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 based on the certification of Hospicio’s architects, with the remaining 20% to be withheld until final acceptance of the completed work. After substantial payments were made, the City Engineer’s inspection revealed the building was defectively constructed and unsafe. Hospicio hired another contractor, W.J. Odom, to remedy the extensive defects, which involved rebuilding major structural elements like beams, columns, foundations, and slabs at a cost of P57,342.37. Hospicio also claimed penalties for construction delays amounting to P95,000, which was later reduced by P28,000 (rentals Hospicio earned from the property), leaving a net penalty of P67,000. In Machetti’s insolvency proceedings, Hospicio filed a claim for P124,342.37 (the sum of repair costs and net penalties). The referee and the trial court allowed the claim. Other creditors (Findlay Millar Timber Co., et al.) opposed, arguing that Hospicio was estopped from questioning the quality of work since it had made progress payments based on its architects’ certifications.

ISSUE

Is El Hospicio de San Jose estopped from claiming that the construction work was defective and recovering damages, since it made progress payments based on the certification of its own architects?

RULING

No. The Supreme Court affirmed the trial court’s order allowing Hospicio’s claim. The contractual provisions for progress payments based on architects’ certificates did not make those certificates final and conclusive as to the contractor’s full compliance with the contract. The certificates created only a *prima facie* presumption that the work was satisfactory, primarily for the purpose of regulating installment payments. The contract expressly allowed the retention of 20% of the contract price to cover defects discoverable before final acceptance. The massive and largely hidden structural defects (e.g., beams without steel, unstable foundations, bulging walls) constituted a fundamental breach that went to the very safety and integrity of the building, which the architects’ periodic certifications could not conclusively waive. Therefore, Hospicio was not estopped and was entitled to recover the costs incurred to remedy the defects and the stipulated penalties for delay.