Contracts

Engr. Lito I. Mauro

Contract – meeting of minds between
two persons whereby one binds
himself, with respect to the other, to
give something or to render some
service.
Contract and obligation distinguished
Contract is one of the sources of
obligations.
On the other hand, obligation is the legal
tie or relation itself that exists after a
contract has been entered into.
There can be no contract if there is no
obligation.
But an obligation may exist without the
contract.
Contract and agreement distinguished.
Contracts are agreements enforceable
through legal proceedings.
Agreements which cannot be enforced by
action in the courts of justice (like an
agreement to go to a dance party) are not
contracts but merely moral or social
agreements.
A contract cannot be given effect if it is
contrary to law because law is superior
to a contract.
Contract must not be contrary to morals.
Morals deal with norms of good and right
conduct evolved in a community.
These norms may differ at different times
and places and with each group of people.
Ex.: An agreement that X is to render
service as a servant to Y without
compensations long as X has not paid his
debt is reprehensible and censurable. It is
also contrary to law.
Contract must not be contrary to
public order
Public order refers principally to public
safety although it has been considered
to mean also the public weal.
Ex.: A stipulation in a contract of lease
whereby the landlord can use force to
eject the tenant in case of failure of the
latter to pay the rent agreed upon is void
as being against public order.
Contract must not be contrary to public
policy.
Public policy is broader than public order,
as the former may refer not only to public
safety but also to considerations which
are moved by the common good.
Ex.: X stole the car of Y. Later, they
entered into a contract where Y will not
prosecute X in lieu of ₱50,000.
A contract is an agreement which gives
rise to obligations.
It must bind both parties in order that it
can be enforced against either.
Without this equality between the parties,
it cannot be said that the contract has
the force of law between them.
Ex.: S agreed to sell his car to B
for ₱100,000. The contract is
binding upon both contracting
parties and either of them can
enforce the contract against the
other.
Classification of contracts according to
perfection
a. Solemn contract – that which requires
compliance with certain formalities
prescribed by law. (e.g. donation of real
property which must be in a public
instrument)
b. Consensual contract – that which
is perfected by mere consent.
(e.g. sale, lease, agency)
c. Real contract –that which is
perfected by the delivery of the
thing subject matter of the
contract. (e.g. pledge)
Stages in the life of a contract
a. Preparation or negotiation – This
includes all the steps taken by the parties
leading to the perfection of the contract.
At this stage, the parties have not yet
arrived at any definite agreement.
b. Perfection or birth – This is when the
parties have come to a definite agreement
or meeting of the minds regarding the
subject matter and cause of the contract.
Consummation or termination – This is
when the parties have performed their
respective obligations and the contract
may be said to have been fully
accomplished or executed, resulting in
the extinguishments or termination
thereof.
Ex.: 1. S offers to sell his car to B for
₱100,000. B asks S to show him
the car. Later, S brings the car and
shows it to B. B offers to pay
₱80,000 for the car. Here, the
parties are taking all the steps that
may lead to the perfection of the
contract.
2. Now, if S agrees to sell the car for
₱80,000, the contract is perfected
because there is a meeting of the
minds upon the subject matter and
the cause of the contract.
3. The contract will be consummated after
S delivers the car to B and B pays
₱80,000. B becomes the owner of
the car and S, the owner of the
money paid by B.
As a general rule, a person is not
bound by the contract of another
of which he has no knowledge
or to which he has not given his
consent.
A contract involves the free will of
the parties and only he who
enters into the contract can be
bound thereby.
Essential Requisites of Contracts
There is no contract unless the following
requisites concur:
a. Consent of the contracting parties
b. Object certain which is the subject
matter of the contract
c. Cause of the obligation which is
established
Classes of elements of a contract
a. Essential elements – those without
which no contract can validly exist.
They are also known as requisites of a
contract.
They may be subdivided into:
Common – those present in all
contracts, namely, consent, object,
and cause.
Special – those not common to all
contracts or those which must be
present only in, or peculiar to, certain
specified contracts.
b. Natural elements – those that are
presumed to exist in certain contracts
unless the contrary is expressly
stipulated by the parties, like
warranty against eviction or warranty
against hidden defects in sale.
Accidental errors – or the particular
stipulations, clauses, terms, or
conditions established by the
parties in their contract like
conditions, period, interest,
penalty, etc.
And, therefore, they exist only when
they are expressly provided by
the parties.
Consent
Consent – the meeting of minds between the
parties on the subject matter and the cause
which are to constitute the contract.
Offer – a proposal made by one party to
another to enter into a contract. It is more
than an expression of desire or hope.
It is really a promise to act or to refrain from
acting on condition that the terms thereof
are accepted by the person (offeree) to
whom it is made.
The offer must be certain or definite so
that the liability (or the rights) of
the parties may be exactly fixed
because it is necessary that the
acceptance be identical with the
offer to create a contract.
Ex.:(a) “Will you buy this watch for
₱1,000?” This is an offer.
(b.) “I am willing to consider the sale of
my land to you for ₱150,000.”
The offer here is uncertain. Its acceptance
will not create a contract.
(c) “I am willing to buy you a car.”
There is no offer because it is
incomplete. No price is given.
Acceptance – the manifestation by the
offeree of his assent to the terms of the
offer.
Without acceptance, there can be no meeting
of the minds between two parties.
The acceptance of an offer must be absolute
or unqualified.
It must be identical in all respects with that
of the offer so as to produce consent or
meeting of the minds.
Ex.: S asked B: “Will you buy my
car for ₱150,000?” If B
answers “yes, I accept your
offer,” or “yes, I agree,” or
just “yes,” the acceptance of
B is absolute or unconditional.
The following cannot give consent to
a contract
a. unemancipated minors
b. insane or demented persons, and
deaf-mutes who do not know how
to write
Drunkenness and hypnotic spell impair
the capacity of a person to give
intelligent consent. These conditions
are equivalent to temporary insanity.
Contracts entered into during a lucid
interval
Lucid interval – a temporary period of
sanity. A contract entered into by an
insane or demented person during a
lucid interval is valid.
It must be shown, however, that there is a
full return of the mind to sanity as to
enable him to understand the contract
he is entering into.
Under the Rules of Court, the following are
considered incompetents and may be
placed under guardianship
a. persons suffering the accessory penalty of
civil interdiction
b. hospitalized lepers
c. prodigals
d. deaf and dumb who are unable to read
and write
e. those who are of unsound mind even
though they have lucid intervals
f. those who, by reason of age, disease,
weak mind and other similar causes,
cannot, without outside aid, take care
of themselves and manage their
property, becoming thereby an easy
prey for deceit and exploitation
Characteristics of consent
a. It must be intelligent – there is
capacity to act.
b. It is free and voluntary – there is no
vitiation of consent by reason of
violence or intimidation.
c. It is conscious or spontaneous – there
is no vitiation of consent by reason
of mistake, undue influence, or
fraud.
Vices of consent
a. error or mistake
b. violence or force
c. intimidation or threat or duress
d. undue influence
e. fraud or deceit
Mistake or error – the false notion
of a thing or a fact material to
the contract.
Violence requires the employment of
physical force.
For intimidation to vitiate the consent of
a party to a contract, the following
requisites should be present
a. It must produce a reasonable and
well-grounded fear of an evil.
b. The evil must be imminent and grave.
c. The evil must be upon his person or
property, or that of his spouse,
descendants, or ascendants.
d. It is the reason why he enters into the
contract.
Ex.: If X signs the document because a
gun is pointed at him by Y who
threatens to kill him and he has no
reason to believe that Y will not carry
out his threat, the intimidation would
vitiate consent. But if X was merely
intimidated that he would be shot by
Y and the latter had no gun at the
time of the threat, there is no
intimidation.
All things which are not outside the
commerce of men, including future
things, may be the object of a
contract.
Requisites of things as object of contract
In order that things may be the object of a
contract, the following requisites must
occur:
a. It must not be impossible, legally or
physically.
b. The thing must be within the commerce
of men, that is, it can legally be the
subject of commercial transaction.
c. It must be in existence or capable of
coming into existence.
d. It must be determinate or determinable
without the need of a new contract
between the parties.
Requisites of services as object of contract
In order that service may be the object of a
contract, the following requisites must
occur:
a. The service must be within the commerce
of men.
b. It must not be impossible, physically or
legally.
c. It must be determinate or capable of being
made determinate.
Rights as object of contract
Ex.: a. Outside the commerce of men –
Things of public ownership such as
sidewalks, public places, bridges, etc.,
things that are common to everybody
such as air, sunlight, rain, etc.
b. Impossible, physically and legally –
Prohibited drugs and all illicit objects,
to kill a person
 c. Determinate things – All the sacks of
rice in a bodega,; my land with the
smallest area; the land at the corner of
a particular street.
d. Future things or rights – Things to be
manufactured, raised, or acquired after
the perfection of the contract such as
wine that a vineyard is expected to
produce; rice to be harvested next
harvesting season; young animals not
yet in existence, etc.
Cause of Contracts
Cause (causa) – the essential or more
proximate purpose which the
contracting parties have in view
at the time of entering into the
contract.
Ex.: X sells a watch to Y for ₱5,000. As far
as X (the seller) is concerned, the
subject matter or object is the watch
and the cause is the price. As regards Y
(buyer), the subject matter or object is
the price and the cause is the watch.
The cause of X is the delivery of the price
and for Y, the delivery of the watch.
But for both X and Y, the subject matter of
the transaction is the watch.
Classification of contracts according to
cause
a. Onerous – one the cause of which, for
each contracting party is the
prestation or promise of a thing or
service by the other.
In this contract, the parties are
reciprocally obligated to each other.
Ex.: Sale; lease of thing; partnership
b. Remuneratory or remunerative – one
the cause of which is the service or
benefit which remunerated.
The purpose of the contract is to reward
the service that had been previously
rendered by the party remunerated.
Ex.: X rendered service as the defense
counsel of Y who agreed to pay X
₱10,000 for said services.
c. Gratuitous – one the cause of which is
the mere liberality of the benefactor
or giver.
Ex.: Pure donation
Requisites of cause
a. It must exist at the time the contract
is entered into.
b. It must be lawful.
c. It must be true or real.
Effect of absence of cause
Absence or want of cause means that
there is a total lack of any valid
consideration for the contract.
Contracts without cause confer no right
and produce no legal effect
whatever. Thus, a contract which is
absolutely simulated or fictitious is
inexistence and void.
Form of Contracts
The form of contract refers to the manner in
which a contract is executed or manifested.
The contract may be oral, or in writing, or
partly or and partly in writing.
Classification of contracts according to
form
a. Informal or common contract – that
which may be entered into in whatever
form provided all the essential requisites
for their validity are present.
b. Formal or solemn contract – that
which is required by law for its efficacy
to be in a certain specified form.
Contracts which must appear in a public
document
A public document or instrument is one
which is acknowledged before a notary
public or any official authorized to
administer oath, by the person who
executed the same.
a. Creation, etc., of real rights over
immovable property.
Ex.: As security for his debt, D
mortgaged his land to C. This mortgage
must appear in a public document. The
extinguishments of the mortgage, upon
payment of the debt by D, must
likewise appear in a public document
b. Cession or renunciation of hereditary
rights or those of conjugal
partnership of gains.
Ex.: X and Y are the heirs of Z, their
deceased father. X, being
financially stable, renounces his
share in the inheritance. This
renunciation must appear in a
public document.
• Power to administer property.
Ex.: X is leaving for the U.S. to study
for 2 years. He appoints Y, agent, to
manage his property. In this case,
the authority of Y to administer the
property of X must appear in a
public document.
• Cession (surrendering) of actions or
rights.
Ex.: D mortgaged his land to C to secure the
payment of a debt. This mortgage appears
in a public document. The cession by C of
his right, as mortgagee, to D must also be
in a public document.
Interpretation of a contract – the
determination of the meaning of the
terms or words used by the parties in
their contract.
Ex. A contract was executed between S and B. The
contract recites that it is a sale of parcel of land
belonging to S for ₱500,000. In the contract, S is
the vendor and B, the vendee. The terms of the
contract are clear and it does not appear from the
circumstances that the intention of the parties is
contrary to the literal meaning of said terms.
Therefore, the contract should be considered a
contract of sale. No interpretation should be
given which would alter or change the plain
meaning of the wording thereof, it not being
lawful to make a new contract between the
parties.
Voidable or annullable contracts are those
which possess all the essential requisites
of a valid contract but one of the parties
is incapable of giving consent.
Ratification cleanses the contract from all its
defects from the moment it was constituted.
Unenforceable contracts are those that
cannot be enforced in court or sued upon
by reason of defects provided by law
until and unless they are ratified
according to law.
Unauthorized contracts are those entered
into in the name of another person by
one who has been given no authority or
legal representation or who has acted
beyond his powers.
Voidable contracts are valid contracts until
annulled unless there has been a
ratification. These are those which
possess all the essential requisites of a
valid contract but one of the parties is
incapable of giving consent.
Rescissible contracts are valid contracts
because all the essential requisites of
a contract exist but by reason of
injury or damage to one of the
parties or to third persons, such as
creditors, the contract may be
rescinded.
Ex.: G is the guardian of M (a minor). G
sells the property of M worth ₱200,000
for only ₱150,000. The contract of sale
cannot be rescinded because the lesion
(injury) is not more than ¼ . However,
if the property is sold for less than
₱150,000, M can rescind the sale by
proper action in court upon reaching
the age of majority.
Void or inexistent contracts are
absolutely null and void. Void
contracts have no effect at all and
cannot be ratified.
Rescission is a remedy granted by law to
the contracting parties and sometimes
even to third persons in order to
secure reparation of damages caused
them by a valid contract.
Types of contracts
Contract is made after business
arrangement is set.
In construction of an architectural or
engineering work, it requires a
group or organization of expert of
various trade and related works to
implement such complex
undertaking and carry out the
work.
A. The Lump-Sum contract.
The oldest and most common method of
letting work under contract is by
receiving competitive bids with
fixed prices. It is commonly
referred to as “Hard Dollar
contracts”.
The contractor agrees to perform a stipulated
job of work in exchange for a fixed sum of
money. The satisfactory completion of the
work for the stated amount remains the
obligation of the contractor, regardless of
the difficulties and troubles that may be
experienced in the course of construction
activities and even though the total cost of
the work may turn out to be greater than
the contract price.
This type of contract is popular with owners
for the obvious reason that the total cost
of the project is known in advance.
Advantages
• The cost is known before the work began.
• Though the actual cost maybe high, a
definite limit is fixed.
• The responsibilities related to work are
carried by the contractor.
Disadvantages
• It may lead to exorbitant payments for
any extra work required.
•New work may be done on labor and
material basis but usually laborers
tend to be in efficient knowing their
work benefits only their employer.
• It gives no information as to
what the contractor regards as
a fair price for each item of
the work to perform, on
which deductions omitted and
extra payments be based.
B. Contract for Cost-Plus-a-Percentage
The most common method used to obviate the
difficulties of the fixed price contract is to
pay the contractor the actual cost of the
construction work with a specified
percentage as compensation for his
overhead expenses, personal services, and
profits. It does not provide any direct
incentive for the contractor to minimize
construction costs. Rather, it seems to work
the other way.
Advantages
• The owner will pay only such costs as
are actually incurred.
• As the risk or hazard of construction is
entirely removed from the contractor,
the owner can secure his services with
the advantages of his skill and
experience.
Disadvantages
• Every increase in cost increases
the amount payable to the
contractor.
• A contractor might be tempted to
deliberately increase the cost
notwithstanding his moral
obligations
C. Contract for Cost-Plus-a-Fixed Sum
This is a substitute from a percentage to
a fixed sum where the contractor can
not profit by any increase in cost.
It secures the greatest returns for the
contractor by keeping the least
expenditures of time and money for
the owner.
When this scheme is utilized, the work must
be of such a nature that it can be fairly
well defined and a reasonably good
estimate of cost can be approximated.
The contractor computes the amount of
the fee on the basis of the size of the
project, estimated time of construction,
nature and complexity of the work,
hazards involved, location of the project,
equipment and manpower requirements,
etc.
Advantages
• This type of contract eliminates
certain objectionable terms of the
percentage form of contract.
• The contractor, to secure the greatest
returns, will keep the least
expenditures of time and money
for the owner.
Disadvantages
• Quality of work might suffer just
to keep the least expenditures of
time and money for the owner.
• Since the contract will just be
receiving a fixed sum aside from
contract for cost, he might become
lax in fulfilling the contract.
D. Contract for Cost-Plus-a-Variable
Premium
This is a contract where the contractor
undertakes to complete the work for a fixed
sum and in a definite time.
He will be paid in addition to the sum a stated
premium which is reduced or increased
accordingly as the actual cost and time of
completion are greater or less than the
stipulated costs and time of completion.
Advantages
• The owner can determine the final
cost as almost as closely as under the
lump sum contract.
• If the cost of the work is less than
the estimate, the owner is benefited
to the extent one-half the amount
saved. The other half is paid to the
contractor as an extra premium
earned.
Disadvantages
• If the cost of the work increases, the
owner pays half the additional cost and
the other half is deducted from the
contractor’s premium. This is also true
with the time of completion, wherein
an equivalent amount per day will be
shared either as an increase or decrease
for two parties.
• The estimated cost may be
high and the time of
completion too great, that
the contractor may secure an
unfair premium by his
ability to reduce the cost and
time below his estimated.
E. Construction by the Direct
Employment
The responsibility for the cost and
construction is placed on a group
created by the owner or governmental
body wherein results depend mainly
on their efficiency.
Advantages
• The operation is said to be flexible
and the owner has control over the
operation.
• The owner can choose materials that
exactly suit his desires without any
detailed plans and specifications and
contract.
• In case required, the
construction maybe started
before the details on plans
and specifications have
been completed thereby
delay is sometimes
avoided.
Disadvantages
• There is always a danger of
interference in the personnel of
the organization that will
seriously handicap and injure
the efficiency.
• Personal responsibility is often
minimal or missing for
accomplishing proper work at
the lowest cost since no personal
incentive or gain to keep in
maintaining construction cost at
lower price.
• It is difficult for the owner to retain
skilled workers. There are often hard
times in looking for good
superintendents and foremen since at
normal times very seldom will accept
temporary jobs.
• Tools and equipment acquired will be
sold at lower prices after the
completion of work.
F. The Unit-Price Contract
It is based on estimated quantities of
defined items of work and costs per unit
amount of each of these work items.
The owner compiles the estimated
quantities, and the unit costs are those
bid by the contractor for carrying out the
stipulated work in accordance with the
contract documents.
The total sum of money paid to the
contractor for each work item remains
an indeterminable factor until
completion of the project, because
payment is made to the contractor
based on units of work actually done
and measured in the field.
The owner does not know the exact
ultimate cost of the construction until
completion of the project.
G. Cost-Plus-Fee Contract
This is an open-ended contract in the sense
that the total construction cost to the
owner cannot be known until completion
of the project.
When the drawings and specifications are
not complete at the time of contract
negotiation, the owner and contractor
negotiate what is called a ‘scope
contract’.
Four important considerations
• A definite and mutually agreeable
subcontract – letting procedure
should be arranged.
• There must be a clearly understood
agreement concerning the
determination and payment of the
contractor’s fee.
• A common understanding
regarding the accounting
methods to be followed is
essential.
• A list of job costs to be
reimbursable to the contractor
should be set forth.
Contract Documents
a. Advertisement, or request for bids
b. Instruction to bidders
c. Proposal
d. General conditions
e. Supplementary conditions
f. Drawings
g. Technical Specifications
h. Proposal
i. Bid Bond j. Agreement
k. Performance Bond
Lowest responsible bidder – the lowest
bidder whose offer best responds in
quality, fitness, and capacity to
fulfill the particular requirements of
the proposed work and with the
terms of the contract.
Agreement – document specifically
designed to formalize the
construction contract.
It acts as a single instrument that
brings together all of the
contract segments by reference,
and it functions for the formal
execution of the contract.
Progress payments. It is normally neither
practicable nor desirable for the
contractor to finance the construction
from its own resources.
In lump-sum contracts, the degree of
completion of each major work
category is usually expressed as a
percentage.
Fixed-price contracts commonly
require the contractor to submit
applications for payment at least
10 days before the date
established for each progress
payment.
The quantities of work done on unit-
price contracts are determined by
the field measurement of work put
in place.
Cost-plus contracts usually provide
for the contractor to submit
payment vouchers to the owner at
specified intervals during the life
of the contract.
Many contracts provide that if
the owner does not make
timely payments to the
contractor as required, the
contractor has the option of
stopping the work.
Owner supplied & excluded items.
This part of the contract describes the
materials excluded in the scope of
the Contractor and instead will be
supplied by Owner in accordance
with the construction schedule.
In case where delivery of Owner
Supplied Materials is delayed and
the Contractor is forced to advance
its own material, all costs, handling
charges and surcharges for such
materials as advanced by the
Contractor for the Owner shall be
for the account of the Owner.
Scope of works.
Scope of works is the performance or
service to be rendered by the
Contractor under such agreement
until completion or delivery of
the project as stipulated in the
contract documents.
Contract price – the amount in
money or other consideration
to be paid by the Owner to
the Contractor for the
execution of the work in
accordance with the contract.
Adjustment of contract price
Adjustment of contract price takes
place under such agreement in
scope there are change orders or
variation orders from the original
scope of works as stipulated in the
contract and contract document.
Change order is a written order to
the contractor issued by the
Owner after the execution of
the contract authorizing a
change or variation in the work
or an adjustment in the
contract price or contract time.
Terms of payment – describes how the
down payment, progress billing,
retention and release of retention
are being paid by the Owner.
There are certain insurance and surety
required to be submitted to the
Owner prior to Contractor’s claim
of payment.
Time of completion – the period
of time allowed by the
Contractor for the
completion of the project or
any stipulated portion
thereof.
Failure to complete works.
In case of delay in the completion and
turnover of contract works, the
Contractor shall pay the Owner
liquidated damages under the
contracted computations but not
greater than the percentage of
contract price set forth.
Retainage
Many construction contracts
provide that the owner will
retain a certain percentage of
the progress payments.
A retainage of 10% is typical.
The Warranty Period
One year is a commonly specified
warranty period, although periods of
up to 5 years are sometimes required
to make good, at its own expense,
defects detected during this period.
Contract Time
When the contract time is stated to be a
given number of calendar days, the
date on which the time begins is an
important matter.
Construction contracts usually state that
the time will begin on the date the
contract is signed or on the date the
contractor receives a formal ‘notice to
proceed’.
Liquidated Damages
An advantage to the use of a
liquidated damage provision in
a construction contract is the
possible avoidance of
subsequent litigation between
owner and contractor.
Acceleration – refers to the
owner’s directing the prime
contractor to accelerate its
performance to complete
the project at an earlier date
than the current rate of
work advancement will
permit.
Differing site condition, or changed
condition, or concealed condition –
refers to some physical aspect of
the project or its site that differs
materially from that indicated by
the contract documents or that is of
an unusual nature and differs
materially from the conditions
ordinarily encountered.
Owner-Caused Delay
Examples include delays in making the site
available to the contractor, failure to
deliver owner-provided materials on
time, unreasonable delays in the
approval of shop drawings, delays
caused by another contractor, delays in
issuance of change orders, and
suspension of the work because of
financial or legal difficulties.
Value Engineering
It is applied after the contract is
awarded and is concerned with the
elimination or modification of any
contract provision that cost to a
project but is not necessary to the
structure’s required performance,
safety or maintenance.
Termination of the Contract
a. Material breach of contract by either party
b. Default and failure to perform under the
contract
c. Mutual agreement of both parties
d. By giving the contractor written notice to
this effect
Subcontract – an agreement between a
prime contractor and a subcontractor under
which the subcontractor agrees to perform
a certain specialized part of the work.
Purchase order – a written document
that defines and prescribes the
conditions pertaining to a purchase
of materials, supplies, equipment,
machinery, and similar goods.
Contractor’s responsibility for
accidents and damages
a. Safeguard to be undertaken by the
contractor. Contractor shall take all
necessary precautions for the safety
of employees and workmen on the
work and comply with all laws to
prevent injury to persons on, about
or adjacent to the premises where
the works is being performed.
 b. Owner not to be responsible
The contractor shall render the owner free
and harmless for the death of the disease
contracted or injury received by the
contractor or any of his employees or
laborers, for any damage done by or to
contractor’ plant or materials from any
source or cause and damages caused by
him or his employees to adjacent
property.
c. Contractor’s default
The owner shall have the right to
undertake reasonable safety and
protection measures in case of
contractor’s default and charge
the cost of such measures to the
contractor.
Contract bond form – a simple
document that makes no attempt to
describe in detail the specific liabilities
of the surety.
The bond can be invoked by the owner
only if the contractor is in breach of
contract.
Performance bond – acts primarily
for the protection of the owner. It
guarantees that the contract will
be performed and that the owner
will receive its structure, built in
substantial accordance with the
terms of the contract.
Payment bond – acts primarily for the
protection of third parties to the
contract and guarantees payment for
labor and materials used or supplied in
the performance of the construction.
Indemnity of surety
Under the bond, the surety indemnifies
the owner against default by the
contractor.
They in turn must indemnify the surety
against any claim that may be
brought against the surety because of
the contractor’s failure to perform in
the prescribed manner.
Contractor’s insurance and bonds
a. Contractor’s Liability Insurance
The contractor shall secure and maintain
insurance coverage from an insurance
company acceptable to the owner as
will protect himself, his sub-contractors
and the owner from claims for bodily
injury, death or property damage which
may arise under the contract.
b. Accident Insurance for Workers
The contractor shall, in additional to
compulsory coverage of workers under
the Workmen’s Compensation Law,
obtain insurance coverage for accidental
death or injury of his employees and
laborers without regard to their tenure
and employment.
c. Contractor’s fire insurance
In addition to such Fire Insurance as the
contractor elects for his work, he shall
secure and maintain the policies upon
such structures and materials and such
amounts as shall be designed in the
joint names of the Contractor and the
Owner as their respective interest may
appear.
d. Contractor’s Performance and
Payment Bonds
The contractor, prior to signing the
contract, shall furnish a Performance
Bond equal to 15% of the contract
amount for the faithful performance of
his work and 15% bond covering
contractor’s obligations from the
contract to its workers, subcontractors
and suppliers.
e. Contractor’s Guarantee Bond
The Performance and Payment Bonds will be
released by the Owner upon posting by the
contractor of a Guarantee Bond equivalent
to the amount of the retention released to
the contractor.
The Guarantee bond shall be for a period of
1 year commencing from the date of
posting as a guarantee that all materials
and workmanship installed under the
contract are of acceptable quality.
 Owner’s Responsibilities and Liabilities
a. Advance payment
An advance payment in an amount to be
mutually agreed upon shall be paid by the
owner to the contractor, provided that the
contractor shall post a surety bond of
equivalent amount callable on demand and
acceptable to the owner to guarantee its
repayment.
The contractor shall use the
advance payment for mobilization
purchase of materials and the like
for the project.
This shall be recouped pro rata in
the progress billing.
b. Protection of Employees and
Professionals performing services for
the owner
The owner shall be responsible for and
shall maintain such insurance as will
protect him from liability for personal
injury including disease and death of
persons under his employ or service
whether as temporary or permanent in
status that are assigned to the project.
c. Owner’s optional insurance
The owner may maintain such
insurance as will protect him
from his contingent liability for
damages, for personal injury,
including death, which may arise
from the work under the
contract.
Other warranties or responsibilities of the
contractor a. In case of any defect or
defects in workmanship or materials which
may become apparent in the course of the
construction, the contractor, upon the
request of the owner, shall attest own
expense, tear down and replace such portion
of the work done and/or materials installed
that as in the owner’s reasonable option, are
unsound or defective, or not in accordance
with plans and specifications.
b. The hereby does warrant and guarantee
that all the materials to be supplied
by it under this agreement are new,
first class, free from defect and shall
fully comply in every respect with
the specifications, approved samples
and other requirements of the
contract plans and other related
contract documents.
c. The contractor guarantee and shall maintain
the stability of all works, equipment and
materials furnished and keep the same in
good repair and condition for a period of 1
year after issuance of final in good repair
and condition for a period of 1 year after
issuance of final acceptance of the work by
the owner. Defects appearing during this
period or any damages resulting from such
defects shall be corrected without expense
to the owner.