By: Andres Lopez
The Escrow contract or “Escrow agreement” which in English means “deposit”, is an atypical legal instrument in the case of Guatemala, usually used as an accessory in transactions or negotiations, as a guarantee, where a third party intervenes who may or may not be a financial entity. It is mostly used in other jurisdictions such as such as Anglo-Saxon law, usually in transactions related to real estate law.
The reason or object in signing an escrow contract is to provide security and grant a guarantee to one or both parties within a negotiation, where there may be distrust regarding compliance with all or part of the obligations of the main negotiation. Thus, a third party usually known as an “escrow agent” is designated, also called a Trusted Operator in some jurisdictions, who will have the custody and custody of the funds and/or assets that are the subject of the main negotiation contract, until the contingencies or conditions established within the contract are met or happen, and which may be in stages or on a single final date.
It can be seen that an escrow contract serves as a solution in different types of situations or negotiations, where different types of goods, movable or immovable, can be granted as collateral, and which can range from cash funds to securities such as stocks and/or bonds. , etc., and as well as any other type of documentation with an intangible value.
How does escrow operate and who is involved in it?
Thus, the escrow will always be associated with another contract, which can be of a different type, for example, a sale of shares and/or merger of commercial entities to more typical contracts such as leases, mutual agreements, contracting of services, etc., and that cannot be estimated in isolation, only under the pre-existing condition of a main contract.
Typically, the escrow contract exists as an accessory contract to the main obligation, only referring to it within the body of the main contract, where its main conditions and description of the assets that will be kept as collateral may or may not be established.
There are typically three parties involved in the escrow:
- The beneficiary: to whom the guarantees belong once the conditions of the document or sum of money contract have been met.
- The depositary: the person who delivers the goods as collateral.
- The escrow agent or trusted operator: as depositary and custodian of the guaranteed assets.
As we can see, these parties and the escrow operation are similar to a trust or escrow as guarantee, which is why, within the contract, it is important to be able to individualize each party, describe the assets under guarantee, obligations of each party, the deadlines. that must be respected and estimated conditions and contingencies for delivery to the beneficiary, as well as the specific obligations that are agreed upon for the escrow agent and that determine the delivery of the respective goods. For guard and custody services, the trusted operator will charge the respective fees paid by one or both parties that hire it.
Finally, once the conditions and deadlines for delivery of the goods by the escrow agent have been specified, the depositor will no longer have possession of said goods in favor of the beneficiary and with that the object, the contract is fulfilled and all parties are released from their subsequent obligations.
Specifically in Guatemala, the Escrow contract, using a financial entity, is regulated as a trust operation by the banks through the signing of the contract and designating the banking entity as a Trust operator; In these specific cases, it is usually guaranteed through funds and documents mostly, and an account must be opened for said conditional payment of the guarantees, which are previously deposited in the respective account, and kept until the conditions agreed upon by the parties in the instrument materializes and with this the escrow object ends.