An escrow deposit is a measure to ensure the performance of obligations by the obliged party. Typically, the obliged party will deposit a sum of money into a restricted account at a credit institution. If the secured obligation is violated, the credit institution will use the escrowed funds to settle the obligation and compensate for damages to the entitled party, after deducting service fees. In this article, TNTP will present the basic content you need to know about the measure of securing the performance of obligations: the escrow deposit measure.
1. Concept of escrow deposit
Based on Article 330(1) of the 2015 Civil Code, Escrow deposit is an act whereby an obligor deposits a sum of money, precious metals, gems or valuable papers into an escrow account at a credit institution to secure the performance of an obligation.
According to the regulation, assets not used for escrow include real estate, excluding precious metals or gemstones, and property rights. The three parties involved in the escrow transaction are the party with obligations (party making escrow deposit), the entitled party (party holding rights in escrow deposits), and the credit institution.
The conflicting effectiveness of the escrow measure against third parties arises from the moment the escrow assets are deposited into the restricted account at the financial institution where the escrow is made.
2. Conditions for the effectiveness of escrow
The escrow contract is considered a civil transaction, so for this contract to become effective, the parties must comply with the provisions of Article 117 of the Civil Code regarding the conditions for the effectiveness of civil transactions. According to this, the participants in the contract must have legal capacity, civil conduct capacity compatible with the established contract, voluntary participation, and a purpose and content of the contract that does not violate legal prohibitions and is not contrary to social ethics.
Although the Civil Code does not specify the form of the escrow, in cases where specialized laws prescribe specific forms of escrow, the parties must comply with these regulations to ensure the effectiveness of the escrow contract.
3. Submission and payment for escrow deposit
• Money for escrow deposit (hereinafter referred to as “escrow deposit”) is deposited in escrow accounts in credit institutions as agreed upon or by parties holding the right to appoint to secure obligation fulfilment.
• Escrow deposit and single or multiple escrow instances shall be agreed upon by parties or prescribed by the law.
• In case secured obligations are infringed, escrow deposit shall be used for paying for obligations and damages minus a service fee (hereinafter referred to as “payment for obligations”).
4. Rights and obligations of credit institutions
Credit institutions where escrow deposits are made have the rights and obligations to:
• Benefit from service fee;
• Request parties holding rights to comply with agreements on escrow deposits to receive payment for obligations from escrow deposits;
• Pay for obligations at request of parties holding rights within the scope of escrow deposits;
• Return remaining escrow deposits to parties making deposit after paying for obligations at request of parties holding rights and when terminating escrow deposit;
• Other rights and obligations agreed upon or prescribed by the Civil Code or the relevant law provisions.
5. Rights and obligations of parties making escrow deposit
Parties making escrow deposits have rights and obligations:
• Agree with credit institutions where escrow deposits are made regarding payment conditions as per commitment with parties holding rights;
• Request credit institutions where escrow deposits are made to return deposits after settling the obligation as requested by the entitled party and upon termination of the escrow; receive interest in case of agreement with the financial institution where escrow is made;
• Withdraw, add deposits or include deposits in other civil transactions under consent of parties holding rights;
• Submit deposits in credit institutions where deposits are made;
• Other rights and obligations agreed upon or prescribed by the Civil Code or the relevant law provisions.
6. Rights and obligations of parties holding rights in escrow deposits
Parties holding rights in escrow deposits have rights and obligations to:
• Request credit institutions where deposits are made to pay for obligations in an adequate and timely manner;
• Comply with procedures at the request of credit institutions where escrow deposits are made in case the credit institution where the deposit is requested to pay obligations in full and on time within the scope of the deposit;
• Other rights and obligations agreed upon or prescribed by the Civil Code or the relevant law provisions.
This article, “Escrow deposit – Basic content you need to know”, is presented by TNTP. In case of any issues requiring discussion, please contact TNTP for timely assistance.
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