BREACH OF CONTRACT

Plaintiff moves for summary judgment on its breach of contract claim asserting that
during the period when defendant was an authorized distributor of plaintiff's products, in
response to purchase orders reccived from defendant, plaintiff shipped the ordered products to
defendant along with invoices totaling $871,019.50. Defendant argues that plaintiff is not
entitled to summary judgment on its contract claim based on a statutory’ and alleged contractual?
right to set-off costs defendant incurred based on the alleged increased fabrication cost defendant
incurred due to an alleged manufacturer's defect in some of the products shipped from plaintiff to
defendant.

Under Seventh Circuit precedent applying Minois law, a defendant’s claim in the nature
of a set-off must be pled as a counterclaim and is to be adjudicated separately from the plaintiff's
claim. See, Schieffelin & Co. v. Valley Liquors. Inc., 823 F.2d 1064, 1067-1068 (7" Cir, 1987);

S.A.M. Electronics, Inc. v. Osaraprasop, 39 F.Supp.2d 1074, 1086 (N.D. Ill. 1999). It is well-

recognized that under Illinois law, a set-off counterclaim is limited to damages arising out of the

“In its brief, defendant asserts a statutory right to set-off pursuant to 735 Ill. Comp. Stat. §
5/2-717. There is no such section. The court believes defendant’s argument is made pursuant to
a section of the U.C.C., codified in Illinois at 810 Ill. Comp. Stat. § 5/2-717, which provides:

Deduction of Damages From the Price. The buyer on notifying the seller of his intention
to do so may deduct all or any part of the damages resulting from any breach of the
contract from any part of the price still due under the same contract.

‘Defendant asserts that prior to each shipment at issue, defendant orally told plaintiff that
defendant would receive a set-olf of the invoice price reflecting defendant’s increased fabrication
costs, Which was a condition precedent to defendant’s obligation to pay for plaintiff's products,
and that plaintiff's shipment of the products to defendant with knowledge of defendant’s
intention to claim this set-off was an acceptance of this term.


noting that “Section 2-717, which allows a buyer to offset breach of contract damages but does
not mention prejudgment interest, does not require a different result.” /d.
CONCLUSION

For the reasons set forth above, the court grants plaintiff's motion for summary judgment
on Count J of its complaint and denics summary judgment on Count Il as moot. Because of
defendant’s set-off claim and the other six claims asserted against plaintiff in defendant’s
counterclaim, the court denies plaintiff's request to enter a final judgment on the amount owing
under plaintiff's breach of contract claim. The court notes, however, that the interest awarded
herein will continue to accrue on the $871,019.50 in unpaid invoices at 1.25% per month, until a

final enforceable judgment is entered.

ENTER: July 29, 2002

[ededd. Gatlimen

Robert W. Gettleman
United States District Judge



defendant pursuant to purchase orders placed with plaintiff! The amount of set-off damages
alleged are specified as $123,654.21,

Under Illinois law and Seventh Circuit precedent, therefore, defendant's only defense to
plaintiff's contract claim for $871,019.50 plus interest, is a set-off claim for $123,654.21. There
is no dispute that defendant’s purchase orders and plaintiff's invoices attached to the complaint
constitute valid contracts between the parties. The price of the goods is that stated in plaintiff's
invoices, less the potential set-off claim of $123,654.21, if defendant prevails on his breach of
warranty counterclaim. Based on the undisputed facts before it, the court finds that there is no
genuine issue of matcrial fact that plaintiff has established a valid contract claim and defendant’s
breach thercof. Accordingly, the court grants plainti{!’s motion for summary judgment on its
contract claim for $871,019.50. The granting of summary judgment on plaintiff’s contract claim,
of course, does not affect or prejudice defendant’s counterclaim, still pending before this court.
Because plaintiff’s account stated claim in Count IT is an altemative claim seeking the same

damages, the court denies summary judgment on that claim as moot.

‘In its counterclaim, defendant does not specify which purchase order or invoice number
the alleged defective products were shipped under, but alleges that the products were ordered and
received by defendant between December 2000 and June 2001. Citing to these allegations and
the documents attached to its complaint, plaintiff argues that defendant’s set-off counterclaim is
for defects in products that were alrcady paid for in full by defendant prior to the time any of the
shipments at issue in plainuff's complaint were shipped. Although the first purchase order
attached to plaintiff's complaint is dated June 27, 2001, the product invoice date, the dale the
materials were shipped to defendant, was July 9, 2001. While plaintiff may be correct that
defendant is seeking a set-off from previously paid items, it is unclear because the items are of
the same nature as the products al issue and pursuant to the same type of invoicing, rather than
claims relating to a separate distributorship agreement. Accordingly, the court will allow
defendant’s sct-off counterclaim alleged in Count Vi to stand against plaintiff's contract claim

6


same contract as the claim for the goods. Rebaque v. Forsythe Racing, Inc., 480 N.E.2d 1338,
1342 (IIL. App. CL. 1985),

Applying this standard to factually analogous situations, the Seventh Circuit has held that
“under Illinois law . . . distribution agreements and the purchase orders that arise under them arc
different contracts [and] [t]herefore, the price of the goods a buyer accepts pursuant to a purchase
order is not susceptible (o set-off against damages the buyer sustains as a result of a seller’s

alleged breach of a related distributorship agrecment.” Echo, Inc. v. Whitson Co., Inc., 52 I'.3d

702, 705 (7" Cir. 1995). This tule applies regardless of the fact that the goods sold pursuant to
the purchase orders are of the same character as those covered by the distribution agreement

between the parties. See, Shintom America, Inc. v. Car Telephones, Inc., 45 F.3d 1107, 1109 (7
Cir, 1995).

‘The first six counts of defendant’s counterclaim relate to plaintiff's alleged breach of the
distribution agreement between plaintiff and defendant, and thus cannot be used to scek a set-off
from plaintiff's contract claim, In Count VII of its counterclaim, however, defendant asserts a

breach of warranty claim based on alleged manufacturer’s defects in the products shipped to


1990 WL 92879 at *5 (N.D. TI. June 26, 1990) (enforcing provision in seller’s purchase order
acknowledgment form for a 1 % per month interest charge for late payment, under § 2-207);
Extel Corp. v. Cermetck Microelectronics, Inc., 539 N.E.2d 320, 323 (Il. App. Ct. 1989)
(provision in seller's invoice that accounts not paid in full within 30 days were subject to an 18
per cent per annum finance charge was a valid term of contract under UCC as intcrest provision
was not material alteration to contract and there was no record of objection to the term).

Attached to its reply brief, plaintiff provided an invoice interest calculation computing the
proper amount of total interest accrued by applying a 1.25 % per month rate as of July 1, 2002,
totaling $94,599.08. Thus, the total of invoices and interest due as of July 1, 2002, is
$965,618.58. Based on the undisputed terms of plaintiff’s invoices, the court finds plaintiff is
entitled to such interest as of thal date and accruing at that rate.

The court further finds that because defendant has withheld payment on this large of a
debt, with only $123,654.21 worth of damages that it had a legal right to setoff from such debt,
plaintiff is entitled to interest on the full amount of the invoiced debt equaling $871,019.50,
regardless of the merits of defcndant’s sct-off claim, which is to be adjudicated at a later date.”

In Twin Disc. Inc. v. Big Bud Tractor, Inc., 772 F.2d 1329, 1335-1336 (7" Cir. 1985), the court

affirmed the calculation of prejudgment interest on the amount the buyer owed to the seller on
account before offsetting the amount the seller owed to the buyer from a breach of warranty

claim. The court held that the seller was entitled to interest on the money as a matter of law,

’The merits of defendant’s breach of warranty sct-off claim has not been briefed and is
not before the court at this time.


Miawte Order Form (06,97)

United States District Court, Northern District of Illinois

vancofasanet ite | Robert W. Gettleman | Shinrsuie or

CASE NUMBER 01 C 8539 DATE July 29, 2002
CASE Inspec Foams,Inc. v The Claremont Sales Corp.
TITLE

[In the fallowing box (a) indicate the party filing the motion, ¢.g,, plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

of the motion being presented.)

(ut)

MOTION:

DOCKET ENTRY:

qd) Oo Filed motion of [ usc listing in “Motion” box above.]

Q) ia) Brief in support of motion due

GB) im} Answer brief to motiondue___. Reply to answer briefduc___

(4) o Ruling/Hearingon set fort.

(5) Oo Status hearing

(6) Oo Pretrial conference[held/continued to] [set for/re-set for}on set for at

(ea) o Trial[set for/re-set for] on, at.

(8) Qo (Bench/Jury trial] [Hearing] held/continued to__at

9) o This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OFRCP4(m) (General Rule21 OFRCP41(a)(1) OO FRCP41(a)(2),

ao) [Other docket entry]

Memorandum opinion and order entered. Accordingly,
Plaintiff's motion for summary judgment (doc. no. 13) is granted on
count I and denied on count II. Plaintiff is entitled to interest.

o [For further detail see order attached to the original minute order.]

‘No notices required, advised in open court,

No notices required, number af natices

Notices mailed by judge's staff.

au 9.0 2002

dare dncketed

NM oputy initials

‘Notified counsel by telephone.
Docketing to mail notices.

Mail AO 450 form,

Copy to judge/magistrate judge.

date mriled notice
courtroom

Gps deputy's
initials

Badri eaived ——
sentral Clerk’s Ottice mailing depuly initials



INTEREST ON OVERDUE AMOUNTS
In addition to the total of the unpaid invoices, $871,019.50, plaintiff moves for pre-
Judgment interest on this amount pursuant to the lerms set forth in plaintiffs invoices. The
invoice payment terms are: “net 45 days [rom date of invoice; 1.25 % per month finance charge
on late payments.” Defendants do not address or appear to dispute plaintiff's right to such
damages. Under the U.C.C., codified at 810 Ill. Comp. Stat. § 5/2-207,' and official comment 5
thereto,’ overdue payment interest penalty clauses in a seller’s shipping documentation are not

considered material alterations of the parties’ contract and thus arc incorporated into the parties’

contract terms. See, International Adhesive Coating Co., Inc. v. James River Paper Co.. Inc.,

Section 2-207(1)-(2) provides:

Additional Terms in Acceptance or Confirmation. (1) A definite and seasonable expression of
acceptance or a written confirmation which is sent within a reasonable time operates as an
acceptance even though it states terms additional to or different from those offered or agrecd
upon, unless acceptance is expressly made conditional on assent to the additional or different
terms.
(2) The additional terms are to be construed as proposals for addition to the contract.
Between merchants such terms become part of the contract unless:
(a) the offer expressly limits acccptancc to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a

reasonable time afler nolice of them is received,
ae * *

°Official Comment 5 to § 2-207, states:

5. Examples of clauses which involve no element of unreasonable surprise and which
therefore are to be incorporated in the contract unless notice of objection is seasonably
given arc: .. . a clause providing for interest on overdue invoices or fixing the seller's
standard credit terms where they are within the range of trade practice and do not limit
any credit bargained for


continuing through October 8, 2001. ‘The total of the invoices for these products, before intcrest,
is $871,019.50.

Upon receipt of the insulation products from plaintiff, defendant “fabricated” the material
by slicing it into specific sized pieces and applying an adhesive and fiberglass cloth material. In
its answer to plaintiff's complaint, defendant admits that it accepted each of the shipments at
issue and has sold or placed into its inventory for sale to defendant’s customers all of the
insulation products shipped pursuant to the specified invoiccs. Defendant further concedes that it
has not made any payment to plaintiff for the invoiced products at issue.

SUMMARY JUDGMENT

“Summary judgment is proper when the ‘pleadings, depositions, answers to

interrogatories, and admissions on file, together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving party is entitled to a judgment as a

matter of law.’” Bekker v, Humana Health Plan, Inc., 229 F.3d 662, 668 (7" Cir. 2000), quoting,
Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-323 (U.S. 1986). While the
movant has the burden of affirmatively demonstrating the absence of a genuine issue of fact, the
Opponent, “on the other hand, ‘may not rest upon the mere allegations or denials of his pleading,

but... must set forth specific facts showing that there is a genuine issue for trial.’” Shintom

America, Inc. v. Car Telephones, Inc., 45 F.3d 1107, 1109 (7" Cir. 1995) (citations omitted). In

determining whether a genuine issue of material fact exists, the court must review the record in
the light most favorable to the non-moving party and make all reasonable inferences in his or her

favor. See, Anderson v. Liberty Lobby, Inc., 477 U.S, 242, 255 (U.S. 1986),

w


in excess of $75,000. Count VIL, however, specifies that based on the alleged manufacturer’s
defects in a product known as Polyimed foam, of which plaintiff is the only supplier, one of
defendant’s customers, Bath Iron Works Corporation, rejected the products and defendant
incurred $123,654.21 to cure the alleged defects. Defendant also claims that in return for
defendant’s continued orders, plaintiff had agreed to negotiate the terms of a set-off from the
invoice price of such orders, but reneged on the agreement.

Shortly after defendant filed its answer and counterclaims, plaintiff filed a motion for
partial summary judgment on Counts J and Ll of its complaint. For the reasons sct forth below,
the court grants in part and denies in part plaintiffs motion.

FACTS!

Plaintiff manufactures insulation products. Defendant distributes insulation products and
other products related to certain construction industries, Defendant and a predecessor
corporation of plaintiff entered into a distribution agreement in September 1986, under which
defendant would purchase insulation products from plaintiff and distribute those products to
defendant’s customers. Under this agreement, defendant was an authorized distributor of
plaintiff's products from 1986 until at least September 2001.

During the period between June 27, 2001, and October 8, 2001, defendant sent plaintiff
15 purchase orders for insulation products. In response to these purchase orders, plaintiff

shipped insulation products with accompanying invoices to defendant beginning on July 9, and

"The facts are taken from the parties’ Local Rule 56.1 statements of undisputed facts.


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF JLLINOIS

LASTERN DIVISION
TNSPEC FOAMS, INC., )
)
Plaintiff, )
) No. 01 C 8539 .
v. )
) Judge Robert W. Gettleman DOCKETEE
THE CLAREMONT SALES CORPORATION, )
) JUL 3 0 200
Defendant. )

MEMORANDUM OPINION AND ORDER

Plaintiff Inspec Foams, Inc. filed a two-count complaint against defendant The Claremont
Sales Corporation asserting claims for breach of contract (Count 1) and, in the altemative,
account stated (Count II), based on: plaintiffs delivery of msulation products to defendant
pursuant to purchase orders issucd by defendant between June 27 and September 18, 2001;
defendant’s acceptance of delivery of such shipments invoiced by plaintiff between July 9 and
September 6, 2001; and, defendant’s failure to pay for such products. Plaintiff seeks an award
equal to the invoice price of the products accepted by defendant plus interest at the rale provided
for in plaintiff’s invoices.

Defendant answered and filed a seven-count counterclaim against plaintiff. The first six
counts assert causes of action arising from a distribution agreement between plaintiff and
defendant, alleging: breach of contract (Counts I-TV); promissory estoppel (Count V); and
tortuous interference with defendant’s relationship with its customers (Count VT). Count VIT
asserts a breach of warranty claim alleging that between December 2000 and Junc 2001,
defendant ordered and received from plaintiff 242 cartons of materials that had latent

manufacturer’s defects. In Counts 1-V1, defendant prays for judgment in an unspecified amount

a2