Trust and reputation are essential in the construction industry, both of which take time and experience to develop. Sometimes, especially for newer contractors trying to hang their shingle, lack of existing trust and reputation become impediments in procuring new work and developing relationships. For this exact reason, the construction industry often relies on mechanisms such as joint cheque agreements (“JCA”), to create a level of comfort between established subcontractors/trades and new contractors.
What is a JCA?
A JCA is an agreement between three parties that establishes a manner of payment. For example, suppose an owner (A) wants to hire a contractor (B) who recently started operating and lacks the necessary reputation/relationships to complete a project. (A) may now have trouble finding subcontractors (C) who would be willing to take the risk and enter into a contractual relationship with (B), given that (B) has not yet established their reputation in terms of payment consistency/frequency/etc.
As such, a JCA is a risk-mitigating mechanism that gives comfort to (C) that if, for whatever reason, (B) does not or cannot pay (C), (C) can look to (A) to have (A) pay (C) directly for (C)’s supply of services and materials without (C) having to turn to (B) for payment. However, this payment would be limited to whatever (A) already owes (B) with respect to the services and materials supplied by (C) to (B).[1]
Inquiries stemming from JCAs
The Construction Act explicitly establishes two sorts of agreements: 1) Contracts, being prime contracts between an Owner and the Contractor; and 2) Subcontracts, being any agreement between the Contractor and a Subcontractor, or between two or more Subcontractors.[2] As outlined, a JCA effectively creates an agreement between the Owner, the Contractor, and a Subcontractor. Does that mean that a JCA is then a Contract between the Owner and a Subcontractor?
As always, the answer is: it depends – namely on the purpose of the JCA. Where the only purpose of the JCA is to establish an agreement as to the manner of payment, the JCA will not be deemed to be a Contract between the Owner and Subcontractor.[3] In order for a JCA to create this relationship, the Subcontractor will have to demonstrate that the JCA also establishes an agreement for the sale or supply of services and/or materials.[4]
Further, parties may, in their JCAs, establish that the JCA will not create any liability between (A) and (C). This term must be explicitly put in writing to truly limit liability from (A) to (C) as being the purpose of the agreement.[5] In those cases, (A)’s liability to (C) would be limited to the holdback obligations imposed onto (A) pursuant to Sections 22 and 23 of the Construction Act.
Lessons from JCAs
While not always creating avenues for contractual enforcement, JCAs are still useful in confirming that money paid to a Contractor will reach a particular Subcontractor to ensure that that Subcontractor will continue providing services and materials to a project. As such, when contemplating a JCA, consider:
- The extent to which Owner(s) want to be involved in making payments to Subcontractors;
- Whether it may make more sense to insist on a direct contract between the Owner and Subcontractor, depending on the nature of the services being provided; and
- Whether there are other methods of ensuring that money is paid to Subcontractors, such as the new prompt-payment regime.
The foregoing is for informational purposes only and should in no way be relied upon as legal advice. If you have any further questions, or would like to schedule an appointment for legal advice tailored to your circumstances and business, please contact me at dan@fridmar.com.
[1] Liteco v. Nova Scotia (Transportation and Infrastructure Renewal), 2017 NSSC 304.
[2] Construction Act, R.S.O. 1990, c. C.30, as amended, s. 1 (1).
[3] Ottawa Acoustic Supply (1998) Co. v. Tomic Construction Ltd. (1994), 1994 CarswellOnt 7041 at para. 2 (Ont. Gen. Div.).
[4] Ibid.
[5] Protosteel Industries Ltd. v. 1355902 Ontario Ltd.(2009), 2009 CarswellOnt 9675 at paras. 93 and 95.
