Court Enforces Liquidated Damages Cap and Consequential Damages Waiver in Pass-Through Claim

By: Jeffrey M. Haber

In Gamma USA, Inc. v. Pavarini McGovern, LLC, 2026 N.Y. Slip Op. 05237 (1st Dept. September 10, 2026), the Appellate Division, First Department, addressed the interplay between pass-through claims, liquidating agreements, liquidated damages provisions, and consequential damages waivers in complex construction disputes. The Court held that a subcontractor could not be exposed, through a pass-through claim, to damages that had been contractually waived or limited under the governing project agreements. At the same time, the Court rejected an expansive reading of those limitations, concluding that direct damages remained recoverable where the contracts did not expressly bar them.

Gamma is notable not only for its treatment of pass-through claims, but also for its application of fundamental principles of contract interpretation. In reading the primary contract and subcontract together, the Court emphasized that negotiated risk-allocation provisions must be enforced according to their plain terms. A liquidated damages clause governing delay damages could not be transformed into a cap on all damages, and a waiver of consequential damages could not be expanded to eliminate direct damages. Gamma, therefore, underscores that a liquidating agreement cannot be used to circumvent or reallocate the contractual limitations negotiated by sophisticated parties; rather, the scope of recoverable damages remains a matter of contract interpretation governed by the plain language of the underlying agreements.

Gamma USA, Inc. v. Pavarini McGovern, LLC

Gamma arose from a renovation project involving a 47-story mixed-use tower in Times Square, New York, which included hotel, retail, and theater improvements. Plaintiff served as a subcontractor on the project, while defendant acted as the construction manager and general contractor.

After disputes emerged during the project, litigation followed. The primary issue in Gamma concerned the scope of damages that could be recovered by the defendant, the general contractor. Specifically, defendant asserted a counterclaim against plaintiff as a “pass-through” claim on behalf of the project’s owner, Times Square Hotel Owner, LLC (“Owner”), a non-party to the action.

The Owner engaged defendant on the project pursuant to a Construction Management Agreement (the “CMA”) in August 2018. Pursuant to Section 3.1.2 of the CMA, if defendant did not meet certain milestones by a specified date, it was required to pay the Owner liquidated damages in the amount of $10,000 per day, not to exceed $3.6 million (the “Delay Provision”). The Delay Provision clarified that such liquidated damages would constitute the Owner’s “sole remedy” for delay damages from defendant.

Separately, Section 25.19 of the CMA provided that defendant and the Owner would waive claims for consequential damages against each other arising under the contract (the “Waiver Provision”). The Waiver Provision clarified that it was not meant to preclude an award of liquidated damages in accordance with the Delay Provision. The parties did not waive other damages (such as direct damages) under the Waiver Provision.

In August 2018, defendant retained plaintiff to perform curtain wall and facade work pursuant to a trade contract (the “Subcontract”). The Subcontract required plaintiff to complete the work in accordance with the CMA and other contract documents, with time being of the essence. Unlike the Waiver Provision found in the CMA (which waived consequential damages), Section 6.1 of the Subcontract specified that plaintiff would be liable to defendant “for all direct and consequential damages arising out of . . . this [Subcontract] including any defects in [plaintiff’s] Work”.

In Section 22.1 (entitled “Timely Completion”), as modified by Exhibit H, Section V(7) of the Subcontract, plaintiff acknowledged that failure to complete the work in a timely manner would “result in extreme hardship to [the] Owner” and that if plaintiff failed to do so “[the] Owner’s damages for such delays shall be liquidated” in the same manner as specified in the Delay Provision of the CMA, and “[n]otwithstanding the foregoing, [plaintiff’s] liability for liquidated damages” would be capped at $3.6 million (the “Liquidated Damages Cap”). Section 22.2 set forth that the Liquidated Damages Cap would not “in any way limit [defendant’s] right . . . to collect damages for, inter alia, increased cost of construction . . . and any other damages, including direct or consequential damages, to which [defendant] may be entitled to collect by law for breach of this contract.”

Plaintiff commenced the action against defendant, seeking more than $16 million for nonpayment and breach of the Subcontract. Defendant answered the complaint.

Several months after the commencement of the action, defendant and the Owner entered a “pass-through” liquidating agreement so that defendant could assert a counterclaim in the lawsuit on the Owner’s behalf (as amended, the “Amended Liquidating Agreement”). The Amended Liquidating Agreement was necessary because the Owner lacked privity to assert its own claim against plaintiff, and the Owner wished to avoid the time and expense of suing defendant (which would then in turn sue plaintiff for indemnification).

In the Amended Liquidating Agreement, the Owner and defendant acknowledged that the Owner had incurred damages (including consequential damages) on account of plaintiff’s failure to perform work in accordance with the Subcontract (the “Owner Claim”), and that defendant was liable to the Owner for that claim under the CMA. The Owner and defendant also agreed that they had entered the Amended Liquidated Agreement to “liquidate the Owner Claim such that [defendant’s] liability to [the] Owner in connection with the Owner Claim [was] liquidated and limited to the amount, if any, that [was] actually recovered from [plaintiff] on account of the Owner Claim, including, without limitation the consequential damages incurred by [the] Owner as a result of [plaintiff’s] breach. . . .”

Defendant filed a second amended answer, the operative pleading in the action, asserting an amended counterclaim brought by defendant solely on the Owner’s behalf in accordance with the Amended Liquidating Agreement.

Plaintiff moved to dismiss the amended counterclaim shortly after it was filed, arguing that the Amended Liquidating Agreement was unenforceable. In the alternative, plaintiff argued that its liability for liquidated damages was capped at $3.6 million under the Liquidated Damages Cap of the Subcontract.

Supreme Court granted the motion to dismiss the amended counterclaim to the extent it sought damages exceeding the $3.6 million Liquidated Damages Cap. The court found that the amended counterclaim sought damages solely for the Owner’s injuries, not defendant’s injuries. The court also noted that, under the CMA, the Owner had expressly waived its right to recover “any damages” other than liquidated damages from defendant, which included consequential delay damages.

Thus, Supreme Court held that while defendant would have retained the right to recover consequential damages from plaintiff for its own injuries under the Subcontract (see, e.g., Section 6.1 of the Subcontract), the liability for the Owner’s injuries was governed by the Liquidated Damages Cap found in 2.21 of the Subcontract, which capped recoverable damages at $3.6 million. Defendant’s recovery on its amended counterclaim asserted on behalf of the Owner was thus limited to a maximum of $3.6 million with respect to all forms of damages.

The Court held that Supreme Court “correctly read the amended counterclaim — styled entirely as a pass-through claim by [defendant] on behalf of the Owner — in determining that there was no independent claim asserted by [defendant] (apart from the liability for its subcontractors to the Owner under the CMA).”[1] The Court pointed to paragraph 194 of the second amended answer in support, which alleged that the “Owner incurred substantial additional costs as a result of [plaintiff’s] breaches, in the form of overhead and supervision, direct work costs charged by separate contractors, additional storage, and labor expenditures.”[2] The Court also pointed to paragraph 196 of the second amended answer, which “asserted that “[u]nder the [CMA], [defendant] is responsible for all the acts and omissions of its subcontractors and is liable to [the] Owner for damages incurred due to" the Subcontractor's breaches of the Subcontract.”[3] From these allegations, the Court concluded that defendant “did not allege that it incurred additional damages apart from those owing to the Owner on account of the [plaintiff’s] breaches.”[4]

The Court also held that “Supreme Court . . . properly found that it was necessary to interpret both the CMA (between the Owner and [defendant]) and the Subcontract (between [defendant] and [plaintiff]) in determining the scope of recoverable damages on the pass-through counterclaim.”[5] “First,” said the Court, Supreme Court “correctly found that to the extent [defendant] sought to recover damages from [plaintiff] that the Owner incurred based on [plaintiff’s] delays, that recovery was subject to the Liquidated Damages Cap in the Subcontract.”[6] “That section,” noted the Court, “explicitly provide[d] that the Owner’s damages for such delays would be . . . liquidated in the same daily amount specified by the owner in the CMA (i.e., $10,000 per day for each day of the delay) in the proportion that [plaintiff] was the cause of such delay, and that notwithstanding the foregoing, [plaintiff’s] liability for liquidated damages would be capped at $3.6 million.”[7]

“However,” said the Court, “the above limitation [was] applicable only to the Owner’s damages caused by the Subcontractor’s delays.”[8] “The relevant agreements do not,” explained, “restrict the other damages that [defendant could] recover on behalf of the Owner.”[9] “Notably,” said the Court, “the first amended counterclaim claim assert[ed] several forms of damages attributable to Owner, not just delay damages. To the extent the damages sought were not delay damages, they should not have been subject to the $3.6 million cap.”[10]

Second, said the Court, “with respect to other forms of damages recoverable by the Owner, it was necessary to look to the CMA.”[11] “While Supreme Court addressed the CMA only in passing,” noted the Court, “the recognition that the terms of the CMA apply to the pass-through counterclaim [was] important.”[12] The Court explained that  

the Owner had the ability to assert claims for damages directly against [defendant] for liquidated delay damages and other (nonconsequential) damages under the CMA. However, the Owner instead chose to rely on the Amended Liquidating Agreement to pursue claims against [plaintiff] by way of a pass-through counterclaim asserted by [defendant] against [plaintiff]. This strategic decision did not (and should not) alter or expand the scope of [plaintiff’s] liability for the Owner’s damages under the Subcontract, which expressly incorporated the terms of the CMA.[13]

The Court noted that “[w]hile Supreme Court properly acknowledged that the CMA applied, the court’s interpretation exceeded the intended scope of the prescribed damages waived in the CMA.”[14] “Specifically,” said the Court, “Supreme Court concluded that the ‘Owner expressly waived its rights to recover any damages other than liquidated damages from defendant [General Contractor], including consequential delay damages” in the CMA.”[15] “However,” explained the Court, “the CMA did not waive all damages as between the Owner and the General Contractor, but only claims for “consequential damages arising of and relating to the Contract.”[16] The Court concluded that “[c]onsequential damages are meant to compensate for indirect losses, and are but a small subset of permissible damages under a contract.”[17] 

Thus, held the Court, “nothing in either the Subcontract or the CMA limit[ed] the Owner’s ability (vis-a -vis the [defendant]) to pursue direct damages from [plaintiff], so long as they [were] not consequential damages or delay damages in excess of the $3.6 million cap.”[18] In so holding, the Court modified Supreme Court’s order to dismiss “only those portions of the counterclaim seeking delay damages in excess of the $3.6 million liquidated damages cap and consequential damages.”[19]

Takeaway

Although Gamma arose in the context of a pass-through claim, the decision is fundamentally a contract interpretation case. It concerns the well-established doctrine under New York law permitting a contractor to assert claims on behalf of a party with whom the defendant lacks contractual privity through a liquidating agreement. The central principle is that a pass-through claim is a procedural vehicle for recovery; it does not create new substantive rights or expand existing liability. The Court emphasized that the Owner’s decision to proceed through a liquidating agreement could not alter the scope of damages otherwise available under the governing contracts.

Starting from that premise, the Court analyzed the CMA and Subcontract together, giving effect to each provision according to its plain language. The Court rejected the notion that the subcontract’s $3.6 million liquidated damages cap restricted all forms of owner damages. By its terms, the provision addressed only delay damages. Consistent with New York’s preference for enforcing negotiated risk-allocation provisions as written, the Court refused to expand the cap beyond the category of damages expressly identified in the contract.

The Court applied the same interpretive approach to the consequential damages waiver in the CMA. Supreme Court had effectively treated the waiver as eliminating all damages other than liquidated damages. The Court disagreed, emphasizing that the parties waived only consequential damages, not direct damages. Relying on established New York law distinguishing direct damages from consequential damages, the Court declined to enlarge the scope of the waiver beyond what the parties actually negotiated and memorialized in their agreement.

Viewed through this lens, Gamma reinforces several related principles of contract interpretation under New York law. Related agreements forming part of the same transaction must be read together. Damages limitations and waivers are enforced according to their plain terms. Courts will not rewrite contracts by implication, nor will they transform a liquidated damages provision governing one category of loss into a cap on all damages. Likewise, a waiver of consequential damages does not extinguish claims for direct damages absent clear contractual language to that effect.

The pass-through nature of the claim ultimately reinforced, rather than altered, those principles. Because defendant was asserting only the Owner’s claim, it stood in the owner’s shoes and could recover only those damages the Owner itself could have recovered under the contractual framework. As a result, delay damages remained subject to the $3.6 million liquidated damages cap, consequential damages remained barred by the waiver provision, and direct damages remained recoverable because neither agreement expressly eliminated them. The liquidating agreement provided a mechanism for pursuing the claim, but it could not expand plaintiff’s contractual exposure beyond the limits established by the underlying agreements.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice.

Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. ___________________________________

[1] Slip Op. at *4.

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id. at *5.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id. (internal quotation marks omitted).

[17] Id., citing Bi-Economy Market, Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187, 192-193 (2008); American List Corp. v. U.S. News & World Report, 75 N.Y.2d 38, 43 (1989).

[18] Id.

[19] Id. at *1.