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Escrow arrangements for construction contracts: new standard form released

United KingdomScotland
29/06/2018
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The recent insolvencies in the construction industry are a sharp reminder that "cashflow is the lifeblood of the construction industry" (Lord Denning, 1971) and have led to an increased focus on payment security. Retention practices have been in the spotlight recently (see our Law-Now here) and the City of London Law Society (“CLLS”) has now published a model form of Escrow Agreement for use with construction contracts. Escrow arrangements are typically used as a means of achieving payment security where the employer is a special purpose vehicle (“SPV”), an overseas entity or otherwise unable to demonstrate sufficient financial strength.

The CLLS agreement is based on the JCT 2016 Design & Build contract and is accompanied by an explanatory note giving commentary on the key features of the model form. The model form and note can be accessed here and here.

A key point to note is that the model form has been drafted to be separate from the associated construction contract. It incorporates escrow provisions often incorporated into building contracts and creates a typical tripartite arrangement amongst the Employer, the Contractor and the Escrow Agent. The CLLS hopes that, with the model form, the complex negotiations often faced in trying to capture all relevant points and provisions will be made less prolonged.

It is hoped that the model form will be widely used by the industry. If this can be achieved, the benefits of standardisation seen on other model forms could be realised, reducing expense and allowing parties to concentrate on agreeing key points rather than the detailed mechanics set out in the model form.

As with all standard form agreements, health warnings apply. The model form needs to reviewed and amended to deal with project specifics. It also does not intend to be exhaustive, so it may not capture all of the points which need to be addressed. It will be important to ensure that the provisions agreed in the escrow agreement do not cut across the terms of the underlying construction contract and do not fall foul of the Housing Grants, Construction and Regeneration Act 1996.

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