PML Development LLC v. Village of Hawthorn Woods , 2023 IL 128770 ( 2023 )

2023 IL 128770IN THE
SUPREME COURT
OF
THE STATE OF ILLINOIS
(Docket No. 128770)
PML DEVELOPMENT LLC, Appellant, v. THE VILLAGE OF HAWTHORN WOODS,
Appellee.
Opinion filed June 15, 2023.
JUSTICE O’BRIEN delivered the judgment of the court, with opinion.
Chief Justice Theis and Justices Neville, Overstreet, Holder White, and
Cunningham concurred in the judgment and opinion.
Justice Rochford specially concurred, with opinion.
OPINION
¶1 Plaintiff, PML Development LLC (PML), brought an action against the Village
of Hawthorn Woods (Village). PML alleged the Village breached a development
agreement (Agreement) between the parties. The complaint sought damages
resulting from the Village’s breach, as well as an order compelling the Village to
comply with the Agreement. The Village denied breaching the Agreement and filed
counterclaims alleging that PML breached the Agreement. Following a bench trial,
the circuit court of Lake County found that both parties materially breached the
Agreement. However, the circuit court concluded the Village’s first material breach
excused PML from performing its obligations under the Agreement. Therefore, the
circuit court entered judgment in favor of PML on both its breach of contract claim
and the Village’s counterclaim.
¶2 The Village appealed, and PML cross-appealed. The appellate court reversed,
finding that neither party could recover damages because each party materially
breached the Agreement. The court reasoned that, because PML continued to
perform under the contract despite the Village’s breach, PML remained bound by
the terms of the Agreement. When PML subsequently materially breached those
terms, it could not recover damages. 2022 IL App (2d) 200779. This court granted
PML’s petition for leave to appeal. Ill. S. Ct. R. 315 (eff. Oct. 1, 2021). For the
following reasons, we reverse the appellate court’s judgment. We affirm the circuit
court’s judgment in favor of PML on its breach of contract claims. We reverse the
circuit court’s judgment in favor of PML on the Village’s breach of contract
counterclaims. We remand the matter to the circuit court for further proceedings.
¶3 BACKGROUND
¶4 In June and July 2012, PML prepared a set of grading plans for a 62-acre
property within the Village and submitted those plans to the Village for preapproval
before it purchased the property. The Village’s chief administration officer and
Village clerk informed PML that they had no objection to the plans, and on
September 7, 2012, PML purchased the property.
¶5 On October 11, 2012, PML and the Village entered into the Agreement
regarding the use of the property. The Agreement included the following relevant
terms. Recital B limited PML to adding 1.2 million cubic yards of fill. Recital F
required a drawdown deposit to be executed before commencing work.
¶6 The parties agreed that, upon completion of the grading project but no later than
December 31, 2015, PML would donate the entire parcel of land to the Village for
a total sum of $1 by warranty deed free and clear of all liens, encumbrances, and
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special service area (SSA) assessments as of the date of conveyance. PML would
pay all taxes while the property was in its possession, and the Village would assume
responsibility for the taxes once PML conveyed the property to the Village.
¶7 The Agreement also allowed the property to be accessed by Kruger 1 Road.
PML agreed to bring Kruger Road back up to current Village standards at the end
of the project. PML would perform the reconstruction with an anticipated donation
toward that reconstruction of $200,000.
¶8 The Agreement provided that, before work could commence, PML would
present the Village engineer with all plans, studies, reports, surveys, and other
materials that might be necessary under the applicable Village codes and ordinances
or that might be reasonably be requested by the Village engineer. The Village
engineer would then approve the final plans if those plans satisfied the applicable
codes and ordinances. The parties also agreed that the grading permit would be
valid for two years from the date of issuance and that, if work was not completed
within two years, a permit extension would be granted for an additional two years.
The Agreement required PML to establish a drawdown account, and the funds from
that account would be used to pay for inspections related to the grading, filling,
sedimentation and soil erosion control measures, stormwater management,
perimeter landscaping, and seeding operations.
¶9 The Village originally approved the plans PML submitted, and PML began
operations on the property in February 2013. However, the Village attempted to
transform the Agreement by placing additional requirements on PML so that PML
could fill and develop the land to conform with the Village’s concept plan for future
development of a municipal campus on the property. From March 2013 through
September 2014, the Village repeatedly required PML to revise its plans without
citing any Village code or ordinance violations. Instead, the Village made its
demands to accommodate the Village’s ever-changing concept plans. Despite this,
PML sent revised plans to accommodate the Village’s demands.
¶ 10 On May 4, 2015, PML filed a three-count complaint against the Village alleging
the Village interfered with PML’s work on the property. Count I of PML’s
1
PML’s complaint and the development agreement spell the road’s name as “Krueger”; PML’s
site surveys and the Village’s filings reflect the spelling “Kruger.”
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complaint sought declaratory relief so that PML could complete its work in
substantial compliance with the Agreement. Count II sought mandamus relief
directing the Village to comply with its obligations under the Agreement. Count III
alleged a breach of contract claim and sought monetary damages for the Village’s
breach along with a determination that PML should be excused from its obligation
to convey the property to the Village. The complaint did not specifically allege that
the Agreement should be terminated based on the Village’s alleged material
breaches.
¶ 11 The Village filed an answer, affirmative defenses, and counterclaims. The
Village denied breaching the Agreement. The counterclaims alleged PML
materially breached the Agreement for several reasons. Relevant to this appeal are
the Village’s claims that PML failed to (1) pay the property taxes on the property
(count IV) and (2) fund the drawdown account, which had a $58,103.25 deficit
(count V).
¶ 12 On November 17, 2015, PML filed a mandamus petition. PML alleged that its
incentive to enter into the Agreement was the potential income to be derived from
charging its customers by volume for accepting fill for deposit on the property and
then using that fill to grade the property. PML asserted that the Village’s
misconduct had impaired any potential profit PML may have derived from the
project. Specifically, the Village refused to issue the grading permit allowed under
the Agreement. Instead, the Village interfered with PML’s operations and
attempted to force PML to comply with the Village’s demands to conform the
property to the Village’s conceptual plan, which differed substantially from the
approved grading plans. PML requested a mandamus order directing the Village to
issue the permit as required by the Agreement.
¶ 13 In response, the Village argued that PML breached the Agreement and should
not be granted mandamus relief. The Village alleged that PML failed to pay the
taxes for the property in violation of the Agreement. Consequently, PML could no
longer convey the property free and clear of liens and encumbrances due to the tax
delinquencies.
¶ 14 On January 15, 2016, the circuit court granted PML’s mandamus petition and
ordered the Village to issue a permit to PML with a December 31, 2016, expiration.
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¶ 15 In October 2016, the Village filed a motion to enforce the circuit court’s prior
mandamus order and compel PML to complete its work by December 31, 2016.
The Village argued that the Agreement did not contemplate PML operating on the
property beyond the four-year period (2012-16). PML also continued to be in
breach of the Agreement by failing to pay taxes on the property. The Village
claimed that PML should not be allowed to reap the benefits of the project while
avoiding the court’s orders and PML’s obligations under the Agreement.
¶ 16 PML filed a response to the motion to enforce the court’s mandamus order and
included a cross-motion for mandamus relief. PML noted that the Agreement
included a provision that allowed an automatic two-year extension if it had not
completed the project. PML asserted that it had a right under the Agreement to
continue to perform its operations and asked the court to deny the Village’s request
to compel PML to finish the project by December 2016. As to its cross-motion for
mandamus relief, PML asked the court to compel the Village to issue a permit
extending the expiration by two years as required by the Agreement.
¶ 17 The Village also filed a motion for summary judgment. In this motion, the
Village argued that PML materially breached the Agreement by failing to pay the
property taxes and, as a result, PML could no longer convey the property to the
Village free and clear of all liens and encumbrances as provided by the Agreement.
Therefore, the Village requested summary judgment in its favor as to count IV of
its counterclaims.
¶ 18 In response to the motion for summary judgment, PML argued that the failure
to pay taxes was not a breach because the project had not yet been completed and
PML could still redeem the taxes.
¶ 19 The Village also filed a motion to appoint a receiver. The Village contended
that PML failed to pay the property taxes and caused the taxes to be sold at a tax
auction. Consequently, it would be impossible for PML to convey the property to
the Village, unless PML redeemed the taxes. The Village asked the court to compel
specific performance by ordering PML to redeem those taxes or appoint a receiver
to redeem those taxes on PML’s behalf.
¶ 20 On December 9, 2016, the circuit court extended its mandamus order and gave
PML until December 31, 2018, to complete its work on the property pursuant to the
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Agreement. The court denied the Village’s motion to enforce the court’s prior
mandamus order, motion for summary judgment, and motion to appoint a receiver.
¶ 21 On August 7, 2017, the Village filed a motion for partial summary judgment on
count IV of its counterclaims. Like the Village’s previous motion for summary
judgment, this motion was also based on PML’s continued failure to pay the
property taxes.
¶ 22 At a hearing on the motion, the Village argued that the Agreement required
PML to pay the property taxes while PML possessed the property. Due to PML’s
failure to pay taxes, third-party tax buyers purchased the unpaid taxes and now had
liens on the property. The Agreement required PML to convey the property to the
Village free and clear of all liens and encumbrances.
¶ 23 At the hearing, the court asked the Village’s counsel what its damages were,
since the tax deed had not yet been issued and PML could presumably cure the tax
deficiency. The Village responded that specific performance was one remedy
provided by the Agreement, so damages were not required. The Village did not
believe it was premature to seek relief, as it was attempting to protect its future
interest in obtaining the property under the Agreement. Once the redemption period
expired, it would be too late for the Village to obtain the property.
¶ 24 The court pointed out that the Agreement required PML to transfer the property
no later than December 31, 2015. It asked why the property had not been
transferred. According to the Village’s counsel, PML had not tendered the property
and could not tender the property free and clear of the tax liens as required by the
Agreement. PML’s counsel argued that the permit had been extended by the court’s
first mandamus order to December 2016. The court, however, noted that December
2016 had come and gone as well. PML represented that it was ready and willing to
convey the property to the Village at any time but that the Village refused to accept
the conveyance. PML also claimed that its failure to pay the taxes was caused by
the Village’s interference with its operations on the property.
¶ 25 During the argument the court commented that the parties were in a unique
situation:
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“[W]henever there’s a breach of a contract, people basically say, Okay, we’re
done, I’m not going to do my portion; he’s not—the other side’s not going to
do—you guys are still operating under this contract, that it’s still valid and
everybody owes everybody all the obligations and responsibilities under the
agreement. I mean, it’s not like you said, Oh, you know, you breached, we’re
stopping, we’re going to sue you, we would have made X dollars if we would
have continued to the end of the term. You’re still operating. They’re still going
there and checking to see if you’re in compliance with the ordinance and
everybody’s operating as if this is still a valid un-breached contract ***.”
PML’s counsel responded, “Well, isn’t that to our benefit?” The court believed this
was a factual question and asked PML’s counsel why it should receive the benefits
of the contract but not the Village, since both parties sought specific performance.
The court asked PML’s counsel if PML was still operating under the contract, and
counsel responded, “Right.” Counsel explained that PML continued its operations
to mitigate damages and that the property could lose value if it stopped its
operations. The court noted that PML could operate to mitigate its damages but that
it could also terminate the Agreement and claim damages for the profits it expected
to generate had it continued performing.
¶ 26 PML’s counsel explained that PML could convey the property within a day’s
notice, but the Village would not accept the conveyance due to the outstanding
property taxes. The Village’s counsel answered:
“You know. This is a unique situation where we have a trial in less than two
weeks on a contract that’s going to be continued to be performed until 2018,
and you know, that’s I think unique as well, because we have now additional
tax buyers *** out there who have the ability to perform as it relates to tax
deeds.
So are we going to have a trial and then, you know, they’re going to continue
to perform until 2018 and then lose the property, you know, in that interim
period?”
The court raised concern about the damages being potentially speculative:
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“The other thing that it makes difficult I think at some point, I mean, you’re
going to tell me what your damages are potentially as of October 23 or
whenever we finish the trial this year, but you’re right, you’re going to still be
operating and you could all of the sudden become the most popular fill dump
place in the county and get more business than you ever thought you would get
and make more money than you thought you would ever make ***.”
¶ 27 Ultimately, the circuit court granted the Village’s motion for partial summary
judgment in part. The court explained:
“The motion for summary judgment as to Count 4 for failure to pay the
taxes, I’m in a quandary on this one ***.
I think that I can partially grant your motion because I think that there is no
genuine issue of material fact that there has been a breach based on the failure
to pay taxes given the fact that there was a turnover date of title prior to when
this became an issue even though it’s been extended. I don’t think there’s a
genuine—I don’t think that there’s no genuine issue of material fact whether,
in fact, they can comply with that, whether they can do specific performance. I
don’t know anything about their financial information, whether they, in fact,
have the money to redeem the taxes or not.
I think to order them to do that without having information whether that is
valid or if your remedy is a breach of contract instead of specific performance,
I think that’s an issue that has to be reserved for trial.
So to the extent that we’ll take an issue out of the litigation here, I am going
to find that there was a breach for failing to pay the taxes no later than what the
turnover date was contemplated, whether it was December—the end of
December 2015 or the extended date in 2016. At this point, that date has come
and gone and that may eliminate some evidence that’s presented at trial ***.
***
*** As everybody has noted, there have been allegations of breaches back
and forth and I’m going to have to make a determination probably who was the
original at fault to see how the things are going to shake out at the end of the
day.
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So, no, [PML is] not going to be precluded from saying, you know, here’s
the reason why. I’m merely taking this issue out that, in fact, I think was a
contested issue that you didn’t have to pay the taxes yet. And I think the
deadline for payment of taxes based on what’s in the agreement has come and
gone and [PML is] in breach of that. Whether there’s an excuse for it or not, I
have not made a determination of that.”
¶ 28 Prior to trial, both parties submitted pretrial memorandums to the court. Both
parties agreed that the Agreement was binding and enforceable. Each party asserted
that it performed its obligations under the Agreement but claimed the other party
should be liable for its alleged breach. The Village’s memorandum added the
allegation that PML breached the Agreement by failing to reconstruct Kruger Road
as required by the Agreement.
¶ 29 The cause went to trial on November 20, 2020.
¶ 30 After trial, the parties submitted posttrial memorandums. In PML’s posttrial
memorandum, PML maintained that the Agreement was valid and enforceable and
that it performed its obligations under the Agreement. PML alleged that the
evidence showed that the Village materially breached the Agreement by (1) failing
to issue the proper grading permit, (2) imposing obligations on PML that were not
part of the Agreement, and (3) interfering with PML’s means and methods of
developing the property. PML also asserted that any claimed breach as to the
drawdown account and Kruger Road reconstruction occurred after the Village
materially breached. Thus, the Village could not recover. In addition, the Village
hindered PML’s performance and caused PML’s inability to pay the taxes on the
property. Further, the Village failed to mitigate its damages by rejecting PML’s
offers to convey the property to the Village.
¶ 31 In the Village’s memorandum, it claimed that it performed its obligations and
alleged that PML breached the Agreement by failing to (1) convey the property to
the Village, (2) fund the drawdown account, and (3) reconstruct Kruger Road. As
to damages, the Village argued that PML’s inability to convey the property
frustrated the main purpose of the Agreement, the Village suffered damages based
on PML’s failure to fund the drawdown account, and the Village suffered damages
in excess of $200,000 caused by PML’s failure to restore Kruger Road. The Village
asked the court to order PML to convey the property to the Village by warranty
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deed free and clear of all liens and encumbrances “in full compliance with the terms
of the Development Agreement,” reconstruct Kruger Road, pay the amounts owed
under the drawdown account, and pay the Village’s attorney fees. The Village did
not request monetary damages caused by PML’s failure to convey the property.
¶ 32 Prior to judgment, the Village filed a motion to reopen proofs. The motion asked
the court to take judicial notice of the tax deed, quitclaim deed, and Lake County
property tax records, which showed that one of the parcels comprising the property
had been conveyed to a third party by quitclaim deed. The Village did not ask the
court for a hearing on damages caused by PML’s failure to convey the property.
However, the Village asked the court to take judicial notice of these records to the
extent the new evidence would impact the court’s upcoming judgment and the relief
it awarded. Subsequently, the parties entered an agreed stipulation of these facts,
and the Village withdrew the motion as moot.
¶ 33 The circuit court entered a written judgment, which included detailed factual
findings and legal conclusions. The court found “[e]ach party accused the other
party of materially breaching the Development Agreement, but neither party
stopped the development of the Property from proceeding even after PML filed its
lawsuit against the Village in 2015.”
¶ 34 As to the Village, the circuit court found the Village materially breached the
Agreement in three ways. First, the circuit court found that the Village materially
breached the Agreement by refusing to approve PML’s grading plans and issue the
appropriate grading permit. The Agreement required the Village to approve PML’s
final grading plans and issue the grading permit once PML submitted all plan
studies, reports, surveys, and other materials that might be necessary under the
applicable Village codes and ordinances or that might be reasonably requested by
the Village engineers. However, neither the Village nor the Village engineers told
PML that the grading plans violated any specific code or other regulatory provision.
Therefore, the circuit court determined that the plans were code compliant. Pursuant
to the Agreement, the Village should have issued the initial grading permit in
February 2013, but the Village did not issue the grading permit until December 15,
2014. Additionally, the permit issued by the Village violated the Agreement and
required the court’s intervention. The grading permit should have been for a two-
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year period as required by the Agreement, but the Village only issued a nine-month
permit.
¶ 35 Second, the court found the Village materially breached the Agreement by
imposing obligations on PML that were not bargained for and not part of the
Agreement to obtain concessions from PML. The court based this finding on the
Village’s continued refusal to issue the required permits to PML. The Village also
issued at least six improper stop work orders.
¶ 36 Third, the court found the Village materially breached the Agreement by failing
to allow PML to dictate the means and methods of developing the property through
the Village’s use of earth change approvals. Because the Village did not have its
municipal concept plan finalized, it only issued earth change approvals to force
PML to work in areas that the Village believed would not have any buildings, roads,
parking areas, or bike paths.
¶ 37 The court found the Village’s earth change approvals illogical because it
required PML to deposit fill in front of the Kruger Road entrance. The work
sequencing forced onto PML by the Village contributed to poor site conditions and
sediment being tracked onto Kruger Road and long lines of trucks waiting on
Kruger Road to deposit fill. This caused PML to perform unnecessary work to move
the mountain of fill that accumulated at the entrance.
¶ 38 As to PML, the circuit court found that PML materially breached the Agreement
in three ways. First, the Agreement required PML to fund a drawdown deposit
account. The drawdown account had a deficit of $53,103.25 as of June 2015. The
court found that the charges debited against the account were authorized charges
under the terms of the Agreement. PML’s failure to fund the account constituted a
material breach of the Agreement.
¶ 39 Second, the Agreement also required PML to reconstruct Kruger Road upon
completion of the project. PML’s total financial donation toward the reconstruction
of Kruger Road was to be $200,000. PML did not reconstruct the road, which the
court found to be a material breach of the Agreement.
¶ 40 Third, the Agreement required PML to donate the property to the Village for
the sum of one dollar at the completion of the grading project, but no later than
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December 31, 2015. PML never conveyed the property to the Village. The donation
of the property was to be by warranty deed free and clear of all liens and
encumbrances. The court found that the payment of taxes was part of the
requirement that PML convey the property to the Village by warranty deed free and
clear of all liens, encumbrances, and SSA assessments as of the date of conveyance.
However, it concluded that the failure to pay the real estate taxes when due was not
a material violation of the Agreement because the Agreement required that all taxes
be fully paid by the time of the conveyance, which provided PML with time to pay
any delinquent taxes. Nevertheless, PML never redeemed the taxes and failed to
convey the property to the Village by warranty deed by December 2015, which the
court found to be a material breach of the Agreement.
¶ 41 Despite finding breaches by both parties, the court entered judgments in favor
of PML on its breach of contract claims and the Village’s breach of contract
counterclaim because the Village materially breached the Agreement first. The
court reasoned the Village could not seek to enforce the terms beneficial to the
Village against PML given that the Village materially breached the Agreement first.
Therefore, it held that PML’s performance of its obligations under the Agreement
was excused. The court awarded PML damages for lost revenue in the amount of
$268,223.70 (based on the difference in target fill rate and the actual fill rate);
additional costs relating to site preparation, topsoil, and clay work through the
expiration of the grading permit in the amount of $4,898,161; and additional costs
attributable to multiple revisions to PML’s plans to comply with the Village’s
demands in the amount of $183,292. The court also awarded PML $1,571,795.60
in attorney fees and $2654.74 in costs.
¶ 42 The Village appealed, and PML cross-appealed. The Village raised four
arguments. First, it argued that, because the circuit court found that PML had
materially breached the parties’ agreement, the circuit court should have awarded
the Village judgment on its counterclaims. 2022 IL App (2d) 200779, ¶ 40.
Specifically, the Village argued that the circuit court wrongly found that it had
materially breached the Agreement and then compounded its error by finding that
the Village’s breach excused PML’s obligations under the agreement. Id. Second,
the Village argued that, because the court had found that PML materially breached
the agreement, it erred in allowing PML to recover damages under the agreement.
Id. Third, the Village argued that PML failed to satisfy its burden in proving
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damages under the new-business rule. Id. Fourth, the Village argued that the circuit
court erred in awarding attorney fees to PML. Id. In its cross-appeal, PML
contended that its damages award should be increased. Id. ¶ 38.
¶ 43 As to the first issue, the appellate court found that the circuit court properly
found “the Village materially breached the Agreement when it hindered PML’s
ability to use the property via customary means and methods.” Id. ¶ 48. As one
material breach is sufficient to prevent the Village from recovering under the
Agreement, the court did not address the other ways the circuit court found that the
Village had materially breached the Agreement. Id.
¶ 44 As to the second issue, the appellate court agreed with the Village that its breach
of the agreement did not automatically alleviate PML of its contractual obligations.
Id. ¶ 50. The court noted that PML chose to file a complaint and received a writ of
mandamus to compel the Village to adhere to the terms of the Agreement. Id. ¶ 51.
PML was able to complete its work on the property by December 2018. Id. Since
PML elected to proceed with the Agreement after the Village’s alleged breach of
that Agreement, PML remained bound by the obligations imposed under the
Agreement. Id. The appellate court found that the circuit court erred in finding that
the Village’s first breach excused PML from its obligations under the contract.
Relying on Chicago Washed Coal Co. v. Whitsett, 278 Ill. 623 (1917), the appellate
court concluded that neither party could recover damages since both parties
materially breached the Agreement, and the court vacated the damages award in
favor of PML. 2022 IL App (2d) 200779, ¶¶ 60-61. Given this finding, the appellate
court did not address each party’s challenges to the circuit court’s damages
calculation. Id. ¶ 62.
¶ 45 ANALYSIS
¶ 46 In this court, neither party challenges the circuit court’s and appellate court’s
findings that each party materially breached the Agreement. Nor do the parties
dispute the fact that the Village materially breached first. Instead, the arguments in
this court are focused on the unique scenario presented in this case, where both
parties materially breach a contract but there is a question as to whether each party
elected to continue performing despite the breach. We are asked to determine each
party’s respective rights to pursue its breach of contract claims.
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¶ 47 The appellate court found the Village could not recover since it breached the
Agreement first. It also found that PML could not recover because it “elected” to
continue the Agreement despite the Village’s material breach. Given this
“election,” the appellate court found that PML remained bound to the terms of the
Agreement. Since PML subsequently materially breached the Agreement, the
appellate court found that it too could not recover damages. Upon review, we find
that both parties elected to continue performing the Agreement. Therefore, we hold
that both the Village and PML retained a viable claim for breach of contract.
¶ 48 Initially, PML contends that the appellate court erred in applying the election
of remedies doctrine. Despite using the term “elected,” what the appellate court
applied is the partial breach doctrine. Although the partial breach doctrine has been
referred to as an “aspect of [the] election of remedies,” each doctrine has its own
separate rules and distinct application. Emerald Investments Ltd. Partnership v.
Allmerica Financial Life Insurance & Annuity Co., 516 F.3d 612, 618 (7th Cir.
2008). The partial breach doctrine, which is at issue here, is an exception to the
first-to-breach rule. 2 Both parties ask this court to adopt and apply the partial
breach doctrine to this case, though they disagree on the result of the doctrine’s
application. We, therefore, focus our analysis on the application of the first-to-
breach rule and the partial breach doctrine.
¶ 49 A. The First-to-Breach Rule and Its Exception
¶ 50 Generally, to recover on a breach of contract claim, the party must have
performed its part of the contract. See Dubey v. Public Storage, Inc., 395 Ill. App.
3d 342, 361-62 (2009). This is true because substantial performance is a necessary
element of a breach of contract claim. Talbert v. Home Savings of America, F.A.,
265 Ill. App. 3d 376, 379-80 (1994). The first-to-breach rule excuses a party’s duty
to perform under the contract if the other party materially breaches the agreement
first. See Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52, 70 (2006); Eager
2
PML contends that the appellate court should have deemed the Village’s arguments on the
partial breach doctrine “waived” because the Village failed to raise the issue in the trial court.
However, PML failed to make this forfeiture argument in the appellate court. Therefore, PML has
forfeited this argument. See Illinois Supreme Court Rule 341(h)(7) (eff. Oct. 1, 2020) (“Points not
argued are forfeited ***.”).
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v. Berke, 11 Ill. 2d 50, 54 (1957); Finch v. Illinois Community College Board, 315
Ill. App. 3d 831, 836 (2000). In other words, the first-to-breach rule excuses the
injured party from future performance and allows the injured party to pursue its
breach of contract claims. Conversely, the first breaching party cannot seek to
enforce the contract against the injured party.
¶ 51 The circuit court in this case ended its analysis here. It found the Village
breached first. This breach excused PML from performing, and only PML could
recover. The circuit court’s analysis was flawed. As the appellate court recognized,
there is an exception to this rule where the nonbreaching party may lose its right to
assert the first-to-breach rule if it accepts the benefits of the contract despite the
other party’s material breach. This is often referred to as the “partial” breach
doctrine. See Emerald Investments, 516 F.3d at 618; Dustman v. Advocate Aurora
Health, Inc., 2021 IL App (4th) 210157, ¶ 38 (citing 2 E. Allan Farnsworth,
Farnsworth on Contracts § 8.15, at 437-38 (2d ed. 1998)). It applies where an
injured party elects to continue performing under the contract despite the other
party’s material breach. By continuing the contract, the injured party remains bound
by its obligation to perform. Dustman, 2021 IL App (4th) 210157, ¶ 38. This does
not amount to a waiver of the right to damages for the first material breach, but the
injured party may too be liable if it breaches the contract. See Restatement (Second)
of Contracts § 237, cmt. e (1981).
¶ 52 All of this is to say that, following a material breach, the injured party reaches
a fork in the road: it may either continue the contract (retain its benefits of the
bargain and sue for damages) or repudiate the agreement (cease performing and sue
for damages). See id. § 246, cmts. a-c, illus. 1-3; Emerald Investments, 516 F.3d at
618. If the party elects to continue with the contract, it cannot suspend performance
later and then claim it had no duty to perform based on the first material breach.
This election converts the material breach to a “partial” breach. “[T]he injured party
may sue for any damages caused by the partial breach, but having elected to keep
the contract in force, the injured party must continue to perform the contract on pain
of likewise incurring liability for a breach.” Dustman, 2021 IL App (4th) 210157,
¶ 38. Although this court has yet to explicitly adopt the partial breach doctrine, the
general principle underlying the doctrine is well rooted in Illinois law. See Chicago
Washed Coal Co., 278 Ill. at 627-28; Wollenberger v. Hoover, 346 Ill. 511, 544-45
(1931) (discussing the concept in terms of inconsistent remedies); Emerald
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Investments, 516 F.3d at 618 (applying Illinois law); South Beloit Electric Co. v.
Lar Gar Enterprises, Inc., 80 Ill. App. 2d 367, 374-75 (1967) (citing Lichter v.
Goss, 232 F.2d 715 (7th Cir. 1956) (applying Illinois law)); Dustman, 2021 IL App
(4th) 210157, ¶ 38. To the extent this court has not yet explicitly adopted the partial
breach doctrine, we do so now.
¶ 53 The application of the partial breach doctrine is illustrated in Dustman, 2021 IL
App (4th) 210157. In Dustman, a dispute arose between the plaintiff shareholders
and two former shareholders, as well as the individuals that had purchased their
shares. Id. ¶ 1. Initially, the plaintiffs alleged that it made several demands for the
defendants to engage in arbitration or mediation as provided by the parties’
operating agreement. Id. ¶ 36. The plaintiffs alleged that the defendants ignored or
rejected those demands. Id. The plaintiffs brought an action against defendants
raising several claims. Id. ¶ 16. The proceedings were initially stayed after the
parties agreed to participate in nonbinding mediation. Id. ¶ 19. When mediation
failed, the defendants filed a motion to stay the litigation and compel binding
arbitration pursuant to the agreement. Id. ¶¶ 20-21. The plaintiffs, having changed
their minds, argued that the defendants’ initial refusal to mediate or arbitrate the
dispute constituted a material breach. Id. ¶ 36. Thus, according to the plaintiffs, the
plaintiffs were relieved of their contractual obligation to arbitrate the dispute
expressed in their complaint. Id. ¶ 37.
¶ 54 The appellate court rejected the plaintiffs’ argument. The court assumed that
the defendants refused the demands for mediation or arbitration and that such
refusal constituted a material breach of the operating agreement. Id. It noted, where
there is a material, uncured breach of contract, the injured party must decide either
to terminate the contract or continue the contract. Id. The court explained,
“ ‘If the injured party chooses to terminate the contract, it is said to treat the
breach as total. The injured party’s claim for damages for total breach takes the
place of its remaining substantive rights under the contract. Damages are
calculated on the assumption that neither party will render any further
performance. They therefore compensate the injured party for the loss that it
will suffer as a result of being deprived of the balance of the other party’s
performance, minus the amount of any saving that resulted from the injured
party not having to render its own performance.
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If the injured party does not terminate the contract, either because that party
has no right to or does not choose to, the injured party is said to treat the breach
as partial. The injured party has a claim for damages for partial breach, in
addition to its remaining substantive rights under the contract. Damages are
calculated on the assumption that both parties will continue to perform in spite
of the breach. They therefore compensate the injured party only for the loss it
suffered as the result of the delay or other defect in performance that constituted
the breach, not for the loss of the balance of the return performance. Since the
injured party is not relieved from performing, there is no saving to it to be
subtracted.’ ” (Emphases omitted.) Id. ¶ 38 (quoting 2 E. Allan Farnsworth,
Farnsworth on Contracts § 8.15, at 437-38 (2d ed. 1998)).
¶ 55 The court continued by noting that, if the injured party elects to continue
performing the contract by treating the breach as “partial,” the injured party is
bound by this decision and has lost the right to stop performance. Id. The court
explained the effect of an election to proceed in these circumstances:
“ ‘Where there has been a material failure of performance by one party to a
contract, so that a condition precedent to the duty of the other party’s
performance has not occurred, the latter party has the choice to continue to
perform under the contract or to cease to perform, and conduct indicating an
intention to continue the contract in effect will constitute a conclusive election,
in effect waiving the right to assert that the breach discharged any obligation to
perform. In other words, the general rule that one party’s uncured, material
failure of performance will suspend or discharge the other party’s duty to
perform does not apply where the latter party, with knowledge of the facts,
either performs or indicates a willingness to do so, despite the breach, or insists
that the defaulting party continue to render future performance.’ ” Id. ¶ 39
(quoting 14 Samuel Williston, Richard A. Lord, A Treatise on the Law of
Contracts § 43:15, at 626 (4th ed. 2000)).
¶ 56 Applying the “partial” breach doctrine, the Dustman court found that, despite
the defendants’ previous refusals to submit to mediation or arbitration, the plaintiffs
continued to insist that the defendants submit to mediation or arbitration under the
operating agreement. Id. ¶ 40. The plaintiffs therefore insisted that the defaulting
party continue to render future performance. Id. This constituted a conclusive
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election to continue the contract. Id. Further, the parties underwent mediation of
their present claims. Id. By participating in nonbinding arbitration, the plaintiffs
performed their contractual obligations. Id. Therefore, the plaintiffs elected to
continue the contract. Id. Because of this election, the appellate court concluded
that the plaintiffs remained bound by the contractual duty to submit their dispute to
arbitration. Id.
¶ 57 Dustman is helpful in establishing the general principle of the “partial” breach
doctrine. That is, when a party to a contract elects to continue performing despite
the other party’s material breach, the nonbreaching party remains bound to its
obligation to perform. It does not, however, answer the specific question presented
in this appeal, that is: if an injured party elects to continue performing a contract—
despite the other party’s material breach—what is the consequence of the injured
party’s subsequent material breach? Or, in this case, what impact does PML’s
subsequent breach have on its ability to pursue its breach of contract claims against
the Village? Similarly, what effect does PML’s election to continue performing
have on the Village’s ability to pursue its breach of contract claim? Before
answering those questions, we must first address each party’s argument that it did
not “elect” to continue performing the Agreement after the other party’s material
breach.
¶ 58 Neither party has provided a case establishing the standard of review for this
specific question. Given that it is a disputed question of fact, we believe the decision
to continue performing is a factual question to be reviewed under the manifest
weight of the evidence standard. See generally Galesburg Clinic Ass’n v. West, 302
Ill. App. 3d 1016, 1019-20 (1999) (applying manifest weight of the evidence
standard to similar issue of whether a party waived its right to assert a breach of
contract claim); Eychaner v. Gross, 202 Ill. 2d 228, 251 (2002) (generally, the
standard of review in a bench trial is whether the order or judgment is against the
manifest weight of the evidence); cf. Dustman, 2021 IL App (4th) 210157, ¶¶ 28-
29 (applying de novo review to the same question presented here but where facts
were not in dispute). We review the legal effect of that factual determination
de novo. Eychaner, 202 Ill. 2d at 252 (applying de novo review to the circuit court’s
ruling on the legal effect of factual determinations).
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¶ 59 Here, the circuit court found that “[e]ach party accused the other party of
materially breaching the Development Agreement, but neither party stopped the
development of the Property from proceeding even after PML filed its lawsuit
against the Village in 2015.” In other words, the circuit court found that PML and
the Village elected to continue performing despite the other party’s material breach.
The record supports a finding that PML elected to continue performing. PML never
sought to terminate the Agreement. It only asked to be relieved of its obligation to
convey the property to the Village. When the Village refused to approve PML’s
grading permit, it could have terminated the contract. It did not. Instead, it insisted
that the Village issue the proper grading permit. So too, when the Village interfered
with PML’s means and methods by dictating where and how to work on the
property, PML could have terminated the Agreement. And, when the Village
imposed terms not bargained for, PML could have terminated the agreement. Yet
it continued to operate on the property, reaping significant economic benefits. We
also do not view PML’s actions as mere attempts to mitigate damages. PML sought
and obtained mandamus orders extending its operations under the Agreement for
several years in the future.
¶ 60 The Village asserts that it did not elect to continue the contract after PML’s
material breach. Therefore, it contends that the appellate court erred when it
determined that it too could not recover under its breach of contract counterclaim.
In the Village’s view, its breach was converted to a partial breach, and it can show
substantial performance to pursue its breach of contract claim. PML’s material
breach, on the other hand, never converted to a partial breach because the Village
did not elect to continue performing. Since PML’s breach remained material, it
cannot show substantial performance. Therefore, the Village claims that it is
entitled to judgment in its favor and PML is barred from recovering.
¶ 61 In holding that neither party could recover damages since both parties
materially breached the Agreement, the appellate court relied on Chicago Washed
Coal, 278 Ill. 623. However, the appellate court mischaracterized the holding of
Chicago Washed Coal, as we will explain below. Additionally, the appellate court
failed to consider the crucial factual distinctions between Chicago Washed Coal
and this case.
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¶ 62 In Chicago Washed Coal, the parties agreed to the sale and delivery of 1500
tons of certain types of coal to be delivered in daily installments from December
28, 1909, to March 30, 1910, with payment to be made on or before the tenth day
of the month following shipment. Id. at 624. The seller could not supply the agreed-
upon type of coal, or the entire amount agreed upon, but did deliver coal to the
buyer. Id. at 624-25. The buyer refused to pay for any of the coal delivered in the
month of March until the seller delivered more coal. Id. at 625. The seller gave
notice to the buyer that it had rescinded the contract and would no longer deliver
coal to the buyer based on the buyer’s refusal to make payment. Id. The circuit court
entered judgment in favor of the seller for the coal delivered that the buyer refused
to pay for. Id. at 626. It denied judgment in favor of the buyer because it breached
the agreement by refusing to make payments. Id. at 624. On appeal, this court held
that the buyer’s election to continue the contract meant that the buyer remained
obligated to make payments. Id. at 627. The buyer’s failure to make payments
barred it from recovering damages caused by the sellers’ breach of contract. Id.¶ 63 In holding that neither party could recover in this case, the appellate court took
the following statement from Chicago Washed Coal out of context: “Therefore the
most that can be said for [the buyer’s] case is that its proofs show that both parties
were in default. In this condition of the record there could be no recovery by either
against the other on the contract.” Id. However, this court held that the seller
properly recovered damages from the buyer’s refusal to make payment for the coal
delivered by the seller. Id. at 626. Chicago Washed Coal is consistent with the
partial breach doctrine: the seller could recover despite its material breach because
the buyer elected to continue the contract.
¶ 64 At this point, the facts of Chicago Washed Coal also diverge from the facts in
the present case in a critical way. Chicago Washed Coal did not involve the
question of whether both parties elected to continue performing despite the other
party’s material breach. Rather, the seller in that case affirmatively terminated the
agreement. Consequently, we find the appellate court’s analysis in our case flawed
because it failed to consider whether the Village elected to continue performing
despite PML’s breach. If the answer to that question is “yes,” then PML’s material
breach also converted to a partial breach.
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¶ 65 Contrary to the Village’s argument, the record supports the circuit court’s
finding that the Village also operated as if the Agreement remained in force despite
allegations of breaches by PML. The Village acknowledges that its brief in the
appellate court admitted “both parties elected to proceed,” but it contends that this
was merely a mistake. However, the Village’s pleadings and arguments in the
circuit court are consistent with the statement that the Village elected to continue
performing. Throughout the proceedings, the Village claimed it performed its part
of the Agreement and repeatedly sought specific performance. At the hearing on
the Village’s motion for partial summary judgment, the Village admitted that the
parties would continue performing under the Agreement until at least 2018. At the
time of that hearing, the Village already claimed that PML materially breached the
Agreement. The Village could have made a claim to terminate the Agreement. It
did not. In fact, the Village continued to demand specific performance of the
conveyance of the property at trial. Even after trial, the Village maintained that it
“demonstrated that it ha[d] allowed this project to go forward despite those
numerous breaches.” By presenting its claims as if the Agreement were still in force
despite alleged breaches by PML, we cannot say the circuit court erred when it
found that the Village also elected to continue performing despite PML’s breach.
¶ 66 Having found both parties elected to continue the Agreement, we next
determine whether either party may recover damages. As discussed above, by
electing to continue performing the Agreement, both PML and the Village, in
essence, treated each “material” breach as merely a “partial” one (or nonmaterial).
See All EMS, Inc. v. 7-Eleven, Inc., 181 Fed. App’x 551, 557-58 (7th Cir. 2006)
(applying Illinois law). Unlike a material breach, when the breach is partial, “ ‘both
parties may be guilty of breaches, each having a right to damages.’ ” InsureOne
Independent Insurance Agency, LLC v. Hallberg, 2012 IL App (1st) 092385, ¶ 33
(quoting Israel v. National Canada Corp., 276 Ill. App. 3d 454, 460 (1995)); see
also Devon Bank v. Schlinder, 72 Ill. App. 3d 147, 154 (1979); Dawdy v. Sample,
178 Ill. App. 3d 118, 126 (1989) (holding that, where both parties mutually breach
a contract, both parties are entitled to some, but not total, damages for breach). We
hold that the Village materially breached first by failing to issue the proper grading
permit, imposing obligations that were not part of the Agreement, and interfering
with PML’s means and methods. PML’s election to continue the Agreement did
not bar it from seeking damages, but it did convert the Village’s material breach to
a partial breach. Converting the breach to a partial breach meant that the Village
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could seek a breach of contract claim if PML subsequently breached. PML
subsequently materially breached by failing to convey the property, failing to fund
the drawdown account, and failing to reconstruct Kruger Road. The Village could
pursue its breach of contract claim based on those breaches given that the Village’s
breaches converted to partial breaches. The Village elected to continue the
Agreement and converted PML’s material breach to a partial breach. Therefore,
PML’s breaches did not bar it from pursuing a breach of contract claim against the
Village for the Village’s prior breaches. Each party had a viable breach of contract
claim.
¶ 67 In sum, we find the appellate court erred when it held that neither party could
recover damages. We hold that the circuit court correctly entered judgment in favor
of PML on its breach of contract claim. However, it erred when it entered a
judgment in favor of PML on the Village’s breach of contract counterclaim. The
circuit court should enter judgment in favor of the Village on its breach of contract
counterclaim. The circuit court should calculate each party’s respective damages
and offset the ultimate award given.
¶ 68 B. Unaddressed Issues in the Appellate Court
¶ 69 In the appellate court, both parties challenged the circuit court’s calculation of
PML’s damages. PML argued that its damages should be increased, and the Village
argued that PML failed to prove its damages. The appellate court did not reach these
arguments, given that it held that neither party could recover. In addition, the
Village challenged the circuit court’s award of attorney fees. It appears the appellate
court did not reach this issue. The Village and PML both request a remand to the
appellate court to address these issues. We believe the most efficient approach is to
remand the matter to the trial court. The trial court entered its judgment under the
incorrect belief that the Village could not recover, and the court did not make
findings as to the Village’s damages. The trial court should enter a new judgment
under the correct legal framework. It should also reconsider its award of attorney
fees. Whether an additional evidentiary hearing on the Village’s damages is
required is for the trial court to determine.
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¶ 70 CONCLUSION
¶ 71 For the foregoing reasons, we reverse the appellate court’s judgment. We affirm
circuit court’s judgment in favor of PML on its breach of contract claims. We
reverse the circuit court’s judgment in favor of PML on the Village’s breach of
contract counterclaims. We remand the matter to the circuit court for further
proceedings consistent with this opinion.
¶ 72 Appellate court judgment reversed.
¶ 73 Circuit court judgment affirmed in part and reversed in part.
¶ 74 Cause remanded.
¶ 75 JUSTICE ROCHFORD, specially concurring:
¶ 76 The facts relevant to the parties’ remedies are straightforward: the Village and
PML each materially breached the agreement, and each party, despite the mutual
breaches, persisted in performing under the agreement. I agree with my colleagues
that PML’s election to continue the contract obligated PML to fulfill its obligations,
thereby preserving the Village’s claim for damages. Likewise, the Village’s
election to continue the contract obligated the Village to fulfill its obligations,
thereby preserving PML’s claim for damages. But on its journey to the correct
result, the majority opinion veers off course, perpetuating the myth of the “partial
breach.” I write separately to clarify that the so-called “partial-breach” doctrine is
better understood as an election of remedies.
¶ 77 If a party fails to perform his duties under a contract, without a valid excuse, he
is liable for a breach of contract, and the remedy depends on whether the breach
was material or minor. Finch v. Illinois Community College Board, 315 Ill. App.
3d 831, 836 (2000); Circle Security Agency, Inc. v. Ross, 107 Ill. App. 3d 195(1982). The Seventh Circuit Court of Appeals, recognizing the difference,
accurately described the “partial-breach” doctrine this way:
“Like many legal doctrines, it is badly named. There is no such thing as a partial
breach. There is a breach of contract, and there are alterations and terminations
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that are not breaches. The doctrine is really an aspect of election of remedies. If
a party to a contract breaks it, the other party can abandon the contract (unless
the breach is very minor [citations]) and sue for damages, or it can continue
with the contract and sue for damages. [Citations.] But if it makes the latter
election, it is bound to the obligations that the contract imposes on it.
[Citations.] When [the defendant] *** broke its contract ***, [the plaintiff]
could have terminated the contract. But it did not, and so [the defendant] was
entitled to enforce the obligations that the contract put on [the plaintiff].”
Emerald Investments v. Allmerica Financial Life Insurance & Annuity Co., 516
F.3d 612, 618 (7th Cir. 2008).
¶ 78 Thus, a party injured by a minor breach is entitled to damages but may not
abandon the contract. By contrast, a material breach allows the injured party to elect
one of two remedies: (1) abandon the contract and sue for damages or (2) continue
the contract and sue for damages but risk liability for failing to fulfill his own
contractual obligations.
¶ 79 Contract breaches are described as material or minor, yet the majority
repeatedly refers to “partial” breaches, which do not exist. The majority compounds
the misnomer by holding that a material breach can “convert” to a “partial” breach.
Supra ¶¶ 52, 60, 64, 66. A material breach remains material regardless of the chosen
remedy—the breach is not diminished by the election to continue the contract.
Rather, the material breach is treated like a minor breach.
¶ 80 A party who does not terminate the contract either because he has no right to
(because the breach is minor) or elects not to (when the breach is material) has a
claim for damages in addition to his remaining substantive rights under the contract.
Damages are calculated on the assumption that both parties will continue to perform
in spite of the breach. Dustman v. Advocate Aurora Health, Inc., 2021 IL App (4th)
210157, ¶ 38 (citing 2 E. Allan Farnsworth, Farnsworth on Contracts § 8.15, at 437-
38 (2d ed. 1998)). To be sure, an injured party may sue for any damages caused by
a material breach, but having elected to keep the contract in force, the injured party
must continue to fulfill its obligations on pain of likewise incurring liability for a
breach. Id.
¶ 81 I agree with my colleagues that PML and the Village, each having elected to
keep the contract in force despite the mutual breaches, incurred liability for failing
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to fulfill their respective contractual obligations. Therefore, I concur in the
judgment.
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