What do dual party payee checks have to do with contracts? The reality is sometimes you can run into situations where you either don’t trust the supplier or contractor to pay their subcontractors or they may not have the funds available to make the payment and you have a subcontractor that is critical to performance. Unless they get paid they may stop all work. As the buyer you cannot pay the subcontractor directly as you have no legal relationship with them. When you write a dual party payee check, neither of the payees can cash or deposit the check individually. One of the parties must endorse (sign) the check, and provide it to the other party for cashing or depositing. Since the supplier or contractor cannot get any benefit from it on their own, they will endorse the check over to the subcontractor. In construction contracting making sure that a subcontractor gets paid can have additional importance as in many locations unpaid subcontractors can place financial liens on the location for their protection using what is referred to as a mechanics or materialmans lien. To the owner this means that if the contractor fails to make payment, the owner could have to pay twice. One payment to the contractor and the other to have the lien removed.
Dual party payee checks frequently also may be used when the buyer or owner is either an “additional insured” or “loss payee” under the supplier or contractor’s insurances. As the insurance company’s primary contract relationship is with their policy holder they will always include the policy holder’s name on the check as a payee, but since the buyer or owner has the status as additional insured or loss payee, if they only paid the supplier or contractor and the contractor didn’t pay the buyer or owner, the buyer or owner could make a claim for payment against the insurance company. The insurance company could wind up paying twice. To avoid that potential situation they will use dual party payee checks to make sure the additional insured or loss payee gets paid.
Dual party payee checks are just another tool that contracts people should be aware of when you want to ensure that the subcontractor gets paid and you have serious concerns about the contractor paying them. For a subcontractor that gets paid this way, they can claim that they haven’t been paid, as you will have proof of payment by their endorsing the check.