By John Hickey
Joint checks are common in construction. Joint checks are checks made out to two payees — most often a subcontractor and the subcontractor's supplier. An agreement to issue joint checks may come from the top or bottom of the contracting chain. Owners and general contractors want to issue joint checks to ensure that subcontractors pay their suppliers, which helps avoid lien and bond claims by the suppliers. Suppliers want joint checks because they increase their chances of actually being paid.
But there are risks. The consequences of not knowing the risks range from owners and general contractors having to pay twice for materials to suppliers losing any right to be paid. Owners, contractors, and suppliers should be familiar with what is sometimes called "the joint check rule" and with important issues related to the wording of joint check agreements.
The Joint Check Rule
Under the joint check rule, a supplier who signs a joint check is deemed to have received the money it is owed for the period covered by the check. For example, assume that a subcontractor is due $10,000 for work performed prior to June 30 and owes a supplier $5,000 for materials supplied during that period. If the general contractor issues a joint check for $10,000 to the subcontractor and supplier, the supplier will be deemed to have been paid the $5,000 it was owed if it signs the check — even if it does not actually receive the money.
Some general contractors mistakenly argue that the supplier should be deemed to have been paid the full amount of all joint checks. For example, if a subcontractor delays a project and the general contractor is entitled to deduct delay damages from the payment to the subcontractor, the joint check may be for less than the amount owed the supplier for that pay period. The general contractor may argue that because all of the joint checks issued throughout the project total more than the amount owed the supplier, the supplier should be deemed to have been fully paid — after all, the general contractor paid the subcontractor in full. The general contractor will lose that argument because under the joint check rule, the supplier is deemed to have received only the amount it is owed for the period covered by the joint check.
But, a supplier will be deemed to have received the entire amount of a joint check regardless of how much it is owed for a pay period when the supplier fails to account for payments on a project-by-project basis. If a supplier simply keeps an account for the subcontractor that applies to a number of different projects, the supplier will be deemed to have received the full amount of the joint check. In other words, suppliers have the burden of proving how much of each joint check was intended to pay for materials supplied to a specific project.
General contractors cannot assume that a supplier will be deemed to have received the full amount of all joint checks added together. Unless a supplier fails to account for payments on a project-by-project basis, the joint check rule will apply only to specific pay periods — suppliers will be deemed to have received the amount they are owed during the pay period covered by the joint check up to the amount of the check.
Joint Check Agreements
General contractors often include a provision in their subcontracts that gives them the right to issue joint checks (e.g., "Contractor may, but is not obligated to, issue joint checks to Subcontractor and any of its suppliers."). Such provisions are an important risk-management tool, but must be drafted carefully. If a general contractor agrees to issue joint checks to the subcontractor and its supplier (a mandatory obligation as opposed to just having the right to do so), the supplier may enforce the agreement against the general contractor.
For example, assume a supplier requires a subcontractor to get the general contractor to agree to issue joint checks and the subcontractor proposes the following modification to the subcontract: "Contractor shall issue joint checks to Subcontractor and its material supplier." If the general contractor accepts the change but neglects to issue joint checks, the supplier will be able to sue the general contractor for breach of contract if the supplier is not paid. The supplier is entitled to rely on the subcontractor's subcontract with the general contractor if the language requiring the general contractor to issue joint checks is mandatory.
Supplier Joint Check Agreement
Joint check agreements may also arise when a supplier refuses to supply materials to a subcontractor unless the subcontractor and the general contractor agree that the general contractor will pay by joint check. Usually in those situations, the supplier proposes a form of joint check agreement. General contractors must read such forms with caution since suppliers often include other obligations in such forms (e.g., the form may say that the general contractor will issue joint checks and guarantee payment to the supplier). Most additional obligations will be enforced by the courts. If a general contractor is willing to issue joint checks, it should be sure that the joint check agreement proposed does not have additional obligations that it is unwilling to accept.
Joint checks are a valuable risk-mitigation tool. But to avoid costly surprises, parties on a construction project must be familiar with the joint check rule and carefully negotiate and draft joint check agreements.