1. The Core Principle - Strict Compliance

Courts in England and India consistently hold that partial or "substantial" performance does not suffice for milestone payments.

As summarized in Milestone Payments Vs Retention Money - Conventus Law analysis of English and Indian law:

Milestone payments will not become payable until the specified milestone is achieved (often evidenced by certificates). Courts consistently hold that tribunals cannot "deem" milestone completion to circumvent explicit escrow language. Retention money becomes payable only when contractual conditions for release are met.

In other words, if escrow says "Release 20% on Architect Certificate + CA Certificate + Engineer Certificate", you cannot get release on Architect certificate alone, even if 90% work is done.

2. Three Classic Misalignments That Lead to Litigation

Type 1: Definition Misalignment
Construction contract says "Foundation Complete = excavation + PCC". Escrow agreement says "Foundation Complete = excavation + PCC + backfilling + third party inspection". Contractor claims payment, owner denies.

Type 2: Certification Misalignment
RERA Act Sec 4(2)(l)(D) says promoter can withdraw from 70% escrow only after joint certification by Architect, Engineer and CA, proportionate to completion. Many builder escrow agreements drafted earlier say "on architect certificate alone". Bank releases on architect alone = violation of RERA, buyers sue.

Type 3: Timing / Notice Misalignment
SPA says warranty claim must be notified before Release Date. Escrow says release automatically on Release Date unless escrow agent receives written objection. Buyer emails seller about breach but not to escrow agent in prescribed format.

This is exactly Arani & Ors v Cordic Group Ltd EWHC 829:
Sellers sold company. £ multi-million consideration kept in escrow. SPA provided unless a "Claim" (breach of warranty) had been notified to sellers by Release Date in accordance with SPA, escrow must be released. Buyer had fraud claims but failed to notify in accordance with SPA procedure. Buyer told escrow agent not to release. High Court granted sellers summary judgment for specific performance - ordered escrow agent to release, despite fraud allegations, because claims had not been notified in accordance with SPA. Lesson: Escrow release condition is judged by escrow agreement's notice mechanism, not by underlying merit of fraud claim.[2021]

3. Key Case Laws

A. Source Code Escrow - The Classic Misalignment Case

Filmflex Movies Ltd v Piksel Ltd [UK High Court, Chancery] - Discussed in Techlaw.ie and Mondaq:
MSA and Escrow Agreement both had release events for source code, but list was different.

• MSA trigger events: any termination, change of control, bringing third party to provide services.
• Escrow Agreement trigger events (NCC Escrow): only insolvency, cessation of business, material breach.

Licensee terminated MSA and demanded source code from escrow agent NCC. Escrow agent refused because its agreement's conditions were not met. Court held: Escrow agreement is separate contract. MSA cannot expand escrow release events unless escrow agreement amended. Claimant lost despite termination being valid under MSA.

This is now taught as: Problems arise if there is any uncertainty surrounding conditions which will trigger release of source code from escrow.

Drafting fix used in India now: Add clause "Escrow Agreement release events shall be deemed automatically amended to include any release events in MSA."

B. Construction Escrow - $4.3 Million Holdback as Penalty

SAMS Hotel Group LLC v Environs Inc, 7th Circuit Court of Appeals No. 12-2979, May 31, 2013 and GK Development Inc v Iowa Malls Financing Corp 2013 IL App (1st) 112802:
Buyer and Sellers negotiated $4.3 million escrow holdback held by Chicago Title and Trust Company, representing present value of Hy-Vee's expanded lease space. Amendment directed Chicago Title to release holdback only after ALL of following events: (1) New Hy-Vee lease executed, (2) Store built, (3) Rent commencement.
Seller completed 2 of 3, buyer refused to allow release, claimed holdback was liquidated damages. 7th Circuit held: Escrow is not liquidated damages, but unenforceable penalty if release conditions are impossible or disproportionate to actual loss. Court scrutinized milestone linkage to actual loss.

Lesson for Indian infra projects: If you tie 100% escrow to final milestone that depends on third party (government approval), courts may treat it as penalty under Sec 74 Contract Act.

C. RERA Escrow - Milestone Withdrawal Must Match Law

Mastering RERA Escrow Compliance 2025 analysis of Sec 4(2)(l)(D) RERA:
Promoter must park 70% of allottee money in separate project-specific escrow with scheduled bank. Withdrawal only proportionate to completion and after joint certification by engineer, architect & CA. NCDRC in M/s Puri Construction Pvt Ltd v Gurudarshan Singh (03 June 2024) held builder cannot excuse delay by citing allottee payment delay, and must refund with interest if milestone misused.

If escrow agreement allows withdrawal on architect alone, it is void to extent of contravention of RERA. Bank that releases faces liability as constructive trustee.

D. Escrow Account Restrictions Do Not Excuse Default

Catalyst Trusteeship Ltd Vs J.U.D Cements Ltd - NCLT Guwahati 2024:
Corporate Debtor argued sufficient funds were in escrow account No. 259862065562, but trustee controlling escrow did not release to pay coupon, hence no default. NCLT held escrow account restrictions do not extinguish financial debt default. Debtor cannot hide behind milestone misalignment. Financial creditor can proceed under IBC Sec 7 even if escrow agent wrongfully withheld. Remedy of debtor is against escrow agent, not against financial creditor.

E. Supreme Court Limits Power to Create Escrow Mid-Dispute

A2Z Infraservices Ltd - Supreme Court (Justices Manoj Misra & Manmohan) 2025:
Calcutta High Court directed contractual receipts to be deposited in escrow during pendency of arbitration. SC set aside: direction to deposit proceeds in escrow warranted only where underlying contract providing for escrow is subsisting or where material shows party likely to divert money and lacks assets to satisfy award. Courts cannot rewrite milestone to create escrow where parties did not agree.

4. How to Draft to Avoid Misalignment - Litigation-Proof Structure

If you are drafting escrow today, use 4-way alignment test:

1. Single Definition Clause: Don't define milestone separately in MSA and escrow. In escrow, write: "Milestone means as defined in Clause __ of MSA dated __, copy annexed. In case of conflict, MSA definition prevails and escrow agent shall be deemed instructed accordingly."

2. Joint Certification Mechanism:

Code

Release Condition 1: Architect Certificate + Engineer Certificate + CA Certificate in Form RERA-2, uploaded on RERA portal.Deemed Acceptance: If Owner does not object in writing to escrow agent within 5 business days of certificate, milestone deemed achieved.

3. Notice Procedure Same as SPA: Replicate Arani lesson: All claims blocking release must be (a) in writing, (b) to escrow agent at specified email, (c) with reference to escrow account number, (d) before Release Date 5pm.

4. Fallback - Expert Determination: If parties disagree whether milestone achieved, escrow agent does not decide - it refers to independent expert (architect/engineer) within 7 days, and releases as per expert. This saves bank from breach of trust suit.

5. Partial Release, Not All-or-Nothing: Instead of "Release Rs 4.3 cr only after all 3 events", draft "Release Rs 1 cr after Event 1, Rs 1.5 cr after Event 2..." This avoids penalty argument in SAMS Hotel case.