1019-00001 · Haber Reinhardt Schlosser Partners · Correspondence/Client

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Contract analysis Extract to table

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP Counselors at Law

600 Lexington Avenue New York, New York 10022

Telephone: (212) 841-7200 Facsimile: (212) 841-7201 www.calderwoodharkness.com

March 25, 2024

Via Email and FedEx

Dana Prescott, Esq. Vice President & General Counsel Whitmore Aerospace LLC 4200 Wilson Boulevard, Suite 1100 Arlington, Virginia 22203

Marcus J. Whitmore III Chief Executive Officer Whitmore Aerospace LLC 4200 Wilson Boulevard, Suite 1100 Arlington, Virginia 22203

Re: Analysis of Partial Award — ICC Case No. 27914/MHM, Kestrel Dynamics GmbH v. Whitmore Aerospace LLC

Engagement No.: 1019-00001

Dear Dana and Marcus:

I. Introduction and Purpose

Calderwood & Harkness LLP is pleased to provide this detailed analysis of the Partial Award (the "Award" or "Partial Award") issued on March 22, 2024, by the Arbitral Tribunal (the "Tribunal") constituted in ICC Case No. 27914/MHM, captioned Kestrel Dynamics GmbH ("Kestrel" or "Claimant") v. Whitmore Aerospace LLC ("WAL" or "Respondent"). This letter is intended to provide WAL's senior leadership and legal team with a comprehensive assessment of the Tribunal's findings, the financial implications of the Award, and our recommendations concerning enforcement and next steps.

The Tribunal was composed of Prof. Dame Eleanor Fitzwilliam (Presiding Arbitrator, nominated jointly by the co-arbitrators following the procedure set forth in Article 13 of the ICC Rules), Dr. Hans-Ulrich Perren (nominated by Claimant Kestrel Dynamics GmbH), and the Hon. Robert A. Castillo (Ret.) (nominated by Respondent Whitmore Aerospace LLC). The arbitration was seated in New York, New York, and conducted in the English language, governed throughout by the ICC Rules of Arbitration (2021 edition). The substantive law governing the dispute was that of the State of New York, consistent with the choice-of-law provision set forth in Section 22.1 of the Master Supply Agreement dated June 15, 2018 (the "MSA").

We are gratified to report that the Partial Award represents a comprehensive and overwhelmingly favorable outcome for Whitmore Aerospace LLC. The Tribunal dismissed the entirety of Kestrel Dynamics GmbH's claims — which totaled €47.3 million across four separate heads of damage — and sustained WAL's counterclaim for replacement-component costs in substantial part. Critically, the Tribunal found no material breach of the MSA on WAL's part, thereby vindicating WAL's position that its termination of the MSA for persistent quality failure was both procedurally and substantively proper under the terms of the agreement. This result removes the most significant source of legal and financial exposure that WAL has faced since the commencement of the arbitration in late 2022.

The analysis that follows addresses each of the Tribunal's principal findings, the costs allocation, the net financial outcome for WAL, enforcement considerations, reserved matters pertaining to post-award interest and the anticipated Final Award, the status of insurance notifications, and our recommended next steps.

II. Summary of the Tribunal's Key Findings

The Partial Award spans 187 pages and addresses each of the Tribunal's findings in considerable detail. For ease of reference, we have organized our summary of the key findings into four principal categories, each of which is discussed below.

A. No Material Breach by WAL

The central issue in this arbitration was whether WAL committed a material breach of the MSA by rejecting fourteen (14) lots of Ti-6Al-4V ELI (Extra Low Interstitial) titanium alloy turbine housings delivered by Kestrel between March 2022 and September 2022. Kestrel contended that WAL's lot rejections were arbitrary, commercially unreasonable, and constituted a repudiation of WAL's purchase obligations under the MSA. WAL maintained, and the Tribunal ultimately agreed, that the rejections were proper exercises of WAL's contractual quality-control rights.

The Tribunal found, by a preponderance of the evidence, that WAL did not commit a material breach of the MSA. In reaching this conclusion, the Tribunal undertook a detailed examination of the applicable quality specifications, the incoming inspection results, and the competing expert testimony regarding the metallurgical properties of the rejected units.

The fourteen (14) lots rejected by WAL between March 2022 (commencing with Lot KDG-2022-0307) and September 2022 (concluding with Lot KDG-2022-0919) encompassed a total of 1,680 individual turbine housing units. Each of these lots was rejected on the basis that the units failed to meet the contractual porosity specification of ≤0.25% as set forth in WAL-SPEC-TH-401, Appendix C, Table 3, which was incorporated by reference into the MSA pursuant to Section 5.1 and Exhibit B thereto. The porosity specification is a critical quality parameter for Ti-6Al-4V ELI turbine housings, as porosity above the contractual threshold introduces fatigue-crack initiation sites that can compromise the structural integrity of the component during high-temperature, high-cycle-fatigue operating conditions typical of turbofan engine environments.

In evaluating the competing expert evidence on this question, the Tribunal credited the metallurgical expert testimony of Dr. Raymond Chow of Arclight Materials Science Inc. (Raleigh, North Carolina), WAL's designated expert, over the testimony of Kestrel's expert, Dr. Martina Kessler of Albrecht Prüftechnik GmbH (Munich, Germany). The Tribunal found that Dr. Chow's methodology — which employed micro-CT scanning followed by destructive cross-sectional analysis in accordance with ASTM E1441-11 and ASTM B311-17 — was more rigorous and reproducible than the methodology employed by Dr. Kessler, who relied principally on Archimedes-method density measurements supplemented by limited optical microscopy. The Tribunal noted, in particular, that Dr. Kessler's testing protocols did not account for the surface-connected porosity that Dr. Chow's micro-CT analysis identified in multiple lots.

Dr. Chow's independent testing, conducted on retained samples from each of the fourteen rejected lots, confirmed that porosity levels in the rejected lots ranged from 0.19% to 0.38%. While certain lots exhibited porosity at or marginally below the ≤0.25% contractual threshold (the lowest recorded value being 0.19% in Lot KDG-2022-0614), multiple lots materially exceeded the ≤0.25% contractual limit, with four lots exhibiting porosity levels in excess of 0.30% and two lots exceeding 0.35%. The Tribunal found that, taken as a whole, the rejection pattern reflected a systematic quality-control failure on Kestrel's part rather than isolated manufacturing anomalies.

Of particular significance, the Tribunal rejected Kestrel's contention — which was central to its theory of breach — that WAL had applied an unpublished or informal porosity tolerance of ≤0.15% that was more restrictive than the contractual specification. Kestrel had argued that WAL's incoming inspection records prior to March 2022 demonstrated a pattern of accepting lots only when porosity was at or below 0.15%, and that the ≤0.25% specification in WAL-SPEC-TH-401 was a nominal ceiling that was superseded in practice by WAL's allegedly more stringent internal standard. The Tribunal squarely rejected this argument, finding that the ≤0.25% standard was expressly stated in WAL-SPEC-TH-401, Appendix C, Table 3, and was thus the governing specification. The Tribunal further noted that the pre-March 2022 inspection history was equally consistent with Kestrel having simply delivered conforming product during that period, and that the inference Kestrel sought to draw — that WAL was selectively tightening its acceptance criteria — was unsupported by the documentary record and was contradicted by the testimony of WAL's Director of Quality Assurance, Dr. Ingrid Vollmer, whom the Tribunal found to be a credible and well-prepared witness.

B. Termination for Persistent Quality Failure Was Proper

Having found that WAL's lot rejections were justified, the Tribunal proceeded to evaluate whether WAL's termination of the MSA for cause on October 3, 2022, was procedurally and substantively proper. The Tribunal concluded that it was, on both grounds.

The termination was effected pursuant to Section 14.2(b) of the MSA, which grants either party the right to terminate the agreement for cause upon the occurrence of a "Persistent Quality Failure" as defined in Section 8.4. Section 8.4 defines a "Persistent Quality Failure" as the occurrence of three (3) or more lot rejections in any rolling twelve (12)-month period where the supplying party has failed to cure the nonconformity within the applicable cure period. The cure period, as originally set forth in the MSA, was thirty (30) calendar days from the date of WAL's written rejection notice. Amendment No. 2 to the MSA, dated September 3, 2021, extended the cure period to forty-five (45) calendar days in recognition of certain supply-chain constraints that Kestrel had represented it was experiencing in connection with its raw material sourcing.

The Tribunal confirmed that seven (7) of the fourteen (14) rejected lots remained uncured within the applicable forty-five (45)-calendar-day cure period. With respect to the remaining seven lots, Kestrel either provided replacement units within the cure window or the cure period had not yet expired as of the date of termination. However, the seven uncured rejections that occurred within the rolling twelve (12)-month period from March 2022 through September 2022 far exceeded the threshold of three (3) uncured rejections required to constitute a "Persistent Quality Failure" under Section 8.4 of the MSA. The Tribunal therefore found that WAL's invocation of the termination-for-cause provision was substantively warranted.

On the procedural question, the Tribunal examined whether WAL had complied with the notice requirements of Section 14.2(b), which requires the terminating party to provide written notice of termination specifying the grounds therefor, referencing the specific lot rejection numbers and the dates of the uncured rejections. The Tribunal found that WAL's termination letter of October 3, 2022, prepared by Ms. Prescott and transmitted to Kestrel's General Counsel, Herr Friedrich Lehmann, satisfied each of the procedural requirements of Section 14.2(b) in all material respects.

Additionally, the Tribunal confirmed that WAL's incoming inspection procedures, as codified in WAL-QCP-100 (the Whitmore Aerospace Quality Control Protocol, Revision 7, dated January 2022), were applied consistently throughout the relevant period and in full accordance with the contractual specifications set forth in WAL-SPEC-TH-401 through WAL-SPEC-TH-410. The Tribunal noted that WAL's inspection protocols had been audited by the Defense Contract Management Agency ("DCMA") in connection with WAL's AS9100D certification and had been found to be compliant with applicable industry standards. The Tribunal rejected Kestrel's suggestion that WAL had selectively or inconsistently applied its inspection protocols in a manner calculated to generate pretextual lot rejections.

C. Dismissal of All of Kestrel's Claims

The Tribunal dismissed the entirety of Kestrel's claimed damages, which totaled €47.3 million across four separate heads of damage. Each head of damage and the Tribunal's reasoning for dismissal are summarized below.

Lost Profits for the Remaining MSA Term (Contract Year 5). Kestrel claimed €12.83 million in lost profits for the remaining term of the MSA (i.e., Contract Year 5, running from July 1, 2023 through June 30, 2024), on the theory that WAL's termination of the MSA was wrongful and deprived Kestrel of the revenue it would have earned during the final year of the base term. The Tribunal dismissed this claim in its entirety, holding that because WAL's termination was rightful — a conclusion that followed necessarily from the Tribunal's finding of no breach by WAL and of proper termination under Section 14.2(b) — there was no basis for any breach-based lost-profit recovery. The Tribunal further observed that even if it had found the termination to be wrongful, Kestrel's lost-profit calculation was overstated because it failed to account for the variable costs Kestrel would have incurred in manufacturing the CY5 deliverables, a deficiency that Kestrel's damages expert, Mr. Patrice Arnaud of Desjardins Financial Advisory SA, acknowledged during cross-examination.

Lost Profits for the Two Optional One-Year Renewal Periods. Kestrel claimed €27.15 million in lost profits for the two optional one-year renewal periods (Contract Years 6 and 7), which would have extended the MSA through June 30, 2026. This claim constituted the largest single component of Kestrel's damages case. The Tribunal dismissed this claim on the independent ground that the renewal options set forth in Section 3.2 of the MSA were exercisable solely at WAL's discretion and conferred no legally cognizable expectation interest on Kestrel. The Tribunal applied established New York law holding that a unilateral option right does not give rise to a compensable expectancy on the part of the non-exercising party, citing Ashland Mgmt. Inc. v. Janien, 82 N.Y.2d 395 (1993), and Kenford Co. v. County of Erie, 73 N.Y.2d 312 (1989). The Tribunal noted that WAL had not indicated, either in writing or through course of dealing, any intention to exercise the renewal options prior to the events giving rise to this dispute, and that Kestrel's assertion that renewal was "virtually certain" was speculative and unsupported by the evidentiary record.

Cost of Unreimbursed Rework on Rejected Lots. Kestrel claimed €3.42 million representing the cost of rework activities it undertook on the rejected lots, including reprocessing through hot isostatic pressing ("HIP"), re-machining, and re-inspection. Kestrel contended that because the lot rejections were improper, it was entitled to recover the rework costs it incurred in attempting to cure the alleged nonconformities. The Tribunal dismissed this claim, finding that rework was Kestrel's own obligation under the cure provisions of the MSA (specifically Section 8.3, which allocated to the supplying party the cost of curing any nonconformity identified through the buyer's incoming inspection process) and that the rejections underlying the rework were, in any event, justified. The Tribunal noted that Kestrel's decision to undertake rework rather than simply supply replacement units from new production was a business decision made at Kestrel's own risk, and that the MSA did not entitle Kestrel to reimbursement of cure costs irrespective of the outcome of the cure effort.

Reputational Damages and Loss of Other Business Opportunities. Kestrel claimed €3.90 million in damages attributable to alleged reputational harm arising from WAL's termination of the MSA and the associated lot rejections, which Kestrel contended had caused it to lose business opportunities with other aerospace OEMs. The Tribunal dismissed this claim on two independent grounds. First, the Tribunal held that these damages were consequential in nature and were expressly waived under Section 8.7 of the MSA, which provides that "[i]n no event shall either Party be liable to the other for any indirect, incidental, consequential, special, punitive, or exemplary damages, including but not limited to loss of profits, loss of revenue, loss of business, or reputational harm, whether arising in contract, tort, or otherwise." The Tribunal conducted a thorough analysis of the enforceability of the consequential damages waiver under New York governing law and concluded that the waiver was fully enforceable as between sophisticated commercial parties represented by counsel during the negotiation of the MSA. The Tribunal cited Metropolitan Life Ins. Co. v. Noble Lowndes Int'l, Inc., 84 N.Y.2d 430 (1994), for the proposition that New York law enforces contractual limitations on consequential damages in commercial transactions absent unconscionability or other vitiating circumstances, none of which were present here. Second, and in any event, the Tribunal found that Kestrel's claimed reputational damages were speculative and unsupported by competent evidence, noting that Kestrel had failed to identify any specific customer that had declined to do business with Kestrel as a result of the WAL termination, and that the testimony of Kestrel's CEO, Herr Dieter Brugmann, on this point was vague and conclusory.

D. WAL's Counterclaim Sustained in Part

WAL's counterclaim for replacement-component costs was sustained in substantial part, further confirming the Tribunal's view that Kestrel bore responsibility for the quality failures that gave rise to this dispute.

WAL's counterclaim sought €5.17 million, representing the incremental premium cost WAL incurred in sourcing 1,680 replacement turbine housing units from Valkyr Precision Components Inc. of Tucson, Arizona, an alternative qualified supplier that WAL engaged following its termination of the MSA. The claimed amount was calculated as the difference between Valkyr's unit price of €8,432.92 and Kestrel's Contract Year 4 unit price of €5,222.92, yielding a per-unit premium of €3,210.00, multiplied by 1,680 units, and net of a 4.2% introductory volume discount negotiated with Valkyr (i.e., 1,680 × €3,210.00 × 0.958 = approximately €5.17 million). WAL's damages expert, Ms. Catherine Okafor of Meridian Economic Consulting LLC, provided detailed testimony supporting this calculation, including a comparison of the Valkyr pricing to market rates for comparable Ti-6Al-4V ELI components from other qualified suppliers.

The Tribunal awarded €3.82 million on WAL's counterclaim, applying a reduction of approximately 26% to the claimed amount (€5.17 million × 0.74 ≈ €3.83 million, rounded by the Tribunal to €3.82 million). The reduction reflected the Tribunal's finding that WAL had a duty to mitigate its damages by seeking competitive bids from alternative suppliers sooner than it did. Specifically, the Tribunal found that WAL delayed approximately six weeks between the termination of the MSA (October 3, 2022) and the issuance of its first request for quotation to alternative suppliers (mid-November 2022), during which time market conditions for titanium alloy components tightened and pricing increased due to supply-chain disruptions affecting the aerospace sector more broadly. The Tribunal concluded that had WAL initiated the rebidding process promptly upon termination — or, indeed, upon the occurrence of the sixth or seventh uncured lot rejection, when termination became a realistic prospect — it likely would have obtained pricing somewhat more favorable than Valkyr's final quoted price.

While the mitigation reduction is notable and reflects a point on which WAL might have achieved a marginally better result had the re-sourcing process commenced earlier, the practical significance of this finding should not be overstated. The Tribunal's sustaining of the counterclaim in the amount of €3.82 million unambiguously confirms Kestrel's liability for the quality failures that necessitated the transition to Valkyr and validates WAL's position that it was entitled to recover the incremental costs of re-sourcing from a culpable supplier.

III. Costs Allocation

The Tribunal's costs allocation further reflects the overwhelmingly favorable nature of the outcome for WAL. The allocation addressed two categories of costs: (1) ICC administrative costs and arbitrators' fees, and (2) legal cost reimbursement.

A. ICC Administrative Costs and Arbitrators' Fees

The total ICC administrative costs and arbitrators' fees for the proceeding amounted to $1.24 million. This figure comprises the ICC's administrative charges calculated in accordance with the ICC cost scales based on the amount in dispute, together with the fees and expenses of the three arbitrators as fixed by the ICC Court.

The Tribunal ordered Kestrel to bear seventy-five percent (75%) of these costs, amounting to $930,000. WAL's share of the costs was set at twenty-five percent (25%), or $310,000. The allocation reflects the Tribunal's broad discretion under Article 38(4) of the ICC Rules to apportion costs in light of the relative success of the parties. The Tribunal's decision to impose seventy-five percent of the costs on Kestrel is consistent with the fact that Kestrel failed entirely on its claims and was found liable on WAL's counterclaim. To the extent that WAL was assessed any share of the costs at all, this likely reflects the Tribunal's recognition that the counterclaim was sustained only in part rather than in full.

As a practical matter, WAL has already advanced $620,000 toward the ICC costs as its share of the advance on costs fixed by the ICC Court at the outset of the proceeding. The net effect of the costs allocation is that WAL is entitled to recover $310,000 from Kestrel (i.e., the difference between WAL's $620,000 advance and its 25% allocated share of $310,000), and Kestrel is obligated to bear an additional $310,000 beyond its own advance on costs.

B. Legal Cost Reimbursement

WAL's total legal costs incurred in connection with this arbitration were $3.12 million. This amount comprises $2,487,300 in professional fees billed by Calderwood & Harkness LLP for legal services rendered throughout the arbitration (including all phases from the initial response to the Request for Arbitration through the post-hearing briefing), together with $634,700 in costs and disbursements. The latter figure includes fees charged by WAL's metallurgical expert, Dr. Raymond Chow of Arclight Materials Science Inc.; fees charged by WAL's damages expert, Ms. Catherine Okafor of Meridian Economic Consulting LLC; hearing-related travel and accommodation expenses for the evidentiary hearing held in New York in September 2023; transcript costs; translation costs for German-language documents produced by Kestrel; and WAL's portion of the ICC advance on costs.

The Tribunal ordered Kestrel to reimburse WAL $1.85 million of its total legal costs, representing a recovery rate of approximately 59.3% of WAL's total legal spend. This level of cost-shifting is significant and reflects the Tribunal's recognition of the overwhelmingly favorable outcome for WAL on both the claims and the counterclaim. While a dollar-for-dollar recovery of legal costs is unusual in international arbitration — and the Tribunal exercised its customary discretion in arriving at a figure that reflects the partial nature of the counterclaim recovery and other equitable considerations — the $1.85 million reimbursement represents a substantial and meaningful offset to WAL's litigation expenditures.

IV. Net Financial Outcome for WAL

The following table summarizes WAL's aggregate financial position as a result of the Partial Award:

When combining the avoided exposure from the complete dismissal of Kestrel's €47.3 million claims with the affirmative recoveries on the counterclaim and costs, the net value preserved and recovered for WAL is approximately €51.1 million (using a USD/EUR conversion rate of approximately 0.92 as of the date of the Award for the purpose of combining the dollar-denominated and euro-denominated components). We note that the avoided exposure figure, while not a cash recovery, is of considerable significance insofar as it eliminates a contingent liability that had been disclosed in WAL's financial reporting and had been the subject of inquiry from WAL's auditors and lenders.

In this regard, we wish to highlight an additional material benefit of the Award that extends beyond the direct financial terms. The complete dismissal of Kestrel's claims removes a significant source of uncertainty relating to WAL's $350 million senior secured revolving credit facility with Veltrano National Bank, N.A., dated as of April 2, 2021. As you are aware, the credit agreement contains financial maintenance covenants — including a maximum leverage ratio and minimum interest coverage ratio — whose compliance could have been adversely affected had Kestrel's claim been sustained in whole or in part. A judgment or award of €47.3 million, or any material fraction thereof, could have triggered a covenant default or required WAL to negotiate a covenant waiver or amendment with Veltrano, potentially on unfavorable terms. The complete dismissal of the claims eliminates this risk and provides WAL with a clean resolution that should be well-received by Veltrano and WAL's other financial stakeholders. We recommend that WAL's treasury team and CFO be briefed on the Award promptly so that any necessary lender notifications can be made in accordance with the reporting provisions of the credit agreement.

V. Enforcement Considerations

While we are optimistic that Kestrel will comply with the monetary obligations imposed by the Partial Award in a timely manner, prudent practice requires that we address the enforcement options available to WAL in the event that voluntary compliance is not forthcoming.

A. Voluntary Compliance

The Partial Award is final and binding on Kestrel Dynamics GmbH with respect to the matters decided therein, in accordance with Article 35(6) of the ICC Rules. The Award imposes three distinct monetary obligations on Kestrel: (1) payment of €3.82 million to WAL on the counterclaim; (2) payment of $930,000 to bear its allocated share of ICC administrative costs and arbitrators' fees (including reimbursement of amounts advanced by WAL in excess of WAL's allocated share); and (3) payment of $1.85 million in legal cost reimbursement to WAL.

We recommend allowing a reasonable period for Kestrel to comply voluntarily with these monetary obligations before initiating enforcement proceedings. We suggest a window of thirty (30) days from the date of issuance of the Award, i.e., until approximately April 21, 2024, as an appropriate period. This timeframe is consistent with customary practice in ICC arbitration and provides Kestrel with sufficient time to review the Award, consult with counsel, and arrange for the transfer of funds.

As an initial step, we recommend that a formal written communication be transmitted to Kestrel's counsel of record in the arbitration, Haber Reinhardt Schlosser Partnerschaft mbB (attention: Dr. Klaus-Peter Reinhardt), inquiring as to Kestrel's intentions regarding payment and requesting confirmation of the accounts to which payment should be directed. We will prepare a draft of this communication for your review and approval.

B. Enforcement Under the New York Convention

Should Kestrel fail to comply voluntarily with the monetary obligations imposed by the Partial Award within the voluntary compliance period, WAL has robust enforcement options available under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the "New York Convention").

The New York Convention, to which both the United States and Germany are signatories, provides a streamlined mechanism for the recognition and enforcement of international arbitral awards in the courts of signatory states. The grounds for refusal of recognition and enforcement under Article V of the New York Convention are narrowly circumscribed, and the burden of establishing any such ground falls on the party resisting enforcement. Given the procedural regularity of the arbitration, the clear and well-reasoned nature of the Award, and the absence of any apparent basis for a challenge, enforcement of the Award should be straightforward in any New York Convention jurisdiction.

The Federal Republic of Germany is a signatory to the New York Convention and has implemented it through Sections 1061 et seq. of the German Code of Civil Procedure (Zivilprozessordnung, "ZPO"). Enforcement proceedings in Germany may be initiated in the competent Landgericht (Regional Court) having jurisdiction over Kestrel's registered office. Based on our records, Kestrel's registered office is located at Industriestraße 88, 70565 Stuttgart, Baden-Württemberg, Germany, which would place jurisdiction in the Landgericht Stuttgart. German courts have a well-established and arbitration-friendly track record of enforcing New York Convention awards, and we would not anticipate significant obstacles to enforcement in Germany, absent a meritorious challenge by Kestrel (which, for the reasons discussed below, we do not consider likely).

Alternatively, enforcement may be sought in the courts of the United States, given that the seat of arbitration was New York, New York. Enforcement of the Award in the United States would be pursued under Chapter 2 of the Federal Arbitration Act (9 U.S.C. §§ 201–208), which implements the New York Convention in U.S. law. A petition to confirm the Award could be filed in the United States District Court for the Southern District of New York, which would have both subject-matter jurisdiction under Section 203 of the FAA and personal jurisdiction over Kestrel by virtue of the New York seat of arbitration and Kestrel's submission to the ICC proceedings. Enforcement in the United States may be advantageous if Kestrel maintains assets in the United States, a question we will investigate further if enforcement becomes necessary.

Calderwood & Harkness LLP is fully prepared to handle enforcement proceedings in the United States directly. Should enforcement in Germany become necessary, we can coordinate with local German counsel to initiate and manage the proceedings. We have previously worked with several leading German dispute-resolution firms on cross-border enforcement matters and can recommend appropriate local counsel for your consideration.

C. Recognition of Award in Other Jurisdictions

If Kestrel maintains assets in jurisdictions other than Germany and the United States, the Award may be recognized and enforced in any state that is a signatory to the New York Convention, which currently includes over 170 countries. This provides WAL with considerable flexibility in identifying the most efficient and effective forum for enforcement based on the location of Kestrel's assets.

We will assess Kestrel's asset base as needed in the event that enforcement proceedings become necessary. This assessment may include a review of publicly available corporate filings, financial statements, and other sources of information regarding Kestrel's operations, subsidiaries, bank accounts, and tangible assets in various jurisdictions. If appropriate, we may recommend retaining an asset-tracing firm to assist in this effort.

VI. Reserved Jurisdiction — Post-Award Interest and Final Award

The Partial Award expressly reserved the Tribunal's jurisdiction over certain matters that were not finally resolved in the Award. Specifically, the Tribunal retained jurisdiction over the following:

(a) The calculation and determination of post-award interest on the €3.82 million counterclaim award from the date of the Award until the date of payment, including the applicable rate of interest and the method of compounding, if any;

(b) The calculation and determination of post-award interest on the cost reimbursement amounts ($930,000 in ICC costs and $1.85 million in legal costs) from the date of the Award until the date of payment;

(c) Any disputes that may arise between the parties regarding the interpretation or enforcement of the Partial Award, to the extent such disputes fall within the scope of the arbitration agreement and the Tribunal's mandate under the ICC Rules; and

(d) The issuance of a Final Award addressing the foregoing matters, together with any other matters that the Tribunal determines are necessary to resolve in order to bring the proceedings to a final conclusion.

These reservations are procedurally standard in ICC practice, where partial awards addressing liability and the principal quantum of damages are often followed by a Final Award that addresses interest, any remaining cost issues, and other ancillary matters. The reservation of jurisdiction ensures that the Tribunal retains the authority to address these matters without the need for a new arbitration proceeding.

To date, no further proceedings have been initiated before the Tribunal in connection with these reserved matters, and we do not anticipate the need for additional proceedings absent a dispute over compliance with the Partial Award. If Kestrel pays the amounts due within the voluntary compliance window, the question of post-award interest may be rendered moot (or may involve only a de minimis amount for the period between the date of the Award and the date of payment). However, if Kestrel fails to comply in a timely manner, WAL may wish to petition the Tribunal for a Final Award that determines the applicable rate and quantum of post-award interest. Under New York law, the statutory pre-judgment interest rate is 9% per annum (N.Y. C.P.L.R. § 5004), although the Tribunal has discretion to apply a different rate that it considers more appropriate in the circumstances of an international commercial dispute.

We will monitor the situation closely and advise promptly if Kestrel seeks to challenge the Partial Award (whether by means of an application to set aside the Award at the seat of arbitration or by resisting enforcement in a foreign court) or if further Tribunal proceedings are required for any reason.

VII. Insurance Notification Update

For completeness, we wish to provide an update on the status of the insurance notification that was made at the commencement of this matter.

Pinnacle Continental Insurance Co. ("Pinnacle") was notified of the arbitration on November 14, 2022, under WAL's commercial general liability policy, Policy No. PCE-GL-2021-08854, with an effective period of July 1, 2021 through June 30, 2022, as renewed. The notification was made as a precautionary measure to preserve WAL's rights under the policy with respect to any potential coverage for defense costs or indemnification obligations arising from the arbitration.

Pinnacle acknowledged receipt of the notification and, following a coverage review, issued a reservation-of-rights letter dated December 19, 2022. Pinnacle ultimately declined to assume defense obligations or to reimburse WAL's defense costs, citing the commercial-supply exclusion set forth in Section IV(J) of the policy, which excludes from coverage claims arising from or relating to the insured's obligations under commercial supply agreements for manufactured goods. WAL's outside coverage counsel at the time reviewed Pinnacle's declination and advised that a coverage challenge was unlikely to succeed given the breadth of the commercial-supply exclusion and the nature of the underlying claims.

Given the overwhelmingly favorable outcome of the arbitration, no further action vis-à-vis Pinnacle is required at this time. However, we recommend that WAL maintain the notification file, including all correspondence with Pinnacle, for record-keeping purposes and in the event that any insurance-related question arises in the future. The notification file should be retained in accordance with WAL's standard document-retention policies.

VIII. Recommended Next Steps

Based on our analysis of the Partial Award and the considerations discussed above, we recommend the following next steps:

1. Monitor the 30-Day Voluntary Compliance Window. Allow Kestrel until approximately April 21, 2024, to comply voluntarily with the monetary obligations imposed by the Partial Award, including payment of the €3.82 million counterclaim award, $930,000 in allocated ICC costs (net of amounts already advanced), and $1.85 million in legal cost reimbursement. During this period, we will transmit a formal written communication to Kestrel's counsel, Haber Reinhardt Schlosser Partnerschaft mbB, inquiring as to Kestrel's payment intentions.

2. Initiate Enforcement Proceedings if Necessary. If Kestrel does not comply with the monetary obligations within the voluntary compliance period, we will promptly initiate enforcement proceedings in the appropriate jurisdiction. The choice of forum — Germany (Landgericht Stuttgart) or the United States (S.D.N.Y.) — will be determined based on the location of Kestrel's readily attachable assets and the relative efficiency of enforcement in each jurisdiction. We will provide a separate recommendation on forum selection if enforcement becomes necessary.

3. Coordinate Internally Regarding Post-Award Interest. WAL should consider whether it wishes to petition the Tribunal for a Final Award addressing post-award interest on the counterclaim and cost-reimbursement amounts. If Kestrel pays promptly, this issue may be of limited financial significance. However, if Kestrel delays or resists payment, the accrual of post-award interest at the applicable rate could be material, and WAL may wish to secure a Final Award fixing the interest obligation. Please advise us of WAL's preference on this point at your earliest convenience.

4. Close Out Engagement Records and Finalize Document Retention. With the issuance of the Partial Award and the anticipated conclusion of the proceedings, we recommend that WAL and Calderwood & Harkness LLP coordinate to close out the engagement records for this matter and finalize document-retention protocols. The litigation hold that was issued on November 8, 2022, in connection with the commencement of the arbitration should be maintained until all obligations under the Award have been satisfied, all enforcement proceedings (if any) have been concluded, and any applicable statutes of limitations for related claims have expired. At that point, the litigation hold may be released in accordance with WAL's standard document-retention and destruction policies, and documents subject to the hold may be managed in the ordinary course.

5. Final Invoice. Our final invoice for professional services and disbursements incurred through the date of issuance of the Partial Award will be transmitted to WAL under separate cover within the next ten (10) business days. The invoice will reflect all time and charges incurred since our most recent interim billing statement, including preparation of this analysis letter and the post-award communications referenced herein.

IX. Closing

We are very pleased with the outcome of this arbitration, which represents a thorough vindication of WAL's position on every significant issue in dispute. The complete dismissal of €47.3 million in claims, coupled with the substantial recovery on WAL's counterclaim and the favorable costs allocation, constitutes an exceptionally strong result by any measure.

We wish to acknowledge the invaluable contributions of WAL's internal team throughout this proceeding. In particular, we extend our sincere thanks to Dana Prescott, whose strategic judgment and mastery of the contractual framework were instrumental at every stage of the case; to Gerald Huang, whose meticulous assembly of the documentary record and coordination of fact witnesses greatly strengthened WAL's evidentiary presentation; and to Dr. Ingrid Vollmer, whose expert testimony regarding WAL's quality-assurance protocols and incoming inspection procedures was credited by the Tribunal as both credible and persuasive. The successful outcome in this matter was, in large part, a product of the close and effective collaboration between WAL's internal team and the Calderwood & Harkness litigation team.

We remain available to discuss any aspect of this analysis or the recommended next steps at your convenience. Please do not hesitate to contact the undersigned directly with any questions or to schedule a call or meeting to review these matters in further detail.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Theodore Langston, Partner

600 Lexington Avenue New York, New York 10022 Telephone: (212) 841-7244

Email: tlangston@calderwoodharkness.com

cc: Vivienne St. Claire, Partner, Calderwood & Harkness LLP Simone Laroche, Senior Associate, Calderwood & Harkness LLP Jeffrey Park, Associate, Calderwood & Harkness LLP

Enclosure: Copy of Partial Award dated March 22, 2024 (ICC Case No. 27914/MHM)

Category	Amount	Currency
Kestrel's claims dismissed (avoided exposure)	€47.30 million	EUR
Counterclaim recovery awarded to WAL	€3.82 million	EUR
Legal cost reimbursement awarded to WAL	$1.85 million	USD
ICC cost reallocation benefit (net recovery of advance)	$0.31 million	USD
Total value preserved and recovered	≈ €51.1 million	EUR equivalent

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Counselors at Law
600 Lexington Avenue New York, New York 10022
Telephone: (212) 841-7200 Facsimile: (212) 841-7201 www.calderwoodharkness.com
March 25, 2024
Via Email and FedEx
Dana Prescott, Esq. Vice President & General Counsel Whitmore Aerospace LLC 4200 Wilson Boulevard, Suite 1100 Arlington, Virginia 22203
Marcus J. Whitmore III Chief Executive Officer Whitmore Aerospace LLC 4200 Wilson Boulevard, Suite 1100 Arlington, Virginia 22203
Re: Analysis of Partial Award — ICC Case No. 27914/MHM, Kestrel Dynamics GmbH v. Whitmore Aerospace LLC
Engagement No.: 1019-00001
Dear Dana and Marcus:
I. Introduction and Purpose
Calderwood & Harkness LLP is pleased to provide this detailed analysis of the Partial Award (the "Award" or "Partial Award") issued on March 22, 2024, by the Arbitral Tribunal (the "Tribunal") constituted in ICC Case No. 27914/MHM, captioned Kestrel Dynamics GmbH ("Kestrel" or "Claimant") v. Whitmore Aerospace LLC ("WAL" or "Respondent"). This letter is intended to provide WAL's senior leadership and legal team with a comprehensive assessment of the Tribunal's findings, the financial implications of the Award, and our recommendations concerning enforcement and next steps.
The Tribunal was composed of Prof. Dame Eleanor Fitzwilliam (Presiding Arbitrator, nominated jointly by the co-arbitrators following the procedure set forth in Article 13 of the ICC Rules), Dr. Hans-Ulrich Perren (nominated by Claimant Kestrel Dynamics GmbH), and the Hon. Robert A. Castillo (Ret.) (nominated by Respondent Whitmore Aerospace LLC). The arbitration was seated in New York, New York, and conducted in the English language, governed throughout by the ICC Rules of Arbitration (2021 edition). The substantive law governing the dispute was that of the State of New York, consistent with the choice-of-law provision set forth in Section 22.1 of the Master Supply Agreement dated June 15, 2018 (the "MSA").
We are gratified to report that the Partial Award represents a comprehensive and overwhelmingly favorable outcome for Whitmore Aerospace LLC. The Tribunal dismissed the entirety of Kestrel Dynamics GmbH's claims — which totaled €47.3 million across four separate heads of damage — and sustained WAL's counterclaim for replacement-component costs in substantial part. Critically, the Tribunal found no material breach of the MSA on WAL's part, thereby vindicating WAL's position that its termination of the MSA for persistent quality failure was both procedurally and substantively proper under the terms of the agreement. This result removes the most significant source of legal and financial exposure that WAL has faced since the commencement of the arbitration in late 2022.
The analysis that follows addresses each of the Tribunal's principal findings, the costs allocation, the net financial outcome for WAL, enforcement considerations, reserved matters pertaining to post-award interest and the anticipated Final Award, the status of insurance notifications, and our recommended next steps.
II. Summary of the Tribunal's Key Findings
The Partial Award spans 187 pages and addresses each of the Tribunal's findings in considerable detail. For ease of reference, we have organized our summary of the key findings into four principal categories, each of which is discussed below.
A. No Material Breach by WAL
The central issue in this arbitration was whether WAL committed a material breach of the MSA by rejecting fourteen (14) lots of Ti-6Al-4V ELI (Extra Low Interstitial) titanium alloy turbine housings delivered by Kestrel between March 2022 and September 2022. Kestrel contended that WAL's lot rejections were arbitrary, commercially unreasonable, and constituted a repudiation of WAL's purchase obligations under the MSA. WAL maintained, and the Tribunal ultimately agreed, that the rejections were proper exercises of WAL's contractual quality-control rights.
The Tribunal found, by a preponderance of the evidence, that WAL did not commit a material breach of the MSA. In reaching this conclusion, the Tribunal undertook a detailed examination of the applicable quality specifications, the incoming inspection results, and the competing expert testimony regarding the metallurgical properties of the rejected units.
The fourteen (14) lots rejected by WAL between March 2022 (commencing with Lot KDG-2022-0307) and September 2022 (concluding with Lot KDG-2022-0919) encompassed a total of 1,680 individual turbine housing units. Each of these lots was rejected on the basis that the units failed to meet the contractual porosity specification of ≤0.25% as set forth in WAL-SPEC-TH-401, Appendix C, Table 3, which was incorporated by reference into the MSA pursuant to Section 5.1 and Exhibit B thereto. The porosity specification is a critical quality parameter for Ti-6Al-4V ELI turbine housings, as porosity above the contractual threshold introduces fatigue-crack initiation sites that can compromise the structural integrity of the component during high-temperature, high-cycle-fatigue operating conditions typical of turbofan engine environments.
In evaluating the competing expert evidence on this question, the Tribunal credited the metallurgical expert testimony of Dr. Raymond Chow of Arclight Materials Science Inc. (Raleigh, North Carolina), WAL's designated expert, over the testimony of Kestrel's expert, Dr. Martina Kessler of Albrecht Prüftechnik GmbH (Munich, Germany). The Tribunal found that Dr. Chow's methodology — which employed micro-CT scanning followed by destructive cross-sectional analysis in accordance with ASTM E1441-11 and ASTM B311-17 — was more rigorous and reproducible than the methodology employed by Dr. Kessler, who relied principally on Archimedes-method density measurements supplemented by limited optical microscopy. The Tribunal noted, in particular, that Dr. Kessler's testing protocols did not account for the surface-connected porosity that Dr. Chow's micro-CT analysis identified in multiple lots.
Dr. Chow's independent testing, conducted on retained samples from each of the fourteen rejected lots, confirmed that porosity levels in the rejected lots ranged from 0.19% to 0.38%. While certain lots exhibited porosity at or marginally below the ≤0.25% contractual threshold (the lowest recorded value being 0.19% in Lot KDG-2022-0614), multiple lots materially exceeded the ≤0.25% contractual limit, with four lots exhibiting porosity levels in excess of 0.30% and two lots exceeding 0.35%. The Tribunal found that, taken as a whole, the rejection pattern reflected a systematic quality-control failure on Kestrel's part rather than isolated manufacturing anomalies.
Of particular significance, the Tribunal rejected Kestrel's contention — which was central to its theory of breach — that WAL had applied an unpublished or informal porosity tolerance of ≤0.15% that was more restrictive than the contractual specification. Kestrel had argued that WAL's incoming inspection records prior to March 2022 demonstrated a pattern of accepting lots only when porosity was at or below 0.15%, and that the ≤0.25% specification in WAL-SPEC-TH-401 was a nominal ceiling that was superseded in practice by WAL's allegedly more stringent internal standard. The Tribunal squarely rejected this argument, finding that the ≤0.25% standard was expressly stated in WAL-SPEC-TH-401, Appendix C, Table 3, and was thus the governing specification. The Tribunal further noted that the pre-March 2022 inspection history was equally consistent with Kestrel having simply delivered conforming product during that period, and that the inference Kestrel sought to draw — that WAL was selectively tightening its acceptance criteria — was unsupported by the documentary record and was contradicted by the testimony of WAL's Director of Quality Assurance, Dr. Ingrid Vollmer, whom the Tribunal found to be a credible and well-prepared witness.
B. Termination for Persistent Quality Failure Was Proper
Having found that WAL's lot rejections were justified, the Tribunal proceeded to evaluate whether WAL's termination of the MSA for cause on October 3, 2022, was procedurally and substantively proper. The Tribunal concluded that it was, on both grounds.
The termination was effected pursuant to Section 14.2(b) of the MSA, which grants either party the right to terminate the agreement for cause upon the occurrence of a "Persistent Quality Failure" as defined in Section 8.4. Section 8.4 defines a "Persistent Quality Failure" as the occurrence of three (3) or more lot rejections in any rolling twelve (12)-month period where the supplying party has failed to cure the nonconformity within the applicable cure period. The cure period, as originally set forth in the MSA, was thirty (30) calendar days from the date of WAL's written rejection notice. Amendment No. 2 to the MSA, dated September 3, 2021, extended the cure period to forty-five (45) calendar days in recognition of certain supply-chain constraints that Kestrel had represented it was experiencing in connection with its raw material sourcing.
The Tribunal confirmed that seven (7) of the fourteen (14) rejected lots remained uncured within the applicable forty-five (45)-calendar-day cure period. With respect to the remaining seven lots, Kestrel either provided replacement units within the cure window or the cure period had not yet expired as of the date of termination. However, the seven uncured rejections that occurred within the rolling twelve (12)-month period from March 2022 through September 2022 far exceeded the threshold of three (3) uncured rejections required to constitute a "Persistent Quality Failure" under Section 8.4 of the MSA. The Tribunal therefore found that WAL's invocation of the termination-for-cause provision was substantively warranted.
On the procedural question, the Tribunal examined whether WAL had complied with the notice requirements of Section 14.2(b), which requires the terminating party to provide written notice of termination specifying the grounds therefor, referencing the specific lot rejection numbers and the dates of the uncured rejections. The Tribunal found that WAL's termination letter of October 3, 2022, prepared by Ms. Prescott and transmitted to Kestrel's General Counsel, Herr Friedrich Lehmann, satisfied each of the procedural requirements of Section 14.2(b) in all material respects.
Additionally, the Tribunal confirmed that WAL's incoming inspection procedures, as codified in WAL-QCP-100 (the Whitmore Aerospace Quality Control Protocol, Revision 7, dated January 2022), were applied consistently throughout the relevant period and in full accordance with the contractual specifications set forth in WAL-SPEC-TH-401 through WAL-SPEC-TH-410. The Tribunal noted that WAL's inspection protocols had been audited by the Defense Contract Management Agency ("DCMA") in connection with WAL's AS9100D certification and had been found to be compliant with applicable industry standards. The Tribunal rejected Kestrel's suggestion that WAL had selectively or inconsistently applied its inspection protocols in a manner calculated to generate pretextual lot rejections.
C. Dismissal of All of Kestrel's Claims
The Tribunal dismissed the entirety of Kestrel's claimed damages, which totaled €47.3 million across four separate heads of damage. Each head of damage and the Tribunal's reasoning for dismissal are summarized below.
Lost Profits for the Remaining MSA Term (Contract Year 5). Kestrel claimed €12.83 million in lost profits for the remaining term of the MSA (i.e., Contract Year 5, running from July 1, 2023 through June 30, 2024), on the theory that WAL's termination of the MSA was wrongful and deprived Kestrel of the revenue it would have earned during the final year of the base term. The Tribunal dismissed this claim in its entirety, holding that because WAL's termination was rightful — a conclusion that followed necessarily from the Tribunal's finding of no breach by WAL and of proper termination under Section 14.2(b) — there was no basis for any breach-based lost-profit recovery. The Tribunal further observed that even if it had found the termination to be wrongful, Kestrel's lost-profit calculation was overstated because it failed to account for the variable costs Kestrel would have incurred in manufacturing the CY5 deliverables, a deficiency that Kestrel's damages expert, Mr. Patrice Arnaud of Desjardins Financial Advisory SA, acknowledged during cross-examination.
Lost Profits for the Two Optional One-Year Renewal Periods. Kestrel claimed €27.15 million in lost profits for the two optional one-year renewal periods (Contract Years 6 and 7), which would have extended the MSA through June 30, 2026. This claim constituted the largest single component of Kestrel's damages case. The Tribunal dismissed this claim on the independent ground that the renewal options set forth in Section 3.2 of the MSA were exercisable solely at WAL's discretion and conferred no legally cognizable expectation interest on Kestrel. The Tribunal applied established New York law holding that a unilateral option right does not give rise to a compensable expectancy on the part of the non-exercising party, citing Ashland Mgmt. Inc. v. Janien, 82 N.Y.2d 395 (1993), and Kenford Co. v. County of Erie, 73 N.Y.2d 312 (1989). The Tribunal noted that WAL had not indicated, either in writing or through course of dealing, any intention to exercise the renewal options prior to the events giving rise to this dispute, and that Kestrel's assertion that renewal was "virtually certain" was speculative and unsupported by the evidentiary record.
Cost of Unreimbursed Rework on Rejected Lots. Kestrel claimed €3.42 million representing the cost of rework activities it undertook on the rejected lots, including reprocessing through hot isostatic pressing ("HIP"), re-machining, and re-inspection. Kestrel contended that because the lot rejections were improper, it was entitled to recover the rework costs it incurred in attempting to cure the alleged nonconformities. The Tribunal dismissed this claim, finding that rework was Kestrel's own obligation under the cure provisions of the MSA (specifically Section 8.3, which allocated to the supplying party the cost of curing any nonconformity identified through the buyer's incoming inspection process) and that the rejections underlying the rework were, in any event, justified. The Tribunal noted that Kestrel's decision to undertake rework rather than simply supply replacement units from new production was a business decision made at Kestrel's own risk, and that the MSA did not entitle Kestrel to reimbursement of cure costs irrespective of the outcome of the cure effort.
Reputational Damages and Loss of Other Business Opportunities. Kestrel claimed €3.90 million in damages attributable to alleged reputational harm arising from WAL's termination of the MSA and the associated lot rejections, which Kestrel contended had caused it to lose business opportunities with other aerospace OEMs. The Tribunal dismissed this claim on two independent grounds. First, the Tribunal held that these damages were consequential in nature and were expressly waived under Section 8.7 of the MSA, which provides that "[i]n no event shall either Party be liable to the other for any indirect, incidental, consequential, special, punitive, or exemplary damages, including but not limited to loss of profits, loss of revenue, loss of business, or reputational harm, whether arising in contract, tort, or otherwise." The Tribunal conducted a thorough analysis of the enforceability of the consequential damages waiver under New York governing law and concluded that the waiver was fully enforceable as between sophisticated commercial parties represented by counsel during the negotiation of the MSA. The Tribunal cited Metropolitan Life Ins. Co. v. Noble Lowndes Int'l, Inc., 84 N.Y.2d 430 (1994), for the proposition that New York law enforces contractual limitations on consequential damages in commercial transactions absent unconscionability or other vitiating circumstances, none of which were present here. Second, and in any event, the Tribunal found that Kestrel's claimed reputational damages were speculative and unsupported by competent evidence, noting that Kestrel had failed to identify any specific customer that had declined to do business with Kestrel as a result of the WAL termination, and that the testimony of Kestrel's CEO, Herr Dieter Brugmann, on this point was vague and conclusory.
D. WAL's Counterclaim Sustained in Part
WAL's counterclaim for replacement-component costs was sustained in substantial part, further confirming the Tribunal's view that Kestrel bore responsibility for the quality failures that gave rise to this dispute.
WAL's counterclaim sought €5.17 million, representing the incremental premium cost WAL incurred in sourcing 1,680 replacement turbine housing units from Valkyr Precision Components Inc. of Tucson, Arizona, an alternative qualified supplier that WAL engaged following its termination of the MSA. The claimed amount was calculated as the difference between Valkyr's unit price of €8,432.92 and Kestrel's Contract Year 4 unit price of €5,222.92, yielding a per-unit premium of €3,210.00, multiplied by 1,680 units, and net of a 4.2% introductory volume discount negotiated with Valkyr (i.e., 1,680 × €3,210.00 × 0.958 = approximately €5.17 million). WAL's damages expert, Ms. Catherine Okafor of Meridian Economic Consulting LLC, provided detailed testimony supporting this calculation, including a comparison of the Valkyr pricing to market rates for comparable Ti-6Al-4V ELI components from other qualified suppliers.
The Tribunal awarded €3.82 million on WAL's counterclaim, applying a reduction of approximately 26% to the claimed amount (€5.17 million × 0.74 ≈ €3.83 million, rounded by the Tribunal to €3.82 million). The reduction reflected the Tribunal's finding that WAL had a duty to mitigate its damages by seeking competitive bids from alternative suppliers sooner than it did. Specifically, the Tribunal found that WAL delayed approximately six weeks between the termination of the MSA (October 3, 2022) and the issuance of its first request for quotation to alternative suppliers (mid-November 2022), during which time market conditions for titanium alloy components tightened and pricing increased due to supply-chain disruptions affecting the aerospace sector more broadly. The Tribunal concluded that had WAL initiated the rebidding process promptly upon termination — or, indeed, upon the occurrence of the sixth or seventh uncured lot rejection, when termination became a realistic prospect — it likely would have obtained pricing somewhat more favorable than Valkyr's final quoted price.
While the mitigation reduction is notable and reflects a point on which WAL might have achieved a marginally better result had the re-sourcing process commenced earlier, the practical significance of this finding should not be overstated. The Tribunal's sustaining of the counterclaim in the amount of €3.82 million unambiguously confirms Kestrel's liability for the quality failures that necessitated the transition to Valkyr and validates WAL's position that it was entitled to recover the incremental costs of re-sourcing from a culpable supplier.
III. Costs Allocation
The Tribunal's costs allocation further reflects the overwhelmingly favorable nature of the outcome for WAL. The allocation addressed two categories of costs: (1) ICC administrative costs and arbitrators' fees, and (2) legal cost reimbursement.
A. ICC Administrative Costs and Arbitrators' Fees
The total ICC administrative costs and arbitrators' fees for the proceeding amounted to $1.24 million. This figure comprises the ICC's administrative charges calculated in accordance with the ICC cost scales based on the amount in dispute, together with the fees and expenses of the three arbitrators as fixed by the ICC Court.
The Tribunal ordered Kestrel to bear seventy-five percent (75%) of these costs, amounting to $930,000. WAL's share of the costs was set at twenty-five percent (25%), or $310,000. The allocation reflects the Tribunal's broad discretion under Article 38(4) of the ICC Rules to apportion costs in light of the relative success of the parties. The Tribunal's decision to impose seventy-five percent of the costs on Kestrel is consistent with the fact that Kestrel failed entirely on its claims and was found liable on WAL's counterclaim. To the extent that WAL was assessed any share of the costs at all, this likely reflects the Tribunal's recognition that the counterclaim was sustained only in part rather than in full.
As a practical matter, WAL has already advanced $620,000 toward the ICC costs as its share of the advance on costs fixed by the ICC Court at the outset of the proceeding. The net effect of the costs allocation is that WAL is entitled to recover $310,000 from Kestrel (i.e., the difference between WAL's $620,000 advance and its 25% allocated share of $310,000), and Kestrel is obligated to bear an additional $310,000 beyond its own advance on costs.
B. Legal Cost Reimbursement
WAL's total legal costs incurred in connection with this arbitration were $3.12 million. This amount comprises $2,487,300 in professional fees billed by Calderwood & Harkness LLP for legal services rendered throughout the arbitration (including all phases from the initial response to the Request for Arbitration through the post-hearing briefing), together with $634,700 in costs and disbursements. The latter figure includes fees charged by WAL's metallurgical expert, Dr. Raymond Chow of Arclight Materials Science Inc.; fees charged by WAL's damages expert, Ms. Catherine Okafor of Meridian Economic Consulting LLC; hearing-related travel and accommodation expenses for the evidentiary hearing held in New York in September 2023; transcript costs; translation costs for German-language documents produced by Kestrel; and WAL's portion of the ICC advance on costs.
The Tribunal ordered Kestrel to reimburse WAL $1.85 million of its total legal costs, representing a recovery rate of approximately 59.3% of WAL's total legal spend. This level of cost-shifting is significant and reflects the Tribunal's recognition of the overwhelmingly favorable outcome for WAL on both the claims and the counterclaim. While a dollar-for-dollar recovery of legal costs is unusual in international arbitration — and the Tribunal exercised its customary discretion in arriving at a figure that reflects the partial nature of the counterclaim recovery and other equitable considerations — the $1.85 million reimbursement represents a substantial and meaningful offset to WAL's litigation expenditures.
IV. Net Financial Outcome for WAL
The following table summarizes WAL's aggregate financial position as a result of the Partial Award:
When combining the avoided exposure from the complete dismissal of Kestrel's €47.3 million claims with the affirmative recoveries on the counterclaim and costs, the net value preserved and recovered for WAL is approximately €51.1 million (using a USD/EUR conversion rate of approximately 0.92 as of the date of the Award for the purpose of combining the dollar-denominated and euro-denominated components). We note that the avoided exposure figure, while not a cash recovery, is of considerable significance insofar as it eliminates a contingent liability that had been disclosed in WAL's financial reporting and had been the subject of inquiry from WAL's auditors and lenders.
In this regard, we wish to highlight an additional material benefit of the Award that extends beyond the direct financial terms. The complete dismissal of Kestrel's claims removes a significant source of uncertainty relating to WAL's $350 million senior secured revolving credit facility with Veltrano National Bank, N.A., dated as of April 2, 2021. As you are aware, the credit agreement contains financial maintenance covenants — including a maximum leverage ratio and minimum interest coverage ratio — whose compliance could have been adversely affected had Kestrel's claim been sustained in whole or in part. A judgment or award of €47.3 million, or any material fraction thereof, could have triggered a covenant default or required WAL to negotiate a covenant waiver or amendment with Veltrano, potentially on unfavorable terms. The complete dismissal of the claims eliminates this risk and provides WAL with a clean resolution that should be well-received by Veltrano and WAL's other financial stakeholders. We recommend that WAL's treasury team and CFO be briefed on the Award promptly so that any necessary lender notifications can be made in accordance with the reporting provisions of the credit agreement.
V. Enforcement Considerations
While we are optimistic that Kestrel will comply with the monetary obligations imposed by the Partial Award in a timely manner, prudent practice requires that we address the enforcement options available to WAL in the event that voluntary compliance is not forthcoming.
A. Voluntary Compliance
The Partial Award is final and binding on Kestrel Dynamics GmbH with respect to the matters decided therein, in accordance with Article 35(6) of the ICC Rules. The Award imposes three distinct monetary obligations on Kestrel: (1) payment of €3.82 million to WAL on the counterclaim; (2) payment of $930,000 to bear its allocated share of ICC administrative costs and arbitrators' fees (including reimbursement of amounts advanced by WAL in excess of WAL's allocated share); and (3) payment of $1.85 million in legal cost reimbursement to WAL.
We recommend allowing a reasonable period for Kestrel to comply voluntarily with these monetary obligations before initiating enforcement proceedings. We suggest a window of thirty (30) days from the date of issuance of the Award, i.e., until approximately April 21, 2024, as an appropriate period. This timeframe is consistent with customary practice in ICC arbitration and provides Kestrel with sufficient time to review the Award, consult with counsel, and arrange for the transfer of funds.
As an initial step, we recommend that a formal written communication be transmitted to Kestrel's counsel of record in the arbitration, Haber Reinhardt Schlosser Partnerschaft mbB (attention: Dr. Klaus-Peter Reinhardt), inquiring as to Kestrel's intentions regarding payment and requesting confirmation of the accounts to which payment should be directed. We will prepare a draft of this communication for your review and approval.
B. Enforcement Under the New York Convention
Should Kestrel fail to comply voluntarily with the monetary obligations imposed by the Partial Award within the voluntary compliance period, WAL has robust enforcement options available under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the "New York Convention").
The New York Convention, to which both the United States and Germany are signatories, provides a streamlined mechanism for the recognition and enforcement of international arbitral awards in the courts of signatory states. The grounds for refusal of recognition and enforcement under Article V of the New York Convention are narrowly circumscribed, and the burden of establishing any such ground falls on the party resisting enforcement. Given the procedural regularity of the arbitration, the clear and well-reasoned nature of the Award, and the absence of any apparent basis for a challenge, enforcement of the Award should be straightforward in any New York Convention jurisdiction.
The Federal Republic of Germany is a signatory to the New York Convention and has implemented it through Sections 1061 et seq. of the German Code of Civil Procedure (Zivilprozessordnung, "ZPO"). Enforcement proceedings in Germany may be initiated in the competent Landgericht (Regional Court) having jurisdiction over Kestrel's registered office. Based on our records, Kestrel's registered office is located at Industriestraße 88, 70565 Stuttgart, Baden-Württemberg, Germany, which would place jurisdiction in the Landgericht Stuttgart. German courts have a well-established and arbitration-friendly track record of enforcing New York Convention awards, and we would not anticipate significant obstacles to enforcement in Germany, absent a meritorious challenge by Kestrel (which, for the reasons discussed below, we do not consider likely).
Alternatively, enforcement may be sought in the courts of the United States, given that the seat of arbitration was New York, New York. Enforcement of the Award in the United States would be pursued under Chapter 2 of the Federal Arbitration Act (9 U.S.C. §§ 201–208), which implements the New York Convention in U.S. law. A petition to confirm the Award could be filed in the United States District Court for the Southern District of New York, which would have both subject-matter jurisdiction under Section 203 of the FAA and personal jurisdiction over Kestrel by virtue of the New York seat of arbitration and Kestrel's submission to the ICC proceedings. Enforcement in the United States may be advantageous if Kestrel maintains assets in the United States, a question we will investigate further if enforcement becomes necessary.
Calderwood & Harkness LLP is fully prepared to handle enforcement proceedings in the United States directly. Should enforcement in Germany become necessary, we can coordinate with local German counsel to initiate and manage the proceedings. We have previously worked with several leading German dispute-resolution firms on cross-border enforcement matters and can recommend appropriate local counsel for your consideration.
C. Recognition of Award in Other Jurisdictions
If Kestrel maintains assets in jurisdictions other than Germany and the United States, the Award may be recognized and enforced in any state that is a signatory to the New York Convention, which currently includes over 170 countries. This provides WAL with considerable flexibility in identifying the most efficient and effective forum for enforcement based on the location of Kestrel's assets.
We will assess Kestrel's asset base as needed in the event that enforcement proceedings become necessary. This assessment may include a review of publicly available corporate filings, financial statements, and other sources of information regarding Kestrel's operations, subsidiaries, bank accounts, and tangible assets in various jurisdictions. If appropriate, we may recommend retaining an asset-tracing firm to assist in this effort.
VI. Reserved Jurisdiction — Post-Award Interest and Final Award
The Partial Award expressly reserved the Tribunal's jurisdiction over certain matters that were not finally resolved in the Award. Specifically, the Tribunal retained jurisdiction over the following:
(a) The calculation and determination of post-award interest on the €3.82 million counterclaim award from the date of the Award until the date of payment, including the applicable rate of interest and the method of compounding, if any;
(b) The calculation and determination of post-award interest on the cost reimbursement amounts ($930,000 in ICC costs and $1.85 million in legal costs) from the date of the Award until the date of payment;
(c) Any disputes that may arise between the parties regarding the interpretation or enforcement of the Partial Award, to the extent such disputes fall within the scope of the arbitration agreement and the Tribunal's mandate under the ICC Rules; and
(d) The issuance of a Final Award addressing the foregoing matters, together with any other matters that the Tribunal determines are necessary to resolve in order to bring the proceedings to a final conclusion.
These reservations are procedurally standard in ICC practice, where partial awards addressing liability and the principal quantum of damages are often followed by a Final Award that addresses interest, any remaining cost issues, and other ancillary matters. The reservation of jurisdiction ensures that the Tribunal retains the authority to address these matters without the need for a new arbitration proceeding.
To date, no further proceedings have been initiated before the Tribunal in connection with these reserved matters, and we do not anticipate the need for additional proceedings absent a dispute over compliance with the Partial Award. If Kestrel pays the amounts due within the voluntary compliance window, the question of post-award interest may be rendered moot (or may involve only a de minimis amount for the period between the date of the Award and the date of payment). However, if Kestrel fails to comply in a timely manner, WAL may wish to petition the Tribunal for a Final Award that determines the applicable rate and quantum of post-award interest. Under New York law, the statutory pre-judgment interest rate is 9% per annum (N.Y. C.P.L.R. § 5004), although the Tribunal has discretion to apply a different rate that it considers more appropriate in the circumstances of an international commercial dispute.
We will monitor the situation closely and advise promptly if Kestrel seeks to challenge the Partial Award (whether by means of an application to set aside the Award at the seat of arbitration or by resisting enforcement in a foreign court) or if further Tribunal proceedings are required for any reason.
VII. Insurance Notification Update
For completeness, we wish to provide an update on the status of the insurance notification that was made at the commencement of this matter.
Pinnacle Continental Insurance Co. ("Pinnacle") was notified of the arbitration on November 14, 2022, under WAL's commercial general liability policy, Policy No. PCE-GL-2021-08854, with an effective period of July 1, 2021 through June 30, 2022, as renewed. The notification was made as a precautionary measure to preserve WAL's rights under the policy with respect to any potential coverage for defense costs or indemnification obligations arising from the arbitration.
Pinnacle acknowledged receipt of the notification and, following a coverage review, issued a reservation-of-rights letter dated December 19, 2022. Pinnacle ultimately declined to assume defense obligations or to reimburse WAL's defense costs, citing the commercial-supply exclusion set forth in Section IV(J) of the policy, which excludes from coverage claims arising from or relating to the insured's obligations under commercial supply agreements for manufactured goods. WAL's outside coverage counsel at the time reviewed Pinnacle's declination and advised that a coverage challenge was unlikely to succeed given the breadth of the commercial-supply exclusion and the nature of the underlying claims.
Given the overwhelmingly favorable outcome of the arbitration, no further action vis-à-vis Pinnacle is required at this time. However, we recommend that WAL maintain the notification file, including all correspondence with Pinnacle, for record-keeping purposes and in the event that any insurance-related question arises in the future. The notification file should be retained in accordance with WAL's standard document-retention policies.
VIII. Recommended Next Steps
Based on our analysis of the Partial Award and the considerations discussed above, we recommend the following next steps:
1. Monitor the 30-Day Voluntary Compliance Window. Allow Kestrel until approximately April 21, 2024, to comply voluntarily with the monetary obligations imposed by the Partial Award, including payment of the €3.82 million counterclaim award, $930,000 in allocated ICC costs (net of amounts already advanced), and $1.85 million in legal cost reimbursement. During this period, we will transmit a formal written communication to Kestrel's counsel, Haber Reinhardt Schlosser Partnerschaft mbB, inquiring as to Kestrel's payment intentions.
2. Initiate Enforcement Proceedings if Necessary. If Kestrel does not comply with the monetary obligations within the voluntary compliance period, we will promptly initiate enforcement proceedings in the appropriate jurisdiction. The choice of forum — Germany (Landgericht Stuttgart) or the United States (S.D.N.Y.) — will be determined based on the location of Kestrel's readily attachable assets and the relative efficiency of enforcement in each jurisdiction. We will provide a separate recommendation on forum selection if enforcement becomes necessary.
3. Coordinate Internally Regarding Post-Award Interest. WAL should consider whether it wishes to petition the Tribunal for a Final Award addressing post-award interest on the counterclaim and cost-reimbursement amounts. If Kestrel pays promptly, this issue may be of limited financial significance. However, if Kestrel delays or resists payment, the accrual of post-award interest at the applicable rate could be material, and WAL may wish to secure a Final Award fixing the interest obligation. Please advise us of WAL's preference on this point at your earliest convenience.
4. Close Out Engagement Records and Finalize Document Retention. With the issuance of the Partial Award and the anticipated conclusion of the proceedings, we recommend that WAL and Calderwood & Harkness LLP coordinate to close out the engagement records for this matter and finalize document-retention protocols. The litigation hold that was issued on November 8, 2022, in connection with the commencement of the arbitration should be maintained until all obligations under the Award have been satisfied, all enforcement proceedings (if any) have been concluded, and any applicable statutes of limitations for related claims have expired. At that point, the litigation hold may be released in accordance with WAL's standard document-retention and destruction policies, and documents subject to the hold may be managed in the ordinary course.
5. Final Invoice. Our final invoice for professional services and disbursements incurred through the date of issuance of the Partial Award will be transmitted to WAL under separate cover within the next ten (10) business days. The invoice will reflect all time and charges incurred since our most recent interim billing statement, including preparation of this analysis letter and the post-award communications referenced herein.
IX. Closing
We are very pleased with the outcome of this arbitration, which represents a thorough vindication of WAL's position on every significant issue in dispute. The complete dismissal of €47.3 million in claims, coupled with the substantial recovery on WAL's counterclaim and the favorable costs allocation, constitutes an exceptionally strong result by any measure.
We wish to acknowledge the invaluable contributions of WAL's internal team throughout this proceeding. In particular, we extend our sincere thanks to Dana Prescott, whose strategic judgment and mastery of the contractual framework were instrumental at every stage of the case; to Gerald Huang, whose meticulous assembly of the documentary record and coordination of fact witnesses greatly strengthened WAL's evidentiary presentation; and to Dr. Ingrid Vollmer, whose expert testimony regarding WAL's quality-assurance protocols and incoming inspection procedures was credited by the Tribunal as both credible and persuasive. The successful outcome in this matter was, in large part, a product of the close and effective collaboration between WAL's internal team and the Calderwood & Harkness litigation team.
We remain available to discuss any aspect of this analysis or the recommended next steps at your convenience. Please do not hesitate to contact the undersigned directly with any questions or to schedule a call or meeting to review these matters in further detail.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Theodore Langston, Partner
600 Lexington Avenue New York, New York 10022 Telephone: (212) 841-7244
Email: tlangston@calderwoodharkness.com
cc: Vivienne St. Claire, Partner, Calderwood & Harkness LLP Simone Laroche, Senior Associate, Calderwood & Harkness LLP Jeffrey Park, Associate, Calderwood & Harkness LLP
Enclosure: Copy of Partial Award dated March 22, 2024 (ICC Case No. 27914/MHM)
Category | Amount | Currency
Kestrel's claims dismissed (avoided exposure) | €47.30 million | EUR
Counterclaim recovery awarded to WAL | €3.82 million | EUR
Legal cost reimbursement awarded to WAL | $1.85 million | USD
ICC cost reallocation benefit (net recovery of advance) | $0.31 million | USD
Total value preserved and recovered | ≈ €51.1 million | EUR equivalent

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