Joint check agreements are very popular in the construction industry. In fact, many folks mistakenly believe that joint check agreements are exclusively a construction industry instrument. Many folks also believe that joint check agreements are all the same, that there is standardized agreement language and rules, that they offer a lot of payment security, and a host of other incorrect assumptions. Perhaps the joint check agreement is the most misunderstood and dangerous document you can confront on a construction project.
zlien conducted a Webinar a few weeks ago titled “Joint Check Agreement Mistakes That Can Cost You Thousands,” and the video recording of that Webinar is embedded at the top of this post. It’s a great presentation that gives a high level overview of common joint check agreement mistakes.
One of my favorite parts of the presentation comes right at the beginning when it’s suggested that the Joint Check Agreement is not a security device, but is instead a “floatation device.” These agreements, in other words, are only used by parties when things are going wrong in some way.
Think about when your company has encountered joint check agreements:
What do all of these things have in common? Something has gone wrong with your customer, or your customer isn’t in a good enough financial position. Right from the start, therefore, you should be cautious about joint check agreements. They are a floatation device thrown at sea to help companies that are drowning. They help, and they may save the situation, but the parties are not out of the woods simply because it’s been thrown overboard and grabbed.
You likely never heard of the “Joint Check Rule,” or otherwise, you don’t understand it. Nevertheless, if you’re not careful, you can find yourself on the wrong side of this rule and subjected to a substantial loss.
The rule as applied in California is explained (and defined) nicely by the court in Post Bros. Constr. Co v. Yoder as follows:
When a subcontractor and his materialman are joint payees, and no agreement exists with the owner or general contractor as to allocation or proceeds, the materialman by endorsing the check will be deemed to have received the money due him.
This interpretation of the “joint check rule” has been adopted by a number of states, including Arizona, California, and Washington. However, these are not the only three states who’ve adopted the rule, and unfortunately for clarity’s sake, many courts have not weighed in on whether they would or would not adopt the rule. This leaves the parties subjected to a difficult legal gray area.
For various reasons, every supplier in every state should consider the joint check rule applicable to their project. Every time a joint check is received by a supplier, the supplier should only cash the check if the amount paid is the total amount due as of the date of deposit.
Yes, I understand that you do progress billing and progress payment. Yes, I understand that this isn’t how the construction industry practically works. Yes, I understand that your business has been employing opposite practices for years. Yes, I believe that the rule is unfair and ridiculous.
Yet, it is the rule.
This article is pretty rough on the joint check agreement and that is a tad unfortunate, because the instrument is wildly popular and very useful for a lot of circumstances. There are a thousand examples of situations when the joint check agreement can be an asset for your company.
However, there are a lot of misunderstandings about these agreements, and a lot of dangers.
The moral of this article is not to bury the importance or usefulness of joint check agreements, but just to educate you of their dangers so you keep your eyes open and avoid costly mistakes.