Joint Checks – Advantages & Dangers
With increasing frequency sub-subs, including suppliers, are requesting payment by joint check from the prime contractor. Many are unwilling to work for certain subcontractors without such an arrangement, particularly on unbonded projects. Joint checks are a form of payment security because they greatly diminish the opportunity for an economically desperate subcontractor to divert payment made on account of a sub-subs work. They also benefit the prime contractor because they provide a means of insuring payment to sub-subs or suppliers and thus avoid work stoppages and potential lien or bond claims.
Whatever the advantage, there are legal implications that attach to a joint check arrangement that may result in unexpected consequences. For example, if a sub-sub endorses a joint check but allows the subcontractor to retain part of the proceeds, that sub-sub may be barred from recovering the balance. Some jurisdictions have adopted a so called “joint check rule” that regards a sub-subs endorsement of a joint check as conclusive evidence of payment of the face amount of the check. A similar result was reached in Massachusetts. The court denied recovery to a supplier against the contractor’s payment bond for materials the contractor previously paid for by joint check where the supplier permitted the subcontractor to take part of the joint check proceeds. Also, a prime contractor who agrees to pay by joint check may take on more liability that it intended. Absent a clear understanding to the contrary, a prime contractor’s promise to pay a sub-sub by joint check may constitute an agreement that a sub-sub or supplier can enforce independent of the contractor’s liability to its subcontractor. The Massachusetts Appeals Court ordered a prime contractor to pay a sub’s supplier to whom the contractor had promised payment by joint check, even though the contractor had not been paid for those materials and no payment was yet due the subcontractor because of a pay when paid clause in the subcontract. The prime contractor may have thought it was agreeing to pay the supplier only amounts otherwise due its subcontractor, but the Court saw it as an independent obligation owed to the supplier.