What is a Joint Check Agreement?
A Joint Check Agreement is a construction industry-specific document utilized for payment purposes. It is an agreement between an owner and its general contractor or builder, where they both agree on the payment everyone will receive. In other words, it is two checks handed out by a single source — the general contractor.
When the parties execute the Joint Check Agreement, the general contractor confirms it will issue two checks: one to the subcontractor for the work the subcontractor performed, and another "joint" check to the owner and the general contractor for secured funds.
The purpose of the Joint Check Agreement is to help ensure the subcontractor gets paid. The general contractor depersonalizes the receipt of funds , thereby keeping the subcontractor from ever contacting the owner for payment. Because the owner and the general contractor have agreed to the payment plans, the subcontractor loses the option to present a lien on the property.
For the owner, if the general contractor ever fails to pay the subcontractor for work performed, the owner will receive a notice of default from the general contractor and be forced to step in as the project administrator. Once the owner steps in, it can be beneficial because the owner will get involved in the payment of any remaining costs of construction. The owner will also receive proof the general contractor failed to pay the subcontractor, and the owner will be able to demand the general contractor pay the subcontractor.
Key Components of a Joint Check Agreement Template
A joint check agreement template needs to contain certain basic elements. Otherwise, the parties will have trouble later if the relationship goes south regarding how to handle outstanding invoices. This is why uses of a joint check agreement template at the start of the relationship is a great tool.
First, the joint check agreement template should be signed by both parties, plus a witness and notary as well. That way you have several witnesses from the beginning who can back up your defense if a dispute arises later. Additionally, if you use a joint check agreement template that also includes an acknowledgment of the form of performance, then you can back it up in court with your own witnesses later (if the court allows that in), in addition to the others you had at the beginning.
Second, you want a joint check agreement template that specifically states that joint checks will be required. Left to their own devices, lots of contractors or suppliers might prefer just writing one check for a job. No matter how much it benefits you to have a joint check, their interests might not be aligned with yours. So they might try to write a single check. If the contract lets them, then they will. Regarding a joint check agreement template, you want a provision saying that your agreement requires joint payment on checks.
Third, a joint check agreement template should require the parties to get checks from a particular bank. This step prevents the parties from disagreeing about where to deposit those checks later. It helps ensure that which party has control over the funds is known from the beginning.
Fourth, a joint check agreement template should stipulate where the parties are required to send the checks. This way, you do not end up trying to chase down someone to pay you what you are owed.
Fifth, you should require a written notice if the agreement terminates for any reason (whether expiration of time or cancellation without cause), else the parties will not have an incentive to send the checks until they run out of time. This is true even if the termination is only for one party.
Sixth, the joint check agreement template should state that it is a bilateral agreement (requiring both parties’ signatures). You add this because sometimes one party might try to allege later that they really only wanted a unilateral contract. Such a claim would require you to go back and prove that both parties really intended a bilateral agreement. Finally, the agreement should be governed by the laws of your state.
Advantages of a Joint Check Agreement
Joint check agreements are beneficial for everyone involved in the transaction. Subcontractors benefit by ensuring payment from both the general contractor and the property owner. Property owners benefit by protecting themselves against payment issues and potential legal disputes. General contractors benefit by protecting themselves against potential legal disputes with both the property owner and the subcontractor.
Without a joint check agreement, subcontractors are likely to file a mechanics lien against the property where the work is being performed if they are not paid. Mechanics liens give priority over most other types of liens and can cause a property owner to lose the entire property if it has to be sold to pay off the mechanics lien holders. Mechanics liens create legal disputes between property owners and contractors which could have been avoided by using a joint check agreement.
Subcontractors are likewise protecting themselves against a potential legal dispute with the property owner by entering into a joint check agreement. The property owner is going to have the subcontractor sign a waiver and release of lien before the check is issued. As a result, the subcontractor will not be able to file a mechanics lien if he does not receive payment.
Drafting a Joint Check Agreement
Resolving these issues is not as simple as it seems. A company cannot, for example, merely include language in its contract that dictates that the customer will make payments jointly to the borrower and the material supplier. If the contract does not contain language making this clear, then that provision would probably be an unenforceable unilateral alter ego modification.
Therefore, in many cases, a specific joint check agreement may need to be executed between the parties. It is important to note that courts require that joint check agreements be contained in separate documents. That is because a joint check agreement is, in effect, a third-party beneficiary contract, which frequently requires consent of a third party. So if the agreement is attached as a letter or part of a much lengthier agreement, the court might not be able to determine whether the third party has consented to the agreement or not.
Thus, the best practice is to draft the joint check agreement separately and not attach it as an addendum to another agreement. In addition, the joint check agreement should be provided to the third party, in this case the material supplier, before the contract is signed so that the third party can object to any terms. Finally, the material supplier should sign at the end of the contract and at the bottom of the joint check agreement to demonstrate assent to both documents.
A typical joint check agreement will have three signers on the line: The borrower, the customer and a representative of the material supplier. If the supplier is FEMA, as distinguished from FEMA’s authorized agent, the representative of the subcontractor will likely only sign the joint check agreement.
Common Errors in Joint Check Agreements
When it comes to joint check agreements, there are several common mistakes that parties should be aware of and avoid when drafting or using a joint check agreement template. Here are some of the most frequently made errors:
- Not obtaining a lien waiver: A joint check agreement provides a useful tool for a general contractor to use so that they can protect their own payment rights and make certain that they know their sub-subcontractor has been paid. However, it is still important for a general contractor to obtain a lien waiver from any subcontractor who will be receiving the joint check. Otherwise , a subsequent mechanic’s lien waiver may attach that does not contain any provision addressing the payment of prior amounts owed.
- Using a poorly written joint check agreement: There is a standard industry-used form for use as a joint check agreement. However, it is important to make sure that all names and references to the parties are accurate and that no spaces for information are left open.
- Failing to properly execute a joint check agreement: If a party executes the joint check agreement without properly having the other party sign the document at the same time that the checks are being delivered, this improperly formed joint check agreement may be void, regardless of whether the checks are exchanged in a timely manner.
Legal Considerations for Joint Check Agreements
The use of a joint check agreement template can provide a substantial amount of protection for all involved in a construction project. However, there are many legal implications involved. One major issue involves enforcement of the agreement. It is vital for all parties to understand that a specific joint check agreement template that is acceptable to the parties must be completely filled out and signed by all parties involved. Granting partial or complete payment to another party without having the appropriate paperwork on file can create significant problems down the line should a dispute arise.
Another legal problem that may arise between a contractor and subcontractor is the verification of work properly performed. It is not uncommon for a subcontractor to actually sign off on a check made to another party without ever having performed any work at all. This can create a serious accounting problem for contractors when a significant time lapse occurs between the time the joint check is executed and when it is presented for payment. When this situation arises, it is typically difficult to track down the subcontractor for confirmation on quality of work.
Third, problems may arise with regard to relationship between the contractor and supplier. Although a joint check agreement template may provide contractual vestiges that will protect suppliers, it is up to the parties to ensure that the agreement resonates proper enforceability in the event of litigation. Unfortunately, many suppliers who operate under a joint check agreement are unaware that their rights may be limited should a conflict ensue.
Fourth, the joint check agreement template may or may not bind the parties to arbitration to resolve any dispute over the contract. Indeed, if one of the parties does not choose to have a joint check agreement template drafted properly, the wording may actually result in a limitation on the creation of an arbitration clause. A court may be incapable of enforcing an arbitration clause should any party feel that the contract is not legally binding.
Fifth, if the state permits joint checks, yet utilizes specific statutory language, the parties may be able to use this language to provide leverage during contract dispute. By using the statutory language, the parties are essentially attempting to alter the state statute in order to resolve the dispute out of court. California is one such state where a conflict may arise.
Lastly, the parties may be perceived as having a tilt towards illegality should the necessary paperwork not be in place before a dispute arises. If one party feels that the other has violated the terms of the agreement, the validly created agreement will protect those relying upon it should the dispute end up in court.
Sample Joint Check Agreement Template
As with any business tool, organizations often make use of a standard form when dealing with a joint check agreement. An agreement in this form can be modified to suit the needs of the parties involved. These parties will typically include the material/labor provider and either the land owner or contractor.
A sample joint check agreement template may be available at Business Form Template. Examples of the wording could include:
Co-Maker agrees that it will pay Owner when due the total sum due under the subcontract to subcontractor to the extent of charges made under such agreement by subcontractor for labor and/or materials in the improvement on the property of Co-Maker and shall be jointly and severally liable therefor.
Any Co-Maker or subcontractor of subcontractor shall have the right (after 14 days’ notice to Co-Maker) to attach and garnish all accounts, receivables, or other claims from Co-Maker to subcontractor for all labor and materials arising out of the subcontractor with owner.
As discussed above, a joint check agreement is a convenient method of providing security for a seller’s receivables. The same benefit could be accomplished with a Personal Guaranty. However, if you believe that a joint check agreement is the best option, make sure you have a sufficient form; do it yourself forms are often lacking the nuances of Alabama law to be truly effective.
Real-world Uses for Joint Check Agreements
Joint check agreements can be used in many different situations, across most industries. Some of the clear examples of when a joint check agreement is appropriate are in the construction industry and the subcontractor / vendor relationship with a general contractor. For example, if a lumber supplier is delivering to various sites for a large general construction project, a lumber supplier may use a joint check agreement to protect its interest in the payment for all work it performs. This may include a correct delivery, receipt of material, and that its ledger is in order. Using such a joint check agreement will prevent any subcontractors from taking advantage of the lumber supplier and its ability to pay up front for any building materials, while at the same time require payment be remitted for materials on a frontend basis.
In addition to the construction industry, the manufacturing and healthcare industries also lend themselves well to joint check agreements. Many manufacturers use similar agreements with their suppliers in order to ensure both they and the subcontractors/suppliers are being paid for their contributions. In the healthcare industry , part suppliers also use these agreements.
If a hospital or major healthcare provider needs medical and surgical supplies for certain surgical procedures, the hospital will ask its supplier to use a joint check agreement. This is important so that if the patient’s insurance fails to pay for the procedure within the timeframe required, the hospital will not be liable and ultimately responsible for the amount owed to the medical/surgical supplier.
General contractors for large, multi-unit multi-million dollar housing projects will bid out the work to interested subcontractors, including dry wallers, masons, electric and plumbing contractors. A general contractor can provide a joint check agreement for projects of this size to everyone involved including the primary contractor for the work, any subcontractors and up the chain to any suppliers or sub-suppliers.
The perception is that joint check agreements are only used in larger scale industries and for higher value payments; however, they are certainly an effective tool for those concerned about payment issues and potential losses.