Sunday, May 20, 2012

Dual Party Payee Checks

Ever have a situation where you need a subcontractor to do something but they won’t because they haven’t been paid by the prime? Have you had the situation where you don’t trust that the prime will make payment to the subcontractor? If you were to pay the subcontractor directly, the prime could still demand payment from you, as it’s a contract obligation you have with them and you do not have privity of contract with the sub-contractor.

An approach that works is to make it dual party payee check. In a dual party payee check you would include the prime contractor’s name, the subcontractors and include “and” between the two names so it’s clear that the check needs to be endorsed by both parties. If you simply listed both parties on the check and didn’t include “and” technically either could deposit or cash it, although banking institutions may require both parties endorse the check.

When you write the check to Contractor A and Subcontractor B, the use of “and” requires both parties to endorse the check for it to be deposited or cashed. When you do this, since one of the payees on the check was the contractor you have the endorsed check as proof of payment to them. The prime contractor alone cannot cash or use the check, they need the endorsement by the subcontractor. The subcontractor won’t endorse the check unless they get the proceeds. Once the subcontractor endorses the check, you have proof of payment to them from the perspective of managing against potential liens or claims for non-payment by the contractor.

If the contractor refuses to endorse the check and provide that to the subcontractor for their endorsement and use, you lose nothing. They can’t cash the check and you still have the funds to deal with any potential claims in the future.