The Appellate Division of the New Jersey Superior Court has ruled that a "joint check" agreement signed by a general contractor could form the basis for a lawsuit against the general contractor, after it issued a final payment directly to its subcontractor, contrary to the terms of the joint check agreement. The suit had been dismissed by the trial court, on the basis that there was no consideration for the agreement, and that the general contractor could not be bound by what was viewed as simply a letter confirming a voluntary, non-binding undertaking.
On appeal, the appellate court agreed with the plaintiff that there was sufficient indication of a binding agreement for the matter to proceed to trial. It found consideration in the fact that the plaintiff withheld taking any action against the subcontractor that owed it money for period of 14 months, during which time the subcontractor that owed the money became insolvent. In addition, the court held that the general contractor could be estopped from claiming a lack of consideration, based on it written promise to the plaintiff that "all monies owed to" the subcontractor would "not be paid to them directly." According to the court, a jury could find that the plaintiff reasonably relied on the contractor's commitment, even though the agreement was not entered into until after the subcontractor had become indebted to the plaintiff.
This case provides needed clarification concerning an arrangement that is commonly used in the construction industry. Joint check agreements are frequently employed with there is a question as to the financial stability of a subcontractor. Sometimes they are entered into before a project begins, but often they are prepared during a project, or as in this case, after the creditor has delivered goods or services to the subcontractor. Issues also arise as to whether the owner/contractor is permitted to deduct offsets or other claimed credits from amounts it is required to pay. This case does not address the latter question, but does reinforce the notion that the agreements will be enforceable, even when there is limited reliance on the agreement by the beneficiary.
Questions concerning this important development in law can be directed to Thomas A. Clark at the above, or at tclark@ccclaw.com