Practical Law

In construction, the employer is usually more fearful that the contractor will go bust than vice versa, hence the whole panoply of security that usually surrounds a construction contract, such as bonds and parent company guarantees.

However, occasionally the boot is on the other foot, particularly if the employer is in straitened financial circumstances or is perhaps a new company with no trading record. In these circumstances, an escrow account may be used.

Escrow accounts

Escrow accounts seem to be a bit like buses: having previously come across them only rarely, I now have three escrow accounts on the go. They have highlighted some of the unexpected issues that can arise when dealing with these accounts, particularly as far as banks are concerned. The lessons I have learned are:

• Always provide a firm longstop date in the drafting, so that the escrow account can be closed after a certain time and the money released to the employer.
• Banks move in mysterious ways, which are particularly mysterious ways to construction lawyers.

Longstop dates

I inherited my first escrow account. The deed setting it up provided that, when the account was closed, any balance was payable to the bank. Complications arose when my client wanted to amend the deed, with the agreement of all the parties, so that the last few thousand pounds remaining after the project was completed were released direct to my client and not to the bank. While the bank was taking a leisurely approach to reviewing the documents, the contractor, who had already agreed the amendment, went into administration.

We then had to renegotiate the terms of the letter with the contractor’s administrator, who had no incentive or inclination to sign anything.  Over 18 months later, the money is still sitting in the escrow account and it is no longer cost-effective for me to take any action to encourage the bank to release the funds. A clear longstop date on the account providing for release of monies to my client, at my client’s sole request, would have been the solution.

Mysterious banks

I set up the second escrow account, using PLC precedents, duly amended to reflect the requirements of my particular project. I beefed up the account closing provisions to try to avoid the problems I had experienced in trying to close escrow account one. I happily sent the documents and the cash to the bank and it all seemed so easy.

However, the bank did not like PLC’s bank instruction letter very much. I still do not understand what the problem was, or why it was so crucial to the bank, or why they could not explain it to me, but it was something to do with the number of partners who had authority to release the funds. As a lowly construction lawyer, this seems to me to be a very straightforward issue, and simple to fix. Once this matter was dealt with, then the letter was fine.

OK with the bank and easy to close

So, there are my two tales of woe on being involved in escrow accounts. The next time I set one up, I shall get something in writing from the bank to confirm that they approve the documents before I open the account, and I may also tinker further with the longstop date to make the escrow account even easier to close.

I’d advise anyone working with escrow accounts to consider doing the same.