New York Supreme Court, Appellate Division, First Department

Case no.: 2025-01311
Date filed: September 10, 2026

A New York appeals court has ruled that a subcontractor was protected by a contractual cap on liquidated damages for late completion. But the subcontractor was still liable, above and beyond the cap, for direct, non-delay damages it sub may have caused.

Times Square Hotel Owner, LLC entered into a construction manager/general contractor agreement with Pavarini McGovern LLC for renovation of a 47-story tower in Manhattan. The agreement called for liquidated damages of $10,000 per day if Pavarini failed to meet certain completion milestones.

The liquidated damages were Times Square Hotel’s exclusive remedy for delay, and those damages were capped at $3.6 million. Times Square Hotel and Pavarini reciprocally waived the right to consequential damages arising under the contract, but the waiver did not mention direct damages.

Pavarini awarded a subcontract to Gamma USA Inc. to perform the curtain wall and façade work on the project. The subcontract referenced the liquidated damages provision from the prime contract. Gamma would be liable to Pavarini for any liquidated damages. But the $3.6 million cap expressly applied.

The relationship between Pavarini and Gamma apparently went awry. Gamma sued Pavarini for nonpayment. Pavarini counterclaimed for more than $3.6 million.

Pavarini and Times Square Hotel entered into a “liquidating agreement” that allowed Pavarini to sue Gamma on Times Square Hotel's behalf. Pavarini’s contractual liability to Times Square Hotel was limited to the recovery, if any, against Gamma.

Pavarini settled the payment dispute with Gamma but pursued the counterclaim for Times Square Hotel. Gamma moved to dismiss the counterclaim to the extent it sought damages in excess of the $3.6 million cap. Under the terms of the prime contract, incorporated into the subcontract, Times Square Hotel’s sole remedy was liquidated damages, which had been capped. The trial court granted the motion. Pavarini appealed.

The New York Supreme Court, Appellate Division, ruled that the liquidated damages clause found in the prime contract and incorporated into the subcontract was Times Square Hotel’s exclusive remedy for delay damages. But that did not include other damages flowing from breach of contract. And while the prime contract included a waiver of claims for consequential damages, that waiver did not apply to the direct damages arising from increased construction costs.

“Nothing in either the Subcontract or the [construction management agreement] limits the Owner’s ability (vis-à-vis the General Contractor) to pursue direct damages from the Subcontractor, so long as they are not consequential damages or delay damages in excess of the $3.6 million cap.”

In distinguishing consequential damages from direct damages, the court characterized the former as compensation for indirect losses, which “are but a small subset of permissible damages under a contract.” But with construction contracts, some elements of a project owner’s consequential delay damages can carry big price tags. Examples include lost rent and extended financing costs.

There is very little a subcontractor can do to prevent a pass-through claim by the prime contractor on behalf of the project owner, under a liquidating agreement, an assignment, or otherwise. Subcontractors should be aware of the terms of the prime contract. That agreement is usually incorporated by reference into the subcontract.

Participants:
For Gamma USA: Michael Catania; New Windsor, New York
For Pavarini McGovern: Skyler Santomartino; New York, New York

Before: Judges Manzanet-Daniels, Kapnick, Shulman, Chan, and Hagler

Opinion by: The full court

Outcome: Lower court order dismissing counterclaim modified

Source: Please click here to read the complete opinion.