Generally, markets can be very volatile and often bring risks in the course of financial transactions; on large scale deals, you may wonder if you can trust your counterparty (ies), prudence always impels 'caveat emptor'! It is therefore necessary to employ deal execution approaches that will help reduce transaction risks. The aim of this article is to analyse how the use of escrow agents (EAs) could help manage and minimise risk exposure in financial transactions, thereby protecting the parties' interest and promoting their business objective.

Agents are best described as 'conduit pipes' in commercial transactions. An agent is the ultimate middle man who ensures that interaction between two or more parties equals an exchange in goods or services of value. Agents can be appointed expressly (oral or written) or impliedly to act for another (the principal), within the scope of authority delegated to him.

The underlying purpose of escrow is to establish a repository for monies or assets, to hold them in safe keeping until events occur as agreed upon by the contracting parties. The role of an EA as intermediary is to ensure that all parties to a transaction perform as required. The performance requirements are composite of demands each party to the transaction has placed upon the other in order to achieve the desired contractual outcomes.

Escrow itself is: "a legal document or property delivered by a promisor to a third party to be held by the third party for a given amount of time or until the occurrence of a condition, at which time the third party is to hand over the document or property to the promisee."1

An EA must be capable of holding assets (money, property, stocks, etc.), on behalf of the contracting parties. These assets could be held until instructions regarding disbursement is received. The third party after being officially engaged by contacting parties or signing an escrow agreement, opens an escrow account which can be a bank account where the assets value is held and not to be released until fulfilment of specific conditions of the transaction. In N.B.N. Limited v. Savol W.A. Limited,2 it was stated "...that a bank account generally held in the name of the depositor and escrow agent, which is returnable to depositor or paid to a third party on fulfilment of specified condition is an escrow account..." For example, funds payment for real estate taxes are commonly paid into escrow bank account of mortgagor by mortgagee.3

Thus, in a financial transaction involving EA, the following activities takes place:

  • the vendor and purchaser agrees on the terms and conditions;
  • the purchaser pays the amount into the escrow account;
  • the vendor performs/renders the services;
  • the purchaser receives same and is satisfied; and
  • the escrow agent releases the amount in favour of the vendor.

The roles and importance of EA in financial transactions

The major role of an EA is to ensure that the parties to a transaction sticks to their end of the bargain, thereby safeguarding their counterparties' interest in the transaction. An EA can also be seen as a mediator of the transaction where disputes arise. An escrow is also beneficial when the transaction needs to be completed in steps, the service provider may need funds to continue a project, but it may be unwise for the buyer to pay the full amount before completion. Funds can therefore, be partially released as predetermined milestones are completed. The primary duties of an EA include the duty to follow the escrow instructions; to use good faith and reasonable skill; and to redeliver goods on the completion of conditions.

Unauthorised delivery before the performance of the condition or the happening of a contingency is a breach of the escrow agreement, and a violation of the depositor's rights. Where one party defaults on an obligation under a transaction, the non-defaulting party typically has rights and remedies, including the right to terminate the contact. Where the contact is terminated, the money that was placed into escrow becomes idle because the EA is usually instructed not to release or refund the money until dispute between the parties is settled, unless otherwise stated in the EA agreement. An EA who breaches duties to the parties to the escrow agreement can be held liable in tort and for breach of contract: Commercial Escrow Co. v. Rockport Rebel, Inc.4

Variants of EA Arrangements in Financial Transactions

a) Online Transactions: The emergence of e-commerce in Nigeria changed the way Nigerians buy and sell goods; many Nigerians have now embraced the idea of buying things online and having them delivered at their doorsteps.5 The fear of paying for something you have not seen physically, coupled with the thought of logging on to a website and providing card details - especially with the spate of internet fraud, initially kept Nigerians from trusting online payment. Thus online companies introduced payment on delivery (PoD) to assure Nigerians that they do not have to part with their money until they are satisfied with the items delivered to them.

However, there are several downsides of PoD, exemplified with the case of a Jumia delivery man in Port Harcourt, Rivers State who was killed whilst delivering iPhones to some customers who had ordered on PoD basis.6 Also, e-commerce companies have recorded the cases of customers not being available to pick up their orders (often having changed their minds in the interim, or not having the cash to pay). Thus, high rates of returned goods can only be tied to lack of monetary commitments on the parts of the buyers, whilst there are also cases of merchants delivering sub-standard goods and sometimes cancelling deliveries. With these downsides, most companies would definitely move for the motion to kill PoD in Nigeria.7

For e-commerce platforms to successfully carry on business transactions, buyers need to know that their purchases are protected, the companies also need assurance of financial commitments. Hence, the need for a third party (EA) who ensures the process goes smoothly, as sine qua non for successful delivery.

EA - Strengthening Online Transactions

EAs can protect buyers and sellers by acting as third parties that collect and hold payments from buyers to be released to the sellers when the buyers are satisfied or based on agreements. This creates a commitment bridge between buyers and merchants, it is a safe way to strike a balance between both parties and eliminate fraud. A few Nigerian e-commerce platforms like Konga and online payment platforms like SimplePay and Voguepay have claimed to offer escrow services but how many buyers are aware of this? And how functional are their advertised escrow services?8 These are issues that needs to be addressed.

Whilst trust is still a big issue with online shopping in Nigeria, many Nigerians shop on American and other foreign e-commerce platforms like Amazon, eBay, Walmart, Etsy, Aliexpress, Alibaba etc, who require payment before delivery. These platforms provide escrow services that ensures purchases made on their website are protected, they started with PoD services but were able to work around the trust issues with the help of intermediaries like PayPal which affords buyers some payment protection. Knowing that a trusted third party is involved to ensure the integrity of the process will make buyers more committed and reduce the return rates of goods and on the other hand, merchants are more likely to perform their own end of the deal. It is therefore imperative that Nigerian online shopping platforms introduce functional escrow services in order to have a safe shopping environment for their customers.

b) Normal Sale and Purchase Transactions: The services of an EA can be required if the buyer and the seller identify the need for independent oversight of payment transaction, especially where the transaction involves a large sum of money.9

c) Real Estate Transaction: An EA can play a huge role in a real estate (RE) transactions especially with the requirement of deposit which is common in RE transactions as it allows the buyer to carry out adequate due diligence of any potential purchase and opt out without fear of not easily recovering the deposit if not satisfied with the findings. Also, the funds deposited into the escrow account assures the vendor that the purchaser has the funds required for the purchase, such assurance helps save transaction time and costs by discouraging unserious parties.

A common example of how escrow works in RE transactions is where a vendor executes a deed of conveyance and gives same to an EA (usually a solicitor) for transference to the purchaser upon payment by the latter of the purchase price. Title cannot be withdrawn by the vendor before the purchaser has had an opportunity to make complete payment and the purchaser on the other hand will not have the legal estate passed to him and raise difficulties by refusing to pay the purchase price. Thus, both parties must fulfil their obligations in order to have their interests protected.10 Escrow can also be used in Joint Venture (JV) transactions.

This escrow arrangement becomes necessary where a landowner cannot give up his entire land as (part of) his JV contribution because the land is a large expanse and the JV project would only occupy a portion of it, whereas there is only one title document for the entire land. In order to prevent the landowner from using or pledging such land as security in a manner that is inconsistent with the JV partner's rights, parties to the real estate JV transaction can agree that the title documents would be put in escrow pending partitioning of the land and perfection of title to the JV portion. This also operates as a form of payment security for the JV partner.11

d) Escrow Shares: Escrowed shares are shares held in escrow account, secured by a third party, pending the completion of a corporate action or an elapse of time leading up to an event in order to reduce counterparty risk.12 Shares are escrowed in three common cases: merger and acquisition (M&A) transactions, bankruptcy,13 or reorganisation of a company; and granting of restricted shares to an employee-companies' issue stock in escrow, imposing limitations on when the shares can be sold as part of employees' compensation plan.

e) Mergers and Acquisitions: M&A transactions often requires shares of the target company to be held in escrow until the deal is finalised.14 A merger or acquisition can result in the buyer (acquirer) requesting a portion of the deal in consideration - 10% to 15%, to be held in escrow. The escrowed shares protect the buyer from potential breaches in seller representation and warranties, covenant, contingencies, and working capital adjustments, among other material adverse items that may affect the valuation of deal or the closing itself. For example, funds for an acquisition can be held in escrow until government regulatory authorities approve the transaction. Other times, the purchase price might need to be adjusted at some point during the process as a result, funds are placed in escrow to cover for the variance.

Regulatory Overview/Governing Laws

Primarily, the principles governing agency relationships and particularly escrow agents are as received from common law and further espoused by our courts. However, there are some provisions in our laws that lay credence to the activities of escrow agents and govern/ regulate their actions and inactions. One of such provisions is section 290(1) Companies and Allied Matters Act (CAMA),15 which states that:

"Where a company - (a)Receives money by way of loan for a specific purpose; or (b)Receives money or other property by way of advance payment for the execution of a contract or project; and (c)With intent to defraud, fails to apply the money or other property for which it was received, every director or other officer of the company shall be personally liable to the party from whom the money or property was received for a refund of the money or property so received and not applied for the purpose for which it was received: provided that nothing in this section shall affect the liability of the company itself."

A careful perusal of the above provision of CAMA if applied to escrow agents presupposes that where monies or properties lodged in an escrow account and run by an escrow agent are not used for that purpose, the principal officers of the company that served as escrow agents will be held personally liable.

Trustees can also serve as escrow agents. Their actions are governed by the Investment and Securities Act (ISA) 2007. Sections 40, 41, 42, 43 and 44 ISA regulate the use of these properties and monies in their custody. Accordingly, section 40 ISA mandates that a separate account (in this case, an escrow account) be maintained on behalf of different clients, section 41 ISA prescribes the punishment for withdrawing money from the trust account without authority. 'Without authority' used here refers to using the money for any purpose other than to pay the person entitled to the payment, to defray brokerage and other proper charges; or as may otherwise be authorised by law. Section 42 ISA provides that money in a trust account (an escrow account) are not available for the payment of the trustee's (escrow agent's) debt or even the principal's agent.

In Olam (Nig.) Ltd v. Intercontinental Bank Ltd16, the Court of Appeal held that:

"... at all times, there must be a difference between a customers' current or savings account and the escrow account, cheques were issued to Pacers escrow account, but the respondent paid the cheques into a personal current account belonging to the EA contrary to the instruction on the cheques and the court stated that the act is wrong because the accounts are distinct..."

Furthermore, except otherwise expressly or impliedly stated, agency agreements made amongst Nigerian residents and to be performed within jurisdiction, regardless of such parties' actual domiciles, are governed by the contract laws of the relevant State in Nigeria.17 For an escrow to be valid, there must be: a binding contract between the parties to the transaction, and conditional delivery or transfer of instruments or money to a third party. If the escrow service is to be performed in another jurisdiction such as the UK, same must be registered and is regulated by UK's Financial Conduct Authority (FCA).18

Legal Implications of Using EA

Although there are valid reasons to justify the adoption of escrow services in certain financial transactions, parties should also be aware of some associated risks in using escrow services.

First, escrow services providers are third party contractors. Thus, their trustworthiness must be assessed the same way the trustworthiness of a bank is assessed in a letter of credit transaction. In a letter of credit transaction, the parties agree that a letter of credit issued by an international bank is acceptable, presumably because both can assess that bank's trustworthiness. If an escrow service is to hold funds and release them when appropriate, the assurance and trustworthiness that it will do so must be assessed by the parties. Therefore, it is advised that the appropriate authorities step in to ensure the trustworthiness of EAs. This can be achieved by mandating increased minimum operating capital requirements for EAs verifiable through statutory deposits with the regulator. Such funds can be provided so that in cases where there is mismanagement of funds by EA, the aggrieved parties can have a recourse to their fun ds. The deposited funds can also serve as guarantee for principals who hire EAs.

Just like any other transaction, escrow agreement could be subject to fraud which is a criminal offence. Therefore, parties involved in financial transactions should be aware that fraudsters setup phony escrow sites which mirrors escrow services and accept funds under false pretences. Thus, every organisation or persons using escrow services should conduct due diligence into any escrow service to prevent fraud. The identity of an EA must be verified with the appropriate bodies.

Apart from the risk to be considered, other terms of the escrow agreement should be properly negotiated. For instance, the escrow agreement should stipulate in clear terms the scope and obligation of the escrow service. Provisions should be made for events, the occurrence of which will trigger payment to one party or refund of funds to the other party. In addition a dispute resolution clause should also be provided for by the parties to the financial transaction.19


Having the knowledge of escrow services and using it for your financial transactions can help keep contractual parties from fraud and other risks. A great benefit of using escrow services is that all the obligations required will be met by both parties to the contract before the consideration exchanges hands. Reputable escrow agents verify the validity of all parties involved in transactions, this ensures that the parties are not fraudulent.

A regulatory framework for the operation of EAs should be provided in Nigeria, to ensure uniformity in the practice of escrow agency and provide ascertainable position in international commercial transactions involving Nigerians and foreign nationals. This will build confidence on the security of funds meant for investment and business operations.

Article originally published on LeLaw Thought Leadership page:


1 Bryan A. Garner, 'Black's Law Dictionary'' (9th ed., 2009), 624. See also Deji Sasegbon Esq., 'Sasegbon's Judicial Dictionary of Nigerian Law'' (1st ed., 2019), 412.; Brossette Manufacturing (Nig) Ltd. v. M/S Ola Ilembola Ltd & Ors (2007) LPELR-809 (SC).

2 [1994] 3 NWLR (Pt. 333), 435.

3 See 'Black's Law Dictionary', (9th ed., 2009), 20.

4 778 S.W.2d 532 (Tex. App. 1989).

5 According to a recent Alexa ranking (a measure of websites in order of popularity), online shopping sites are among the most visited websites in Nigeria. Pioneer e-commerce companies like Jumia and Konga who had ventured into the uncharted waters of e-commerce at the time had to win the trust of Nigerians to get them to buy items online. See Kim Kosaka, 'Alexa Rank Definition and Resources': (accessed 17.02.2020).

6 Chukwudi Akasike and Samson Folarin, 'Jumia Delivery Man Killed by Customer Over iPhones', The Punch, 29.03.2017: (accessed 22.03.2020) Apart from other reports of robbery of delivery men and intimidation by customers, for businesses, there is also the risk of incurring the cost of delivery trips for unconfirmed orders.

7 Already, in a quick reaction, PayPorte, an online retail store in Nigeria, has announced that it is cancelling the payment on delivery option for shoppers. The decision, Eyo Bassey, Payporte CEO, admits, has been "necessitated by the increasing risk and security challenges posed by this payment option" and therefore the need reducing the amount of cash receipts by delivery staff. See Yomi Kazeem, 'A Gory Murder is Forcing Nigeria e-Commerce to Rethink Payment on Delivery', Africa Reporter, 11.04.2017: (accessed 22.3.2020).

8 Titilola Oludimu, 'How Escrow Service Providers Can Help Promote e-Commerce in Nigeria', TechPoint Africa, 05.05.2017: (accessed 02.02.2020).

9 For instance, a State Government hires XYZ Construction Company on an instalmental payment plan.. XYZ performs 50% of the work and needs more funds to continue but because of some bureaucratic bottlenecks, the funds takes a long time to be released and as a result, increases commercial challenges for the company. Such situation would be different where an EA was contracted by the parties to oversee the contact and release funds based on milestones. Delayed payments often results in contractors' demobilisation from sites, many times culminating in abandoned projects.

10 In Dalfam (Nig.) Ltd. v. Okaku International Limited [2001] 15 NWLR (Pt. 735), 203, it was held that an instrument signed and sealed but not delivered and left in the hands of a stakeholder to hold until both parties had performed their respective obligations thereunder is an escrow. Similarly, Awojugbabe Light Industries Limited v. Chinukwe, (1995) LPELR-650(SC), 51-52 D-B stated that: "Where an instrument is delivered to take effect on the happening of a specified event, or upon the condition that it is not operative until some condition is performed,...Until the specified time has arrived or the condition has been performed, the instrument is called an escrow."

11 See Afolabi Elebiju and Frank Okeke, 'Inflections: Unlocking Value Through Real Estate Joint Venture Transactions in Nigeria' LeLaw Thought Leadership, 07. 2018: (accessed 02.06.2020).

12 Section 129(4) & (5) Investment and Securities Act (ISA) 2007.

13 Section 25, 26 & 27 of the Bankruptcy Act, Cap. B2, LFN 2004 (for Court appointed fund managers).

14 Sections 147(9) (b), 149(1) ISA 2007.

15 Cap. C20 LFN 2004

16 (2009) LPELR-8275 (CA).

17 See for example, section 24, Lagos State High Court Law, Cap H3, 2003..

18 The FCA regulates and supervises the conduct of more than 50,000 firms in the UK that provide financial products and services to both UK and international customers. See Andrew John Bailey, 'Financial Conduct Authority': (accessed 10.3.2020).

19 Section 1, Arbitration and Conciliation Act, Cap. A18, LFN 2004.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.