§ 19.3 - Common-Law Duties and Liabilities

• Jurisdiction: Washington

§19.3 COMMON-LAW DUTIES AND LIABILITIES

An escrow holder is an agent with a "fiduciary relationship to all parties to the escrow." Nat'l Bank v. Equity Investors, 81 Wn.2d 886, 910, 506 P.2d 20 (1973); Styrk v. Cornerstone Invs., Inc., 61 Wn.App. 463, 472, 810 P.2d 1366, review denied, 117 Wn.2d 1020 (1991). The duty of a fiduciary includes the duty to comply strictly with the parties' instructions and to act with skill, diligence, honesty, and reasonable care in performing the fiduciary's work. Nat'l Bank, 81 Wn.2d at 910 (quoting 30A C.J.S. Escrows §8 (1965)); Styrk, 61 Wn.App. at 472. The duty of a fiduciary includes "the same duty of fidelity that an agent or trustee owes" its principals. Delson Lumber Co. v. Wash. Escrow Co., 16 Wn.App. 546, 550, 558 P.2d 832 (1976).

An escrow agent's duties are defined by the agent's instructions. Nat'l Bank, 81 Wn.2d at 910. The escrow instructions, sometimes called the escrow agreement, identify and express the agreement between the agent and its principal. See Delson Lumber Co., 16 Wn.App. at 551 (citing Nat'l Bank, 81 Wn.2d at 910).

(1) Duty to comply with escrow instructions

An escrow agent must comply strictly with the escrow instructions. Styrk, 61 Wn.App. at 472; Nat'l Bank, 81 Wn.2d at 910; see also Wegg v. Henry Broderick Inc., 16 Wn.App. 589, 595, 557 P.2d 861 (1976) (escrow closer "had a duty to obey the escrow instructions and the duty not to interfere with the transaction between the parties"). The escrow instructions/agreement can be written or oral; an oral contract arises if the terms of the escrow are not based upon a written instrument. Cf. Sanwick v. Puget Sound Title Ins. Co., 70 Wn.2d 438, 442, 423 P.2d 624 (1967) (defendant alleged that the "three-year statute must apply" because the action for damages was not based on written instructions).

If the instructions are reduced to writing, the principals and the agent enter a valid written contract, even though the escrow instructions are signed by the principals and not by the agent. See Sanwick, 70 Wn.2d at 443. When a dispute arises over the terms of that contract, the terms can be proved by parol evidence. See Lechner v. Halling, 35 Wn.2d 903, 913, 216 P.2d 179 (1950) (when there is conflict in the testimony about the parties' understanding concerning the conditions of the escrow, oral testimony may be considered in attempting to resolve the conflict).

Escrow agents become liable for damages resulting from a breach of the escrow instructions. Nat'l Bank, 81 Wn.2d at 910 (citing Sanwick, 70 Wn.2d 438; Kirby v. Woolbert, 48 Wn.2d 141, 291 P.2d 666 (1955)). Thus, a licensed escrow agent or licensed escrow officer who breaches the escrow instructions may face an action for damages arising from breach of contract (i.e., the escrow instructions), breach of fiduciary duty (see §19.3, above), or negligence (see §19.3(10), below). The commencement of any such action, of course, is limited by the statute of limitations: if there are written instructions, the statute of limitations runs six years from the date of the breach, and when there are oral instructions, the three-year statute of limitations applies. Sanwick, 70 Wn.2d at 442-43.

Practice Tip: Licensed escrow agents and officers expose themselves to the risk of conflict when they accept funds deposited into escrow with no instructions or upon oral instructions alone. For example should the transaction fail to close, both parties to the transaction may claim entitlement to the funds in escrow. Absent consistent instructions from both parties, the funds may not be disbursed without possible consequence to the agent and/or officer (see §19.3(5), below), and obtaining consistent instructions may be difficult, if not impossible, after a dispute has arisen.

(2) Duty not to exceed escrow instructions

The common-law duty to follow instructions (above) includes the duty not to exceed the instructions. Delson Lumber Co., 16 Wn.App. at 550 (citing Nat'l Bank, 81 Wn.2d at 910). An escrow agent's authority is strictly construed and extends only to what is necessary and proper to carry out the authority given. See id. at 550-51 (escrow agent liable for damage proximately caused by "exceeding the authority conferred...by the instructions"; "duty...to act strictly in accordance with the provisions of the escrow agreement"); see also Wegg, 16 Wn.App. at 595 (noting that an escrow agent has a duty not to interfere with transaction between parties), cited with mild disapproval in Bowers v. Transamerica Title Ins., 100 Wn.2d 581, 588, 675 P.2d 193 (1983).

Moreover, an escrow agent's unauthorized deviation from the escrow instructions does not constitute a waiver of the instructions. See Angell v. Ingram, 35 Wn.2d 582, 586-87, 213 P.2d 944 (1950) (premature delivery of real estate commission from buyer's funds did not waive buyer's instructions to hold funds until buyer's conditions had been satisfied). Similarly, premature delivery of an instrument is not effective to pass title or complete the rights accruing on delivery. Id. at 587 (real estate agent's premature delivery of real estate contract did not pass title); see also Hecomovich v. Nielsen, 10 Wn.App. 563, 569, 518 P.2d 1081, review denied, 83 Wn.2d 1012 (1974) (unauthorized delivery of bill of sale "is of no effect").

An escrow agent faces possible liability for damages resulting from exceeding the authority conferred on the agent by the escrow instructions. Nat'l Bank, 81 Wn.2d at 910 (citing Sanwick, 70 Wn.2d at 438; Kirby, 48 Wn.2d at 141).

(3) Duty to obtain clarification of inconsistent instructions

Escrow agents also have a common-law duty to obtain clarification from the parties before acting upon inconsistent instructions. Delson Lumber Co., 16 Wn.App. at 550-51.

DELSON LUMBER CO. V. WASHINGTON ESCROW CO., 16 Wn.App. 546, 558 P.2d 832 (1976). Delson Lumber signed an earnest money agreement with International Properties Corporation, in which Delson agreed to purchase and International Properties agreed to sell certain timber, which earnest money agreement required title to be free of encumbrances or defects, except those of record. Delson provided escrow instructions to Washington Escrow that stated: "title insurance company...to issue its commitment to insure the title of Delson Lumber Company to this timber 'free and clear of encumbrances. '" Id. at 548 (emphasis in original). Washington Escrow recorded the timber deed and disbursed a portion of Delson's funds without resolving the inconsistency between Delson's escrow instructions and the earnest money agreement. Because the inconsistency "should have been resolved before defendant proceeded to close the transaction," on appeal, the judgment in favor of Delson and against Washington Escrow was affirmed. Id. at 550.

If an escrow agent receives conflicting instructions and acts upon the first party's instructions to the second party's detriment, the agent is liable to the second party for the loss. Cf. Kirby, 48 Wn.2d at 142-44 (dispute over payoff for real estate contract). However, if the agent relied upon the first party's misrepresentation in doing so, the agent may recover the loss from the first party. Id.

Common-law liability for breaching the duty to refrain from acting on inconsistent escrow instructions does not arise if the escrow agent's act does not proximately cause a party's loss. Egan v. Morris, 77 Wn.2d 934, 937, 468 P.2d 681 (1970). In Egan, an escrow agent amended an earnest money agreement and escrow instructions at the seller's direction to provide that the purchaser would assume all indebtedness; the seller and the agent advised the purchaser of the change, the agent read the revised instructions to the purchaser prior to closing, and the purchaser closed the transaction without objection. Id. at 936. Under these facts, the Washington Supreme Court held that the escrow agent was not the proximate cause of the purchaser's damages when the purchaser later defaulted due to the change because there "was no causal link between the escrow company's draftsmanship of the amended earnest money agreement under direction and plaintiff's loss." Id. at 937.

(4) Duties of a dual agent

In addition, the duties of an escrow agent are owed to both parties to the escrow. Radach v. Prior, 48 Wn.2d 901, 905, 297 P.2d 605 (1956) (upon "consummation of the contract and deposit..., the escrow agent is generally considered the agent of both parties, at least for the limited purpose of the escrow"). When an instrument is deposited into escrow and "the condition upon which the instrument is to take effect is performed, the...[escrow agent] becomes a...trustee for each party with respect to the things in escrow to which each [party] has...become completely entitled"; at this point, the escrow agent's possession is equivalent to possession by the "entitled" party. Radach, 48 Wn.2d at 906 (quoting 30 C.J.S. Escrows §8 (1965)).

(5) General duty not to improperly disburse funds

Escrow agents have a general common-law duty not to improperly disburse funds held in an escrow...