A software development company entered into a contract to deliver a custom software solution to a retail chain by a specified deadline. The development company breached the contract by failing to deliver the software on time. The retail chain had to hire a substitute software developer at a higher price, which led to additional costs. The retail chain also lost significant profits during the period their operations were delayed. Which of the following types of damages is the retail chain entitled to recover for its losses?
Reliance damages for the expenses incurred before the breach
Punitive damages to penalize the software development company
Incidental damages for the costs of mitigating the breach
Expectation damages for the additional cost of completing performance and lost profits
The correct answer is expectation damages because they are designed to put the injured party in the position they would have been in if the contract had been carried out as agreed. This includes both the additional cost of completing performance (the higher price paid to the substitute developer) and the lost profits due to the breach. Consequential damages such as lost profits are recoverable if they were foreseeable at the time of contracting. On the other hand, reliance damages are not typically used to account for lost profits but rather for expenses incurred. Incidental damages are limited to costs incurred in mitigating losses, which, standing alone, would not fully compensate the retail chain. Punitive damages are rarely awarded in contract law since their purpose is to punish, not compensate.
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