Escrow arrangements are commonly used in high-value commercial transactions to provide a structured process for holding and releasing funds. By establishing conditions that must be satisfied before payment is released, an escrow arrangement can help protect the interests of buyers and sellers.

However, not every transaction reaches completion. A buyer may fail to meet a contractual deadline, a seller may not deliver the agreed assets, or the parties may disagree over whether the conditions for releasing funds have been satisfied.

When a transaction falls apart, determining who is entitled to the funds held in escrow depends on the contractual terms, the circumstances of the dispute, and the applicable law. Five legal considerations deserve particular attention.

1. Examine the Escrow Agreement First

The escrow agreement establishes the framework governing the receipt, holding, and release of funds. It should identify the parties, define the escrow provider’s responsibilities, and specify the conditions that must be satisfied before funds can be disbursed.

When a transaction fails, the first step is to examine the provisions governing termination, refunds, disputed instructions, and the release of funds.

For example, an agreement may require the escrow provider to return the buyer’s funds if the seller fails to deliver the agreed asset by a specified deadline. Alternatively, the agreement may permit payment to the seller once particular contractual conditions have been satisfied.

The outcome depends on the actual wording of the agreement and the applicable law. Neither party should assume that the funds automatically belong to them simply because the transaction has failed.

2. Determine Why the Transaction Failed

The reason for the failed transaction can significantly affect the parties’ contractual rights.

Consider a business acquisition in which the buyer deposits the purchase price with an escrow provider. If the seller fails to transfer the agreed assets, the buyer may have grounds to request a refund under the transaction documents.

Conversely, if the seller fulfills the agreed obligations but the buyer refuses to complete the transaction, the seller may be entitled to seek contractual remedies.

However, the failure to complete a transaction does not automatically establish that either party is in breach. The agreement may permit termination under specified circumstances, including the failure to obtain regulatory approval, the occurrence of a defined contingency, or the expiration of a closing deadline.

The parties should therefore distinguish between a permitted termination, a contractual breach, and a genuine disagreement about whether completion conditions have been met.

3. Understand the Escrow Provider’s Role in a Dispute

An escrow provider’s responsibilities depend on the agreement and the legal framework governing the arrangement.

In many arrangements, the provider is responsible for holding funds and releasing them in accordance with specified contractual conditions. The provider may not have authority to determine independently which party is legally entitled to the money when the parties disagree.

Suppose a buyer instructs the provider to return the purchase funds, while the seller demands payment on the basis that the contractual conditions have been satisfied. If the agreement does not authorize the provider to resolve that disagreement, the provider may need to follow the agreement’s dispute procedures or seek appropriate legal direction.

Depending on the circumstances and applicable law, resolution may require mutual written instructions, a settlement agreement, a court order, or another agreed dispute resolution mechanism.

Clearly defining the provider’s authority before funds are deposited can help prevent uncertainty when a transaction encounters difficulties.

4. Review Refund Provisions, Termination Rights, and Contractual Remedies

An escrow agreement should explain what happens to the funds if the transaction does not proceed.

Relevant provisions may address:

• Refund conditions: The circumstances in which funds must be returned to the depositing party.
• Termination rights: The events that permit either party to terminate the transaction.
• Payment deadlines: The consequences of missing a contractual deadline.
• Disputed funds: The procedure for handling conflicting claims or instructions.
• Fees and expenses: The treatment of agreed escrow fees and other transaction costs.
• Contractual remedies: The rights available to the parties following a breach, subject to the agreement and applicable law.

These provisions should be consistent with the underlying commercial agreement. If the purchase agreement permits termination under certain conditions but the escrow instructions do not adequately address the resulting disbursement, the parties may face avoidable complications.

Where multiple agreements govern the same transaction, their terms should be reviewed together to identify inconsistencies and clarify the intended outcome.

5. Establish a Clear Procedure for Resolving Disputes

When the parties cannot agree on the release of escrow funds, a defined dispute resolution procedure can provide a path forward.

Depending on the transaction, the agreement may require good-faith negotiations, mediation, arbitration, or court proceedings. It should also identify the governing law and the appropriate forum for resolving disputes.

The parties should consider what the escrow provider must do while a dispute remains unresolved. The agreement may require the provider to continue holding the funds pending mutual written instructions, a settlement, or a legally effective decision.

Any such arrangement must be consistent with the provider’s contractual duties and applicable law. Continued retention of funds should not be assumed to be permissible in every circumstance.

For cross-border transactions, the parties should pay particular attention to jurisdiction, the location and legal status of the funds, and the practical enforceability of any resulting judgment or award.

Conclusion

When a business deal falls apart, entitlement to funds held in escrow is determined by the applicable contractual framework, the circumstances of the failed transaction, and the governing law. A failed closing does not automatically entitle the buyer to a refund or the seller to payment.

A carefully drafted escrow agreement should establish objective release conditions, clear termination and refund provisions, defined responsibilities for the escrow provider, and a workable procedure for resolving disputes.

Dr. Mohamed Alhammadi Advocates & Legal Consultants Office LLC provides legal, escrow, and paymaster services for appropriately structured transactions. Depending on the scope of the engagement, the firm can assist with reviewing contractual obligations, drafting escrow documentation, defining fund release conditions, and establishing procedures for handling disputed transactions.

Before depositing funds into escrow, parties should ensure that the agreement addresses not only successful completion but also the possibility that the transaction may fail.

Disclaimer: Dr. Mohamed Alhammadi Advocates & Legal Consultants Office LLC provides escrow and/or paymaster services only where such services are ancillary and wholly incidental to the provision of legal services.

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