Escrow – new instrument of business development in Russia
A substantial share of profitable deals are not concluded (or their structure is seriously complicated) for lack of confidence that the counterpart will fulfill all terms and conditions. Thus, at purchase/sale the seller is not sure that it will collect money, and the buyer is not sure to get the acquired commodity. That is relevant for both deals between individuals (e.g., in selling a car or an apartment) and for large-scale transactions between legal entities (selling enterprises, real estate, etc.). In such case the parties even if they are eager to make non-cash settlement have to use safe deposit box. Another option is to register a deal abroad using foreign law and specially set up companies. But what to do when it comes to settlements under complex agreements including elements of several types of contracts? However USA, EU and other developed economies have elaborated, stipulated by law and successfully implemented a mechanism of parties’ protection against default – escrow. It may be treated as contingent deposit. It is both a way to make settlements and a security for agreed obligations, which permits the parties to guarantee performance of a transaction and minimize potential risks.
Of course, Russian laws provide for certain measures to secure obligations. They include forfeit, pledge, bank guarantee, etc. However, none of such means protects against a situation when a person simply takes the money and runs or gets away with it by hiding his property from attachment.
In foreign law escrow is a tripartite transaction between an escrow agent and conventionally speaking the seller and the buyer. Pursuant to such agreement, a party shall transfer (deposit) property (cash, documents, other valuables) to a licensed escrow agent pending performance of obligations by the other party. An escrow agent is an attorney to either party, an independent person having no interest of its own in the transaction. He shall act strictly within the contract since control over observance of all agreed terms is the attorney’s key duty. For depositing cash or securities a special escrow account is used. It is opened by an escrow agent or a bank which may act in the same capacity. So long as all agreements are observed the agent shall transfer property, cash or securities to the party that has performed its obligations. Otherwise, the property is returned to the owner.
Such instrument is broadly used abroad: from purchase/sale of residential property to merger or acquisition transactions, from deals in securities to selling intellectual products. Convenience and efficiency of such settlement scheme is hard to overestimate. It should be pointed out that abroad the escrow agent is not just an independent party but shall have a mandatory license (accreditation). In such case reputational risk and risk of sanctions (license cancellation, penalties, etc.) are also a guarantee of integrity and efficiency of escrow agent’s activity.
Russia saw attempts to legislatively stipulate the instrument popular abroad, however they were not seen through. New draft amendments to the Civil Code of the Russian Federation propose introduction of escrow institute, however presently they raise a lot of issues.
Thus, the Russian version of escrow contract is also an agreement between two transaction parties and an escrow agent who receives property from a party and transfers it to the other party to the extent as all respective obligations are performed. If cash or securities are deposited the escrow agent shall also open a special bank account, however guarantees of his acting in good faith are uncertain. Besides, the draft law leaves unregulated the following essential issues: general requirements to entities who may act as escrow agents; mechanism and control of their operations; mode of operation of accounts opened by an escrow agent (other than a bank); assignment of escrow agent duties in case of termination of his activities or death. It should be also pointed out that laws governing execution proceeding, bankruptcy and tax relationships are in need of amendment.
Escrow is a new phase in Russian contractual law purported to develop business and attract foreign investments. So the novelties proposed by draft CC amendment are the first and very significant step towards establishment of civilized escrow service in Russia. This institute may significantly raise the degree of trust of Russian civil turnover and hopefully withdraw some of transactions in Russian assets out of foreign jurisdictions.
Andrey Ageshin, partner of Art De Lex; Anastasia Vasinenko, lawyer of Art De Lex.
