Maglasang Vs.

Northwestern University
FACTS:

ISSUE:

Northwestern University (Northwestern), a maritime-related educational

institution, engaged the services of GL Enterprises to install a new Integrated
Bridge System (IBS) in Laoag City. This IBS was required by Commission on
Higher Education (CHED) as training laboratory for students so the school
could offer maritime transportation programs.
Respondent required petitioner to make the IBS comply with CHED and the
International Maritime Organization (IMO) standards. Because of this, parties
executed two contracts. Both of the contracts contain the same condition:
a) The IBS to be installed and its components must be compliant with
IMO and CHEDs standards and with manuals for simulators/major
equipments;
b) Contracts may be terminated if one party commits a breach;
c) Any dispute must first be settled mutually between parties, if not,
may resort to courts of law.
Northwestern paid P1M as down payment. Then petitioner assumed
possession of the IBS. Two (2) months after execution, petitioner delivered to
respondent the materials for installation but halted because the respondents
found the equipment were substandard, old, did not have instruction
manuals and warranty. Some of the machine appears to be reconditioned
and did not meet the IMO standards.
Respondent demanded petitioner to comply with the agreement however the
latter filed a complaint for breach of contract and prayed for the payment
of the remaining balance of P1.9M with damages. Petitioner alleged breach
when respondent ordered the installation to be stopped.
Trial Court ruled both parties to be at fault. Northwestern unduly halted
operations; GL Enterprises breach by delivery of substandard equipment and
it did not comply with the IMO and CHED standards as required in the
agreement. Hence, ordering the contract as impossible and dissolved by
mutual consent. Both parties appealed.
CA ruled it was petitioners delivery of defective equipment that breached
the contracts, thereby affirming TCs order of mutual rescission.
Whether or not substantial breach was committed by petitioner.

HELD:
Yes. The power to rescind obligations of the injured parties is implied in
reciprocal ones, In case one of the obligors should not comply with what is
incumbent upon him. Applying Art. 1191 of the Civil Code.
Supreme Court affirmed that GL Enterprise breached the contracts
without justification. The two (2) contracts require substantial breach before they

can be rescinded. However, the contracts did not define substantial breach. In the
case at bar, it was explicitly agreed that materials shall be compliant with the IMO
and CHED standards and must be complete with manuals. The intention was to
replace the old IBS for CHEDs accreditation. It was incumbent on petitioner to
supply the components that would effectively facilitate the learning of students.
However, GL Enterprise failed to meet its responsibility and did not refute that the
equipment were substandard.
Petitioner alleged that Northwestern should have made an assessment after
the completion of the IBS. Hence, the order of halting the installation was the
breach.
Supreme Court did not agree and justified that Northwestern correctly
stopped the project for apparent substandard items to be installed would incur more
costs for both parties. Thus, it is clear that delivery of substandard components for
the new IBS is a violation of the agreement.
Northwesterns breach, if any, was slight or casual since the stoppage was
justified to prevent the rejection of the IBS.