India is a developing nation, and the practice of enforcing business contracts is not prevalent in the Indian market, which makes the whole business transaction uncertain. Escrow Mechanism serves as a solution to this issue. It plays a vital role in providing safe, secure, and sound business transactions worldwide. Escrow Mechanism aids in boosting the economy, which significantly impacts the industry's growth. In India, the pendency of numerous litigations reflects that people tend not to abide by the contracts and rules, which can be gleaned from various reports published over the years. Escrow Mechanism helps conduct business without fear of litigation, cheating, and fraud.
The escrow mechanism works through a third-party intervention in which, on behalf of both parties, a third party holds either money or documents concerning the transaction. If any party commits any default during the pendency of said transaction, then the third party could compensate the aggrieved party against said default or restore the status quo. It imposes the parties to discharge their duties and liabilities most efficiently under the business transaction. This third party can hold any security, financial instruments and assets on behalf of both parties. Escrow Mechanism is not very prevalent among the business community and is primarily implemented in mergers and acquisitions and cross-border transactions. Still, as the economy is developing and the world is evolving, people accept the changes and adopt the new methods to run business smoothly and fearlessly.
An Escrow Agreement includes details of the designated escrow agent, securities, financial instruments or assets to be set aside in the escrow, terms and conditions for releasing the assets, rights and obligation of escrow agent along with jurisdiction of Court in case any dispute arises. An escrow agent is an Independent Party who holds securities, financial instruments or assets on behalf of both parties to contract. In India, another industry where Escrow Mechanism is prevalent in real estate as it is an undisputed fact that real estate transactions involve a lot of complexities and risk factor is elevated, so to manage the same, buyers and sellers prefer to enter into a transaction through the Escrow Mechanism.
In India, the escrow mechanism is rapidly growing, and the status of the escrow payment method could be gathered from two landmark judgments that defined the true essence of this method. In the landmark case of Jeweltouch (India) Pvt. Ltd. vs. Naheed Hafeez Quraishi And Ors. 2008 (3) BomCR 217, the Hon'ble Bombay High Court relied on the definition of Escrow mentioned in Halsbury's Laws of England. According to it, no party is bound with an escrow agreement until and unless any party performs their part. The escrow agreement is not enforceable if the buyer has not made the payment or the seller has not dispatched the item. There should be the performance of any condition, and in the absence of that, the escrow agreement is not binding on any party. Further, Hon'ble Court has discussed the situations in which delivery of a written sealed escrow agreement would be enforceable and as per Hon'ble Court.
“When sealed writing is delivered as an escrow, it cannot take effect as a deed pending the performance of the condition subject to which it was so delivered, and if that condition is not performed, the writing remains entirely inoperative. If, therefore, sealed writing delivered as an escrow comes, pending the performance of the condition and without the consent, fault, or negligence of the party who so delivered it, into the possession of the party intended to benefit, it has no effect either in his hands or in the hands of any purchaser from him; for until fulfilment of the condition, it is not, and never has been, the deed of the party who so delivered it. When sealed writing has been delivered as an escrow to await the performance of some condition, it takes effect as a deed (without any further delivery) immediately the condition is fulfilled, and the rule is that its delivery as a deed will, if necessary, relate to the time of its delivery as an escrow. Still, the relation back does not have the effect of validating a notice to quit given at a time when the fee simple was not vested in the person giving it”.
Further, in the case of Siddhivinayak Realities Pvt. Ltd vs. Tulip Hospitality Services Ltd. Civil Appeal No. 1403 of 2007, the Hon’ble Supreme Court purports that.
“An escrow arrangement is normally arrived at to safeguard the parties' interest for a contract. The Escrow Agents are normally trusted by the parties to act fairly and without bias notwithstanding their relationship with the respective parties”.
In most circumstances, escrow agents are appointed by the parties themselves. Their advocates draft or vet the credentials of escrow agreements, and in certain circumstances, advocates act as joint escrow agents for the concerned parties. The main requirement of an escrow agent is that he should be independent of all pre-decided notions and shall act in good faith and best interest of both parties.
Among the many benefits of escrow, sellers primarily have protection against chargebacks, non-enough funds, the possibility s of fraud, etc. Buyers have the opportunity to carry out due diligence before the monies have been transferred to the sellers.
Thus, it is evident that the Escrow Mechanism could be an effective tool in mitigating various risks involved in business transactions, especially those transactions involving a significant stake. It provides a secure environment to enter into business with other parties and expand the horizon.
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