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Saffire Corp. v. NewKidCo, LLC, 286 F.Supp.2d 302 (S.D.N.Y. 2003) (full-text).
Factual Background Edit
The videogame publisher NewKidCo entered into a written contract with game developer Saffire for Saffire’s creation and NewKidCo’s publication of a new “Little League Baseball” game for the Nintendo Game Cube. The contract provided that NewKidCo would make “progress payments” to Saffire as Saffire completed specified “milestones.” In that respect, the agreement was like many others in the videogame industry.
Saffire performed as agreed by completing several milestones on time. NewKidCo did not perform as agreed, however. After making some progress payments, it stopped, saying it was “unable” to make the additional payments called for by their agreement. Saffire faxed and mailed a notice of default to NewKidCo and then filed suit for breach of contract in federal court in New York City. (Federal jurisdiction was based on diversity: Saffire is in Utah, while NewKidCo is in New York.)
Trial Court Proceedings Edit
In its suit, Saffire sought $881,150 in monetary damages: $295,000 in progress payments for milestones Saffire reached; and an additional $586,150 in “early termination” payments NewKidCo agreed to pay if it exercised its contractual right to terminate the project before it was completed.
Judge Robert Sweet granted Saffire’s motion for summary judgment. With respect to the $295,000 in progress payments, the judge noted that NewKidCo accepted the “milestones” submitted by Saffire, acknowledged that most of them were acceptable, and never rejected any as unacceptable. The Uniform Commercial Code requires rejection of unacceptable goods to be made in a reasonable time, the judge noted. Since Saffire continued to work in reliance of NewKidCo’s acceptance of submitted milestones, “NewKidCo cannot now raise the defense of nonconforming goods,” Judge Sweet ruled.
NewKidCo apparently raised a more vigorous defense to Saffire’s claim for $586,150 in “early termination” payments. NewKidCo argued that it had never exercised its contractual right to terminate the project. But Judge Sweet held that “the agreement was terminated by NewKidCo’s default on payments.” He explained that “Saffire could not continue meeting its milestones, while NewKidCo stopped sending the payments specified in the agreement.” What’s more, “if NewKidCo could avoid the obligations agreed to under the early termination provision by simply discontinuing payments, this would defeat the purpose of the provision.”
NewKidCo also argued that the “early termination” provision was “an unenforceable penalty,” because at least $486,150 of it was “more than the value of the work that is currently in dispute.” Judge Sweet disagreed, however. He said the payment “is not penal if it takes into account the front-loading of Saffire’s work and the back-loading of NewKidCo’s payment.” The judge explained that “Where . . . cash flow is a critical issue for one of the parties, they can decide to defer certain payments until after a project’s completion.” And that is what was done in this case.