Joint checks can solve a lot of problems within the construction payment chain. But, they can create new problems, too. Like – what happens when one party to a joint check refuses to endorse or deposit the check?
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Joint checks in general
Joint checks can help make sure that everyone gets paid what they’re due. In a normal, non-joint check situation there’s one payor (the party making payment) and one payee (the party receiving payment). The check is cut by the payor, endorsed by the payee, and deposited by that payee.
When joint checks are involved, two payees must endorse the check in order for that check to be deposited. For example: a contractor may issue a joint check that their subcontractor and their subcontractor’s supplier must both endorse before payment can be released. Generally, unless both payees have endorsed that joint check, payment won’t be released.
Note, though, that joint checks can be used at different points in the payment chain. For instance, an insurance company might issue joint checks releasing payment to their insured (the property owner) and the project’s contractor. Also, keep in mind that joint checks are completely contractual. Meaning, unlike say mechanics lien requirements, joint check agreements aren’t bound by statute. Rather, whatever the joint check agreement says, goes (within reason).
More joint check resources:
A recent case: Josefowicz v. Allstate
A recent California case, Josefowicz v. Allstate, addressed joint checks in California and who can deposit them. You can read Jozefowicz v. Allstate Ins. Co. here, courtesy of Justia. Haight Brown & Bonesteel has a great breakdown of the case, too.
Owner and contractor enter into a unique joint check agreement
Sunny Hills Restoration (the “contractor”) was hired to repair a mobile home owned by Stanley Jozefowicz (the “owner”) which was damaged by fire. The home was insured by Allstate, who was responsible for paying for the repairs. In the agreement for work, payment would be made to the contractor via a joint check issued by Allstate to both the contractor and the owner. So, the owner requested that Allstate make all checks payable to both the owner and the contractor.
Under the contract between the owner and Sunny Hills Restoration, Sunny Hills was entitled to deposit the joint checks on their own. Still, the joint checks were sent to the property owner, who would then endorse the joint check then pass along to the contractor.
Owner and contractor hit a payment dispute, owner withholds payment
The contractor and the owner ran into a dispute. As a result, the owner refused to pass along the joint check Allstate had issued for the benefit of the contractor. Though the owner had no right, itself, to payment under the check from Allstate, payment was withheld.
Seeking payment, Sunny Hills Restoration contacted Allstate and asked Allstate to cut a new check, sending this new check directly to the contractor. Allstate obliged, bypassing the property owner altogether.
Unsurprisingly, the property owner was not pleased. They sued everyone – the contractor, Allstate, and the bank who cashed the check. According to the owner, the check should have been treated like a lost or stolen check – and it should not have been able to be deposited.
The court sides with the contractor and insurance company
The court sided with Allstate and Sunny Hill Restoration. The owner appealed, but the appellate court found the same thing. Ultimately, it came down to the contract.
The agreement between Sunny Hill Restoration and the owner stated that Sunny Hill was entitled to deposit any checks – even though the checks were to be made jointly payable to both Allstate and Sunny Hill. As a result, Allstate sending the check directly to the contractor and the contractor depositing that check was perfectly fine, according to the court.
What does this mean for California construction businesses?
Those who use joint checks in California should pay close attention to what happened here. There are plenty of details to keep in mind when using joint checks on a project. This case presents some new ones.
Restoration contractors may benefit from using similar contract language
If you’re in the restoration business, you know this situation happens all too often. The insurance company cuts a check to the owner, then the owner begins negotiating. Sometimes it’s a real dispute over the work performed, sometimes there are alleged defects in play, and sometimes it’s as simple as the owner trying to get a lower price in order to pocket some of the insurance proceeds.
In this case, Sunny Hill Restoration was able to get paid despite the property owner refusing to pay them. It all came down to the fact that the contractor was entitled to deposit the check on their own. Now, the insurer was still cutting checks directly to the owner, and then the owner was responsible for passing the check along to their contractor, Sunny Hill. But, because that clause was in place allowing Sunny Hill to deposit checks without help from the owner, the contractor was able to reach out directly to the insurer, Allstate, to resolve the issue.
Exact contract language used by Sunny Hills
Here’s the exact contract language permitting the contractor to deposit the joint check without the owner:
“Sunny Hills Restoration is hereby appointed as my representative in fact to endorse and deposit in its account any Insurance Company checks or drafts relating to this Proposal and Work Authorization.”
As for the language requiring joint checks in the first place:
“I direct that Allstate Insurance include the name of Sunny Hills Restoration on any checks or drafts relating to this Proposal and work Authorization.”
The illusion of protection from a joint check agreement
If the joint check can be deposited by one of the recipients of the joint check without any intervention from the other joint check payee, there could be trouble. Conceivably, a joint check agreement like the one in the case above might be used anywhere in the payment chain.
To re-use the example from earlier in this article: Let’s say an owner will cut a joint check for their general contractor and that contractor’s sub. If, under the terms of the joint check agreement, the contractor can deposit the check on their own, then the contractor will be able to proceed as if there’s no joint check agreement in place, at all. The same is true for other parties along the chain.
Pay attention to the terms of the contract! Joint check agreements are just that – agreements. The language of that contract will heavily impact how California joint checks are treated and what actions will be allowable when it comes time to endorse and deposit checks.
Honestly, the same is true in all states. When joint checks are in play, understand the rules of the game. And, if you’re going to use joint checks, set up your contract for success.