Joint checks: Make sure you follow these guidelines to get paid
Tuesday, August 27, 2019
What Is a Joint Check Agreement?
Simply put, a joint check is a check made payable to two or more parties, such that both parties must endorse the check prior to deposit. A joint check agreement, therefore, is a contract through which one party agrees to (or gives permission to) make payment in the form of joint checks.
While joint check agreements are just contracts, and can exist in any industry or between any group of parties, they are most common in construction, and used to manage payment on construction projects far more than anywhere else.
For example, a GC (or direct contractor) may agree to issue a check jointly to the first-tier subcontractor and that sub’s material supplier in order to ensure the supplier gets paid, and accordingly, to help the GC avoid liens on the project. Since construction projects have multiple tiers of participants, joint checks can provide a helpful tool to manage payment through sub-tiers and protect the project against payment issues.
In addition to helping the upper-tier party avoid liens from down-stream payment issues, the joint check also directly benefits the party in the agreement furthest “down-stream” from the money, by giving that party power though their required signature, to ensure that payment is made. In a joint check agreement entered into between a general contractor, a subcontractor and a material supplier, the supplier wants to protect itself against non-payment, and the GC wants to protect against a lien from that same supplier.
In the absence of a joint check agreement, the prime contractor pays the subcontractor for the work, and then the subcontractor will pay the supplier for the materials used. This can work out fine, but everybody involved in the construction industry knows the risks, inefficiencies, and delays associated with payment.
When a joint check agreement is in place, however, the payment process is much more lateral, as the payment goes from the GC to both the sub and supplier at functionally the same time, as both parties must endorse the check.
It’s important to note, however, that joint check agreements are creatures of contract — not statute. Similar to lien waivers in states with no statutory form, a joint check agreement can say basically whatever the parties to the agreement want it to say.
This means that there is no set, standard, or required form for joint check agreements, and all agreement should be reviewed thoroughly to make sure that the agreement says what all the parties have agreed upon. There are many common issues that can be avoided by a review of the agreement.
Common Joint Check Agreement Problems and How to Avoid Them
Since a joint check agreement is just a contract between the parties, and there is no specifically mandated joint check agreement template, they are subject to the desires of the parties and to the specific drafting of the agreement. Joint check agreements differ from party to party, job to job, and agreement to agreement.
One common and potentially devastating difference in joint check agreements is whether the agreement is mandatory or permissive. Put another way, some joint check agreements obligate the paying party to use a joint check, but others merely allow them to do so.
Despite gaining certain protections through the joint check agreement, many paying parties are not keen to incur joint check obligations. It adds a bit of complexity and modifies the usual structure for how a GC (or other paying party) makes payment, so the motivation to agree to a joint check agreement may be low.
Accordingly, a GC may provide a joint check agreement in which issuing joint checks is permitted but is not required. Since the language of the agreement controls the obligations of the parties, it’s important to examine the agreement to know which type it is. A permissive joint check agreement can be disregarded by the paying party, so it may not even matter that the agreement is in place at all.
The language that determines whether the joint check agreement is mandatory or permissive can be pretty similar to parties not accustomed to reviewing legal documents, so be careful. Mandatory language can look something like:
“the subcontractor and the Paying Party hereby agree and guarantee that [the supplier’s] invoices will be paid by joint checks to be sent directly to [the supplier].”
Permissive language, on the other hand, may look similar to this:
“the subcontractor authorizes the Paying Party to make all payments, with respect to the materials supplied and/or labor furnished by [the supplier], in the form of a check jointly payable to both the Subcontractor and [the supplier]”
Being able to spot the difference can be the difference in getting paid or being stuck in a general construction payment quagmire waiting and waiting for payment, that comes late, if at all.
A very similar issue is how the names appear on the joint check itself. In the world of joint checks “and” is a very important word. Accepting joint checks without an “and” can make to protections of the joint check disappear. In the eyes of banks (and the law) there is a big difference between "ABC Construction and ABC Supply" and "ABC Construction / ABC Supply.”
In the first situation (the one with the “and”) the check will not be accepted by the bank unless it is endorsed by both parties. If the second structure is followed, it is possible the check could be accepted for deposit if only one company endorses the check. It is crucial, then, to make sure the agreement specifies that the checks must be written out to include the word "AND."
Another extremely dangerous potential issue surrounding joint checks is the dreaded joint check rule. The joint check rule is a principal of law for the proposition that that whenever a joint check is issued, the lower-tiered party endorsing and depositing the joint check is certifying that it has been paid all amounts due up to the date of the joint check.
This rule has been adopted across the country and can become a huge problem for suppliers. As a California court defined the rule,
“When a subcontractor and his materialman are joint payees, and no agreement exists with the owner or general contractor as to allocation or proceeds, the materialman by endorsing the check will be deemed to have received the money due him.”
This puts suppliers or other participants who are a party to a joint check agreement in a difficult situation. Checks for less than the full amount owed must be rejected, even if the money is sorely needed, and even if there are some other “assurances” from the paying party that the rest of the money will be forthcoming. If a joint check is endorsed and deposited for an amount less than the total due through the date of the check, it can waive the right to recover the difference.
This rule, however, can be overcome. One way to overcome the joint check rule is to not cash joint checks for less than the total outstanding debt, but there are other ways as well.
A written agreement (either separate or as a clause in the underlying joint check agreement) from the paying party providing that the endorsement and/or deposit of a joint check is solely an acknowledgment of receipt of the amount actually paid, and not an acknowledgment of receipt of all amounts owed to you to date can overcome the joint check rule presumption. Additionally, a specific agreement related to the allocation of a particular check can overcome the rule, as well.
Joint checks can provide some protection to lower-tiered parties on construction projects and can also provide some protection against liens being filed. However, joint check agreements can be a double-edged sword.
It’s important to make sure that the agreement is analyzed, and simple precautions are taken. It’s important to learn about using joint check agreements to your advantage and avoiding the problems, so that the agreement actually helps payment run smoothly.
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