M&A Escrow Arrangements in UAE: Purchase Price Protection

M&A Escrow Arrangements in UAE: Purchase Price Protection

Most of the law surrounding a UAE acquisition has been rewritten in the space of a few years. The companies legislation was replaced by Federal Decree-Law No. 32 of 2021, the law of commercial transactions by Federal Decree-Law No. 50 of 2022.Even the arbitration map moved: the DIFC-LCIA Arbitration Centre was abolished in 2021 and ADCCAC became arbitrateAD in 2024, so dispute clauses drafted a few years ago can now name an institution that no longer exists under that name.

Escrow did not move with any of it. There is still no dedicated escrow statute in the UAE, and nothing supplies a default answer to the questions escrow actually raises — when the money is released, who may instruct the agent, what the agent does with the funds while a warranty claim is contested. An escrow here rests on two things and nothing else: general contract principles under the UAE Civil Code (Federal Law No. 5 of 1985), and the escrow agreement the parties wrote. The bank holding the money is separately answerable to Central Bank regulation and anti-money-laundering requirements, but those rules govern the bank's conduct as a licensed institution. They do not decide the buyer's argument with the seller.

An agreement imported from a market that has an escrow statute carries assumptions that will not be honoured here. Every gap in the drafting stays open, and it opens at the worst moment: the day one side notifies a claim and the other tells the agent to pay out anyway.

Related services: where the target holds property, our real estate advisory team works with the deal lawyers, and our due diligence practice sizes the exposures the escrow covers.

The escrow agreement has to do all the work

An escrow agreement is a separate contract from the sale and purchase agreement (SPA), and the distinction matters more than it looks. The agent is not a party to the SPA. It has not read the warranty schedule, has no view on whether a disclosure was adequate, and cannot decide whether a claim is good. It reads one document and does what that document tells it to do.

That drives most of the drafting. If the SPA and the escrow agreement describe the same event in different words, the agent follows the escrow agreement, and the party relying on the SPA wording argues about it after the money has gone. Definitions used in both — claim period, notification, determination — should be identical, not merely consistent in spirit.

Three drafting points carry most of the risk:

• Who may instruct. Named individuals or an officeholder, with a mechanism for substitution. A signatory who has left the company is a common cause of a stalled release.
• What form an instruction takes. Joint written instruction is the usual default, but the agreement should say what happens when one side does not respond, otherwise silence becomes a veto.
• What the agent does with a document it receives. An agent asked to assess whether an award is final and binding is being asked for a legal judgement it will decline to give. The safer construction tells it to act on a document meeting stated formal criteria.

The escrow period is set by the parties, normally by reference to the claim period in the SPA rather than by any external rule. The amount is usually a percentage of the consideration, negotiated between the buyer's wish for cover and the seller's wish for its money. Neither figure has a legal floor or ceiling.

Four escrow structures and what each is for

Four structures cover most UAE transactions. They are not strict alternatives — a deal can carry two in separate accounts — but they answer different questions, and mixing their release logic into one pot reliably produces an argument later.

1. Holdback escrow

Part of the consideration is withheld at completion and held against warranty breaches and indemnity claims. In market practice the holdback commonly falls in a range of about 5% to 15% of total consideration, though the figure is commercial rather than conventional. This is what most deals mean by "escrow", and its claim mechanics need the most care, because the money is held against events nobody has yet identified.

2. Earn-out escrow

Funds are held against the target's future performance and released as agreed thresholds are met. Earn-outs are used less often in the UAE than in some markets, largely because the enforcement questions are harder: the buyer controls the business whose performance determines what the seller is paid. Where one is used, the measurement method deserves more attention than the release date.

3. Purchase price adjustment escrow

A sum is held pending a completion accounts exercise — working capital, net debt, or whichever metric the SPA nominates. This escrow has a natural endpoint: once the adjustment is determined, the money belongs to one side or is split in a calculable way. Size it against the plausible range of the adjustment rather than against general deal risk, and release it on the determination rather than on a calendar date.

4. Dispute escrow

Where a specific claim is live and contested, the disputed sum moves into its own account so the rest of the money can be released. This is the structure most often overlooked at signing and improvised at the point of argument, when nobody has much appetite for agreeing anything. Building it in from the start — a mechanism for segregating a notified claim so the undisputed balance can go out — removes a whole category of standoff.

Structure	Secures	Typical release trigger	Where it goes wrong
Holdback	Warranty and indemnity claims	Expiry of the claim period, with notified claims retained	"Notified claim" left undefined
Earn-out	Deferred consideration tied to performance	Agreed performance measure met	Measurement method disputed
Price adjustment	Completion accounts movement	Determination of the adjustment	Released on a date rather than on the determination
Dispute	One identified, contested claim	Settlement or binding determination of that claim	Not provided for until the dispute already exists

What the bank brings with it

Choosing a licensed bank as agent brings a second rulebook into the transaction. Banks acting as escrow agents in the UAE operate under Central Bank regulation and under anti-money-laundering and counter-terrorist-financing requirements. Those obligations belong to the bank, are not waivable by the parties, and are not negotiable in the escrow agreement.

In practice this means customer due diligence on both sides and on the persons behind them, documentation beyond what the deal lawyers have prepared, and compliance review of transfers in and out. None of it is unusual, but all of it takes time, spent at exactly the moment the parties assume the mechanics are done. An account not opened and onboarded before signing is a completion risk in its own right.

Two habits reduce the friction. Start the bank's onboarding in parallel with the SPA negotiation, so documentary requirements surface while there is time to satisfy them. And have the bank confirm in advance that it will accept the release mechanic as drafted; banks hold internal positions on what instructions they will act on, and an agent that will not operate the agreed clause is worse than no agent. Due diligence on the target feeds this directly, since the compliance file the bank wants overlaps with what the buyer has already gathered.

Staged release: designing the triggers

Release conditions work when they turn on facts an agent can verify from the face of a document, and fail when they turn on judgements it cannot make. The drafting choices are few, and each carries a cost.

• Objective criteria. Passage of a stated period, receipt of a specified certificate, delivery of a determination in agreed form. Anything requiring the agent to weigh a claim's merits will not fire cleanly.
• Joint instructions. The standard protection against unilateral withdrawal, and the standard cause of deadlock. Pair it with a mechanism addressing a party's failure to sign.
• Automatic release. Payment on expiry unless a claim has been notified in the agreed manner. This shifts the burden of acting onto the party who wants the money held, usually the buyer.
• Early release. On mutual agreement, or on resolution of an identified claim, freeing funds without renegotiating the agreement.
• Agent discretion. Keep it narrow and explicit. An agent given broad discretion exercises it by doing nothing, which favours whichever party benefits from delay.

A worked example

Take a purchase price of AED 200 million with 10% — AED 20 million — held for eighteen months. Half is released at month twelve if no claim has been notified, and the balance at month eighteen.

At month ten the buyer notifies a warranty claim quantified at AED 4 million, which the seller disputes. Under a well-drafted retention mechanic the agent releases at month twelve the tranche then due less the notified claim: AED 10 million less AED 4 million, so AED 6 million goes to the seller and AED 14 million stays held — the second tranche of AED 10 million plus the AED 4 million retained. At month eighteen the second tranche is released, and the AED 4 million continues to be held until the claim is settled or determined.

The arithmetic is trivial. The drafting is not. All of it depends on the agreement defining a notified claim, requiring it to be quantified, and saying that retention operates against the tranche next due rather than the fund as a whole. Remove any one and the same facts produce a contested outcome.

Interest and currency

Escrow funds may accrue interest, and the agreement should say who takes it: whether it accretes to the fund and follows the principal, or is paid out periodically. Left silent, it becomes a small argument attached to a large one.

Where the consideration is in one currency and the escrow held in another, say which party carries the movement, and whether conversion happens on deposit, on release, or at intervals. Over an eighteen-month hold that exposure can exceed the claims the escrow was created to cover.

Once a claim is contested

The agent's position changes the moment the parties disagree. It cannot adjudicate and should not try. Its duties under a properly drafted agreement are narrow, and that narrowness is why the structure works at all:

• Hold the funds, releasing only on joint instruction or on a determination meeting the criteria the agreement specifies.
• Remain impartial, and avoid any step that could be read as taking a side between depositor and beneficiary.
• Notify both parties promptly of any claim, instruction or notice it receives from either of them.
• Keep accurate records of deposits, releases, instructions and communications.

An agent that departs from these duties — paying out on one party's instruction, or failing to pass on a notice — exposes itself to a claim in damages. That is why agents insist on tightly drawn mandates and on indemnities, and why those provisions repay close reading. An indemnity broad enough to cover the agent's own failure to follow the agreement is not the bargain the parties think they are striking.

The dispute mechanism behind the escrow

Because the agent decides nothing, the escrow is only as good as the mechanism producing the determination it acts on. Agreements commonly stage this: negotiation or mediation first, expert determination for financial rather than legal questions, and arbitration or litigation for the rest. Arbitration is widely used in the UAE, supported by the Federal Arbitration Law (Federal Law No. 6 of 2018), with DIAC among the institutions available, alongside the frameworks of the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM).

Four points deserve attention in the clause. Scope should say which questions are covered — release triggers, validity of a claim, the agent's own conduct. The sequence needs defined endpoints, so a party cannot sit in mediation indefinitely. Expert determination should name who appoints the expert and whether the outcome binds. And the clause should address interim relief, so a party can act if funds look likely to move before the merits are heard.

A scenario

A buyer discovers liabilities after completion that it says were not disclosed, notifies a claim, and instructs the agent to pay it out of escrow. The seller says there was no breach and instructs the agent to release everything to it. The agent, holding an agreement that permits release only on joint instruction or a binding determination, does neither. It notifies both parties, records both instructions, and holds.

That is the correct outcome and the whole point of the structure: neither party can help itself to money the other disputes. The argument moves to the chosen forum, and the funds sit until it is resolved. With a dispute escrow in place, the undisputed balance would already have been released and only the contested sum would be standing still.

Choosing the agent

Escrow agents in the UAE are typically banks, sometimes law firms or specialist providers. The choice is not administrative. Five criteria carry the weight:

• Regulatory standing. Licensed, and subject to the Central Bank and AML framework the parties are relying on.
• Relevant experience. An agent that has administered acquisition escrows will read a retention clause as intended.
• Independence. No relationship with either side capable of being characterised as a conflict, existing lending to the target included.
• Operational capability. Named contacts, defined turnaround times, and systems that will not lose a notice.
• Liability and indemnity terms. Read as carefully as the release mechanic; the agent's standard form is drafted for the agent.

Fees are charged on the escrow amount, the duration, and the complexity of the mechanics, and may be fixed, tiered, or event-driven where a dispute requires extra administration. Settle in the agreement who pays, on what basis, and out of which pot. Fees deducted from the fund at release with no allocation agreed become a dispute about a small sum at the end of a transaction where goodwill has usually been spent.

Escrow, caps and baskets

Escrow sizing is not a standalone question. It sits against the liability regime in the SPA, and the two should be set together.

• Caps fix the maximum recoverable under the indemnity or warranty regime, often as a percentage of the consideration.
• Baskets set a threshold below which claims cannot be brought, filtering out small items.

An escrow larger than the cap holds money that can never be claimed against. One much smaller secures only part of the buyer's exposure and leaves it chasing the seller for the rest — which, where the seller is a holding company that has distributed the proceeds, may be no recovery at all. The escrow period should likewise track the claim period: money released while a claim can still be brought is protection that expired early. Settle explicitly, too, whether the escrow is the buyer's sole remedy or merely its first.

An illustration

In an acquisition of a manufacturing business, the buyer is concerned about environmental liabilities that may not have surfaced at completion. The parties place 10% of the consideration in escrow for twenty-four months, matched to the claim period for the environmental warranties. If nothing is notified, the fund is released at expiry. If something is, the money is already with a third party rather than with a seller who may have distributed it. The escrow does not decide whether the claim is good. It decides that the money will still exist when that question is answered.

Tax and free zone considerations

A release is not tax-neutral simply because the money moved through a third party. Where it adjusts the consideration, or discharges an indemnity relating to goods or services, the indirect tax treatment — including value added tax — follows the substance of the payment rather than the mechanics of the account, and is best checked when the escrow is structured rather than when it is released. Our note on tax structuring in UAE M&A covers the wider position.

Where the transaction sits in the DIFC or ADGM, the escrow can be made subject to those jurisdictions' common law based regimes and courts, which some parties prefer for predictability. Make that choice consistently: an escrow governed by one system, an SPA by another, and an agent applying a third set of internal rules is an arrangement with seams in it.

Points to settle before signing

• Is the account open and both parties onboarded, or is that still ahead of completion?
• Do the SPA and the escrow agreement define claim period, notification and determination identically?
• Who may instruct the agent, and what happens if that person leaves?
• Must a notified claim be quantified, and does retention bite on the next tranche or the whole fund?
• Can the undisputed balance be released while one claim is contested?
• Has the agent confirmed it will operate the release clause as drafted?

Conclusion

Escrow in the UAE is a contractual arrangement in a jurisdiction with no escrow statute to fall back on, and that is the beginning and end of the analysis. The Civil Code supplies general contract principles. The Central Bank and AML framework governs how the bank behaves. Neither supplies the terms of the deal. Whatever the escrow agreement does not say, nobody says.

Deals that use escrow well treat the agreement as a substantive instrument rather than an administrative annex: the structure matched to the risk it actually covers, releases keyed to facts an agent can verify, a defined route for a contested claim, and an agent that has confirmed it will do what the clause requires. Deals that use it badly find the gaps at the point where money is meant to move and does not.

Nour Attorneys advises buyers and sellers on escrow structuring within wider transaction work, from diligence and SPA negotiation through to release mechanics and any dispute that follows.

Disclaimer

This article is general information, not legal advice on any particular transaction.

Additional resources

• Mergers and acquisitions
• Corporate and commercial advice
• Contract drafting

Contact Nour Attorneys

Structuring an escrow, or facing a release that has stalled on a contested claim? Get in touch with our team.

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