CE 163

Civil Engineering Laws, Contracts & Ethics

Department of Civil Engineering

UP Los Baños
 2.7 Issues Related to Contracts

2.7.1 Mistakes in contracts

• Mistakes as to facts
• Mistakes in mutual understanding
(common mistake)
• Mistake by one party known to the other
(unilateral mistake)

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 2.7 Issues Related to Contracts

Mistakes as to facts

Can either be attributed to:

a) provision of wrong facts
b) wrong interpretation of correct information

Does not generally make contract voidable

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 2.7 Issues Related to Contracts

Mistakes in mutual understanding

(common mistake)

ART 1334. When consent arises based on mutual

error and the real purpose of the parties is frustrated
(means there is no meeting of the minds), contract
would be void

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 2.7 Issues Related to Contracts

Mistakes in mutual understanding

(common mistake)

Example #1: owner who thought he had a good title and

proceeded to engage a contractor to build a structure,
only to find out that the land was actually leased (title is
not good); then the building contract would be void

Example #2: if owner is offering to sell an item, and

recipient accepts them thinking the items are being
donated; then agreement must be set aside

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 2.7 Issues Related to Contracts

Mistake by one party known to the other (unilateral

mistake)

Can create a problem if it relates to an essential term of

the contract

Example #1: owner accepts the offer from a contractor

who made a mistake in his offered price; contractor
could have the contract voided IF he can show that the
owner knew about the mistake

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 2.7 Issues Related to Contracts

2.7.2 Rectification of mistakes in construction

(industry) contracts

Can be classified into two categories

Mistakes in the legal sense or definition, examples:
Identity of parties
Nature of the contract

Non-legal mistakes
Misinterpretation of the motives of one party
Misjudgment of the effects of clearly stated terms

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 2.7 Issues Related to Contracts

2.7.3 Mechanic’s lien registration

if one party contracts to sell goods or services to

a second party, the first party expects to be paid

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 2.7 Issues Related to Contracts

Rights of the first party

if second party fails to pay; (has the right to) start action
to recover value of his losses

if second party is insolvent; (join other creditors and)

hope for a share of whatever money can be obtained
from the second party

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 2.7 Issues Related to Contracts

Means of providing security (as a condition of the contract)

contractor: bid bond, and performance bonds
owner: rights to the land

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 2.7 Issues Related to Contracts

Effects of the mechanic’s lien registration

provide necessary security by protecting the interest of
the contractor (and their employees)
assist those who provide service to obtain payment

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 2.7 Issues Related to Contracts

Rights created by the mechanic’s lien registration

• rights to place a ‘lien’ (or claim for the building and

keep the property pending payment of a debt)

• for workmen and subcontractors: right to be paid for

work done or goods provided

money paid by the owner to the contractor is

considered to be held in trust; and that the money is
not to be used by them UNTIL all workers are paid
full for the value of the work done up to that point

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 2.7 Issues Related to Contracts

Rights crated by the mechanics lien registration

• empowers the owner to hold back a small percentage

(usually 15%; referred to as retention fee) of the money
owed to the contractor until the end of the contract

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 2.7 Issues Related to Contracts

Retention fee

• purpose: satisfy lien claims not paid off by the

contractor

• if no claim is made, released within a short period

of time (say 30 days) after the end of the contract

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 2.7 Issues Related to Contracts

Disadvantages of the retention fee

• slows down the flow of money
• causes loss of interest: consider and compare
possible losses of an excavation vis-à-vis painting
subcontractor
• creates false sense of security: in some cases,
actual losses sustained may be greater than the
15% being held back (seldom equal)