One unique facet of construction industry contracts is the joint check agreement. This is an agreement between two or more parties that states they must all sign off on a payment check in order to deposit it. This is designed to protect subcontractors and material suppliers from non-payment. However, the level of protection afforded actually depends a lot on the details of how the agreement is worded.
A common example of this is a supplier to a subcontractor wanting to ensure they are paid when the general contractor is paid. The parties enter into a joint check agreement such that when the general contractor pays the subcontractor, the check is written both to the subcontractor and the material supplier. Both parties then have to sign off on the check in order for it to be deposited, which the material supplier will do when they are assured of payment.
“Pay When Paid” Clauses
These agreements are a tradition of the industry and are not governed by statute. As such, there is no inherent protection against poorly worded agreements that come back and bite those they aim to protect. The rules of how the agreement operates are contained within the body of the contract, so you want to read it carefully and make sure the joint check agreement doesn’t have a built-in “pay when paid” clause that cuts against you.
In some situations, this clause is worded where the subcontractor in our example above is only obligated to pay if they receive payment from the general contractor, so if they aren’t paid, they have no obligation to pay their suppliers. This is a problem if you’ve already performed the work as, with this clause, until they are paid, they have no requirement to pay you.
Clauses worked to pay when paid means that the subcontractor is obligated to pay suppliers once payment is received. So again, if payment from the general contractor is delayed, then payment to suppliers is delayed. However, this clause provides a timing mechanism on when payment is owed and, once the first payment is made, it starts the clock on when the rest of the payments are made.
An Agreement That Protects Your Right to Be Paid
These seem like basically the same thing, you get paid when the subcontractor gets paid, but the difference between if and when, while subtle, can matter. With the first version, the pay if paid clause, both parties share the risk when the owner fails to pay. If the first party doesn’t pay, the supplier is unlikely to be able to collect from the subcontractor.
With the second version, the pay when paid, since this is considered merely a timing mechanism, the risk is not shared and, regardless of whether the subcontractor has been paid, the supplier can, after a reasonable time sue for payment. This is a subtle difference, but it’s the kind of thing a good construction attorney will be on the lookout for.
There are many more reasons to be careful with joint check agreements. You may want to have an experienced construction attorney on call that can look at the agreement and tell you exactly what it means. In these situations, the team at National Lien & Bond can not only help you review agreements, we can also negotiate agreements to make sure they work for you.
This blog is for educational purposes only and not intended for legal advice.