CBA Record January-February 2024

YOUNG LAWYERS SECTION

Illinois Supreme Court Recognizes Exception to First-to-Breach Rule

By J. Kopczyk

I magine a situation where a party breaches a contract, and the non breaching party continues performing the contract knowing that the other party materially breached it. In a turn of events, the injured party subsequently breaches the same contract. What are the conse quences of the injured party’s subsequent material breach? The Illinois Supreme Court recently resolved this question in PML Development, LLC v. Village of Haw thorn Woods, 2023 IL 128770. There, the Illinois Supreme Court held that the Second District Appellate Court erred in finding that neither party could recover damages. The Illinois Supreme Court further held that the circuit court erred when it entered a judgment only in favor of the plaintiff developer on its breach of contract claim. Instead, the Illi nois Supreme Court remanded the matter and directed the circuit court to also enter judgment in favor of the Village of Hawthorn Woods on its breach of con tract counterclaim. The Illinois Supreme Court then directed the circuit court to recalculate each party’s respective dam ages and offset the ultimate award given to the developer. In doing so, the Illinois Supreme Court recognized the partial breach doctrine, an exception to the first to-breach rule. What is the First-to-Breach Rule? Generally, a party seeking to recover on a breach of contract claim must perform its part of the contract because substan tial performance is a necessary element

of such a claim. However, that duty to perform under the contract is excused if the other party materially breaches the agreement first. The first-to-breach rule excuses the injured party from all future performance and allows the injured party to recover damages for the other party’s breach. Further, the party that breached first cannot then enforce the injured par ty’s obligations under the contract. Exception: The Partial Breach Doctrine In the PML Development decision, the Illinois Supreme Court stated that “[t]o the extent this court has not yet explicitly adopted the partial breach doctrine, we do so now.” 2023 IL 128770, ¶ 52. The court noted that although certain prin ciples of the doctrine were already deeply rooted in Illinois law, it ultimately found reason to expressly adopt the doctrine in this case of first impression. The partial breach doctrine is applied where an injured party elects to continue performing under a contract instead of repudiating the contract, despite the other party’s material breach. The now injured, still-performing party ultimately remains bound to perform its obliga tions under that contract and may also be liable for breach based on its contin ued performance. Importantly, the now injured party’s continuing performance does not amount to a waiver of the right to damages for the first material breach, but the now-injured party may also be liable to the other party if it breaches the contract.

Definitive Establishment of the Partial Breach Doctrine The Illinois Supreme Court recognized that both the developer and the Village were trying to have their cake and eat it too—that is, each party was attempting to obtain the dual benefit of damages from the other party’s breach and a court-sanc tioned excuse from its own obligation to perform under the parties’ contract. Here, the cake for the developer was a fill and grading project, and the cake for the Vil lage was a repaved road and a property ready for municipal use. The developer and the Village agreed that the developer would purchase the property at issue from the Village with a set of grading plans that the Village approved. The agreement limited the amount of fill the developer could add and required the developer to execute a draw down deposit before starting work. The developer agreed to bring the public road on the property up to Village standards. Once the work and the road rehabilita tion were finished, the developer agreed to donate the newly graded property to the Village via warranty deed free of all liens and assessments. The Village agreed to issue a grading permit that would be valid for two years, with an automatic two-year extension subject to the grading plans approved by the Village’s engineer. However, over the following year, the Village repeatedly required the developer to revise its plans without citing any cor responding code or ordinance violation.

30 JanuaryFebruary 2024