Business contract lawsuits often present each side of the transaction with the possibility of pursuing alternative remedies. Either party may consider (a) affirming the contract and claiming damages, or (b) disaffirming the contract and seeking rescission. The decision as to which approach is further complicated by the uncertainties as to the amount of damages recoverable and the need to defend against the approach taken by the opposite party.
The focus of this article is a recent Appellate Court decision in Quality Components Corporation v. Kel-Keef Enterprises, Inc., 316 Ill.App.3d 998, 250 Ill. Dec. 308, 738 N.E.2d 524 (1st Dist. 2000), appeal denied 193 Ill.2d 599, 250 Ill. Dec. 7, 744 N.E.2d 289, and the determination of when an election of a remedy occurs. To avoid a discussion of other aspects of the case which may be distracting and reach beyond the scope of this article, the factual background has been simplified.
Quality Components Corporation ("Buyer") and Kel-Keef Enterprises, Inc. ("Seller") entered into an asset purchase agreement in December 1989 under which Buyer purchased substantially all of the Seller’s assets. A significant portion of the sales price was paid via an installment promissory note for $160,000 payable over five years.
Within a year of the closing, the Buyer was sued by Rockwell who claimed that approximately 53 blueprints and drawings sold by the Seller were misappropriated trade secrets and the Buyer was forced to surrender them to Rockwell. The Buyer eventually decided to stop making any further installment payments on the promissory note to the Seller.
Due to the Buyer’s refusal to continue making installment payments, the Seller filed suit in chancery court for payment on the promissory note and to foreclose on the collateral (i.e. purchased assets). Buyer responded by pleading the Seller had materially breached the contract and therefore, Buyer was discharged from its duty to perform.
Buyer also filed a second suit at law claiming damages against the Seller for breach of contract. At the center of Buyer’s case was its position that Seller had breached the contract by failing to deliver the assets (i.e. blueprints and drawings) free and clear.
At the trial court level, the two cases were consolidated but the Buyer’s action at law was tried first before a jury. Thereafter, the Seller’s action on the promissory note was tried second as a bench trial.
The jury verdict on the Buyer’s breach of contract claim was in favor of the Buyer and against the Seller. However, the jury’s award was only $60,000 due in part to the fact that Buyer’s expert witness on damages was denied an opportunity to testify on the date the jury trial commenced.
Following the jury verdict, the trial judge entertained arguments regarding the Seller’s action on the promissory note and initially held that due to the material breach of contract by Seller, the Buyer was excused from making payments under the promissory note.
Seller and Buyer filed motions to reconsider. The Seller argued that the Buyer could not (a) receive damages of $60,000 for breach of contract, and (b) be relieved of making payments on the promissory note as a result of the breach of contract. Buyer’s response included an election to forego the $60,000 jury verdict and stand firm on its position that due to the material breach of contract, Buyer should be relieved of the obligation to make further payments on the promissory note. The balance due on the note as a result of the default rate of 18% per annum was by then over $200,000.
The trial court rejected the Buyer’s election to forego the jury verdict and entered judgment against Buyer for the balance on the promissory note including the accrued interest at 18% per annum less an offset for the judgment of $60,000 in damages against the Seller as per the jury’s award.
Buyer and Seller appealed. The principal issue concerned the election of remedies. Buyer contended that its election to forego the jury verdict and award of $60,000 prior to the entry of judgment constituted an election of a remedy which must be honored. Seller argued that Buyer had elected the remedy of damages by filing the suit at law seeking damages and it was not necessary for the suit at law to be prosecuted to judgment for an election of remedies to occur.
V. ELECTION OF REMEDIES:
The general rule regarding election of remedies in Illinois is well settled and should be confirmed to cases where:
"(1) double compensation of the plaintiff is threatened or (2) the defendant has actually been misled by the plaintiff’s conduct or (3) res adjudicata can be applied." Faber, Coe & Gregg, Inc. v. First National Bank of Chicago, 107 Ill.App.2d 204, 211, 246 N.E.2d 96, 100 (1969). Accord, International Association of Machinists & Aerospace Workers v. Industrial Commission, 79 Ill.2d 544, 550-51, 39 Ill. Dec. 196, 404 N.E.2d 787, 789 (1980)." Quality, 316 Ill.App.3d at 1008, 738 N.E.2d at 531.
In the instant case, the Buyer conceded that the remedies of (i) damages for Seller’s breach of contract and (ii) being excused from performing on the promissory note due to Seller’s breach of contract are inconsistent and would amount to double compensation. Furthermore, the Appellate Court held, "It is clear that the ‘prosecution of one remedial right to judgment or decree constitutes an election barring subsequent prosecution of inconsistent remedial rights.’ Majacher v. Laurel Motors, Inc., 287 Ill.App.3d 719, 726, 223 Ill. Dec. 683, 680 N.E.2d 416, 421 (1997)." Quality, 316 Ill.App.3d at 1007, 738 N.E.2d at 532.
While the Appellate Court noted that old authority in Illinois supported the rule that the mere bringing of an action may amount to an election, (see generally, Schopler, 6 A.L.R.2d at 72, see, e.g., Hanchett v. Riverdale Distillery Co., 15 Ill.App. 57 (1884), more recent authority shifts toward the rule of the Second Restatement which states:
"If a party has more than one remedy under the rules stated in this Chapter, his manifestation of a choice of one of them by bringing suit or otherwise is not a bar to another remedy unless the remedies are inconsistent and the other party materially changes his position in reliance on the manifestation." Restatement (Second) of Contracts § 378 (1981).
Referencing the shift toward the Second Restatement, the Appellate Court cites Gironda v. Paulsen, 238 Ill.App.3d 1081, 1084, 179 Ill. Dec. 75, 605 N.E.2d 1089, 1091 (1992); Finke v. Woodward, 122 Ill.App.3d 911, 919, 78 Ill. Dec. 297, 462 N.E.2d 13, 19 (1984); Altom v. Hawes, 63 Ill.App.3d 659, 662-63, 20 Ill. Dec. 330, 380 N.E.2d 7, 9 (1978).
The reliance by the trial court in its ruling on Douglas Theater Corp. v. Chicago Title & Trust Co., 288 Ill.App.3d 880, 224 Ill. Dec. 249, 681 N.E.2d 564 (1997) was deemed by the Appellate Court to be "entirely erroneous", stating:
"We find nothing in the language of the Douglas Theater decision to support either Kel-Keef’s [Seller’s] argument or the holding of the trial court. In fact, Douglas Theater appears to support the opposite proposition, as it states that a plaintiff ‘may pursue a remedy at law for damages and alternatively seek specific performance.’ Douglas Theater only prevents a plaintiff from seeking a remedy once a remedy inconsistent with the remedy sought is obtained." Quality, 316 Ill.App.3d at 1011, 738 N.E.2d at 533.
The Appellate Court held that the filing of Buyer’s suit at law for damages did not constitute an election of remedies and nothing in the record indicated the Seller materially changed its position in reliance thereon. Furthermore, the verdict for breach of contract (by the jury) had not been entered as a final judgment at the time Buyer attempted to make its election. Given the Buyer prevailed in both suits, Buyer was required to elect which remedy it wished to pursue before final judgment was entered in either case.
Clearly, Illinois law has adopted the rule as set forth in the Restatement (Second) of Contracts for the election of remedies. Moreover, absent a substantial change in position by the opposing party in reliance on the suit initially filed, the election can be made after submitting both legal and equitable claims for determination and prior to final judgment or decree being entered on either.
Frederick E. Roth of Roth Law Firm, Naperville, Illinois. A graduate of The John Marshall Law School, Mr. Roth received his B.S. in Accountancy with Honors from the University of Illinois. His firm served as counsel for Quality Components Corporation in the trials and appeals of the subject case.