How to Avoid the 5 Most Common Mistakes in Escrow Agreements

In this blog, we’ll explore the five most common pitfalls in drafting an escrow agreement and how to avoid them. If you have questions or want to discuss your specific situation with a professional after reading this, don’t hesitate to contact us.

Mistake 1: Starting Too Late

Solution: It’s never too early to set up an escrow agreement.

Starting too late—even after going live—is something we sometimes see, but it’s far from ideal. Ideally, you should begin considering the escrow agreement well before signing the contract with the software provider. This ensures you can optimize the agreement. For instance, finalize the escrow arrangement alongside the SLA. For government institutions, having an escrow agreement is often a requirement in tenders.

Mistake 2: Focusing Only on Bankruptcy

Solution: Specify the release conditions.

Clearly define the specific scenarios under which the escrow agreement will be activated. Don’t limit the agreement to situations involving bankruptcy. While bankruptcy is often the main reason for invoking an escrow agreement, other conditions shouldn’t be overlooked, such as signs of impending failure or supplier instability. For example, it might be critical to take over hosting services before bankruptcy is declared. Be thorough when drafting contracts, and seek professional advice if needed.

Mistake 3: Making Inconsistent Contractual Agreements

Solution: Establish a hierarchy in your contracts.

Ensure logical consistency between your contracts. For example, the terms in your SLA should align with those in your escrow agreement. This avoids conflicting clauses in different contracts, which can lead to complications later.

Mistake 4: Assuming an SLA Negates the Need for Escrow

Solution: Understand that they serve different purposes.

An SLA (Service Level Agreement) and an escrow arrangement are fundamentally different. An SLA covers the agreements made when the service provider and their services are operational. In contrast, an escrow agreement comes into play when this is no longer the case. Recognize the distinction, as these are two entirely separate safeguards.

Mistake 5: Not Keeping the Escrow Agreement Up to Date

Solution: Update at the right frequency.

An escrow agreement must be kept up to date. If software development continues but the escrow agreement isn’t updated, its usefulness will quickly diminish. For example, if there’s a new sprint every two weeks but you deposit updates only twice a year, you’ll soon fall far behind. Set an appropriate update frequency to ensure the agreement remains effective when needed..

Escrow: Logical but Complex

While the above points may sound logical, implementing them can be complex. Don’t hesitate to contact us. Escrow is what we do every day, and we’re here to help you create an escrow agreement that truly works for you.