Key Elements of an Effective Joint Check Agreement

A joint check is simply a check issued by one party, the payor, and made payable to two parties as co-payees. The use of joint check agreements and the issuance of joint checks are practices well-established by custom in the construction industry and are typically used to get downstream subcontractors and suppliers paid as soon as the upstream subcontractors are paid. Typically, a joint check arrangement involves an agreement between the prime contractor and its first-tier subcontractor whereby the two parties agree that the prime contractor will issue all or part of a progress payment as a joint check, or as a series of individual joint checks, payable to the subcontractor and one of the subcontractor’s material suppliers or lower-tier subcontractors as co-payees. Joint check arrangements are also sometimes made by using a three-party agreement where one of the first-tier subcontractor’s material suppliers or lower-tier subcontractors is also a party to the formal joint check agreement. While seemingly simple in concept, joint check agreements and the issuance of joint checks raise several important issues which, if not properly addressed, could defeat the purpose of using joint checks in the first place. I suggest that you read the article: Soon as I Get Paid—The Use of Joint Check Agreements on Construction Projects. Send me an email, and I will send you a copy.

Before issuing a joint check, make sure that there is a signed joint check agreement between or among the relevant parties. Without a contractual right, a contractor cannot unilaterally institute a joint check requirement. In fact, the contractor’s issuing a joint check in the absence of an agreement with the subcontractor will not satisfy the payment obligations of the contractor and may be a breach of the subcontract.

The respective needs and concerns of the project participants may vary widely from project to project and thus there is no industry standard form for a joint check agreement. Well-drafted joint check agreements should consider and address the unique needs and concerns of the project participants. With that in mind, below is a topical checklist of some of the important terms and conditions that you should consider and address when negotiating or drafting a joint check agreement. Because each situation is different, this checklist is not an exhaustive list. This checklist assumes the use of a three-party agreement where the parties to the joint check agreement include the Contractor, Subcontractor and one of the Subcontractor’s Vendors (a sub-subcontractor, material supplier, equipment supplier, or other vendor). Consider including or addressing the following in your joint check agreement:

• An introductory paragraph detailing the consideration given in exchange for the agreement, the name of the construction project, and the names of the parties bound by the agreement. Typically, the parties to the joint check agreement will include the Contractor, Subcontractor, and Vendor. Consideration for the agreement could include, for example, the Vendor’s extension of credit to the Subcontractor and the Vendor’s supply of materials, equipment, labor or services to the project.
• Language expressing an agreement to use, issue, and accept joint checks. Ideally, the underlying subcontract should contain language authorizing the Contractor’s use of joint checks in the event that the Subcontractor fails to make payment to a Vendor for work properly performed or material or equipment suitably delivered. The subcontract language should give the Contractor the right, but not the obligation, to issue joint checks if necessary.
• A statement regarding the purpose of joint checks and details explaining how the joint checks will be delivered to the Subcontractor and Vendor. Include the address to which joint checks are to be sent.
• A requirement that the Subcontractor shall submit the separate outstanding invoices of the Vendor to the Contractor for the purposes of providing the Contractor with the necessary information that the Contractor requires to issue a joint check to pay the Vendor.
• An agreement that the Contractor may rely on information provided by the Vendor regarding the total indebtedness of the Subcontractor to the Vendor.
• Subcontractor’s promise to endorse and deliver the check to the Vendor. Identify the party that bears the risk of one party to the joint check cashing the check and failing to disburse the proceeds to the other co-payee. Include an express acknowledgement that the Vendor will be deemed by reason of its acceptance of a joint check to have received the full amount of the joint check. Alternatively, and if practical, include a requirement that the Subcontractor visit the Contractor’s office to endorse the joint check so that the Contractor can then deliver the joint check to the Vendor. If that is not practical, consider including the Subcontractor’s limited power of attorney allowing the Vendor to endorse the joint check on behalf of the Subcontractor so that the joint check can be sent directly from the Contractor to the Vendor.
• Vendor’s release of claims against the Contractor. Consider including a waiver, release and relinquishment of any and all claims, demands, or right of lien for all work, labor material, machinery, equipment, fixtures, and services performed or furnished for any payment previously received. Require that the Subcontractor provide a signed and notarized original lien waiver from the Vendor, in a form acceptable to the Contractor, stating the amount of all funds previously received by the Vendor.
• A provision that the delivery of the joint check acts as a release of the Subcontractor’s and Vendor’s claims regardless of whether the Subcontractor or Vendor execute a separate formal waiver or release of lien.
• A provision requiring the Subcontractor to continue performing its contractual obligations.
• Agreement by the Vendor to credit its billings in accordance with the joint check. Disputes sometimes arise over the allocation of the proceeds of the joint check. In order to avoid disputes later, the parties should specify how the joint check proceeds are to be allocated between the Subcontractor and the Vendor. Alternatively, include language that the amount of the joint check shall be solely in an amount owed to the Vendor and shall not include any amounts owed to the Subcontractor on its own account or on the account of any other supplier or subcontractor.
• Language limiting or capping the Contractor’s liability to the amount owed to the Subcontractor, less deducts, change orders, back-charges and credits. If the Contractor has multiple subcontracts with the subcontractor for other unrelated projects, consider expanding the limiting language to make the cap or limitation of liability subject to the Contractor’s setoff rights, if any, arising from any damage claims against the Subcontractor on other projects.
• A provision making clear that the joint check agreement creates no independent obligation on the Contractor’s part to pay the Vendor out of the Contractor’s own funds. Include language that the Contractor shall only make joint check payments when there are funds that are due and owing to the Subcontractor. To avoid any argument that a “pay-if-paid” provision found in the subcontract has been waived, include an express pay-if-paid provision in the joint check agreement making clear that the Contractor has no obligation to issue a joint check if the Contractor never receives payment from the owner.
• An agreement that the joint check represents the full amount owed to the Subcontractor and Vendor.
• A requirement that the Subcontractor and Vendor will execute lien releases upon receipt of payment.
• An agreement that any joint check funds are the property of the Vendor and not the property of the Subcontractor. In the event of a Subcontractor bankruptcy, including such a provision may help the Vendor fend off claims that the funds are the property of the bankruptcy estate.
• A provision defining the limits of liability. Include a statement disavowing that the Contractor is a guarantor of the Subcontractor’s obligations to the Vendor or that the Vendor is a third-party beneficiary of the underlying subcontract. The Contractor should make clear that the payment arrangement is being made merely as an accommodation to the Vendor and should not be relied upon to establish any contractual obligations flowing from the Contractor to the Vendor. Include a provision that the Vendor shall have no direct right of action against the Contractor for nonpayment.
• A disclaimer of any liability arising from the Contractor’s forwarding of any proceeds other than by joint check, either through negligence or otherwise.
• An agreement that the parties’ respective rights or defenses under the federal Miller Act, state little Miller Act or state lien laws are neither diminished nor enlarged by virtue of the joint check agreement. Also, consider including language clarifying that the existence of the joint check agreement or the exchange of information between or among the parties, including the presentation of Vendor invoices, does not constitute any of the formal notices that may otherwise be required of the Vendor to make a claim or protect its rights under the federal Miller Act, state little Miller Act or state lien laws.

The process of establishing formal joint check agreements, issuing joint checks, and negotiating joint checks carries with it important rights and obligations that may vary based on the contractual agreements involved, the relationships among the various parties, representations made to the co-payees, and applicable law. Accordingly, whether you are the anticipated payor or co-payee, you should not hesitate to seek the advice of your construction attorney when considering establishing or carrying out a joint payment arrangement.

This article originally appeared in Construction Connection Newsletter.www.constructionconnection.com.

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Contact Gene at gjheady@smithcurrie.com or directly at 404-582-8055.