Many construction contracts are written so that the owner will pay for labor
and materials by way of joint checks. In the typical scenario, a contractor will
submit a payment application itemizing work performed by various subcontractors
during that month's payment cycle. The owner will then issue checks payable jointly
to the general contractor and to the subcontractor whose work was listed on the
application. This process can work to the subcontractor's advantage, because it
prevents the general contractor from using payments earmarked for the
subcontractor to satisfy other obligations.
Unfortunately, joint check payments can also present problems to those
unfamiliar with the "Joint Check Rule," which states that when a supplier or
subcontractor endorses a check payable jointly to him and the general contractor,
he is presumed to have "received all sums then owed to him, even though he
actually may have received only part or none of the amounts owed to him." See
Brown Wholesale Electric, Inc. v. Beztak of Scottsdale, Inc., 163 Ariz. 340, 345
This Joint Check Rule presents a dilemma for suppliers and subcontractors,
because they have to endorse the check if they want to be paid at all. However, their
endorsement of the joint check creates a legal presumption that they have been paid
the full amount of the check, even if the general contractor has withheld retention
funds or has otherwise reduced the payment. The dilemma is magnified by the fact
that checks are usually issued for the prior month's work. By the time the check is
endorsed and payment made to the subcontractor, he has probably supplied even
more labor or materials to the project, which may be considered to be part of the
"sums then owed to him."
Fortunately, with some advance planning, a subcontractor can overcome this
incorrect presumption that he was paid everything owed up to the date the check
was endorsed. All that is required is an agreement with the owner and general
contractor that the endorsement of a joint check is more limited than the Joint Check
Rule presumes. The presumption will be disregarded if an "agreement exists
between the materialman [or subcontractor] and the owner or general contractor as
to allocation of the proceeds." 163 Ariz. at 343.
Therefore, a supplier or subcontractor should obtain a written agreement from
the owner and general contractor that his endorsement of the check is not an
acknowledgement of payment of everything owed at the time of the endorsement,
but is instead merely an acknowledgment of amounts actually paid. Failure to obtain
such an agreement places the subcontractor at risk of never getting paid for the
work not included in the joint check.
A subcontractor can benefit from joint checks, because they give him more
control over payments to the general contractor. With knowledge of how the
Joint Check Rule works, the subcontractor can also overcome the legal fiction
that he has been paid for work that was never included in the payment.