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The Hidden Dangers of Joint Checks

by | Dec 3, 2019 | Construction Law |

Many construction contracts are written so that the owner will pay for labor and materials by way of joint checks. In the typical scenario, a contractor will submit a payment application itemizing work performed by various subcontractors during that month’s payment cycle. The owner will then issue checks payable jointly to the general contractor and to the subcontractor whose work was listed on the application. This process can work to the subcontractor’s advantage, because it prevents the general contractor from using payments earmarked for the subcontractor to satisfy other obligations.

Unfortunately, joint check payments can also present problems to those unfamiliar with the “Joint Check Rule,” which states that when a supplier or subcontractor endorses a check payable jointly to him and the general contractor, he is presumed to have “received all sums then owed to him, even though he actually may have received only part or none of the amounts owed to him.” See Brown Wholesale Electric, Inc. v. Beztak of Scottsdale, Inc., 163 Ariz. 340, 345 (Ariz.1990).

This Joint Check Rule presents a dilemma for suppliers and subcontractors, because they have to endorse the check if they want to be paid at all. However, their endorsement of the joint check creates a legal presumption that they have been paid the full amount of the check, even if the general contractor has withheld retention funds or has otherwise reduced the payment. The dilemma is magnified by the fact that checks are usually issued for the prior month’s work. By the time the check is endorsed and payment made to the subcontractor, he has probably supplied even more labor or materials to the project, which may be considered to be part of the “sums then owed to him.”

Fortunately, with some advance planning, a subcontractor can overcome this incorrect presumption that he was paid everything owed up to the date the check was endorsed. All that is required is an agreement with the owner and general contractor that the endorsement of a joint check is more limited than the Joint Check Rule presumes. The presumption will be disregarded if an “agreement exists between the materialman [or subcontractor] and the owner or general contractor as to allocation of the proceeds.” 163 Ariz. at 343.

Therefore, a supplier or subcontractor should obtain a written agreement from the owner and general contractor that his endorsement of the check is not an acknowledgement of payment of everything owed at the time of the endorsement, but is instead merely an acknowledgment of amounts actually paid. Failure to obtain such an agreement places the subcontractor at risk of never getting paid for the work not included in the joint check.

A subcontractor can benefit from joint checks, because they give him more control over payments to the general contractor. With knowledge of how the Joint Check Rule works, the subcontractor can also overcome the legal fiction that he has been paid for work that was never included in the payment.