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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

To: Simone Laroche, Senior Associate; Theodore Langston, Partner

From: Jeffrey Park, Associate

Date: January 2023

Re: Enforceability of Contractual Limitation of Liability and Consequential Damages Waiver Under New York Law — Master Supply Agreement Between Whitmore Aerospace LLC and Kestrel Dynamics GmbH (ICC Case No. 27914/MHM)

Engagement No.: 1019-00001

Client: Whitmore Aerospace LLC

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I. Executive Summary

This memorandum analyzes the enforceability under New York law of the consequential damages waiver contained in Section 8.7 of the Master Supply Agreement dated June 15, 2018 (the "MSA") between our client, Whitmore Aerospace LLC ("WAL"), and Kestrel Dynamics GmbH ("Kestrel"). The MSA is governed by the laws of the State of New York, without regard to conflict-of-laws principles, pursuant to Section 22.1 of the MSA.

On November 7, 2022, Kestrel filed a Request for Arbitration before the International Chamber of Commerce (ICC Case No. 27914/MHM), alleging breach of the MSA and claiming approximately €47.3 million in damages. The damages sought by Kestrel are comprised of the following four categories:

(a) Lost profits for the remaining MSA term (Contract Year 5), quantified by Kestrel at approximately €12.83 million;

(b) Lost profits for two discretionary one-year renewal periods that were exercisable solely at WAL's option, quantified by Kestrel at approximately €27.15 million;

(c) Unreimbursed rework costs incurred by Kestrel in connection with its cure obligations under Section 8.4 of the MSA, quantified at approximately €3.42 million; and

(d) Reputational damages and alleged lost business opportunities arising from WAL's termination of the MSA, quantified at approximately €3.90 million.

Based on the analysis set forth below, our conclusion is as follows: Under well-established New York law, Section 8.7 of the MSA is enforceable as between sophisticated commercial parties and bars Kestrel's claims for lost profits, reputational damages, and lost business opportunities — all of which are consequential in nature. The consequential damages waiver in Section 8.7 is mutual, was negotiated at arm's length between parties of comparable bargaining power and sophistication, and is precisely the type of contractual risk allocation that New York courts have consistently upheld. The rework cost claim, to the extent it may be characterized as direct damages for non-performance, presents a slightly different analytical question, but is also barred under Section 8.7's exclusive remedy framework, which limits Kestrel's available remedies to replacement, credit, or termination. Even under the most conservative reading, Section 8.7 eliminates approximately €43.88 million of Kestrel's €47.3 million claim, and we believe the better reading bars the entirety of the claim.

This memorandum addresses the enforceability of Section 8.7 as a matter of New York law. Separate memoranda address (i) the characterization of WAL's termination as rightful under the MSA (dated December 2022), (ii) the independent insufficiency of Kestrel's reputational damages claim (forthcoming, February 2023), and (iii) the option-versus-obligation issue relating to the renewal-period lost profits claim (forthcoming, March 2023).

II. Relevant Contractual Provisions

The MSA is a detailed, 78-page commercial supply agreement that governs WAL's procurement of precision-machined titanium and nickel-alloy components from Kestrel for use in WAL's turbine-engine and structural-airframe product lines. The MSA was executed on June 15, 2018, following approximately four months of negotiation between the parties' respective commercial and legal teams. It has been amended twice: Amendment No. 1, dated February 10, 2020, which adjusted pricing for Contract Year 3 and modified certain delivery schedules; and Amendment No. 2, dated September 3, 2021, which, among other things, extended the cure period under Section 8.4 from 30 to 45 calendar days and revised the force majeure provisions in light of supply-chain disruptions.

The provisions most directly relevant to the enforceability analysis are set forth below.

A. Section 8.7 — Exclusive Remedy for Quality Failures

Section 8.7 of the MSA, entitled "Exclusive Remedy for Quality Failures; Limitation of Liability," provides in relevant part as follows:

"NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL, OR PUNITIVE DAMAGES ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE PERFORMANCE OR NON-PERFORMANCE OF OBLIGATIONS HEREUNDER, INCLUDING, WITHOUT LIMITATION, LOST PROFITS, LOST REVENUE, LOSS OF USE, LOSS OF DATA, BUSINESS INTERRUPTION, REPUTATIONAL HARM, OR COST OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, OR OTHERWISE, AND REGARDLESS OF WHETHER SUCH DAMAGES WERE FORESEEABLE OR WHETHER EITHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

Buyer's sole and exclusive remedy for any non-conformance, defect, or quality failure in any Product delivered under this Agreement shall be, at Buyer's election: (i) replacement of the non-conforming Product at Seller's expense pursuant to Section 8.4; (ii) a credit against future purchase orders in an amount equal to the price paid for the non-conforming Product; or (iii) upon a Persistent Quality Failure (as defined in Section 8.4), termination of this Agreement pursuant to Section 14.2(b), subject to the terms and conditions thereof."

Several features of Section 8.7 merit emphasis. First, the consequential damages waiver is mutual — it applies to "neither party" and restricts the liability of both WAL and Kestrel. This mutuality is significant because it demonstrates that the provision reflects a balanced, negotiated allocation of risk rather than an adhesive term imposed by one party on the other. New York courts have consistently recognized that mutual liability limitations are strong evidence of arm's-length bargaining and weigh heavily in favor of enforceability. See, e.g., Metropolitan Life Ins. Co. v. Noble Lowndes Int'l, Inc., 84 N.Y.2d 430, 437 (1994).

Second, Section 8.7 does not deprive the aggrieved party of all remedies. Rather, it establishes an exclusive remedy framework — replacement, credit, or termination — that provides meaningful avenues of redress while limiting exposure to open-ended consequential damages claims. This tiered remedial structure is precisely the type of commercially reasonable limitation that the Uniform Commercial Code contemplates and permits.

Third, the consequential damages waiver contains a comprehensive enumeration of excluded damage types, including "lost profits, lost revenue, loss of use, loss of data, business interruption, reputational harm, [and] cost of procurement of substitute goods or services." This specificity further evidences that the parties understood the scope of the waiver and deliberately agreed to it.

B. Section 8.4 — Rejection / Cure Provision

Section 8.4 of the MSA, entitled "Rejection and Cure," establishes the procedural framework for WAL's rejection of non-conforming products and Kestrel's corresponding cure obligations. Under Section 8.4, if WAL rejects a lot for non-conformance with the applicable product specifications set forth in Appendix C to the MSA, WAL must provide Kestrel with a written notice of rejection that identifies the specific non-conformance and the supporting test data. Upon receipt of such notice, Kestrel has a cure period — originally 30 calendar days under the MSA as executed, subsequently extended to 45 calendar days by Amendment No. 2, dated September 3, 2021 — to replace or rework the rejected lot at Kestrel's sole expense.

Section 8.4 further provides that three or more uncured rejections in any rolling 12-month period constitute a "Persistent Quality Failure." The concept of Persistent Quality Failure is central to the remedial architecture of the MSA because it triggers WAL's right to terminate the MSA for cause under Section 14.2(b). The threshold was set at three uncured rejections following negotiation; Kestrel's initial draft proposed five, and WAL's initial position was two.

As set forth in WAL's Notice of Termination for Cause dated October 3, 2022, WAL documented seven uncured rejections during the period from March through September 2022, significantly exceeding the three-rejection threshold for Persistent Quality Failure. Each rejection was supported by independent metallurgical testing performed by Arclight Materials Science Inc. under the supervision of Dr. Raymond Chow, as discussed in greater detail in Part IV.E below.

C. Section 14.2 — Termination for Cause

Section 14.2 of the MSA, entitled "Termination for Cause," permits either party to terminate the MSA in two circumstances:

(a) Upon a material breach of the MSA that remains uncured for 60 days following written notice thereof to the breaching party; or

(b) Upon a Persistent Quality Failure, as defined in Section 8.4.

WAL issued its Notice of Termination for Cause on October 3, 2022, invoking Section 14.2(b) on the basis of seven uncured rejections during the March–September 2022 period. Kestrel did not contest the factual basis for the rejections prior to the termination but subsequently alleged in its Request for Arbitration that certain rejections were "wrongful" and based on "fabricated or exaggerated quality deficiencies." This allegation is addressed in Part IV.E below and in the separate memorandum on the rightfulness of WAL's termination (dated December 2022).

D. Section 22.1 — Governing Law

Section 22.1 of the MSA provides:

"This Agreement shall be governed by and construed in accordance with the laws of the State of New York, United States of America, without regard to its conflict-of-laws principles. The United Nations Convention on Contracts for the International Sale of Goods (CISG) shall not apply to this Agreement."

The express exclusion of the CISG is significant because it ensures that the enforceability of Section 8.7 is analyzed exclusively under the New York Uniform Commercial Code and New York common law, rather than under the CISG's more restrictive framework governing contractual limitations of damages. The exclusion of conflict-of-laws principles prevents any argument that German law (as the law of Kestrel's domicile) or Swiss law (as the law of the seat of arbitration, though the arbitration is seated in New York pursuant to Section 22.3) should govern the enforceability analysis.

III. Classification of Kestrel's Claimed Damages as Consequential

A. Framework: Direct vs. Consequential Damages Under New York Law

The distinction between direct and consequential damages is fundamental to the enforceability analysis because Section 8.7 waives consequential damages while preserving (subject to the exclusive remedy framework) the availability of direct damages. Accordingly, the threshold question is whether each category of Kestrel's claimed damages is properly characterized as direct or consequential under New York law.

Under New York law, direct damages (sometimes referred to as "general damages") are those that flow naturally and necessarily from a breach of contract — they represent the value of the performance itself, or the cost of obtaining equivalent performance, and are the natural and probable consequence of the breach. Direct damages are recoverable as a matter of course without any special showing of foreseeability or particular circumstances. In a sale-of-goods context, direct damages typically include the difference between the contract price and the market price (or the cost of cover), as well as incidental damages such as inspection and transportation costs. See N.Y. U.C.C. § 2-714 (buyer's damages for breach in regard to accepted goods); § 2-712 (buyer's damages for cover); § 2-713 (buyer's damages for non-delivery or repudiation).

Consequential damages (sometimes referred to as "special damages"), by contrast, are losses that do not flow directly and immediately from the breach but rather arise from the special circumstances or particular situation of the non-breaching party. They include losses that the breaching party had reason to know about at the time of contracting but that are not the inevitable result of every breach of the type at issue. The classic examples of consequential damages are lost profits on downstream transactions, lost business opportunities, and reputational harm. New York's codification of the Hadley v. Baxendale framework is found in N.Y. U.C.C. § 2-715(2), which defines consequential damages to include:

"(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and (b) injury to person or property proximately resulting from any breach of warranty."

The distinction between direct and consequential damages is well established in New York jurisprudence. In Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 22 N.Y.3d 799, 806 (2014), the Court of Appeals reaffirmed that lost profits are generally classified as consequential damages in a commercial context. Similarly, in Kenford Co. v. County of Erie, 73 N.Y.2d 312, 319 (1989), the Court of Appeals emphasized that lost profits represent special, not general, damages and are recoverable only when shown with reasonable certainty and when they were within the contemplation of the parties at the time of contracting.

Although the MSA is a contract for the sale of goods and certain provisions of the UCC are therefore applicable, Section 8.7 constitutes a permitted contractual allocation of remedies under N.Y. U.C.C. § 2-719, which expressly authorizes parties to modify or limit the remedies available under the Code, subject to the limitations of unconscionability and failure of essential purpose discussed in Part IV below.

With this framework in mind, we turn to the classification of each category of Kestrel's claimed damages.

B. Lost Profits — Remaining Term (€12.83 million)

Kestrel claims €12.83 million in lost profits for the remaining MSA term — specifically, the projected margin that Kestrel expected to earn during Contract Year 5 (June 15, 2023 through June 14, 2024) had the MSA not been terminated. Kestrel's damages expert, Prof. Dieter Langfeld of Rheinsberg Advisory AG, calculates this figure on the basis of a 22.4% gross margin applied to projected revenue for the remaining term, using historical order volumes from Contract Years 1 through 4 as the baseline.

Lost profits are the paradigmatic form of consequential damages under New York law. See Bi-Economy Market, Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187, 192 (2008) (noting that "consequential damages, of which lost profits are an example, are the natural and probable consequence of the defendant's breach"). Kestrel's claim for lost profits during the remaining MSA term represents the margin Kestrel expected to earn had the MSA continued — that is, the profits from future performance that was never rendered. This is not the value of goods already delivered or payment for accepted products. It is a forward-looking loss that depends entirely on Kestrel's particular cost structure, its projected margin (which Kestrel claims was 22.4%), the assumed continuation of historical order volumes, and the absence of any intervening events that might have disrupted performance. These are precisely the kinds of "special circumstances" and "particular requirements and needs" that distinguish consequential from direct damages.

Under New York law, the characterization of lost profits as consequential damages is settled and well-established. The Court of Appeals has repeatedly held that expected profits from a contract are consequential damages, not direct damages, because they depend on the claimant's particular business circumstances and are not the natural and inevitable result of every breach. See Kenford Co., 73 N.Y.2d at 319; see also Schonfeld v. Hilliard, 218 F.3d 164, 175-76 (2d Cir. 2000) (applying New York law and classifying lost profits as consequential damages).

Accordingly, Kestrel's lost-profits claim for the remaining MSA term is consequential in nature and falls squarely within the scope of the Section 8.7 waiver.

C. Lost Profits — Renewal Periods (€27.15 million)

Kestrel further claims €27.15 million in lost profits for two optional one-year renewal periods (Contract Year 6, June 15, 2024 through June 14, 2025, and Contract Year 7, June 15, 2025 through June 14, 2026). These renewal options were contained in Section 3.2 of the MSA and were exercisable solely at WAL's discretion; WAL had no contractual obligation to renew, and the renewal was conditioned on WAL's delivery of written notice of election at least 90 days prior to the expiration of the then-current term.

Even setting aside the option-versus-obligation issue — which is the subject of a separate memorandum addressing the independent ground that Kestrel has no entitlement to damages for discretionary renewal periods that WAL was not obligated to exercise — the renewal-period lost profits claim is consequential in nature under any analysis. The claimed damages are forward-looking, dependent on hypothetical future performance, contingent on WAL's exercise of a discretionary option, and calculated on the basis of assumed order volumes and margins that are inherently speculative. If lost profits for the remaining contractual term are consequential (as they plainly are), then lost profits for discretionary renewal periods are a fortiori consequential — and more attenuated and speculative besides.

This category of damages is clearly barred by Section 8.7 as consequential damages. Indeed, even absent the Section 8.7 waiver, Kestrel would face substantial obstacles in recovering lost profits for renewal periods under general New York law principles, given the speculative nature of the claim and the absence of any contractual obligation on WAL's part to renew. See Ashland Mgmt. Inc. v. Janien, 82 N.Y.2d 395, 403 (1993) (lost profits must be established with reasonable certainty; speculative or contingent profits are not recoverable).

D. Reputational Damages / Lost Business Opportunities (€3.90 million)

Kestrel claims €3.90 million in reputational damages and purported loss of other business opportunities allegedly caused by WAL's termination of the MSA. According to Kestrel's Request for Arbitration, WAL's termination and the associated quality-failure allegations have "irreparably harmed Kestrel's standing among aerospace and defense original equipment manufacturers," causing the loss of two unnamed potential customer relationships and a reduction in inquiries for new work.

Under New York law, reputational damages and lost business opportunities are classic forms of consequential or special damages. They arise not from the breach itself but from the impact of the breach on the claimant's relationships with third parties and on its standing in the marketplace — circumstances that are particular to the claimant and that do not flow directly and inevitably from every contractual breach. See Gruber v. Owens-Illinois, Inc., 899 F.2d 1366, 1373 (2d Cir. 1990) (holding that lost business opportunities are consequential damages under New York law); see also Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 110 (2d Cir. 2007) (noting that consequential damages include "all other damages, such as injury to persons or property, resulting from the breach").

Kestrel's reputational damages claim is remote, speculative, and falls squarely within the scope of the Section 8.7 waiver. The claimed losses depend on the actions and decisions of unidentified third parties, on market conditions in the aerospace supply chain, and on a causal chain that runs from WAL's termination through the market's perception of that termination to the loss of specific business opportunities. These are precisely the kinds of downstream, ripple-effect damages that consequential damages waivers are designed to preclude.

A separate memorandum, to be completed in February 2023, addresses the independent insufficiency of Kestrel's reputational damages claim even absent the Section 8.7 waiver, including the failure to identify the specific opportunities allegedly lost, the absence of any mitigation efforts, and the speculative methodology employed by Kestrel's damages expert.

E. Unreimbursed Rework Costs (€3.42 million)

Kestrel claims €3.42 million for costs incurred in attempting to rework or replace rejected lots during the cure periods triggered by WAL's rejection notices. According to Kestrel, these costs include labor, materials, equipment time, and subcontractor charges associated with rework and replacement efforts that ultimately proved unsuccessful in some cases.

This category of damages presents a more nuanced analytical question than the lost-profits and reputational-damages categories. Rework costs could arguably be characterized as direct damages — they represent the cost of performing the contractual obligation to cure defective products, and they were incurred in the course of actual performance rather than in connection with future, hypothetical transactions. Unlike lost profits or reputational harm, rework costs are backward-looking and based on expenditures actually made.

However, even if rework costs are treated as direct damages rather than consequential damages, Section 8.7's exclusive remedy clause limits Kestrel's available remedies to three specified alternatives: replacement, credit, or termination. The exclusive remedy framework does not include monetary reimbursement for the cost of Kestrel's own cure efforts. Kestrel's rework costs were incurred in discharging Kestrel's own contractual obligation — the obligation to cure non-conforming products at Kestrel's sole expense under Section 8.4. Seeking reimbursement from WAL for the costs of performing that obligation inverts the contractual risk allocation and is inconsistent with the parties' bargained-for allocation of responsibilities.

Moreover, to the extent the rework costs represent expenditures on unsuccessful cure attempts — that is, attempts that did not result in conforming products — they are even more clearly barred. Section 8.7's exclusive remedy framework provides for replacement (i.e., successful cure) or credit; it does not compensate a party for failed efforts at cure.

Additionally, there is a strong argument that rework costs are themselves consequential in nature. Kestrel incurred these costs as a result of its own failure to deliver conforming products in the first instance. The rework expenditures are a consequence of Kestrel's initial non-performance, not a direct loss caused by any breach by WAL. Under this analysis, the rework costs fall within the consequential damages waiver as well.

Regardless of the characterization, we believe Kestrel's rework cost claim is barred under the MSA, though we note that this category presents the greatest risk of an adverse characterization by the Tribunal and warrants careful attention in our briefing and expert submissions.

IV. Enforceability of Consequential Damages Waivers Under New York Law

A. General Principle: Freedom of Contract Between Sophisticated Parties

New York law strongly favors the enforcement of contractual provisions freely negotiated between sophisticated commercial parties. The New York Court of Appeals has repeatedly emphasized that "a court may not by construction add or excise terms, nor distort the meaning of those used, and thereby make a new contract for the parties under the guise of interpreting the writing." Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004). This principle applies with particular force to limitations of liability and consequential damages waivers negotiated between commercial entities with access to competent legal counsel.

Both parties to the MSA are sophisticated commercial enterprises. WAL is a privately held aerospace and defense manufacturer headquartered in Stamford, Connecticut, with approximately $1.87 billion in annual revenue and approximately 6,400 employees across 12 manufacturing facilities in the United States and Europe. Kestrel is a German precision-components supplier headquartered in Stuttgart, Germany, with approximately €312 million in annual revenue and approximately 1,800 employees, serving major aerospace and automotive original equipment manufacturers worldwide. Both parties were represented by experienced legal counsel at the time of MSA execution — WAL by Drummond & Fenwick LLP (the undersigned firm) and Kestrel by Castellane & Voss LLP in Düsseldorf.

The MSA itself is a heavily negotiated, arm's-length commercial agreement. The negotiation process extended from approximately February 2018 through June 2018 and involved multiple rounds of markup and in-person negotiating sessions. The agreement contains detailed quality-control provisions (Article 8), comprehensive representations and warranties (Article 9), extensive intellectual property and confidentiality provisions (Articles 10 and 11), and a sophisticated dispute-resolution framework including ICC arbitration (Article 22). The fact that the MSA was subsequently amended twice — first in February 2020 and again in September 2021 — further demonstrates that the parties continued to negotiate and adjust the agreement's terms over the life of the relationship. Notably, Amendment No. 2 modified the cure period in Section 8.4 (from 30 to 45 days) but left Section 8.7's consequential damages waiver and exclusive remedy framework entirely unchanged, suggesting that both parties were satisfied with the risk allocation embodied in Section 8.7.

Under New York law, courts give effect to clear contractual language limiting remedies and excluding consequential damages, absent fraud, unconscionability, or gross negligence. See Metropolitan Life Ins. Co., 84 N.Y.2d at 436-37 ("When the provision limiting liability is contained in a commercial contract negotiated at arm's length between sophisticated business entities, courts will generally enforce the clause"); Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 377, 384-85 (1983) (enforcing a limitation of liability clause in a construction contract and noting that "a party who contracts with another for the performance of a function is free to insulate himself, by contract, from liability for the negligence of his contractor").

B. UCC § 2-719: Modification or Limitation of Remedies

Because the MSA is a contract for the sale of goods, the New York Uniform Commercial Code applies, including Article 2's provisions governing the modification and limitation of remedies. N.Y. U.C.C. § 2-719 is the principal statutory provision governing the enforceability of contractual limitations of remedies in sale-of-goods transactions.

Section 2-719(1)(a) provides that the agreement may "provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts." This provision expressly authorizes precisely the type of exclusive remedy framework contained in Section 8.7 of the MSA, which limits WAL's remedy to replacement, credit, or termination.

Section 2-719(3) is even more directly on point. It provides: "Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not." (Emphasis added.) The negative implication of the second sentence is critical: in a commercial transaction (as opposed to a consumer-goods transaction involving personal injury), a limitation or exclusion of consequential damages is not prima facie unconscionable. Rather, it is presumptively valid, and the party challenging the limitation bears the burden of demonstrating unconscionability.

Section 8.7 of the MSA is a textbook example of a permissible contractual exclusion of consequential damages under UCC § 2-719(3). It excludes consequential damages in a commercial transaction between sophisticated parties, and there is no allegation of personal injury. The statutory presumption of validity therefore applies.

New York courts have consistently enforced consequential damages exclusions in commercial contracts under Section 2-719(3). See, e.g., Cayuga Harvester, Inc. v. Allis-Chalmers Corp., 95 A.D.2d 5, 10-11 (4th Dep't 1983) (enforcing consequential damages exclusion between commercial parties and finding no unconscionability); Roneker v. Pemberton Holdings Truck Co., 944 F. Supp. 179, 182-83 (W.D.N.Y. 1996) (enforcing consequential damages exclusion in commercial transaction and noting that "between merchants, an exclusion of consequential damages is valid unless the party opposing the exclusion proves it unconscionable").

C. Unconscionability Defense

Kestrel may attempt to argue that Section 8.7 is unconscionable and therefore unenforceable under UCC § 2-719(3). Under New York law, unconscionability requires a showing of both procedural unconscionability (the absence of meaningful choice on the part of one of the parties) and substantive unconscionability (contract terms that are unreasonably favorable to the other party). See Gillman v. Chase Manhattan Bank, N.A., 73 N.Y.2d 1, 10 (1988). The challenging party bears the burden of establishing both elements.

Procedural unconscionability is not present here. Procedural unconscionability focuses on the circumstances surrounding the formation of the contract — whether one party lacked a meaningful opportunity to understand the terms, whether there was a significant disparity in bargaining power, whether the agreement was a contract of adhesion, and whether the challenged provisions were hidden or obscured. None of these factors is present in this case.

• Both WAL and Kestrel are sophisticated commercial entities of comparable size and bargaining power.

• The MSA was negotiated over a period of approximately four months, with multiple rounds of drafting and in-person negotiation sessions.

• Kestrel was represented throughout the negotiation by experienced legal counsel at Castellane & Voss LLP, one of Germany's leading commercial law firms.

• Kestrel was free to reject the consequential damages waiver or to propose modifications; indeed, Kestrel did negotiate amendments to other terms of the MSA, including pricing, delivery schedules, and — in Amendment No. 2 — the cure period. The fact that Kestrel successfully negotiated changes to other provisions but left Section 8.7 intact strongly suggests that Kestrel made a deliberate choice to accept the waiver.

• Section 8.7 is not hidden or buried in the MSA; it is a prominently placed provision in Article 8 (Quality Assurance), set forth in uppercase boldface type, and it is cross-referenced in multiple other provisions of the MSA.

Substantive unconscionability is likewise absent. The consequential damages waiver in Section 8.7 is mutual — it applies equally to both parties, restricting both WAL's and Kestrel's ability to claim consequential damages from the other. This mutuality reflects a balanced risk allocation and defeats any argument that the provision is unreasonably one-sided. Furthermore, consequential damages waivers are standard in aerospace supply agreements and in commercial contracts generally. The MSA preserves Kestrel's right to replacement, credit, and ultimately termination in the event of Persistent Quality Failure — it does not deprive Kestrel of all remedies. An exclusion of consequential damages is not unconscionable merely because it limits the quantum of potentially recoverable damages; it is unconscionable only if it is so one-sided as to be oppressive, which Section 8.7 plainly is not.

Conclusion: An unconscionability challenge to Section 8.7 would almost certainly fail. The parties are sophisticated, the provision is mutual, the contract was negotiated at arm's length, and the exclusion preserves meaningful alternative remedies. This is precisely the type of commercially reasonable risk allocation that New York law protects.

D. Failure of Essential Purpose

N.Y. U.C.C. § 2-719(2) provides that "[w]here circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act." This provision operates as a safety valve, ensuring that parties are not left without any remedy at all when the contractual remedy proves illusory. However, the doctrine is narrow in scope and has been applied sparingly by New York courts.

Kestrel may argue that the exclusive remedy of replacement or credit has failed of its essential purpose because WAL terminated the MSA, thereby rendering the replacement and credit remedies unavailable. The argument would be that termination has destroyed the contractual framework within which the exclusive remedy was designed to operate, and that the failure of the remedy triggers Kestrel's right to pursue any remedy available under the UCC, including consequential damages.

This argument is flawed for several reasons.

First, the exclusive remedy framework in Section 8.7 itself contemplates termination as the ultimate remedy upon Persistent Quality Failure. Termination is expressly identified as the third prong of the exclusive remedy — alongside replacement and credit — and is incorporated into the remedial scheme by cross-reference to Section 14.2(b). Termination is therefore part of the contractual remedy, not evidence of its failure. The essential purpose of the exclusive remedy clause was to provide an escalating series of remedies — replacement, credit, or termination — calibrated to the severity and persistence of quality failures. That purpose has been fulfilled, not frustrated.

Second, under New York law, the failure-of-essential-purpose analysis is applied narrowly and is generally found only where a repair-or-replace remedy proves impossible due to the seller's inability or unwillingness to perform — for example, where the seller repeatedly attempts repairs but is unable to bring the product into conformance, leaving the buyer with a defective product and no recourse. See, e.g., Cayuga Harvester, 95 A.D.2d at 10 (failure of essential purpose found where seller's repair efforts were unsuccessful and buyer was left with a non-functional machine). That is not the situation here. WAL did not experience a failure of the remedy; rather, WAL exercised the remedy of termination that was expressly provided for in the MSA.

Third, and most importantly, New York courts have held that a consequential damages exclusion clause can survive even when the exclusive remedy fails of its essential purpose, where the two provisions are independent and the consequential damages waiver is separately bargained for. See Cayuga Harvester, 95 A.D.2d at 11 (noting the "growing trend" among courts to treat the consequential damages exclusion and the exclusive remedy clause as independent provisions); Kearney & Trecker Corp. v. Master Engraving Co., 107 N.J. 584, 527 A.2d 429, 439 (1987) (adopted by several New York federal courts applying New York law, holding that a consequential damages exclusion may survive the failure of an exclusive remedy where the two clauses are independent). In Section 8.7 of the MSA, the consequential damages waiver is set forth in a separate paragraph from the exclusive remedy provision and uses standalone language ("Neither party shall be liable . . . regardless of the form of action . . . and regardless of whether such damages were foreseeable"). This structure demonstrates that the consequential damages waiver was intended to operate independently of the exclusive remedy clause.

Conclusion: Kestrel's failure-of-essential-purpose argument is unlikely to succeed. Termination is an integral part of the contractual remedial scheme, not a failure of it. And even if the Tribunal were to find a failure of essential purpose with respect to the exclusive remedy (replacement/credit), the independent consequential damages waiver in Section 8.7 would remain enforceable as a separately bargained-for provision.

E. Gross Negligence or Willful Misconduct Carve-Out

Under certain circumstances, New York courts have declined to enforce limitation-of-liability clauses where the breaching party acted with gross negligence or willful misconduct. The rationale is that public policy precludes a party from insulating itself from liability for egregious misconduct. See Kalisch-Jarcho, 58 N.Y.2d at 385 (noting that limitation-of-liability clauses are not enforceable where they purport to exonerate a party from intentional or reckless conduct); Sommer v. Stonefield Enterprises, 79 N.Y.2d 540, 554 (1992). However, this exception is narrow and requires a clear showing of intentional wrongdoing or conduct that evinces a reckless disregard for the rights of others.

Kestrel's Statement of Claim, filed on April 28, 2023, alleges that WAL's rejections were "wrongful" and based on "fabricated or exaggerated quality deficiencies" — language that may be intended to invoke a willful misconduct or bad-faith argument as a basis for circumventing Section 8.7. Kestrel's Statement of Claim does not expressly frame the argument in terms of gross negligence or willful misconduct, but the factual allegations appear designed to lay the groundwork for such an argument.

WAL's position is that the rejections were entirely justified and supported by objective evidence. Independent metallurgical testing performed by Arclight Materials Science Inc., under the supervision of Dr. Raymond Chow, Ph.D., confirmed that porosity levels in the rejected lots ranged between 0.19% and 0.38%, exceeding the contractual limit of ≤0.25% as specified in WAL-SPEC-TH-401, Appendix C, Table 3. Dr. Chow's testing methodology followed ASTM E1441 and ASTM B311 standards and is documented in seven separate test reports corresponding to the seven rejected lots. WAL relied on these independent test results in good faith in making its rejection determinations and in ultimately issuing the Notice of Termination for Cause.

To the extent Kestrel seeks to circumvent Section 8.7 via a willful misconduct theory, the factual record strongly supports WAL's good-faith reliance on contractual specifications and independent testing. Kestrel has not alleged that Dr. Chow's testing was fabricated or that WAL colluded with Arclight to produce false results; Kestrel's position appears to be limited to a disagreement about the appropriate porosity threshold and testing methodology. Such disagreements — even if Kestrel prevails on the underlying quality dispute — do not rise to the level of gross negligence or willful misconduct necessary to override a contractual limitation of liability.

Moreover, even a wrongful-termination theory — i.e., a finding by the Tribunal that WAL's rejections were unjustified and the termination therefore improper — would not transform consequential damages into direct damages. The nature of the damages claimed by Kestrel (lost profits, reputational harm, lost business opportunities) remains consequential regardless of the intent behind or justification for WAL's actions. The distinction between direct and consequential damages is determined by the nature of the loss, not by the nature of the breach. See Tractebel, 487 F.3d at 109 ("The characterization of damages as general or consequential depends on the nature of the injury, not the nature of the cause of injury").

V. Application to Kestrel's Specific Claims

A. Summary Table

B. Detailed Application

Lost profits (€12.83 million + €27.15 million = €39.98 million). The combined lost-profits claim of €39.98 million constitutes forward-looking expectation damages based on Kestrel's projected margins over the remaining MSA term and two discretionary renewal periods. These are quintessentially consequential damages — they represent the profits Kestrel expected to earn from future performance that was never rendered, calculated on the basis of Kestrel's particular cost structure and assumed order volumes. Lost profits are squarely barred by Section 8.7, which expressly excludes "lost profits" and "lost revenue" from recoverable damages. The renewal-period component of the claim (€27.15 million) is additionally infirm because the renewal options under Section 3.2 of the MSA were exercisable solely at WAL's discretion, and WAL was under no obligation to renew. Even absent the Section 8.7 waiver, Kestrel would face substantial obstacles in recovering lost profits for periods during which WAL had no contractual obligation to continue the relationship.

Reputational damages and lost business opportunities (€3.90 million). Kestrel's claim for reputational damages and lost business opportunities is remote, speculative, and arises not from the breach itself but from the impact of WAL's termination on Kestrel's relationships with unidentified third parties and on its standing in the aerospace supply market. These are classic consequential or special damages under New York law. They are expressly enumerated in Section 8.7's list of excluded damage types ("reputational harm") and fall squarely within the waiver. As noted above, a separate memorandum will address the independent insufficiency of this claim.

Unreimbursed rework costs (€3.42 million). Even if rework costs are arguably direct damages — representing actual expenditures incurred in performing Kestrel's contractual cure obligation — Section 8.7's exclusive remedy clause limits Kestrel's available remedies to replacement, credit, or termination. The exclusive remedy framework does not include monetary reimbursement for the cost of Kestrel's own cure efforts. Kestrel bore the obligation to cure non-conforming products at its own expense under Section 8.4, and the MSA's risk allocation does not contemplate shifting those costs to WAL. Kestrel cannot recover its rework costs through the exclusive remedy framework, and the consequential damages waiver independently bars recovery to the extent the rework costs are characterized as consequential rather than direct.

VI. Potential Counterarguments and Risk Assessment

A. Kestrel's Likely Counterarguments

Based on the allegations in Kestrel's Request for Arbitration and Statement of Claim, as well as the general landscape of challenges to consequential damages waivers under New York law, we anticipate that Kestrel may advance the following counterarguments:

1. Unconscionability. Kestrel may argue that Section 8.7 is unconscionable and therefore unenforceable under UCC § 2-719(3). As analyzed in detail in Part IV.C above, this argument lacks merit. Both parties are sophisticated commercial entities of comparable bargaining power, both were represented by experienced legal counsel, the MSA was negotiated at arm's length over a period of months, and the consequential damages waiver is mutual. There is no procedural unconscionability — Kestrel had a meaningful choice and exercised it — and no substantive unconscionability — the waiver is balanced, preserves alternative remedies, and is standard in aerospace supply agreements. We assess the likelihood of success for this argument as very low.

2. Failure of essential purpose. Kestrel may argue that WAL's termination of the MSA caused the exclusive remedy of replacement and credit to fail of its essential purpose, thereby triggering Kestrel's right to pursue all remedies available under the UCC, including consequential damages. As analyzed in Part IV.D above, this argument is unlikely to succeed. Termination is an integral part of the contractual remedial scheme — it is the third prong of the exclusive remedy expressly provided for in Section 8.7 — and therefore does not constitute a failure of the remedy. Moreover, even if the Tribunal were to find a failure of essential purpose with respect to the exclusive remedy, the independent consequential damages waiver would survive as a separately bargained-for provision.

3. Willful misconduct / bad faith. Kestrel has alleged that WAL's rejections were "wrongful" and based on "fabricated or exaggerated quality deficiencies." To the extent this is intended to invoke a willful misconduct or bad-faith carve-out to the consequential damages waiver, the factual record strongly favors WAL. Independent metallurgical testing by Dr. Chow of Arclight Materials Science Inc. confirmed that porosity levels in rejected lots exceeded the contractual threshold. WAL's reliance on these independent test results was reasonable and in good faith. Even a finding that WAL's rejections were unjustified — which we do not concede — would not rise to the level of gross negligence or willful misconduct required to override a contractual limitation of liability. Furthermore, even a wrongful-termination finding would not transform consequential damages into direct damages; the nature of the loss, not the intent of the breach, determines the characterization.

4. Scope of the waiver — quality disputes only. Kestrel may argue that Section 8.7, by its heading ("Exclusive Remedy for Quality Failures"), applies only when quality failures are conceded or established, and not when the central dispute is whether a quality failure occurred at all. On this theory, if the Tribunal finds that WAL's rejections were unjustified — i.e., that no quality failure existed — then Section 8.7 would not apply because its precondition (a quality failure) was never satisfied.

This argument is textually unsupported. The operative language of Section 8.7's consequential damages waiver is broad and general: "Neither party shall be liable to the other for any indirect, incidental, special, consequential, or punitive damages arising out of or related to this Agreement or the performance or non-performance of obligations hereunder." (Emphasis added.) This language encompasses all disputes arising under or related to the MSA, not merely disputes in which a quality failure has been established. Moreover, the exclusive remedy clause itself refers to "any non-conformance, defect, or quality failure" — phrasing that encompasses alleged non-conformance, not only proven non-conformance. The scope of Section 8.7 is broad enough to encompass disputes about whether quality standards were met, not merely disputes about the consequences of conceded quality failures.

Additionally, the heading of a contractual provision does not control its interpretation under New York law. See N.Y. U.C.C. § 1-107 (now § 1-303) (providing that section captions are part of the Code but do not control interpretation); see also Restatement (Second) of Contracts § 203(d) (separately negotiated or added terms are given greater weight than standardized terms or headings).

B. Overall Risk Assessment

We assess the overall risk that Section 8.7 will be found unenforceable as low. The contractual language is clear and comprehensive, the parties are sophisticated commercial entities of comparable bargaining power, the waiver is mutual, the MSA preserves meaningful alternative remedies, and New York law strongly favors the enforcement of negotiated limitations of liability and consequential damages waivers in commercial transactions. The most commonly raised defenses to such provisions — unconscionability, failure of essential purpose, and willful misconduct — are all factually and legally weak in this case.

The Tribunal, seated in New York and applying New York law pursuant to Section 22.1 of the MSA, should apply these principles regardless of the international character of the arbitration. ICC tribunals regularly give effect to contractual limitations of liability and consequential damages waivers where the governing law so provides, and there is no basis for departing from that approach here.

The one area of modest vulnerability is the rework cost claim of €3.42 million, which presents a closer question on the direct-versus-consequential characterization. However, even on this claim, we believe the better reading of Section 8.7 bars recovery, and the quantum is relatively small in comparison to the total claim of €47.3 million.

VII. Relevance to WAL's Counterclaim

WAL intends to assert a counterclaim of approximately €5.17 million in its Statement of Defense and Counterclaim, representing the incremental cost incurred by WAL in procuring replacement components from Valkyr Precision Components Inc. ("Valkyr") following the termination of the MSA with Kestrel.

WAL's counterclaim is structured as a direct-damages claim representing the cost of cover — specifically, the difference between the price WAL paid Valkyr for replacement components and the price WAL would have paid Kestrel under the MSA for the same components. The calculation is as follows:

• Number of replacement units procured from Valkyr: 1,680 units

• Valkyr unit price: €8,432.92

• Kestrel Contract Year 4 unit price: €5,222.92

• Price differential per unit: €3,210.00

• Gross cost differential: 1,680 × €3,210.00 = €5,392,800.00

• Less: Valkyr introductory discount of 4.2%: €5,392,800.00 × 0.958 = €5,166,503.00 (rounded to €5.17 million)

This counterclaim is framed as a cost-of-cover claim, analogous to N.Y. U.C.C. § 2-712, which permits a buyer who has rightfully rejected goods or justifiably revoked acceptance to "cover" by making in good faith and without unreasonable delay any reasonable purchase of goods in substitution for those due from the seller. Cover damages under Section 2-712 are measured as the difference between the cost of cover and the contract price, together with incidental and consequential damages, less expenses saved in consequence of the seller's breach.

WAL's cost-of-cover claim constitutes direct damages — the additional cost incurred to obtain the goods that Kestrel was obligated but failed to supply in conforming condition. Unlike lost profits or reputational harm, cover damages represent the immediate and direct financial consequence of the seller's non-performance: the buyer must pay more to obtain substitute goods. This is the paradigmatic example of a direct-damage recovery in a sale-of-goods context.

Accordingly, the Section 8.7 consequential damages waiver does not affect WAL's right to recover direct damages on its counterclaim. While Section 8.7 limits both parties' right to recover consequential damages, it does not limit or waive direct damages. WAL's cost-of-cover claim falls outside the scope of the waiver and is fully recoverable, subject to proof of the reasonableness of the cover transaction and the justification for WAL's rejection and termination (which are addressed in the separate December 2022 memorandum).

VIII. Recommendations

Based on the foregoing analysis, we recommend the following course of action:

1. Primary defensive argument. WAL should assert Section 8.7 of the MSA as a complete bar to all four categories of Kestrel's damages claim, totaling €47.3 million, in the Statement of Defense and Counterclaim. The Section 8.7 defense should be framed as a threshold legal issue that disposes of the entirety of Kestrel's damages claim without the need for detailed quantum analysis. The consequential damages waiver bars the lost-profits claims (€12.83 million and €27.15 million), the reputational damages claim (€3.90 million), and the rework costs claim (€3.42 million). The Statement of Defense and Counterclaim is due on June 30, 2023.

2. Briefing strategy. In our written submissions, we should present the Section 8.7 analysis as a threshold issue — if the Tribunal enforces the waiver, the entire quantum analysis of Kestrel's claims becomes moot, and the proceeding can be streamlined to focus on the merits of WAL's counterclaim and Kestrel's defenses thereto. We should consider requesting that the Tribunal address the enforceability of Section 8.7 as a preliminary matter, either through bifurcation or through a procedural order addressing threshold legal issues before the quantum phase. This approach would conserve the parties' resources and the Tribunal's time and would be consistent with ICC's emphasis on procedural efficiency.

3. Expert coordination. We should instruct Dr. Nadia Ostrovsky of Ridgeline Economic Consulting LLC, WAL's damages expert, to include in her expert report an alternative damages analysis showing that, even if the Section 8.7 waiver is not enforced, Kestrel's damages figures are substantially overstated. Specific areas of vulnerability in Kestrel's damages calculation include: (a) the assumed margin of 22.4%, which appears inflated relative to industry benchmarks and Kestrel's own historical performance in Contract Years 1 through 3; (b) the inclusion of lost profits for two discretionary renewal periods, which are speculative and contingent on WAL's unexercised option; (c) the absence of any mitigation analysis for the reputational damages claim; and (d) the methodological deficiencies in Kestrel's rework cost calculations, which appear to include overhead charges and management time that would have been incurred regardless of the rework activities. Dr. Ostrovsky should present this alternative analysis as a fallback position, clearly labeled as conditional on the Tribunal's rejection of the Section 8.7 defense.

4. Document production. In the Redfern Schedule (to be submitted in connection with the procedural conference scheduled for March 2023), we should request production of Kestrel's internal communications regarding the negotiation of Section 8.7 of the MSA. Such documents — including emails, internal memoranda, and board-level approvals — would likely demonstrate that the consequential damages waiver was a negotiated, understood, and deliberately accepted term, further undermining any unconscionability argument. Specifically, we should request: (a) all communications between Kestrel's commercial team and its legal counsel at Hengeler Mueller regarding Sections 8.4, 8.7, and 14.2 of the MSA; (b) any board or management committee presentations regarding the MSA negotiation that discuss risk allocation or limitation of liability; and (c) Kestrel's internal markup and redline history of Article 8 of the MSA.

5. Forensic accounting. We should coordinate with Sandra Gillespie at Canfield & Thorpe LLP regarding the rework cost claim of €3.42 million. As noted above, this category of damages is the most vulnerable to characterization as direct damages and therefore requires careful scrutiny on both legal and factual grounds. Ms. Gillespie should be tasked with: (a) analyzing the composition of Kestrel's claimed rework costs to determine whether they include overhead, administrative charges, or other indirect costs that should not be recoverable even as direct damages; (b) determining whether Kestrel's rework costs are consistent with commercially reasonable cure efforts or reflect excessive expenditures; and (c) identifying any rework costs attributable to deficiencies in Kestrel's own manufacturing processes (as opposed to efforts to meet WAL's specifications), which would further support the argument that these costs are properly borne by Kestrel under the MSA's risk allocation framework.

IX. Conclusion

Section 8.7 of the MSA is enforceable under New York law and bars Kestrel's claims for lost profits for the remaining term (€12.83 million), lost profits for the discretionary renewal terms (€27.15 million), reputational damages and lost business opportunities (€3.90 million), and unreimbursed rework costs (€3.42 million). The total claimed damages of €47.3 million are consequential in nature — or, in the case of the rework costs, fall outside the exclusive remedy framework — and are within the scope of the waiver.

The enforceability of Section 8.7 is supported by the clear and unambiguous language of the provision, the mutual nature of the waiver, the sophistication of both parties, the arm's-length negotiation of the MSA, the statutory presumption of validity under N.Y. U.C.C. § 2-719(3), and the consistent body of New York case law upholding consequential damages waivers in commercial transactions. The principal counterarguments available to Kestrel — unconscionability, failure of essential purpose, willful misconduct, and narrow scope of the waiver — are all factually and legally weak under the circumstances of this case.

The Section 8.7 waiver does not affect WAL's counterclaim of approximately €5.17 million, which is a direct cost-of-cover claim properly structured as direct damages under N.Y. U.C.C. § 2-712.

This analysis should be incorporated as a central defense in all arbitration submissions, beginning with the Statement of Defense and Counterclaim due on June 30, 2023. We recommend presenting the Section 8.7 defense as a threshold issue capable of disposing of the entirety of Kestrel's damages claim and reserving the alternative quantum analysis as a fallback position.

This memorandum is a privileged and confidential attorney work product prepared for the exclusive use of Whitmore Aerospace LLC in connection with ICC Case No. 27914/MHM. It is not intended for distribution to any third party and should not be disclosed outside the attorney-client relationship without the prior written consent of Drummond & Fenwick LLP.

Prepared by:

Jeffrey Park Associate Drummond & Fenwick LLP

Claim	Amount	Nature	Barred by § 8.7?
Lost profits — remaining term (CY5)	€12.83M	Consequential	Yes
Lost profits — renewal periods (CY6–CY7)	€27.15M	Consequential	Yes
Reputational damages / lost opportunities	€3.90M	Consequential	Yes
Unreimbursed rework costs	€3.42M	Arguably direct, but outside exclusive remedy	Yes (under exclusive remedy clause)
Total barred	€47.30M

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
To: Simone Laroche, Senior Associate; Theodore Langston, Partner
From: Jeffrey Park, Associate
Date: January 2023
Re: Enforceability of Contractual Limitation of Liability and Consequential Damages Waiver Under New York Law — Master Supply Agreement Between Whitmore Aerospace LLC and Kestrel Dynamics GmbH (ICC Case No. 27914/MHM)
Engagement No.: 1019-00001
Client: Whitmore Aerospace LLC
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I. Executive Summary
This memorandum analyzes the enforceability under New York law of the consequential damages waiver contained in Section 8.7 of the Master Supply Agreement dated June 15, 2018 (the "MSA") between our client, Whitmore Aerospace LLC ("WAL"), and Kestrel Dynamics GmbH ("Kestrel"). The MSA is governed by the laws of the State of New York, without regard to conflict-of-laws principles, pursuant to Section 22.1 of the MSA.
On November 7, 2022, Kestrel filed a Request for Arbitration before the International Chamber of Commerce (ICC Case No. 27914/MHM), alleging breach of the MSA and claiming approximately €47.3 million in damages. The damages sought by Kestrel are comprised of the following four categories:
(a) Lost profits for the remaining MSA term (Contract Year 5), quantified by Kestrel at approximately €12.83 million;
(b) Lost profits for two discretionary one-year renewal periods that were exercisable solely at WAL's option, quantified by Kestrel at approximately €27.15 million;
(c) Unreimbursed rework costs incurred by Kestrel in connection with its cure obligations under Section 8.4 of the MSA, quantified at approximately €3.42 million; and
(d) Reputational damages and alleged lost business opportunities arising from WAL's termination of the MSA, quantified at approximately €3.90 million.
Based on the analysis set forth below, our conclusion is as follows: Under well-established New York law, Section 8.7 of the MSA is enforceable as between sophisticated commercial parties and bars Kestrel's claims for lost profits, reputational damages, and lost business opportunities — all of which are consequential in nature. The consequential damages waiver in Section 8.7 is mutual, was negotiated at arm's length between parties of comparable bargaining power and sophistication, and is precisely the type of contractual risk allocation that New York courts have consistently upheld. The rework cost claim, to the extent it may be characterized as direct damages for non-performance, presents a slightly different analytical question, but is also barred under Section 8.7's exclusive remedy framework, which limits Kestrel's available remedies to replacement, credit, or termination. Even under the most conservative reading, Section 8.7 eliminates approximately €43.88 million of Kestrel's €47.3 million claim, and we believe the better reading bars the entirety of the claim.
This memorandum addresses the enforceability of Section 8.7 as a matter of New York law. Separate memoranda address (i) the characterization of WAL's termination as rightful under the MSA (dated December 2022), (ii) the independent insufficiency of Kestrel's reputational damages claim (forthcoming, February 2023), and (iii) the option-versus-obligation issue relating to the renewal-period lost profits claim (forthcoming, March 2023).
II. Relevant Contractual Provisions
The MSA is a detailed, 78-page commercial supply agreement that governs WAL's procurement of precision-machined titanium and nickel-alloy components from Kestrel for use in WAL's turbine-engine and structural-airframe product lines. The MSA was executed on June 15, 2018, following approximately four months of negotiation between the parties' respective commercial and legal teams. It has been amended twice: Amendment No. 1, dated February 10, 2020, which adjusted pricing for Contract Year 3 and modified certain delivery schedules; and Amendment No. 2, dated September 3, 2021, which, among other things, extended the cure period under Section 8.4 from 30 to 45 calendar days and revised the force majeure provisions in light of supply-chain disruptions.
The provisions most directly relevant to the enforceability analysis are set forth below.
A. Section 8.7 — Exclusive Remedy for Quality Failures
Section 8.7 of the MSA, entitled "Exclusive Remedy for Quality Failures; Limitation of Liability," provides in relevant part as follows:
"NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL, OR PUNITIVE DAMAGES ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE PERFORMANCE OR NON-PERFORMANCE OF OBLIGATIONS HEREUNDER, INCLUDING, WITHOUT LIMITATION, LOST PROFITS, LOST REVENUE, LOSS OF USE, LOSS OF DATA, BUSINESS INTERRUPTION, REPUTATIONAL HARM, OR COST OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, OR OTHERWISE, AND REGARDLESS OF WHETHER SUCH DAMAGES WERE FORESEEABLE OR WHETHER EITHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Buyer's sole and exclusive remedy for any non-conformance, defect, or quality failure in any Product delivered under this Agreement shall be, at Buyer's election: (i) replacement of the non-conforming Product at Seller's expense pursuant to Section 8.4; (ii) a credit against future purchase orders in an amount equal to the price paid for the non-conforming Product; or (iii) upon a Persistent Quality Failure (as defined in Section 8.4), termination of this Agreement pursuant to Section 14.2(b), subject to the terms and conditions thereof."
Several features of Section 8.7 merit emphasis. First, the consequential damages waiver is mutual — it applies to "neither party" and restricts the liability of both WAL and Kestrel. This mutuality is significant because it demonstrates that the provision reflects a balanced, negotiated allocation of risk rather than an adhesive term imposed by one party on the other. New York courts have consistently recognized that mutual liability limitations are strong evidence of arm's-length bargaining and weigh heavily in favor of enforceability. See, e.g., Metropolitan Life Ins. Co. v. Noble Lowndes Int'l, Inc., 84 N.Y.2d 430, 437 (1994).
Second, Section 8.7 does not deprive the aggrieved party of all remedies. Rather, it establishes an exclusive remedy framework — replacement, credit, or termination — that provides meaningful avenues of redress while limiting exposure to open-ended consequential damages claims. This tiered remedial structure is precisely the type of commercially reasonable limitation that the Uniform Commercial Code contemplates and permits.
Third, the consequential damages waiver contains a comprehensive enumeration of excluded damage types, including "lost profits, lost revenue, loss of use, loss of data, business interruption, reputational harm, [and] cost of procurement of substitute goods or services." This specificity further evidences that the parties understood the scope of the waiver and deliberately agreed to it.
B. Section 8.4 — Rejection / Cure Provision
Section 8.4 of the MSA, entitled "Rejection and Cure," establishes the procedural framework for WAL's rejection of non-conforming products and Kestrel's corresponding cure obligations. Under Section 8.4, if WAL rejects a lot for non-conformance with the applicable product specifications set forth in Appendix C to the MSA, WAL must provide Kestrel with a written notice of rejection that identifies the specific non-conformance and the supporting test data. Upon receipt of such notice, Kestrel has a cure period — originally 30 calendar days under the MSA as executed, subsequently extended to 45 calendar days by Amendment No. 2, dated September 3, 2021 — to replace or rework the rejected lot at Kestrel's sole expense.
Section 8.4 further provides that three or more uncured rejections in any rolling 12-month period constitute a "Persistent Quality Failure." The concept of Persistent Quality Failure is central to the remedial architecture of the MSA because it triggers WAL's right to terminate the MSA for cause under Section 14.2(b). The threshold was set at three uncured rejections following negotiation; Kestrel's initial draft proposed five, and WAL's initial position was two.
As set forth in WAL's Notice of Termination for Cause dated October 3, 2022, WAL documented seven uncured rejections during the period from March through September 2022, significantly exceeding the three-rejection threshold for Persistent Quality Failure. Each rejection was supported by independent metallurgical testing performed by Arclight Materials Science Inc. under the supervision of Dr. Raymond Chow, as discussed in greater detail in Part IV.E below.
C. Section 14.2 — Termination for Cause
Section 14.2 of the MSA, entitled "Termination for Cause," permits either party to terminate the MSA in two circumstances:
(a) Upon a material breach of the MSA that remains uncured for 60 days following written notice thereof to the breaching party; or
(b) Upon a Persistent Quality Failure, as defined in Section 8.4.
WAL issued its Notice of Termination for Cause on October 3, 2022, invoking Section 14.2(b) on the basis of seven uncured rejections during the March–September 2022 period. Kestrel did not contest the factual basis for the rejections prior to the termination but subsequently alleged in its Request for Arbitration that certain rejections were "wrongful" and based on "fabricated or exaggerated quality deficiencies." This allegation is addressed in Part IV.E below and in the separate memorandum on the rightfulness of WAL's termination (dated December 2022).
D. Section 22.1 — Governing Law
Section 22.1 of the MSA provides:
"This Agreement shall be governed by and construed in accordance with the laws of the State of New York, United States of America, without regard to its conflict-of-laws principles. The United Nations Convention on Contracts for the International Sale of Goods (CISG) shall not apply to this Agreement."
The express exclusion of the CISG is significant because it ensures that the enforceability of Section 8.7 is analyzed exclusively under the New York Uniform Commercial Code and New York common law, rather than under the CISG's more restrictive framework governing contractual limitations of damages. The exclusion of conflict-of-laws principles prevents any argument that German law (as the law of Kestrel's domicile) or Swiss law (as the law of the seat of arbitration, though the arbitration is seated in New York pursuant to Section 22.3) should govern the enforceability analysis.
III. Classification of Kestrel's Claimed Damages as Consequential
A. Framework: Direct vs. Consequential Damages Under New York Law
The distinction between direct and consequential damages is fundamental to the enforceability analysis because Section 8.7 waives consequential damages while preserving (subject to the exclusive remedy framework) the availability of direct damages. Accordingly, the threshold question is whether each category of Kestrel's claimed damages is properly characterized as direct or consequential under New York law.
Under New York law, direct damages (sometimes referred to as "general damages") are those that flow naturally and necessarily from a breach of contract — they represent the value of the performance itself, or the cost of obtaining equivalent performance, and are the natural and probable consequence of the breach. Direct damages are recoverable as a matter of course without any special showing of foreseeability or particular circumstances. In a sale-of-goods context, direct damages typically include the difference between the contract price and the market price (or the cost of cover), as well as incidental damages such as inspection and transportation costs. See N.Y. U.C.C. § 2-714 (buyer's damages for breach in regard to accepted goods); § 2-712 (buyer's damages for cover); § 2-713 (buyer's damages for non-delivery or repudiation).
Consequential damages (sometimes referred to as "special damages"), by contrast, are losses that do not flow directly and immediately from the breach but rather arise from the special circumstances or particular situation of the non-breaching party. They include losses that the breaching party had reason to know about at the time of contracting but that are not the inevitable result of every breach of the type at issue. The classic examples of consequential damages are lost profits on downstream transactions, lost business opportunities, and reputational harm. New York's codification of the Hadley v. Baxendale framework is found in N.Y. U.C.C. § 2-715(2), which defines consequential damages to include:
"(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and (b) injury to person or property proximately resulting from any breach of warranty."
The distinction between direct and consequential damages is well established in New York jurisprudence. In Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 22 N.Y.3d 799, 806 (2014), the Court of Appeals reaffirmed that lost profits are generally classified as consequential damages in a commercial context. Similarly, in Kenford Co. v. County of Erie, 73 N.Y.2d 312, 319 (1989), the Court of Appeals emphasized that lost profits represent special, not general, damages and are recoverable only when shown with reasonable certainty and when they were within the contemplation of the parties at the time of contracting.
Although the MSA is a contract for the sale of goods and certain provisions of the UCC are therefore applicable, Section 8.7 constitutes a permitted contractual allocation of remedies under N.Y. U.C.C. § 2-719, which expressly authorizes parties to modify or limit the remedies available under the Code, subject to the limitations of unconscionability and failure of essential purpose discussed in Part IV below.
With this framework in mind, we turn to the classification of each category of Kestrel's claimed damages.
B. Lost Profits — Remaining Term (€12.83 million)
Kestrel claims €12.83 million in lost profits for the remaining MSA term — specifically, the projected margin that Kestrel expected to earn during Contract Year 5 (June 15, 2023 through June 14, 2024) had the MSA not been terminated. Kestrel's damages expert, Prof. Dieter Langfeld of Rheinsberg Advisory AG, calculates this figure on the basis of a 22.4% gross margin applied to projected revenue for the remaining term, using historical order volumes from Contract Years 1 through 4 as the baseline.
Lost profits are the paradigmatic form of consequential damages under New York law. See Bi-Economy Market, Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187, 192 (2008) (noting that "consequential damages, of which lost profits are an example, are the natural and probable consequence of the defendant's breach"). Kestrel's claim for lost profits during the remaining MSA term represents the margin Kestrel expected to earn had the MSA continued — that is, the profits from future performance that was never rendered. This is not the value of goods already delivered or payment for accepted products. It is a forward-looking loss that depends entirely on Kestrel's particular cost structure, its projected margin (which Kestrel claims was 22.4%), the assumed continuation of historical order volumes, and the absence of any intervening events that might have disrupted performance. These are precisely the kinds of "special circumstances" and "particular requirements and needs" that distinguish consequential from direct damages.
Under New York law, the characterization of lost profits as consequential damages is settled and well-established. The Court of Appeals has repeatedly held that expected profits from a contract are consequential damages, not direct damages, because they depend on the claimant's particular business circumstances and are not the natural and inevitable result of every breach. See Kenford Co., 73 N.Y.2d at 319; see also Schonfeld v. Hilliard, 218 F.3d 164, 175-76 (2d Cir. 2000) (applying New York law and classifying lost profits as consequential damages).
Accordingly, Kestrel's lost-profits claim for the remaining MSA term is consequential in nature and falls squarely within the scope of the Section 8.7 waiver.
C. Lost Profits — Renewal Periods (€27.15 million)
Kestrel further claims €27.15 million in lost profits for two optional one-year renewal periods (Contract Year 6, June 15, 2024 through June 14, 2025, and Contract Year 7, June 15, 2025 through June 14, 2026). These renewal options were contained in Section 3.2 of the MSA and were exercisable solely at WAL's discretion; WAL had no contractual obligation to renew, and the renewal was conditioned on WAL's delivery of written notice of election at least 90 days prior to the expiration of the then-current term.
Even setting aside the option-versus-obligation issue — which is the subject of a separate memorandum addressing the independent ground that Kestrel has no entitlement to damages for discretionary renewal periods that WAL was not obligated to exercise — the renewal-period lost profits claim is consequential in nature under any analysis. The claimed damages are forward-looking, dependent on hypothetical future performance, contingent on WAL's exercise of a discretionary option, and calculated on the basis of assumed order volumes and margins that are inherently speculative. If lost profits for the remaining contractual term are consequential (as they plainly are), then lost profits for discretionary renewal periods are a fortiori consequential — and more attenuated and speculative besides.
This category of damages is clearly barred by Section 8.7 as consequential damages. Indeed, even absent the Section 8.7 waiver, Kestrel would face substantial obstacles in recovering lost profits for renewal periods under general New York law principles, given the speculative nature of the claim and the absence of any contractual obligation on WAL's part to renew. See Ashland Mgmt. Inc. v. Janien, 82 N.Y.2d 395, 403 (1993) (lost profits must be established with reasonable certainty; speculative or contingent profits are not recoverable).
D. Reputational Damages / Lost Business Opportunities (€3.90 million)
Kestrel claims €3.90 million in reputational damages and purported loss of other business opportunities allegedly caused by WAL's termination of the MSA. According to Kestrel's Request for Arbitration, WAL's termination and the associated quality-failure allegations have "irreparably harmed Kestrel's standing among aerospace and defense original equipment manufacturers," causing the loss of two unnamed potential customer relationships and a reduction in inquiries for new work.
Under New York law, reputational damages and lost business opportunities are classic forms of consequential or special damages. They arise not from the breach itself but from the impact of the breach on the claimant's relationships with third parties and on its standing in the marketplace — circumstances that are particular to the claimant and that do not flow directly and inevitably from every contractual breach. See Gruber v. Owens-Illinois, Inc., 899 F.2d 1366, 1373 (2d Cir. 1990) (holding that lost business opportunities are consequential damages under New York law); see also Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 110 (2d Cir. 2007) (noting that consequential damages include "all other damages, such as injury to persons or property, resulting from the breach").
Kestrel's reputational damages claim is remote, speculative, and falls squarely within the scope of the Section 8.7 waiver. The claimed losses depend on the actions and decisions of unidentified third parties, on market conditions in the aerospace supply chain, and on a causal chain that runs from WAL's termination through the market's perception of that termination to the loss of specific business opportunities. These are precisely the kinds of downstream, ripple-effect damages that consequential damages waivers are designed to preclude.
A separate memorandum, to be completed in February 2023, addresses the independent insufficiency of Kestrel's reputational damages claim even absent the Section 8.7 waiver, including the failure to identify the specific opportunities allegedly lost, the absence of any mitigation efforts, and the speculative methodology employed by Kestrel's damages expert.
E. Unreimbursed Rework Costs (€3.42 million)
Kestrel claims €3.42 million for costs incurred in attempting to rework or replace rejected lots during the cure periods triggered by WAL's rejection notices. According to Kestrel, these costs include labor, materials, equipment time, and subcontractor charges associated with rework and replacement efforts that ultimately proved unsuccessful in some cases.
This category of damages presents a more nuanced analytical question than the lost-profits and reputational-damages categories. Rework costs could arguably be characterized as direct damages — they represent the cost of performing the contractual obligation to cure defective products, and they were incurred in the course of actual performance rather than in connection with future, hypothetical transactions. Unlike lost profits or reputational harm, rework costs are backward-looking and based on expenditures actually made.
However, even if rework costs are treated as direct damages rather than consequential damages, Section 8.7's exclusive remedy clause limits Kestrel's available remedies to three specified alternatives: replacement, credit, or termination. The exclusive remedy framework does not include monetary reimbursement for the cost of Kestrel's own cure efforts. Kestrel's rework costs were incurred in discharging Kestrel's own contractual obligation — the obligation to cure non-conforming products at Kestrel's sole expense under Section 8.4. Seeking reimbursement from WAL for the costs of performing that obligation inverts the contractual risk allocation and is inconsistent with the parties' bargained-for allocation of responsibilities.
Moreover, to the extent the rework costs represent expenditures on unsuccessful cure attempts — that is, attempts that did not result in conforming products — they are even more clearly barred. Section 8.7's exclusive remedy framework provides for replacement (i.e., successful cure) or credit; it does not compensate a party for failed efforts at cure.
Additionally, there is a strong argument that rework costs are themselves consequential in nature. Kestrel incurred these costs as a result of its own failure to deliver conforming products in the first instance. The rework expenditures are a consequence of Kestrel's initial non-performance, not a direct loss caused by any breach by WAL. Under this analysis, the rework costs fall within the consequential damages waiver as well.
Regardless of the characterization, we believe Kestrel's rework cost claim is barred under the MSA, though we note that this category presents the greatest risk of an adverse characterization by the Tribunal and warrants careful attention in our briefing and expert submissions.
IV. Enforceability of Consequential Damages Waivers Under New York Law
A. General Principle: Freedom of Contract Between Sophisticated Parties
New York law strongly favors the enforcement of contractual provisions freely negotiated between sophisticated commercial parties. The New York Court of Appeals has repeatedly emphasized that "a court may not by construction add or excise terms, nor distort the meaning of those used, and thereby make a new contract for the parties under the guise of interpreting the writing." Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004). This principle applies with particular force to limitations of liability and consequential damages waivers negotiated between commercial entities with access to competent legal counsel.
Both parties to the MSA are sophisticated commercial enterprises. WAL is a privately held aerospace and defense manufacturer headquartered in Stamford, Connecticut, with approximately $1.87 billion in annual revenue and approximately 6,400 employees across 12 manufacturing facilities in the United States and Europe. Kestrel is a German precision-components supplier headquartered in Stuttgart, Germany, with approximately €312 million in annual revenue and approximately 1,800 employees, serving major aerospace and automotive original equipment manufacturers worldwide. Both parties were represented by experienced legal counsel at the time of MSA execution — WAL by Drummond & Fenwick LLP (the undersigned firm) and Kestrel by Castellane & Voss LLP in Düsseldorf.
The MSA itself is a heavily negotiated, arm's-length commercial agreement. The negotiation process extended from approximately February 2018 through June 2018 and involved multiple rounds of markup and in-person negotiating sessions. The agreement contains detailed quality-control provisions (Article 8), comprehensive representations and warranties (Article 9), extensive intellectual property and confidentiality provisions (Articles 10 and 11), and a sophisticated dispute-resolution framework including ICC arbitration (Article 22). The fact that the MSA was subsequently amended twice — first in February 2020 and again in September 2021 — further demonstrates that the parties continued to negotiate and adjust the agreement's terms over the life of the relationship. Notably, Amendment No. 2 modified the cure period in Section 8.4 (from 30 to 45 days) but left Section 8.7's consequential damages waiver and exclusive remedy framework entirely unchanged, suggesting that both parties were satisfied with the risk allocation embodied in Section 8.7.
Under New York law, courts give effect to clear contractual language limiting remedies and excluding consequential damages, absent fraud, unconscionability, or gross negligence. See Metropolitan Life Ins. Co., 84 N.Y.2d at 436-37 ("When the provision limiting liability is contained in a commercial contract negotiated at arm's length between sophisticated business entities, courts will generally enforce the clause"); Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 377, 384-85 (1983) (enforcing a limitation of liability clause in a construction contract and noting that "a party who contracts with another for the performance of a function is free to insulate himself, by contract, from liability for the negligence of his contractor").
B. UCC § 2-719: Modification or Limitation of Remedies
Because the MSA is a contract for the sale of goods, the New York Uniform Commercial Code applies, including Article 2's provisions governing the modification and limitation of remedies. N.Y. U.C.C. § 2-719 is the principal statutory provision governing the enforceability of contractual limitations of remedies in sale-of-goods transactions.
Section 2-719(1)(a) provides that the agreement may "provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts." This provision expressly authorizes precisely the type of exclusive remedy framework contained in Section 8.7 of the MSA, which limits WAL's remedy to replacement, credit, or termination.
Section 2-719(3) is even more directly on point. It provides: "Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not." (Emphasis added.) The negative implication of the second sentence is critical: in a commercial transaction (as opposed to a consumer-goods transaction involving personal injury), a limitation or exclusion of consequential damages is not prima facie unconscionable. Rather, it is presumptively valid, and the party challenging the limitation bears the burden of demonstrating unconscionability.
Section 8.7 of the MSA is a textbook example of a permissible contractual exclusion of consequential damages under UCC § 2-719(3). It excludes consequential damages in a commercial transaction between sophisticated parties, and there is no allegation of personal injury. The statutory presumption of validity therefore applies.
New York courts have consistently enforced consequential damages exclusions in commercial contracts under Section 2-719(3). See, e.g., Cayuga Harvester, Inc. v. Allis-Chalmers Corp., 95 A.D.2d 5, 10-11 (4th Dep't 1983) (enforcing consequential damages exclusion between commercial parties and finding no unconscionability); Roneker v. Pemberton Holdings Truck Co., 944 F. Supp. 179, 182-83 (W.D.N.Y. 1996) (enforcing consequential damages exclusion in commercial transaction and noting that "between merchants, an exclusion of consequential damages is valid unless the party opposing the exclusion proves it unconscionable").
C. Unconscionability Defense
Kestrel may attempt to argue that Section 8.7 is unconscionable and therefore unenforceable under UCC § 2-719(3). Under New York law, unconscionability requires a showing of both procedural unconscionability (the absence of meaningful choice on the part of one of the parties) and substantive unconscionability (contract terms that are unreasonably favorable to the other party). See Gillman v. Chase Manhattan Bank, N.A., 73 N.Y.2d 1, 10 (1988). The challenging party bears the burden of establishing both elements.
Procedural unconscionability is not present here. Procedural unconscionability focuses on the circumstances surrounding the formation of the contract — whether one party lacked a meaningful opportunity to understand the terms, whether there was a significant disparity in bargaining power, whether the agreement was a contract of adhesion, and whether the challenged provisions were hidden or obscured. None of these factors is present in this case.
•  Both WAL and Kestrel are sophisticated commercial entities of comparable size and bargaining power.
•  The MSA was negotiated over a period of approximately four months, with multiple rounds of drafting and in-person negotiation sessions.
•  Kestrel was represented throughout the negotiation by experienced legal counsel at Castellane & Voss LLP, one of Germany's leading commercial law firms.
•  Kestrel was free to reject the consequential damages waiver or to propose modifications; indeed, Kestrel did negotiate amendments to other terms of the MSA, including pricing, delivery schedules, and — in Amendment No. 2 — the cure period. The fact that Kestrel successfully negotiated changes to other provisions but left Section 8.7 intact strongly suggests that Kestrel made a deliberate choice to accept the waiver.
•  Section 8.7 is not hidden or buried in the MSA; it is a prominently placed provision in Article 8 (Quality Assurance), set forth in uppercase boldface type, and it is cross-referenced in multiple other provisions of the MSA.
Substantive unconscionability is likewise absent. The consequential damages waiver in Section 8.7 is mutual — it applies equally to both parties, restricting both WAL's and Kestrel's ability to claim consequential damages from the other. This mutuality reflects a balanced risk allocation and defeats any argument that the provision is unreasonably one-sided. Furthermore, consequential damages waivers are standard in aerospace supply agreements and in commercial contracts generally. The MSA preserves Kestrel's right to replacement, credit, and ultimately termination in the event of Persistent Quality Failure — it does not deprive Kestrel of all remedies. An exclusion of consequential damages is not unconscionable merely because it limits the quantum of potentially recoverable damages; it is unconscionable only if it is so one-sided as to be oppressive, which Section 8.7 plainly is not.
Conclusion: An unconscionability challenge to Section 8.7 would almost certainly fail. The parties are sophisticated, the provision is mutual, the contract was negotiated at arm's length, and the exclusion preserves meaningful alternative remedies. This is precisely the type of commercially reasonable risk allocation that New York law protects.
D. Failure of Essential Purpose
N.Y. U.C.C. § 2-719(2) provides that "[w]here circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act." This provision operates as a safety valve, ensuring that parties are not left without any remedy at all when the contractual remedy proves illusory. However, the doctrine is narrow in scope and has been applied sparingly by New York courts.
Kestrel may argue that the exclusive remedy of replacement or credit has failed of its essential purpose because WAL terminated the MSA, thereby rendering the replacement and credit remedies unavailable. The argument would be that termination has destroyed the contractual framework within which the exclusive remedy was designed to operate, and that the failure of the remedy triggers Kestrel's right to pursue any remedy available under the UCC, including consequential damages.
This argument is flawed for several reasons.
First, the exclusive remedy framework in Section 8.7 itself contemplates termination as the ultimate remedy upon Persistent Quality Failure. Termination is expressly identified as the third prong of the exclusive remedy — alongside replacement and credit — and is incorporated into the remedial scheme by cross-reference to Section 14.2(b). Termination is therefore part of the contractual remedy, not evidence of its failure. The essential purpose of the exclusive remedy clause was to provide an escalating series of remedies — replacement, credit, or termination — calibrated to the severity and persistence of quality failures. That purpose has been fulfilled, not frustrated.
Second, under New York law, the failure-of-essential-purpose analysis is applied narrowly and is generally found only where a repair-or-replace remedy proves impossible due to the seller's inability or unwillingness to perform — for example, where the seller repeatedly attempts repairs but is unable to bring the product into conformance, leaving the buyer with a defective product and no recourse. See, e.g., Cayuga Harvester, 95 A.D.2d at 10 (failure of essential purpose found where seller's repair efforts were unsuccessful and buyer was left with a non-functional machine). That is not the situation here. WAL did not experience a failure of the remedy; rather, WAL exercised the remedy of termination that was expressly provided for in the MSA.
Third, and most importantly, New York courts have held that a consequential damages exclusion clause can survive even when the exclusive remedy fails of its essential purpose, where the two provisions are independent and the consequential damages waiver is separately bargained for. See Cayuga Harvester, 95 A.D.2d at 11 (noting the "growing trend" among courts to treat the consequential damages exclusion and the exclusive remedy clause as independent provisions); Kearney & Trecker Corp. v. Master Engraving Co., 107 N.J. 584, 527 A.2d 429, 439 (1987) (adopted by several New York federal courts applying New York law, holding that a consequential damages exclusion may survive the failure of an exclusive remedy where the two clauses are independent). In Section 8.7 of the MSA, the consequential damages waiver is set forth in a separate paragraph from the exclusive remedy provision and uses standalone language ("Neither party shall be liable . . . regardless of the form of action . . . and regardless of whether such damages were foreseeable"). This structure demonstrates that the consequential damages waiver was intended to operate independently of the exclusive remedy clause.
Conclusion: Kestrel's failure-of-essential-purpose argument is unlikely to succeed. Termination is an integral part of the contractual remedial scheme, not a failure of it. And even if the Tribunal were to find a failure of essential purpose with respect to the exclusive remedy (replacement/credit), the independent consequential damages waiver in Section 8.7 would remain enforceable as a separately bargained-for provision.
E. Gross Negligence or Willful Misconduct Carve-Out
Under certain circumstances, New York courts have declined to enforce limitation-of-liability clauses where the breaching party acted with gross negligence or willful misconduct. The rationale is that public policy precludes a party from insulating itself from liability for egregious misconduct. See Kalisch-Jarcho, 58 N.Y.2d at 385 (noting that limitation-of-liability clauses are not enforceable where they purport to exonerate a party from intentional or reckless conduct); Sommer v. Stonefield Enterprises, 79 N.Y.2d 540, 554 (1992). However, this exception is narrow and requires a clear showing of intentional wrongdoing or conduct that evinces a reckless disregard for the rights of others.
Kestrel's Statement of Claim, filed on April 28, 2023, alleges that WAL's rejections were "wrongful" and based on "fabricated or exaggerated quality deficiencies" — language that may be intended to invoke a willful misconduct or bad-faith argument as a basis for circumventing Section 8.7. Kestrel's Statement of Claim does not expressly frame the argument in terms of gross negligence or willful misconduct, but the factual allegations appear designed to lay the groundwork for such an argument.
WAL's position is that the rejections were entirely justified and supported by objective evidence. Independent metallurgical testing performed by Arclight Materials Science Inc., under the supervision of Dr. Raymond Chow, Ph.D., confirmed that porosity levels in the rejected lots ranged between 0.19% and 0.38%, exceeding the contractual limit of ≤0.25% as specified in WAL-SPEC-TH-401, Appendix C, Table 3. Dr. Chow's testing methodology followed ASTM E1441 and ASTM B311 standards and is documented in seven separate test reports corresponding to the seven rejected lots. WAL relied on these independent test results in good faith in making its rejection determinations and in ultimately issuing the Notice of Termination for Cause.
To the extent Kestrel seeks to circumvent Section 8.7 via a willful misconduct theory, the factual record strongly supports WAL's good-faith reliance on contractual specifications and independent testing. Kestrel has not alleged that Dr. Chow's testing was fabricated or that WAL colluded with Arclight to produce false results; Kestrel's position appears to be limited to a disagreement about the appropriate porosity threshold and testing methodology. Such disagreements — even if Kestrel prevails on the underlying quality dispute — do not rise to the level of gross negligence or willful misconduct necessary to override a contractual limitation of liability.
Moreover, even a wrongful-termination theory — i.e., a finding by the Tribunal that WAL's rejections were unjustified and the termination therefore improper — would not transform consequential damages into direct damages. The nature of the damages claimed by Kestrel (lost profits, reputational harm, lost business opportunities) remains consequential regardless of the intent behind or justification for WAL's actions. The distinction between direct and consequential damages is determined by the nature of the loss, not by the nature of the breach. See Tractebel, 487 F.3d at 109 ("The characterization of damages as general or consequential depends on the nature of the injury, not the nature of the cause of injury").
V. Application to Kestrel's Specific Claims
A. Summary Table
B. Detailed Application
Lost profits (€12.83 million + €27.15 million = €39.98 million). The combined lost-profits claim of €39.98 million constitutes forward-looking expectation damages based on Kestrel's projected margins over the remaining MSA term and two discretionary renewal periods. These are quintessentially consequential damages — they represent the profits Kestrel expected to earn from future performance that was never rendered, calculated on the basis of Kestrel's particular cost structure and assumed order volumes. Lost profits are squarely barred by Section 8.7, which expressly excludes "lost profits" and "lost revenue" from recoverable damages. The renewal-period component of the claim (€27.15 million) is additionally infirm because the renewal options under Section 3.2 of the MSA were exercisable solely at WAL's discretion, and WAL was under no obligation to renew. Even absent the Section 8.7 waiver, Kestrel would face substantial obstacles in recovering lost profits for periods during which WAL had no contractual obligation to continue the relationship.
Reputational damages and lost business opportunities (€3.90 million). Kestrel's claim for reputational damages and lost business opportunities is remote, speculative, and arises not from the breach itself but from the impact of WAL's termination on Kestrel's relationships with unidentified third parties and on its standing in the aerospace supply market. These are classic consequential or special damages under New York law. They are expressly enumerated in Section 8.7's list of excluded damage types ("reputational harm") and fall squarely within the waiver. As noted above, a separate memorandum will address the independent insufficiency of this claim.
Unreimbursed rework costs (€3.42 million). Even if rework costs are arguably direct damages — representing actual expenditures incurred in performing Kestrel's contractual cure obligation — Section 8.7's exclusive remedy clause limits Kestrel's available remedies to replacement, credit, or termination. The exclusive remedy framework does not include monetary reimbursement for the cost of Kestrel's own cure efforts. Kestrel bore the obligation to cure non-conforming products at its own expense under Section 8.4, and the MSA's risk allocation does not contemplate shifting those costs to WAL. Kestrel cannot recover its rework costs through the exclusive remedy framework, and the consequential damages waiver independently bars recovery to the extent the rework costs are characterized as consequential rather than direct.
VI. Potential Counterarguments and Risk Assessment
A. Kestrel's Likely Counterarguments
Based on the allegations in Kestrel's Request for Arbitration and Statement of Claim, as well as the general landscape of challenges to consequential damages waivers under New York law, we anticipate that Kestrel may advance the following counterarguments:
1. Unconscionability. Kestrel may argue that Section 8.7 is unconscionable and therefore unenforceable under UCC § 2-719(3). As analyzed in detail in Part IV.C above, this argument lacks merit. Both parties are sophisticated commercial entities of comparable bargaining power, both were represented by experienced legal counsel, the MSA was negotiated at arm's length over a period of months, and the consequential damages waiver is mutual. There is no procedural unconscionability — Kestrel had a meaningful choice and exercised it — and no substantive unconscionability — the waiver is balanced, preserves alternative remedies, and is standard in aerospace supply agreements. We assess the likelihood of success for this argument as very low.
2. Failure of essential purpose. Kestrel may argue that WAL's termination of the MSA caused the exclusive remedy of replacement and credit to fail of its essential purpose, thereby triggering Kestrel's right to pursue all remedies available under the UCC, including consequential damages. As analyzed in Part IV.D above, this argument is unlikely to succeed. Termination is an integral part of the contractual remedial scheme — it is the third prong of the exclusive remedy expressly provided for in Section 8.7 — and therefore does not constitute a failure of the remedy. Moreover, even if the Tribunal were to find a failure of essential purpose with respect to the exclusive remedy, the independent consequential damages waiver would survive as a separately bargained-for provision.
3. Willful misconduct / bad faith. Kestrel has alleged that WAL's rejections were "wrongful" and based on "fabricated or exaggerated quality deficiencies." To the extent this is intended to invoke a willful misconduct or bad-faith carve-out to the consequential damages waiver, the factual record strongly favors WAL. Independent metallurgical testing by Dr. Chow of Arclight Materials Science Inc. confirmed that porosity levels in rejected lots exceeded the contractual threshold. WAL's reliance on these independent test results was reasonable and in good faith. Even a finding that WAL's rejections were unjustified — which we do not concede — would not rise to the level of gross negligence or willful misconduct required to override a contractual limitation of liability. Furthermore, even a wrongful-termination finding would not transform consequential damages into direct damages; the nature of the loss, not the intent of the breach, determines the characterization.
4. Scope of the waiver — quality disputes only. Kestrel may argue that Section 8.7, by its heading ("Exclusive Remedy for Quality Failures"), applies only when quality failures are conceded or established, and not when the central dispute is whether a quality failure occurred at all. On this theory, if the Tribunal finds that WAL's rejections were unjustified — i.e., that no quality failure existed — then Section 8.7 would not apply because its precondition (a quality failure) was never satisfied.
This argument is textually unsupported. The operative language of Section 8.7's consequential damages waiver is broad and general: "Neither party shall be liable to the other for any indirect, incidental, special, consequential, or punitive damages arising out of or related to this Agreement or the performance or non-performance of obligations hereunder." (Emphasis added.) This language encompasses all disputes arising under or related to the MSA, not merely disputes in which a quality failure has been established. Moreover, the exclusive remedy clause itself refers to "any non-conformance, defect, or quality failure" — phrasing that encompasses alleged non-conformance, not only proven non-conformance. The scope of Section 8.7 is broad enough to encompass disputes about whether quality standards were met, not merely disputes about the consequences of conceded quality failures.
Additionally, the heading of a contractual provision does not control its interpretation under New York law. See N.Y. U.C.C. § 1-107 (now § 1-303) (providing that section captions are part of the Code but do not control interpretation); see also Restatement (Second) of Contracts § 203(d) (separately negotiated or added terms are given greater weight than standardized terms or headings).
B. Overall Risk Assessment
We assess the overall risk that Section 8.7 will be found unenforceable as low. The contractual language is clear and comprehensive, the parties are sophisticated commercial entities of comparable bargaining power, the waiver is mutual, the MSA preserves meaningful alternative remedies, and New York law strongly favors the enforcement of negotiated limitations of liability and consequential damages waivers in commercial transactions. The most commonly raised defenses to such provisions — unconscionability, failure of essential purpose, and willful misconduct — are all factually and legally weak in this case.
The Tribunal, seated in New York and applying New York law pursuant to Section 22.1 of the MSA, should apply these principles regardless of the international character of the arbitration. ICC tribunals regularly give effect to contractual limitations of liability and consequential damages waivers where the governing law so provides, and there is no basis for departing from that approach here.
The one area of modest vulnerability is the rework cost claim of €3.42 million, which presents a closer question on the direct-versus-consequential characterization. However, even on this claim, we believe the better reading of Section 8.7 bars recovery, and the quantum is relatively small in comparison to the total claim of €47.3 million.
VII. Relevance to WAL's Counterclaim
WAL intends to assert a counterclaim of approximately €5.17 million in its Statement of Defense and Counterclaim, representing the incremental cost incurred by WAL in procuring replacement components from Valkyr Precision Components Inc. ("Valkyr") following the termination of the MSA with Kestrel.
WAL's counterclaim is structured as a direct-damages claim representing the cost of cover — specifically, the difference between the price WAL paid Valkyr for replacement components and the price WAL would have paid Kestrel under the MSA for the same components. The calculation is as follows:
•  Number of replacement units procured from Valkyr: 1,680 units
•  Valkyr unit price: €8,432.92
•  Kestrel Contract Year 4 unit price: €5,222.92
•  Price differential per unit: €3,210.00
•  Gross cost differential: 1,680 × €3,210.00 = €5,392,800.00
•  Less: Valkyr introductory discount of 4.2%: €5,392,800.00 × 0.958 = €5,166,503.00 (rounded to €5.17 million)
This counterclaim is framed as a cost-of-cover claim, analogous to N.Y. U.C.C. § 2-712, which permits a buyer who has rightfully rejected goods or justifiably revoked acceptance to "cover" by making in good faith and without unreasonable delay any reasonable purchase of goods in substitution for those due from the seller. Cover damages under Section 2-712 are measured as the difference between the cost of cover and the contract price, together with incidental and consequential damages, less expenses saved in consequence of the seller's breach.
WAL's cost-of-cover claim constitutes direct damages — the additional cost incurred to obtain the goods that Kestrel was obligated but failed to supply in conforming condition. Unlike lost profits or reputational harm, cover damages represent the immediate and direct financial consequence of the seller's non-performance: the buyer must pay more to obtain substitute goods. This is the paradigmatic example of a direct-damage recovery in a sale-of-goods context.
Accordingly, the Section 8.7 consequential damages waiver does not affect WAL's right to recover direct damages on its counterclaim. While Section 8.7 limits both parties' right to recover consequential damages, it does not limit or waive direct damages. WAL's cost-of-cover claim falls outside the scope of the waiver and is fully recoverable, subject to proof of the reasonableness of the cover transaction and the justification for WAL's rejection and termination (which are addressed in the separate December 2022 memorandum).
VIII. Recommendations
Based on the foregoing analysis, we recommend the following course of action:
1. Primary defensive argument. WAL should assert Section 8.7 of the MSA as a complete bar to all four categories of Kestrel's damages claim, totaling €47.3 million, in the Statement of Defense and Counterclaim. The Section 8.7 defense should be framed as a threshold legal issue that disposes of the entirety of Kestrel's damages claim without the need for detailed quantum analysis. The consequential damages waiver bars the lost-profits claims (€12.83 million and €27.15 million), the reputational damages claim (€3.90 million), and the rework costs claim (€3.42 million). The Statement of Defense and Counterclaim is due on June 30, 2023.
2. Briefing strategy. In our written submissions, we should present the Section 8.7 analysis as a threshold issue — if the Tribunal enforces the waiver, the entire quantum analysis of Kestrel's claims becomes moot, and the proceeding can be streamlined to focus on the merits of WAL's counterclaim and Kestrel's defenses thereto. We should consider requesting that the Tribunal address the enforceability of Section 8.7 as a preliminary matter, either through bifurcation or through a procedural order addressing threshold legal issues before the quantum phase. This approach would conserve the parties' resources and the Tribunal's time and would be consistent with ICC's emphasis on procedural efficiency.
3. Expert coordination. We should instruct Dr. Nadia Ostrovsky of Ridgeline Economic Consulting LLC, WAL's damages expert, to include in her expert report an alternative damages analysis showing that, even if the Section 8.7 waiver is not enforced, Kestrel's damages figures are substantially overstated. Specific areas of vulnerability in Kestrel's damages calculation include: (a) the assumed margin of 22.4%, which appears inflated relative to industry benchmarks and Kestrel's own historical performance in Contract Years 1 through 3; (b) the inclusion of lost profits for two discretionary renewal periods, which are speculative and contingent on WAL's unexercised option; (c) the absence of any mitigation analysis for the reputational damages claim; and (d) the methodological deficiencies in Kestrel's rework cost calculations, which appear to include overhead charges and management time that would have been incurred regardless of the rework activities. Dr. Ostrovsky should present this alternative analysis as a fallback position, clearly labeled as conditional on the Tribunal's rejection of the Section 8.7 defense.
4. Document production. In the Redfern Schedule (to be submitted in connection with the procedural conference scheduled for March 2023), we should request production of Kestrel's internal communications regarding the negotiation of Section 8.7 of the MSA. Such documents — including emails, internal memoranda, and board-level approvals — would likely demonstrate that the consequential damages waiver was a negotiated, understood, and deliberately accepted term, further undermining any unconscionability argument. Specifically, we should request: (a) all communications between Kestrel's commercial team and its legal counsel at Hengeler Mueller regarding Sections 8.4, 8.7, and 14.2 of the MSA; (b) any board or management committee presentations regarding the MSA negotiation that discuss risk allocation or limitation of liability; and (c) Kestrel's internal markup and redline history of Article 8 of the MSA.
5. Forensic accounting. We should coordinate with Sandra Gillespie at Canfield & Thorpe LLP regarding the rework cost claim of €3.42 million. As noted above, this category of damages is the most vulnerable to characterization as direct damages and therefore requires careful scrutiny on both legal and factual grounds. Ms. Gillespie should be tasked with: (a) analyzing the composition of Kestrel's claimed rework costs to determine whether they include overhead, administrative charges, or other indirect costs that should not be recoverable even as direct damages; (b) determining whether Kestrel's rework costs are consistent with commercially reasonable cure efforts or reflect excessive expenditures; and (c) identifying any rework costs attributable to deficiencies in Kestrel's own manufacturing processes (as opposed to efforts to meet WAL's specifications), which would further support the argument that these costs are properly borne by Kestrel under the MSA's risk allocation framework.
IX. Conclusion
Section 8.7 of the MSA is enforceable under New York law and bars Kestrel's claims for lost profits for the remaining term (€12.83 million), lost profits for the discretionary renewal terms (€27.15 million), reputational damages and lost business opportunities (€3.90 million), and unreimbursed rework costs (€3.42 million). The total claimed damages of €47.3 million are consequential in nature — or, in the case of the rework costs, fall outside the exclusive remedy framework — and are within the scope of the waiver.
The enforceability of Section 8.7 is supported by the clear and unambiguous language of the provision, the mutual nature of the waiver, the sophistication of both parties, the arm's-length negotiation of the MSA, the statutory presumption of validity under N.Y. U.C.C. § 2-719(3), and the consistent body of New York case law upholding consequential damages waivers in commercial transactions. The principal counterarguments available to Kestrel — unconscionability, failure of essential purpose, willful misconduct, and narrow scope of the waiver — are all factually and legally weak under the circumstances of this case.
The Section 8.7 waiver does not affect WAL's counterclaim of approximately €5.17 million, which is a direct cost-of-cover claim properly structured as direct damages under N.Y. U.C.C. § 2-712.
This analysis should be incorporated as a central defense in all arbitration submissions, beginning with the Statement of Defense and Counterclaim due on June 30, 2023. We recommend presenting the Section 8.7 defense as a threshold issue capable of disposing of the entirety of Kestrel's damages claim and reserving the alternative quantum analysis as a fallback position.
This memorandum is a privileged and confidential attorney work product prepared for the exclusive use of Whitmore Aerospace LLC in connection with ICC Case No. 27914/MHM. It is not intended for distribution to any third party and should not be disclosed outside the attorney-client relationship without the prior written consent of Drummond & Fenwick LLP.
Prepared by:
Jeffrey Park Associate Drummond & Fenwick LLP
Claim | Amount | Nature | Barred by § 8.7?
Lost profits — remaining term (CY5) | €12.83M | Consequential | Yes
Lost profits — renewal periods (CY6–CY7) | €27.15M | Consequential | Yes
Reputational damages / lost opportunities | €3.90M | Consequential | Yes
Unreimbursed rework costs | €3.42M | Arguably direct, but outside exclusive remedy | Yes (under exclusive remedy clause)
Total barred | €47.30M

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