CALDERWOOD & HARKNESS LLP Attorneys at Law

CALDERWOOD & HARKNESS LLP Attorneys at Law
600 Lexington Avenue New York, New York 10022 Telephone: (212) 554-7000 Facsimile: (212) 554-7001
1750 K Street NW, Suite 800 Washington, DC 20006 Telephone: (202) 448-3200 Facsimile: (202) 448-3201
www.calderwoodharkness.com
November 14, 2022
Via Certified Mail, Return Receipt Requested, and Electronic Mail
Pinnacle Continental Insurance Co. Claims / Coverage Department 200 Berkeley Street Boston, Massachusetts 02116
Re: Notice of ICC Arbitration — Whitmore Aerospace LLC Policy No.: PCE-GL-2021-08854 ICC Case No.: 27914/MHM Our File / Engagement No.: 1019-00001
To the Claims Department:
I. Introduction and Purpose of Letter
Calderwood & Harkness LLP ("C&H" or "this Firm") represents Whitmore Aerospace LLC ("WAL" or the "Insured"), a Delaware limited liability company headquartered at 4200 Wilson Boulevard, Suite 1100, Arlington, Virginia 22203. WAL is the named insured under Commercial General Liability Policy No. PCE-GL-2021-08854 (the "Policy") issued by Pinnacle Continental Insurance Co. ("Pinnacle" or the "Insurer").
The purpose of this letter is to provide Pinnacle with formal notification of a pending arbitration proceeding administered by the International Chamber of Commerce ("ICC") in which WAL has been named as Respondent, and to request that Pinnacle undertake a prompt coverage determination under the Policy with respect to the claims asserted in that proceeding. A copy of the claimant's Request for Arbitration, together with all exhibits filed therewith, is enclosed herewith as Enclosure 1.
This notification is being provided promptly upon our engagement by WAL and in accordance with the notice provisions set forth in the Policy. WAL is mindful of its contractual obligation to notify Pinnacle of any claim, suit, or proceeding that may implicate coverage under the Policy, and provides this notice in a timely manner to preserve all coverage rights available to the Insured. Nothing in this letter shall be construed as an admission that any exclusion, limitation, or condition of the Policy applies to the claims described herein, and WAL expressly reserves all rights, as set forth more fully in Section X below.
II. Identification of the Insured
For purposes of the Insurer's records and coverage analysis, the relevant identifying information for the named insured is as follows:
WAL is a leading supplier of critical propulsion-system components and structural airframe assemblies to both military and commercial aviation customers. WAL's primary manufacturing operations are conducted at its facility in Manassas, Virginia, where it maintains AS9100 Rev D certification and holds numerous ITAR and EAR registrations relevant to its defense-sector operations. The claims described herein arise, in part, from manufacturing and supply activities conducted at or directed from the Manassas facility.
III. Description of the Underlying Proceeding
On November 7, 2022, Kestrel Dynamics GmbH ("Kestrel"), a German limited liability company (Gesellschaft mit beschränkter Haftung) registered at Industriestraße 88, 70565 Stuttgart, Germany (Commercial Register No. HRB 745621, Amtsgericht Stuttgart), filed a Request for Arbitration with the International Chamber of Commerce. The arbitration has been assigned ICC Case No. 27914/MHM.
The arbitration is brought under the ICC Rules of Arbitration (2021 edition). Pursuant to the dispute resolution clause contained in the underlying contract (described in Section IV below), the arbitration will be conducted before a three-member tribunal. The contractually designated seat of arbitration is New York, New York, and the language of the arbitration is English.
Kestrel is represented in this proceeding by Haber Reinhardt Schlosser Partnerschaft mbB ("HRS"), an international law firm with offices at Königstraße 35, 70173 Stuttgart, Germany and 30 St Mary Axe, London EC3A 8BF, United Kingdom. HRS's lead counsel on this matter is Dr. Maximilian Haber.
As of the date of this letter, no tribunal has been constituted. WAL anticipates that the ICC International Court of Arbitration will issue procedural directions regarding the constitution of the tribunal in the coming weeks. WAL's Answer and Counterclaim is expected to be filed on or before December 12, 2022, consistent with the time limits prescribed by the ICC Rules.
IV. Summary of the Underlying Contract
The dispute arises from a Master Supply Agreement for Titanium Alloy Turbine Housings, bearing internal reference number WAL-KDG-MSA-2018-0615 (the "MSA"), which was executed by the parties on June 15, 2018. The following summarizes the material terms of the MSA and its subsequent amendments:
Parties. The MSA was entered into between Whitmore Aerospace LLC, as Buyer, and Kestrel Dynamics GmbH, as Seller.
Scope. Under the MSA, Kestrel agreed to manufacture and deliver Ti-6Al-4V ELI (Extra Low Interstitials) titanium alloy turbine housings in conformity with WAL's proprietary engineering specifications, designated WAL-SPEC-TH-401 through WAL-SPEC-TH-409. These specifications encompass detailed metallurgical, dimensional, and surface-finish requirements for turbine housings used in both military and commercial propulsion systems. The specifications were later expanded to include WAL-SPEC-TH-410 via Amendment No. 1, as described below.
Term. The MSA has an initial term of five (5) years, commencing June 15, 2018 and expiring June 14, 2023, with two optional one-year renewal periods exercisable at WAL's sole discretion upon not less than one hundred twenty (120) days' written notice prior to the expiration of the then-current term.
Volume Commitment. WAL committed to a minimum annual purchase volume of 2,400 units and a maximum annual purchase volume of 3,600 units during the initial term. Pursuant to Amendment No. 1, the maximum annual volume was increased to 4,000 units.
Contract Value. At minimum annual volume over the initial five-year term, the aggregate contract value is approximately €61.2 million, based on the unit pricing schedule set forth in Schedule B to the MSA.
Delivery Terms. All shipments are to be made DDP (Delivered Duty Paid) to WAL's manufacturing facility at 8500 Coppermine Road, Manassas, Virginia 20110, in accordance with Incoterms 2020.
Quality Standards. The MSA requires Kestrel to maintain AS9100 Rev D certification throughout the term of the agreement. All deliveries are subject to WAL's incoming inspection procedures as set forth in WAL-QCP-100, WAL's proprietary quality control protocol. Section 7 of the MSA establishes detailed acceptance and rejection procedures, including Kestrel's right to cure rejected lots within a specified period.
Governing Law. The MSA is governed by the laws of the State of New York, without regard to its conflict-of-laws principles.
Dispute Resolution. Section 15.2 of the MSA provides that any dispute arising out of or in connection with the MSA shall be finally settled by arbitration under the ICC Rules of Arbitration, with a three-member tribunal, seated in New York, New York.
Amendment No. 1 (executed February 10, 2020): Added engineering specification WAL-SPEC-TH-410, covering a newly designed turbine housing variant for a next-generation commercial turbofan engine program, and increased the maximum annual purchase volume from 3,600 units to 4,000 units.
Amendment No. 2 (executed September 3, 2021): Extended the contractual cure period for rejected lots from thirty (30) to forty-five (45) calendar days, and added a pandemic-related force majeure carve-out provision addressing potential supply-chain disruptions attributable to COVID-19 and related governmental restrictions.
V. Summary of Kestrel's Claims Against WAL
In its Request for Arbitration, Kestrel asserts that WAL committed a material breach of the MSA. Kestrel's claims can be summarized as follows:
(i) Wrongful Rejection of Deliverables. Kestrel alleges that WAL wrongfully rejected fourteen (14) lots of titanium alloy turbine housings delivered between March 2022 and September 2022, totaling approximately 1,680 individual units. According to Kestrel, the first rejected lot was designated Lot KDG-2022-0307, delivered on or about March 7, 2022, and the last rejected lot was designated Lot KDG-2022-0919, delivered on or about September 19, 2022. Kestrel contends that these rejections were not supported by legitimate quality concerns and instead were pretextual.
(ii) Wrongful Termination. Kestrel further alleges that WAL's issuance of a Notice of Termination for Cause on October 3, 2022, purportedly based on "Persistent Quality Failure" under § 8.4 of the MSA, was improper and constituted a material breach by WAL. Kestrel contends that the termination was predicated on fabricated or materially exaggerated quality deficiencies.
Central to Kestrel's position is its allegation that WAL's incoming inspection personnel applied an unpublished, undisclosed porosity tolerance threshold of ≤0.15% when evaluating delivered turbine housings, rather than the contractually specified tolerance of ≤0.25% set forth in WAL-SPEC-TH-401, Appendix C, Table 3. According to Kestrel, this undisclosed tightening of the acceptance criteria resulted in the rejection of conforming goods that met the express contractual specifications.
Kestrel further alleges that WAL's true motive for rejecting the lots and terminating the MSA was to replace Kestrel with a lower-cost domestic supplier, Valkyr Precision Components Inc. ("Valkyr"), based in Tucson, Arizona. Kestrel claims that WAL had been in negotiations with Valkyr as early as January 2022, several months before the first contested lot rejection, and that WAL manufactured the quality dispute as a pretext to exit the MSA without triggering the early termination penalties set forth in § 14.5.
Damages. Kestrel claims total damages of approximately €47.3 million, broken down as follows:
It should be noted that Kestrel's damages calculations assume, inter alia, that WAL would have exercised both optional renewal periods, a matter that WAL disputes. WAL also contends that certain of these damages categories are barred by the MSA's contractual limitations on liability, as discussed in Section VI below.
VI. WAL's Preliminary Position and Defenses
WAL categorically denies all claims asserted by Kestrel and maintains that its termination of the MSA was proper, justified, and fully consistent with the contractual provisions governing quality failures and termination for cause. WAL's principal defenses may be summarized as follows:
Legitimate Quality Rejections. WAL rejected the lots at issue based on independent metallurgical testing performed by both WAL's in-house quality laboratory and an accredited third-party testing facility. The testing results confirmed porosity levels in the rejected lots ranging from 0.19% to 0.38%, exceeding the contractual tolerance of ≤0.25% specified in WAL-SPEC-TH-401, Appendix C, Table 3. WAL did not apply an unpublished or undisclosed standard. Several of the rejected lots exhibited porosity levels significantly in excess of even the contractual threshold, with certain individual units measured at 0.38% — more than fifty percent above the permissible limit.
Persistent Quality Failure. WAL documented seven (7) uncured lot rejections within a rolling twelve-month period (March 2022 through September 2022). Under § 8.4 of the MSA, a "Persistent Quality Failure" is defined as three (3) or more uncured lot rejections within any rolling twelve-month period, entitling the Buyer to exercise remedies under § 14.2(b), including termination for cause. WAL thus exceeded the contractual threshold by a wide margin.
Failure to Cure. Kestrel failed to cure the identified quality deficiencies within the forty-five (45) calendar-day amended cure period (as established by Amendment No. 2) with respect to five of the seven uncured lots. Kestrel's cure submissions for the remaining two lots were similarly deficient and were rejected upon re-inspection.
Termination for Cause. WAL terminated the MSA for cause under § 14.2(b) by issuing its Notice of Termination dated October 3, 2022. WAL contends that this termination was procedurally and substantively proper under the terms of the MSA.
Consequential Damages Waiver. Section 8.7 of the MSA contains a mutual waiver of consequential, incidental, and indirect damages. WAL contends that this provision bars the majority of Kestrel's claimed damages, including its claims for lost profits on the optional renewal years, reputational damages, and loss of business opportunities. Only Kestrel's claim for unreimbursed rework costs, if meritorious (which WAL disputes), might arguably survive the consequential damages waiver.
Counterclaim. WAL has asserted a counterclaim against Kestrel in the amount of €5.17 million, representing the replacement-component costs WAL incurred through its emergency engagement of Valkyr Precision Components Inc. to manufacture substitute turbine housings following Kestrel's delivery of non-conforming goods. These costs include expedited tooling charges, qualification testing, premium pricing associated with accelerated delivery schedules, and related logistics expenses.
WAL's Answer and Counterclaim was filed on December 12, 2022, in accordance with the procedural timetable established by the ICC Secretariat.
VII. Potential Financial Exposure
We wish to draw Pinnacle's attention to the magnitude of the potential financial exposure at issue in this arbitration.
The total quantum of damages claimed by Kestrel is approximately €47.3 million, which at current exchange rates equates to approximately $49 to $50 million. While WAL believes the claims are without merit and intends to mount a vigorous defense, the Insurer should be aware that an adverse arbitral award, in whole or in part, could result in a significant financial liability for the Insured.
WAL's counterclaim of €5.17 million may partially offset any exposure in the event WAL is unsuccessful in defending against all or a portion of Kestrel's claims. However, counterclaim recovery is inherently uncertain and should not be relied upon as a basis for reducing the coverage analysis.
Additionally, we note that WAL maintains a senior secured revolving credit facility with Veltrano National Bank, N.A., in the aggregate principal amount of $350 million. The credit agreement governing that facility contains customary financial covenants, including a leverage ratio covenant and a minimum interest coverage ratio covenant. A substantial adverse arbitral award could implicate WAL's compliance with these financial covenants and, depending on timing and magnitude, could trigger cross-default provisions or require WAL to seek covenant modifications from its lender group. This further underscores the importance of a prompt and thorough coverage analysis by the Insurer.
We respectfully request that Pinnacle assess the potential coverage implications in light of the magnitude of this exposure and the potential cascading financial consequences for the Insured.
VIII. Identification of Counsel
WAL has retained Calderwood & Harkness LLP to serve as its defense counsel in the ICC arbitration proceeding described herein. The C&H team responsible for this matter is as follows:
The C&H engagement number for this matter is 1019-00001. All billing records, correspondence, and work product will be maintained under this engagement number.
The primary address for all correspondence to C&H is:
Calderwood & Harkness LLP 600 Lexington Avenue New York, New York 10022 Telephone: (212) 554-7000
Attention: Theodore Langston, Esq.
Should Pinnacle wish to designate separate coverage counsel or monitoring counsel in connection with this matter, we request that such designation be communicated to both WAL and this Firm at the earliest practicable date so that appropriate coordination arrangements can be established.
IX. Request for Coverage Determination
WAL hereby formally requests that Pinnacle Continental Insurance Co. undertake a prompt and thorough review of Policy No. PCE-GL-2021-08854 and issue a coverage determination with respect to the following matters:
(a) Whether the claims asserted by Kestrel Dynamics GmbH in ICC Case No. 27914/MHM fall within the scope of coverage afforded by the Policy, including but not limited to coverage for breach-of-contract claims, wrongful termination claims, and claims sounding in commercial tort or analogous theories;
(b) Whether Pinnacle has a duty to defend WAL in the arbitration proceeding, a duty to indemnify WAL with respect to any adverse award or settlement, or both;
(c) Any reservations of rights, exclusions, or coverage limitations that Pinnacle may assert with respect to all or any portion of the claims at issue, including but not limited to any commercial-supply exclusion, products-completed-operations exclusion, contractual-liability exclusion, professional-services exclusion, or any other potentially applicable exclusion or endorsement;
(d) Whether the Policy provides coverage for the costs associated with the defense of the arbitration, including but not limited to outside legal fees and expenses, expert witness fees and costs, e-discovery and document management expenses, arbitrator compensation, and ICC administrative costs and fees; and
(e) Any conditions precedent, cooperation requirements, or procedural obligations that the Insurer requires WAL to satisfy in connection with the coverage determination process.
WAL understands that a coverage reservation letter may be forthcoming from the Insurer and anticipates that Pinnacle may wish to reserve certain rights pending completion of its coverage analysis. WAL does not object to a reasonable reservation of rights, provided that any such reservation is issued in a timely manner and identifies with specificity the grounds upon which the Insurer relies.
WAL respectfully requests that any coverage reservation letter or other formal coverage correspondence be directed to both of the following:
(i) Dana Prescott, Vice President & General Counsel, Whitmore Aerospace LLC, 4200 Wilson Boulevard, Suite 1100, Arlington, Virginia 22203; and
(ii) Theodore Langston, Esq., Partner, Calderwood & Harkness LLP, 600 Lexington Avenue, New York, New York 10022.
X. Reservation of Rights by the Insured
WAL expressly reserves all rights, claims, and defenses available to it under the Policy, at law, and in equity, including without limitation:
(a) The right to challenge any denial of coverage, in whole or in part, by Pinnacle;
(b) The right to contest any reservation of rights, coverage exclusion, or coverage limitation asserted by Pinnacle;
(c) The right to seek a judicial or arbitral determination of coverage obligations, including the duty to defend and the duty to indemnify;
(d) The right to recover defense costs and other expenses incurred by WAL in connection with the underlying proceeding in the event that coverage is ultimately established; and
(e) All rights arising under applicable state insurance laws, including the insurance laws of the Commonwealth of Virginia, the State of New York, and the Commonwealth of Massachusetts, as may be applicable.
This notification is provided without waiver of any rights, defenses, privileges, or immunities available to WAL, whether under the Policy, at common law, or by statute. Nothing in this letter shall be construed as a concession by WAL that any exclusion, limitation, condition, or other restrictive provision in the Policy applies to the claims at issue in the underlying arbitration. WAL's provision of this notice is intended solely to satisfy its contractual notice obligations under the Policy and to preserve its coverage rights thereunder.
XI. Request for Acknowledgment and Contact Information
WAL respectfully requests that Pinnacle acknowledge receipt of this notification in writing at the earliest practicable date, and that Pinnacle provide the following information in its acknowledgment:
(a) The name, title, and direct contact information (telephone number, e-mail address, and mailing address) of the claims adjuster assigned to this matter;
(b) The name and contact information of any coverage counsel engaged by Pinnacle in connection with this matter; and
(c) Pinnacle's claim or file reference number for purposes of future correspondence.
All future correspondence and communications concerning this matter should be directed to:
For Calderwood & Harkness LLP: Theodore Langston, Esq., Partner Calderwood & Harkness LLP 600 Lexington Avenue New York, New York 10022 Telephone: (212) 554-7118 E-mail: t.langston@calderwoodharkness.com
For Whitmore Aerospace LLC: Dana Prescott, Vice President & General Counsel Whitmore Aerospace LLC 4200 Wilson Boulevard, Suite 1100 Arlington, Virginia 22203 Telephone: (703) 812-4400 E-mail: dprescott@whitmoreallc.com
We appreciate Pinnacle's prompt attention to this matter. This Firm and WAL remain prepared to provide any additional information, documentation, or clarification that the Insurer may require in connection with its coverage analysis. Should you wish to discuss this matter by telephone or schedule a meeting, please do not hesitate to contact the undersigned directly.
We look forward to hearing from you at your earliest convenience.
Respectfully,
CALDERWOOD & HARKNESS LLP
By: ________
Theodore Langston Partner
Telephone: (212) 554-7118 E-mail: t.langston@calderwoodharkness.com
Enclosures:
1.  Copy of Request for Arbitration filed by Kestrel Dynamics GmbH, dated November 7, 2022 (ICC Case No. 27914/MHM), with all exhibits thereto
2.  Copy of relevant portions of Policy No. PCE-GL-2021-08854 (coverage summary page and endorsement schedule)
cc: Dana Prescott, Vice President & General Counsel, Whitmore Aerospace LLC (via e-mail and first-class mail) cc: Marcus J. Whitmore III, Chief Executive Officer, Whitmore Aerospace LLC (via e-mail and first-class mail) cc: Vivienne St. Claire, Partner, Calderwood & Harkness LLP (internal distribution)
Item | Detail
Full Legal Name | Whitmore Aerospace LLC
Entity Type | Delaware limited liability company
Employer Identification Number (EIN) | 54-3298710
Registered Agent Address | 1209 Orange Street, Wilmington, Delaware 19801
Principal Place of Business | 4200 Wilson Boulevard, Suite 1100, Arlington, Virginia 22203
Manufacturing Facility | 8500 Coppermine Road, Manassas, Virginia 20110
Industry | Aerospace and defense manufacturing; specializing in propulsion systems and structural airframe components for military and commercial aviation applications
Chief Executive Officer | Marcus J. Whitmore III
Vice President & General Counsel | Dana Prescott
Category | Amount (€)
Lost profits for the remaining MSA term (Contract Year 5) | 12,830,000
Lost profits for the two optional one-year renewal periods | 27,150,000
Cost of unreimbursed rework on rejected lots | 3,420,000
Reputational damages / loss of business opportunities | 3,900,000
Total | 47,300,000
Role | Attorney | Title
Responsible Partner | Theodore Langston | Partner
Billing Partner | Vivienne St. Claire | Partner
Lead Associate | Simone Laroche | Senior Associate
Working Associate | Jeffrey Park | Associate