Drafting Construction Joint Check Agreements: Contractor Liability, Supplier Payment and Lien Rights

Description

Joint check agreements and issuing joint checks are well established in the construction industry. They 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 where the 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.

Counsel must ensure there is a signed joint check agreement between or among the relevant parties. A contractor cannot unilaterally institute a joint check requirement. If a contractor issues a joint check without an agreement with the subcontractor, the check will not satisfy the contractor's payment obligations and may breach the subcontract.

Well drafted joint check agreements should consider and address the unique needs and concerns of the project participants. The contractor potentially undertakes an independent payment obligation to the material supplier with whom the contractor has no direct contractual relationship.

Contractors can knowingly or unknowingly assume a direct obligation to the supplier if the agreement can be read as creating such a direct obligation. The parties' intent demonstrated in the contract governs a direct payment obligation to the supplier in a joint check agreement.

Joint check agreements can also impact the supplier's payment and lien rights. Under a rule applied in some jurisdictions known as "the joint check rule," when a subcontractor and a material supplier are joint payees, and no agreement exists with the contractor as to the allocation of the joint check proceeds, the supplier by endorsing the joint check is deemed to have received the money due.

Listen as our authoritative panel discusses the advantages and disadvantages of utilizing a joint check agreement in a construction project. The panel will discuss the ways such an agreement may affect a general contractor's liability and a supplier's payment and lien rights.