Specific Practice Risks
Risks for lawyers as escrow agents, stakeholders and trustees
Editor's update: The following is a Benchers' Bulletin article that was published in 1994. The coverage information has been updated and a useful risk management article referenced.
The insurance program has experienced several significant claims arising out of lawyers acting as escrow agents, stakeholders or trustees in connection with commercial transactions.
Without careful consideration of the obligations and proper documentation of the terms and conditions, these situations present a serious risk. Whenever possible, lawyers should consider alternate arrangements. However, if it is necessary for a lawyer to hold property or funds contingent on a future event, there are several issues that should be addressed:
1. If the lawyer has acted for any of the parties to the arrangement, a conflict of interest may arise if there is any dispute between the parties. In order to minimize this risk, the arrangements must allow no discretion to the member in distributing or retaining the property or funds, and the circumstances in which the lawyer must hold and distribute the property or funds should be clearly spelled out in the agreement.
2. The agreement should be in writing and signed by all the parties.
3. The agreement should clearly give the lawyer the right to interplead the property or funds should any dispute arise regarding the lawyer's obligations.
4. The agreement should contain proper indemnity arrangements for the lawyer from the parties to cover the cost of any court application or subsequent proceedings.
Lawyers should always consider whether undertaking the role of escrow agent, stakeholder or trustee may take them outside the scope of the coverage provided by the LSBC Captive Insurance Company Ltd. For more information, see Executors, trustees and other fiduciaries.
For a useful article offering more risk management advice for lawyers acting as escrow agents, see Lawyer as Escrow Agent – Is it Worth It?