Joint check agreements and joint checks are looked upon quite favorably in the construction industry, and for good reason. While joint checks can be issued in any transaction they are most commonly used in the construction industry, and they usually come along to help guarantee payment or get payment to lower tiered subcontractors or suppliers who might be at risk of not getting paid.
General contractors and developers like the device because it reduces mechanics lien and bond claim exposure, and lets them control the flow of money down the contracting chain. Lower tiered parties like the device because it reduces their risk of not getting paid.
Ah, but do they know about the “Joint Check Rule?”
What Is The Joint Check Rule?
The Joint Check Rule is a jurisprudential principal of law providing that whenever an owner or a general contractor issues a joint check to a subcontractor and the subcontractor’s material supplier, the material supplier endorsing and depositing the joint check is certifying that it has been paid all amounts due up to the date of the joint check.
The Joint Check Rule has been adopted by courts across the country, including courts in Arizona, California and Washington. The adoption of the Joint Check Rule in Arizona is explained nicely in Rex Christensen’s article “The Hidden Dangers of Joint Checks.” The rule 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.
These aren’t the only three states who have adopted the Joint Check Rule. It is a rule widely adopted across the United States.
Joint Check Rule Will Destroy Your Claim For Further Payments
Consider this scenario. You’re owed $100,000 for materials furnished to a subcontractor over two months ago. The account has been flagged as high risk, all furnishing has been put on hold and you’ve started to prepare a collection plan that may involve filing a bond claim or mechanics lien. The general contractor sends you a check for $85,000 jointly written to you and the subcontractor. You could really use this money.
Should you deposit the $85,000 and then proceed for the remainder separately? Can you really reject acceptance of this huge chunk of cash?
According to the Joint Check Rule, if you endorse and/or deposit that $85,000 check you’ll be waiving your rights to the remaining $15,000 debt. Period. End of story. You’ll be unable to sue for the unpaid portion, and any lien or bond claims you file will be considered invalid.
How To Handle Joint Checks To Avoid The Joint Check Rule Penalty
The Joint Check Rule is a legal presumption, and the presumption can be overcome by showing an agreement to the contrary. Accordingly, if you’re presented with a joint check that does not pay the entire outstanding debt, you should simply obtain a written agreement from the owner and general contractor providing that the endorsement and/or deposit of the joint check is an acknowledgment of receipt of the amount actually paid to you, and not an acknowledgment of receipt of all amounts owed to you to date.
Obtain a written agreement providing that endorsement of the joint check is not an acknowledgment that you received payment for all amounts outstanding.If the owner or general contractor are not willing to sign such an agreement you’ll be left with the difficult decision of whether to accept the smaller payment as full and final settlement of the debt, or to turn away the money and proceed for full recovery. As you can imagine, this is a very difficult decision for material suppliers in need of cash.
This is explained by the California court in the Post Bros. Constr Co case saying that “The material man may protect himself by simply refusing to endorse the check,” clearly disregarding the practical realities of cash flow challenges in the construction industry.
Note also that the “written agreement” discussed in this section can be contained within a general joint check agreement.