Opinion ID: 2999151
Heading Depth: 2
Heading Rank: 2

Heading: Breach of the Franchise Agreement

Text: As it did at the bench trial, All EMS seeks to avoid liability for breach of the franchise agreement’s net worth provisions by asserting that 7-Eleven induced the breach when it failed to fulfil its own obligations under the contract. Although the district court decided the issue of contractual liability in 7-Eleven’s favor, All EMS now maintains that the district court, by reducing 7-Eleven’s award, “demonstrate[d] that the conduct of 7-Eleven prevented or frustrated the Wagdy’s [sic] ability to fully perform under the Store Franchise Agreement.” Appellants’ Br. at 28. This misconduct, according to the district court, included 7-Eleven’s failure to fix the Wagdys’ freezers and provide them with adequate consulting support. In addition, All EMS cites instances in which 7-Eleven deprived the Wagdys of the opportunity to participate in revenue-generating cigarette promotions and made improper charges against the Wagdys’ net worth account. All EMS claims that these additional instances of misconduct on the part of 7-Eleven were overlooked by the district court, further prevented the Wagdys from meeting their net worth Nos. 05-1234, 05-1330 Page 6 obligations and should excuse their breach. We shall address these contentions after setting forth the basic legal framework. Under Illinois law, “[a] party that fails to perform its contractual duties is liable for breach of contract, and a material breach of the terms of the contract will serve to excuse the other party from its duty of counterperformance.” Elda Arnhold & Byzantio, L.L.C., 284 F.3d at 700 (collecting Illinois authority). A breaching party will not be liable, however, when the other party to the contract unjustifiably caused the breach by preventing the breaching party from performing.2 A party is said to have prevented performance when it refuses to comply with its own obligations under the agreement, and the party accused of breach can show that it would have rendered performance absent the hindering party’s misconduct. See Restatement (Second) of Contracts § 245, comments a & b. In seeking relief from liability under this doctrine, All EMS first contends that the district court should have considered an assortment of “disputed charges” imposed by 7-Eleven that decreased the Wagdys’ net worth by a total of $8,263. Appellants’ Br. at 36. By wrongfully imposing these charges, All EMS submits, 7- Eleven contributed to the decline in the Wagdys’ net worth and induced their material breach. As far as we can tell, the most significant of these charges, and the only one addressed by All EMS in any detail, is a $6,167 “Inventory Variation charge” assessed in January 1999. See id. Concerning this charge, All EMS maintains that evidence of an “audit adjustment” occurring in December 1998 demonstrates that the charge was booked improperly against All EMS’ net worth account. We fail to see, however, why evidence of an “audit adjustment” would supply proof that the improper charge stayed on the books. As All EMS explains it, the audit would appear to have corrected such a charge. Moreover, as All EMS concedes, 7-Eleven offered testimony that this inventory variation was handled properly by its accountants. In hearing this testimony and reviewing what appears to be a proper adjustment, the district court’s refusal to accept All EMS’ contention was not clear error. 2 This rule has deep roots in the common law and has been reaffirmed by Illinois courts and federal courts applying Illinois law. See United States v. Peck, 102 U.S. 64, 65 (1880) (“[H]e who prevents a thing being done shall not avail himself of the non-performance he has occasioned.”); Cenco Inc. v. Seidman & Seidman, 686 F.2d 449, 453 (7th Cir. 1982) (“A breach of contract is excused if the promisee’s hindrance or failure to cooperate prevented the promisor from performing the contract.”); Pfaff v. Petrie, 71 N.E.2d 345, 351 (Ill. 1947) (“[D]elays and non-performance may be . . . excused where prevented by the other party to the contract.”). Nos. 05-1234, 05-1330 Page 7 All EMS contends next that 7-Eleven contributed to the decline in the Wagdys’ net worth by denying Mr. Wagdy the display pieces necessary to participate in lucrative cigarette promotions. In addressing this contention, the district court relied upon what it deemed credible testimony from Bernard Schmidt, a 7-Eleven field representative, that Mr. Wagdy already had the shelving necessary to participate in the cigarette promotions. All EMS now submits that Schmidt “had a problem recalling things” on the stand, Appellants’ Br. at 39, and therefore that his testimony should not have been credited. This argument does not present a sound basis for overturning the district court’s credibility determination on appeal. The district court heard Schmidt testify and did not think that his testimony should be discounted because of his problems recalling the events. Such a credibility determination “can virtually never amount to clear error,” Lac Du Flambeau v. Stop Treaty Abuse-Wisconsin, Inc., 41 F.3d 1190, 1194 (7th Cir. 1994), and it did not in this instance. Of course, the district court did find that 7-Eleven’s failure to repair the Wagdys’ freezers and provide adequate consulting support impeded All EMS’ ability to earn revenue and remedy its net worth balance. The court penalized 7-Eleven for its misconduct by reducing the award of damages. All EMS now submits that 7- Eleven’s misconduct also should relieve the Wagdys of contractual liability. However, even according to All EMS’ chronology, 7-Eleven’s misconduct cannot excuse the Wagdys’ breach. On January 31, 2000, All EMS’ net worth account reflected a balance of $0, meaning that All EMS was $10,000 short of the contractual minimum. Thus, as of this date, All EMS was in material breach of the franchise agreement and had until February 4, 2000 to cure the breach by paying 7- Eleven $10,000. All EMS paid only $301 before the February 4, 2000 deadline. It made no additional payment until February 21, 2000, and even that payment, $2,730, failed to remedy the net worth deficit. Failure to cure the January 31, 2000 shortfall placed All EMS squarely in breach of the agreement as of February 4, 2000. The February 4 date is crucial--and ultimately fatal to All EMS’ position-- because conduct attributed to 7-Eleven that caused the decline in All EMS’ net worth began at the earliest on March 23, 2000, well after All EMS already had breached the agreement. For instance, All EMS’ brief cites “Spring of 2000 as the first time 7-Eleven had notice of problems concerning the freezer equipment in the store. Appellants’ Br. at 12. More specifically, All EMS describes a visit on March 23, 2000 from 7- Eleven Field Consultant Bernard Schmidt, in which he observed the freezer problems and reported them to a 7-Eleven market manager. All EMS points out that, despite this visit, the freezer problems went unrepaired. Yet, even assuming 7-Eleven’s failure to fix the freezers hindered All EMS’ performance, this neglect did not begin for more than a month after All EMS had let its net worth deficit go Nos. 05-1234, 05-1330 Page 8 uncured. Similarly, the interruption in field consultant support, according to All EMS, began on July 17, 2000, when John Stetzinger replaced Schmidt as the field consultant assigned to All EMS’ store. See id. at 13. This date also is well after the point at which All EMS and the Wagdys were in material breach of the franchise agreement. The sequence of events establishes, therefore, that All EMS materially breached the agreement and surrendered its rights to the franchise before any conduct by 7-Eleven would have justified that breach. Of course, as the district court concluded, part of the subsequent decline in the Wagdys’ net worth may have been exacerbated by 7-Eleven’s own actions. Ordinarily, when one party to a contract is in material breach, the non-breaching party is excused from performance. See, e.g., Eager v. Berke, 142 N.E.2d 36 (Ill. 1957). However, when the non-breaching party was partially to blame for the harm that it suffered, there are two doctrines in contract law that allow a court to reduce the damages awarded to that party.3 The first is the obligation imposed on the nonbreaching party to mitigate damages. See Maier v. Lucent Techs., Inc., 120 F.3d 730, 738 (7th Cir. 1997) (discussing the duty to mitigate under Illinois contract law). In the present case, All EMS breached the franchise agreement first, but 7- Eleven failed to ease, or “mitigate,” the effect of this breach by refusing All EMS the services that it needed to maximize net worth for the remainder of the parties’ relationship. Therefore, the district court was justified in reducing 7-Eleven’s damages by the degree to which it failed to mitigate. The second doctrine supporting a reduction in 7-Eleven’s damages is known most commonly as “partial breach.” See Israel v. Nat’l Canada Corp., 658 N.E.2d 1184, 1190 (Ill. App. Ct. 1995) (citing Corbin on Contracts § 946 at 926). Under this doctrine, a non-breaching party who fails to terminate the contractual relationship upon the other party’s material breach will be said to treat that breach as “partial” instead of as material.4 In such a case, the non-breaching party may sue for 3 The district court, in analyzing “whether the reduction in Net Worth [was] justified due to 7-Eleven’s misconduct,” R.311 at 7, failed to specify which of these doctrinal approaches it followed. Nevertheless, we may affirm the ultimate conclusion on any basis fairly supported by the record. See Cygan v. Wisconsin Dep’t Corr., 388 F.3d 1092, 1098 (7th Cir. 2004). 4 An explanation of this approach can be found in Farnsworth on Contracts § 8.15 (2d. Ed. 2001): If the injured party does not terminate the contract, either because that party (continued...) Nos. 05-1234, 05-1330 Page 9 damages, but must continue performing its own obligations under the contract. Id. (“[A] partial breach by one party does not justify the other party’s subsequent failure to perform.” (internal quotation marks omitted)). Applying this doctrine to the record before us, we see that 7-Eleven, although justified at various points to terminate the contract, did not. It therefore was obligated, until it did terminate the agreement, to continue performing its end of the bargain. To the extent that it did not and therefore was responsible for the post-breach decline in All EMS’ net worth, the district court was correct in offsetting 7-Eleven’s damages accordingly. We therefore see no reason to upset the district court’s formula for apportioning damages.