Joint check arrangements are useful business tools. They assure the prime contractor of a steady flow of materials to the job site. They enable the subcontractor to establish a supplier account the sub may otherwise be unable to maintain. They protect the supplier against subcontractor misallocation of payments received from the prime. What they do not do is convert the prime contractor into a guarantor of subcontractor payment to the supplier. This is what the Virginia Supreme Court recently got wrong.
The controversial 4-3 decision, reported in this issue, held a prime contractor liable to a lower-tier supplier for unpaid invoices the supplier had submitted to a subcontractor. The ruling came even though the supplier was on notice that the prime assumed no such obligation. The ruling came despite the fact the prime paid the subcontractor in full for the labor and materials the sub furnished to the project.
The majority opinion displayed a lack of understanding of fixed-price construction contracting as well as the allocation of risk on the contractual chain. The ruling bailed out a supplier that had imprudently delivered materials on a past-due account and forced the prime contractor to pay twice for those materials. Most significantly, the ruling cast doubt and uncertainty on the use of joint check arrangements in Virginia.
The other case in this issue involved a public project owner’s right to terminate a contractor for default. Under the terms of the contract, the contractor was entitled to a notice of breach and 15 days to cure the breach. The owner was not entitled to default the contractor for safety problems the contractor had cured prior to expiration of the cure period.