G.R. No. 26482, March 31, 1927
In the matter of the involuntary insolvency of Romulo Machetti. EL HOSPICIO DE SAN JOSE, claimant-appellee, vs. FINDLAY MILLAR TIMBER CO., ET AL., objectors-appellants.

FACTS

Romulo Machetti, a building contractor, entered into two contracts with El Hospicio de San Jose (Hospicio) for the construction of a building and warehouses. The contracts stipulated that monthly progress payments equivalent to 80% of the work done would be made upon certification by Hospicio’s architects, with the remaining 20% to be withheld until final acceptance of the completed work. After substantial payments were made based on the architects’ certificates, the City Engineer found the building to be defectively constructed and unsafe. An expert, W.J. Odom, was hired to remedy the defects, which included beams without steel reinforcement, cracked slabs, bulging walls, and faulty foundations. The cost of repairs amounted to P57,342.37. Additionally, Hospicio claimed penalties for construction delays amounting to P95,000, from which P28,000 in accrued rentals were deducted, leaving a net claim of P67,000. Hospicio filed a claim in Machetti’s insolvency proceedings for a total of P124,342.37 (repair costs plus net penalties). The insolvency court allowed the claim. Other creditors (Findlay Millar Timber Co., et al.) opposed, arguing that the architects’ progress certificates estopped Hospicio from claiming defective work.

ISSUE

Are the architects’ progress payment certificates, issued under the construction contract, conclusive and thus estop the owner (Hospicio) from later claiming that the work was defectively performed?

RULING

No. The Supreme Court affirmed the allowance of Hospicio’s claim. The contract provisions for progress payments based on architects’ certificates were intended primarily to regulate installment payments and did not contain an express stipulation making such certificates final and conclusive as to the contractor’s full compliance with the contract terms. At most, the certificates created a prima facie presumption that the work was satisfactory, but this presumption was overcome by clear and convincing evidence of substantial and hidden defects. The 20% retention clause itself anticipated the possibility of discovering defects before final acceptance. The massive and latent nature of the construction failures, as detailed by expert testimony, justified Hospicio’s claim for damages (cost of repairs) and enforceable delay penalties.