Key Aspects of Joint Check Agreements

In the construction industry, owners and prime contractors can use joint checks to protect themselves from lien foreclosures by lower-tier subcontractors and material suppliers that upper-tier contractors and subcontractors have failed to pay. Aside from other contractual measures that can be implemented before and even during construction (such as lien and claim waivers and releases, payment withholding rights, contingent payment clauses and lien claim indemnity provisions), this device helps to mitigate against an owner or prime contractor being required to pay twice for the same work or materials.

A joint check arrangement usually involves an agreement between the owner or prime contractor and downstream subcontractors and suppliers or simply the issuance of a joint check made payable to joint payees and endorsed to one of the joint payees. By entering into such an agreement or issuing a joint check, an owner or prime contractor gains peace of mind that lower-tier subcontractors or suppliers are in fact paid and potential lien claims are avoided. Material suppliers, meanwhile, are assured that additional payment security is in place from an upper-tier entity with which it has no privity of contract.

A payor issuing the joint check or one of the co-payees in a joint check transaction should carefully consider many important issues. For instance, many states (including Washington and Oregon) to varying degrees have adopted what is called the “joint check rule.” This rule provides that, when downstream parties (such as a subcontractor) are joint payees, and no agreement exists with the owner or prime contractor as to allocation of the proceeds, the supplier by endorsing the check will be deemed to have received the money owed to it from the subcontractor. The presumption of payment upon endorsement of the joint check can have serious consequences for an unwary lower-tier subcontractor or supplier, particularly to the extent that it may have received only partial payment of the amounts owed. Additionally, this presumption may give rise to a release of claims against the prime contractor’s registration or payment bond sureties (but not rights between co-payees and their sureties) and even a waiver of mechanic’s or materialmen’s lien rights. However, the joint check rule usually does not apply in public construction settings.

Ultimately, the issue of whether a joint check constitutes payment of the amount owed by the contractor or subcontractor to lower-tier subcontractors or suppliers is a question of fact based on the intention of the parties. To mitigate the risks arising from a factual dispute concerning what the parties intended, prime contractors or owners might want to incorporate joint check agreements into their contracts and subcontracts. Such agreements, whether incorporated into a prime contract or via collateral agreements, should clearly spell out the parties’ rights relative to the issuance, endorsement and effect of joint check payments.

Although each construction project – and the relationship of the project participants – is different, consider the following when using joint checks and joint check agreements:

• Ensure that the prime contract or the subcontract clearly provides that the owner or prime contractor may (but is not required to) use joint checks for payment to downstream parties. By attaching a copy of a form joint check agreement to the prime (or any sub) contract or by incorporating express language in the contract that affords the owner or prime contractor the right (but not the duty) to issue joint checks to lower-tier subcontractors and suppliers, the owner or prime contractor can avoid the risk of potentially breaching the contract by the unilateral issuance of joint checks.
• Establish that the joint check arrangement between the parties and any payment issued to a lower-tier subcontractor or supplier is merely an accommodation of payment and does not create any contractual relationship between the owner or the prime contractor and lower-tier persons or entities not having a direct contractual relationship with the payor. A series of payments made to downstream entities may create a presumption that a contractual relationship exists between the parties and consequently give rise to independent liability on the part of the payor.
• Although any payment made (progress or final) should require completed and signed waiver and release of claim documents, make sure in the joint check agreement or clause that endorsement of the check constitutes an express release of bond and lien rights and waiver of any claims arising from the work or materials furnished by the payee.
• Limit the joint check agreement as payment for work or materials furnished only after the date of the agreement and only for items actually incorporated into the project.
• Confirm that the immediate downstream party (prime contractor or subcontractor) agrees to endorse the joint check and the co-payee subcontractor or supplier agrees to pay the immediate upstream party any excess over the joint check amount.
• Identify who bears the risk of one co-payee cashing the joint check and failing to disburse the proceeds to the other co-payee.
• Consider a limitation of liability provision consistent with the amount of the joint check payment(s) or in some aggregate amount.
• Reflect an acknowledgement that the joint check proceeds are the property of the co-payee recipient and not of the other co-payee (like the prime contractor) in an effort to mitigate against the risk of such funds being associated with the co-payee’s bankruptcy estate, should the payee contractor or subcontractor file for bankruptcy.
• If a joint check arrangement is not part of a more robust contractual agreement, ensure that the parties also consider a choice-of-law provision, a venue selection clause for the resolution of any disputes, an entire-agreement or merger clause to mitigate the risk arising from any contemporaneous or prior oral agreements or representations, an anti-waiver provision, and a clause binding the terms of the agreement to the parties’ respective successors and assigns.

Joint check agreements and the actions taken under (or in the absence of) them can give rise to unintended consequences and liability. Prior to drafting or entering into any joint check agreement, consult an experienced construction lawyer able to identify the associated risks and benefits.

"Key Aspects of Joint Checking Agreements" was originally published by the Daily Journal of Commerce on January 15, 2016.