Illinois Supreme Court: Mutual Breach of Contract Dispute

In PML Development, LLC v. Village of Hawthorn Woods, 2023 IL 128770, the Illinois Supreme Court addressed a fundamental breach of contract question: When both parties materially breach an agreement yet continue performing, can either still recover for breach? The business dispute arose from a business contract between PML Development, LLC (“PML”) and the Village of Hawthorn Woods (“the Village”) concerning a 62-acre property in Lake County, Illinois.

Under the contract, PML would perform grading work on the land and, upon completion, donate the parcel to the Village for one dollar. The agreement required PML to continue paying property taxes during the grading process and to fund a drawdown account to cover inspection costs. After initially approving PML’s grading plans, the Village refused to issue a necessary permit and instead attempted to impose additional obligations reflecting its evolving concept plans for the site. Despite this interference, PML continued its efforts to comply and submitted revised plans.

Jurisdiction and Venue

This case was initially heard in the Circuit Court of Lake County and eventually reached the Illinois Supreme Court via the Second District Appellate Court. The Supreme Court exercised jurisdiction under Illinois Supreme Court Rule 315, which allows review of appellate decisions involving significant legal questions—including clarification of contract principles affecting parties throughout the state. As the state’s highest court, the Illinois Supreme Court was the appropriate forum to resolve the doctrinal questions raised by this case, including whether the “partial breach doctrine” should be explicitly adopted under Illinois law.

Plaintiff’s Claims in Detail

PML filed a three-count complaint in 2015 asserting that the Village breached the development agreement by interfering with its grading work. Specifically:

• Count I sought declaratory relief permitting PML to complete the project in substantial compliance with the agreement.
• Count II sought mandamus relief compelling the Village to comply with its obligations, including permit issuance.
• Count III alleged breach of contract, asserting that the Village’s refusal to issue the appropriate permits and its imposition of extra-contractual demands constituted a material breach.

PML argued that the Village failed to honor its commitments and disrupted PML’s operations to such an extent that performance became impracticable under the original terms.

Relief Sought by the Plaintiff

PML’s requested relief was both monetary and equitable. It sought:

• Declaratory and mandamus orders to allow it to proceed under the original agreement terms.
• Monetary damages for lost revenue, added site preparation costs, and additional work caused by the Village’s changing demands.
• A determination that it was no longer required to convey the property to the Village due to the Village’s prior material breach.

Breach of contract remedies: Ultimately, the trial court awarded PML over $5.3 million in damages, plus attorney’s fees exceeding $1.5 million.

Defendant’s Defenses in Detail

The Village denied wrongdoing and asserted that PML materially breached the business agreement in three ways:

• Failing to pay property taxes, resulting in tax liens that would prevent clean conveyance of the land.
• Failing to fund the required drawdown account, which had a shortfall of over $53,000.
• Failing to reconstruct Kruger Road, as required by the agreement, resulting in alleged damages exceeding $200,000.

The Village claimed these contract breaches excused any obligation on its part to perform and sought counter-relief, including specific performance to compel PML to convey the property and repair the road.

Commentary and Observations

At the heart of this case is a classic breach of contract dispute complicated by mutual nonperformance. Rather than walking away, both parties continued performing—seeking benefits under the contract while asserting that the other had defaulted.

This gave rise to the central legal question: Can a party who continues to perform under a breached agreement still assert claims for breach, or does continued performance waive the right to complain?

The Illinois Supreme Court’s answer was significant for any party entering into long-term business agreements, particularly in development, construction, or public-private partnerships. It clarifies that under Illinois law, continuing to perform after a breach does not eliminate your right to seek damages—so long as the contract remains in force and the breach is treated as “partial.”

The Supreme Court’s Decision

Justice O’Brien, writing for the majority, explained that under traditional contract rules, a party who materially breaches a contract first excuses the other party’s performance. However, this rule is not absolute. The Court adopted what it called the “partial breach doctrine”—an exception to the first-to-breach rule.

When one party materially breaches, the non-breaching party faces a fork in the road: either terminate the agreement and sue for total breach or continue performing and sue for damages later. If the non-breaching party chooses to continue, it becomes bound by the contract’s terms going forward and can still sue for damages resulting from the breach. The Court found that both PML and the Village continued performing despite alleging breaches, thus both were entitled to damages under the doctrine.

Accordingly, the Court:

• Reversed the appellate court, which had held that neither party could recover because both had materially breached.
• Affirmed the trial court’s ruling that PML could recover damages from the Village.
• Reversed the trial court in part for denying the Village’s counterclaims; the Village too had viable claims for breach.
• Remanded the matter to the trial court to calculate each party’s damages and apply an offset.

In a special concurrence, Justice Rochford agreed with the outcome but criticized the term “partial breach” as a misnomer. She emphasized that the proper framework is an “election of remedies”—a clearer description of the choice to treat a breach as either terminating the contract or continuing under its terms.

Conclusion

The Illinois Supreme Court’s decision in PML Development provides important guidance on mutual breaches and the consequences of continuing performance after a default. For business owners, municipalities, and developers, the ruling underscores the importance of strategic decision-making when facing contract disputes. Electing to continue a contract after a material breach preserves rights—but also obligations.

Breach of contract litigation is one of our law firm’s core practice areas. This case is a reminder that even when a contract goes off track, how parties respond—whether by terminating or continuing performance—can have lasting legal implications. If you are navigating a contractual dispute, our business attorneys are here to help you assess your options and protect your interests.