While joint checks and joint check agreements are common in the construction business, these agreements can actually be entered into by businesses in any industry. However, these tools are utilized far more in construction than anywhere else.
A joint check agreement is a contractual agreement between multiple parties whereby one party agrees to (or is given permission to) make payment jointly to two or more parties. Read on for a discussion of how joint checks are used in the construction business.
How Basic Joint Check Agreements Work
Joint check agreements are most common in the construction industry because so many tiers of parties participate on a typical construction project. This reality of the construction business just happens to perfectly fit with the joint check concept.
A joint check agreement is commonly entered into between a general contractor, a subcontractor and a material supplier. The supplier, being hired by the subcontractor, wants to protect itself against non-payment. All three parties agree that any payments made by the general contractor for work involving the supplier’s materials will be written jointly to the subcontractor and the material supplier.
With a joint check agreement in place, the material supplier is protected against the risk of the subcontractor not paying them, even after the sub received payment from the GC. The general contractor is protected from risk of the supplier not getting paid and filing a mechanics lien.
Without a joint check agreement in place, when work is completed, the prime contractor will pay the subcontractor for the work. The subcontractor will turn around and pay the supplier for the building material supplies that were involved in the work. Ideally, all parties get paid, but of course, there are inefficiencies and risks that interrupt the proper trickling down of construction payments.
Joint Check Agreements Exist By Contract And Not By Statute
Where does this “joint check” concept come from? Is there a federal or state statute to give contractors, owners and suppliers a guideline on how these agreements work? Is there some regulatory restrictions on what can be agreed upon within a joint check agreement?
Joint check agreements is not a creature of statute. In other words, there is no state or federal law that governs joint check agreements specifically or offers any guidelines.
To the contrary, joint check agreements are a creature of contract. In the United States, all parties have the general freedom to contract for whatever they want. The law only marginally restricts this freedom to prohibit folks from violating public policy (i.e. contracting into slavery, murder…or “no lien clauses”).
What does this mean?
It means that there is no such thing as a “standard joint check agreement.”
Accordingly, the parties to a joint check agreement can write the agreement any way they want. While this sounds nice and flexible, the result is that the industry is flooded with a ton of sample joint check agreements, and each of the samples would have sometimes significantly different effect. However, we have a resource that should help – please see below.
Download a Free Resource
We have a comprehensive Joint Check Agreement Guidebook available that is beneficial for any member of the construction industry, including project owners, general contractors, subs, suppliers, and more. To download your free copy, simply click below.