By Jones Osborn II

Everyone involved in construction -- whether owner, developer, or contractor -- is concerned about mechanics' and materialmen's liens, and for good reason.

If a subcontractor or supplier is not paid, he will usually file a lien, often after the project has been completed and everyone is supposedly paid. The result is that someone -- usually the owner or general contractor -- gets stuck and must pay off the lien, thereby paying twice for the same work or materials. This can result in a large loss or even bankruptcy.

Joint Checks. To protect themselves, many owners, developers and contractors issue joint checks. That is, they make their checks payable to all contractors, subcontractors, and materialmen who are to be paid from the draw. Most contractors assume that this protects them from liens by anyone named on the check, even if they don't get lien waivers. A decision of the Arizona Supreme Court holds that this assumption is correct -- sometimes. (Brown Wholesale Electric Co. v. Beztak of Scottsdale, Inc., 163 Ariz. 340, 788 P.2d 73 (1990)).

Until this decision, no one really knew for sure whether a joint check furnished any protection at all against a mechanics' lien. The good news is that this decision does adopt the "joint check rule" in Arizona, which means that in most cases the owner or contractor is protected against liens by anyone named on a joint check, up to the amount of that check, even if they didn't get lien waivers. The bad news is that the decision creates a pitfall for those who ironically, try to be the most scrupulous.

Trap for the Unwary. The pitfall created by this decision is that the builder or contractor who specifies how much of each draw is to go to each subcontractor or supplier increases his risk of being liened. For example, the builder may note on a $10,000.00 check that $5,000.00 is allocated to XYZ Lumber Company. Under the Beztak decision, this builder takes on more risk than the builder who doesn't allocate, even though the purpose of the allocation is to insure that everyone gets paid. The same problem results if the owner has an agreement with the general contractor specifying how each draw is to be disbursed, or tells the general contractor how to distribute the check, and the subcontractor or materialman is aware of the agreement or instruction. Ironically, the less conscientious builder or developer who simply issues the joint check without specifying any allocation among the payees is entitled to full protection against liens from those named on the check, up to the amount of the check, while the builder who specifies the allocation on the check or by separate agreement does not always receive that protection.

This result is reached because the Court held that the subcontractor or materialman who has a check presented to him for endorsement must insure that he collects all the money he is then owed, or he loses his lien rights for the uncollected amount. However, if the check specifies his share or if he is aware of an agreement or instruction that only a specified portion of the check is his, he is required to take only that portion. He retains his lien rights as to the balance of his claim.

The problem this creates for the builder or contractor who makes specific allocations is that the builder thereby assumes the risk that the specified amount is wrong. For example, if clerical errors, change orders, price increases, mistakes as to the amount of work completed, or other reasons cause the amount allocated to a supplier or subcontractor to be in error, the issuer of the check will be exposed to liens for the shortage. On the other hand, the builder or contractor who simply issues joint checks without specific allocations is entitled to lien protection for all amounts then owed the subcontractor or supplier, up to the amount of the check.

Lesson of the Decision. The lesson of this decision for all Arizona owners, developers, and contractors is as follows: do issue joint checks whenever possible, but don't specify or agree how the check is to be allocated among the payees.

If you're the one being paid by joint check, do collect all money you are then owed (up to the greater of the amount of the check or the amount allocated to you) before signing and releasing the check.