Joint Check Arrangements and What They Prove

Joint checks are the standard commercial response to payment risk on construction projects. A prime contractor uncertain that its subcontractor will pay a supplier issues an instrument payable to both together, so that the supplier must participate in the transaction before the funds can be used. The mechanism is simple, effective and the source of a doctrine that regularly costs suppliers more than the arrangement was worth.

How the instrument works

The negotiable instruments rules distinguish between payees named alternatively and payees named together. If an instrument is payable to two or more persons alternatively, it is payable to any of them and may be negotiated, discharged or enforced by any or all of them in possession. If it is payable to two or more persons not alternatively, it is payable to all of them and may be negotiated, discharged or enforced only by all of them.

That distinction turns on the words on the face of the instrument, and the rule supplies a tie-breaker: where an instrument payable to two or more persons is ambiguous as to whether it is payable alternatively, it is treated as payable alternatively. A drawer intending joint payment must therefore say so unambiguously, because a formulation that leaves the question open permits either payee to negotiate the instrument alone.

Where an instrument requiring both endorsements is nevertheless paid on one, the omitted payee has a conversion claim under the negotiable instruments rules against the party that took or paid the instrument, and the underlying obligation may not have been discharged. Banks accordingly examine endorsements on these instruments, and the omitted payee's remedy exists independently of any construction statute.

The presumption that follows endorsement

The commercially significant doctrine is not in the instruments rules at all. Under what is generally called the joint check rule, a supplier that endorses a check on which it is named as a joint payee is presumed to have received the amount of that check on account of what it was owed for the project, regardless of how the payees actually divided the funds between themselves. A supplier that endorses a substantial instrument and takes only part of the proceeds may find the whole face amount credited against its claim.

States differ on the strength of the presumption. In some it is rebuttable by evidence of a contrary agreement or of the actual application of the funds. In others it operates close to conclusively, on the reasoning that the supplier had the power to insist on its share and chose not to exercise it. Because the rule is a creature of state decisional law rather than statute, its content must be established for the jurisdiction governing the project.

The rationale for the rule explains its edges. It rests on the idea that a joint payee has effective control: the funds cannot move without its participation, so a payee that allows them to move without securing its share has made a choice. Applied to a supplier that received nothing, the reasoning is harsh, which is why several courts confine the presumption to the amount the supplier could have insisted on, or admit evidence of an agreement allocating proceeds among several projects.

Documenting the arrangement

A written joint check agreement removes most of the uncertainty. It should identify the project, the parties and the invoices to which proceeds will be applied; state whether the supplier's account has priority over other claims of the subcontractor; provide for the treatment of any surplus; and state expressly whether the party issuing the checks assumes any direct obligation to the supplier. Absent that last term, the practice of issuing joint checks is generally treated as a payment mechanism rather than as a promise to pay the supplier's account.

The releases exchanged alongside the payment require equal attention. California prescribes statutory forms and provides that a waiver given in exchange for a progress payment is void unless it follows the prescribed form, expressly contemplating that a joint payee check may be what is given in exchange. Using the conditional form, which takes effect only on receipt of payment, and listing disputed items as exceptions preserves what the joint check did not cover.

Where a supplier serves the same customer on several projects at once, the allocation term becomes the whole point of the document. Without it, proceeds from an instrument drawn on one project may be applied against the oldest balance on the account, which could belong to a different job entirely. That application leaves the bonded project unpaid while the supplier has endorsed an instrument that a surety will later characterize as payment for it.

How the arrangement affects a bond claim

Sureties raise joint checks as a payment defense, and it is one of the more effective ones because it rests on the claimant's own endorsement. A claimant meeting that defense must produce the reconciliation described in proving the claim and the records that support it, showing the amount actually received and the invoices to which it was applied. Where the presumption is rebuttable, that record is the rebuttal; where it is not, the claim is reduced regardless.

Two limits on the defense deserve mention. It reduces the claim only to the extent of the instruments actually endorsed, so it does not answer charges accrued afterward. And it cannot be converted into a general release of bond rights, since a waiver of the right to sue on a required federal payment bond is void unless made in writing, signed by the person whose right is waived, and executed after that person furnished labor or material. The full sequence of objections a surety assembles is set out in defenses the surety will raise, and whether the arrangement was needed at all depends on the position established in who may claim, by tier.