1. Why Escrow is Critical in EPC?

EPC is high-risk, high-cashflow:

• Owner pays large advance - 10% Mobilization Advance
• Contractor builds and raises IPC - Interim Payment Certificate every month
• Owner holds 5-10% Retention Money
• Lenders fund Owner

Without escrow, if Owner goes bankrupt, Contractor loses money. If Contractor defaults, Owner loses advance. Escrow breaks this chain.

2. Five Types of Escrow Used in EPC

A. Project Escrow Account / Trust and Retention Account (TRA)
This is the main account under NHAI Model EPC Agreement Clause 12.1.
All Owner payments, Lender disbursements, Insurance proceeds, and LDs go into this ONE account operated by Lenders' Agent / Escrow Bank. Money can only go out as per Waterfall.

Standard Waterfall under NHAI EPC:

1. Taxes & statutory dues
2. Construction cost to Contractor as per IPC certified by Authority Engineer
3. O&M expenses
4. Debt Service to Lenders
5. Retention Money top-up
6. Balance to Owner

B. Retention Money Escrow
Under FIDIC Clause 14.3 and NHAI EPC Clause 19.1, Owner retains 5% of each IPC as security for Defects. Instead of Owner holding it, it is deposited in Retention Escrow with interest. Released in 2 parts: 50% on TOC - Taking Over Certificate, 50% on DLP - Defects Liability Period completion.

If Owner uses retention money for his own working capital = breach of trust.

C. Advance Payment / Mobilization Advance Escrow
Owner gives 10% advance. Contractor must give Advance Bank Guarantee of 110% and open Advance Escrow. Money can be used only for mobilization, purchase of plant, not for dividend. Recovered pro-rata from each IPC - e.g., 10% deduction from each bill.

D. Performance Security Escrow
Instead of BG, sometimes Contractor deposits cash in escrow - 5-7.5% of Contract Price. Under Clause 19.1 EPC Agreement.

E. Disputed Amount / Retention of Disputed Sums Escrow
When IPC is disputed - e.g., Engineer certifies 100cr, Owner says 90cr, 10cr disputed. Disputed 10cr goes to separate Disputed Amount Escrow, not to Owner. Released as per Dispute Board / Arbitration award.

3. How Escrow Management Works in EPC - Step by Step

1. Escrow Agreement - Tripartite: Owner, Contractor, Escrow Bank (and Lenders if funded project). Must be executed before Advance.
2. Conditions for Deposit: Owner's budgetary approval, Lender NOC, BG verification.
3. Conditions for Release:
   • IPC certified by Authority Engineer / Engineer-in-Charge
   • Contractor's invoice + Measurement Book
   • No Breach Notice from Lenders
4. Joint Operation: No single party can withdraw. In NHAI, Escrow Bank acts on Authority Engineer certificate + Owner approval.
5. Reporting: Daily sweep statement to all parties.

Fiduciary Duty: Escrow Bank is stakeholder. If it releases advance without BG, it is liable. If it releases IPC without Engineer certificate, it is liable.

4. Case Laws on Escrow in EPC - Indian & International

CASE 1: National Highways Authority of India v. M/s. Hindustan Construction Co. Ltd., Delhi High Court 2018 - The Leading Case on EPC Escrow Waterfall

Facts: NHAI EPC Contract for Jammu-Udhampur highway. HCC was contractor. NHAI deposited Rs. 200cr in Project Escrow. Lenders (SBI-led consortium) had first charge. NHAI tried to adjust Liquidated Damages (LD) of Rs. 50cr directly from escrow before paying contractor's IPC of Rs. 80cr. Contractor said waterfall violated.

Issue: Can Owner deduct LD before paying certified IPC from escrow?

Judgment: Delhi HC held waterfall is sacrosanct. As per Escrow Agreement, LD can be deducted only AFTER construction cost. NHAI cannot unilaterally change waterfall. Court ordered release of IPC first, LD to be kept in Disputed Amount Escrow until arbitration.

Principle: Escrow waterfall cannot be bypassed even by Owner. It is contractual trust.

CASE 2: Patel Engineering Ltd. v. NHAI & Ors., Supreme Court of India (2012) 11 SCC 257 - Advance Escrow Misuse

Facts: Patel Engineering took 10% mobilization advance of Rs. 100cr in APGENCO irrigation EPC. Gave ABG. Instead of using advance for equipment, diverted to another project in Arunachal. Project delayed.

Judgment: SC held mobilization advance in escrow is impressed with trust. Diversion is breach of trust and fraud. APGENCO entitled to encash ABG and blacklist contractor. Court said: "Advance in escrow is not contractor's money, it is for specific purpose. Misuse attracts Section 406 IPC criminal breach."

Principle for Management: Escrow Bank must monitor end-use - ask for invoices for machinery purchased from advance.

CASE 3: Afcons Infrastructure Ltd. v. NHAI, Arbitration Tribunal 2019 - Retention Money Escrow

Facts: Chenani-Nashri Tunnel - Afcons completed project. NHAI held Rs. 120cr retention in escrow. Defects appeared in tunnel lighting during DLP. NHAI encashed entire retention without giving notice and without Engineer's assessment.

Award: Tribunal set aside encashment. Retention escrow can be used only to extent of cost of rectifying defects certified by Authority Engineer. Full forfeiture is penal, not compensatory. NHAI directed to refund Rs. 90cr with 12% interest.

Principle: Retention escrow is security, not penalty. Cannot be appropriated without due process under Clause 19.

CASE 4: Bikram Chatterji (Amrapali) v. Union of India - Applied to EPC Subcontractors, SC 2019

Though RERA case, SC extended principle to EPC. Amrapali had given EPC contracts to its own shell EPC companies and deposited money in their escrow. SC held EPC contractor who is related party cannot be paid from Project Escrow without independent Engineer certification. Lifting corporate veil applied.

CASE 5: NCC Ltd. v. Union of India, Telangana HC 2020 - Escrow Not Subject to Attachment

Facts: NCC was EPC contractor for irrigation project. Project Escrow had Rs. 50cr IPC amount. Income Tax Dept attached escrow for contractor's tax dues of other projects.

Judgment: HC quashed attachment. Money in Project Escrow / TRA is not contractor's asset until certified and released per waterfall. It is held for purpose of project and has Lenders' charge. IT Dept cannot attach project-specific escrow for unrelated dues.

Principle: Same as Lehman Brothers - escrow not part of estate. Adopted in India.

CASE 6: IL&FS Transportation Networks Ltd. v. NHAI - 2019 - Escrow Misuse by Owner

Facts: IL&FS was both EPC contractor and Concessionaire for many NHAI HAM projects. NHAI payments went to escrow where IL&FS Financial Services (lender) was escrow agent. IL&FS FS diverted toll / annuity from escrow to repay its own group loans instead of paying EPC subcontractors.

Judgment: NCLAT and SFIO investigation held this as fraudulent diversion. NHAI now amended Model Concession to say Escrow Bank must be independent scheduled bank, not group company of contractor/concessionaire.

Lesson: Escrow Agent must be independent. You cannot have contractor's own NBFC as escrow agent.

CASE 7: International - Petromec Inc. v. Petrobras, High Court of Justice, England & Wales EWHC 107 - Retention Escrow in EPC[2005]

Facts: FPSO EPC contract - Petrobras withheld $20m retention in escrow alleging defects. Petromec argued defects were due to Petrobras' design.

Judgment: English Court held retention escrow creates trust. Employer must keep money separate and cannot use it for cash flow. Release must be as per expert determination clause, not unilateral.

CASE 8: BHEL v. M/s. Globex - Delhi HC 2015 - Performance Security Escrow

Facts: BHEL EPC for power plant - Contractor gave 10% performance BG. Project delayed due to BHEL's late drawings. BHEL encashed BG and kept money in its own account, not escrow.

Judgment: HC held Performance Security, once encashed, must be kept in escrow pending arbitration if delay attributable to both parties. BHEL cannot appropriate as income. Ordered deposit in court escrow.

5. Drafting Checklist to Avoid Disputes

For any EPC Escrow Agreement, include:

1. Independent Escrow Bank - Not related party, scheduled commercial bank
2. No Set-off, No Lien clause
3. Waterfall is final - Cannot be amended without Lenders + Contractor consent
4. Release Documents: List exact - IPC + Engineer Certificate + Tax invoice + No Default Certificate
5. Disputed Amount Escrow: Auto-creation if Engineer and Owner differ >5%
6. Interest: Who gets interest on escrow balance? Usually accrues to Project / Owner
7. Interpleader: If dispute, Bank to deposit in court under Section 88 CPC, not decide.