ConstructionPro Week, Volume: 2 - Issue: 34 - 08/23/2013

When Three Parties Are Involved, Shouldn’t Proceeds Be Allocated?

By Bruce Jervis

 

The design and construction process primarily involves two-party agreements, a chain of contractual relationships. Sometimes, however, arrangements are created which involve three or more parties. Examples include claim sponsorship and joint check agreements. When these agreements fail to allocate financial proceeds, disputes follow. Two recent cases provide examples.

 

The first case involved a prime contractor’s sponsorship of a subcontractor delay claim against the project owner. The contractor eventually settled the dispute with the owner on behalf of itself and several subcontractors. But the settlement agreement was not itemized and did not allocate the proceeds among the multiple claimants. Litigation ensued.

 

The second case was a dispute over a joint check agreement which did not specify the division of the joint check proceeds between the two endorsers. A Texas court was asked to decide whether, by endorsing the check, a party was deemed to have had access to all of the proceeds.

 

Why did these agreements fail to address the allocation of the financial proceeds which were the core of the agreements? Inadvertence or carelessness is the best guess. But it raises a question. Shouldn’t agreements which contemplate the allocation of proceeds always stipulate a framework, if not a formula, for the division of those proceeds? It may not be possible to specify the division with mathematic precision, but it should be possible to state the parties’ assumptions and expectations. What practices have you observed in this regard, and what would you recommend? I invite your comments.

 

COMMENTS

In New York, the subcontractor's claim must be paid in full before the contractor can touch the money. Acting otherwise is a violation of Section 79-a, the dreaded section, because trust fund diversions are felonious larcenies. A joint check to the trade and contractor is presumed to be the trade's money. OF course, joint checks are simply stupid from the owner's perspective, since now you have given the trade an open door to sue the owner. This is a bad outcome.
Posted by: Kevin J. Connolly - Friday, August 23, 2013 10:25 AM


 









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