A tech startup entered into a contract with a software developer to create a custom application for $50,000. The startup paid a $20,000 deposit upfront. The developer failed to deliver the application as promised and breached the contract. The startup hired a different developer to complete the project for $55,000. Additionally, the startup incurred $5,000 in lost profits due to the delay in launching the application to its clients. What is the proper measure of damages the startup is entitled to recover from the original developer?
$15,000, representing the difference between the original contract price and the replacement cost.
$55,000, representing the cost paid to the substitute developer.
$10,000, representing the extra cost of a substitute developer and lost profits, less the initial deposit already paid.
$25,000, representing the deposit plus the lost profits.
The measure of expectation damages is designed to put the non-breaching party in the position they would have been in had the contract been fully performed. Here, the startup is entitled to recover the additional $5,000 paid to the substitute developer to complete the project, plus the $5,000 in lost profits resulting from the delay, for a total of $10,000. The deposit of $20,000 is subtracted from the total damages since it is recoverable against the contract price already paid. Incorrect answers fail to properly account for either the lost profits or the cost of completing the application with the replacement developer. Answers that fail to subtract the deposit improperly calculate the startup’s total losses.
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What are expectation damages?
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How do lost profits factor into damage calculations?
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Why is the initial deposit subtracted from the total damages?