Contract analysis

I. Introduction and Purpose of Memorandum This memorandum analyzes Illinois law governing the interpretation and enforcement of surcharge pass-through clauses in commercial supply agreements. It has been prepared in connection with the defense of our client, Nexford Industrial Holdings Inc. ("Nexford" or "NIH"), in the above-captioned action filed by Cardinal Peak Industries ("Cardinal Peak" or "CPI") on August 8, 20

1. Condition Precedent / Late Notice Defense. Whether the 15-business-day Surcharge Notice requirement under Section 7.4(a) of the MSA operates as a condition precedent to Cardinal Peak's entitlement to surcharge payments, and the legal consequences of Cardinal Peak's non-compliance with that requirement. This defense applies to 7 of the 14 disputed months and corresponds to approximately $2.18 million in claimed sur

2. Methodology Deviation Defense. Whether Cardinal Peak's deviation from the Exhibit C Surcharge Methodology — specifically, its use of an internal "blended cost" metric rather than the contractually specified Ferrous Scrap Index and Industrial Energy Cost Index — constitutes a breach of the MSA that relieves Nexford of its payment obligation for the excess amounts. This defense corresponds to approximately $1.47 mil

3. Cap Exceedance Defense. Whether the 12% monthly surcharge cap under Section 7.4(c) is enforceable as written, and what legal effect the absence of Nexford's prior written consent has on surcharges exceeding the cap. This defense applies to four months during the disputed period and corresponds to approximately $1.08 million in surcharges invoiced above the contractual cap. Taken together, these three defense categ

II. Factual Background Relevant to the Legal Analysis A. The Master Supply Agreement On January 15, 2020, Nexford and Cardinal Peak entered into the MSA for the supply of hot-rolled coil ("HRC") and cold-rolled coil ("CRC") steel products. The MSA was executed following several months of negotiation between the parties' respective commercial and legal teams and was drafted with the assistance of outside counsel on bo

Section 7.4 of the MSA is the central provision at issue in this dispute. It permits Cardinal Peak, as Seller, to pass through to Nexford, as Buyer, documented raw-material surcharges incurred during the applicable invoice period. The surcharges are intended to account for fluctuations in the costs of three categories of raw-material inputs: (i) ferrous scrap; (ii) energy; and (iii) alloys. The surcharge pass-through

Section 7.4(a) — Notice Requirement. Section 7.4(a) requires Cardinal Peak to deliver a Surcharge Notice, together with supporting documentation, to Nexford no later than fifteen (15) business days after the end of the applicable month. The Surcharge Notice must identify the specific surcharge components (scrap, energy, and/or alloy), the applicable index values, the calculation methodology, and the resulting surchar

Section 7.4(c) — Monthly Surcharge Cap. Section 7.4(c) imposes a ceiling on the aggregate monthly surcharge that Cardinal Peak may invoice without obtaining Nexford's prior written consent. Specifically, the monthly aggregate surcharge may not exceed 12% of the applicable Base Price for the relevant product category. For HRC, the 12% cap translates to $74.40 per ton (12% × $620/ton); for CRC, the cap translates to $8

Section 7.4(d) — Dispute Procedure. Section 7.4(d) provides Nexford with 30 calendar days from receipt of a Surcharge Notice to notify Cardinal Peak of any disputed surcharges. If the dispute is not resolved within an additional 15-business-day period, it escalates to the senior officers designated by each party, and thereafter to mandatory mediation under Section 14.3. During the pendency of a dispute, Nexford is re

1. Late Notice (7 of 14 months; $2.18 million). For seven of the 14 disputed months, Cardinal Peak failed to deliver Surcharge Notices within the 15-business-day deadline prescribed by Section 7.4(a). The lateness ranged from several days to, in certain months, more than three weeks beyond the deadline. Nexford contends that timely delivery of the Surcharge Notice is a condition precedent to Cardinal Peak's right to

2. Methodology Deviation ($1.47 million). Across multiple months during the disputed period, Cardinal Peak deviated from the Exhibit C Surcharge Methodology by using an internal "blended cost" metric — an average of Cardinal Peak's actual procurement costs across multiple raw-material sources — rather than referencing the published Ferrous Scrap Index and Industrial Energy Cost Index specified in Exhibit C. This non-

3. Cap Exceedance (4 months; $1.08 million). For four months during the disputed period, Cardinal Peak invoiced surcharges exceeding the 12% monthly cap established by Section 7.4(c). Nexford did not provide prior written consent for any exceedance of the cap. The aggregate excess above the cap for these four months totals approximately $1.08 million. As noted, some overlap exists among these three categories; certai

III. Illinois Law on Contract Interpretation — General Principles A. Standard of Interpretation Under Illinois law, a court's primary objective in construing a contract is to give effect to the intent of the parties at the time they entered into the agreement. Gallagher v. Lenart, 226 Ill. 2d 208, 232–33 (2007); Air Safety, Inc. v. Teachers Realty Corp., 185 Ill. 2d 457, 462 (1999). The intent of the parties is to be

IV. Condition Precedent Analysis — Section 7.4(a) Notice Requirement A. Conditions Precedent Under Illinois Law A condition precedent is "an act or event, other than a lapse of time, that must occur before a duty of performance arises." Beary v. City of Champaign, 262 Ill. App. 3d 835, 839 (4th Dist. 1994); see also Restatement (Second) of Contracts § 224 (1981). Where a contractual obligation is subject to a conditi

Section 7.4(a) of the MSA states, in relevant part: "Seller may pass through documented raw-material surcharges incurred during the applicable invoice period, provided that (a) Seller delivers to Buyer a Surcharge Notice with supporting documentation no later than fifteen (15) business days after the end of the applicable month . . ." (emphasis added). The use of the phrase "provided that" is classic condition preced

V. Waiver Doctrine Under Illinois Law A. Elements of Waiver Under Illinois law, waiver is defined as the voluntary relinquishment of a known right. Ryder v. Bank of Hickory Hills, 146 Ill. 2d 98, 104 (1991); Whalen v. K-Mart Corp., 166 Ill. App. 3d 339, 343 (1st Dist. 1988). To establish waiver, a party must demonstrate that the waiving party: (1) had knowledge of the right in question; and (2) acted in a manner that

VI. Enforceability of Price-Cap Provisions — Section 7.4(c) A. General Enforceability of Price Caps Under Illinois Law and UCC Article 2 Price modification and adjustment clauses, including caps, ceilings, and floors, are enforceable under Illinois law when clearly stated in the contract. The freedom of contract is a foundational principle of Illinois law, and courts will give effect to the parties' agreed-upon prici

Section 7.4(c) of the MSA provides, in clear and unambiguous terms, that the aggregate monthly surcharge shall not exceed 12% of the applicable Base Price for the relevant product category without the prior written consent of Buyer. The specific dollar amounts implied by this cap are readily calculable: • HRC: 12% × $620/ton = $74.40/ton maximum monthly surcharge • CRC: 12% × $740/ton = $88.80/ton maximum monthly sur

VII. Exhibit C Surcharge Methodology — Enforceability of the Specified Calculation Approach A. Contractual Obligation to Use Published Indices As described in Section II.B above, Exhibit C to the MSA sets forth a detailed and specific Surcharge Methodology that Cardinal Peak is required to follow when calculating surcharges. The methodology mandates use of two published, third-party indices: (i) The Ferrous Scrap Ind

VIII. Account Stated Claim — Brief Analysis Cardinal Peak's third cause of action is for account stated. Under Illinois law, an account stated is defined as "an agreement between parties who have had previous transactions of a monetary character that all the items of the account are true, that the balance struck is correct, and that the debtor promises to pay such balance." Dreyer Med. Clinic, S.C. v. Corral, 227 Ill