Custody agreement

What it means

A custody agreement is a contract under which a custodian takes an item from a depositor in order to look after it and return it on request. It is governed by the Civil Code, and where the relationship is between businesses acting in the course of trade, commercial law rules also apply. On the usual interpretation, the contract only arises once the item is handed to the custodian.

Custody may be free, for example between acquaintances, or paid, where the custodian receives a fee for the care. The custodian may not use the item or pass it on to someone else for safekeeping unless agreed or necessary, and is liable for its loss, destruction or damage.

A special form is the deposit of money or documents with a notary or attorney to secure a transaction. With notarial escrow or escrow generally, the money is released to the other party only once agreed conditions are met, such as registration of ownership in the land register.

How it works in practice

In business, custody is used when samples, documents, equipment or valuables are left with a third party. Where goods are regularly stored with a professional for a fee, the contract is usually a warehousing contract, which has stricter rules and protects the depositor better. The choice of contract type affects both liability and insurance.

Businesses most often meet custody when buying property or a business. The buyer deposits the purchase price, the seller has assurance that the money exists, and the buyer has assurance that the seller receives it only after the transfer. The payout conditions are set out precisely in a custody protocol linked to the purchase contract.

In the accounts, money held in custody remains the asset of whoever deposited it until the conditions are met. It is shown separately from ordinary bank accounts, for example as cash in transit or a receivable, and the custody fee is an expense. If the deal falls through and the money is returned, nothing is taxed.

What to watch out for

The custodian is liable for damage to the item, but the extent of compensation for damage can be disputed when custody is free. For more valuable items, it is better to have a written contract, a description and value of the item, photographs and an agreement on insurance. Without evidence of condition at handover, damage is hard to prove.

When money is held in custody, the payout conditions must be worded precisely. Vague wording such as "after transfer of ownership" without naming the document can lead to the notary or attorney refusing to pay out and the parties ending up in a dispute. It also helps to set a deadline after which the money is returned if the conditions are not met.