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IN THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS COUNTY DEPARTMENT, LAW DIVISION

DEFENDANT/COUNTER-PLAINTIFF NEXFORD INDUSTRIAL HOLDINGS INC.'S MEMORANDUM IN OPPOSITION TO PLAINTIFF/COUNTER-DEFENDANT CARDINAL PEAK INDUSTRIES' MOTION TO DISMISS COUNTERCLAIM

Filed: November 2, 2022

I. INTRODUCTION

Defendant/Counter-Plaintiff Nexford Industrial Holdings Inc. ("Nexford" or "Counter-Plaintiff"), by and through its attorneys, Calderwood & Harkness LLP, respectfully submits this Memorandum in Opposition to the Motion to Dismiss Counterclaim (the "Motion") filed by Plaintiff/Counter-Defendant Cardinal Peak Industries ("Cardinal Peak" or "Counter-Defendant") and, in support thereof, states as follows.

On October 3, 2022, Nexford filed its Counterclaim in this action, asserting two counts against Cardinal Peak. Count I asserts a claim for Breach of Contract against Cardinal Peak arising from Cardinal Peak's failure to comply with the Exhibit C Surcharge Methodology and the notice requirements of Section 7.4 of the Master Supply Agreement between the parties (the "MSA"), reference number MSA-NIH-CPI-2020-001, dated January 15, 2020. Count II seeks a Declaratory Judgment — a judicial declaration of the parties' respective rights and obligations under the MSA's surcharge provisions, including MSA Section 7.4 and Exhibit C — as well as recovery of approximately $210,000 in overpayments made by Nexford on surcharge invoices that did not comply with the MSA's contractual requirements.

Cardinal Peak now moves to dismiss the Counterclaim in its entirety pursuant to Section 2-615 of the Illinois Code of Civil Procedure, arguing that the Counterclaim fails to state a claim upon which relief can be granted. Cardinal Peak's Motion should be denied for several independent reasons.

First, the Counterclaim states well-pleaded claims for both breach of contract and declaratory judgment under Illinois law, supported by specific contractual provisions that Cardinal Peak itself does not dispute were part of the parties' agreement. The Counterclaim identifies three distinct categories of material breach by Cardinal Peak: (i) failure to deliver timely Surcharge Notices as required by Section 7.4(a); (ii) deviation from the mandatory Exhibit C calculation methodology; and (iii) invoicing surcharges in excess of the 12% cap under Section 7.4(c) without obtaining Nexford's prior written consent.

Second, the Counterclaim is not merely a mirror or restatement of Nexford's affirmative defenses. Rather, it asserts independent, affirmative claims for monetary relief — specifically, the return of approximately $210,000 in overpayments — and for declaratory relief regarding the parties' prospective rights under the MSA. Neither form of relief is obtainable through affirmative defenses alone.

Third, the Counterclaim raises genuine factual disputes regarding the proper calculation of surcharges, the timeliness of Cardinal Peak's Surcharge Notices, and whether Cardinal Peak obtained the requisite written consent for cap exceedances — disputes that cannot and should not be resolved at the pleading stage.

For these reasons, and those set forth more fully below, the Court should deny Cardinal Peak's Motion to Dismiss the Counterclaim in its entirety and permit Nexford's claims to proceed to discovery and resolution on the merits.

II. FACTUAL BACKGROUND

A. The Master Supply Agreement

On January 15, 2020, Nexford and Cardinal Peak entered into the Master Supply Agreement, reference number MSA-NIH-CPI-2020-001 (the "MSA"), for the supply of hot-rolled coil ("HRC") and cold-rolled coil ("CRC") steel products. (Counterclaim ¶¶ 8–10.) The MSA is a comprehensive, negotiated commercial agreement that governs the pricing, quantity, delivery, and quality terms of Cardinal Peak's supply of steel products to Nexford. Cardinal Peak's own Complaint in this action is premised upon the MSA, and there is no dispute between the parties that the MSA constitutes a valid and enforceable contract under Illinois law.

The MSA established an initial three-year term commencing January 15, 2020 and running through January 14, 2023, with automatic one-year renewal periods unless either party provided written notice of termination no fewer than 180 days before the end of the then-current term. (Counterclaim ¶ 11; MSA § 2.1.) As of the date the Counterclaim was filed, the MSA had not been terminated and remained in effect.

The MSA established base pricing for the two primary product categories: HRC at $620 per ton and CRC at $740 per ton. (Counterclaim ¶ 12; MSA § 7.1.) These base prices were subject to quarterly adjustment in accordance with Section 7.2 of the MSA, which provided a formulaic adjustment mechanism tied to published market indices. The parties estimated annual volumes of approximately 18,000 tons of HRC and 6,500 tons of CRC, for a total estimated annual volume of approximately 24,500 tons, representing an estimated annual spend of approximately $15.97 million. (Counterclaim ¶ 13.) These volume estimates underscored the significance of the commercial relationship between the parties and the importance of the MSA's pricing and surcharge provisions to Nexford's business operations and cost planning.

B. The Surcharge Provisions — MSA Section 7.4 and Exhibit C

Section 7.4 of the MSA authorized Cardinal Peak, as the supplier, to pass through documented raw-material surcharges to Nexford, as the buyer, in certain defined circumstances. These surcharges were limited to three categories: scrap surcharges, energy surcharges, and alloy surcharges. (Counterclaim ¶ 14; MSA § 7.4.) Critically, however, Cardinal Peak's entitlement to pass through such surcharges was not unlimited or discretionary. The MSA expressly conditioned Cardinal Peak's right to invoice surcharges upon strict compliance with three requirements — a notice requirement, a mandatory calculation methodology, and a cap provision — each of which was the product of arms'-length negotiation between sophisticated commercial parties.

Section 7.4(a) — Notice Requirement. Section 7.4(a) of the MSA required Cardinal Peak to deliver a Surcharge Notice, accompanied by supporting documentation, to Nexford no later than fifteen (15) business days after the end of the applicable month in which the surcharge was incurred. (Counterclaim ¶ 15; MSA § 7.4(a).) The supporting documentation was to include, among other things, the published index data upon which the surcharge calculation was based and a calculation showing the derivation of the surcharge amount. This notice requirement was not a mere formality; it was a material term of the MSA designed to ensure that Nexford had timely access to the data necessary to verify the accuracy and contractual compliance of Cardinal Peak's surcharge invoices. The 15-business-day deadline was specific and unambiguous, reflecting the parties' intent that Cardinal Peak's right to invoice surcharges was conditioned upon timely notice.

Exhibit C — Surcharge Methodology. Exhibit C to the MSA set forth the detailed methodology by which surcharges were to be calculated. (Counterclaim ¶¶ 16–17; MSA, Ex. C.) The methodology was specific, prescriptive, and mandatory. Surcharges were to be calculated using the published Ferrous Scrap Index (as reported by Drayton Partners LLC, formerly known as SPI) and the Industrial Energy Cost Index, applied against agreed baseline costs: a baseline scrap cost of $340 per ton and a baseline energy cost of $48 per ton. (Counterclaim ¶ 17; MSA, Ex. C, §§ 1–3.) Where the published index value for a given month exceeded the applicable baseline cost, the difference was to be applied on a per-ton basis to calculate the surcharge for that product category. Where the published index value was at or below the applicable baseline, no surcharge was to be invoiced for that cost component. The Exhibit C methodology left no room for Cardinal Peak to substitute alternative data sources, internal cost metrics, or proprietary calculations in lieu of the specified published indices.

Section 7.4(c) — Cap Provision. Section 7.4(c) of the MSA imposed a further limitation on Cardinal Peak's surcharge authority: the aggregate monthly surcharge for any product category could not exceed twelve percent (12%) of the applicable Base Price for that product category without the prior written consent of Nexford. (Counterclaim ¶ 18; MSA § 7.4(c).) For HRC, priced at a base of $620 per ton, the 12% cap equated to a maximum surcharge of $74.40 per ton absent Nexford's written authorization. For CRC, priced at $740 per ton, the cap equated to $88.80 per ton. This cap provision served a critical risk-allocation function: it limited Nexford's exposure to raw-material cost volatility and ensured that extreme surcharge claims could not be imposed unilaterally by Cardinal Peak. The consent mechanism — requiring prior written consent — reflected a deliberate contractual structure under which surcharges above the cap required bilateral agreement, not mere notification.

These three provisions — the notice requirement, the mandatory calculation methodology, and the cap — operated in tandem to govern the surcharge regime under the MSA. Together, they represented the carefully negotiated balance between Cardinal Peak's right to recover genuine raw-material cost increases and Nexford's right to transparency, verification, and cost certainty.

C. Cardinal Peak's Breaches of the MSA

During the period from March 2021 through May 2022 (the "Disputed Period"), Cardinal Peak invoiced Nexford for total surcharges of approximately $6.41 million across both HRC and CRC product categories. (Counterclaim ¶ 20.) Nexford reviewed each Surcharge Notice and its accompanying documentation (where provided) and paid $1.68 million of those surcharges that it determined were properly documented, timely noticed, and correctly calculated in accordance with the MSA's requirements. (Counterclaim ¶ 21.) Cardinal Peak now claims, through its Complaint in this action, that Nexford owes an additional $4.73 million in unpaid surcharges (the difference between the $6.41 million invoiced and the $1.68 million paid). (Complaint ¶¶ 32–35.)

Nexford's Counterclaim alleges — and the Court must accept these allegations as true at the pleading stage — that Cardinal Peak materially breached the MSA in three distinct and independently actionable ways during the Disputed Period:

(1) Late Surcharge Notices. For seven (7) of the fourteen (14) disputed months within the Disputed Period, Cardinal Peak failed to deliver compliant Surcharge Notices to Nexford within the mandatory 15-business-day deadline prescribed by Section 7.4(a) of the MSA. (Counterclaim ¶¶ 23–25.) In some instances, the Surcharge Notice was delivered weeks or even months after the contractual deadline had passed. In other instances, the purported notice was delivered without the required supporting documentation, rendering it incomplete and non-compliant. The surcharges attributable to these seven months of non-compliant notices total approximately $2.18 million. (Counterclaim ¶ 26.) Because Section 7.4(a) conditions Cardinal Peak's entitlement to pass through surcharges upon timely notice, Cardinal Peak's failure to comply with this requirement for over half of the Disputed Period months is a material breach of the MSA.

(2) Deviation from the Exhibit C Methodology. Rather than calculating surcharges using the published Ferrous Scrap Index and the Industrial Energy Cost Index — as expressly required by Exhibit C — Cardinal Peak utilized an internal "blended cost" metric that amalgamated proprietary data from Cardinal Peak's own operations with selectively chosen third-party data that did not correspond to the indices specified in Exhibit C. (Counterclaim ¶¶ 27–30.) The result of this unauthorized methodology was a systematic overstatement of surcharges. Nexford's analysis, based on the contractually specified indices and baseline costs, reveals that the deviation from the Exhibit C methodology resulted in an overstatement of surcharges of approximately $1.47 million across the Disputed Period. (Counterclaim ¶ 31.) Cardinal Peak was not authorized to deviate from the Exhibit C methodology, and its unilateral decision to do so constitutes a separate and independent breach of the MSA.

(3) Cap Exceedances Without Written Consent. For four (4) months during the Disputed Period, Cardinal Peak's invoiced surcharges exceeded the 12% cap imposed by Section 7.4(c) of the MSA. (Counterclaim ¶¶ 32–33.) At no time did Cardinal Peak obtain — or even seek — Nexford's prior written consent to exceed the cap for any of these months. The aggregate amount by which Cardinal Peak's invoiced surcharges exceeded the 12% cap across these four months totals approximately $1.08 million. (Counterclaim ¶ 34.) Cardinal Peak's unilateral invoicing of above-cap surcharges without obtaining the contractually required written consent constitutes a third independent breach of the MSA.

When these three categories of breach are reconciled — accounting for overlap among months in which more than one category of breach occurred — Nexford calculates that, after crediting the $1.68 million it has already paid, it has in fact overpaid Cardinal Peak by approximately $210,000 beyond the amounts that were properly owed under the MSA. (Counterclaim ¶¶ 36–37.) Nexford seeks recovery of this overpayment through its Counterclaim.

D. Procedural History

The procedural history of this action is as follows. On August 8, 2022, Cardinal Peak filed its Complaint in this Court, asserting claims against Nexford for breach of contract (Count I), unjust enrichment (Count II), and account stated (Count III), seeking recovery of $4.73 million in allegedly unpaid surcharges plus interest and attorneys' fees. (Dkt. No. 1.) On September 19, 2022, Nexford filed its Answer and Affirmative Defenses to Cardinal Peak's Complaint, denying liability and asserting, among other defenses, that Cardinal Peak had failed to comply with the conditions precedent to surcharge entitlement under the MSA. (Dkt. No. 14.) On October 3, 2022, Nexford filed its Counterclaim, asserting Count I for Breach of Contract and Count II for Declaratory Judgment, seeking recovery of the approximately $210,000 overpayment and a judicial declaration of the parties' respective rights and obligations under MSA Section 7.4 and Exhibit C. (Dkt. No. 18.)

On October 17, 2022, Cardinal Peak filed its Motion to Dismiss the Counterclaim pursuant to Section 2-615 of the Illinois Code of Civil Procedure, arguing that the Counterclaim fails to state a claim upon which relief can be granted. (Dkt. No. 22.) This Memorandum in Opposition is timely filed in response to that Motion.

III. LEGAL STANDARD

Cardinal Peak moves to dismiss Nexford's Counterclaim pursuant to Section 2-615 of the Illinois Code of Civil Procedure, 735 ILCS 5/2-615. A motion to dismiss under Section 2-615 tests the legal sufficiency of a complaint or counterclaim by examining whether the pleading, taken in the light most favorable to the non-movant, states a cause of action upon which relief can be granted. marshall v. Burger King Corp., 222 Ill. 2d 422, 429, 856 N.E.2d 1048, 1053 (2006).

In ruling on a Section 2-615 motion, the Court must accept all well-pleaded facts in the counterclaim as true and draw all reasonable inferences from those facts in favor of the counter-plaintiff. Vitro v. Mihelcic, 209 Ill. 2d 76, 81, 806 N.E.2d 632, 634 (2004). A court should not dismiss a cause of action on the pleadings unless it is clearly apparent that no set of facts can be proved under the pleadings that would entitle the plaintiff to relief. Pooh-Bah Enters., Inc. v. Cty. of Cook, 232 Ill. 2d 463, 473, 905 N.E.2d 781, 789 (2009).

The standard for surviving a motion to dismiss under Section 2-615 is deliberately liberal. Illinois courts have consistently held that doubts regarding the sufficiency of a pleading should be resolved in favor of the non-movant. Wakulich v. Mraz, 203 Ill. 2d 223, 228, 785 N.E.2d 843, 847 (2003). The question is not whether the counter-plaintiff will ultimately prevail on the merits, but whether the counter-plaintiff has alleged facts sufficient to state a cognizable cause of action. King v. First Capital Fin. Servs. Corp., 215 Ill. 2d 1, 12, 828 N.E.2d 1155, 1161 (2005). This standard applies with equal force to counterclaims as it does to complaints. See Raprager v. Allstate Ins. Co., 183 Ill. App. 3d 847, 855, 539 N.E.2d 787, 791 (1st Dist. 1989).

Applying these principles here, the Court should deny Cardinal Peak's Motion to Dismiss because Nexford's Counterclaim readily satisfies the liberal pleading requirements of Section 2-615.

IV. ARGUMENT

A. Count I of the Counterclaim States a Viable Claim for Breach of Contract Under Illinois Law

1. The Elements of Breach of Contract Are Adequately Pleaded. Under Illinois law, a claim for breach of contract requires the plaintiff to plead: (a) the existence of a valid and enforceable contract; (b) performance by the plaintiff (or a valid excuse for nonperformance); (c) breach by the defendant; and (d) resulting damages. Priebe v. Top Tag, Inc., 2015 IL App (1st) 142172, ¶ 11; Henderson-Smith & Assocs., Inc. v. Nahamani Family Serv. Ctr., Inc., 323 Ill. App. 3d 15, 27, 752 N.E.2d 33, 43 (1st Dist. 2001). Nexford's Counterclaim pleads each of these elements with specificity and particularity that exceeds what is required at the pleading stage.

Existence of a Valid and Enforceable Contract. The MSA (MSA-NIH-CPI-2020-001), executed on January 15, 2020, is a valid and enforceable contract between Nexford and Cardinal Peak. (Counterclaim ¶¶ 8–10.) There is no dispute as to this element. Cardinal Peak's own Complaint in this action relies upon the MSA as the basis for its breach of contract claim against Nexford. (Complaint ¶¶ 8–12.) A party cannot rely upon a contract for its own claims while simultaneously arguing that the counter-party's claims under the same contract are insufficient. The existence of the MSA is beyond question.

Performance by Nexford. The Counterclaim alleges that Nexford performed its obligations under the MSA, including its payment obligations. Nexford paid $1.68 million in surcharges that it determined complied with the MSA's requirements — specifically, surcharges that were timely noticed pursuant to Section 7.4(a), correctly calculated pursuant to the Exhibit C methodology, and within the 12% cap under Section 7.4(c). (Counterclaim ¶¶ 21–22.) Moreover, the Counterclaim alleges that Nexford timely disputed the noncompliant surcharge invoices within the 30-calendar-day window prescribed by Section 7.4(d) of the MSA. (Counterclaim ¶ 38.) Nexford's decision not to pay surcharges that did not comply with the MSA's express requirements was itself a performance of its contractual rights — Nexford was not obligated to pay surcharges that were untimely noticed, improperly calculated, or above the cap without consent. To the extent Cardinal Peak contends that Nexford's nonpayment of disputed surcharges constitutes a breach, that argument goes to the merits, not to the legal sufficiency of Nexford's pleading.

Breach by Cardinal Peak. The Counterclaim specifically pleads three categories of breach by Cardinal Peak, each tied to an identified provision of the MSA:

(i) For seven of the fourteen disputed months during the Disputed Period, Cardinal Peak failed to deliver compliant Surcharge Notices within the mandatory 15-business-day deadline under Section 7.4(a) of the MSA, affecting approximately $2.18 million in claimed surcharges. (Counterclaim ¶¶ 23–26.)

(ii) Cardinal Peak used an internal "blended cost" calculation methodology rather than the published Ferrous Scrap Index and Industrial Energy Cost Index specified in Exhibit C, resulting in an overstatement of approximately $1.47 million. (Counterclaim ¶¶ 27–31.)

(iii) For four months during the Disputed Period, Cardinal Peak invoiced surcharges exceeding the 12% cap under Section 7.4(c) without obtaining Nexford's prior written consent, with the aggregate excess above the cap totaling approximately $1.08 million. (Counterclaim ¶¶ 32–34.)

These are not vague or conclusory allegations. Each category of breach identifies the specific contractual provision violated, the specific months affected, and the specific dollar amounts at issue. This level of particularity more than satisfies the pleading requirements of Section 2-615.

Damages. Nexford has pleaded specific damages of approximately $210,000, representing the net overpayment made by Nexford on surcharge invoices that, upon proper application of the MSA's contractual methodology, notice requirements, and cap provision, were not owed. (Counterclaim ¶¶ 36–37.) This is a definite, ascertainable sum that Nexford seeks to recover from Cardinal Peak. The Counterclaim explains the derivation of this figure: total surcharges invoiced ($6.41 million), less total surcharges properly owed under the MSA upon application of all three requirements (approximately $1.47 million), less amounts paid ($1.68 million), resulting in an overpayment of approximately $0.21 million. (Counterclaim ¶ 37.) While Cardinal Peak may dispute these calculations on the merits, the existence and amount of damages is a factual question not properly resolved on a motion to dismiss.

In sum, all four elements of a breach of contract claim are adequately pleaded. Count I of the Counterclaim should survive the Motion to Dismiss.

2. The Counterclaim Is Not Merely a Restatement of Affirmative Defenses. Cardinal Peak's principal argument in support of its Motion appears to be that Nexford's Counterclaim is duplicative of its affirmative defenses and therefore should be dismissed as redundant. This argument is legally unsound and should be rejected.

Illinois law is clear that a party may plead both affirmative defenses and counterclaims arising from the same operative facts. Affirmative defenses and counterclaims serve fundamentally different procedural purposes. An affirmative defense operates as a shield — it seeks to defeat or reduce the plaintiff's claims by raising matters that, if established, negate the plaintiff's right to recovery. See Zannini v. Reliance Ins. Co. of Ill., 147 Ill. 2d 437, 453, 588 N.E.2d 1084, 1091 (1992). A counterclaim, by contrast, operates as a sword — it asserts an independent cause of action seeking affirmative relief from the opposing party. Safeway Ins. Co. v. Hadary, 320 Ill. App. 3d 34, 38, 745 N.E.2d 31, 35 (1st Dist. 2001).

The distinction is not merely academic. It has concrete procedural and practical consequences. Most critically, affirmative defenses cannot yield affirmative monetary relief. A defendant that successfully proves an affirmative defense may defeat the plaintiff's claims but cannot recover damages from the plaintiff. See Miner v. Fashion Enters., Inc., 342 Ill. App. 3d 405, 417, 794 N.E.2d 902, 912 (1st Dist. 2003). Here, Nexford seeks affirmative monetary relief — the return of approximately $210,000 in overpayments. This relief is obtainable only through a counterclaim, not through an affirmative defense. If the Court were to dismiss the Counterclaim, Nexford would be deprived of any mechanism to recover the overpayment, even if it demonstrates at trial that Cardinal Peak breached the MSA and that Nexford paid more than was owed.

Similarly, Nexford's claim for declaratory relief under Count II — seeking a judicial declaration of the parties' rights under the MSA's surcharge provisions — is a form of affirmative relief that is not available through an affirmative defense. A declaratory judgment defines the parties' prospective rights and obligations, providing binding guidance for future conduct. This is especially significant here because the MSA remained in effect at the time the Counterclaim was filed and may be subject to automatic renewal.

Moreover, the fact that some of the operative facts underlying Nexford's affirmative defenses overlap with the facts supporting its Counterclaim does not render the Counterclaim improper. Illinois courts have repeatedly recognized that "the same facts may support both a defense and a counterclaim," and that the mere existence of factual overlap does not render a counterclaim impermissibly duplicative. Havoco of Am., Ltd. v. Hill, 197 Ill. 2d 557, 575, 790 N.E.2d 390, 400 (2003). The availability of a counterclaim is especially appropriate where, as here, the counter-plaintiff's damages and the plaintiff's damages arise from different aspects of the same contractual relationship. Cardinal Peak's claims arise from Nexford's alleged failure to pay surcharges; Nexford's Counterclaim arises from Cardinal Peak's alleged overcharging and breach of the surcharge provisions. These are distinct wrongs giving rise to distinct remedies.

Cardinal Peak's redundancy argument, if accepted, would effectively bar any defendant from filing a counterclaim whenever it has also asserted affirmative defenses on related facts — a result that finds no support in Illinois law and would undermine the purpose of permissive counterclaim practice under Illinois Supreme Court Rule 281 and Section 2-608 of the Code of Civil Procedure. The Court should reject this argument.

3. The Surcharge Notice Requirement Under Section 7.4(a) Is a Condition Precedent, and Cardinal Peak's Failure to Comply States a Breach. The Counterclaim alleges, and the Court must accept as true, that Cardinal Peak failed to deliver compliant Surcharge Notices within the mandatory 15-business-day deadline under Section 7.4(a) for seven of the fourteen disputed months. Cardinal Peak apparently contends that this allegation does not state a cognizable breach. That contention is wrong.

Section 7.4(a) of the MSA provides in relevant part:

"Seller may pass through documented raw-material surcharges to Buyer provided that Seller delivers to Buyer a Surcharge Notice with supporting documentation no later than fifteen (15) business days after the end of the applicable month in which the surcharge was incurred."

(MSA § 7.4(a) (emphasis added).)

The use of the conditional language "provided that" creates a condition precedent to Cardinal Peak's entitlement to surcharge payments. Under Illinois law, a condition precedent is "an act or event, other than a lapse of time, which must exist or occur before a duty of immediate performance of a promise arises." Sheppard v. Kruck, 323 Ill. App. 3d 628, 632, 753 N.E.2d 1040, 1044 (2d Dist. 2001); see also Restatement (Second) of Contracts § 224 (1981). The word "provided that" is among the most commonly recognized formulations for creating a condition precedent in contractual drafting. See Midwest Builder Distrib., Inc. v. Lord & Essex, Inc., 383 Ill. App. 3d 645, 659, 891 N.E.2d 1, 13 (2d Dist. 2008).

Cardinal Peak's failure to satisfy this condition precedent for seven of the fourteen disputed months is not merely a defensive matter that reduces or offsets Cardinal Peak's claims. It is an independently actionable breach. When Cardinal Peak invoiced Nexford for surcharges that had not been properly noticed under Section 7.4(a), Cardinal Peak acted in violation of the MSA. And when Nexford — in reliance on Cardinal Peak's invoices and under the time pressures of ongoing commercial operations — paid a portion of those improperly noticed surcharges, Cardinal Peak received payments to which it was not contractually entitled. The Counterclaim seeks to recover that portion of the overpayment attributable to improperly noticed surcharges.

To the extent Cardinal Peak argues that it substantially complied with the notice requirement, or that Nexford waived strict compliance by paying certain late-noticed invoices, those arguments raise factual questions that cannot be resolved on a motion to dismiss. Illinois courts have consistently held that issues of substantial compliance, waiver, and estoppel are fact-intensive inquiries that are inappropriate for resolution at the pleading stage. See LaSalle Nat'l Trust, N.A. v. Schaffner, 286 Ill. App. 3d 18, 28, 676 N.E.2d 233, 240 (1st Dist. 1996) ("Waiver is a question of fact that is not properly decided on a motion to dismiss."). At this stage, the Court must accept Nexford's well-pleaded allegation that Cardinal Peak failed to comply with the 15-business-day notice requirement and that this failure constitutes a breach of the MSA.

4. Cardinal Peak's Deviation from the Exhibit C Methodology Is a Separately Pleadable Breach. The Counterclaim further alleges that Cardinal Peak breached the MSA by calculating surcharges using a methodology that deviated from the mandatory requirements of Exhibit C. This allegation is specific, well-pleaded, and states a cognizable breach of contract claim.

Exhibit C to the MSA prescribed a specific and mandatory calculation methodology for surcharges. (Counterclaim ¶¶ 16–17; MSA, Ex. C.) The methodology required Cardinal Peak to use two published indices — the Ferrous Scrap Index (as reported by Drayton Partners LLC) and the Industrial Energy Cost Index — and to apply those indices against agreed baseline costs: a baseline scrap cost of $340 per ton and a baseline energy cost of $48 per ton. (Counterclaim ¶ 17.) The methodology was not a guideline or a suggestion; it was a mandatory, contractually binding formula that Cardinal Peak was required to follow in calculating any surcharge invoiced to Nexford.

The Counterclaim alleges that Cardinal Peak disregarded the Exhibit C methodology and instead used an internal "blended cost" metric — a proprietary calculation that amalgamated Cardinal Peak's actual operational costs with selectively chosen third-party data sources that did not correspond to the indices specified in Exhibit C. (Counterclaim ¶¶ 27–30.) This deviation was not an inadvertent error in a single month's calculation; it was a systematic departure from the contractual methodology that persisted throughout the Disputed Period and resulted in an overstatement of surcharges of approximately $1.47 million. (Counterclaim ¶ 31.)

The use of a non-conforming methodology to calculate surcharges and then invoice Nexford for the resulting inflated amounts constitutes a breach of the MSA. A contract that specifies a particular methodology for determining a price component implicitly prohibits the use of any alternative methodology. See Avery v. Brightmoor Indemnity Co., 216 Ill. 2d 100, 129, 835 N.E.2d 801, 821 (2005) (contractual terms must be given their plain and ordinary meaning, and where a contract is clear and unambiguous, its terms must be enforced as written). Cardinal Peak cannot unilaterally substitute its own internal cost figures for the published indices that the parties agreed to use. To permit Cardinal Peak to do so would render Exhibit C meaningless — a result that is contrary to the well-established Illinois principle that all provisions of a contract must be given effect and no provision should be treated as surplusage. See Thompson v. Gordon, 241 Ill. 2d 428, 441, 948 N.E.2d 39, 47 (2011).

The approximately $1.47 million overstatement attributable to Cardinal Peak's deviation from the Exhibit C methodology is a factual allegation that the Court must accept as true at this stage. Whether the deviation actually occurred, and the precise amount of the resulting overstatement, are factual matters for discovery and trial. At the pleading stage, Nexford's allegation is more than sufficient.

5. Invoicing Above the 12% Cap Without Written Consent Constitutes an Additional Breach. Finally, the Counterclaim alleges that for four months during the Disputed Period, Cardinal Peak invoiced surcharges that exceeded the 12% cap imposed by Section 7.4(c) of the MSA without obtaining Nexford's prior written consent. (Counterclaim ¶¶ 32–34.)

The language of Section 7.4(c) is unambiguous:

"The aggregate monthly surcharge for any product category shall not exceed twelve percent (12%) of the applicable Base Price for the relevant product category without the prior written consent of Buyer."

(MSA § 7.4(c).)

This provision imposes an absolute ceiling on the surcharge that Cardinal Peak may invoice for any product category in any given month, absent Nexford's prior written consent. The cap is expressed in clear, mandatory terms — "shall not exceed" — and the consent mechanism is equally clear — "prior written consent." There is no ambiguity in this provision that would require interpretation at the pleading stage.

The Counterclaim alleges that Cardinal Peak does not possess, and cannot produce, any written consent from Nexford authorizing surcharges in excess of the 12% cap for any of the four months at issue. (Counterclaim ¶ 33.) Cardinal Peak's own Complaint and Motion to Dismiss do not allege or argue that it obtained such consent. The aggregate amount by which Cardinal Peak's invoiced surcharges exceeded the 12% cap across these four months totals approximately $1.08 million. (Counterclaim ¶ 34.)

Cardinal Peak's invoicing of above-cap surcharges without obtaining the required prior written consent constitutes an independent breach of the MSA. This breach is separate and distinct from the notice and methodology breaches described above, although there is some overlap in the affected months. The Counterclaim adequately pleads this breach with the specificity required under Section 2-615.

B. Count II of the Counterclaim States a Viable Claim for Declaratory Judgment

1. Illinois Declaratory Judgment Standards Are Satisfied. Count II of the Counterclaim seeks a declaratory judgment pursuant to the Illinois Declaratory Judgment Act, 735 ILCS 5/2-701, declaring the parties' respective rights and obligations under MSA Section 7.4, Exhibit C, and Section 7.4(c). The Declaratory Judgment Act provides that courts "may, in cases of actual controversy, make binding declarations of rights, status, and other legal relations whether or not further relief is or could be prayed." 735 ILCS 5/2-701(a). To invoke the Act, the counter-plaintiff must demonstrate: (1) a plaintiff who is interested under a deed, will, written instrument, or contract; (2) a defendant who has or claims an interest that is adverse to the plaintiff; and (3) an actual controversy between the parties. John Crane Inc. v. Admiral Ins. Co., 391 Ill. App. 3d 693, 698, 909 N.E.2d 788, 793 (1st Dist. 2009).

All three requirements are plainly satisfied here. Nexford is interested under a written instrument — the MSA — and seeks a declaration of its rights thereunder. Cardinal Peak claims adverse interests under the same instrument, asserting entitlement to $4.73 million in surcharges. And an actual controversy manifestly exists: the parties fundamentally disagree about the proper interpretation and application of MSA Section 7.4, Exhibit C, and the surcharge cap provision. Cardinal Peak claims it is owed $4.73 million in unpaid surcharges; Nexford contends it owes nothing further and has overpaid by approximately $210,000. The gap between these positions — nearly $5 million — reflects a genuine, substantial, and justiciable controversy.

A declaratory judgment will resolve the parties' rights under the MSA and provide clarity regarding three contested issues: (a) whether Section 7.4(a)'s 15-business-day notice requirement is a condition precedent to Cardinal Peak's entitlement to surcharge payments, such that non-compliance extinguishes the right to invoice for the affected month; (b) whether the Exhibit C methodology is mandatory and exclusive, precluding Cardinal Peak from using alternative cost metrics or proprietary data sources; and (c) whether the 12% cap under Section 7.4(c) operates as an absolute limit on invoicable surcharges absent Nexford's prior written consent. A binding judicial declaration on these points will not only resolve the parties' current dispute but will also govern their conduct for the remainder of the MSA term and any renewal periods.

2. Declaratory Relief Is Appropriate Where Contract Interpretation Is in Dispute. Illinois courts routinely entertain declaratory judgment claims — including declaratory judgment counterclaims — in contract disputes to resolve the meaning of contested contractual provisions. See Strathmore Life Insurance v. Livorsi Marine, Inc., 222 Ill. 2d 303, 310, 856 N.E.2d 338, 342 (2006) ("[T]he declaratory judgment action is a commonly used procedural mechanism for resolving controversies involving the interpretation of contracts."); Glenrock Assurance Ins. Co. v. Raymark Indus., Inc., 118 Ill. 2d 23, 51, 514 N.E.2d 150, 163 (1987). The dispute here centers on the interpretation of specific, identified contractual clauses — a quintessential and appropriate use of the Declaratory Judgment Act.

Cardinal Peak's argument that a declaratory judgment count is unnecessary because the breach of contract claims will resolve the underlying issues misapprehends the scope and purpose of declaratory relief. A declaratory judgment may encompass broader prospective rights under the MSA that go beyond the specific damages at issue in the breach of contract count. This is particularly significant given that the MSA had not yet expired at the time the Counterclaim was filed — the MSA's initial three-year term ran through January 14, 2023 — and was subject to automatic renewal. A declaration of the parties' rights under the surcharge provisions will govern not only the Disputed Period but also any future surcharge invoices that Cardinal Peak may issue for the remainder of the MSA term and any renewal periods. The breach of contract claim, by contrast, is limited to the specific damages incurred during the Disputed Period.

Furthermore, declaratory relief and damages relief are not mutually exclusive. Illinois law permits a party to seek both forms of relief in the same action. See 735 ILCS 5/2-701(a) ("whether or not further relief is or could be prayed"). The inclusion of a declaratory judgment count alongside a breach of contract count is common, appropriate, and serves the interests of judicial economy by enabling the Court to resolve both the parties' past dispute and their prospective rights in a single proceeding.

Count II of the Counterclaim therefore states a viable claim for declaratory judgment and should not be dismissed.

C. The Parties' Course of Dealing Supports Nexford's Counterclaim

The Counterclaim further alleges that the course of dealing between Nexford and Cardinal Peak during the period prior to the Disputed Period — specifically, from January 2020 (the effective date of the MSA) through February 2021 — demonstrates that Cardinal Peak historically complied with the 15-business-day notice requirement under Section 7.4(a) and the Exhibit C methodology. (Counterclaim ¶¶ 39–41.) During this thirteen-month period, Cardinal Peak consistently delivered Surcharge Notices within the contractual timeframe, used the published Ferrous Scrap Index and Industrial Energy Cost Index as required by Exhibit C, and did not exceed the 12% surcharge cap. Nexford timely paid all surcharges invoiced during this period, reflecting the parties' mutual understanding of and adherence to the MSA's requirements.

Cardinal Peak's departure from this established course of dealing beginning in March 2021 — when it began delivering late Surcharge Notices, using a non-conforming calculation methodology, and invoicing above-cap surcharges without consent — further supports Nexford's breach of contract claims. Under the Illinois Uniform Commercial Code, 810 ILCS 5/1-303(b), a "course of dealing" is "a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct." The parties' pre-Disputed Period course of dealing is relevant to the interpretation of the MSA's surcharge provisions and confirms that both parties understood those provisions to be mandatory and binding.

At the motion to dismiss stage, the Court must accept Nexford's well-pleaded allegations regarding the parties' course of dealing as true. See marshall, 222 Ill. 2d at 429. These allegations further buttress the Counterclaim's viability and militate against dismissal.

D. Cardinal Peak's Remaining Arguments Fail

1. Cardinal Peak's "Failure to Mitigate" Argument Is Premature. To the extent Cardinal Peak argues that Nexford failed to mitigate its damages — for example, by continuing to pay surcharges that it knew or suspected were non-compliant — this argument is an affirmative defense, not a ground for dismissal of the Counterclaim at the pleading stage. Under Illinois law, failure to mitigate damages is an affirmative defense that the defendant (here, the counter-defendant, Cardinal Peak) bears the burden of proving. See Ride-Away of Ill., Inc. v. Mid-Am. Grain Inspection Serv., Inc., 115 Ill. App. 3d 968, 976, 451 N.E.2d 897, 903 (4th Dist. 1983). The sufficiency of a counter-plaintiff's mitigation efforts is a factual inquiry that involves consideration of the counter-plaintiff's conduct, the reasonableness of its actions, and the available alternatives — none of which are appropriate for resolution on a Section 2-615 motion. Moreover, the Counterclaim alleges that Nexford timely disputed the noncompliant invoices in accordance with Section 7.4(d), which itself constitutes a form of mitigation. Cardinal Peak's failure to mitigate argument is premature and should not be considered as a basis for dismissal.

2. Cardinal Peak's Argument That Nexford's Dispute Procedure Under Section 7.4(d) Bars the Counterclaim Is Without Merit. Cardinal Peak also appears to argue that Nexford's exclusive remedy for disputed surcharges is the dispute procedure set forth in Section 7.4(d) of the MSA, and that the existence of this procedure somehow bars Nexford from asserting a counterclaim for breach of contract in this litigation. This argument fundamentally mischaracterizes both the purpose and the scope of Section 7.4(d).

Section 7.4(d) provides that Nexford must notify Cardinal Peak of any disputed surcharge within thirty (30) calendar days of receipt of the Surcharge Notice, and that the parties shall attempt to resolve the dispute through good-faith negotiations. (MSA § 7.4(d).) This provision governs the internal dispute procedure between the parties; it does not limit or foreclose Nexford's right to assert a counterclaim for breach of contract in pending litigation. Section 7.4(d) is a notice-and-negotiation provision, not an exclusive remedies clause or a forum-selection provision.

The Counterclaim alleges that Nexford timely disputed the applicable surcharge invoices in accordance with Section 7.4(d) and that the parties were unable to resolve the disputes through negotiation. (Counterclaim ¶ 38.) The Counterclaim further alleges that the MSA's dispute resolution clause, Section 14.3, provides that unresolved disputes are to escalate first to senior officers of each party and then to mandatory mediation in Chicago, Illinois before either party may initiate litigation. (Counterclaim ¶ 42.) To the extent Cardinal Peak's argument is that Nexford failed to exhaust the Section 14.3 mediation process, this argument is equally unavailing. Cardinal Peak itself initiated this litigation by filing its Complaint on August 8, 2022, thereby invoking the jurisdiction of this Court. Having done so, Cardinal Peak cannot now argue that Nexford is precluded from asserting a counterclaim in the very same proceeding. The purpose of permissive counterclaim practice is to enable the efficient resolution of related disputes in a single action, and it would be anomalous in the extreme for a plaintiff who has chosen to litigate in court to argue that the defendant cannot counterclaim because a mediation provision exists.

Furthermore, Section 14.3's mediation requirement does not foreclose judicial remedies; it establishes a prerequisite to the initiation of litigation. Once litigation has been commenced — as it has been by Cardinal Peak — the parties are before the Court, and counterclaims are properly asserted within the existing proceeding.

3. Governing Law Supports the Counterclaim. The MSA is governed by Illinois law. (MSA § 14.3 and the governing law provision contained therein.) The choice-of-law provision states:

"This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois, without regard to its conflict of laws principles."

(MSA § 14.3.)

As discussed above, Illinois law favors liberal construction of pleadings and the resolution of disputes on the merits rather than at the pleading stage. See Wakulich, 203 Ill. 2d at 228; Pooh-Bah Enters., 232 Ill. 2d at 473. Illinois public policy strongly favors permitting parties to have their day in court and to present evidence in support of their claims. See Illinois Graphics Co. v. Nickum, 159 Ill. 2d 469, 486, 639 N.E.2d 1282, 1290 (1994) (emphasizing that "our pleading rules are to be liberally construed to the end that controversies may be speedily and finally determined according to the substantive rights of the parties").

All of Nexford's claims arise under the MSA, which is governed by Illinois law; all claims are supported by specific, well-pleaded factual allegations; and all claims present genuine factual and legal disputes that are appropriate for resolution through discovery and adjudication on the merits. Illinois law requires nothing more at the pleading stage.

V. CONCLUSION

For all of the foregoing reasons, Defendant/Counter-Plaintiff Nexford Industrial Holdings Inc. respectfully requests that the Court deny in its entirety Cardinal Peak Industries' Motion to Dismiss the Counterclaim.

Nexford's Counterclaim adequately states claims for breach of contract (Count I) and declaratory judgment (Count II), supported by specific contractual provisions — MSA Section 7.4, Exhibit C, and Section 7.4(c) — detailed factual allegations of three independent categories of breach, and a well-pleaded claim for approximately $210,000 in overpayment damages. The Counterclaim is not duplicative of Nexford's affirmative defenses; it seeks affirmative monetary and declaratory relief that cannot be obtained through defensive pleading alone. The factual and legal disputes between the parties — concerning the proper interpretation of the surcharge provisions, the timeliness of Cardinal Peak's notices, the propriety of Cardinal Peak's calculation methodology, and the effect of Cardinal Peak's cap exceedances — are genuine, material, and incapable of resolution at the pleading stage. These disputes should be resolved through discovery and adjudication on the merits, not by dismissal of the Counterclaim.

PRAYER FOR RELIEF

WHEREFORE, Defendant/Counter-Plaintiff Nexford Industrial Holdings Inc. respectfully requests that this Court enter an Order:

1. Denying Plaintiff/Counter-Defendant Cardinal Peak Industries' Motion to Dismiss the Counterclaim in its entirety;

2. Permitting the Counterclaim to proceed through discovery and further proceedings in this action; and

3. Granting such other and further relief as this Court deems just and proper.

Respectfully submitted,

NEXFORD INDUSTRIAL HOLDINGS INC., By its attorneys,

CALDERWOOD & HARKNESS LLP

By: ________

Priya Anand ARDC No. 6328174 Responsible Partner

Simone Laroche ARDC No. 6341892 Lead Associate

Jeffrey Park ARDC No. 6355210 Associate

200 South Wacker Drive, Suite 4400 Chicago, Illinois 60606 Telephone: (312) 555-7800

Attorneys for Defendant/Counter-Plaintiff Nexford Industrial Holdings Inc.

Dated: November 2, 2022

CERTIFICATE OF SERVICE

The undersigned, an attorney, hereby certifies that on November 2, 2022, a true and correct copy of the foregoing Memorandum in Opposition to Motion to Dismiss Counterclaim was served upon counsel for Plaintiff/Counter-Defendant Cardinal Peak Industries at the following address, via the Court's electronic filing system and by electronic mail:

Garrett Blackwood Megan Hsu Blackwood Stein & Associates LLP 717 Seventeenth Street, Suite 2200 Denver, Colorado 80202 gblackwood@blackwoodstein.com mhsu@blackwoodstein.com

________________________________________

Priya Anand ARDC No. 6328174 CALDERWOOD & HARKNESS LLP 200 South Wacker Drive, Suite 4400 Chicago, Illinois 60606

CARDINAL PEAK INDUSTRIES, a Colorado limited liability company,

Plaintiff/Counter-Defendant,

NEXFORD INDUSTRIAL HOLDINGS INC., a Delaware corporation,

Defendant/Counter-Plaintiff.

IN THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS COUNTY DEPARTMENT, LAW DIVISION
DEFENDANT/COUNTER-PLAINTIFF NEXFORD INDUSTRIAL HOLDINGS INC.'S MEMORANDUM IN OPPOSITION TO PLAINTIFF/COUNTER-DEFENDANT CARDINAL PEAK INDUSTRIES' MOTION TO DISMISS COUNTERCLAIM
Filed: November 2, 2022
I. INTRODUCTION
Defendant/Counter-Plaintiff Nexford Industrial Holdings Inc. ("Nexford" or "Counter-Plaintiff"), by and through its attorneys, Calderwood & Harkness LLP, respectfully submits this Memorandum in Opposition to the Motion to Dismiss Counterclaim (the "Motion") filed by Plaintiff/Counter-Defendant Cardinal Peak Industries ("Cardinal Peak" or "Counter-Defendant") and, in support thereof, states as follows.
On October 3, 2022, Nexford filed its Counterclaim in this action, asserting two counts against Cardinal Peak. Count I asserts a claim for Breach of Contract against Cardinal Peak arising from Cardinal Peak's failure to comply with the Exhibit C Surcharge Methodology and the notice requirements of Section 7.4 of the Master Supply Agreement between the parties (the "MSA"), reference number MSA-NIH-CPI-2020-001, dated January 15, 2020. Count II seeks a Declaratory Judgment — a judicial declaration of the parties' respective rights and obligations under the MSA's surcharge provisions, including MSA Section 7.4 and Exhibit C — as well as recovery of approximately $210,000 in overpayments made by Nexford on surcharge invoices that did not comply with the MSA's contractual requirements.
Cardinal Peak now moves to dismiss the Counterclaim in its entirety pursuant to Section 2-615 of the Illinois Code of Civil Procedure, arguing that the Counterclaim fails to state a claim upon which relief can be granted. Cardinal Peak's Motion should be denied for several independent reasons.
First, the Counterclaim states well-pleaded claims for both breach of contract and declaratory judgment under Illinois law, supported by specific contractual provisions that Cardinal Peak itself does not dispute were part of the parties' agreement. The Counterclaim identifies three distinct categories of material breach by Cardinal Peak: (i) failure to deliver timely Surcharge Notices as required by Section 7.4(a); (ii) deviation from the mandatory Exhibit C calculation methodology; and (iii) invoicing surcharges in excess of the 12% cap under Section 7.4(c) without obtaining Nexford's prior written consent.
Second, the Counterclaim is not merely a mirror or restatement of Nexford's affirmative defenses. Rather, it asserts independent, affirmative claims for monetary relief — specifically, the return of approximately $210,000 in overpayments — and for declaratory relief regarding the parties' prospective rights under the MSA. Neither form of relief is obtainable through affirmative defenses alone.
Third, the Counterclaim raises genuine factual disputes regarding the proper calculation of surcharges, the timeliness of Cardinal Peak's Surcharge Notices, and whether Cardinal Peak obtained the requisite written consent for cap exceedances — disputes that cannot and should not be resolved at the pleading stage.
For these reasons, and those set forth more fully below, the Court should deny Cardinal Peak's Motion to Dismiss the Counterclaim in its entirety and permit Nexford's claims to proceed to discovery and resolution on the merits.
II. FACTUAL BACKGROUND
A. The Master Supply Agreement
On January 15, 2020, Nexford and Cardinal Peak entered into the Master Supply Agreement, reference number MSA-NIH-CPI-2020-001 (the "MSA"), for the supply of hot-rolled coil ("HRC") and cold-rolled coil ("CRC") steel products. (Counterclaim ¶¶ 8–10.) The MSA is a comprehensive, negotiated commercial agreement that governs the pricing, quantity, delivery, and quality terms of Cardinal Peak's supply of steel products to Nexford. Cardinal Peak's own Complaint in this action is premised upon the MSA, and there is no dispute between the parties that the MSA constitutes a valid and enforceable contract under Illinois law.
The MSA established an initial three-year term commencing January 15, 2020 and running through January 14, 2023, with automatic one-year renewal periods unless either party provided written notice of termination no fewer than 180 days before the end of the then-current term. (Counterclaim ¶ 11; MSA § 2.1.) As of the date the Counterclaim was filed, the MSA had not been terminated and remained in effect.
The MSA established base pricing for the two primary product categories: HRC at $620 per ton and CRC at $740 per ton. (Counterclaim ¶ 12; MSA § 7.1.) These base prices were subject to quarterly adjustment in accordance with Section 7.2 of the MSA, which provided a formulaic adjustment mechanism tied to published market indices. The parties estimated annual volumes of approximately 18,000 tons of HRC and 6,500 tons of CRC, for a total estimated annual volume of approximately 24,500 tons, representing an estimated annual spend of approximately $15.97 million. (Counterclaim ¶ 13.) These volume estimates underscored the significance of the commercial relationship between the parties and the importance of the MSA's pricing and surcharge provisions to Nexford's business operations and cost planning.
B. The Surcharge Provisions — MSA Section 7.4 and Exhibit C
Section 7.4 of the MSA authorized Cardinal Peak, as the supplier, to pass through documented raw-material surcharges to Nexford, as the buyer, in certain defined circumstances. These surcharges were limited to three categories: scrap surcharges, energy surcharges, and alloy surcharges. (Counterclaim ¶ 14; MSA § 7.4.) Critically, however, Cardinal Peak's entitlement to pass through such surcharges was not unlimited or discretionary. The MSA expressly conditioned Cardinal Peak's right to invoice surcharges upon strict compliance with three requirements — a notice requirement, a mandatory calculation methodology, and a cap provision — each of which was the product of arms'-length negotiation between sophisticated commercial parties.
Section 7.4(a) — Notice Requirement. Section 7.4(a) of the MSA required Cardinal Peak to deliver a Surcharge Notice, accompanied by supporting documentation, to Nexford no later than fifteen (15) business days after the end of the applicable month in which the surcharge was incurred. (Counterclaim ¶ 15; MSA § 7.4(a).) The supporting documentation was to include, among other things, the published index data upon which the surcharge calculation was based and a calculation showing the derivation of the surcharge amount. This notice requirement was not a mere formality; it was a material term of the MSA designed to ensure that Nexford had timely access to the data necessary to verify the accuracy and contractual compliance of Cardinal Peak's surcharge invoices. The 15-business-day deadline was specific and unambiguous, reflecting the parties' intent that Cardinal Peak's right to invoice surcharges was conditioned upon timely notice.
Exhibit C — Surcharge Methodology. Exhibit C to the MSA set forth the detailed methodology by which surcharges were to be calculated. (Counterclaim ¶¶ 16–17; MSA, Ex. C.) The methodology was specific, prescriptive, and mandatory. Surcharges were to be calculated using the published Ferrous Scrap Index (as reported by Drayton Partners LLC, formerly known as SPI) and the Industrial Energy Cost Index, applied against agreed baseline costs: a baseline scrap cost of $340 per ton and a baseline energy cost of $48 per ton. (Counterclaim ¶ 17; MSA, Ex. C, §§ 1–3.) Where the published index value for a given month exceeded the applicable baseline cost, the difference was to be applied on a per-ton basis to calculate the surcharge for that product category. Where the published index value was at or below the applicable baseline, no surcharge was to be invoiced for that cost component. The Exhibit C methodology left no room for Cardinal Peak to substitute alternative data sources, internal cost metrics, or proprietary calculations in lieu of the specified published indices.
Section 7.4(c) — Cap Provision. Section 7.4(c) of the MSA imposed a further limitation on Cardinal Peak's surcharge authority: the aggregate monthly surcharge for any product category could not exceed twelve percent (12%) of the applicable Base Price for that product category without the prior written consent of Nexford. (Counterclaim ¶ 18; MSA § 7.4(c).) For HRC, priced at a base of $620 per ton, the 12% cap equated to a maximum surcharge of $74.40 per ton absent Nexford's written authorization. For CRC, priced at $740 per ton, the cap equated to $88.80 per ton. This cap provision served a critical risk-allocation function: it limited Nexford's exposure to raw-material cost volatility and ensured that extreme surcharge claims could not be imposed unilaterally by Cardinal Peak. The consent mechanism — requiring prior written consent — reflected a deliberate contractual structure under which surcharges above the cap required bilateral agreement, not mere notification.
These three provisions — the notice requirement, the mandatory calculation methodology, and the cap — operated in tandem to govern the surcharge regime under the MSA. Together, they represented the carefully negotiated balance between Cardinal Peak's right to recover genuine raw-material cost increases and Nexford's right to transparency, verification, and cost certainty.
C. Cardinal Peak's Breaches of the MSA
During the period from March 2021 through May 2022 (the "Disputed Period"), Cardinal Peak invoiced Nexford for total surcharges of approximately $6.41 million across both HRC and CRC product categories. (Counterclaim ¶ 20.) Nexford reviewed each Surcharge Notice and its accompanying documentation (where provided) and paid $1.68 million of those surcharges that it determined were properly documented, timely noticed, and correctly calculated in accordance with the MSA's requirements. (Counterclaim ¶ 21.) Cardinal Peak now claims, through its Complaint in this action, that Nexford owes an additional $4.73 million in unpaid surcharges (the difference between the $6.41 million invoiced and the $1.68 million paid). (Complaint ¶¶ 32–35.)
Nexford's Counterclaim alleges — and the Court must accept these allegations as true at the pleading stage — that Cardinal Peak materially breached the MSA in three distinct and independently actionable ways during the Disputed Period:
(1) Late Surcharge Notices. For seven (7) of the fourteen (14) disputed months within the Disputed Period, Cardinal Peak failed to deliver compliant Surcharge Notices to Nexford within the mandatory 15-business-day deadline prescribed by Section 7.4(a) of the MSA. (Counterclaim ¶¶ 23–25.) In some instances, the Surcharge Notice was delivered weeks or even months after the contractual deadline had passed. In other instances, the purported notice was delivered without the required supporting documentation, rendering it incomplete and non-compliant. The surcharges attributable to these seven months of non-compliant notices total approximately $2.18 million. (Counterclaim ¶ 26.) Because Section 7.4(a) conditions Cardinal Peak's entitlement to pass through surcharges upon timely notice, Cardinal Peak's failure to comply with this requirement for over half of the Disputed Period months is a material breach of the MSA.
(2) Deviation from the Exhibit C Methodology. Rather than calculating surcharges using the published Ferrous Scrap Index and the Industrial Energy Cost Index — as expressly required by Exhibit C — Cardinal Peak utilized an internal "blended cost" metric that amalgamated proprietary data from Cardinal Peak's own operations with selectively chosen third-party data that did not correspond to the indices specified in Exhibit C. (Counterclaim ¶¶ 27–30.) The result of this unauthorized methodology was a systematic overstatement of surcharges. Nexford's analysis, based on the contractually specified indices and baseline costs, reveals that the deviation from the Exhibit C methodology resulted in an overstatement of surcharges of approximately $1.47 million across the Disputed Period. (Counterclaim ¶ 31.) Cardinal Peak was not authorized to deviate from the Exhibit C methodology, and its unilateral decision to do so constitutes a separate and independent breach of the MSA.
(3) Cap Exceedances Without Written Consent. For four (4) months during the Disputed Period, Cardinal Peak's invoiced surcharges exceeded the 12% cap imposed by Section 7.4(c) of the MSA. (Counterclaim ¶¶ 32–33.) At no time did Cardinal Peak obtain — or even seek — Nexford's prior written consent to exceed the cap for any of these months. The aggregate amount by which Cardinal Peak's invoiced surcharges exceeded the 12% cap across these four months totals approximately $1.08 million. (Counterclaim ¶ 34.) Cardinal Peak's unilateral invoicing of above-cap surcharges without obtaining the contractually required written consent constitutes a third independent breach of the MSA.
When these three categories of breach are reconciled — accounting for overlap among months in which more than one category of breach occurred — Nexford calculates that, after crediting the $1.68 million it has already paid, it has in fact overpaid Cardinal Peak by approximately $210,000 beyond the amounts that were properly owed under the MSA. (Counterclaim ¶¶ 36–37.) Nexford seeks recovery of this overpayment through its Counterclaim.
D. Procedural History
The procedural history of this action is as follows. On August 8, 2022, Cardinal Peak filed its Complaint in this Court, asserting claims against Nexford for breach of contract (Count I), unjust enrichment (Count II), and account stated (Count III), seeking recovery of $4.73 million in allegedly unpaid surcharges plus interest and attorneys' fees. (Dkt. No. 1.) On September 19, 2022, Nexford filed its Answer and Affirmative Defenses to Cardinal Peak's Complaint, denying liability and asserting, among other defenses, that Cardinal Peak had failed to comply with the conditions precedent to surcharge entitlement under the MSA. (Dkt. No. 14.) On October 3, 2022, Nexford filed its Counterclaim, asserting Count I for Breach of Contract and Count II for Declaratory Judgment, seeking recovery of the approximately $210,000 overpayment and a judicial declaration of the parties' respective rights and obligations under MSA Section 7.4 and Exhibit C. (Dkt. No. 18.)
On October 17, 2022, Cardinal Peak filed its Motion to Dismiss the Counterclaim pursuant to Section 2-615 of the Illinois Code of Civil Procedure, arguing that the Counterclaim fails to state a claim upon which relief can be granted. (Dkt. No. 22.) This Memorandum in Opposition is timely filed in response to that Motion.
III. LEGAL STANDARD
Cardinal Peak moves to dismiss Nexford's Counterclaim pursuant to Section 2-615 of the Illinois Code of Civil Procedure, 735 ILCS 5/2-615. A motion to dismiss under Section 2-615 tests the legal sufficiency of a complaint or counterclaim by examining whether the pleading, taken in the light most favorable to the non-movant, states a cause of action upon which relief can be granted. marshall v. Burger King Corp., 222 Ill. 2d 422, 429, 856 N.E.2d 1048, 1053 (2006).
In ruling on a Section 2-615 motion, the Court must accept all well-pleaded facts in the counterclaim as true and draw all reasonable inferences from those facts in favor of the counter-plaintiff. Vitro v. Mihelcic, 209 Ill. 2d 76, 81, 806 N.E.2d 632, 634 (2004). A court should not dismiss a cause of action on the pleadings unless it is clearly apparent that no set of facts can be proved under the pleadings that would entitle the plaintiff to relief. Pooh-Bah Enters., Inc. v. Cty. of Cook, 232 Ill. 2d 463, 473, 905 N.E.2d 781, 789 (2009).
The standard for surviving a motion to dismiss under Section 2-615 is deliberately liberal. Illinois courts have consistently held that doubts regarding the sufficiency of a pleading should be resolved in favor of the non-movant. Wakulich v. Mraz, 203 Ill. 2d 223, 228, 785 N.E.2d 843, 847 (2003). The question is not whether the counter-plaintiff will ultimately prevail on the merits, but whether the counter-plaintiff has alleged facts sufficient to state a cognizable cause of action. King v. First Capital Fin. Servs. Corp., 215 Ill. 2d 1, 12, 828 N.E.2d 1155, 1161 (2005). This standard applies with equal force to counterclaims as it does to complaints. See Raprager v. Allstate Ins. Co., 183 Ill. App. 3d 847, 855, 539 N.E.2d 787, 791 (1st Dist. 1989).
Applying these principles here, the Court should deny Cardinal Peak's Motion to Dismiss because Nexford's Counterclaim readily satisfies the liberal pleading requirements of Section 2-615.
IV. ARGUMENT
A. Count I of the Counterclaim States a Viable Claim for Breach of Contract Under Illinois Law
1. The Elements of Breach of Contract Are Adequately Pleaded. Under Illinois law, a claim for breach of contract requires the plaintiff to plead: (a) the existence of a valid and enforceable contract; (b) performance by the plaintiff (or a valid excuse for nonperformance); (c) breach by the defendant; and (d) resulting damages. Priebe v. Top Tag, Inc., 2015 IL App (1st) 142172, ¶ 11; Henderson-Smith & Assocs., Inc. v. Nahamani Family Serv. Ctr., Inc., 323 Ill. App. 3d 15, 27, 752 N.E.2d 33, 43 (1st Dist. 2001). Nexford's Counterclaim pleads each of these elements with specificity and particularity that exceeds what is required at the pleading stage.
Existence of a Valid and Enforceable Contract. The MSA (MSA-NIH-CPI-2020-001), executed on January 15, 2020, is a valid and enforceable contract between Nexford and Cardinal Peak. (Counterclaim ¶¶ 8–10.) There is no dispute as to this element. Cardinal Peak's own Complaint in this action relies upon the MSA as the basis for its breach of contract claim against Nexford. (Complaint ¶¶ 8–12.) A party cannot rely upon a contract for its own claims while simultaneously arguing that the counter-party's claims under the same contract are insufficient. The existence of the MSA is beyond question.
Performance by Nexford. The Counterclaim alleges that Nexford performed its obligations under the MSA, including its payment obligations. Nexford paid $1.68 million in surcharges that it determined complied with the MSA's requirements — specifically, surcharges that were timely noticed pursuant to Section 7.4(a), correctly calculated pursuant to the Exhibit C methodology, and within the 12% cap under Section 7.4(c). (Counterclaim ¶¶ 21–22.) Moreover, the Counterclaim alleges that Nexford timely disputed the noncompliant surcharge invoices within the 30-calendar-day window prescribed by Section 7.4(d) of the MSA. (Counterclaim ¶ 38.) Nexford's decision not to pay surcharges that did not comply with the MSA's express requirements was itself a performance of its contractual rights — Nexford was not obligated to pay surcharges that were untimely noticed, improperly calculated, or above the cap without consent. To the extent Cardinal Peak contends that Nexford's nonpayment of disputed surcharges constitutes a breach, that argument goes to the merits, not to the legal sufficiency of Nexford's pleading.
Breach by Cardinal Peak. The Counterclaim specifically pleads three categories of breach by Cardinal Peak, each tied to an identified provision of the MSA:
(i) For seven of the fourteen disputed months during the Disputed Period, Cardinal Peak failed to deliver compliant Surcharge Notices within the mandatory 15-business-day deadline under Section 7.4(a) of the MSA, affecting approximately $2.18 million in claimed surcharges. (Counterclaim ¶¶ 23–26.)
(ii) Cardinal Peak used an internal "blended cost" calculation methodology rather than the published Ferrous Scrap Index and Industrial Energy Cost Index specified in Exhibit C, resulting in an overstatement of approximately $1.47 million. (Counterclaim ¶¶ 27–31.)
(iii) For four months during the Disputed Period, Cardinal Peak invoiced surcharges exceeding the 12% cap under Section 7.4(c) without obtaining Nexford's prior written consent, with the aggregate excess above the cap totaling approximately $1.08 million. (Counterclaim ¶¶ 32–34.)
These are not vague or conclusory allegations. Each category of breach identifies the specific contractual provision violated, the specific months affected, and the specific dollar amounts at issue. This level of particularity more than satisfies the pleading requirements of Section 2-615.
Damages. Nexford has pleaded specific damages of approximately $210,000, representing the net overpayment made by Nexford on surcharge invoices that, upon proper application of the MSA's contractual methodology, notice requirements, and cap provision, were not owed. (Counterclaim ¶¶ 36–37.) This is a definite, ascertainable sum that Nexford seeks to recover from Cardinal Peak. The Counterclaim explains the derivation of this figure: total surcharges invoiced ($6.41 million), less total surcharges properly owed under the MSA upon application of all three requirements (approximately $1.47 million), less amounts paid ($1.68 million), resulting in an overpayment of approximately $0.21 million. (Counterclaim ¶ 37.) While Cardinal Peak may dispute these calculations on the merits, the existence and amount of damages is a factual question not properly resolved on a motion to dismiss.
In sum, all four elements of a breach of contract claim are adequately pleaded. Count I of the Counterclaim should survive the Motion to Dismiss.
2. The Counterclaim Is Not Merely a Restatement of Affirmative Defenses. Cardinal Peak's principal argument in support of its Motion appears to be that Nexford's Counterclaim is duplicative of its affirmative defenses and therefore should be dismissed as redundant. This argument is legally unsound and should be rejected.
Illinois law is clear that a party may plead both affirmative defenses and counterclaims arising from the same operative facts. Affirmative defenses and counterclaims serve fundamentally different procedural purposes. An affirmative defense operates as a shield — it seeks to defeat or reduce the plaintiff's claims by raising matters that, if established, negate the plaintiff's right to recovery. See Zannini v. Reliance Ins. Co. of Ill., 147 Ill. 2d 437, 453, 588 N.E.2d 1084, 1091 (1992). A counterclaim, by contrast, operates as a sword — it asserts an independent cause of action seeking affirmative relief from the opposing party. Safeway Ins. Co. v. Hadary, 320 Ill. App. 3d 34, 38, 745 N.E.2d 31, 35 (1st Dist. 2001).
The distinction is not merely academic. It has concrete procedural and practical consequences. Most critically, affirmative defenses cannot yield affirmative monetary relief. A defendant that successfully proves an affirmative defense may defeat the plaintiff's claims but cannot recover damages from the plaintiff. See Miner v. Fashion Enters., Inc., 342 Ill. App. 3d 405, 417, 794 N.E.2d 902, 912 (1st Dist. 2003). Here, Nexford seeks affirmative monetary relief — the return of approximately $210,000 in overpayments. This relief is obtainable only through a counterclaim, not through an affirmative defense. If the Court were to dismiss the Counterclaim, Nexford would be deprived of any mechanism to recover the overpayment, even if it demonstrates at trial that Cardinal Peak breached the MSA and that Nexford paid more than was owed.
Similarly, Nexford's claim for declaratory relief under Count II — seeking a judicial declaration of the parties' rights under the MSA's surcharge provisions — is a form of affirmative relief that is not available through an affirmative defense. A declaratory judgment defines the parties' prospective rights and obligations, providing binding guidance for future conduct. This is especially significant here because the MSA remained in effect at the time the Counterclaim was filed and may be subject to automatic renewal.
Moreover, the fact that some of the operative facts underlying Nexford's affirmative defenses overlap with the facts supporting its Counterclaim does not render the Counterclaim improper. Illinois courts have repeatedly recognized that "the same facts may support both a defense and a counterclaim," and that the mere existence of factual overlap does not render a counterclaim impermissibly duplicative. Havoco of Am., Ltd. v. Hill, 197 Ill. 2d 557, 575, 790 N.E.2d 390, 400 (2003). The availability of a counterclaim is especially appropriate where, as here, the counter-plaintiff's damages and the plaintiff's damages arise from different aspects of the same contractual relationship. Cardinal Peak's claims arise from Nexford's alleged failure to pay surcharges; Nexford's Counterclaim arises from Cardinal Peak's alleged overcharging and breach of the surcharge provisions. These are distinct wrongs giving rise to distinct remedies.
Cardinal Peak's redundancy argument, if accepted, would effectively bar any defendant from filing a counterclaim whenever it has also asserted affirmative defenses on related facts — a result that finds no support in Illinois law and would undermine the purpose of permissive counterclaim practice under Illinois Supreme Court Rule 281 and Section 2-608 of the Code of Civil Procedure. The Court should reject this argument.
3. The Surcharge Notice Requirement Under Section 7.4(a) Is a Condition Precedent, and Cardinal Peak's Failure to Comply States a Breach. The Counterclaim alleges, and the Court must accept as true, that Cardinal Peak failed to deliver compliant Surcharge Notices within the mandatory 15-business-day deadline under Section 7.4(a) for seven of the fourteen disputed months. Cardinal Peak apparently contends that this allegation does not state a cognizable breach. That contention is wrong.
Section 7.4(a) of the MSA provides in relevant part:
"Seller may pass through documented raw-material surcharges to Buyer provided that Seller delivers to Buyer a Surcharge Notice with supporting documentation no later than fifteen (15) business days after the end of the applicable month in which the surcharge was incurred."
(MSA § 7.4(a) (emphasis added).)
The use of the conditional language "provided that" creates a condition precedent to Cardinal Peak's entitlement to surcharge payments. Under Illinois law, a condition precedent is "an act or event, other than a lapse of time, which must exist or occur before a duty of immediate performance of a promise arises." Sheppard v. Kruck, 323 Ill. App. 3d 628, 632, 753 N.E.2d 1040, 1044 (2d Dist. 2001); see also Restatement (Second) of Contracts § 224 (1981). The word "provided that" is among the most commonly recognized formulations for creating a condition precedent in contractual drafting. See Midwest Builder Distrib., Inc. v. Lord & Essex, Inc., 383 Ill. App. 3d 645, 659, 891 N.E.2d 1, 13 (2d Dist. 2008).
Cardinal Peak's failure to satisfy this condition precedent for seven of the fourteen disputed months is not merely a defensive matter that reduces or offsets Cardinal Peak's claims. It is an independently actionable breach. When Cardinal Peak invoiced Nexford for surcharges that had not been properly noticed under Section 7.4(a), Cardinal Peak acted in violation of the MSA. And when Nexford — in reliance on Cardinal Peak's invoices and under the time pressures of ongoing commercial operations — paid a portion of those improperly noticed surcharges, Cardinal Peak received payments to which it was not contractually entitled. The Counterclaim seeks to recover that portion of the overpayment attributable to improperly noticed surcharges.
To the extent Cardinal Peak argues that it substantially complied with the notice requirement, or that Nexford waived strict compliance by paying certain late-noticed invoices, those arguments raise factual questions that cannot be resolved on a motion to dismiss. Illinois courts have consistently held that issues of substantial compliance, waiver, and estoppel are fact-intensive inquiries that are inappropriate for resolution at the pleading stage. See LaSalle Nat'l Trust, N.A. v. Schaffner, 286 Ill. App. 3d 18, 28, 676 N.E.2d 233, 240 (1st Dist. 1996) ("Waiver is a question of fact that is not properly decided on a motion to dismiss."). At this stage, the Court must accept Nexford's well-pleaded allegation that Cardinal Peak failed to comply with the 15-business-day notice requirement and that this failure constitutes a breach of the MSA.
4. Cardinal Peak's Deviation from the Exhibit C Methodology Is a Separately Pleadable Breach. The Counterclaim further alleges that Cardinal Peak breached the MSA by calculating surcharges using a methodology that deviated from the mandatory requirements of Exhibit C. This allegation is specific, well-pleaded, and states a cognizable breach of contract claim.
Exhibit C to the MSA prescribed a specific and mandatory calculation methodology for surcharges. (Counterclaim ¶¶ 16–17; MSA, Ex. C.) The methodology required Cardinal Peak to use two published indices — the Ferrous Scrap Index (as reported by Drayton Partners LLC) and the Industrial Energy Cost Index — and to apply those indices against agreed baseline costs: a baseline scrap cost of $340 per ton and a baseline energy cost of $48 per ton. (Counterclaim ¶ 17.) The methodology was not a guideline or a suggestion; it was a mandatory, contractually binding formula that Cardinal Peak was required to follow in calculating any surcharge invoiced to Nexford.
The Counterclaim alleges that Cardinal Peak disregarded the Exhibit C methodology and instead used an internal "blended cost" metric — a proprietary calculation that amalgamated Cardinal Peak's actual operational costs with selectively chosen third-party data sources that did not correspond to the indices specified in Exhibit C. (Counterclaim ¶¶ 27–30.) This deviation was not an inadvertent error in a single month's calculation; it was a systematic departure from the contractual methodology that persisted throughout the Disputed Period and resulted in an overstatement of surcharges of approximately $1.47 million. (Counterclaim ¶ 31.)
The use of a non-conforming methodology to calculate surcharges and then invoice Nexford for the resulting inflated amounts constitutes a breach of the MSA. A contract that specifies a particular methodology for determining a price component implicitly prohibits the use of any alternative methodology. See Avery v. Brightmoor Indemnity Co., 216 Ill. 2d 100, 129, 835 N.E.2d 801, 821 (2005) (contractual terms must be given their plain and ordinary meaning, and where a contract is clear and unambiguous, its terms must be enforced as written). Cardinal Peak cannot unilaterally substitute its own internal cost figures for the published indices that the parties agreed to use. To permit Cardinal Peak to do so would render Exhibit C meaningless — a result that is contrary to the well-established Illinois principle that all provisions of a contract must be given effect and no provision should be treated as surplusage. See Thompson v. Gordon, 241 Ill. 2d 428, 441, 948 N.E.2d 39, 47 (2011).
The approximately $1.47 million overstatement attributable to Cardinal Peak's deviation from the Exhibit C methodology is a factual allegation that the Court must accept as true at this stage. Whether the deviation actually occurred, and the precise amount of the resulting overstatement, are factual matters for discovery and trial. At the pleading stage, Nexford's allegation is more than sufficient.
5. Invoicing Above the 12% Cap Without Written Consent Constitutes an Additional Breach. Finally, the Counterclaim alleges that for four months during the Disputed Period, Cardinal Peak invoiced surcharges that exceeded the 12% cap imposed by Section 7.4(c) of the MSA without obtaining Nexford's prior written consent. (Counterclaim ¶¶ 32–34.)
The language of Section 7.4(c) is unambiguous:
"The aggregate monthly surcharge for any product category shall not exceed twelve percent (12%) of the applicable Base Price for the relevant product category without the prior written consent of Buyer."
(MSA § 7.4(c).)
This provision imposes an absolute ceiling on the surcharge that Cardinal Peak may invoice for any product category in any given month, absent Nexford's prior written consent. The cap is expressed in clear, mandatory terms — "shall not exceed" — and the consent mechanism is equally clear — "prior written consent." There is no ambiguity in this provision that would require interpretation at the pleading stage.
The Counterclaim alleges that Cardinal Peak does not possess, and cannot produce, any written consent from Nexford authorizing surcharges in excess of the 12% cap for any of the four months at issue. (Counterclaim ¶ 33.) Cardinal Peak's own Complaint and Motion to Dismiss do not allege or argue that it obtained such consent. The aggregate amount by which Cardinal Peak's invoiced surcharges exceeded the 12% cap across these four months totals approximately $1.08 million. (Counterclaim ¶ 34.)
Cardinal Peak's invoicing of above-cap surcharges without obtaining the required prior written consent constitutes an independent breach of the MSA. This breach is separate and distinct from the notice and methodology breaches described above, although there is some overlap in the affected months. The Counterclaim adequately pleads this breach with the specificity required under Section 2-615.
B. Count II of the Counterclaim States a Viable Claim for Declaratory Judgment
1. Illinois Declaratory Judgment Standards Are Satisfied. Count II of the Counterclaim seeks a declaratory judgment pursuant to the Illinois Declaratory Judgment Act, 735 ILCS 5/2-701, declaring the parties' respective rights and obligations under MSA Section 7.4, Exhibit C, and Section 7.4(c). The Declaratory Judgment Act provides that courts "may, in cases of actual controversy, make binding declarations of rights, status, and other legal relations whether or not further relief is or could be prayed." 735 ILCS 5/2-701(a). To invoke the Act, the counter-plaintiff must demonstrate: (1) a plaintiff who is interested under a deed, will, written instrument, or contract; (2) a defendant who has or claims an interest that is adverse to the plaintiff; and (3) an actual controversy between the parties. John Crane Inc. v. Admiral Ins. Co., 391 Ill. App. 3d 693, 698, 909 N.E.2d 788, 793 (1st Dist. 2009).
All three requirements are plainly satisfied here. Nexford is interested under a written instrument — the MSA — and seeks a declaration of its rights thereunder. Cardinal Peak claims adverse interests under the same instrument, asserting entitlement to $4.73 million in surcharges. And an actual controversy manifestly exists: the parties fundamentally disagree about the proper interpretation and application of MSA Section 7.4, Exhibit C, and the surcharge cap provision. Cardinal Peak claims it is owed $4.73 million in unpaid surcharges; Nexford contends it owes nothing further and has overpaid by approximately $210,000. The gap between these positions — nearly $5 million — reflects a genuine, substantial, and justiciable controversy.
A declaratory judgment will resolve the parties' rights under the MSA and provide clarity regarding three contested issues: (a) whether Section 7.4(a)'s 15-business-day notice requirement is a condition precedent to Cardinal Peak's entitlement to surcharge payments, such that non-compliance extinguishes the right to invoice for the affected month; (b) whether the Exhibit C methodology is mandatory and exclusive, precluding Cardinal Peak from using alternative cost metrics or proprietary data sources; and (c) whether the 12% cap under Section 7.4(c) operates as an absolute limit on invoicable surcharges absent Nexford's prior written consent. A binding judicial declaration on these points will not only resolve the parties' current dispute but will also govern their conduct for the remainder of the MSA term and any renewal periods.
2. Declaratory Relief Is Appropriate Where Contract Interpretation Is in Dispute. Illinois courts routinely entertain declaratory judgment claims — including declaratory judgment counterclaims — in contract disputes to resolve the meaning of contested contractual provisions. See Strathmore Life Insurance v. Livorsi Marine, Inc., 222 Ill. 2d 303, 310, 856 N.E.2d 338, 342 (2006) ("[T]he declaratory judgment action is a commonly used procedural mechanism for resolving controversies involving the interpretation of contracts."); Glenrock Assurance Ins. Co. v. Raymark Indus., Inc., 118 Ill. 2d 23, 51, 514 N.E.2d 150, 163 (1987). The dispute here centers on the interpretation of specific, identified contractual clauses — a quintessential and appropriate use of the Declaratory Judgment Act.
Cardinal Peak's argument that a declaratory judgment count is unnecessary because the breach of contract claims will resolve the underlying issues misapprehends the scope and purpose of declaratory relief. A declaratory judgment may encompass broader prospective rights under the MSA that go beyond the specific damages at issue in the breach of contract count. This is particularly significant given that the MSA had not yet expired at the time the Counterclaim was filed — the MSA's initial three-year term ran through January 14, 2023 — and was subject to automatic renewal. A declaration of the parties' rights under the surcharge provisions will govern not only the Disputed Period but also any future surcharge invoices that Cardinal Peak may issue for the remainder of the MSA term and any renewal periods. The breach of contract claim, by contrast, is limited to the specific damages incurred during the Disputed Period.
Furthermore, declaratory relief and damages relief are not mutually exclusive. Illinois law permits a party to seek both forms of relief in the same action. See 735 ILCS 5/2-701(a) ("whether or not further relief is or could be prayed"). The inclusion of a declaratory judgment count alongside a breach of contract count is common, appropriate, and serves the interests of judicial economy by enabling the Court to resolve both the parties' past dispute and their prospective rights in a single proceeding.
Count II of the Counterclaim therefore states a viable claim for declaratory judgment and should not be dismissed.
C. The Parties' Course of Dealing Supports Nexford's Counterclaim
The Counterclaim further alleges that the course of dealing between Nexford and Cardinal Peak during the period prior to the Disputed Period — specifically, from January 2020 (the effective date of the MSA) through February 2021 — demonstrates that Cardinal Peak historically complied with the 15-business-day notice requirement under Section 7.4(a) and the Exhibit C methodology. (Counterclaim ¶¶ 39–41.) During this thirteen-month period, Cardinal Peak consistently delivered Surcharge Notices within the contractual timeframe, used the published Ferrous Scrap Index and Industrial Energy Cost Index as required by Exhibit C, and did not exceed the 12% surcharge cap. Nexford timely paid all surcharges invoiced during this period, reflecting the parties' mutual understanding of and adherence to the MSA's requirements.
Cardinal Peak's departure from this established course of dealing beginning in March 2021 — when it began delivering late Surcharge Notices, using a non-conforming calculation methodology, and invoicing above-cap surcharges without consent — further supports Nexford's breach of contract claims. Under the Illinois Uniform Commercial Code, 810 ILCS 5/1-303(b), a "course of dealing" is "a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct." The parties' pre-Disputed Period course of dealing is relevant to the interpretation of the MSA's surcharge provisions and confirms that both parties understood those provisions to be mandatory and binding.
At the motion to dismiss stage, the Court must accept Nexford's well-pleaded allegations regarding the parties' course of dealing as true. See marshall, 222 Ill. 2d at 429. These allegations further buttress the Counterclaim's viability and militate against dismissal.
D. Cardinal Peak's Remaining Arguments Fail
1. Cardinal Peak's "Failure to Mitigate" Argument Is Premature. To the extent Cardinal Peak argues that Nexford failed to mitigate its damages — for example, by continuing to pay surcharges that it knew or suspected were non-compliant — this argument is an affirmative defense, not a ground for dismissal of the Counterclaim at the pleading stage. Under Illinois law, failure to mitigate damages is an affirmative defense that the defendant (here, the counter-defendant, Cardinal Peak) bears the burden of proving. See Ride-Away of Ill., Inc. v. Mid-Am. Grain Inspection Serv., Inc., 115 Ill. App. 3d 968, 976, 451 N.E.2d 897, 903 (4th Dist. 1983). The sufficiency of a counter-plaintiff's mitigation efforts is a factual inquiry that involves consideration of the counter-plaintiff's conduct, the reasonableness of its actions, and the available alternatives — none of which are appropriate for resolution on a Section 2-615 motion. Moreover, the Counterclaim alleges that Nexford timely disputed the noncompliant invoices in accordance with Section 7.4(d), which itself constitutes a form of mitigation. Cardinal Peak's failure to mitigate argument is premature and should not be considered as a basis for dismissal.
2. Cardinal Peak's Argument That Nexford's Dispute Procedure Under Section 7.4(d) Bars the Counterclaim Is Without Merit. Cardinal Peak also appears to argue that Nexford's exclusive remedy for disputed surcharges is the dispute procedure set forth in Section 7.4(d) of the MSA, and that the existence of this procedure somehow bars Nexford from asserting a counterclaim for breach of contract in this litigation. This argument fundamentally mischaracterizes both the purpose and the scope of Section 7.4(d).
Section 7.4(d) provides that Nexford must notify Cardinal Peak of any disputed surcharge within thirty (30) calendar days of receipt of the Surcharge Notice, and that the parties shall attempt to resolve the dispute through good-faith negotiations. (MSA § 7.4(d).) This provision governs the internal dispute procedure between the parties; it does not limit or foreclose Nexford's right to assert a counterclaim for breach of contract in pending litigation. Section 7.4(d) is a notice-and-negotiation provision, not an exclusive remedies clause or a forum-selection provision.
The Counterclaim alleges that Nexford timely disputed the applicable surcharge invoices in accordance with Section 7.4(d) and that the parties were unable to resolve the disputes through negotiation. (Counterclaim ¶ 38.) The Counterclaim further alleges that the MSA's dispute resolution clause, Section 14.3, provides that unresolved disputes are to escalate first to senior officers of each party and then to mandatory mediation in Chicago, Illinois before either party may initiate litigation. (Counterclaim ¶ 42.) To the extent Cardinal Peak's argument is that Nexford failed to exhaust the Section 14.3 mediation process, this argument is equally unavailing. Cardinal Peak itself initiated this litigation by filing its Complaint on August 8, 2022, thereby invoking the jurisdiction of this Court. Having done so, Cardinal Peak cannot now argue that Nexford is precluded from asserting a counterclaim in the very same proceeding. The purpose of permissive counterclaim practice is to enable the efficient resolution of related disputes in a single action, and it would be anomalous in the extreme for a plaintiff who has chosen to litigate in court to argue that the defendant cannot counterclaim because a mediation provision exists.
Furthermore, Section 14.3's mediation requirement does not foreclose judicial remedies; it establishes a prerequisite to the initiation of litigation. Once litigation has been commenced — as it has been by Cardinal Peak — the parties are before the Court, and counterclaims are properly asserted within the existing proceeding.
3. Governing Law Supports the Counterclaim. The MSA is governed by Illinois law. (MSA § 14.3 and the governing law provision contained therein.) The choice-of-law provision states:
"This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois, without regard to its conflict of laws principles."
(MSA § 14.3.)
As discussed above, Illinois law favors liberal construction of pleadings and the resolution of disputes on the merits rather than at the pleading stage. See Wakulich, 203 Ill. 2d at 228; Pooh-Bah Enters., 232 Ill. 2d at 473. Illinois public policy strongly favors permitting parties to have their day in court and to present evidence in support of their claims. See Illinois Graphics Co. v. Nickum, 159 Ill. 2d 469, 486, 639 N.E.2d 1282, 1290 (1994) (emphasizing that "our pleading rules are to be liberally construed to the end that controversies may be speedily and finally determined according to the substantive rights of the parties").
All of Nexford's claims arise under the MSA, which is governed by Illinois law; all claims are supported by specific, well-pleaded factual allegations; and all claims present genuine factual and legal disputes that are appropriate for resolution through discovery and adjudication on the merits. Illinois law requires nothing more at the pleading stage.
V. CONCLUSION
For all of the foregoing reasons, Defendant/Counter-Plaintiff Nexford Industrial Holdings Inc. respectfully requests that the Court deny in its entirety Cardinal Peak Industries' Motion to Dismiss the Counterclaim.
Nexford's Counterclaim adequately states claims for breach of contract (Count I) and declaratory judgment (Count II), supported by specific contractual provisions — MSA Section 7.4, Exhibit C, and Section 7.4(c) — detailed factual allegations of three independent categories of breach, and a well-pleaded claim for approximately $210,000 in overpayment damages. The Counterclaim is not duplicative of Nexford's affirmative defenses; it seeks affirmative monetary and declaratory relief that cannot be obtained through defensive pleading alone. The factual and legal disputes between the parties — concerning the proper interpretation of the surcharge provisions, the timeliness of Cardinal Peak's notices, the propriety of Cardinal Peak's calculation methodology, and the effect of Cardinal Peak's cap exceedances — are genuine, material, and incapable of resolution at the pleading stage. These disputes should be resolved through discovery and adjudication on the merits, not by dismissal of the Counterclaim.
PRAYER FOR RELIEF
WHEREFORE, Defendant/Counter-Plaintiff Nexford Industrial Holdings Inc. respectfully requests that this Court enter an Order:
1. Denying Plaintiff/Counter-Defendant Cardinal Peak Industries' Motion to Dismiss the Counterclaim in its entirety;
2. Permitting the Counterclaim to proceed through discovery and further proceedings in this action; and
3. Granting such other and further relief as this Court deems just and proper.
Respectfully submitted,
NEXFORD INDUSTRIAL HOLDINGS INC., By its attorneys,
CALDERWOOD & HARKNESS LLP
By: ________
Priya Anand ARDC No. 6328174 Responsible Partner
Simone Laroche ARDC No. 6341892 Lead Associate
Jeffrey Park ARDC No. 6355210 Associate
200 South Wacker Drive, Suite 4400 Chicago, Illinois 60606 Telephone: (312) 555-7800
Attorneys for Defendant/Counter-Plaintiff Nexford Industrial Holdings Inc.
Dated: November 2, 2022
CERTIFICATE OF SERVICE
The undersigned, an attorney, hereby certifies that on November 2, 2022, a true and correct copy of the foregoing Memorandum in Opposition to Motion to Dismiss Counterclaim was served upon counsel for Plaintiff/Counter-Defendant Cardinal Peak Industries at the following address, via the Court's electronic filing system and by electronic mail:
Garrett Blackwood Megan Hsu Blackwood Stein & Associates LLP 717 Seventeenth Street, Suite 2200 Denver, Colorado 80202 gblackwood@blackwoodstein.com mhsu@blackwoodstein.com
________________________________________
Priya Anand ARDC No. 6328174 CALDERWOOD & HARKNESS LLP 200 South Wacker Drive, Suite 4400 Chicago, Illinois 60606
CARDINAL PEAK INDUSTRIES, a Colorado limited liability company,
Plaintiff/Counter-Defendant,
v. | Case No. 2022-L-008471
NEXFORD INDUSTRIAL HOLDINGS INC., a Delaware corporation,
Defendant/Counter-Plaintiff.

IN THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS COUNTY DEPARTMENT, LAW DIVISION

I. INTRODUCTION

II. FACTUAL BACKGROUND

III. LEGAL STANDARD

IV. ARGUMENT

V. CONCLUSION

PRAYER FOR RELIEF

CALDERWOOD & HARKNESS LLP

CERTIFICATE OF SERVICE

Record

Parties

Dates

Amounts