plaintiffs or other uses which may include mitigation. The defendant remits the entire sum of the settlement) to the court appointed escrow fund, and in turn the fund dispenses the money.