Illinois Supreme Court Adopts Partial Breach Doctrine

The dispute in PML arose from a real estate development agreement. PML Development, LLC purchased real estate in order to grade (i.e., level) it and generate income from the fill used in the project. As part of its contract with PML, the Village of Hawthorn Woods agreed to give PML a two-year grading permit, which could be extended for an additional two years. In exchange, PML agreed, among other things, to donate the real estate to the Village free and clear of all liens when it completed the grading project and to fund an account to pay for inspections. Conflicts arose when the Village forced PML to alter plans that the Village had previously approved. While PML made some accommodations, it eventually sued the Village for breaching the parties’ contract, and the Village filed counterclaims accusing PML of doing the same. 

After years of litigation, the trial court entered a judgment in favor of PML. The court determined that the Village had materially breached the development agreement in several ways, such as refusing to issue the appropriate permit to PML and imposing obligations not found in the parties’ agreement and awarded PML damages. While the court found PML had also materially breached the agreement by failing to fund the required account or convey the property to the Village free and clear of liens, the court excused PML’s nonperformance because the Village had breached first.

On appeal, the Illinois Supreme Court affirmed entry of judgment on PML’s breach of contract claim against the Village but reversed entry of judgment on the Village’s breach of contract counterclaim against PML.

The court explained that under the first-to-breach rule, the party that first materially breaches a contract cannot seek to enforce it against the injured party, which is entitled to stop performance and to sue. However, the partial breach doctrine operates as an exception to that rule. The partial breach doctrine states that if the injured party elects to continue with the contract despite the other side’s material breach, then the breach becomes only a partial breach, which is insufficient to terminate the contract or the injured party’s obligations.

In other words, following a material breach, the injured party arrives at a fork in the road: it may either terminate the contract or continue honoring it. Choosing the latter option means the injured party must continue to perform its duties, despite the other side’s breach. Applying those principles to the facts at hand, the court found that both PML and the Village elected to continue with their contract even where the other had materially breached the contract. As a result, both sides were entitled to offsetting damages.

PML underscores the importance of understanding and evaluating available options once a party believes its counterparty has breached an agreement. Failure to do so may expose an already injured party to further loss.