Construction Management ResourceMichael King
October 24, 2012 — 1,552 views
QUESTION: When multiple parties are entitled to portions of one payment, how do you make sure the right persons get the right amounts?
ANSWER: Joint checks may be the answer depending upon whether federal law or state law applies to your situation.
You want to pay what you owe, but you want to make sure that the right amounts of money go to those entitled to payment. You certainly don’t want to run the risk of paying twice because the money went to the wrong person! So, what do you do?
One of the most common places for the wrong party to get the wrong money is in the construction industry. Cash poor subcontractors can be notorious for “robbing Peter to pay Paul” and leaving suppliers unpaid.
The construction lender, owner, or general contractor wants to make sure that all of the consultants, subcontractors and material suppliers are paid in full. As the Arizona Supreme Court has said, “[t]he owner should not have to pay the same debt twice.” Brown Wholesale Electric Co. v. Beztak, 788 P.2d 73 (Ariz. 1990).
But why would there be a risk of paying twice? In most states, construction liens provide those who improve real property with encumbrances against the property to make sure they get paid for their labor or materials provided to the project. Similarly, on public construction projects, there will usually be surety bonds to make sure that all of the subcontractors and suppliers get paid. If the subcontractor takes all of the money and doesn’t pay the material supplier, the material supplier probably still has a bond claim or a lien claim. Either way, the general contractor may have to pay twice.
The Joint Check Rule As State Law
Pretty much all states have adopted the joint check rule to provide lenders, owners and general contractors with the ability to protect against unpaid lien claimants. What is the joint check rule?
“When a subcontractor and his materialman are joint payees, and no agreement exists with the owner or general contractor as to allocation of proceeds, the materialman by endorsing the check will be deemed to have received the money due him.”
Post-Bros. Construction Co. v. Yoder, 569 P.2d 133 (Cal. 1977). As the Arizona Supreme Court commented in the Brown Wholesale Electric case, “The joint check rule reflects a widespread practice in the construction industry that allows owners and general contractors to protect themselves from lien foreclosure by materialmen whom subcontractors have failed to pay.”
You make the check jointly payable to both the subcontractor and materialman by using the word “and” between the two names. Neither party can cash the check without the endorsement of the other party. The owner forces the subcontractor and materialman to agree on who receives what. Ideally, joint checks protect all parties because everyone has an interest in making sure that everyone in the construction chain is paid what is owed.
The joint check rule works because “the materialman, by endorsing the check, will be deemed to have been paid the money due him, up to the amount of the joint check.” If the supplier fails to take all of the money to which it is due, it accepts the risk of not being paid by the subcontractor.
Of course, this only works if the lender, owner or general contractor has actually paid the full amount due. “The purpose of the rule, however, is to protect the general contractor from having to pay twice, not enable him to avoid paying once.”
Federal Surety Bond Law is Different
The participants in a public works construction project do not have lien rights, however. Governments don’t allow liens on government property. Instead, most public projects protect laborers and suppliers with surety bond claims. The potential for the general contractor to have to pay twice still exists on government projects, however. If the subcontractor gets paid, but does not pay the material supplier, and the material supplier protects its bond claim, double payment may be required from the general contractor.
Keep in mind that a surety bond is not like insurance. If the surety pays the bond claim, it will expect to be reimbursed by the contractor who posted the payment bond.
Why wouldn’t federal courts be equally concerned about protecting the general contractor from paying twice? The federal courts have generally rejected the joint check rule in Miller Act bonded public works cases because of the “congressional intent to protect those whose labor and materials go into public projects.” Clifford F. MacEvoy Co. v. United States, 322 U.S. 102 (1944).
Seemingly, the joint check rule could be used to protect subcontractors and material suppliers on public works projects in the same manner that the joint check rule protects all parties to the construction project on private projects. Nevertheless, the result is different.
Any time you are concerned about making sure you are paying the right amount to the right party and only paying once, please call me.
GAMMAGE & BURNHAM, P.L.C.
(602) 256-4405 [email protected]
Gammage & Burnham
Mike King is a founding partner of Gammage and Burnham, Attorneys at Law, a well known legal firm in Phoenix Arizona. His practice emphasizes business and corporate law.