Joint checks: Pros and cons

August 11, 2010

When someone asks that a joint check be issued on a construction project, it is fair to assume there is a problem. Use of a joint check can either contribute to a solution or exacerbate a problem.

Requests for joint checks typically arise in one of two contex ts. First, a subcontractor may request that an owner issue joint checks to the general contractor and to the subcontractor, or a supplier may request that a general contractor issue joint checks to the subcontractor and to the supplier. This article will use the scenario of an owner issuing a joint check to its general contractor and subcontractor, while recognizing that the principles also apply when the joint check is issued by the general contractor.

The owner's dilemma

An owner faced with a tight schedule obviously wants to keep the job moving without delays caused by subcontractor payment problems. Thus, it may be in the owner's best interest to consider a subcontractor's request for a joint check. As Lincoln said, 'A full horse pulls harder.' However, the owner must also realize there are risks involved in issuing joint checks to the general contractor and the subcontractor.

The owner's first concern is whether issuance of a joint check actually constitutes payment to the general contractor. It will not become negotiable unless it is endorsed by both parties. Without some sort of authorization from the general contractor, a joint check may not constitute a valid form of payment. The owner must be careful not to breach its contract with the general contractor for failing to make the appropriate progress payments.

A thorough contract between an owner and a general contractor should address the issue of the owner's right to issue joint checks where there are problems in funneling money through the normal contract chain. Indeed, a strong argument can be made that it is in the owner's best interest to include a clause permitting it under certain clearly defined conditions to issue direct payments to subcontractors or others, e.g., to satisfy legitimate mechanic's lien claims or to pay critical suppliers who will only deliver C.O.D.

Where an owner decides it is in its best interest to issue a joint check, it should only do so if there is a three-party agreement authorizing the joint check(s).

Even if the owner's contract with the general contractor permits the issuance of joint checks, it is still in the owner's best interest to have a three-party agreement so that there is no doubt that the owner does not have a continuing responsibility for the duration of the project to issue joint checks to one or more subcontractors or suppliers. The owner should make it abundantly clear that it will assume responsibility to issue only a specific amount via joint checks. Unless the owner expressly limits its responsibility to securing payment for a particular portion of a progress payment, and states there are no continuing payment obligations thereby created, it may be at risk of becoming a guarantor of all future payments due the subcontractor.

Subcontractor risks

A subcontractor who requests a joint check agreement may under extreme circumstances be in a worse position than if the joint check had never been issued. That is because of the 'joint check rule.' It states that unless there is an agreement to the contrary, the party who endorses a joint check will be deemed to have received the entire proceeds regardless of how much is actually received. Thus, if an owner issues a joint check in the amount of $100,000 payable to a general contractor and a subcontractor with the assumption that $90,000 is earmarked for the subcontractor and $10,000 is earmarked for the general contractor, the subcontractor should make sure that the general contractor endorses the check first and gives the endorsed instrument to the subcontractor for deposit into the subcontractor's account. Otherwise, if the subcontractor endorses the check first and the general contractor deposits the check into its account but never pays the subcontractor, the subcontractor will lose any rights it may have to file a claim for either a mechanic's lien or against the general contractor's bond. By endorsing the check the subcontractor has in effect acknowledged receipt of payment without regard to how much is actually received.

Lessons learned

Joint checks can be a good tool to facilitate distribution of project funds to the intended recipient, thereby helping the project to keep moving. However, because of the legal ramifications, they should only be used with an agreement covering the following points:

  • Identification of all three parties;

  • Identification of the particular project and a clear statement that the arrangement is limited to that project;

  • Maximum amount paid or to be paid;

  • Agreement by the maker of a check that the amount due the subcontractor is not subject to set-off, deduction or back charge if the general contractor breaches the contract except to the extent caused or contributed to by the subcontractor;

  • A provision that appropriate lien waivers will be issued in exchange for the payment; and

  • No continuing duty to issue joint checks except as expressly covered by the agreement.

         
 

Comments on: "Joint checks: Pros and cons "