How to Avoid an Escrow Dispute

Many international trade transactions are completed using an escrow account. This method works to increase trust between two parties who are not familiar with each other. For example, the exporter may request the importer to place a certain amount of money in an escrow account; either the full amount for the shipment or an ‘advance’ amount.

In normal circumstances, upon the completion of the exporter’s obligations, depending on the contract signed between the two, the exporter will now have access to the money in the escrow account. However, business does not always go as planned and sometimes deals fall through.

“Sometimes deals fall through for reasons that cannot be explained”

When this happens where an escrow is involved, a dispute can arise. The buyer and the seller may both claim the money in the escrow account. For example, the buyer may claim that the goods were not supplied and the seller may claim that the buyer pulled out after the goods were ready; or something along such lines.

In this event, the escrow provider will freeze the account until the dispute is resolved. This can take a long time and be complicated, especially when disparate jurisdictions are involved. Often these disputes are settled amicably by the two parties but sometimes legal proceedings are required, which can take a long time and cost a lot of money. Therefore, it is always best to avoid escrow disputes.

Precautions to Avoid Escrow Disputes

Complete Due Diligence – Make sure to dot the ‘i’s and cross the ‘t’s and look into all the details.

Contract Clarity – Terms of the escrow and who should get the money and in what circumstances should clearly be laid out in the contract. Ideally, all of the possible situations that could arise should be accounted for in the contract and detailed resolutions included.

Adhere to Timelines – Meet every timeline in the contract to avoid giving the other party an opportunity to start a dispute over the escrow account. This also means ensuring that all timelines put down in the contract are reasonable and achievable.

Include Contingencies in the Contract – Many unforeseen things can happen during an international trade transaction that may result in genuine delays. From simple things such as weather, regulatory approvals and other ‘nitty-gritties’ to more complicated things such as political unrest and terrorism. So, make sure your contract allows for contingencies.

Be the Bigger Person – Sometimes deals fall through for reasons that cannot be explained. When this happens, know when it is the right time to let go. Sometimes, letting go of one thing can lead to better things in the future.

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