Sahadi v. Continental Illinois National Bank & Trust Co. of Chicago
706 F.2d 193 (1983)
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Rule of Law:
Only a material breach of a contract provision by one party justifies non-performance by the other party. The determination of whether a breach is material is a complex question of fact that requires a full inquiry into the circumstances, even when a contract specifies a clear deadline for performance.
Facts:
- Great Lakes and European Lines, Inc. (GLE) and its guarantors, the Sahadis, had a contentious loan relationship with Continental Illinois Bank (the Bank) after the Bank repudiated an increased loan commitment.
- To settle their disputes, the parties executed two agreements on October 25, 1977, in which the Sahadis released the Bank from legal claims and provided additional collateral.
- In exchange, the Bank agreed to forbear from demanding payment on GLE's outstanding loan, provided GLE paid accrued interest 'on or before November 15, 1977.'
- The November 15 date was chosen by Sahadi without any contention from the Bank during negotiations.
- In their prior course of dealings, the Bank had routinely accepted late interest payments from GLE.
- Sahadi intentionally delayed the payment, believing the exact date was not critical, and planned to pay it from Chicago-based funds by the end of the week.
- On the morning of November 16, the Bank learned the payment had not been made. Later that day, the Bank presented GLE's representative with a notice calling the entire loan.
- The GLE representative immediately offered to tender the interest payment from GLE's account held at the Bank, but the Bank refused the payment.
Procedural Posture:
- The Sahadis, as assignees of Great Lakes and European Lines, Inc. (GLE), filed a lawsuit against Continental Illinois Bank in the U.S. District Court for breach of contract.
- The Bank moved for partial summary judgment on the breach of contract claim.
- The district court granted the Bank's motion for partial summary judgment, holding that the contract's payment date was unambiguous and that GLE's late payment constituted a breach.
- The Sahadis (plaintiffs-appellants) appealed the district court's order to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Does a party's failure to make an interest payment by the exact date specified in a forbearance agreement constitute a material breach of contract justifying the other party's immediate calling of a loan, when the payment was tendered less than one day late?
Opinions:
Majority - Harlington Wood, Jr.
No. A party's failure to make a payment by the exact date specified in a contract does not automatically constitute a material breach justifying termination of the agreement; determining materiality requires a fact-intensive inquiry inappropriate for summary judgment. Under Illinois law, only a material breach of contract justifies non-performance by the non-breaching party. Materiality is a question of fact that requires a trial to assess factors such as whether the breach defeated the bargained-for objective of the parties, caused disproportionate prejudice, or is considered material by custom and usage. In this case, there are genuine issues of fact as to whether the few-hour delay was material, especially since the Bank suffered de minimis prejudice, had accepted late payments in the past, and received significant concessions (a legal release and extra collateral) in the agreement. The district court erred by focusing on the 'unambiguity' of the date, as the presence of a clear deadline is merely the beginning, not the end, of the analysis into whether a slight delay in meeting it constitutes a material breach.
Analysis:
This decision reinforces the legal principle that courts disfavor forfeitures and will not enforce contract terms so literally as to produce an unjust result. It clarifies that even in formal commercial loan agreements, the doctrine of material breach applies to timing provisions, preventing a party from using a trivial, technical default as a pretext to terminate the contract. The ruling establishes that the materiality of a breach is almost always a question of fact for a jury, making it difficult for lenders to win on summary judgment when calling a loan based on a minor timing delay. This precedent encourages courts to look beyond the four corners of the agreement to the parties' course of dealing and the commercial context to determine if time was truly of the essence.
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