diff --git a/presentation-compiler/src/main/scala/org/alephium/ralph/lsp/pc/workspace/build/BuildValidator.scala b/presentation-compiler/src/main/scala/org/alephium/ralph/lsp/pc/workspace/build/BuildValidator.scala
index f85ff3427..7f4032a52 100644
--- a/presentation-compiler/src/main/scala/org/alephium/ralph/lsp/pc/workspace/build/BuildValidator.scala
+++ b/presentation-compiler/src/main/scala/org/alephium/ralph/lsp/pc/workspace/build/BuildValidator.scala
@@ -38,10 +38,10 @@ object BuildValidator {
   /** Validate that the configured paths are within the workspace directory */
   private def validatePathsInWorkspace(parsed: BuildParsed): Option[BuildState.BuildErrored] = {
     // absolute source paths
-    val (workspacePath, absoluteContractPath, absoluteArtifactPath, _) =
+    val (workspacePath, absoluteContractPath, absoluteArtifactPath, absoluteDependencyPath) =
       Build.getAbsolutePaths(parsed)
 
-    val (contractPathIndex, artifactPathIndex, _) =
+    val (contractPathIndex, artifactPathIndex, dependencyPathIndex) =
       Build.getPathIndexes(parsed)
 
     val errors =
@@ -63,6 +63,17 @@ object BuildValidator {
           index = artifactPathIndex
         )
 
+    // Validate: DependencyPath and ContractPath should not overlap
+    absoluteDependencyPath foreach {
+      absoluteDependencyPath =>
+        if (URIUtil.contains(absoluteContractPath, absoluteDependencyPath) || URIUtil.contains(absoluteDependencyPath, absoluteContractPath)) {
+          // TODO: When `contractPath` and `dependencyPath` are identical then both errors will have the same index, which means
+          //       both errors get reported at the same field. This will be fixed when an AST is available in issue #17.
+          errors addOne ErrorDependencyPathIsWithinContractPath(index = contractPathIndex)
+          errors addOne ErrorDependencyPathIsWithinContractPath(index = dependencyPathIndex)
+        }
+    }
+
     // Check if errors exists
     if (errors.isEmpty)
       None
diff --git a/presentation-compiler/src/main/scala/org/alephium/ralph/lsp/pc/workspace/build/error/ErrorDependencyPathIsWithinContractPath.scala b/presentation-compiler/src/main/scala/org/alephium/ralph/lsp/pc/workspace/build/error/ErrorDependencyPathIsWithinContractPath.scala
new file mode 100644
index 000000000..99564ce92
--- /dev/null
+++ b/presentation-compiler/src/main/scala/org/alephium/ralph/lsp/pc/workspace/build/error/ErrorDependencyPathIsWithinContractPath.scala
@@ -0,0 +1,8 @@
+package org.alephium.ralph.lsp.pc.workspace.build.error
+
+import org.alephium.ralph.lsp.access.compiler.message.{CompilerMessage, SourceIndex}
+
+case class ErrorDependencyPathIsWithinContractPath(index: SourceIndex) extends CompilerMessage.Error {
+  override def message: String =
+    "`dependencyPath` and `contractPath` cannot be identical to or nested within each other. Make sure that they are distinct and do not overlap."
+}
diff --git a/presentation-compiler/src/test/scala/org/alephium/ralph/lsp/pc/workspace/build/BuildValidatorSpec.scala b/presentation-compiler/src/test/scala/org/alephium/ralph/lsp/pc/workspace/build/BuildValidatorSpec.scala
index c85cef31d..83ce5eb35 100644
--- a/presentation-compiler/src/test/scala/org/alephium/ralph/lsp/pc/workspace/build/BuildValidatorSpec.scala
+++ b/presentation-compiler/src/test/scala/org/alephium/ralph/lsp/pc/workspace/build/BuildValidatorSpec.scala
@@ -1,15 +1,19 @@
 package org.alephium.ralph.lsp.pc.workspace.build
 
+import org.alephium.ralph.lsp.access.compiler.message.SourceIndex
 import org.alephium.ralph.lsp.access.file.FileAccess
+import org.alephium.ralph.lsp.pc.workspace.build.error.ErrorDependencyPathIsWithinContractPath
+import org.scalatest.OptionValues._
+import org.scalatest.TryValues.convertTryToSuccessOrFailure
 import org.scalatest.matchers.should.Matchers
 import org.scalatest.wordspec.AnyWordSpec
-import org.scalatest.TryValues.convertTryToSuccessOrFailure
 
 import java.nio.file.Files
+import scala.collection.immutable.ArraySeq
 
 class BuildValidatorSpec extends AnyWordSpec with Matchers {
 
-  "BuildValidator" should {
+  "validate" should {
     "normalize path" in {
       val config1 = RalphcConfig.defaultParsedConfig.copy(
         contractPath = "contracts",
@@ -46,5 +50,114 @@ class BuildValidatorSpec extends AnyWordSpec with Matchers {
 
       BuildValidator.validate(parsed1) shouldBe BuildValidator.validate(parsed2)
     }
+
+    "Fail: contractPath and dependencyPath" when {
+      def doTest(config: RalphcConfig.RalphcParsedConfig) = {
+        // create a build file for the config
+        val build =
+          TestBuild
+            .genParsed(config = config)
+            .sample
+            .get
+
+        TestBuild persist build
+
+        implicit val file: FileAccess =
+          FileAccess.disk
+
+        val actual =
+          BuildValidator.validate(build)
+
+        // errors should reported for both the field
+        actual.value.errors should contain theSameElementsAs
+          ArraySeq(
+            // error for field dependencyPath
+            ErrorDependencyPathIsWithinContractPath(SourceIndex(build.code.lastIndexOf(config.dependencyPath.value), config.dependencyPath.value.length)),
+            // error for field contractPath
+            ErrorDependencyPathIsWithinContractPath(SourceIndex(build.code.lastIndexOf(config.contractPath), config.contractPath.length))
+          )
+
+        TestBuild delete build
+      }
+
+      "they are identical" in {
+        val config =
+          RalphcConfig.defaultParsedConfig.copy(
+            contractPath = "contracts",
+            artifactPath = "artifacts",
+            dependencyPath = Some("contracts")
+          )
+
+        doTest(config)
+      }
+
+      "contractPath is within dependencyPath" in {
+        val config =
+          RalphcConfig.defaultParsedConfig.copy(
+            contractPath = "dependencies/contracts",
+            artifactPath = "artifacts",
+            dependencyPath = Some("dependencies")
+          )
+
+        doTest(config)
+      }
+
+      "dependencyPath is within contractPath" in {
+        val config =
+          RalphcConfig.defaultParsedConfig.copy(
+            contractPath = "contracts",
+            artifactPath = "artifacts",
+            dependencyPath = Some("contracts/dependencies")
+          )
+
+        doTest(config)
+      }
+    }
+
+    "Pass: contractPath and dependencyPath" when {
+      def doTest(config: RalphcConfig.RalphcParsedConfig) = {
+        // create a build file for the config
+        val build =
+          TestBuild
+            .genParsed(config = config)
+            .sample
+            .get
+
+        TestBuild persist build
+
+        implicit val file: FileAccess =
+          FileAccess.disk
+
+        val actual =
+          BuildValidator.validate(build)
+
+        // expect no errors
+        actual shouldBe empty
+
+        TestBuild delete build
+      }
+
+      "they are distinct" in {
+        val config =
+          RalphcConfig.defaultParsedConfig.copy(
+            contractPath = "contracts",
+            artifactPath = "artifacts",
+            dependencyPath = Some("dependencies")
+          )
+
+        doTest(config)
+      }
+
+      "they are distinct within a root folder" in {
+        val config =
+          RalphcConfig.defaultParsedConfig.copy(
+            contractPath = "my_code/contracts",
+            artifactPath = "artifacts",
+            dependencyPath = Some("my_code/dependencies")
+          )
+
+        doTest(config)
+      }
+    }
   }
 }