Explanatory notes

Introduction

The absence of standard market contracts for holding money in an escrow account during a dispute means that parties are left to draft agreements on an individual basis. In order to fill this gap, BIMCO has developed a standard form escrow agreement.

The following notes describe the reasoning behind those clauses in the agreement which are not self-explanatory.

BIMCO would like to thank the following subcommittee members for their considerable efforts in revising the Escrow Agreement for Disputes:

• Ms Lisa-Marie Perrella, Fednav (Chairperson)
• Mr Stuart Plotnek, Ince & Co 
• Mr Paul Herring, Ince & Co 
• Mr Christoph Bruhn, Bruhn Shipbrokers
• Mr Magne Andersen, Nordisk Defence Club

Structure

The agreement is divided into three sections. The first section is a box layout used to insert specific contract information including the name of the parties, description of the underlying dispute and escrow amount. The next section sets out the applicable terms and conditions while Annex A contains a pro forma Letter of Instruction that can be used for the release of the escrow amount.

Box layout

The nature of the dispute should be set out at Box 4 together with particulars relating to the underlying contract and the sum covered by the escrow amount. This is important as a means of identifying the specific issues because the parties might be involved in other ongoing disputes between themselves. However, insertion of individual heads of costs, such as interest and legal expenses, might be counterproductive because itemised figures could limit the claim to such specific amounts.

Boxes 9 and 10 refer to Clause 7 (Escrow Agent’s Fees). The provision is optional but, where agreed, provides for the claimants’ and defendants’ respective share (which might not be in equal proportion) of the escrow agent’s fees. The parties’ liability for any applicable sales tax should also be stated.

Terms and conditions

Clause 3 (Security)

Subclause 3(a) makes it clear that on payment of the escrow amount claimants must refrain from continuing or taking any action to obtain further security from defendants in respect of the claim covered by the agreement. This does not, however, prevent claimants from seeking security for other claims against the same defendants.

However, security is often posted early in the proceedings and the quantum may subsequently prove to be insufficient. Accordingly, subclause 3(b) enables the claimant to seek to top-up the security by written request to the defendants. Nevertheless, the provisions of subclause 3 (a) remain in place for 14 days while such additional security is arranged. Thus, the 14 days can be seen as a grace period within which the defendant has to provide further security as requested by the claimant, failing which the claimant will be free to arrest the ship or secure its claim by other means.

Clause 4 (Payment of the Escrow Amount)

The escrow agent must notify claimants and defendants when it is ready to receive the money. It is unlikely that a new account will have to be opened as the money can be expected to be held in an existing client account.

The defendants must transfer the escrow amount to the escrow account in full. If there are any deductions, such as banking fees, the payment must be increased to cover the shortfall. The escrow agent must notify the claimants and defendants immediately on receipt of the money and advise them of the amount received.

Clause 5 (Release of the Escrow Amount)

Subclause (a) – The escrow amount can be released in accordance with written instructions by the claimants and the defendants (as per the Letter of Instruction at Annex A or in a different form if preferred by the parties) or following a judgment or arbitration award.

Subclause (b) – Separate monetary awards might be made on different issues arising under the dispute and money released before all matters have been fully and finally resolved. The balance, if any, held in the escrow account will be released to the defendants only when all aspects of the dispute have been determined.

Subclause (c) – Bank charges incurred when releasing the escrow amount will be for the account of the receiving party.

Clause 6 (Responsibilities of the Escrow Agent)

Subclause (a) – Sets out the escrow agent’s obligation to hold and deal with the escrow amount in accordance with the agreement. No other duties (express or implied) are owed to the claimants or the defendants or any other person.

Subclause (b) – The escrow agent’s liability is limited to its own negligence or wilful misconduct.

Subclause (c) – Expressly excludes the escrow agent’s liability for direct losses (subparagraph (i)) and indirect or consequential losses (subparagraph (ii)).

Subclause (d) –  Provides an indemnity protecting the escrow agent against losses.

Subclause (e) – The escrow agent must keep the escrow amount separate from its own funds.

Subclause (f) – Payment by the escrow agent must be made as soon as reasonably practicable after receipt of instructions. It should be noted that if the escrow agent has been instructed to releasefunds late in the afternoon, it might not be possible to arrange a bank transfer until the following day.

Subclause (g) – The escrow agent may not necessarily control the actual payment but might have to instruct a bank to release the funds. The generic phrase “initiated the payment” has been used to cover the triggering of payment of the escrow amount regardless of whether the escrow agent is a bank, a broker or a law firm. A bank will generally “effect payment” while a broker will “issue instructions”. The escrow agent’s responsibility in relation to any particular payment ceases when instructions have been given to release funds.

Subclause (h) – Identifies the point at which the escrow agent has fulfilled all of its obligations under the agreement.

Clause 7 (Escrow Agent’s Fees)

This is an optional clause. If the Escrow Agent is one of the parties’ solicitors, or other person who will not be charging separately for holding the escrow amount, the clause might not be necessary and can be deleted.

The escrow agent’s fee, together with any applicable sales tax, is shared between the claimants and the defendants. Normally, the amount will be divided equally. However, as this is not always the case, the amounts payable should be inserted in Boxes 9 and 10 respectively for claimants and defendants. The defendants should pay their fee together with the transfer of the escrow amount to the escrow account. The claimants’ share will be paid by way of deduction by the escrow agent from the payment made to the claimants. Provision is also included to ensure that the escrow agent can invoice the claimants for their share of the fee where the escrow amount has not been released to the claimants.

Clause 14 (Law and Jurisdiction)

The clause follows market practice where disputes under escrow agreements are generally referred to court jurisdiction rather than arbitration. Accordingly, the BIMCO Dispute Resolution Clause has not been used in this agreement. 

The clause has been based on the Governing Law and Jurisdiction provision in the BIMCO Charter Party Guarantee. It sets out a framework giving parties the option to choose the law and forum, failing which English law and the courts of England and Wales will apply.

The clause applies only to disputes arising under the escrow agreement. Disputes arising under the underlying, but separate, contract will be determined in accordance with the appropriate provision in that contract.