An escrow is an arrangement whereby funds, source code, or documents are entrusted to a neutral third party until specific conditions are met. In our practice, we apply escrow in M&A transactions (often 10 percent of the purchase price for warranty claims), in large deliveries with milestone payments, and in SaaS contracts where source code access must be guaranteed. A good escrow arrangement offers confidence to both parties without unnecessary legal risks.
What is the legal problem?
In international transactions, mistrust often exists between parties who do not know each other and operate in different legal systems. Advance payment entails risk for the buyer; delivery without security for the seller. In the case of software, the continuity of the supplier is an additional risk. A good escrow arrangement solves these problems, provided the terms are clear and the escrow agent is reliable.
What does the law say?
Escrow is regulated contractually and is not a statutory institution. Under Dutch law, escrow often functions via a notarial escrow account under Article 25 of the Notarial Profession Act. Its validity depends on the agreed terms, the applicable law, and the choice of the escrow agent. ICC and specialized providers offer model clauses.
For software escrow, the Software Borg Foundation in the Netherlands offers an established framework. Internationally, NCC Group and EscrowTech operate according to comparable standards. In M&A, escrow agreements often follow English or Delaware law to ensure uniformity within the transaction documents.
What risks do companies face?
A poorly drafted escrow clause makes release contested. Unclear triggers lead to proceedings regarding the release or retention of the escrow amount. An unreliable escrow agent or unenforceable jurisdiction undermines security. In M&A, miscalculating the escrow amount is a common cause of disputes between buyer and seller. For software: outdated source code in escrow is practically unusable.
Practical example from our practice
We advised a Dutch buyer on the purchase of shares from a Spanish seller. Ten percent of the purchase price (1.8 million euros) was placed in escrow with a Dutch notary for 18 months to cover guarantee claims under the SPA. After 12 months, a claim arose due to undisclosed tax debt. Thanks to clear triggers and an independent arbitrator under NAI regulations, the escrow amount was paid out within three months. Without escrow, the client would have had to litigate in Spain — estimated costs 250,000 euros, duration 4 years.
What can you do?
Choose a neutral and reliable escrow agent (notary, bank, or specialized provider). Define release triggers clearly and measurably. Set duration, interest, and costs contractually. Combine with arbitration or an independent expert for disputes. For software: choose a reputable escrow foundation and arrange update obligations. See also our article on Bank Guarantees in international transactions.