Deposit agreement: Overview, definition, and example
What is a deposit agreement?
A deposit agreement is a legal contract that outlines the terms and conditions under which a financial institution or escrow agent holds funds or securities on behalf of a depositor. It specifies key terms such as the rights and responsibilities of the parties, withdrawal conditions, interest rates (if applicable), and any fees associated with the deposit.
For example, when an investor purchases American Depositary Receipts (ADRs)—which allow them to invest in foreign companies—a deposit agreement governs how the depositary bank holds and manages the foreign securities on behalf of ADR holders.
Why is a deposit agreement important?
A deposit agreement is important because it defines the legal framework for holding and managing deposited funds or securities. It helps protect the rights of depositors and ensures transparency in financial transactions.
For businesses and individuals, deposit agreements provide legal certainty regarding fund security, access rights, and withdrawal conditions. In cases such as escrow arrangements, these agreements ensure that funds are released only when agreed-upon conditions are met.
Understanding a deposit agreement through an example
Imagine a homebuyer places a down payment into an escrow account before closing on a house. A deposit agreement between the buyer, seller, and escrow agent specifies that the funds will only be released once all closing conditions—such as inspections and loan approvals—are met. If the deal falls through due to unmet conditions, the agreement outlines whether the deposit is refunded or forfeited.
In another scenario, a corporation issuing ADRs enters into a deposit agreement with a depositary bank. The agreement defines how the bank will hold the underlying foreign securities, issue ADRs to investors, and distribute dividends or voting rights. Investors rely on the deposit agreement to understand their rights and how their investments are managed.
An example of a deposit agreement clause
Here’s how a deposit agreement clause might appear in a contract:
“The Depositary shall hold and manage the Deposited Assets in accordance with the terms of this Agreement. The Depositor agrees that withdrawals shall be subject to the conditions specified herein, and any fees or penalties for early withdrawal shall be applied as set forth in this Agreement.”
Conclusion
A deposit agreement establishes the terms under which funds or securities are held and managed by a financial institution or third party. It ensures transparency, protects depositors, and defines conditions for fund access or release. Whether in escrow transactions, ADRs, or other financial arrangements, deposit agreements provide legal clarity and security for all parties involved.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.