Escrow Contract is a trilateral legal relationship in which the parties are main parties (contractor-contractee, buyer-seller, depositor-beneficiary etc.) and Escrow Agent. According to this relationship, the transferor undertakes to deliver something or to perform a job in return for this beneficiary/transferee is obliged to pay the agreed price. The role of the Escrow Agent in this relationship is to ensure that the payments are made or assets are deposited when the contract conditions are met.
Real estate purchase contract for instance. The buyer agrees to pay an agreed-upon amount for the property. In this sale relationship, although the parties are responsible for fulfilling their mutual obligations at the same time when it comes to real-life situation it is not quite possible. The seller may not transfer real property after receiving the payment or at the assumption that the real property transferred first the buyer may not pay agreed price to the seller.
To avoid such risks, the buyer deposits agreed price in an Escrow account instead of paying this price directly to the seller. Escrow Agent, on the other hand, pays the purchase price to the seller after the completion of transfer of title deed. However, in case of that the seller does not transfer real property; Escrow Agent will refund the sale price to the buyer. Both the seller and the buyer build a mutual trust with the Escrow agreement. This relationship is sustained under the guarantee that once the real property transferred, the seller will receive the payment and if it is not transferred the buyer will refund his money.
Letter of Credit is a unilateral transaction authorizing the bank to make payments. The opener requests the bank to allow someone else to receive payments from his own account. In this relationship, which is quite similar to money order, the bank makes payment to the beneficiary in line with the instructions included in the Letter of Credit.
Considering the example above for the Letter of Credit relationship the buyer authorizes the bank for the payment. With this authority, the bank pays the purchase price from buyer's account to the seller in request of him.
While there is a trilateral relationship in Escrow Contract, Letter of Credit is a unilateral transaction. The payment in the Letter of Credit is independent of the main legal relationship such as sale relationship as mentioned above. The bank has no function other than making payments in line with the given authorization. The bank does not even check whether a contract exists between the parties aside from checking whether the contract conditions are met. Unlike the bank in the Letter of Credit relation, the Escrow Agent is a subject of the main legal relationship. Escrow Agent holds property or funds in trust for third parties until contract conditions met and once they are done s/he makes the payment or transfers the property.
Thanks to Escrow; in this respect, the parties secure themselves, but there is no guarantee in Letter of Credit whether the payment will be made or whether the property will be transferred. Since the bank does not have any obligation other than to pay if there is money on the account, and the bank even does not have to accept the authorization given to it.