Contract analysis

I. Executive Summary This memorandum analyzes whether Section 11.4 of the Teaming Agreement dated June 12, 2019 (the "Teaming Agreement"), between Whitmore Aerospace LLC ("WAL") and Hargrove-Dalton Defense Systems, Inc. ("HDDS"), obligates WAL to indemnify HDDS for $14,726,583 in cost overruns identified by the Defense Contract Management Agency ("DCMA") in its Contracting Officer's Preliminary Determination ("COPD")

II. Background A. The Parties and the Teaming Agreement Whitmore Aerospace LLC. WAL is a Virginia limited liability company headquartered at 4200 Commerce Park Drive, Suite 600, Chantilly, Virginia 20151. WAL is an aerospace and defense manufacturer specializing in precision-machined turbine components, integrated propulsion sub-assemblies, and structural airframe parts. The company was founded in 2006 by Marcus J. W

III. Text of Key Contractual Provisions Before proceeding to the legal analysis, we set forth the full text of the contractual provisions at issue. The text is quoted from the fully executed Teaming Agreement dated June 12, 2019. A. Section 11.4 — Indemnification

Section 11.4 provides in full: "Team Member shall indemnify, defend, and hold harmless Team Lead from and against any and all Losses arising out of or relating to (a) Team Member's negligent acts or omissions, willful misconduct, or material breach of this Agreement in the performance of Team Member's Work Package, or (b) any claim by the U.S. Government that costs incurred under Team Member's Work Package are unallo

Section 11.5 provides in full: "Notwithstanding Section 11.4, Team Member's aggregate liability under this Section 11 shall not exceed 120% of the value of Team Member's Work Package." The calculated cap is: 120% × $74,160,000 = $88,992,000 This cap applies to WAL's "aggregate liability under this Section 11" — meaning it encompasses all claims arising under Section 11.4(a), Section 11.4(b), and any other indemnifica

Section 18.1 provides: "This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to its conflicts-of-law principles." Accordingly, all questions of contract interpretation arising under the Teaming Agreement are governed by the substantive law of the State of New York. D. Other Relevant Provisions Several other provisions of the Teaming Agreement are relev

Section 18.2 — Forum Selection. Section 18.2 provides that any litigation arising under the Teaming Agreement shall be brought in the United States District Court for the Southern District of New York or the Supreme Court of the State of New York, New York County. Both parties consent to personal jurisdiction in these forums and waive any objections based on inconvenient forum. This provision supports WAL's filing of

Section 18.3 — Dispute Resolution. Section 18.3 establishes a tiered dispute-resolution process. First, the parties are required to engage in senior executive negotiations for a period of thirty days. Second, the parties "may" submit the dispute to non-binding mediation. Third, if the dispute is not resolved through negotiation or mediation, either party may initiate litigation in the forums specified in Section 18.2

Section 11.6 — Attorneys' Fees. Section 11.6 provides that in any action to enforce the indemnification provisions of Article 11, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs. HDDS's demand letter referenced this provision, signaling HDDS's intention to seek attorneys' fees if it prevails. This provision is a double-edged sword: if WAL prevails in a declaratory judgment a

IV. Analysis of Section 11.4(a): Negligence, Willful Misconduct, or Material Breach A. Elements Required

Section 11.4(a) requires HDDS to establish that WAL committed "negligent acts or omissions, willful misconduct, or material breach of this Agreement in the performance of [WAL's] Work Package," and that the claimed losses "aris[e] out of or relat[e] to" such conduct. This is a fault-based trigger that imposes a meaningful burden of proof on HDDS. Under well-settled New York law, the party seeking contractual indemnif

V. Analysis of Section 11.4(b): Government Cost-Disallowance Claims A. Elements Required

Section 11.4(b) establishes a second, independent trigger for WAL's indemnification obligation. It requires: (1) a "claim by the U.S. Government that costs incurred under Team Member's Work Package are unallowable, unreasonable, or otherwise subject to disallowance"; and (2) that "such claim is caused by Team Member's acts or omissions." These two requirements operate conjunctively — both must be satisfied before WAL

1. Titanium Raw-Material Cost Escalation (~$4.2 million) The titanium price escalation was driven by global market forces entirely outside WAL's control. The period from 2020 through 2022 witnessed extraordinary disruptions in the global titanium supply chain, driven by the COVID-19 pandemic (which curtailed production at major smelters and disrupted international logistics), the Russian invasion of Ukraine in Februa

2. Rework Due to Non-Conforming Machining Tolerances (~$5.1 million) As discussed in Section IV.B above, WAL contends that the non-conformances that necessitated rework were caused by ambiguous or erroneous engineering specifications provided by HDDS as Team Lead. WAL's engineering team performed machining operations in good-faith reliance on the specifications as written. When HDDS subsequently identified dimensiona

3. Schedule Delays / Idle-Labor Charges (~$2.3 million) WAL contends that the schedule delays causing idle-labor charges were attributable to HDDS's late delivery of government-furnished equipment ("GFE") and government-furnished information ("GFI"). Under the Teaming Agreement, HDDS, as Team Lead, was responsible for flowing down GFE and GFI from the government to team members in accordance with the program schedule

4. ECP Implementation Costs (~$1.2 million) The ECP implementation costs arose from government-directed engineering changes that were flowed down through HDDS to WAL. Engineering change proposals are a standard feature of defense acquisition programs, particularly on developmental programs like ATAP. When the government directs a design change, the contractor (and its team members) must implement the change, which ma

VI. Force-Majeure and Commercial Impracticability Defenses A. Teaming Agreement Force-Majeure Provisions We have reviewed the Teaming Agreement for a force-majeure clause. Section 15.1 of the Teaming Agreement contains a force-majeure provision that excuses nonperformance caused by events beyond a party's reasonable control, including but not limited to "acts of God, war, terrorism, insurrection, epidemic, pandemic,

VII. Allocation Issue: WP-4 vs. Non-WP-4 Overruns A. DCMA's Allocation in the COPD The COPD identifies total cost overruns of $14,726,583 on the ATAP program. Of this amount, the COPD attributes: • $12,817,441 (87.03%) to WP-4 — titanium structural assemblies, which is WAL's assigned work package under the Teaming Agreement; and • $1,909,142 (12.97%) to other work packages — including avionics integration (WP-2), fin

VIII. Section 11.5 Liability Cap Analysis A. Calculation

Section 11.5 provides that WAL's "aggregate liability under this Section 11 shall not exceed 120% of the value of Team Member's Work Package." The relevant figures are: • WAL's Work Package value: $74,160,000 (calculated as 18% × $412,000,000 target cost) • Liability cap: 120% × $74,160,000 = $88,992,000 • HDDS's current demand: $14,726,583 • Demand as percentage of cap: approximately 16.5% The current demand is well