Contract analysis

I. Executive Summary Calderwood & Harkness LLP was engaged by Nexford Industrial Holdings Inc. ("Nexford" or "NIH") on August 22, 2022, to defend against a complaint filed on August 8, 2022, by Cardinal Peak Industries ("Cardinal Peak" or "CPI"), a Colorado limited liability company, in the Circuit Court of Cook County, Illinois, County Department, Law Division, Case No. 2022-L-008471. The Complaint was served on Nex

II. Background and Parties A. Nexford Industrial Holdings Inc. (Defendant / Our Client) Nexford Industrial Holdings Inc. is a Delaware corporation headquartered at 4200 West Lakeshore Industrial Parkway, Suite 300, Waukegan, Illinois 60085. Nexford was incorporated in the State of Delaware on April 3, 2014, and has maintained its principal place of business in Waukegan, Illinois, since that time. Nexford is registere

III. The Master Supply Agreement The MSA is the central document in this dispute. Set forth below is a summary of its key terms, with particular attention to the surcharge pass-through provisions that form the basis of Cardinal Peak's claims and Nexford's defenses. A. Key Terms The MSA bears reference number MSA-NIH-CPI-2020-001 and was executed on January 15, 2020. The parties to the MSA are Nexford Industrial Holdi

Section 7.2 of the MSA establishes the base pricing for the two primary product categories: • Hot-Rolled Coil (HRC): Base price of $620 per ton. • Cold-Rolled Coil (CRC): Base price of $740 per ton. These base prices are subject to quarterly adjustment in accordance with a price-review mechanism set forth in Section 7.3 of the MSA, which provides for renegotiation of base prices based on market conditions, subject to

Section 7.4 of the MSA establishes the mechanism by which Cardinal Peak, as Seller, may pass through documented increases in certain raw-material costs to Nexford, as Buyer, in the form of surcharges added to the base pricing. This provision is the central battleground of this dispute. Section 7.4 contains four subsections, each of which is relevant to Nexford's defenses:

Section 7.4(a) — Notice Requirement. Section 7.4(a) provides that Seller may pass through documented raw-material surcharges — specifically, surcharges related to scrap, energy, and alloy costs — provided that Seller delivers a Surcharge Notice with supporting documentation to Buyer no later than fifteen (15) business days after the end of the applicable month. The provision states, in pertinent part: "Seller may pas

Section 7.4(b) — Exhibit C Methodology. Section 7.4(b) requires that all surcharge components be calculated in strict accordance with the methodology set forth in Exhibit C (Surcharge Methodology). Exhibit C prescribes the use of two specific published indices: (i) The Ferrous Scrap Index, as reported by Drayton Partners LLC ("Platts/SPI"), which tracks the market price of ferrous scrap metal used in steelmaking; and

Section 7.4(c) — Cap Provision. Section 7.4(c) establishes a ceiling on the aggregate monthly surcharge that may be passed through to Nexford: "The aggregate monthly surcharge applicable to any Product category shall not exceed twelve percent (12%) of the applicable Base Price for such Product category without the prior written consent of Buyer." Under this provision, the maximum permissible surcharge for HRC is 12%

Section 7.4(d) — Dispute Procedure. Section 7.4(d) establishes a procedure for the resolution of surcharge disputes. If Buyer disputes any surcharge, Buyer must notify Seller of the dispute within thirty (30) calendar days of receipt of the Surcharge Notice. If the dispute is not resolved through direct negotiation between the parties' commercial representatives, it is to be escalated to senior officers of each party

Section 14.3 of the MSA establishes a mandatory mediation requirement that must be satisfied before either party may initiate litigation. The provision requires that all disputes arising under or relating to the MSA be submitted to mediation in Chicago, Illinois, before a mutually agreed-upon mediator. If the parties cannot agree on a mediator, the provision provides for selection through the American Arbitration Ass

Section 15.1 of the MSA provides that Illinois law governs all disputes arising under or in connection with the agreement.

IV. Analysis of Cardinal Peak's Complaint A. Procedural History Leading to the Complaint The dispute between Nexford and Cardinal Peak developed over approximately fifteen months, from March 2021 through May 2022, against the backdrop of extraordinary volatility in commodity markets. During this period, the price of ferrous scrap surged from approximately $400 per ton in early 2021 to over $600 per ton in mid-2022, d

V. Nexford's Available Defenses A. Overview of Three-Pronged Defense Strategy Nexford's defense against Cardinal Peak's breach of contract claim rests on three independent contractual grounds, each rooted in the express terms of MSA Section 7.4. These three defenses are mutually reinforcing but also independently sufficient to reduce or eliminate significant portions of Cardinal Peak's claimed damages. Taken together

1. Untimely Surcharge Notices (Section 7.4(a)): Cardinal Peak failed to deliver timely Surcharge Notices for seven of the fourteen disputed months, affecting approximately $2.18 million in claimed surcharges.

2. Deviation from Exhibit C Surcharge Methodology (Section 7.4(b)): Cardinal Peak used an unauthorized internal "blended cost" metric rather than the published indices prescribed by Exhibit C, resulting in approximately $1.47 million in excess charges.

3. Surcharge Cap Exceedances (Section 7.4(c)): Cardinal Peak invoiced surcharges exceeding the 12% cap for four months without obtaining Nexford's prior written consent, resulting in approximately $1.08 million in excess charges above the cap. It is important to note that there is some overlap among these three defense categories. Certain months are affected by more than one defense — for example, a Surcharge Notice

1. Waiver. Cardinal Peak waived its right to collect surcharges for the seven months where it failed to deliver timely Surcharge Notices, as expressly provided in the waiver language of Section 7.4(a).

2. Failure of Condition Precedent. Cardinal Peak's right to collect surcharges was conditioned on compliance with the timely notice requirement of Section 7.4(a). Cardinal Peak failed to satisfy this condition precedent for seven of the fourteen disputed months.

3. Breach by Cardinal Peak. Cardinal Peak materially breached the MSA by (a) failing to comply with the Section 7.4(a) notice requirements, (b) using a surcharge calculation methodology inconsistent with Exhibit C, and (c) invoicing surcharges in excess of the Section 7.4(c) cap without obtaining Nexford's prior written consent.

4. Contractual Cap Limitation. Surcharges exceeding the 12% cap set forth in Section 7.4(c) are unenforceable absent Nexford's prior written consent, which was never given.

5. Failure to Mitigate Damages. To the extent Cardinal Peak claims damages arising from Nexford's alleged breach, Cardinal Peak failed to mitigate its damages by, among other things, failing to seek Nexford's consent to exceed the surcharge cap, failing to correct its methodology to comply with Exhibit C, and failing to engage in the mediation process required by Section 14.3 before filing suit.

6. Estoppel. Cardinal Peak is estopped from claiming surcharges calculated using a methodology other than that prescribed by Exhibit C, having agreed to and executed the MSA with full knowledge of the Exhibit C requirements.

VI. Preliminary Risk Assessment A. Strengths of Nexford's Position Nexford's defense is anchored in the clear, unambiguous language of the MSA, which provides well-defined requirements for the notice, calculation, and cap of surcharges. The principal strengths of Nexford's position are as follows: First, the contractual language of Section 7.4 is clear, specific, and prescriptive. The fifteen-business-day notice dead

VII. Recommended Counterclaim In addition to defending against Cardinal Peak's claims, we recommend that Nexford assert affirmative counterclaims for breach of contract, declaratory relief, and recovery of overpayment. The counterclaim serves both a substantive and a strategic purpose: substantively, it positions Nexford to recover the amounts it has overpaid; strategically, it shifts the litigation dynamic and under

VIII. Recommended Next Steps and Timeline A. Immediate Actions The following actions should be taken on an expedited basis:

1. File Answer and Affirmative Defenses. We recommend filing a comprehensive Answer and Affirmative Defenses on or before September 19, 2022, which we have identified as the target filing date within the applicable response deadline under Illinois Supreme Court Rules. The Answer should deny all material allegations of the Complaint, assert the affirmative defenses identified in Section V.H above, and preserve all ava

2. File Counterclaim. Nexford's Counterclaim for breach of contract, declaratory judgment, and $0.21 million overpayment recovery should be filed simultaneously with the Answer or shortly thereafter. Filing the Counterclaim concurrently with the Answer is preferable from both a procedural and a strategic standpoint, as it immediately establishes Nexford's affirmative position and shifts the litigation dynamic.

3. Confirm Litigation Hold Compliance. A Litigation Hold Notice was issued on August 23, 2022, the day after Calderwood & Harkness's engagement was opened. The notice was directed to all relevant Nexford personnel and departments, including procurement, finance, legal, information technology, and operations at all three manufacturing facilities (Waukegan, Gary, and Toledo). We should confirm compliance with the litig