ROYAL LINES, INC., PETITIONER, VS. THE HON. COURT OF APPEALS AND THE NATIONAL SHIPYARDS AND STEEL CORPORATION, RESPONDENTS.

Royal Lines versus Court of Appeals and the National Shipyards and Steel Corporation

The Case

This is a petition for certiorari brought by Royal Lines, Incorporated against the Court of Appeals and the National Shipyards and Steel Corporation, which we shall call NASSCO. Royal Lines owned a yacht, the M/V Sea Belle, and engaged NASSCO by written contract to convert it into a passenger and cargo vessel for a stipulated price. When NASSCO later demanded payment for additional work done on the vessel, Royal Lines refused, invoking Article 1724 of the Civil Code and insisting that the extra work had never been authorized in writing. The case matters because it draws a clean line between the special rule governing construction on land and the general rules on contracts, and because it reminds us that a contract may be oral unless the law demands a special form.

Procedural History

NASSCO's demand was sustained by the trial court, and Royal Lines appealed. The Court of Appeals, in a split decision of three against two, affirmed the trial court. The appellate court held that Article 1724 of the Civil Code did not apply because that article refers only to structures on land and does not include vessels. Royal Lines then came to the Supreme Court on certiorari, raising a single assignment of error: the refusal of the Court of Appeals to apply Article 1724 of the Civil Code.

Facts

Royal Lines and NASSCO entered into a written contract for the conversion of the former's yacht, the M/V Sea Belle, into a passenger and cargo vessel, for the stipulated price of 121,980 pesos. Additional work was subsequently done on the ship. NASSCO then demanded the sum of 196,245 pesos and 37 centavos, representing the difference between the amount already paid by Royal Lines and the contract price.

Royal Lines rejected the demand. It claimed that it had not authorized the additional work in writing, as it said Article 1724 of the Civil Code required. It admitted that the additional work was done, but argued that the change had not been authorized in writing and that the additional price had not been determined in writing by both parties. It relied on two prior decisions where claims for additional work were rejected for want of written authorization.

NASSCO countered that Article 1724 refers only to buildings or structures constructed on land, and that all other matters fall under the general rules on contracts, under which no particular form is required. It added that the cases cited by Royal Lines involved buildings, not a vessel. The evidence showed that Royal Lines had sent Victorino Estrella and Steve Pierre to the NASSCO shipyard in Mariveles while the vessel was being repaired, and that these men represented Royal Lines when they requested the extra work.

Issues

• Whether or not Article 1724 of the Civil Code applies to additional work done upon a vessel, so as to require written authorization and a written determination of the additional price.
• Whether or not Royal Lines is liable for the additional work it admittedly received, under the general rules on contracts, even without a written supplemental agreement.

Applicable Provisions

Article 1724 of the Civil Code provides:

Article 1724. The contractor who undertakes to build a structure or any other work for a stipulated price, in conformity with plans and specifications agreed upon with the landowner can neither withdraw from the contract nor demand an increase in the price on account of the higher cost of labor or materials, save when there has been a change in the plans and specifications, provided: (1) Such change has been authorized by the proprietor in writing; and (2) The additional price to be paid to the contractor has been determined in writing by both parties.

This is the provision Royal Lines invoked, and its text, speaking of a structure built for a landowner, is the very reason the Court held it inapplicable to a vessel.

Article IV of the written contract of services between the parties provides:

During the performance of the work required on the vessel at the Bataan National Shipyard at Mariveles, Bataan, the OWNER, at his option may send an authorized representative to be present while the work is being performed. In the event that the OWNER requests for any modification, change, and or extra work to be performed on the vessel, which are not otherwise specified herein and which have not been included in the Specifications submitted by the BUILDER to the OWNER, the same shall be subject of another contract between the parties hereto.

This clause required a second contract for extra work, but it did not say that the second contract had to be in writing, which opened the door to the oral supplemental agreement the Court found.

Ruling

On the first issue, the Court held that there is no ambiguity in the language of Article 1724. Plainly, it refers to a structure or any other work to be built on land by agreement between the contractor and the landowner. It cannot apply to work done upon a vessel, which is not erected on land or owned by a landowner. Hence the article is not controlling in this case, and the Court of Appeals did not err in refusing to apply it.

On the second issue, the Court held that it does not follow that Royal Lines is absolved of liability for work it does not deny receiving. The applicable rules are the general rules on contracts. A contract is a meeting of minds between the parties and is perfected by mere consent, except in certain agreements such as deposit, pledge and commodatum. It may be entered into in whatever form, save where the law requires a document or other special form. As a general rule, therefore, the contract may be oral or written.

The Court reasoned that while the original contract of services was in writing, it does not follow that all supplements of that written contract should also be written. In stipulating that any modification, change or extra work shall be the subject of another contract, the parties did not necessarily or explicitly agree that the second contract should be in writing. The second contract could be merely verbal, as in fact it was, and was binding as long as it represented a meeting of minds. The Court accepted the finding that Estrella and Pierre represented Royal Lines when they requested the extra work. As for the consideration, the Court held that it can be determined in relation to a definite thing, or under the usage and customs of the place, or by leaving it to the judgment of the court in case of disagreement, and it accepted the appellate court's determination based on the evidence.

The Court closed with a sharp rebuke. It deplored the efforts of Royal Lines to evade a legitimate obligation for benefits it had admittedly received, calling it a shabby attempt to enrich oneself at the expense of another by a clever disowning of benefits while at the same time enjoying them. It warned against stilted readings of the law to suit one's motives, and reminded that the law does not permit this, and much less does equity.

Doctrine

Article 1724 of the Civil Code is a special rule that applies only to a structure or any other work built on land by agreement between the contractor and the landowner. It does not govern work done upon a vessel, because a vessel is not erected on land and is not owned by a landowner. For such work, the general rules on contracts govern.

Under the general rules, a contract is perfected by mere consent and may be entered into in whatever form, oral or written, unless the law requires a document or other special form. A written principal contract does not require that its supplements also be written, unless the parties expressly so stipulate. Where extra work is requested by the owner's authorized representatives and accepted, an oral supplemental contract arises and binds the parties, and the consideration may be fixed by reference to a definite thing, by usage and custom, or by the judgment of the court.

Disposition

The Court affirmed the decision of the Court of Appeals, with costs against Royal Lines.

Remember This

Memorize this line: Article 1724 applies only to structures on land, so extra work on a vessel is governed by the general rules on contracts, which allow an oral supplemental agreement. Examiners use this case to test the scope of Article 1724 and the rule that a contract may be in any form unless the law requires a special form.