Peoplesoft U.S.A., Inc. v. Softeck, Inc.
2002 U.S. Dist. LEXIS 21381, 227 F. Supp. 2d 1116, 2002 WL 31424588 (2002)
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Rule of Law:
The defense of frustration of purpose is unavailable to excuse a party's contractual nonperformance when the contract's express language allocates the risk of the frustrating event to that party.
Facts:
- PeopleSoft U.S.A., Inc. designs and sells business software, while Softek, Inc. provides software development services.
- In March 2000, PeopleSoft and Softek entered into a 'Software License and Services Agreement'.
- The agreement required PeopleSoft to provide software to Softek, and Softek to pay noncancellable and nonrefundable license and maintenance fees.
- The contract specified that the software was for the exclusive use of Softek’s customer, the Transportation Division of Policía de Puerto Rico ('Policía').
- The agreement included clauses stating that 'all payment obligations are noncancellable and nonrefundable' and that Softek 'is responsible for and guarantees all payment to PeopleSoft on behalf of itself and of its customer, Policía de Puerto Rico'.
- After PeopleSoft shipped the software, Softek’s customer, Policía, decided not to use it.
- Softek returned the unopened software to PeopleSoft and refused to pay the $150,000 license fee.
- Softek chose not to enforce its own agreement against Policía in order to preserve its business relationship with them.
Procedural Posture:
- PeopleSoft U.S.A., Inc. filed a breach of contract action against Softek, Inc. in the U.S. District Court for the Northern District of California (trial court) on July 23, 2001.
- Softek filed an answer, asserting seventeen affirmative defenses, including frustration of purpose, impossibility, and unconscionability.
- PeopleSoft moved for summary judgment, arguing that there were no genuine issues of material fact regarding its breach of contract claim or Softek's defenses.
- The District Court heard arguments on the motion for summary judgment.
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Issue:
Does the doctrine of frustration of purpose excuse a party's contractual payment obligation when that party's customer refuses to accept the goods, if the contract explicitly states that payment obligations are noncancellable and that the party guarantees payment?
Opinions:
Majority - Hamilton, District Judge
No. The doctrine of frustration of purpose does not excuse Softek's payment obligation because the contract explicitly allocated the risk of its customer's nonperformance to Softek. The court reasoned that while commercial frustration can excuse performance in cases of extreme hardship due to an unforeseen supervening event, this defense is inapplicable when the parties have contemplated and voluntarily assumed the risk in question. The contract's plain language, including the 'noncancellable and nonrefundable' clause and Softek's explicit guarantee of payment on behalf of Policía, demonstrates that Softek assumed the risk that Policía might not follow through. Therefore, Softek is bound by the bargain it made and cannot use the frustration defense to avoid its payment obligation.
Analysis:
This decision reinforces the principle that courts will strictly enforce the allocation of risk as specified in a contract between sophisticated commercial parties. It clarifies that contractual defenses like frustration of purpose and impracticability cannot be used to escape a bad bargain when the contract itself addresses the contingency that occurred. The ruling serves as a strong precedent against intermediaries or resellers attempting to void their payment obligations when their own end-user or customer backs out, especially when 'hell or high water' clauses like 'noncancellable' or payment guarantees are present. The case underscores the importance of precise drafting in commercial contracts to assign responsibility for third-party failures.
