Joint Check Agreement Basics

COVID-19 has turned the world upside down in more ways than one, leaving different parties stuck and hung out to dry through no fault of their own. This black swan has crippled many businesses and individuals, with still many outcomes left to be known. While some larger companies such as Under Armour, Nike and Adidas have come out and said they will pay manufacturers and suppliers in full, many companies, large, small and everywhere in between, do not have the ability to be so generous.

The downstream flow of money and payments has no doubt been affected by COVID-19 with bankruptcy filings and the lot. Businesses have closed, supply chains have been broken and payments have slowed and fallen by the wayside. One industry, while shutdown for a small period of time has started to reopen, if it was ever stopped to begin with. As spring continues into summer, construction will pick up in parts of the U.S. slowed down due to seasonality. Though construction payments are typically slower than other sectors, the impact of COVID-19 was still felt.

Depending on the type of construction project, there are certain mechanisms that can be used to help secure payment, especially for those lower in the supply line. Suppliers and lower-tier subcontractors can rely on mechanic's liens and bond claims to try and lock down payment. Another tool credit professionals and potential lien and bond claimants can use is the joint check agreement (JCA).

"It's even more important now than ever to have contracts in order to protect you for payment given the rough seas we're experiencing and will continue to experience," said Karen Hart, Esq., partner with Bell Nunnally & Martin LLP, during a recent NACM webinar on JCAs.

JCAs are a check payment with typically one issuer made payable to two or more parties as co-payees and is a device used frequently in the construction industry. There are several main purposes for JCAs depending on the viewpoint. Among them are to protect the general contractor (GC) or surety from making double payment; protect the subcontractor's payment rights; and to keep the money and project moving forward. JCAs make sure money goes where it's supposed to go and helps up and downstream contractors get paid at the same time, in theory.

Without a formal agreement, there are risks including checks being deposited without proper endorsements and forcing owners and GCs to pay twice. There is also the "Joint Check Rule" that discharges the GC or surety from liability to lower-tier subs and suppliers once the joint check is issued. However, this rule depends on where the project is located. This can be "very scary" for lower-tier subs and suppliers, Hart said, if the project is located in a state that follows the rule.

It is better to enter a formal JCA since they are more predictable, certain and manageable. "The more control you can have, the better," she said. It is important to note that there are no standard JCAs, and they can vary widely depending on the project and the needs of the parties involved.

Some tips to remember for JCAs are:

• Clearly identify the parties and project
• Identify if the JCA is part of the subcontract
• Have a clear statement of consideration—extending credit/materials to the project in exchange for payment

As a lower-tier sub or supplier, some items to look for in JCAs are to have GCs required to issue joint checks; have the power of attorney to endorse the joint check on behalf of the sub; require the GC to deliver the joint check directly to the supplier; and to preserve lien or bond rights if funds are not received.

-Michael Miller, managing editor