Plains Builders, Inc. v. Steel Source, Inc.
2013 Tex. App. LEXIS 9430, 2013 WL 3945925, 408 S.W.3d 596 (2013)
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Rule of Law:
A joint check agreement is an enforceable contract, and a general contractor's unilateral decision to cease issuing joint checks at a subcontractor's request constitutes a breach. Such an agreement does not, by itself, create the 'direct contractual relationship' required to excuse a sub-subcontractor from the additional notice requirements for payment bond claims under the Texas McGregor Act.
Facts:
- Plains Builders, a general contractor, subcontracted with Construction Services for a public works project.
- Construction Services then entered into a subcontract with Steel Source for a portion of the labor and materials.
- Plains Builders, Construction Services, and Steel Source executed a three-party joint check agreement requiring all payments from Plains Builders to be made by cashier's checks payable jointly to both Construction Services and Steel Source.
- After several joint checks were issued, Construction Services demanded and received a portion of the proceeds back from Steel Source upon endorsement.
- Construction Services then sent a letter to Plains Builders, without Steel Source's knowledge, unilaterally stating it was discontinuing the joint check agreement.
- Following receipt of the letter, Plains Builders stopped issuing joint checks and instead made payments solely to Construction Services or jointly to Construction Services and another supplier.
- Plains Builders ultimately terminated Construction Services from the project, at which point Steel Source was still owed a significant amount for its work and materials.
Procedural Posture:
- Steel Source sued Plains Builders (general contractor), Travelers (surety), and Construction Services (subcontractor) in a Texas state trial court.
- A default judgment was entered against Construction Services.
- Steel Source filed a motion for summary judgment on its claim that Plains Builders breached the joint check agreement.
- The trial court granted a partial summary judgment in favor of Steel Source on the issue of liability, reserving the determination of damages for trial.
- Following a bench trial, the court entered a final judgment awarding Steel Source $80,000 from Plains Builders for the breach of contract and $33,000 from Plains Builders and Travelers on a payment bond claim.
- Plains Builders and Travelers appealed to the Court of Appeals of Texas, and Steel Source filed a cross-appeal challenging the damage award.
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Issue:
Does a general contractor breach an enforceable joint check agreement by ceasing joint payments at the unilateral request of a subcontractor, thus becoming liable to the sub-subcontractor for resulting damages?
Opinions:
Majority - Justice James T. Campbell
Yes. A general contractor breaches an enforceable joint check agreement by ceasing joint payments at the unilateral request of a subcontractor. The court found that the joint check agreement was a valid contract supported by sufficient consideration, as it provided Plains Builders with security against bond claims and gave Steel Source assurance of payment. Plains Builders breached this agreement when it honored Construction Services' unilateral termination letter and stopped including Steel Source as a payee. The court rejected Plains Builders' affirmative defenses, including payment under the 'joint check rule,' finding the rule inapplicable to a breach of contract claim where the agreement itself did not specify how proceeds were to be allocated. The court also held that Steel Source's claim under the McGregor Act payment bond failed because the joint check agreement did not create a 'direct contractual relationship for public work labor or material,' meaning Steel Source was required to give additional statutory notice, which it failed to do in a timely manner.
Analysis:
This decision solidifies the status of joint check agreements in Texas as independently enforceable contracts, holding general contractors to their promise to issue joint payments. It significantly curtails the 'joint check rule' defense in breach of contract actions, placing the burden on payors to either draft allocation terms into the agreement or strictly adhere to the joint payment requirement. The ruling also clarifies the scope of the McGregor Act, establishing that a payment mechanism like a joint check agreement does not substitute for a direct contract for labor or materials, thereby reinforcing the strict statutory notice requirements for lower-tier subcontractors on public projects.
