CALDERWOOD & HARKNESS LLP 600 Lexington Avenue New York, NY 10022
MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT — PREPARED AT THE DIRECTION OF COUNSEL
May 15, 2023
FROM: Simone Laroche, Senior Associate, Calderwood & Harkness LLP, 600 Lexington Avenue, New York, NY 10022
TO: Dr. Nadia Ostrovsky, Managing Director, Ridgeline Economic Consulting LLC, 200 Park Avenue, Suite 3400, New York, NY 10166
RE: Expert Instructions — Damages Analysis and Report, ICC Case No. 27914/MHM, Kestrel Dynamics GmbH v. Whitmore Aerospace LLC
ENGAGEMENT NO.: 1019-00001
This memorandum constitutes confidential attorney work product prepared at the direction of counsel in anticipation of litigation and arbitration. It is protected by the attorney-client privilege, the work product doctrine, and all other applicable privileges. Do not distribute, copy, or disclose the contents of this memorandum to any person or entity without the prior written authorization of Calderwood & Harkness LLP.
I. PURPOSE AND SCOPE OF ENGAGEMENT
This memorandum sets forth the instructions of counsel to Dr. Nadia Ostrovsky in connection with her engagement as Respondent's damages expert in the above-captioned ICC arbitration. This memorandum should be read in conjunction with the Expert Engagement Letter dated March 6, 2023, between Calderwood & Harkness LLP, acting on behalf of Whitmore Aerospace LLC ("WAL" or "Respondent"), and Ridgeline Economic Consulting LLC ("Ridgeline"), pursuant to which Dr. Ostrovsky was retained as an independent expert on damages. To the extent any provision of this memorandum is inconsistent with the Expert Engagement Letter, the Expert Engagement Letter shall control with respect to the commercial terms of the engagement, and this memorandum shall control with respect to the substantive scope of the expert assignment.
Dr. Ostrovsky has been retained as Respondent's damages expert in the international arbitration proceeding styled Kestrel Dynamics GmbH v. Whitmore Aerospace LLC, ICC Case No. 27914/MHM (the "Arbitration"). The Arbitration is administered by the International Court of Arbitration of the International Chamber of Commerce under the ICC Rules of Arbitration (2021 edition). The seat of the arbitration is New York, New York. The language of the arbitration is English. The governing law of the Master Supply Agreement at issue (as defined below) is the law of the State of New York, without regard to its conflict-of-laws principles.
Dr. Ostrovsky's primary tasks are twofold:
1. Rebuttal of Claimant's Damages Claims. Dr. Ostrovsky is to prepare an independent expert report rebutting the damages methodology and quantification that will be presented by Claimant's damages expert, Prof. Dieter Langfeld, Partner at Rheinsberg Advisory AG (Talstrasse 62, 8001 Glenrock Assurance, Switzerland). Prof. Langfeld's expert report is expected to be submitted simultaneously with Dr. Ostrovsky's initial report on October 16, 2023. Dr. Ostrovsky should anticipate Prof. Langfeld's likely methodological approach based on the damages allegations set forth in Claimant's Statement of Claim and prepare her initial report accordingly, with the understanding that a focused rebuttal report will follow after receipt of Prof. Langfeld's report.
2. Quantification of Respondent's Counterclaim. Dr. Ostrovsky is to independently analyze and quantify the damages in support of Respondent's counterclaim in the amount of €5.17 million (approximately), representing the replacement-component cost premium incurred by WAL as a result of Kestrel's Persistent Quality Failure (as defined in the MSA). This analysis should be presented as an affirmative damages quantification, supported by contemporaneous documentation and sound economic methodology.
The following deadlines govern the expert phase of this proceeding:
• Initial Expert Report: October 16, 2023 (simultaneous exchange with Claimant's expert report)
• Rebuttal Expert Report: November 13, 2023 (responding to Prof. Langfeld's initial report)
• Evidentiary Hearing: January 8–12, 2024, at the ICC Hearing Centre, New York, New York
Dr. Ostrovsky should be prepared to testify at the evidentiary hearing, which is currently scheduled to include witness and expert testimony over five hearing days. The Tribunal has indicated that expert testimony will likely be taken in a concurrent-evidence ("hot-tub") format, although this remains subject to the Tribunal's procedural discretion. We will provide further guidance on hearing preparation as the date approaches.
II. BACKGROUND OF THE DISPUTE
The following summary is provided to orient Dr. Ostrovsky to the factual and contractual background of the dispute. Dr. Ostrovsky should not rely solely on this summary but should independently review the underlying documents that will be provided under separate cover as described in Section V of this memorandum.
A. The Parties
1. Respondent — Whitmore Aerospace LLC
Whitmore Aerospace LLC ("WAL") is a Delaware limited liability company with its principal place of business at 4200 Wilson Boulevard, Suite 1100, Arlington, Virginia 22203. WAL is a leading aerospace and defense manufacturer specializing in the design, development, and production of advanced propulsion systems and structural airframe components for both military and commercial aviation platforms. In its most recent fiscal year (FY2022), WAL reported annual revenues of approximately $1.87 billion and employed approximately 6,400 individuals across its facilities in Virginia, Arizona, and Connecticut.
The key WAL personnel relevant to this engagement are as follows:
• Marcus J. Whitmore III — Chief Executive Officer
• Dana Prescott — Vice President and General Counsel
• Gerald Huang — Vice President, Global Supply Chain Operations
• Dr. Ingrid Vollmer — Senior Vice President, Engineering and Manufacturing
Gerald Huang and Dr. Ingrid Vollmer are the principal WAL executives who oversaw the commercial and technical aspects, respectively, of the supply relationship with Kestrel and who were involved in the decision to terminate the MSA. Both are expected to provide witness testimony at the evidentiary hearing.
2. Claimant — Kestrel Dynamics GmbH
Kestrel Dynamics GmbH ("Kestrel" or "KDG") is a German limited liability company (Gesellschaft mit beschränkter Haftung) with its registered office at Industriestraße 88, 70565 Stuttgart, Germany (registered with the commercial register of the Stuttgart Local Court (Amtsgericht Stuttgart) under HRB 745621). Kestrel is a precision-machined aerospace components supplier that manufactures titanium and specialty alloy components for a range of aerospace and defense customers, primarily in Europe and North America. In FY2022, Kestrel reported annual revenues of approximately €312 million and employed approximately 1,800 individuals.
The key Kestrel personnel relevant to this dispute are as follows:
• Friedrich Brenner — Managing Director (Geschäftsführer)
• Luisa Erdmann — Commercial Director
• Dr. Stefan Voss — Head of Quality Assurance
Kestrel is represented in this arbitration by the law firm Haber Reinhardt Schlosser Partnerschaft mbB ("HRS"), with lead counsel being Dr. Maximilian Haber and Katrin Schäfer, both based in Frankfurt am Main, Germany.
B. The Master Supply Agreement
The contract at the center of this dispute is the Master Supply Agreement for Titanium Alloy Turbine Housings, bearing the internal reference number WAL-KDG-MSA-2018-0615 (the "MSA" or the "Agreement"). The MSA was executed on June 15, 2018, by and between WAL, as Buyer, and Kestrel, as Supplier.
The principal terms of the MSA, as relevant to the damages analysis, are as follows:
• Term: The initial term of the MSA is five contract years, running from June 15, 2018, through June 14, 2023. The MSA provides for two optional one-year renewal periods, each exercisable solely at WAL's discretion upon not less than 120 days' prior written notice before the expiration of the then-current term.
• Products: The MSA covers the supply of Ti-6Al-4V ELI (Extra Low Interstitial) titanium alloy turbine housings, manufactured in accordance with WAL's proprietary engineering specifications designated WAL-SPEC-TH-401 through WAL-SPEC-TH-409. These specifications define, among other parameters, dimensional tolerances, surface finish requirements, metallurgical properties (including porosity limits), and non-destructive testing criteria.
• Delivery Terms: All deliveries are to be made DDP (Delivered Duty Paid, Incoterms 2020) to WAL's manufacturing facility located at 8500 Coppermine Road, Manassas, Virginia 20110.
• Quality Standards: The MSA requires Kestrel to maintain AS9100 Revision D certification throughout the term of the Agreement. All incoming shipments are subject to inspection by WAL in accordance with WAL Quality Control Procedure WAL-QCP-100, with acceptance or rejection to be communicated within 15 business days of receipt.
C. Pricing Structure and Escalation Formula
The MSA establishes a detailed pricing framework that is central to the damages quantification in this proceeding.
Annual Volume Commitment. The MSA establishes a minimum annual volume commitment of 2,400 units per contract year and a maximum annual volume of 3,600 units per contract year. Following the execution of Amendment No. 1 (discussed below), the maximum annual volume was increased to 4,000 units.
Unit Pricing. The base unit price for Contract Year 1 was set at €4,850.00 per unit. Section 5.2 of the MSA provides for an annual compounded price escalation of 2.5%, applied at the commencement of each subsequent contract year. The resulting unit prices across the five contract years are as follows:
Aggregate Contract Value. At the minimum committed volume of 2,400 units per contract year, the aggregate value of the MSA over its five-year initial term is calculated as follows:
Sum of unit prices across all five CYs: €4,850.00 + €4,971.25 + €5,095.53 + €5,222.92 + €5,353.49 = €25,493.19
Aggregate minimum contract value: €25,493.19 × 2,400 units = €61,183,656
This aggregate figure is relevant to contextualizing the scale of the contractual relationship and the magnitude of the damages claims asserted by Kestrel.
D. Key Contractual Provisions Relevant to Damages
Several provisions of the MSA are directly relevant to the damages analysis that Dr. Ostrovsky will perform. Dr. Ostrovsky should carefully review the full text of these provisions in the MSA (to be provided under separate cover) and should consult with counsel if she has any questions regarding their legal interpretation or effect.
1. Section 8.4 — Rejection and Cure
Section 8.4 of the MSA governs the procedures applicable when WAL rejects a lot of delivered products for non-conformance with the applicable engineering specifications. Under this provision, Kestrel has a specified period following receipt of a written rejection notice within which to cure the identified non-conformance. As originally drafted, the cure period was 30 calendar days. Amendment No. 2 (dated September 3, 2021, and discussed further below) extended this cure period to 45 calendar days.
Critically, Section 8.4 also establishes the concept of "Persistent Quality Failure," which is defined as three or more uncured rejections occurring within any rolling 12-month period. As set forth in the factual summary below, Kestrel accumulated seven uncured rejections within the relevant 12-month period, significantly exceeding the Persistent Quality Failure threshold.
2. Section 8.7 — Exclusive Remedy and Consequential Damages Waiver
Section 8.7 of the MSA contains two provisions of critical importance to the damages analysis:
First, it establishes that WAL's exclusive remedies for quality failures by Kestrel are limited to: (a) replacement of non-conforming units at Kestrel's expense; (b) a credit against future purchase orders in the amount of the non-conforming units; or (c) upon the occurrence of a Persistent Quality Failure, termination of the Agreement in accordance with Section 14.2.
Second, it contains a mutual waiver of consequential damages. Specifically, Section 8.7 provides that neither party shall be liable to the other for any indirect, incidental, special, or consequential damages arising out of or relating to any quality failure or rejection, including but not limited to lost profits, loss of use, loss of revenue, or loss of business opportunity.
This consequential damages waiver is central to Respondent's position that several categories of Kestrel's claimed damages — including lost profits for the remainder of the MSA term, lost profits for the renewal periods, and reputational damages — are contractually barred. While the legal enforceability and scope of Section 8.7 is ultimately a question for the Tribunal, Dr. Ostrovsky should independently assess the economic implications of this provision and address how it affects the proper quantification of damages from an economic standpoint.
3. Section 14.2 — Termination for Cause
Section 14.2 of the MSA provides that either party may terminate the Agreement for cause upon the occurrence of either (a) a material breach that remains uncured for a period of 60 calendar days following written notice thereof, or (b) a Persistent Quality Failure as defined in Section 8.4. WAL's termination of the MSA on October 3, 2022, was predicated on the occurrence of a Persistent Quality Failure.
4. Amendment No. 1 (February 10, 2020)
Amendment No. 1 to the MSA was executed on February 10, 2020, and made two principal modifications to the Agreement. First, it added a new engineering specification, WAL-SPEC-TH-410, covering a high-temperature variant of the Ti-6Al-4V ELI turbine housing intended for use in next-generation propulsion systems. Second, it increased the maximum annual volume from 3,600 units to 4,000 units per contract year, reflecting WAL's anticipated demand growth associated with the new high-temperature variant.
5. Amendment No. 2 (September 3, 2021)
Amendment No. 2 to the MSA was executed on September 3, 2021, and made two modifications. First, it extended the cure period in Section 8.4 from 30 calendar days to 45 calendar days, at Kestrel's request and with WAL's agreement. Second, it added a force majeure carve-out addressing pandemic-related supply chain disruptions, providing that delays directly attributable to COVID-19-related governmental restrictions would not constitute a breach of delivery timelines under the MSA, subject to specified notice and documentation requirements. Notably, the force majeure carve-out applied only to delivery delays, not to quality non-conformances.
E. Factual Summary of the Dispute
The dispute arises from a series of quality failures by Kestrel during Contract Year 4 and the early portion of Contract Year 5, which culminated in WAL's termination of the MSA for Persistent Quality Failure.
Between March 7, 2022, and September 19, 2022, WAL rejected a total of 14 lots of turbine housings delivered by Kestrel. These rejected lots are identified as Lot KDG-2022-0307 through Lot KDG-2022-0919. The 14 rejected lots encompassed a total of 1,680 units. The basis for each rejection was porosity non-conformance — that is, the lots exhibited porosity levels exceeding the contractual specification of ≤0.25% as set forth in WAL-SPEC-TH-401, Appendix C, Table 3.
Independent metallurgical testing conducted by Dr. Raymond Chow of Arclight Materials Science Inc. confirmed that porosity levels in the rejected lots ranged from 0.19% to 0.38%. Dr. Ostrovsky should note that while certain lots exhibited porosity levels as low as 0.19% (which would fall within the contractual specification), those lots were rejected based on aggregate lot-level assessment, as the lot acceptance criteria in WAL-QCP-100 require that all sampled units within a lot must meet the specification threshold. Dr. Chow will address the technical details of this testing in his expert report, and Dr. Ostrovsky should coordinate with Dr. Chow as necessary to ensure that her damages analysis is consistent with the metallurgical findings.
Following each rejection, WAL issued a written cure notice to Kestrel in accordance with Section 8.4 of the MSA. Of the 14 rejected lots, Kestrel successfully cured 7 lots within the 45-day amended cure period by replacing or reworking the non-conforming units. However, Kestrel failed to cure the remaining 7 lots within the cure period. Because the number of uncured rejections (7) exceeded the Persistent Quality Failure threshold of 3 uncured rejections in a rolling 12-month period, WAL determined that the conditions for termination for cause under Section 14.2 had been satisfied.
On October 3, 2022, WAL issued a Notice of Termination for Cause to Kestrel, effective immediately, citing the occurrence of a Persistent Quality Failure under Section 8.4 of the MSA. Kestrel disputed the termination, contending (among other things) that certain of the rejected lots were improperly rejected and that the porosity specification should be interpreted differently. These disputes form the basis of the current arbitration.
Kestrel filed its Request for Arbitration with the ICC on November 7, 2022. WAL filed its Answer and Counterclaim on December 12, 2022. The Tribunal was constituted in January 2023, and Procedural Order No. 1 was issued on February 14, 2023, establishing the procedural calendar. Kestrel's Statement of Claim was filed on April 28, 2023. Respondent's Statement of Defense and Counterclaim is due on June 30, 2023.
III. CLAIMANT'S DAMAGES CLAIMS — OVERVIEW
Kestrel's Statement of Claim, filed on April 28, 2023, sets forth a total damages claim of €47.3 million, divided into four categories. Dr. Ostrovsky should familiarize herself with each of these categories in detail, as her expert report will need to address every head of damage claimed by Kestrel. The four categories of claimed damages are summarized as follows:
1. Lost Profits for the Remaining MSA Term (CY5): €12.83 million. Kestrel contends that WAL's termination of the MSA was wrongful and that, but for the termination, Kestrel would have earned profits on deliveries during the remainder of Contract Year 5 (i.e., from October 3, 2022, through June 14, 2023). This claim is set forth at paragraph 87 of the Statement of Claim.
2. Lost Profits for Two Renewal-Term Option Years: €27.15 million. Kestrel further claims that, but for the wrongful termination, WAL would have exercised both one-year renewal options, and Kestrel would have earned profits during those two additional years. This claim is set forth at paragraph 92 of the Statement of Claim.
3. Cost of Unreimbursed Rework on Rejected Lots: €3.42 million. Kestrel claims the costs it incurred in attempting to cure the 14 rejected lots, on the theory that the rejections were wrongful or unreasonable and that Kestrel should not bear the cost of reworking units that complied with the contractual specification (as Kestrel interprets it). This claim is set forth at paragraph 96 of the Statement of Claim.
4. Reputational Damages and Loss of Other Business Opportunities: €3.90 million. Kestrel claims that WAL's termination caused damage to Kestrel's market reputation and resulted in the loss of business opportunities with other aerospace customers. This claim is set forth at paragraph 101 of the Statement of Claim.
Kestrel's damages expert is Prof. Dieter Langfeld, a Partner at Rheinsberg Advisory AG, located at Talstrasse 62, 8001 Glenrock Assurance, Switzerland. Prof. Langfeld's expert report has not yet been submitted; it is expected to be exchanged simultaneously with Dr. Ostrovsky's initial report on October 16, 2023. However, the Statement of Claim provides sufficient detail regarding Kestrel's damages theories to permit Dr. Ostrovsky to commence her analysis and prepare her affirmative expert report on the counterclaim, as well as a preliminary rebuttal framework that can be refined upon receipt of Prof. Langfeld's report.
IV. SPECIFIC INSTRUCTIONS FOR EXPERT REPORT
The following sections set forth detailed instructions for each aspect of Dr. Ostrovsky's expert report. These instructions are intended to guide Dr. Ostrovsky's analysis while respecting her independent professional judgment. Dr. Ostrovsky is expected to reach her own conclusions based on her independent analysis of the facts and data; the instructions below identify the issues that counsel considers relevant and the questions that Dr. Ostrovsky's report should address.
A. Rebuttal of Prof. Langfeld's Damages Methodology — General Approach
As a threshold matter, Dr. Ostrovsky should independently evaluate the methodological soundness of Prof. Langfeld's damages model once it is received. In the interim, Dr. Ostrovsky should prepare her analysis based on the damages theories articulated in Kestrel's Statement of Claim and should anticipate the likely methodological approaches that Prof. Langfeld may employ.
In conducting this evaluation, Dr. Ostrovsky should consider the following general principles:
• Whether Prof. Langfeld's methodology is consistent with accepted principles of damages quantification under New York law, including the foundational requirement that damages be proven with "reasonable certainty" and not be based on speculation or conjecture. See, e.g., Kenford Co. v. County of Erie, 67 N.Y.2d 257 (1986); Ashland Mgmt. Inc. v. Janien, 82 N.Y.2d 395 (1993).
• Whether the "but-for" scenario constructed by Prof. Langfeld — i.e., the hypothetical world in which WAL did not terminate the MSA — appropriately accounts for the contractual framework, including the volume commitments (minimums and maximums), the pricing escalation formula, and, critically, the consequential damages waiver set forth in Section 8.7 of the MSA.
• Whether Prof. Langfeld's methodology appropriately distinguishes between direct damages, which may be recoverable under the MSA, and consequential or speculative damages, which are contractually barred or legally impermissible.
• Whether Prof. Langfeld's assumptions are supported by contemporaneous documentary evidence or are instead based on unsupported projections, optimistic estimates, or hypothetical scenarios.
Dr. Ostrovsky should present her critique in a manner that is clear, well-organized, and accessible to arbitrators who may not have specialized economic training but who are experienced in resolving complex commercial disputes.
B. Lost Profits — Remaining MSA Term (CY5): €12.83 Million
Kestrel claims €12.83 million in lost profits for the remainder of Contract Year 5 (the period from WAL's termination on October 3, 2022, through the scheduled expiration of the MSA on June 14, 2023). Based on the Statement of Claim, this figure appears to be derived from an assumed volume of 3,600 units at the CY5 unit price of €5,353.49 and a claimed profit margin of 22.4%, which would yield approximately €4.31 million for a full contract year, and which Kestrel has extrapolated to approximately €12.83 million. The basis for the extrapolation from €4.31 million to €12.83 million is not fully explained in the Statement of Claim and appears to involve either an annualization methodology or additional components that are not transparent; Dr. Ostrovsky should request clarification through counsel if the extrapolation is not explained in Prof. Langfeld's report.
Dr. Ostrovsky should critically evaluate the following aspects of this claim:
1. Volume Assumptions
Kestrel's lost-profit claim for CY5 appears to assume an annual volume of 3,600 units, which is the pre-Amendment No. 1 maximum volume under the MSA. Dr. Ostrovsky should review WAL's actual historical order volumes for Contract Years 1 through 4 to determine the most likely volume trajectory and whether the assumption of 3,600 units per year is supported by the actual purchasing history. In particular, Dr. Ostrovsky should determine:
(a) What were WAL's actual order volumes in each of CY1, CY2, CY3, and CY4?
(b) Was there a discernible trend (increasing, decreasing, or flat) in order volumes over the four-year period?
(c) Was the actual volume in any contract year equal to or near the maximum of 3,600 (or 4,000 post-Amendment No. 1), or was it closer to the minimum of 2,400 units?
(d) What assumptions regarding volume are most consistent with the historical data and market conditions at the time of termination?
2. Profit Margin Assumptions
Kestrel claims a profit margin of 22.4% on the turbine housing products supplied under the MSA. Dr. Ostrovsky should critically evaluate this claimed margin by:
(a) Requesting and reviewing supporting documentation from Kestrel's financial records, to the extent available through document production under Procedural Order No. 2 (dated March 17, 2023), to determine whether the claimed margin is supported by actual cost and revenue data specific to the WAL contract.
(b) Comparing the claimed margin of 22.4% to industry-standard margins for precision aerospace component manufacturers. Dr. Ostrovsky should draw upon publicly available data, industry reports (e.g., from the Aerospace Industries Association, Ashford Consulting Group, or Westvale Advisors aerospace practice publications), and her own expertise to assess whether a 22.4% margin is reasonable for this type of product.
(c) Cross-referencing the claimed margin against Kestrel's overall financial performance, including its FY2022 revenue of €312 million. If Kestrel's company-wide operating margin is significantly lower than 22.4%, Dr. Ostrovsky should address the discrepancy and evaluate whether the product-specific margin for the WAL turbine housings could plausibly exceed the company-wide figure.
(d) Determining whether the claimed margin is a gross margin, operating margin, or contribution margin, and assessing whether the appropriate measure of margin is being used for purposes of a lost-profit calculation under New York law.
3. Consequential Damages Waiver
Dr. Ostrovsky should address whether the lost-profit claim for CY5 is properly characterized as a claim for consequential damages that is barred by Section 8.7 of the MSA. While this is ultimately a legal question for the Tribunal, Dr. Ostrovsky should offer her economic perspective on whether lost profits in this context are appropriately categorized as direct or consequential damages and should address the economic implications of the contractual allocation of risk reflected in Section 8.7.
4. Duty to Mitigate
Dr. Ostrovsky should evaluate whether Kestrel had a duty to mitigate its lost profits by seeking alternative buyers for the turbine housing products or otherwise redeploying its manufacturing capacity following WAL's termination. In particular, Dr. Ostrovsky should consider:
(a) Whether Kestrel had existing relationships with other aerospace customers to whom it could have sold comparable Ti-6Al-4V ELI turbine housings.
(b) Whether the manufacturing capacity that had been dedicated to the WAL contract was fungible — i.e., whether it could be redeployed to produce components for other customers within a reasonable timeframe.
(c) Whether Kestrel made any efforts to mitigate its losses following the termination and, if so, the extent to which those efforts were successful.
(d) Whether any mitigation income should be offset against the claimed lost profits.
5. Extrapolation Methodology
Dr. Ostrovsky should evaluate whether the extrapolation from approximately €4.31 million to approximately €12.83 million is methodologically sound. In particular, Dr. Ostrovsky should examine how the remaining months of CY5 are calculated, whether the extrapolation accounts for the fact that only approximately eight months of CY5 remained at the time of termination (October 3, 2022, through June 14, 2023), and whether additional components have been included in the €12.83 million figure beyond the basic lost-profit calculation.
C. Lost Profits — Renewal-Period Option Years: €27.15 Million
Kestrel claims €27.15 million in lost profits for two optional one-year renewal periods that WAL had the sole discretion to exercise. This claim constitutes more than half of Kestrel's total damages and requires particularly rigorous scrutiny given the speculative nature of damages premised on the exercise of discretionary options.
Dr. Ostrovsky should analyze the following aspects of this claim:
1. Legal and Economic Significance of Discretionary Options
The renewal options under the MSA were exercisable solely at WAL's discretion. There was no obligation whatsoever on WAL to exercise either renewal option, and the MSA contained no provisions requiring WAL to provide any reason for declining to renew. Dr. Ostrovsky should address the economic significance of this contractual structure and explain why damages predicated on the assumption that discretionary options would have been exercised are inherently speculative and unreliable.
2. Absence of a Binding Commitment to Renew
At the time of termination, WAL had not exercised either renewal option, and the first renewal period would not have commenced until June 15, 2023 — more than eight months after the termination. Dr. Ostrovsky should evaluate whether Kestrel had any reasonable expectation of renewal based on the contractual language, the parties' course of dealing, or other objective evidence. In the absence of a binding commitment or a demonstrated course of conduct establishing that renewal was a near-certainty, the inclusion of renewal-period lost profits in the damages calculation raises serious concerns about speculative damages.
3. Assumptions Underlying the €27.15 Million Figure
Dr. Ostrovsky should deconstruct the €27.15 million figure and evaluate each underlying assumption, including:
(a) Volume assumptions: What volume has Kestrel assumed for the renewal years? If the maximum volume of 4,000 units has been assumed, is this supported by the historical order data?
(b) Pricing assumptions: Has Kestrel assumed continued application of the 2.5% annual compounded escalator during the renewal periods? Is this assumption consistent with the MSA's pricing terms for renewal periods, or would renewal pricing have been subject to renegotiation?
(c) Margin assumptions: Has the same 22.4% profit margin been assumed? If so, the concerns identified in Section IV.B.2 above apply equally here.
(d) Duration: Has Kestrel assumed a 100% probability of both renewal options being exercised? If so, what justification exists for this assumption?
4. Industry Practice Regarding Renewal Rates
Dr. Ostrovsky should draw upon her knowledge of industry practice and publicly available data to assess the renewal rates for aerospace supply contracts of this type. Specifically, Dr. Ostrovsky should address whether a 100% renewal probability (which appears to be the assumption underlying Prof. Langfeld's quantification) is reasonable in light of typical renewal rates in the precision aerospace components industry. Relevant considerations include customer diversification strategies, competitive bidding practices, technological obsolescence, and the availability of alternative suppliers.
5. Alternative Quantification
Counsel's view is that renewal-period lost profits are not compensable as a matter of law under the MSA and governing New York law principles, given the purely discretionary nature of the renewal options. However, in the event the Tribunal disagrees with Respondent's legal position, Dr. Ostrovsky should independently quantify the economic unreasonableness of the €27.15 million claim in the alternative. This alternative analysis should demonstrate, at minimum, that any renewal-period damages must be significantly reduced to account for the probability (or improbability) of renewal, realistic volume projections, supportable margin assumptions, and appropriate discounting to present value.
D. Unreimbursed Rework Costs: €3.42 Million
Kestrel claims €3.42 million for costs incurred in attempting to cure the 14 rejected lots. This head of damages is distinct from the lost-profit claims and requires a different analytical approach focused on cost accounting and allocation.
Dr. Ostrovsky should evaluate the following:
1. Documentation and Support
Whether the claimed rework costs of €3.42 million are properly documented and supported by Kestrel's accounting records. Dr. Ostrovsky should request (through counsel) detailed cost breakdowns, including labor costs, material costs, equipment usage, subcontractor fees, and overhead allocations attributable to the rework activities. The analysis should assess whether the claimed costs are supported by contemporaneous cost records (e.g., work orders, time sheets, purchase orders, invoices) or are instead based on estimates or allocations that may be unreliable.
2. Allocation to Rejected Lots
Whether the rework costs are appropriately allocated to the 14 rejected lots versus other production activities. In a manufacturing environment, shared resources are often allocated across multiple production activities, and there is a risk that the claimed rework costs include allocations of overhead or other costs that are not properly attributable to the rework of the rejected WAL lots. Dr. Ostrovsky should assess whether the allocation methodology used by Kestrel is reasonable and consistent with generally accepted cost accounting principles.
3. Cured vs. Uncured Lots
A critical distinction must be drawn between the rework costs associated with the 7 lots that were ultimately cured and accepted by WAL and the 7 lots that remained uncured. Rework costs associated with successfully cured lots resulted in products that were accepted and paid for by WAL — Kestrel presumably received payment for those cured units. Dr. Ostrovsky should determine whether the €3.42 million figure includes rework costs for the cured lots, and if so, whether such costs should be excluded from the damages calculation because Kestrel received the benefit of its bargain on those lots.
4. Direct vs. Consequential Damages
Dr. Ostrovsky should evaluate whether the claimed rework costs constitute direct damages or consequential damages under the MSA's framework. Section 8.7's exclusive remedy provision limits WAL's liability for quality failures to replacement, credit, or termination; rework costs voluntarily incurred by Kestrel in attempting to cure rejected lots may not fit within the MSA's remedial framework. Dr. Ostrovsky should offer her economic perspective on this characterization.
5. Coordination with Forensic Accountant
In analyzing the rework costs, Dr. Ostrovsky should coordinate with Sandra Gillespie, CPA/ABV, of Canfield & Thorpe LLP, located at 1345 Avenue of the Americas, New York, New York 10105. Ms. Gillespie is conducting an independent forensic accounting analysis of Kestrel's claimed rework costs and margin calculations. Dr. Ostrovsky and Ms. Gillespie may share factual data and accounting findings, but all inter-expert communications should be routed through Calderwood & Harkness to preserve applicable privileges.
E. Reputational Damages / Lost Business Opportunities: €3.90 Million
Kestrel claims €3.90 million in reputational harm and lost business opportunities allegedly resulting from WAL's termination of the MSA. This category of damages is, in counsel's view, the most vulnerable to challenge on both legal and economic grounds.
Dr. Ostrovsky should analyze the following:
1. Evidentiary Support
Whether Kestrel has provided any objective, verifiable evidence of specific lost business opportunities that are causally linked to WAL's termination. In particular, Dr. Ostrovsky should determine whether Kestrel has identified specific potential contracts, customers, or business opportunities that were lost as a direct and proximate result of WAL's termination, as opposed to other factors (e.g., market conditions, competition, Kestrel's own business decisions, or unrelated quality issues with other customers).
2. Quantification Methodology
Whether any rigorous quantification methodology exists that connects WAL's termination to measurable reputational harm. Reputational damages in commercial disputes are notoriously difficult to quantify with the reasonable certainty required under New York law. Dr. Ostrovsky should evaluate whether Kestrel or Prof. Langfeld has employed a recognized methodology for quantifying reputational damages (e.g., event study analysis, market-share regression, or survey-based valuation) or whether the €3.90 million figure is based on unsupported assumptions or subjective estimates.
3. Speculative Nature
The inherently speculative nature of reputational damages claims in the context of a bilateral supply contract termination. Dr. Ostrovsky should address whether, as an economic matter, the termination of a single supply contract by one customer would be expected to have a material adverse impact on the reputation and future business prospects of a company with annual revenues of €312 million derived from multiple customers across multiple jurisdictions.
4. Consequential Damages Waiver
Whether reputational damages and lost business opportunities are consequential in nature and therefore barred by Section 8.7 of the MSA. From an economic standpoint, reputational harm and the loss of future business opportunities with third-party customers are quintessential consequential damages — they are indirect consequences of the termination, not direct damages flowing from any specific breach. Dr. Ostrovsky should address this characterization in her report.
5. Alternative Causes of Revenue Fluctuation
Whether Kestrel's other customer relationships and revenue streams — totaling approximately €312 million in annual revenue from a diversified customer base — were actually adversely affected by the WAL termination. If Kestrel's revenues from other customers remained stable or increased following the termination, this would undermine the claim that WAL's termination caused measurable reputational harm.
F. WAL's Counterclaim — Quantification: €5.17 Million
In addition to rebutting Claimant's damages claims, Dr. Ostrovsky is instructed to independently verify and support the quantification of WAL's counterclaim for replacement-component costs in the amount of approximately €5.17 million.
1. Factual Basis for the Counterclaim
Following Kestrel's Persistent Quality Failure and WAL's termination of the MSA, WAL was required to source replacement Ti-6Al-4V ELI titanium alloy turbine housings to maintain its production schedules for downstream aerospace programs. WAL engaged an alternative supplier, Valkyr Precision Components Inc., located at 4401 East Irvington Road, Tucson, Arizona 85714, to manufacture and deliver 1,680 replacement units to cover the shortfall resulting from the 14 rejected lots.
2. Calculation of the Replacement Cost Premium
The counterclaim is calculated as the difference between the unit price charged by Valkyr and the unit price that would have been paid to Kestrel under the MSA, applied to the 1,680 replacement units. The calculation is as follows:
(a) Valkyr unit price: €8,432.92
(b) Kestrel CY4 unit price (applicable at the time of the rejected lots): €5,222.92
(c) Per-unit replacement cost premium: €8,432.92 − €5,222.92 = €3,210.00
(d) Gross replacement cost premium (1,680 units × €3,210.00): €5,392,800.00
(e) Less: Valkyr's introductory discount of 4.2%, applied to the premium: €5,392,800.00 × (1 − 0.042) = €5,392,800.00 × 0.958 = €5,166,542.40
(f) The pleading figure of €5.17 million reflects the operative claim amount after rounding; Dr. Ostrovsky should note the slight computational difference between the arithmetic result of €5,166,542.40 and the rounded pleading figure and should use the precise calculation in her report while noting that the pleading figure of €5.17 million is the operative claim amount.
3. Supporting Documentation
Dr. Ostrovsky should review and present supporting documentation for the counterclaim calculation, including:
(a) The supply contract between WAL and Valkyr, including the pricing terms, volume commitments, and the introductory discount provision.
(b) Invoices from Valkyr for the 1,680 replacement units, confirming the unit price of €8,432.92 and the 4.2% discount.
(c) Documentation of WAL's procurement process in selecting Valkyr as the replacement supplier, including any competitive bidding or market analysis conducted by WAL.
(d) Evidence of the urgency of WAL's procurement need, including the production schedules and downstream program requirements that necessitated timely replacement sourcing.
4. Reasonableness of WAL's Sourcing Decision
Dr. Ostrovsky should address the reasonableness of WAL's decision to source replacement units from Valkyr, including the Valkyr unit price of €8,432.92 in relation to prevailing market prices for comparable Ti-6Al-4V ELI titanium alloy turbine housings meeting WAL's proprietary specifications. Dr. Ostrovsky should assess:
(a) The available market for Ti-6Al-4V ELI titanium alloy turbine housings meeting the exacting requirements of WAL-SPEC-TH-401 through WAL-SPEC-TH-410, including AS9100 Rev D certification.
(b) The number of qualified alternative suppliers capable of producing these components within WAL's required timelines.
(c) Whether the Valkyr unit price, while higher than the Kestrel contract price, is within a reasonable range for emergency or expedited procurement of specialized aerospace components.
(d) Whether WAL acted reasonably in the timeline and manner of its engagement of Valkyr.
5. Anticipated Mitigation Arguments
Kestrel may argue that WAL failed to mitigate its replacement-component costs by not seeking competitive bids from other suppliers sooner or by not pursuing less expensive sourcing alternatives. Dr. Ostrovsky should proactively address these anticipated arguments by:
(a) Assessing the timeline of WAL's procurement efforts following the accumulation of rejected lots and the termination of the MSA, and evaluating whether that timeline was reasonable given the urgency of WAL's production needs.
(b) Evaluating whether alternative suppliers were available who could have provided equivalent products at a lower price and within the required delivery schedule.
(c) Assessing the limited number of qualified suppliers for highly specialized titanium alloy turbine housings and the lead times typically required for qualification and production ramp-up with a new supplier.
(d) Addressing any evidence that WAL explored other sourcing options before or concurrently with engaging Valkyr.
V. MATERIALS TO BE PROVIDED
The following documents and data will be sent to Dr. Ostrovsky under separate cover. Dr. Ostrovsky should review all materials carefully and identify any additional documents or data needed for her analysis promptly upon receipt. Requests for additional materials should be directed to the undersigned.
1. The Master Supply Agreement dated June 15, 2018, bearing reference number WAL-KDG-MSA-2018-0615, including all schedules, appendices, and exhibits, together with Amendment No. 1 (dated February 10, 2020) and Amendment No. 2 (dated September 3, 2021).
2. Kestrel's Statement of Claim, filed April 28, 2023, together with all exhibits referenced therein.
3. WAL's purchase order history for Contract Years 1 through 4, including order dates, lot numbers, quantities, unit prices, and aggregate volumes for each contract year. This data is essential for evaluating the volume assumptions underlying Kestrel's lost-profit claims.
4. WAL's lot rejection records for the 14 rejected lots (Lot KDG-2022-0307 through Lot KDG-2022-0919), including rejection notices, inspection reports, and porosity test results.
5. Correspondence between WAL and Kestrel regarding cure notices and cure failures, including all written notices issued pursuant to Section 8.4 of the MSA and Kestrel's responses thereto.
6. WAL's Notice of Termination for Cause dated October 3, 2022, and any correspondence relating to the termination.
7. The supply contract between WAL and Valkyr Precision Components Inc., including pricing terms, volume commitments, introductory discount provisions, and delivery schedules, together with all invoices issued by Valkyr for the 1,680 replacement units.