Defining Joint Check Agreements
What is a joint check agreement? As the name suggests, it’s an agreement among two parties to pay a third party with a jointly executed instrument. "Jointly executed" means that the piece of paper has the signatures of those two parties on it (and sometimes a third). The actual check itself is usually signed by a single party, but the agreement between the two obligors may also call for it to be paid from an account subscribed to by both of them. And that’s where you start getting into trouble.
On its face, a joint check agreement seems to provide security to subcontractors and suppliers. After all , it’s got two signatures on it, not one! Sadly, it’s a misnomer. The reality is that a JC agreement is often just a trick, especially for sureties. A proper JC agreement between contractor and its supplier may help protect that supplier. But it’s a red warning flag because a surety knows that a prime contractor can use that agreement to come after the subcontractor’s lien rights and bond rights "by contract." So when a prime contractor asks your company to accept a JC agreement, say no. And run. Fast.
The Advantages of Implementing a Joint Check Agreement
The benefits of a joint check agreement are fairly self-evident to many construction and design professionals. But in this post, we will analyze the benefits so that you can decide whether it makes sense to enter into a joint check agreement before you start any construction or design work.
Joint Check Agreements Can Help Insure Payment
In many cases, a joint check agreement can ensure that those performing work for an owner on a construction project are getting paid. A general contractor for a project may be slow in paying subcontractors. Or a subcontractor may be short of funds. A joint check agreement, wherein a check is issued jointly to the general contractor and the subcontractor, will ensure that the subcontractor gets paid his or her portion of funds that are designated for it under the agreement.
Joint Check Agreements Can Minimize Liens and Lawsuits
Many parties may not have to file a construction lien or even file a lawsuit when they enter into a joint check agreement. This is particularly important in the commercial construction context because that’s where a joint check agreement can be the most beneficial to one of the parties.
Joint Check Agreements Are Quick to Execute and Easy to Negotiate
There’s not much negotiating necessary for a joint check agreement. One simple agreement can be used for all construction projects at a given period of time. Because the party getting paid and the party paying have already a working relationship, including strong trust factors, there’s no need to negotiate terms. The joint check relates to a number of projects, or it relates to a specific project.
Many joint check agreements simply provide that the check must be made jointly payable to the party getting paid and the party paying. The joint check agreement may also reference the Florida Prompt Payment Act at Florida Statutes section 713.13 in whole, or for specific provisions, such as paragraph (2) of that section.
In any event, the point is that the joint check agreement simply lays the groundwork for a quick and easy payment system. It reduces the time and cost of collecting through litigation, or by construction lien, and it can practically guarantee that the subcontractor will get paid.
Joint Check Agreements Can Reduce Construction Litigation
In the end, in most litigation, how often does non-payment or reduced payment come up? The "failure to pay" scenario is a huge factor in many construction lawsuits. The existence of a joint check agreement can eliminate that factor.
When it comes to construction litigation, many times a contractor, subcontractor, or professional can reduce their liability, and exposure to litigation, by executing the joint check agreement in the first place. This eliminates one whole reason that suits are filed.
Many parties can avoid having to go through the Expense and Time of Filing a Construction Lien Action
It’s very easy to file a construction lien on real property. It’s not very expensive to file a construction lien on real property. However, it is time-consuming and it must be done within 90 days of the date of furnishing. If you have a joint check agreement in place in many cases, this means you never have to file a construction lien at all, or at least, you can file one outside the normal 90-day window. When it comes to a construction lien, if the materialman or subcontractor can’t collect through their contract with the contractor, its almost always better to file a construction lien than to do nothing at all. If you don’t do anything, because you are hoping the contractor will pay you later, and they don’t pay you later, you’ll probably lose your right to file a construction lien, and almost certainly this means you lose your right to foreclose the construction lien as well. If you don’t file a construction lien, that means you give up your very basic rights to get paid.
The joint check agreement may eliminate the need to file a construction lien, or it may allow you to file the construction lien long after the expiration of the 90-day window. Either way, the filing of the construction lien can lead to litigation, and a lawsuit. A lawsuit usually means going through the whole process of trying to collect a debt, and the filing of a lawsuit often means the expenditure of attorney’s fees on both sides.
If you need to prepare a joint check agreement please contact us here at this Florida Construction Lawyer Blog.
The Key Elements of a Joint Check Agreement
A well-drafted joint check agreement will include the fundamental elements of payment terms, the responsibility of each party, and dispute resolution processes. These are the principal components of a typical joint check agreement:
• Payment terms: JCA’s should set forth the specific terms of payment, including the manner and timing of payments, and the method by which payments will be divided (if more than two parties sign the check).
• Responsibilities of parties: A JCA should clearly set forth which party is to perform a specific act, in order to avoid future disputes between the parties. Additionally, a JCA should also allocate risks concerning liability if a creditor asserts a claim against a party.
• Dispute resolution process: A JCA should include provisions governing how disputes between the parties will be resolved, such as through mediation or arbitration.
One or both parties to a JCA may request that certain language be included in the JCA, such as language providing that the party signing the check has the right to withhold payment until a lien claim is resolved, or language providing that neither party has the right to record a lien or bond around a lien without the consent of the other party.
Drafting a Joint Check Agreement
When a contractor intends that a check is to be a joint check, the drat should include the following language: The undersigned Contractor agrees to accept this check as a joint check and for the purpose of paying [ ] for purchases of material on account with Contractor, to be used in the job located at , County, Florida, The undersigned Vendor agrees to accept payment from this check so long as the payment is made in accordance with the agreement of the undersigned Contractor and the undersigned Vendor.
Provided that the two contractors and the surety have all agreed to use a joint check , then the joint check language should follow industry standards. However, if the two contractors do not agree to a joint check prior to the issuance of the joint check, it may be more difficult to enforce the terms of a joint check agreement since a party may argue that the terms of the contract were never agreed to. To help prevent against someone avoiding the terms of the contract, the vendor should execute the joint check agreement prior to the issuance of the first joint check.
Common Mistakes and Areas of Concern
A joint check agreement can help assure your owner/developer that your subs have actually been paid for the materials you were provided. In many states, the lender will require a joint check to be issued whenever payment is made to a subcontractor or equipment supplier. Nevertheless, there are pitfalls that entre into these agreements when they are not drafted and executed properly.
A joint check agreement is essentially a contract between several parties in which one or more of them agrees to use the proceeds of a certain check or checks for a specific purpose. Typically, the payor is the general contractor, and the other parties are the owner/developer and the subcontractor/supplier.
The most common error made in a joint check agreement is the failure to clearly state the purpose of the check. In other words, the document should make it clear that the check must be used for the specific purpose of paying for the materials supplied or the work performed by the subcontractor or supplier. Otherwise, litigation may ensue over the question of whether payments made in consideration of the joint check agreement should be held in a constructive trust.
In order to avoid any misunderstanding as to the purpose of the joint check, it is a good idea to provide the subcontractor with a copy of the joint check agreement at the time the subcontractor supplies the materials or performs the work for which payment is made with the joint check. A signed acknowledgement of the joint check agreement is a good way to avoid any later misunderstanding between you and the subcontractor.
Another potential pitfall in the use of joint checks is not communicating with the subcontractor. It generally is a good idea to verify with the subcontractor what costs are going to be incurred and how much the cost of the material is going to be that the subcontractor is providing. For example, in the case of a lumber yard supplying lumber for a construction contractor, it is important to know whether the cost of the wood is going to include cost of delivery. In other words, you should ask the subcontractor whether the dollar amount of the joint check is going to be limited only to the cost of the material or if it is going to include the cost of delivery as well. This minimal amount of inquiry can save everyone, including your lawyer, time and money down the road.
Further, if it is determined that a material supplier will be taking a discount if the supplier is paid in a timely manner, it is a good idea to incorporate that discount into the dollar amount of the joint check. This avoids the inconvenience of trying to figure out how much of a discount can be attributed to the materials supplied to the general contractor’s project. Again, all this takes time and money and is easily avoided.
Like the mortgage doctrine of waiver, be careful not to waive your right to require joint checks. One way to do this is to state clearly on your agreement with your subcontractor that you are entitled to require a check jointly made payable to you and the subcontractor for each check related to that subcontractor. This is simply an explicit statement of the subcontractor’s responsibility to you. In addition, if your subcontractor is obtaining materials from a supplier and you require the supplier to issue a check that is payable jointly to you and the subcontractor, that arrangement should require a corresponding change to the payment terms in your agreement with the subcontractor.
Legal Aspects and Compliance
Various jurisdictions have commentary on the subject of joint check agreements and "pay if paid clauses." For example, the American Institute of Architects has a position paper on issues related to joint check agreements and pay if paid clauses entitled "Payment Issues in Construction Contracts." The AIA’s position paper states that it "does not support automatic, blanket use of ‘pay if paid’ clauses in construction contracts. . . . Such clauses create practical difficulties for contractors and suppliers because, without payment from the subcontractor or sub-subcontractor, the contractor has no recourse for recovery." The AIA also states that "if a contractor wishes to seek a joint check in lieu of a performance bond or other security, the contractor must be sensitive to the rights of its subcontractors … the contractor must obtain the subcontractor’s consent in writing." Many states regulate joint check arrangements as a result of the potential for abuse.
In California, joint checks are permitted, but the contractor must abjure payment to the subcontractor until the full amount of the joint check is received by the subcontractor, and that partial payment to the subcontractor constitutes a diversion of funds . If the contractor pays the subcontractor part of the balance of the joint check, the contractor becomes a partner of the subcontractor for the amount paid. In short, California law requires strict compliance with the requirements of the applicable contractor/subcontractor joint check statute.
Washington statutes also contemplate a procedure for joint checks, but provide that the bank shall be the custodian of the proceeds of the joint check, and shall disburse them as an escrow agent, if the parties are unable to agree on how the funds should be disbursed, or if any disputes are raised. Thus, under Washington law, if there are any disputes about payment, either of the contractors or the subcontractors, the funds are to be "frozen" until the disagreement is resolved.
The Uniform Commercial Code was amended in 1993, effective 1995, to add UCC § 5110, which codifies the law under which a check is treated as cash, if endorsed to a third party, and the third party cashes the check with the bank.
Each state governs the scope and extent of its code, so care should be taken to review the applicable statutes from the jurisdiction(s) in which the construction project is being performed.