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By David M. Henry, Esq.
Kohner, Mann & Kailas, S.C.
Milwaukee, Wisconsin

In the construction industry, joint check agreements are often used to enhance a contractor’s or material supplier’s chances of getting paid for labor or materials furnished in a construction project.  However, construction contractors and job owners who issue the joint checks and the contractors and material suppliers who expect to be paid by joint checks must be careful to ensure the proceeds of the joint check end up being paid to the intended recipient.  Too often, through a lack of proper precautions, the funds end up being diverted to another party and it can be costly and time consuming to rectify this preventable error.  Sometimes it may be impossible to do so.

Take the following situation as an example:  one of our clients sold materials to a subcontractor on a construction project, and pursuant to a joint check agreement our client anticipated being paid for the materials by a joint check issued by the general contractor.  While the general contractor issued the joint check payable to both our client and its customer (the subcontractor), the general contractor made the mistake of sending the joint check directly to the subcontractor instead of having the subcontractor come in to the general contractor’s office to endorse the joint check and then to ensure it was sent to our client.  Upon receipt of the joint check, the subcontractor added its endorsement to the joint check and deposited it into its bank account without our client’s endorsement.  Our client never saw the check.

Despite the fact that the joint check lacked our client’s endorsement, not only did the subcontractor’s bank erroneously accept the joint check for deposit, but the general contractor’s bank also erroneously paid the joint check. Neither the subcontractor’s bank nor the general contractor’s bank recognized that the joint check should not have been deposited or paid because our client had never endorsed it.

Not long after the subcontractor improperly obtained the proceeds of the joint check, the subcontractor went out of business.  Since our client was not aware that the joint check had been issued and paid to the subcontractor, our client contacted us and requested that we collect the open invoices for the materials it sold to the subcontractor for the construction project.  Among other things, we contacted the general contractor and we eventually were able to determine the general contractor had issued the joint check but that the subcontractor had obtained the proceeds by clearing the check without client’s endorsement.

Fortunately for our client, our legal research revealed that under applicable law both the subcontractor’s bank and the general contractor’s bank are liable to our client for accepting for deposit and paying the joint check to the subcontractor without our client’s endorsement.  After months of discussions and negotiations with the banks and counsel for the general contractor, the general contractor’s bank refunded the amount of the joint check to the general contractor and the general contractor then paid our client in full.  The banks are now left with the task of trying to get the money back from the subcontractor which is out of business.  This all could have been avoided, however, if the general contractor had simply required the subcontractor to come to its office and endorse the joint check and then the general contractor could simply have mailed it to our client.

If you have questions about joint checks or joint check agreements, contact David M. Henry, Esq. by  e-mail at dhenry@kmksc.com or by telephone at (414) 962-5110.

For more information about Kohner, Mann & Kailas, S.C., please visit the International Society of Primerus Law Firms.