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Breach of contract37

To prove a breach of contract claim in Illinois, a party must show that a valid and enforceable contract exists, that the contract was breached by the defendant, that the non-breaching party performed its obligations, and that the breach caused an injury to the non-breaching party.

In general, a party seeking to recover for a breach of contract must show that it substantially performed its obligations under the contract or had a sufficient excuse for failure to perform. 'What constitutes substantial performance is difficult to define, and whether substantial performance occurred will depend upon the relevant facts of each case'. Illinois courts look to factors such as: whether there has been a 'receipt and enjoyment' of contractual benefits by one party, or whether one party has 'honest[ly] and faithful[ly]' upheld the material portions of an agreement with 'no willful departure' from those essential provisions.

Parties to a contract are held to an implied covenant of good faith and fair dealing. Under this duty, parties executing an agreement must use reasonable discretion and act with proper motive. Discretion cannot be employed arbitrarily, capriciously, or in a manner inconsistent with the reasonable expectations of the parties. The obligation of good faith and fair dealing is applied across the board in all Illinois contract cases, regardless of whether or not it is specified in the disputed agreement.

Under Illinois law, anticipatory repudiation occurs when a party clearly indicates an intent not to fulfil its contractual obligations on the date of the agreed-upon performance. Illinois courts strongly emphasise that the repudiating party must be 'definite and unequivocal' in manifesting non-performance of the agreement. Ambiguous statements do not suffice. As a response to the anticipatory breach, the non-repudiating party may stop performance of the contract or may continue to perform and subsequently sue for damages.

Defences to enforcement

A party may defend against a breach of contract claim in Illinois on several grounds.

i Statute of limitations period expired

The statute of limitations period for a breach of contract claim in Illinois depends on the type of contract at issue. For a written contract (not involving the sale of goods), the limitations period is ten years. For an oral contract (not involving the sale of goods), the limitations period is five years. For a contract involving the sale of goods, the limitations period is four years, but the parties may agree to shorten the limitations period to not less than one year (they cannot extend it). When multiple statutes of limitation arguably apply to a claim, Illinois courts will analyse the statutory language against the subject matter of the claim, and apply the statute that 'more specifically relates to the [cause of] action'.

A breach of contract claim begins accruing at the time of the breach, not when a party sustains damages. However, where one promises to render performance 'on demand' or at a specified time after demand, the statute of limitations does not begin to run until the demand is made.

ii Lack of consideration

As explained above, an enforceable contract requires consideration. In Illinois, sufficient consideration is '[a]ny act or promise which is of benefit to one party or disadvantage to the other'. Illinois courts generally will not inquire into the adequacy of consideration, only its existence. One exception to this rule is a non-compete agreement in the employment context. This exception is based on a recognition that 'a promise of continued employment may be an illusory benefit where the employment is at will'. Illinois courts have generally held that two years or more of continued employment constitutes adequate consideration, but they nevertheless evaluate the adequacy of consideration on a case-by-case basis.

iii Enforcement is contrary to public policy

A contract contrary to public policy can be voided. Illinois courts, however, have a 'long tradition' of protecting the interests of parties who 'freely contract' with one another, and thus rarely void contracts on public policy grounds. The burden rests on the party alleging the breach to show that the agreement is 'clearly contrary to what the constitution, the statutes, or the decisions of the courts have declared to be the public policy'. Alternatively, the non-breaching party may prove that the agreement is 'manifestly injurious to the public welfare'. Illinois courts have applied § 178 of the Restatement (Second) of Contracts when evaluating whether a contract contravenes public policy. Under the Restatement approach, a contract term may be unenforceable due to legislation that renders it unenforceable or due to it being 'clearly outweighed in the circumstances by a public policy'. For example, in a recent Illinois case, the court held that a confidentiality provision in a contract was void as against public policy because it was designed to conceal the parties' prior and continuing misrepresentations to third parties (including third-party banks) about ownership changes that might have resulted in a default under other agreements.

iv Duress and undue influence

Illinois courts will not enforce agreements entered into by an individual under duress. Economic duress or 'business compulsion' occurs when one party compels another party to enter into a contract by using wrongful acts or threats. An act is wrongful when it is contrary to moral sensibilities or when it is 'criminal, tortious, or in violation of a contract duty'. Economic duress goes beyond 'mere hard bargaining or the pressure of financial circumstances'. Rather, a claim of duress implies that, if not for the wrongful act, the agreement 'would have been avoided'.

Illinois courts also will not enforce agreements entered into by parties subject to 'undue influence'. Undue influence is a form of duress where one party presents 'an improper urgency of persuasion' to the extent that the other party is 'induced to do or forbear an act' that she otherwise would or would not do. The standard for undue influence is fact-dependent, and Illinois courts do not have a fixed threshold for determining whether a party was unduly influenced.

v Impossibility or impracticality

In general, Illinois courts will seek to uphold agreements 'where parties, by their own contract and positive undertaking, create a duty or charge upon themselves'. '[C]ontingencies, not provided against in the contract, which render performance impossible, do not bring the contract to an end'. However, the parties' contractual duties may be suspended when a condition, thing, or person necessary for the execution of the contract no longer exists. To invoke an impossibility defence, a party must have tried all practical alternatives and the cause of the impossibility cannot have been anticipated. The party also cannot have created the circumstances that gave rise to the impossibility. The contract must be objectively impossible to perform; subjective, 'personal inability' to perform does not absolve a party of its contractual obligations. Although Illinois courts recognise impossibility and impracticability as defences to the enforcement of a contract, there are few published cases in which the defences were successful.

vi Frustration of purpose

Frustration of purpose – or 'commercial frustration' – occurs when a change in circumstances undermines the reasons behind performing a contract. To prove frustration of purpose, a party must show that reasonably unforeseen circumstances made it impossible for the party to uphold the agreement or that the unforeseen circumstances destroyed the party's expected contractual benefits. The parties must have entered into the contract knowing that performance of the contract was predicated on the existence of the circumstances that later changed. The party alleging frustration of purpose must also show that the unforeseen circumstance 'totally or nearly totally destroyed [the value of counter-performance]'.

vii Lack of capacity

To enter into a contract, parties must be competent. Parties are competent at the age of majority, which is 18 years in Illinois. However, a party experiencing 'insane delusions or other mental illness' is not competent when the party's condition impairs its ability to understand the nature of the agreement. For agreements regarding necessities, the parties need not meet the capacity requirement.

viii Lack of legal authority

A party cannot enter into a contract on behalf of another person or entity unless the party has proper legal authority to do so. If a party attempts to enter into a contract on behalf of another without proper legal authority, the resulting contract is void ab initio; the other party to the contract cannot be held responsible for its promises.

ix A material breach by contracting party

A party may decline to perform its obligations under a contract if the other party has materially breached the contract by failing to perform its duties under the agreement. The breach must be 'so material and important' that it justifies ending the contract. Materiality is determined by whether a breach is 'so substantial and fundamental as to defeat the objects of the parties in making the agreement, or whether the failure to perform renders performance of the rest of the contract different in substance from the original agreement'.