An escrow arrangement is simply a payment arrangement (someone paying someone else), but with a trusted third party inserted in the middle - the escrow agent.
In this way, money goes from the paying party to the escrow agent. The escrow agent only releases the money to the receiving party once certain conditions are met.
The escrow agreement governs the legal arrangements between those three parties. It sets out how much money the paying party must deposit with the escrow agent, what the escrow agent can and can't do with the money, what the conditions are to release money to the receiving party, and under what circumstances the transaction 'fails', allowing the escrow agent to repay the money to the paying party.
