A software developer agreed to create a custom inventory management system for a client for $25,000. The contract specified a completion date of October 1st. In reliance on this contract, the client terminated its existing software license, incurring a $2,000 early termination fee, and leased new server space for $500 per month, beginning October 1st. On September 15th, the developer informed the client that they would not be able to complete the project due to unforeseen staffing issues. The client immediately sought a new developer, who quoted $30,000 for the same system. What damages can the client likely recover?
- A$2,000 (early termination fee only).
- B$7,500 ($5,000 difference + $2,000 termination fee + $500 server lease for one month).
- C$2,500 (half of the difference in contract price).
- D$5,000 (difference in contract price).
Show answer & explanationAnswer & explanation
Correct answer: B. $7,500 ($5,000 difference + $2,000 termination fee + $500 server lease for one month).
The client can recover expectation damages, which aim to put the client in the position they would have been in had the contract been performed. This includes the difference in the cost of obtaining the substitute performance ($30,000 - $25,000 = $5,000) plus any foreseeable consequential damages, such as the $2,000 early termination fee and the $500 server lease fee, which were incurred in reliance on the original contract.
Why the other options are wrong
- A. This only covers reliance damages for the termination fee, ignoring the increased cost of obtaining the performance and other foreseeable reliance damages.
- C. This calculation is arbitrary and has no legal basis for damages.
- D. This only accounts for the direct difference in contract price, ignoring foreseeable consequential damages.
Expectation Damages
Damages awarded to put the non-breaching party in the position they would have been in had the contract been fully performed, including direct and foreseeable consequential damages.
- Aims to give the benefit of the bargain.
- Calculated as the loss in value + other loss - cost avoided - loss avoided.
- Includes direct damages (e.g., cost of cover) and foreseeable consequential damages.
- Consequential damages must be foreseeable at the time of contracting.
Memory trick: Damages? 'E' for Expectation, 'R' for Reliance, 'R' for Restitution, 'L' for Liquidated.