1019-00001 · Haber Reinhardt Schlosser Partners · Internal Memoranda

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

TO: Theodore Langston, Partner

FROM: Simone Laroche, Senior Associate

DATE: December 18, 2022

RE: Analysis of Material Breach and Termination Rights Under Master Supply Agreement — Whitmore Aerospace LLC v. Kestrel Dynamics GmbH, ICC Case No. 27914/MHM

ENGAGEMENT NO.: 1019-00001

I. Executive Summary

This memorandum analyzes Whitmore Aerospace LLC's ("WAL") termination rights under § 14.2 of the Master Supply Agreement for Titanium Alloy Turbine Housings dated June 15, 2018 (the "MSA," reference WAL-KDG-MSA-2018-0615), entered into between WAL, as Buyer, and Kestrel Dynamics GmbH ("Kestrel"), as Seller. The analysis has been prepared at your request in connection with the pending ICC arbitration, Case No. 27914/MHM, to support preparation of WAL's Statement of Defense and Counterclaim.

Principal Conclusion. Based on my review of the MSA (including Amendments No. 1 and No. 2), the lot rejection records, and the independent metallurgical testing reports from Arclight Materials Science Inc., it is my opinion that WAL properly terminated the MSA on October 3, 2022 under § 14.2(b) (Persistent Quality Failure). Between March and September 2022, WAL rejected fourteen lots of titanium alloy turbine housings for non-conformance with the porosity specification set forth in WAL-SPEC-TH-401, Appendix C, Table 3. Of those fourteen rejected lots, seven remained uncured after the expiration of the applicable 45-calendar-day cure period provided under Amendment No. 2. The Persistent Quality Failure threshold defined in § 8.4 of the MSA — three or more uncured rejections in any rolling 12-month period — was therefore exceeded by a significant margin. WAL's October 3, 2022 Notice of Termination for Cause was procedurally compliant and substantively justified.

Secondary Conclusion. Even if the Tribunal were to evaluate the termination under the alternative pathway set forth in § 14.2(a), which permits termination for material breach following a 60-day cure period, Kestrel's repeated delivery of non-conforming products over a six-month period affecting 1,680 units would likely constitute a material breach of the MSA that remained uncured. The sustained pattern of quality failures — including Kestrel's complete failure to attempt any cure on five of the seven uncured lots — demonstrates that additional cure opportunities would have been futile, a recognized defense under the governing law of the State of New York, which applies to the MSA pursuant to § 22.1.

This memorandum also addresses and rebuts the principal counterarguments we anticipate Kestrel will advance, most notably: (i) that WAL applied unpublished, stricter porosity specifications as a pretext for termination; (ii) that WAL engineered the lot rejections to justify switching to a lower-cost domestic supplier; and (iii) that Amendment No. 2's extension of the cure period should be broadly construed to require WAL to show greater leniency. Each of these arguments fails on the facts and the law, as set forth in detail below.

If the Tribunal sustains WAL's termination defense, the entirety of Kestrel's claimed damages of approximately €47.3 million should be dismissed, and WAL's counterclaim of approximately €5.17 million in replacement-component costs should be sustained.

II. Factual Background

A. The MSA and Its Key Provisions

On June 15, 2018, WAL and Kestrel entered into the MSA, a comprehensive supply agreement governing the manufacture and delivery of Ti-6Al-4V ELI (Extra Low Interstitials) titanium alloy turbine housings (the "Products") for use in WAL's commercial and defense aerospace propulsion systems. The MSA was the culmination of an approximately nine-month negotiation process and reflected the parties' intention to establish a long-term strategic supply relationship for a critical component in WAL's turbine assembly operations.

The MSA's principal terms, relevant to the present analysis, are summarized as follows:

Term. The MSA has a base term of five years, commencing on June 15, 2018 and expiring on June 14, 2023, subject to two optional one-year renewal periods exercisable at WAL's sole discretion upon not less than 120 days' written notice prior to the expiration of the then-current term. The renewals are expressly characterized as options, not obligations, and Kestrel has no right to compel WAL to exercise them.

Scope of Supply. Under § 4.1 of the MSA, Kestrel is obligated to manufacture and deliver the Products in conformance with WAL engineering specifications WAL-SPEC-TH-401 through WAL-SPEC-TH-409. These specifications govern the dimensional tolerances, material composition, mechanical properties, surface finish requirements, non-destructive testing protocols, and — critically for present purposes — the porosity tolerances applicable to the cast titanium alloy housings.

Annual Volume Commitment. WAL committed to purchase a minimum of 2,400 units per contract year, with the right to order up to a maximum of 3,600 units per contract year (subsequently increased to 4,000 units by Amendment No. 1). Kestrel was obligated to maintain sufficient manufacturing capacity and raw material inventory to fulfill orders up to the maximum annual volume.

Delivery Terms. Section 6.1 of the MSA provides that all deliveries are to be made DDP (Delivered Duty Paid) to WAL's manufacturing facility located at 8500 Coppermine Road, Manassas, Virginia 20110, in accordance with Incoterms 2020. Title and risk of loss pass to WAL only upon delivery to and acceptance at the Manassas facility.

Quality Standards. Section 8.1 requires Kestrel to maintain AS9100 Rev D certification (the aerospace sector quality management standard) throughout the term of the MSA. Section 8.2 provides that each lot delivered to WAL is subject to incoming inspection by WAL in accordance with WAL's quality control procedure WAL-QCP-100. Under § 8.3, WAL has 15 business days from the date of delivery to inspect each lot and either accept or reject it based on conformance with the applicable WAL engineering specifications. If WAL rejects a lot, it must issue a written rejection notice to Kestrel identifying the specific deficiency, and Kestrel then has a specified cure period (originally 30 calendar days, subsequently extended to 45 calendar days by Amendment No. 2) to either replace the non-conforming units with conforming units or rework the non-conforming units to bring them into specification.

Unit Pricing and Escalation. Under § 5.2, the base unit price for Contract Year 1 (June 15, 2018 through June 14, 2019) was €4,850 per unit. The unit price escalates at a rate of 2.5% per annum, compounded annually, over the term of the MSA. At the minimum annual volume of 2,400 units and applying the contractual escalation, the aggregate value of the MSA over the five-year base term is approximately €61.2 million, underscoring the commercial significance of the supply relationship.

Governing Law and Dispute Resolution. Section 22.1 provides that the MSA is governed by and construed in accordance with the laws of the State of New York, without regard to its conflict-of-laws principles. Section 22.3 provides that any dispute arising out of or in connection with the MSA shall be finally settled by arbitration under the ICC Rules of Arbitration (2021 edition), with the seat of arbitration in New York, New York, and the language of the arbitration in English.

B. Amendments to the MSA

Since its execution, the MSA has been amended twice:

Amendment No. 1 (February 10, 2020). This amendment expanded the scope of the MSA to include a new high-temperature variant of the turbine housing, governed by the additional engineering specification WAL-SPEC-TH-410. The high-temperature variant was developed to meet requirements for WAL's next-generation propulsion platform, the WX-7700 series. Amendment No. 1 also increased the maximum annual volume from 3,600 to 4,000 units to accommodate anticipated demand for the new variant. All other terms of the MSA remained unchanged.

Amendment No. 2 (September 3, 2021). This amendment was negotiated in the context of ongoing COVID-19 pandemic-related disruptions to global supply chains, which had affected both parties' operations during 2020 and the first half of 2021. Amendment No. 2 made two changes to the MSA. First, it extended the cure period under § 8.3 from 30 calendar days to 45 calendar days, acknowledging that pandemic-related logistical challenges — including freight delays, raw material shortages, and workforce constraints at Kestrel's manufacturing facilities in Stuttgart, Germany — had made the original 30-day cure period impractical. Second, Amendment No. 2 added a force majeure carve-out for pandemic-related delays, shielding Kestrel from liability for delivery schedule deviations directly attributable to government-imposed lockdowns or quarantine measures. Critically, Amendment No. 2 did not modify the Persistent Quality Failure threshold defined in § 8.4 (three or more uncured rejections in any rolling 12-month period), nor did it alter any of the engineering specifications governing the Products, including the porosity tolerance in WAL-SPEC-TH-401.

C. The Quality Specification at Issue

The central quality specification at issue in this dispute is the porosity tolerance for the Ti-6Al-4V ELI titanium alloy turbine housings. Porosity — the presence of microscopic voids or pores within the cast metal — is a critical performance parameter for turbine housings because excessive porosity compromises the structural integrity, fatigue life, and pressure-containment capability of the component. In the aerospace context, even small exceedances of allowable porosity levels can render a component unfit for service in a turbine assembly operating at high temperatures and rotational velocities.

The contractual porosity tolerance is expressly stated in WAL-SPEC-TH-401, Appendix C, Table 3, which sets a maximum allowable porosity of ≤0.25% by volume. This specification was part of the original engineering documentation incorporated by reference into the MSA at the time of its execution on June 15, 2018 and was not modified by either Amendment No. 1 or Amendment No. 2. The ≤0.25% threshold was established by WAL's engineering team following extensive materials testing and is consistent with industry-standard practice for investment-cast titanium alloy components in aerospace propulsion applications.

WAL's incoming inspections under WAL-QCP-100 tested each delivered lot against this specification using computed tomography (CT) scanning and metallographic cross-sectioning, which are recognized industry-standard methodologies for porosity measurement in cast titanium alloys. The incoming inspection process was overseen by Dr. Ingrid Vollmer, WAL's Senior Vice President of Engineering and Manufacturing, who has more than twenty-five years of experience in aerospace materials engineering. The procurement and vendor management functions, including the day-to-day management of the Kestrel relationship, were handled by Gerald Huang, WAL's Vice President of Global Supply Chain Operations.

D. The Lot Rejections (March–September 2022)

The facts giving rise to this dispute center on a sustained pattern of quality failures in Kestrel's deliveries during the fourth contract year of the MSA. Between March 7, 2022 and September 19, 2022 — a period of approximately six months — WAL rejected a total of fourteen separate lots of turbine housings delivered by Kestrel, comprising an aggregate of 1,680 units. Each lot was rejected on the basis of non-conformance with the porosity specification of ≤0.25% set forth in WAL-SPEC-TH-401, Appendix C, Table 3.

Upon receiving the rejection notices, Kestrel was afforded the full 45-calendar-day amended cure period (per Amendment No. 2) for each rejected lot. Of the fourteen rejected lots, Kestrel successfully cured seven — either by replacing the non-conforming units or reworking them to bring the porosity levels within specification. However, seven lots remained uncured after the expiration of the 45-day cure period. Of those seven uncured rejections, five lapsed without any cure attempt whatsoever by Kestrel — Kestrel simply failed to respond or take any remedial action within the cure window. The remaining two uncured lots were the subject of deficient cure efforts by Kestrel (replacement units that, upon re-inspection, still failed to meet the porosity specification).

To verify the accuracy of WAL's incoming inspection results and to develop independent evidence for use in any potential dispute, WAL retained Arclight Materials Science Inc., an independent metallurgical testing laboratory based in Philadelphia, Pennsylvania. Dr. Raymond Chow, Principal Engineer at Arclight, conducted independent porosity testing on samples drawn from each of the fourteen rejected lots using both computed tomography and metallographic analysis. Dr. Chow's testing confirmed that the rejected lots exhibited porosity levels ranging from 0.19% to 0.38%, with the majority of lots exceeding the contractual ≤0.25% threshold. The range of 0.19% to 0.38% reflects lot-level measurements; within individual lots, many sampled units exhibited porosity levels well above 0.25%, while a minority fell below the threshold, consistent with the inherent variability of the casting process but reflecting an overall process that had drifted materially out of control.

The chronology of rejections is summarized in the following table:

As reflected in the table, by October 3, 2022 — the date of WAL's Notice of Termination — the cure periods for the first five uncured lots (KDG-2022-0307, KDG-2022-0404, KDG-2022-0516, KDG-2022-0620, and KDG-2022-0725) had already expired, and two additional lots (KDG-2022-0822 and KDG-2022-0919) had cure periods still running but which ultimately lapsed uncured. The Persistent Quality Failure threshold of three uncured rejections had been exceeded as early as the expiration of the cure period for Lot KDG-2022-0516 on June 30, 2022, and continued to worsen through the balance of the rolling 12-month window.

E. WAL's Notice of Termination

On October 3, 2022, WAL issued a formal Notice of Termination for Cause to Kestrel, transmitted via registered international courier and electronic mail to Kestrel's designated contract representative at its Stuttgart headquarters. The Notice expressly cited § 14.2(b) of the MSA as the contractual basis for termination and identified the Persistent Quality Failure giving rise to the termination right — specifically, the seven uncured lot rejections occurring within the rolling 12-month period from March 7, 2022 through September 19, 2022, far exceeding the three-rejection threshold defined in § 8.4. The Notice identified each uncured lot by lot number, rejection date, specific deficiency (porosity exceedance relative to WAL-SPEC-TH-401, Appendix C, Table 3), and the date on which the 45-day cure period expired without cure.

In response, Kestrel disputed the termination and, on November 7, 2022, filed a Request for Arbitration with the International Chamber of Commerce, initiating the proceedings now pending as ICC Case No. 27914/MHM. In its Request for Arbitration, Kestrel alleges that WAL's termination itself constituted a material breach of the MSA and seeks damages in the aggregate amount of approximately €47.3 million, comprising lost profits for the remaining base term (€12.83 million), lost profits for the two renewal periods (€27.15 million), rework costs (€3.42 million), and reputational damages (€3.90 million). WAL filed its Answer and Counterclaim, in which it defends the termination and asserts a counterclaim for replacement-component costs in the amount of approximately €5.17 million.

F. Transition to Replacement Supplier

Following the termination of the MSA, WAL undertook commercially reasonable efforts to identify and engage a qualified replacement supplier for the titanium alloy turbine housings. After evaluating several potential suppliers — a process managed by Gerald Huang and documented in WAL's procurement records — WAL selected Valkyr Precision Components Inc. ("Valkyr"), a specialty aerospace components manufacturer headquartered in Tucson, Arizona. Valkyr holds AS9100 Rev D certification and has experience manufacturing investment-cast titanium alloy components for comparable propulsion applications.

Valkyr's negotiated unit price is €8,432.92, which represents a significant premium of approximately €3,210 per unit over Kestrel's Contract Year 4 unit price of €5,222.92 (calculated by applying the contractual 2.5% annual escalation to the €4,850 base price over four contract years). The premium reflects several factors, including Valkyr's expedited tooling and qualification costs, the relatively short notice on which Valkyr was required to commence production, and the absence of the economies of scale that Kestrel achieved over several years of production under the MSA. Valkyr offered WAL a one-time introductory discount of 4.2% on its quoted unit price for the initial order, which WAL accepted.

WAL's decision to engage Valkyr was a commercially reasonable mitigation measure taken in response to the termination of the MSA and the urgent need to maintain continuity of supply for WAL's propulsion assembly operations. The decision was not a pretext for the termination — as discussed in Section IV.B below, the Valkyr engagement was initiated after the October 3, 2022 termination, and Valkyr's significantly higher unit price is inconsistent with a narrative that WAL sought to replace Kestrel for cost reasons.

WAL's counterclaim of approximately €5.17 million reflects the incremental cost of procuring 1,680 replacement units from Valkyr at the premium unit price, net of the 4.2% introductory discount.

III. Legal Analysis

A. Structure of § 14.2 — Two Independent Termination Pathways

Section 14.2 of the MSA provides two distinct and independent grounds upon which either party may terminate the MSA for cause. A careful reading of the provision — and its interaction with § 8.4 — demonstrates that each pathway has its own trigger, its own procedural requirements, and its own cure mechanism. The two pathways are not cumulative; satisfaction of either is independently sufficient to support termination.

§ 14.2(a) — Material Breach. Under this provision, either party may terminate the MSA upon a material breach by the other party that remains uncured for a period of 60 days following written notice specifying the breach. This is a general termination-for-cause provision requiring the terminating party to: (i) identify the material breach in a written notice; and (ii) afford the breaching party a 60-day period in which to cure the identified breach. If the breach is cured within the 60-day window, the termination right lapses.

§ 14.2(b) — Persistent Quality Failure. Under this provision, either party may terminate the MSA upon a Persistent Quality Failure, as that term is defined in § 8.4. Section 8.4 defines "Persistent Quality Failure" as the occurrence of three or more uncured lot rejections (i.e., rejections for which the non-conforming Products have not been replaced or reworked to specification within the applicable cure period) during any rolling 12-month period. This pathway is conceptually and procedurally distinct from the general material breach provision in § 14.2(a). It does not require the terminating party to issue a separate, additional written notice specifying the breach and does not impose an additional 60-day cure period beyond the lot-specific cure already provided under § 8.3 (45 calendar days per lot under Amendment No. 2).

The critical distinction between the two pathways is this: § 14.2(b) operates as a self-executing trigger. Once the Persistent Quality Failure threshold is met — that is, once three or more lot rejections in any rolling 12-month period have gone uncured after the expiration of their respective 45-day cure periods — the terminating party's right to terminate for cause is ripe and may be exercised without further notice or delay. The cure mechanism is embedded in the lot-by-lot rejection process itself: the Seller receives written notice of each rejection, is informed of the specific deficiency, and has 45 days to cure. By the time the Persistent Quality Failure threshold is reached, the Seller has already had at least three separate opportunities to cure individual rejections and has failed to do so. Requiring the Buyer to then provide yet another notice and yet another 60-day cure period — in addition to the multiple 45-day cure periods already provided — would render § 14.2(b) entirely superfluous, as the termination would effectively collapse into the general material breach pathway of § 14.2(a). This interpretation is disfavored under well-settled New York law principles of contract construction, as discussed below.

B. WAL's Termination Was Proper Under § 14.2(b)

1. The Persistent Quality Failure Threshold Was Met

The Persistent Quality Failure threshold defined in § 8.4 — three or more uncured lot rejections in any rolling 12-month period — was unambiguously met, and indeed substantially exceeded, during the period at issue.

Between March 7, 2022 (the date of the first rejection, Lot KDG-2022-0307) and September 19, 2022 (the date of the final rejection, Lot KDG-2022-0919), WAL rejected fourteen lots of turbine housings delivered by Kestrel for non-conformance with the porosity specification of ≤0.25% set forth in WAL-SPEC-TH-401, Appendix C, Table 3. Of these fourteen rejected lots, seven remained uncured after the expiration of the applicable 45-calendar-day cure period. This is more than double the contractual threshold of three uncured rejections.

Each of the seven uncured rejections involved the same category of deficiency: porosity levels exceeding the contractual maximum of 0.25% by volume. The independent metallurgical testing performed by Arclight Materials Science Inc. confirmed that the porosity levels in the rejected lots ranged from 0.19% to 0.38%, with the majority of sampled units in each uncured lot exceeding the 0.25% threshold. The consistency of the deficiency — the same specification, the same failure mode, repeated across multiple lots over a six-month period — underscores the systemic nature of Kestrel's quality failures and negates any suggestion that the rejections were isolated or aberrant.

For each rejected lot, Kestrel was notified in writing of the rejection and was afforded the full 45-calendar-day cure period established by Amendment No. 2. WAL did not truncate or abbreviate the cure period for any lot. Despite being given ample opportunity to cure, Kestrel failed to cure seven lots. The failure to cure was not marginal: five of the seven uncured rejections lapsed without any cure attempt whatsoever — Kestrel simply did not respond to the rejection notices or take any remedial action. The remaining two uncured lots involved deficient cure attempts in which Kestrel provided replacement units that, upon re-inspection, still failed to meet the porosity specification. This pattern of non-responsiveness and deficient cure strongly supports the conclusion that the quality failures were systemic and that Kestrel lacked the manufacturing capability or the operational discipline to bring its Products into conformance with WAL's specifications.

Accordingly, by the time of WAL's October 3, 2022 Notice of Termination, the Persistent Quality Failure threshold had been exceeded by a wide margin, and WAL's right to terminate under § 14.2(b) had clearly crystallized.

2. WAL Followed Proper Procedural Steps

WAL's exercise of its termination right under § 14.2(b) was procedurally proper in all respects.

First, WAL's incoming inspection process for each lot was performed in strict accordance with WAL-QCP-100, the company's established quality control procedure for incoming material inspection. WAL-QCP-100 prescribes the sampling methodology, testing protocols (including CT scanning and metallographic cross-sectioning for porosity measurement), acceptance criteria (keyed to the applicable WAL engineering specifications), and documentation requirements for each inspection. The inspections were overseen by Dr. Ingrid Vollmer, WAL's SVP of Engineering and Manufacturing. The consistency and rigor of the inspection process are well-documented in WAL's quality records and can be substantiated through the testimony of Dr. Vollmer and the inspection technicians.

Second, for each rejected lot, WAL issued a written rejection notice to Kestrel identifying the specific deficiency — namely, porosity exceedance relative to WAL-SPEC-TH-401, Appendix C, Table 3 — and specifying the lot number, the measured porosity levels, and the applicable specification. These rejection notices satisfied the requirements of § 8.3 of the MSA and provided Kestrel with clear, specific, and actionable notice of each non-conformance.

Third, WAL honored the full 45-calendar-day amended cure period (per Amendment No. 2) for each rejected lot before deeming the rejection uncured. WAL did not accelerate or curtail the cure period for any lot, nor did it reject any cure attempt by Kestrel without conducting a re-inspection. In the two cases where Kestrel submitted replacement units as a cure, WAL performed re-inspection under WAL-QCP-100 and determined that the replacement units still failed to meet specification — an objective, documented finding.

Fourth, WAL's October 3, 2022 Notice of Termination for Cause expressly cited § 14.2(b) of the MSA as the contractual basis for termination, identified the Persistent Quality Failure giving rise to the termination right, and enumerated the seven uncured lot rejections by lot number, rejection date, nature of deficiency, and cure-period expiration date. The Notice was transmitted to Kestrel in accordance with the notice provisions of the MSA (§ 21.1, requiring written notice via registered international courier and electronic mail to the designated contract representative).

In sum, WAL followed every procedural step prescribed by the MSA and its amendments. The termination was not hasty, arbitrary, or procedurally defective. WAL allowed the contractual quality-assurance regime to operate as designed — rejection, notice, cure opportunity — before invoking its termination right only after the Persistent Quality Failure threshold was clearly and materially exceeded.

3. The Termination Did Not Require an Additional 60-Day Cure Period

A central issue likely to be raised by Kestrel is whether WAL was required to provide an additional 60-day cure period under § 14.2(a) before terminating the MSA, notwithstanding that the termination was effected under § 14.2(b). For the reasons set forth below, the answer is no.

The 60-day cure provision in § 14.2(a) applies by its terms to terminations for material breach under that subsection. It is a general cure-before-termination mechanism that applies when a party invokes the material breach pathway. Section 14.2(b), by contrast, provides a separate, alternative termination right triggered by a Persistent Quality Failure. The text of § 14.2(b) does not cross-reference, incorporate, or condition the exercise of the Persistent Quality Failure termination right on compliance with the notice and cure procedures of § 14.2(a). The two provisions are drafted as independent, parallel pathways — each with its own triggering event and its own procedural mechanism.

Moreover, the contractual scheme already embeds a robust cure mechanism within the § 8.4 lot rejection process. Under § 8.3, as amended, the Seller receives: (i) a written rejection notice for each non-conforming lot; (ii) a detailed identification of the specific deficiency; and (iii) a 45-calendar-day cure period in which to replace or rework the non-conforming Products. By the time the Persistent Quality Failure threshold of three uncured rejections is reached, the Seller has already received at least three separate written notices, has been apprised of the nature and specifics of each deficiency, and has been afforded at least three separate 45-day cure periods — totaling a minimum of 135 calendar days of aggregate cure opportunity. In WAL's case, Kestrel received fourteen separate rejection notices and was afforded 45-day cure periods for each, representing a combined cure opportunity of 630 calendar days across the fourteen lots.

To require WAL to provide yet another 60-day cure notice on top of this existing cure regime would be to read into § 14.2(b) a procedural requirement that does not appear in its text and that would, in practical effect, render the Persistent Quality Failure termination pathway redundant. If termination under § 14.2(b) required the same 60-day notice and cure as § 14.2(a), there would be no reason for the MSA to include § 14.2(b) at all — the Seller could always insist on the 60-day cure, and the Persistent Quality Failure trigger would add nothing beyond what the material breach provision already provides.

This result is squarely at odds with established principles of New York contract construction. Under New York law, a contract must be read as a whole and interpreted to give effect to every provision, with no provision rendered meaningless or superfluous. See, e.g., Bramwell Bancorp v. Sommer, 8 N.Y.3d 318, 324–25 (2007) ("A reading of the contract should not render any portion meaningless."); Matter of Westmoreland Coal Co., 968 F.3d 526 (applying New York law and declining interpretation that would render contractual provision "mere surplusage"). The preferred interpretation — that § 14.2(b) provides an independent termination right that does not require compliance with the additional notice and cure procedures of § 14.2(a) — gives meaningful effect to both provisions and is consistent with the MSA's overall quality-assurance architecture.

Furthermore, the commercial rationale of § 14.2(b) supports this reading. The Persistent Quality Failure provision exists precisely because the parties recognized that a pattern of recurring quality failures — three or more uncured rejections in a rolling 12-month period — represents a qualitatively different and more serious problem than a single material breach. A supplier that repeatedly delivers non-conforming products and repeatedly fails to cure those non-conformances has demonstrated a systemic inability or unwillingness to perform its quality obligations. In such circumstances, requiring the buyer to issue yet another cure notice and wait yet another 60 days before terminating serves no meaningful purpose and exposes the buyer to ongoing risk of receiving further non-conforming components for use in safety-critical aerospace applications.

C. Alternative Analysis Under § 14.2(a) — Material Breach

Even if the Tribunal were to conclude — contrary to the analysis in Section III.B above — that WAL's termination must be evaluated under the material breach pathway of § 14.2(a), WAL would still prevail.

Kestrel's repeated delivery of non-conforming Products over a sustained six-month period, affecting fourteen lots and 1,680 units, constitutes a material breach of its core obligations under the MSA. Section 4.1 obligates Kestrel to manufacture and deliver Products in conformance with WAL engineering specifications WAL-SPEC-TH-401 through WAL-SPEC-TH-409. The delivery of Products that systematically fail to meet the porosity specification in WAL-SPEC-TH-401, Appendix C, Table 3 — the very specification that ensures the structural integrity and airworthiness of the turbine housings — is a failure to perform a substantial and essential part of the contract.

Under New York law, whether a breach is "material" is a fact-intensive inquiry guided by the factors identified in the Restatement (Second) of Contracts § 241, which New York courts have adopted as the governing analytical framework. See, e.g., 2 E. Allan Farnsworth, Farnsworth on Contracts § 8.16 (3d ed. 2004); Bear Stearns Inv. Prods., Inc. v. Hitachi Auto. Prods. (USA), Inc., 401 B.R. 598, 619 (S.D.N.Y. 2009). Application of the § 241 factors to the facts of this case strongly supports a finding of material breach:

(a) The extent to which the injured party will be deprived of the benefit which it reasonably expected. WAL reasonably expected to receive turbine housings conforming to the porosity specification and fit for use in safety-critical propulsion systems. Instead, WAL received 1,680 non-conforming units over a six-month period — components that could not be incorporated into its turbine assemblies and that, if installed, could pose catastrophic failure risks. WAL was deprived of the fundamental benefit of the supply relationship: a reliable source of specification-compliant turbine housings.

(b) The extent to which the injured party can be adequately compensated in damages for the part of that benefit of which it will be deprived. While monetary damages can partially compensate WAL for the increased costs of procuring replacement components from Valkyr (€8,432.92 per unit versus Kestrel's €5,222.92 per unit), the significant pricing premium and the disruption to WAL's production schedule are not fully remediable through damages alone. Moreover, the ongoing risk of receiving further non-conforming products from Kestrel — a risk demonstrated by the escalating pattern of rejections — cannot be adequately addressed by monetary compensation.

(c) The extent to which the party failing to perform or to offer to perform will suffer forfeiture. Kestrel was given multiple opportunities to cure its quality failures. It received fourteen separate rejection notices, each with a 45-day cure period. It successfully cured seven of the fourteen rejections but failed to cure the remaining seven — including five lots for which it made no cure attempt whatsoever. Kestrel's forfeiture, to the extent any exists, is the result of its own repeated failure to cure, not of any action or inaction by WAL.

(d) The likelihood that the party failing to perform will cure. The six-month pattern of escalating and recurring quality failures, coupled with Kestrel's failure to even attempt cure on five of the seven uncured lots, strongly suggests that Kestrel was unable or unwilling to cure. The quality failures were not isolated incidents attributable to a single identifiable cause; rather, they reflected a systemic process failure that showed no signs of abating. The likelihood of cure was, and remains, low.

(e) The extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing. Kestrel's failure to attempt any cure on five of the seven uncured lots — and its submission of deficient replacement units on the remaining two — does not reflect the conduct of a party acting in good faith to remedy its performance failures. A supplier that receives a rejection notice identifying a specific, measurable deficiency and simply fails to respond within the cure period is not acting consistently with the standards of good faith and fair dealing that New York law imposes on contracting parties.

Taking these factors together, Kestrel's performance failures clearly satisfy the material breach standard under New York law. The breach was not an isolated incident or a minor deviation from the contractual specifications; it was a sustained, systemic pattern of non-conforming deliveries affecting a critical performance parameter of a safety-critical aerospace component.

Cure and Futility. WAL's October 3, 2022 Notice of Termination, while expressly citing § 14.2(b) as the basis for termination, provided Kestrel with constructive notice of the quality failures underlying the termination. By the date of the Notice, the individual 45-day cure periods for each of the uncured lots had already expired, and the aggregate pattern of uncured quality failures — seven rejections in six months, including five with no cure attempt — demonstrated that an additional 60-day cure period would have been futile. Under New York law, a party seeking to terminate for material breach is not required to provide a cure period where cure would be futile. See Norcon Power Partners, L.P. v. Niagara Mohawk Power Corp., 92 N.Y.2d 458, 463 (1998) (recognizing that a party's reasonable insecurity regarding future performance may justify termination where the pattern of past non-performance renders cure meaningless); New Windsor Volunteer Ambulance Corps, Inc. v. Meyers, 442 F.3d 101, 117 (2d Cir. 2006) (noting that a cure period is unnecessary where the breach is of such a character that cure is not reasonably possible). Kestrel's sustained pattern of non-conformance, its repeated failure to cure, and its failure to even attempt cure on multiple occasions all support the conclusion that further cure opportunities would have been an empty formality.

D. The Consequential Damages Waiver (§ 8.7) and Exclusive Remedy Clause

While the primary focus of this memorandum is WAL's termination rights, a brief discussion of § 8.7 is warranted because it provides an independent basis for barring a substantial portion of Kestrel's claimed damages.

Section 8.7 of the MSA provides that the Buyer's exclusive remedy for quality failures in delivered Products is limited to: (i) replacement of the non-conforming Products with conforming Products; (ii) a credit against future orders in the amount of the purchase price of the non-conforming Products; or (iii) upon a Persistent Quality Failure, termination of the MSA in accordance with § 14.2(b). The provision further states that both parties expressly waive all claims for consequential, incidental, punitive, and special damages arising out of or in connection with any quality failure, delivery delay, or termination of the MSA, regardless of whether such damages were foreseeable or whether the party claiming such damages was advised of their possibility.

This provision serves two important functions in the context of this arbitration. First, it reinforces the conclusion that the MSA contemplates a structured, sequential regime for addressing quality failures — rejection, cure, and ultimately termination — and does not envision open-ended damages claims arising from the exercise of the termination right. The contractual architecture is clear: quality failures are to be addressed through the lot-by-lot cure mechanism, and if the cumulative pattern of failures reaches the Persistent Quality Failure threshold, the Buyer's ultimate remedy is termination, not a claim for consequential damages.

Second, and more directly relevant to Kestrel's claims, the consequential damages waiver independently bars several categories of damages that Kestrel has asserted in its Request for Arbitration. Kestrel's claimed damages include: (i) lost profits for the remaining base term of the MSA (€12.83 million); (ii) lost profits for the two optional renewal periods (€27.15 million); (iii) rework costs incurred in connection with cure attempts (€3.42 million); and (iv) reputational damages allegedly arising from the termination and the associated publicity (€3.90 million). These categories total approximately €47.3 million. The lost profits claims (both base term and renewal periods) are quintessential consequential damages. The reputational damages claim is likewise consequential in nature. And the rework costs, to the extent they are recoverable at all, fall within the exclusive remedy framework of § 8.7 (which limits the remedy to replacement or credit, not reimbursement of rework costs). The consequential damages waiver therefore provides a powerful independent basis for dismissing the bulk of Kestrel's claimed damages.

A detailed analysis of the enforceability of the § 8.7 consequential damages waiver under New York law, including the applicable standards for unconscionability and public policy, is reserved for a separate companion memorandum currently in preparation.

IV. Anticipated Counterarguments by Kestrel

Based on the positions articulated in Kestrel's Request for Arbitration and the preliminary communications between counsel, WAL should anticipate and be prepared to rebut the following counterarguments.

A. WAL Applied Unpublished, Stricter Porosity Specifications

Kestrel is expected to argue — and has already alleged in its Request for Arbitration — that WAL's incoming inspections applied an unpublished, more stringent porosity tolerance of ≤0.15%, rather than the contractual tolerance of ≤0.25% specified in WAL-SPEC-TH-401, Appendix C, Table 3. According to Kestrel, WAL unilaterally tightened its acceptance criteria in order to generate a basis for rejecting lots that would have been acceptable under the contractual specification, thereby manufacturing the Persistent Quality Failure that was used as a pretext for termination.

This argument fails on the facts. The contractual porosity tolerance of ≤0.25% is expressly and unambiguously stated in WAL-SPEC-TH-401, Appendix C, Table 3, which was incorporated by reference into the MSA at the time of execution. WAL's incoming inspection records under WAL-QCP-100 consistently identify ≤0.25% as the applicable acceptance criterion for porosity. There is no documentary evidence — in WAL's inspection procedures, work instructions, training materials, or inspection reports — of any unpublished or informal ≤0.15% standard. WAL's Quality Assurance department has confirmed that no such standard was ever adopted, communicated, or applied.

Furthermore, the measured porosity levels in the rejected lots, as confirmed by Arclight's independent testing, ranged from 0.19% to 0.38%. While some individual units within certain lots had porosity levels between 0.19% and 0.25% — i.e., below the contractual threshold — those units were part of lots that, taken as a whole, contained numerous units exceeding 0.25%. Under the MSA's quality framework, acceptance and rejection are determined on a lot basis, not a unit-by-unit basis, consistent with standard statistical quality control practice in aerospace manufacturing. The fact that some individual units within a rejected lot may have had porosity levels below 0.25% does not establish that WAL applied a ≤0.15% standard; it merely reflects the inherent unit-to-unit variability within a non-conforming lot.

Dr. Raymond Chow's independent metallurgical testing at Arclight Materials Science Inc. provides critical corroborative evidence. Dr. Chow, who has no relationship with WAL other than as an independent testing consultant, tested samples from each of the fourteen rejected lots using industry-standard CT scanning and metallographic cross-sectioning methodologies. His results confirmed the porosity exceedances identified by WAL's incoming inspections and are consistent with a lot-level porosity standard of ≤0.25%, not ≤0.15%.

Finally, Kestrel bears the burden of proving its affirmative allegation that WAL applied a non-contractual specification. To meet this burden, Kestrel would need to produce evidence — such as internal WAL communications, inspection work instructions, or calibration records — showing that WAL's inspectors were instructed to reject lots based on a ≤0.15% threshold rather than the contractual ≤0.25%. We do not believe such evidence exists, and WAL's document production should affirmatively rebut this allegation by making available the full set of inspection records, work instructions, and quality assurance protocols.

B. WAL's True Motive Was to Replace Kestrel with Valkyr

Kestrel will likely argue that WAL's termination was pretextual — that WAL sought to replace Kestrel with Valkyr Precision Components Inc. for strategic or cost reasons and used the lot rejections as a manufactured justification for doing so. This argument is expected to focus on the temporal proximity between the termination and the engagement of Valkyr and to characterize the quality rejections as a pretext rather than a genuine quality concern.

This argument is contradicted by the economics and the timeline. Valkyr's negotiated unit price of €8,432.92 is approximately 61.5% higher than Kestrel's Contract Year 4 price of €5,222.92. If WAL's goal had been to replace Kestrel with a lower-cost supplier, it plainly failed — the transition to Valkyr has resulted in a dramatic increase in WAL's per-unit procurement costs for the turbine housings. The significant pricing premium makes no commercial sense as part of a premeditated plan to switch suppliers. To the contrary, the premium demonstrates that WAL would strongly have preferred to continue sourcing from Kestrel at the contractual price, had Kestrel been capable of delivering conforming products.

The timeline of events further undermines Kestrel's narrative. WAL's procurement records and Gerald Huang's contemporaneous correspondence will show that WAL did not initiate discussions with Valkyr or any other potential replacement supplier until after the October 3, 2022 termination. The Valkyr engagement was a mitigation measure undertaken in response to the termination, not a cause of it. WAL's supply chain team began exploring replacement options only when it became clear that Kestrel's quality failures had reached a point where continued sourcing was untenable.

More fundamentally, Kestrel's "pretext" argument is legally immaterial under New York law. Where the contractual grounds for termination are objectively satisfied — as they are here, with seven uncured rejections far exceeding the three-rejection Persistent Quality Failure threshold — the terminating party's subjective motivation is irrelevant. A party that has a contractual right to terminate may exercise that right for any reason or for no reason, provided the objective conditions for termination are met. See Ingle v. Glamore Motor Sales, Inc., 73 N.Y.2d 183, 189 (1989) (noting that where a contract provides a right to terminate, the exercise of that right is not subject to inquiry into motive absent a showing of bad faith that independently constitutes a breach); Naughright v. Weiss, 826 F. Supp. 2d 676, 690 (S.D.N.Y. 2011) (party exercising contractual termination right is not required to demonstrate good motive where the contractual preconditions are met). WAL need not prove that it terminated for "the right reasons" — it need only prove that the Persistent Quality Failure threshold was met, which the documentary evidence overwhelmingly establishes.

C. Amendment No. 2 Extended Cure Period Should Be Broadly Construed

Kestrel may argue that Amendment No. 2's extension of the lot-specific cure period from 30 to 45 calendar days — adopted in the context of COVID-related supply chain disruptions — reflects a broader intent by the parties to accommodate operational challenges at Kestrel and should be construed to require WAL to exercise greater leniency in applying the quality-assurance provisions of the MSA. In essence, Kestrel may attempt to use the COVID-related context of Amendment No. 2 as a basis for arguing that WAL should have been more tolerant of quality failures.

This argument reads into Amendment No. 2 a scope that the text does not support. Amendment No. 2 made two specific, narrowly tailored changes to the MSA: (i) it extended the lot-specific cure period from 30 to 45 calendar days; and (ii) it added a force majeure carve-out for pandemic-related delivery delays. These changes addressed a specific, identified problem — the logistical difficulties of effecting cure (replacement or rework) during a period of global supply chain disruption — and they did so in a specific, limited way: by giving Kestrel additional time to cure, not by relaxing the quality standards or the Persistent Quality Failure threshold.

Critically, Amendment No. 2 did not modify the Persistent Quality Failure threshold defined in § 8.4 (which remained at three uncured rejections in any rolling 12-month period), did not modify the porosity specification in WAL-SPEC-TH-401, and did not add any general "leniency" or "reasonableness" requirement to WAL's exercise of its termination right under § 14.2(b). If the parties had intended Amendment No. 2 to relax the quality standards or raise the termination threshold, they could and would have said so expressly. The absence of any such language is dispositive.

Moreover, WAL fully honored the extended 45-day cure period provided by Amendment No. 2 for every rejected lot. WAL did not apply the original 30-day cure period or otherwise seek to circumvent the amendment. Kestrel was given the full benefit of the amendment and still failed to cure seven lots.

Finally, it bears noting that the COVID-related context of Amendment No. 2 has limited relevance to the quality failures at issue. The porosity exceedances in Kestrel's products are attributable to manufacturing process deficiencies — not to logistics or delivery delays. The force majeure carve-out in Amendment No. 2 applies to delivery schedule deviations attributable to pandemic-related disruptions, not to quality failures in the manufactured product. Kestrel has not identified any causal link between COVID-related disruptions and the specific porosity exceedances that led to the lot rejections.

V. Impact on Kestrel's Damages Claims

A detailed analysis of Kestrel's claimed damages is reserved for separate companion memoranda currently in preparation. However, the following brief overview is provided to illustrate the significance of the termination defense to the overall case.

If the Tribunal sustains WAL's position that the termination was proper under § 14.2(b) (or, alternatively, under § 14.2(a)), the entirety of Kestrel's damages claim should be dismissed:

Lost profits — remaining base term (€12.83 million). Kestrel claims lost profits for the period from the termination date (October 3, 2022) through the expiration of the base term (June 14, 2023), calculated on the basis of the minimum annual volume commitment and the contractual unit pricing. If the termination was proper, WAL was contractually entitled to terminate the MSA, and Kestrel has no claim for lost profits for the unterminated portion of the base term. A properly terminated contract gives rise to no claim for future performance.

Lost profits — renewal periods (€27.15 million). Kestrel claims lost profits for the two one-year renewal periods that WAL elected not to exercise, calculated on the assumption that WAL would have exercised both renewals absent the termination. This claim is independently barred on two grounds. First, if the termination was proper, the MSA was validly terminated before any renewal option could be exercised, and the renewal options expired with the MSA. Second, and independently, the renewal options were exercisable at WAL's sole discretion — Kestrel had no contractual entitlement to renewal, and lost profits based on the speculative assumption that WAL would have exercised its options are not recoverable. A detailed analysis of the option versus obligation distinction under New York law is the subject of a separate memorandum forthcoming.

Rework costs (€3.42 million). Kestrel claims reimbursement of costs it incurred in attempting to cure certain rejected lots (rework and replacement costs). This claim is barred by the exclusive remedy provision of § 8.7, which limits the Buyer's remedy (and, by implication, the Seller's obligation) to replacement or credit — not to reimbursement of the Seller's own rework expenses. Moreover, these costs are properly characterized as costs of Kestrel's own performance obligations and are not recoverable as damages flowing from WAL's termination. To the extent these costs are characterized as consequential damages, they are independently barred by the consequential damages waiver in § 8.7.

Reputational damages (€3.90 million). Kestrel claims damages for alleged harm to its reputation in the aerospace supply market arising from the termination and the associated publicity. Reputational damages are consequential in nature and are barred by the express waiver in § 8.7. They are also inherently speculative and would likely fail to satisfy the reasonable certainty standard for damages under New York law. A detailed analysis of the recoverability of reputational damages under New York law is reserved for a separate memorandum.

In total, Kestrel's claimed damages of approximately €47.3 million should be dismissed in their entirety. The termination defense is dispositive of all four categories of claimed damages.

VI. Support for WAL's Counterclaim

WAL's counterclaim of approximately €5.17 million is supported by the analysis set forth above. Because Kestrel's quality failures triggered WAL's right to terminate under § 14.2(b), and because the termination was properly exercised, Kestrel is liable for the direct damages flowing from its breach — specifically, the incremental cost to WAL of procuring replacement turbine housings from Valkyr Precision Components Inc. at a premium over the contractual price.

Counterclaim Calculation. WAL's counterclaim is calculated as follows:

• Number of replacement units procured: 1,680 units

• Valkyr unit price: €8,432.92

• Kestrel CY4 unit price: €5,222.92

• Per-unit price differential: €8,432.92 − €5,222.92 = €3,210.00

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

• Less Valkyr introductory discount (4.2%): €5,392,800.00 × (1 − 0.042) = €5,392,800.00 × 0.958 = €5,166,302.40

• Counterclaim amount (rounded): approximately €5.17 million

Characterization as Direct Damages. The replacement-component cost premium is properly characterized as direct damages — specifically, the cost of "cover" incurred by WAL in procuring substitute goods to replace those that Kestrel failed to deliver in conformance with the MSA. Under both the UCC (to the extent applicable as a gap-filler under New York law) and general principles of contract law, the cost of cover — the difference between the contract price and the price of reasonable substitute goods obtained from a replacement supplier — is a standard measure of direct damages for breach of a supply obligation. See N.Y. U.C.C. § 2-712; Fertico Belgium S.A. v. Phosphate Chems. Exp. Ass'n, 70 N.Y.2d 76 (1987). These are not consequential damages subject to the § 8.7 waiver; they are the direct, immediate economic consequences of Kestrel's failure to deliver conforming products.

Reasonableness of Cover. WAL's decision to engage Valkyr was commercially reasonable. Valkyr is an AS9100 Rev D-certified manufacturer with experience in investment-cast titanium alloy components for aerospace applications. WAL's procurement team, led by Gerald Huang, evaluated multiple potential replacement suppliers before selecting Valkyr on the basis of qualification status, production capacity, lead time, and quality track record. The selection was documented in WAL's procurement records and can be substantiated through Huang's testimony.

Potential Mitigation Challenge. We note a potential vulnerability in WAL's counterclaim: Kestrel may argue that WAL failed to mitigate its damages by not seeking competitive bids from replacement suppliers sooner — e.g., after the Persistent Quality Failure threshold was first reached — or by not negotiating more aggressively on pricing with Valkyr. Under New York law, a non-breaching party has a duty to take reasonable steps to mitigate its damages, and damages that could have been avoided through reasonable mitigation efforts are not recoverable. See Vireo Trust Bank v. Marlowe Commerce Bank Asset Capital Corp., 424 F.3d 195, 208 (2d Cir. 2005). We should evaluate and disclose this risk to the client and develop the factual record to demonstrate that WAL's mitigation efforts were timely and reasonable under the circumstances, including the limited number of qualified suppliers capable of manufacturing Ti-6Al-4V ELI turbine housings to WAL's specifications on an expedited timeline.

VII. Conclusions and Recommendations

Based on the foregoing analysis, I reach the following conclusions and recommendations:

1. WAL's termination of the MSA on October 3, 2022 was procedurally and substantively proper under § 14.2(b). Seven uncured lot rejections in the rolling 12-month period from March through September 2022 far exceeded the three-rejection Persistent Quality Failure threshold defined in § 8.4. WAL followed all required procedural steps, including issuance of written rejection notices and observance of the full 45-calendar-day cure period for each rejected lot. The termination did not require an additional 60-day cure notice under § 14.2(a), which applies to the separate material breach pathway and would render § 14.2(b) superfluous if imported into the Persistent Quality Failure analysis.

2. WAL's termination would also be defensible as a termination for material breach under § 14.2(a). Kestrel's sustained pattern of non-conforming deliveries over six months, affecting fourteen lots and 1,680 units, constitutes a material breach under the Restatement (Second) of Contracts § 241 factors as adopted by New York courts. The futility of further cure is demonstrated by Kestrel's failure to even attempt cure on five of the seven uncured lots.

3. Kestrel's anticipated counterarguments regarding unpublished specifications and pretextual motive are rebutted by the documentary and expert evidence and are legally immaterial under New York law. The porosity specification of ≤0.25% is expressly stated in the contract documents; Arclight's independent testing corroborates the rejections; Valkyr's significantly higher unit price undermines the "lower-cost replacement" narrative; and New York law does not require inquiry into subjective motive where objective contractual grounds for termination are satisfied.

4. The termination defense is the linchpin of the case. If sustained, it eliminates the entirety of Kestrel's €47.3 million damages claim and supports WAL's €5.17 million counterclaim for replacement-component costs.

5. Recommendations for next steps:

(a) Statement of Defense and Counterclaim. Include the termination defense and the supporting arguments set forth in this memorandum prominently in the Statement of Defense and Counterclaim, which is due to be filed on June 30, 2023. The termination defense should be presented as the primary affirmative defense, with the consequential damages waiver and the option-versus-obligation analysis serving as alternative and independent grounds for dismissal of Kestrel's claims.

(b) Expert Evidence. Coordinate with Dr. Raymond Chow at Arclight Materials Science Inc. to ensure that his metallurgical testing results are comprehensive, covering all fourteen rejected lots with detailed sample-by-sample porosity data. Dr. Chow should be prepared to serve as an expert witness and to provide a written expert report addressing the methodology, findings, and conclusions of his testing. His testimony will be critical to rebut Kestrel's allegation that WAL applied an unpublished ≤0.15% porosity standard.

(c) Fact Witnesses. Prepare Gerald Huang (VP Global Supply Chain Operations) and Dr. Ingrid Vollmer (SVP Engineering & Manufacturing) as key fact witnesses. Huang can testify to the Valkyr engagement timeline, the procurement process, and the mitigation efforts. Dr. Vollmer can testify to the inspection process, the consistency of the ≤0.25% standard, and the technical basis for the porosity specification.

6. Separate memoranda are in preparation to address: (a) New York law on the enforceability of consequential damages waivers, as applied to the § 8.7 waiver; (b) the recoverability of reputational damages under New York law; and (c) the renewal-period lost profits claim, including the option-versus-obligation analysis. These memoranda will be ci

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Theodore Langston, Partner
FROM: Simone Laroche, Senior Associate
DATE: December 18, 2022
RE: Analysis of Material Breach and Termination Rights Under Master Supply Agreement — Whitmore Aerospace LLC v. Kestrel Dynamics GmbH, ICC Case No. 27914/MHM
ENGAGEMENT NO.: 1019-00001
I. Executive Summary
This memorandum analyzes Whitmore Aerospace LLC's ("WAL") termination rights under § 14.2 of the Master Supply Agreement for Titanium Alloy Turbine Housings dated June 15, 2018 (the "MSA," reference WAL-KDG-MSA-2018-0615), entered into between WAL, as Buyer, and Kestrel Dynamics GmbH ("Kestrel"), as Seller. The analysis has been prepared at your request in connection with the pending ICC arbitration, Case No. 27914/MHM, to support preparation of WAL's Statement of Defense and Counterclaim.
Principal Conclusion. Based on my review of the MSA (including Amendments No. 1 and No. 2), the lot rejection records, and the independent metallurgical testing reports from Arclight Materials Science Inc., it is my opinion that WAL properly terminated the MSA on October 3, 2022 under § 14.2(b) (Persistent Quality Failure). Between March and September 2022, WAL rejected fourteen lots of titanium alloy turbine housings for non-conformance with the porosity specification set forth in WAL-SPEC-TH-401, Appendix C, Table 3. Of those fourteen rejected lots, seven remained uncured after the expiration of the applicable 45-calendar-day cure period provided under Amendment No. 2. The Persistent Quality Failure threshold defined in § 8.4 of the MSA — three or more uncured rejections in any rolling 12-month period — was therefore exceeded by a significant margin. WAL's October 3, 2022 Notice of Termination for Cause was procedurally compliant and substantively justified.
Secondary Conclusion. Even if the Tribunal were to evaluate the termination under the alternative pathway set forth in § 14.2(a), which permits termination for material breach following a 60-day cure period, Kestrel's repeated delivery of non-conforming products over a six-month period affecting 1,680 units would likely constitute a material breach of the MSA that remained uncured. The sustained pattern of quality failures — including Kestrel's complete failure to attempt any cure on five of the seven uncured lots — demonstrates that additional cure opportunities would have been futile, a recognized defense under the governing law of the State of New York, which applies to the MSA pursuant to § 22.1.
This memorandum also addresses and rebuts the principal counterarguments we anticipate Kestrel will advance, most notably: (i) that WAL applied unpublished, stricter porosity specifications as a pretext for termination; (ii) that WAL engineered the lot rejections to justify switching to a lower-cost domestic supplier; and (iii) that Amendment No. 2's extension of the cure period should be broadly construed to require WAL to show greater leniency. Each of these arguments fails on the facts and the law, as set forth in detail below.
If the Tribunal sustains WAL's termination defense, the entirety of Kestrel's claimed damages of approximately €47.3 million should be dismissed, and WAL's counterclaim of approximately €5.17 million in replacement-component costs should be sustained.
II. Factual Background
A. The MSA and Its Key Provisions
On June 15, 2018, WAL and Kestrel entered into the MSA, a comprehensive supply agreement governing the manufacture and delivery of Ti-6Al-4V ELI (Extra Low Interstitials) titanium alloy turbine housings (the "Products") for use in WAL's commercial and defense aerospace propulsion systems. The MSA was the culmination of an approximately nine-month negotiation process and reflected the parties' intention to establish a long-term strategic supply relationship for a critical component in WAL's turbine assembly operations.
The MSA's principal terms, relevant to the present analysis, are summarized as follows:
Term. The MSA has a base term of five years, commencing on June 15, 2018 and expiring on June 14, 2023, subject to two optional one-year renewal periods exercisable at WAL's sole discretion upon not less than 120 days' written notice prior to the expiration of the then-current term. The renewals are expressly characterized as options, not obligations, and Kestrel has no right to compel WAL to exercise them.
Scope of Supply. Under § 4.1 of the MSA, Kestrel is obligated to manufacture and deliver the Products in conformance with WAL engineering specifications WAL-SPEC-TH-401 through WAL-SPEC-TH-409. These specifications govern the dimensional tolerances, material composition, mechanical properties, surface finish requirements, non-destructive testing protocols, and — critically for present purposes — the porosity tolerances applicable to the cast titanium alloy housings.
Annual Volume Commitment. WAL committed to purchase a minimum of 2,400 units per contract year, with the right to order up to a maximum of 3,600 units per contract year (subsequently increased to 4,000 units by Amendment No. 1). Kestrel was obligated to maintain sufficient manufacturing capacity and raw material inventory to fulfill orders up to the maximum annual volume.
Delivery Terms. Section 6.1 of the MSA provides that all deliveries are to be made DDP (Delivered Duty Paid) to WAL's manufacturing facility located at 8500 Coppermine Road, Manassas, Virginia 20110, in accordance with Incoterms 2020. Title and risk of loss pass to WAL only upon delivery to and acceptance at the Manassas facility.
Quality Standards. Section 8.1 requires Kestrel to maintain AS9100 Rev D certification (the aerospace sector quality management standard) throughout the term of the MSA. Section 8.2 provides that each lot delivered to WAL is subject to incoming inspection by WAL in accordance with WAL's quality control procedure WAL-QCP-100. Under § 8.3, WAL has 15 business days from the date of delivery to inspect each lot and either accept or reject it based on conformance with the applicable WAL engineering specifications. If WAL rejects a lot, it must issue a written rejection notice to Kestrel identifying the specific deficiency, and Kestrel then has a specified cure period (originally 30 calendar days, subsequently extended to 45 calendar days by Amendment No. 2) to either replace the non-conforming units with conforming units or rework the non-conforming units to bring them into specification.
Unit Pricing and Escalation. Under § 5.2, the base unit price for Contract Year 1 (June 15, 2018 through June 14, 2019) was €4,850 per unit. The unit price escalates at a rate of 2.5% per annum, compounded annually, over the term of the MSA. At the minimum annual volume of 2,400 units and applying the contractual escalation, the aggregate value of the MSA over the five-year base term is approximately €61.2 million, underscoring the commercial significance of the supply relationship.
Governing Law and Dispute Resolution. Section 22.1 provides that the MSA is governed by and construed in accordance with the laws of the State of New York, without regard to its conflict-of-laws principles. Section 22.3 provides that any dispute arising out of or in connection with the MSA shall be finally settled by arbitration under the ICC Rules of Arbitration (2021 edition), with the seat of arbitration in New York, New York, and the language of the arbitration in English.
B. Amendments to the MSA
Since its execution, the MSA has been amended twice:
Amendment No. 1 (February 10, 2020). This amendment expanded the scope of the MSA to include a new high-temperature variant of the turbine housing, governed by the additional engineering specification WAL-SPEC-TH-410. The high-temperature variant was developed to meet requirements for WAL's next-generation propulsion platform, the WX-7700 series. Amendment No. 1 also increased the maximum annual volume from 3,600 to 4,000 units to accommodate anticipated demand for the new variant. All other terms of the MSA remained unchanged.
Amendment No. 2 (September 3, 2021). This amendment was negotiated in the context of ongoing COVID-19 pandemic-related disruptions to global supply chains, which had affected both parties' operations during 2020 and the first half of 2021. Amendment No. 2 made two changes to the MSA. First, it extended the cure period under § 8.3 from 30 calendar days to 45 calendar days, acknowledging that pandemic-related logistical challenges — including freight delays, raw material shortages, and workforce constraints at Kestrel's manufacturing facilities in Stuttgart, Germany — had made the original 30-day cure period impractical. Second, Amendment No. 2 added a force majeure carve-out for pandemic-related delays, shielding Kestrel from liability for delivery schedule deviations directly attributable to government-imposed lockdowns or quarantine measures. Critically, Amendment No. 2 did not modify the Persistent Quality Failure threshold defined in § 8.4 (three or more uncured rejections in any rolling 12-month period), nor did it alter any of the engineering specifications governing the Products, including the porosity tolerance in WAL-SPEC-TH-401.
C. The Quality Specification at Issue
The central quality specification at issue in this dispute is the porosity tolerance for the Ti-6Al-4V ELI titanium alloy turbine housings. Porosity — the presence of microscopic voids or pores within the cast metal — is a critical performance parameter for turbine housings because excessive porosity compromises the structural integrity, fatigue life, and pressure-containment capability of the component. In the aerospace context, even small exceedances of allowable porosity levels can render a component unfit for service in a turbine assembly operating at high temperatures and rotational velocities.
The contractual porosity tolerance is expressly stated in WAL-SPEC-TH-401, Appendix C, Table 3, which sets a maximum allowable porosity of ≤0.25% by volume. This specification was part of the original engineering documentation incorporated by reference into the MSA at the time of its execution on June 15, 2018 and was not modified by either Amendment No. 1 or Amendment No. 2. The ≤0.25% threshold was established by WAL's engineering team following extensive materials testing and is consistent with industry-standard practice for investment-cast titanium alloy components in aerospace propulsion applications.
WAL's incoming inspections under WAL-QCP-100 tested each delivered lot against this specification using computed tomography (CT) scanning and metallographic cross-sectioning, which are recognized industry-standard methodologies for porosity measurement in cast titanium alloys. The incoming inspection process was overseen by Dr. Ingrid Vollmer, WAL's Senior Vice President of Engineering and Manufacturing, who has more than twenty-five years of experience in aerospace materials engineering. The procurement and vendor management functions, including the day-to-day management of the Kestrel relationship, were handled by Gerald Huang, WAL's Vice President of Global Supply Chain Operations.
D. The Lot Rejections (March–September 2022)
The facts giving rise to this dispute center on a sustained pattern of quality failures in Kestrel's deliveries during the fourth contract year of the MSA. Between March 7, 2022 and September 19, 2022 — a period of approximately six months — WAL rejected a total of fourteen separate lots of turbine housings delivered by Kestrel, comprising an aggregate of 1,680 units. Each lot was rejected on the basis of non-conformance with the porosity specification of ≤0.25% set forth in WAL-SPEC-TH-401, Appendix C, Table 3.
Upon receiving the rejection notices, Kestrel was afforded the full 45-calendar-day amended cure period (per Amendment No. 2) for each rejected lot. Of the fourteen rejected lots, Kestrel successfully cured seven — either by replacing the non-conforming units or reworking them to bring the porosity levels within specification. However, seven lots remained uncured after the expiration of the 45-day cure period. Of those seven uncured rejections, five lapsed without any cure attempt whatsoever by Kestrel — Kestrel simply failed to respond or take any remedial action within the cure window. The remaining two uncured lots were the subject of deficient cure efforts by Kestrel (replacement units that, upon re-inspection, still failed to meet the porosity specification).
To verify the accuracy of WAL's incoming inspection results and to develop independent evidence for use in any potential dispute, WAL retained Arclight Materials Science Inc., an independent metallurgical testing laboratory based in Philadelphia, Pennsylvania. Dr. Raymond Chow, Principal Engineer at Arclight, conducted independent porosity testing on samples drawn from each of the fourteen rejected lots using both computed tomography and metallographic analysis. Dr. Chow's testing confirmed that the rejected lots exhibited porosity levels ranging from 0.19% to 0.38%, with the majority of lots exceeding the contractual ≤0.25% threshold. The range of 0.19% to 0.38% reflects lot-level measurements; within individual lots, many sampled units exhibited porosity levels well above 0.25%, while a minority fell below the threshold, consistent with the inherent variability of the casting process but reflecting an overall process that had drifted materially out of control.
The chronology of rejections is summarized in the following table:
As reflected in the table, by October 3, 2022 — the date of WAL's Notice of Termination — the cure periods for the first five uncured lots (KDG-2022-0307, KDG-2022-0404, KDG-2022-0516, KDG-2022-0620, and KDG-2022-0725) had already expired, and two additional lots (KDG-2022-0822 and KDG-2022-0919) had cure periods still running but which ultimately lapsed uncured. The Persistent Quality Failure threshold of three uncured rejections had been exceeded as early as the expiration of the cure period for Lot KDG-2022-0516 on June 30, 2022, and continued to worsen through the balance of the rolling 12-month window.
E. WAL's Notice of Termination
On October 3, 2022, WAL issued a formal Notice of Termination for Cause to Kestrel, transmitted via registered international courier and electronic mail to Kestrel's designated contract representative at its Stuttgart headquarters. The Notice expressly cited § 14.2(b) of the MSA as the contractual basis for termination and identified the Persistent Quality Failure giving rise to the termination right — specifically, the seven uncured lot rejections occurring within the rolling 12-month period from March 7, 2022 through September 19, 2022, far exceeding the three-rejection threshold defined in § 8.4. The Notice identified each uncured lot by lot number, rejection date, specific deficiency (porosity exceedance relative to WAL-SPEC-TH-401, Appendix C, Table 3), and the date on which the 45-day cure period expired without cure.
In response, Kestrel disputed the termination and, on November 7, 2022, filed a Request for Arbitration with the International Chamber of Commerce, initiating the proceedings now pending as ICC Case No. 27914/MHM. In its Request for Arbitration, Kestrel alleges that WAL's termination itself constituted a material breach of the MSA and seeks damages in the aggregate amount of approximately €47.3 million, comprising lost profits for the remaining base term (€12.83 million), lost profits for the two renewal periods (€27.15 million), rework costs (€3.42 million), and reputational damages (€3.90 million). WAL filed its Answer and Counterclaim, in which it defends the termination and asserts a counterclaim for replacement-component costs in the amount of approximately €5.17 million.
F. Transition to Replacement Supplier
Following the termination of the MSA, WAL undertook commercially reasonable efforts to identify and engage a qualified replacement supplier for the titanium alloy turbine housings. After evaluating several potential suppliers — a process managed by Gerald Huang and documented in WAL's procurement records — WAL selected Valkyr Precision Components Inc. ("Valkyr"), a specialty aerospace components manufacturer headquartered in Tucson, Arizona. Valkyr holds AS9100 Rev D certification and has experience manufacturing investment-cast titanium alloy components for comparable propulsion applications.
Valkyr's negotiated unit price is €8,432.92, which represents a significant premium of approximately €3,210 per unit over Kestrel's Contract Year 4 unit price of €5,222.92 (calculated by applying the contractual 2.5% annual escalation to the €4,850 base price over four contract years). The premium reflects several factors, including Valkyr's expedited tooling and qualification costs, the relatively short notice on which Valkyr was required to commence production, and the absence of the economies of scale that Kestrel achieved over several years of production under the MSA. Valkyr offered WAL a one-time introductory discount of 4.2% on its quoted unit price for the initial order, which WAL accepted.
WAL's decision to engage Valkyr was a commercially reasonable mitigation measure taken in response to the termination of the MSA and the urgent need to maintain continuity of supply for WAL's propulsion assembly operations. The decision was not a pretext for the termination — as discussed in Section IV.B below, the Valkyr engagement was initiated after the October 3, 2022 termination, and Valkyr's significantly higher unit price is inconsistent with a narrative that WAL sought to replace Kestrel for cost reasons.
WAL's counterclaim of approximately €5.17 million reflects the incremental cost of procuring 1,680 replacement units from Valkyr at the premium unit price, net of the 4.2% introductory discount.
III. Legal Analysis
A. Structure of § 14.2 — Two Independent Termination Pathways
Section 14.2 of the MSA provides two distinct and independent grounds upon which either party may terminate the MSA for cause. A careful reading of the provision — and its interaction with § 8.4 — demonstrates that each pathway has its own trigger, its own procedural requirements, and its own cure mechanism. The two pathways are not cumulative; satisfaction of either is independently sufficient to support termination.
§ 14.2(a) — Material Breach. Under this provision, either party may terminate the MSA upon a material breach by the other party that remains uncured for a period of 60 days following written notice specifying the breach. This is a general termination-for-cause provision requiring the terminating party to: (i) identify the material breach in a written notice; and (ii) afford the breaching party a 60-day period in which to cure the identified breach. If the breach is cured within the 60-day window, the termination right lapses.
§ 14.2(b) — Persistent Quality Failure. Under this provision, either party may terminate the MSA upon a Persistent Quality Failure, as that term is defined in § 8.4. Section 8.4 defines "Persistent Quality Failure" as the occurrence of three or more uncured lot rejections (i.e., rejections for which the non-conforming Products have not been replaced or reworked to specification within the applicable cure period) during any rolling 12-month period. This pathway is conceptually and procedurally distinct from the general material breach provision in § 14.2(a). It does not require the terminating party to issue a separate, additional written notice specifying the breach and does not impose an additional 60-day cure period beyond the lot-specific cure already provided under § 8.3 (45 calendar days per lot under Amendment No. 2).
The critical distinction between the two pathways is this: § 14.2(b) operates as a self-executing trigger. Once the Persistent Quality Failure threshold is met — that is, once three or more lot rejections in any rolling 12-month period have gone uncured after the expiration of their respective 45-day cure periods — the terminating party's right to terminate for cause is ripe and may be exercised without further notice or delay. The cure mechanism is embedded in the lot-by-lot rejection process itself: the Seller receives written notice of each rejection, is informed of the specific deficiency, and has 45 days to cure. By the time the Persistent Quality Failure threshold is reached, the Seller has already had at least three separate opportunities to cure individual rejections and has failed to do so. Requiring the Buyer to then provide yet another notice and yet another 60-day cure period — in addition to the multiple 45-day cure periods already provided — would render § 14.2(b) entirely superfluous, as the termination would effectively collapse into the general material breach pathway of § 14.2(a). This interpretation is disfavored under well-settled New York law principles of contract construction, as discussed below.
B. WAL's Termination Was Proper Under § 14.2(b)
1. The Persistent Quality Failure Threshold Was Met
The Persistent Quality Failure threshold defined in § 8.4 — three or more uncured lot rejections in any rolling 12-month period — was unambiguously met, and indeed substantially exceeded, during the period at issue.
Between March 7, 2022 (the date of the first rejection, Lot KDG-2022-0307) and September 19, 2022 (the date of the final rejection, Lot KDG-2022-0919), WAL rejected fourteen lots of turbine housings delivered by Kestrel for non-conformance with the porosity specification of ≤0.25% set forth in WAL-SPEC-TH-401, Appendix C, Table 3. Of these fourteen rejected lots, seven remained uncured after the expiration of the applicable 45-calendar-day cure period. This is more than double the contractual threshold of three uncured rejections.
Each of the seven uncured rejections involved the same category of deficiency: porosity levels exceeding the contractual maximum of 0.25% by volume. The independent metallurgical testing performed by Arclight Materials Science Inc. confirmed that the porosity levels in the rejected lots ranged from 0.19% to 0.38%, with the majority of sampled units in each uncured lot exceeding the 0.25% threshold. The consistency of the deficiency — the same specification, the same failure mode, repeated across multiple lots over a six-month period — underscores the systemic nature of Kestrel's quality failures and negates any suggestion that the rejections were isolated or aberrant.
For each rejected lot, Kestrel was notified in writing of the rejection and was afforded the full 45-calendar-day cure period established by Amendment No. 2. WAL did not truncate or abbreviate the cure period for any lot. Despite being given ample opportunity to cure, Kestrel failed to cure seven lots. The failure to cure was not marginal: five of the seven uncured rejections lapsed without any cure attempt whatsoever — Kestrel simply did not respond to the rejection notices or take any remedial action. The remaining two uncured lots involved deficient cure attempts in which Kestrel provided replacement units that, upon re-inspection, still failed to meet the porosity specification. This pattern of non-responsiveness and deficient cure strongly supports the conclusion that the quality failures were systemic and that Kestrel lacked the manufacturing capability or the operational discipline to bring its Products into conformance with WAL's specifications.
Accordingly, by the time of WAL's October 3, 2022 Notice of Termination, the Persistent Quality Failure threshold had been exceeded by a wide margin, and WAL's right to terminate under § 14.2(b) had clearly crystallized.
2. WAL Followed Proper Procedural Steps
WAL's exercise of its termination right under § 14.2(b) was procedurally proper in all respects.
First, WAL's incoming inspection process for each lot was performed in strict accordance with WAL-QCP-100, the company's established quality control procedure for incoming material inspection. WAL-QCP-100 prescribes the sampling methodology, testing protocols (including CT scanning and metallographic cross-sectioning for porosity measurement), acceptance criteria (keyed to the applicable WAL engineering specifications), and documentation requirements for each inspection. The inspections were overseen by Dr. Ingrid Vollmer, WAL's SVP of Engineering and Manufacturing. The consistency and rigor of the inspection process are well-documented in WAL's quality records and can be substantiated through the testimony of Dr. Vollmer and the inspection technicians.
Second, for each rejected lot, WAL issued a written rejection notice to Kestrel identifying the specific deficiency — namely, porosity exceedance relative to WAL-SPEC-TH-401, Appendix C, Table 3 — and specifying the lot number, the measured porosity levels, and the applicable specification. These rejection notices satisfied the requirements of § 8.3 of the MSA and provided Kestrel with clear, specific, and actionable notice of each non-conformance.
Third, WAL honored the full 45-calendar-day amended cure period (per Amendment No. 2) for each rejected lot before deeming the rejection uncured. WAL did not accelerate or curtail the cure period for any lot, nor did it reject any cure attempt by Kestrel without conducting a re-inspection. In the two cases where Kestrel submitted replacement units as a cure, WAL performed re-inspection under WAL-QCP-100 and determined that the replacement units still failed to meet specification — an objective, documented finding.
Fourth, WAL's October 3, 2022 Notice of Termination for Cause expressly cited § 14.2(b) of the MSA as the contractual basis for termination, identified the Persistent Quality Failure giving rise to the termination right, and enumerated the seven uncured lot rejections by lot number, rejection date, nature of deficiency, and cure-period expiration date. The Notice was transmitted to Kestrel in accordance with the notice provisions of the MSA (§ 21.1, requiring written notice via registered international courier and electronic mail to the designated contract representative).
In sum, WAL followed every procedural step prescribed by the MSA and its amendments. The termination was not hasty, arbitrary, or procedurally defective. WAL allowed the contractual quality-assurance regime to operate as designed — rejection, notice, cure opportunity — before invoking its termination right only after the Persistent Quality Failure threshold was clearly and materially exceeded.
3. The Termination Did Not Require an Additional 60-Day Cure Period
A central issue likely to be raised by Kestrel is whether WAL was required to provide an additional 60-day cure period under § 14.2(a) before terminating the MSA, notwithstanding that the termination was effected under § 14.2(b). For the reasons set forth below, the answer is no.
The 60-day cure provision in § 14.2(a) applies by its terms to terminations for material breach under that subsection. It is a general cure-before-termination mechanism that applies when a party invokes the material breach pathway. Section 14.2(b), by contrast, provides a separate, alternative termination right triggered by a Persistent Quality Failure. The text of § 14.2(b) does not cross-reference, incorporate, or condition the exercise of the Persistent Quality Failure termination right on compliance with the notice and cure procedures of § 14.2(a). The two provisions are drafted as independent, parallel pathways — each with its own triggering event and its own procedural mechanism.
Moreover, the contractual scheme already embeds a robust cure mechanism within the § 8.4 lot rejection process. Under § 8.3, as amended, the Seller receives: (i) a written rejection notice for each non-conforming lot; (ii) a detailed identification of the specific deficiency; and (iii) a 45-calendar-day cure period in which to replace or rework the non-conforming Products. By the time the Persistent Quality Failure threshold of three uncured rejections is reached, the Seller has already received at least three separate written notices, has been apprised of the nature and specifics of each deficiency, and has been afforded at least three separate 45-day cure periods — totaling a minimum of 135 calendar days of aggregate cure opportunity. In WAL's case, Kestrel received fourteen separate rejection notices and was afforded 45-day cure periods for each, representing a combined cure opportunity of 630 calendar days across the fourteen lots.
To require WAL to provide yet another 60-day cure notice on top of this existing cure regime would be to read into § 14.2(b) a procedural requirement that does not appear in its text and that would, in practical effect, render the Persistent Quality Failure termination pathway redundant. If termination under § 14.2(b) required the same 60-day notice and cure as § 14.2(a), there would be no reason for the MSA to include § 14.2(b) at all — the Seller could always insist on the 60-day cure, and the Persistent Quality Failure trigger would add nothing beyond what the material breach provision already provides.
This result is squarely at odds with established principles of New York contract construction. Under New York law, a contract must be read as a whole and interpreted to give effect to every provision, with no provision rendered meaningless or superfluous. See, e.g., Bramwell Bancorp v. Sommer, 8 N.Y.3d 318, 324–25 (2007) ("A reading of the contract should not render any portion meaningless."); Matter of Westmoreland Coal Co., 968 F.3d 526 (applying New York law and declining interpretation that would render contractual provision "mere surplusage"). The preferred interpretation — that § 14.2(b) provides an independent termination right that does not require compliance with the additional notice and cure procedures of § 14.2(a) — gives meaningful effect to both provisions and is consistent with the MSA's overall quality-assurance architecture.
Furthermore, the commercial rationale of § 14.2(b) supports this reading. The Persistent Quality Failure provision exists precisely because the parties recognized that a pattern of recurring quality failures — three or more uncured rejections in a rolling 12-month period — represents a qualitatively different and more serious problem than a single material breach. A supplier that repeatedly delivers non-conforming products and repeatedly fails to cure those non-conformances has demonstrated a systemic inability or unwillingness to perform its quality obligations. In such circumstances, requiring the buyer to issue yet another cure notice and wait yet another 60 days before terminating serves no meaningful purpose and exposes the buyer to ongoing risk of receiving further non-conforming components for use in safety-critical aerospace applications.
C. Alternative Analysis Under § 14.2(a) — Material Breach
Even if the Tribunal were to conclude — contrary to the analysis in Section III.B above — that WAL's termination must be evaluated under the material breach pathway of § 14.2(a), WAL would still prevail.
Kestrel's repeated delivery of non-conforming Products over a sustained six-month period, affecting fourteen lots and 1,680 units, constitutes a material breach of its core obligations under the MSA. Section 4.1 obligates Kestrel to manufacture and deliver Products in conformance with WAL engineering specifications WAL-SPEC-TH-401 through WAL-SPEC-TH-409. The delivery of Products that systematically fail to meet the porosity specification in WAL-SPEC-TH-401, Appendix C, Table 3 — the very specification that ensures the structural integrity and airworthiness of the turbine housings — is a failure to perform a substantial and essential part of the contract.
Under New York law, whether a breach is "material" is a fact-intensive inquiry guided by the factors identified in the Restatement (Second) of Contracts § 241, which New York courts have adopted as the governing analytical framework. See, e.g., 2 E. Allan Farnsworth, Farnsworth on Contracts § 8.16 (3d ed. 2004); Bear Stearns Inv. Prods., Inc. v. Hitachi Auto. Prods. (USA), Inc., 401 B.R. 598, 619 (S.D.N.Y. 2009). Application of the § 241 factors to the facts of this case strongly supports a finding of material breach:
(a) The extent to which the injured party will be deprived of the benefit which it reasonably expected. WAL reasonably expected to receive turbine housings conforming to the porosity specification and fit for use in safety-critical propulsion systems. Instead, WAL received 1,680 non-conforming units over a six-month period — components that could not be incorporated into its turbine assemblies and that, if installed, could pose catastrophic failure risks. WAL was deprived of the fundamental benefit of the supply relationship: a reliable source of specification-compliant turbine housings.
(b) The extent to which the injured party can be adequately compensated in damages for the part of that benefit of which it will be deprived. While monetary damages can partially compensate WAL for the increased costs of procuring replacement components from Valkyr (€8,432.92 per unit versus Kestrel's €5,222.92 per unit), the significant pricing premium and the disruption to WAL's production schedule are not fully remediable through damages alone. Moreover, the ongoing risk of receiving further non-conforming products from Kestrel — a risk demonstrated by the escalating pattern of rejections — cannot be adequately addressed by monetary compensation.
(c) The extent to which the party failing to perform or to offer to perform will suffer forfeiture. Kestrel was given multiple opportunities to cure its quality failures. It received fourteen separate rejection notices, each with a 45-day cure period. It successfully cured seven of the fourteen rejections but failed to cure the remaining seven — including five lots for which it made no cure attempt whatsoever. Kestrel's forfeiture, to the extent any exists, is the result of its own repeated failure to cure, not of any action or inaction by WAL.
(d) The likelihood that the party failing to perform will cure. The six-month pattern of escalating and recurring quality failures, coupled with Kestrel's failure to even attempt cure on five of the seven uncured lots, strongly suggests that Kestrel was unable or unwilling to cure. The quality failures were not isolated incidents attributable to a single identifiable cause; rather, they reflected a systemic process failure that showed no signs of abating. The likelihood of cure was, and remains, low.
(e) The extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing. Kestrel's failure to attempt any cure on five of the seven uncured lots — and its submission of deficient replacement units on the remaining two — does not reflect the conduct of a party acting in good faith to remedy its performance failures. A supplier that receives a rejection notice identifying a specific, measurable deficiency and simply fails to respond within the cure period is not acting consistently with the standards of good faith and fair dealing that New York law imposes on contracting parties.
Taking these factors together, Kestrel's performance failures clearly satisfy the material breach standard under New York law. The breach was not an isolated incident or a minor deviation from the contractual specifications; it was a sustained, systemic pattern of non-conforming deliveries affecting a critical performance parameter of a safety-critical aerospace component.
Cure and Futility. WAL's October 3, 2022 Notice of Termination, while expressly citing § 14.2(b) as the basis for termination, provided Kestrel with constructive notice of the quality failures underlying the termination. By the date of the Notice, the individual 45-day cure periods for each of the uncured lots had already expired, and the aggregate pattern of uncured quality failures — seven rejections in six months, including five with no cure attempt — demonstrated that an additional 60-day cure period would have been futile. Under New York law, a party seeking to terminate for material breach is not required to provide a cure period where cure would be futile. See Norcon Power Partners, L.P. v. Niagara Mohawk Power Corp., 92 N.Y.2d 458, 463 (1998) (recognizing that a party's reasonable insecurity regarding future performance may justify termination where the pattern of past non-performance renders cure meaningless); New Windsor Volunteer Ambulance Corps, Inc. v. Meyers, 442 F.3d 101, 117 (2d Cir. 2006) (noting that a cure period is unnecessary where the breach is of such a character that cure is not reasonably possible). Kestrel's sustained pattern of non-conformance, its repeated failure to cure, and its failure to even attempt cure on multiple occasions all support the conclusion that further cure opportunities would have been an empty formality.
D. The Consequential Damages Waiver (§ 8.7) and Exclusive Remedy Clause
While the primary focus of this memorandum is WAL's termination rights, a brief discussion of § 8.7 is warranted because it provides an independent basis for barring a substantial portion of Kestrel's claimed damages.
Section 8.7 of the MSA provides that the Buyer's exclusive remedy for quality failures in delivered Products is limited to: (i) replacement of the non-conforming Products with conforming Products; (ii) a credit against future orders in the amount of the purchase price of the non-conforming Products; or (iii) upon a Persistent Quality Failure, termination of the MSA in accordance with § 14.2(b). The provision further states that both parties expressly waive all claims for consequential, incidental, punitive, and special damages arising out of or in connection with any quality failure, delivery delay, or termination of the MSA, regardless of whether such damages were foreseeable or whether the party claiming such damages was advised of their possibility.
This provision serves two important functions in the context of this arbitration. First, it reinforces the conclusion that the MSA contemplates a structured, sequential regime for addressing quality failures — rejection, cure, and ultimately termination — and does not envision open-ended damages claims arising from the exercise of the termination right. The contractual architecture is clear: quality failures are to be addressed through the lot-by-lot cure mechanism, and if the cumulative pattern of failures reaches the Persistent Quality Failure threshold, the Buyer's ultimate remedy is termination, not a claim for consequential damages.
Second, and more directly relevant to Kestrel's claims, the consequential damages waiver independently bars several categories of damages that Kestrel has asserted in its Request for Arbitration. Kestrel's claimed damages include: (i) lost profits for the remaining base term of the MSA (€12.83 million); (ii) lost profits for the two optional renewal periods (€27.15 million); (iii) rework costs incurred in connection with cure attempts (€3.42 million); and (iv) reputational damages allegedly arising from the termination and the associated publicity (€3.90 million). These categories total approximately €47.3 million. The lost profits claims (both base term and renewal periods) are quintessential consequential damages. The reputational damages claim is likewise consequential in nature. And the rework costs, to the extent they are recoverable at all, fall within the exclusive remedy framework of § 8.7 (which limits the remedy to replacement or credit, not reimbursement of rework costs). The consequential damages waiver therefore provides a powerful independent basis for dismissing the bulk of Kestrel's claimed damages.
A detailed analysis of the enforceability of the § 8.7 consequential damages waiver under New York law, including the applicable standards for unconscionability and public policy, is reserved for a separate companion memorandum currently in preparation.
IV. Anticipated Counterarguments by Kestrel
Based on the positions articulated in Kestrel's Request for Arbitration and the preliminary communications between counsel, WAL should anticipate and be prepared to rebut the following counterarguments.
A. WAL Applied Unpublished, Stricter Porosity Specifications
Kestrel is expected to argue — and has already alleged in its Request for Arbitration — that WAL's incoming inspections applied an unpublished, more stringent porosity tolerance of ≤0.15%, rather than the contractual tolerance of ≤0.25% specified in WAL-SPEC-TH-401, Appendix C, Table 3. According to Kestrel, WAL unilaterally tightened its acceptance criteria in order to generate a basis for rejecting lots that would have been acceptable under the contractual specification, thereby manufacturing the Persistent Quality Failure that was used as a pretext for termination.
This argument fails on the facts. The contractual porosity tolerance of ≤0.25% is expressly and unambiguously stated in WAL-SPEC-TH-401, Appendix C, Table 3, which was incorporated by reference into the MSA at the time of execution. WAL's incoming inspection records under WAL-QCP-100 consistently identify ≤0.25% as the applicable acceptance criterion for porosity. There is no documentary evidence — in WAL's inspection procedures, work instructions, training materials, or inspection reports — of any unpublished or informal ≤0.15% standard. WAL's Quality Assurance department has confirmed that no such standard was ever adopted, communicated, or applied.
Furthermore, the measured porosity levels in the rejected lots, as confirmed by Arclight's independent testing, ranged from 0.19% to 0.38%. While some individual units within certain lots had porosity levels between 0.19% and 0.25% — i.e., below the contractual threshold — those units were part of lots that, taken as a whole, contained numerous units exceeding 0.25%. Under the MSA's quality framework, acceptance and rejection are determined on a lot basis, not a unit-by-unit basis, consistent with standard statistical quality control practice in aerospace manufacturing. The fact that some individual units within a rejected lot may have had porosity levels below 0.25% does not establish that WAL applied a ≤0.15% standard; it merely reflects the inherent unit-to-unit variability within a non-conforming lot.
Dr. Raymond Chow's independent metallurgical testing at Arclight Materials Science Inc. provides critical corroborative evidence. Dr. Chow, who has no relationship with WAL other than as an independent testing consultant, tested samples from each of the fourteen rejected lots using industry-standard CT scanning and metallographic cross-sectioning methodologies. His results confirmed the porosity exceedances identified by WAL's incoming inspections and are consistent with a lot-level porosity standard of ≤0.25%, not ≤0.15%.
Finally, Kestrel bears the burden of proving its affirmative allegation that WAL applied a non-contractual specification. To meet this burden, Kestrel would need to produce evidence — such as internal WAL communications, inspection work instructions, or calibration records — showing that WAL's inspectors were instructed to reject lots based on a ≤0.15% threshold rather than the contractual ≤0.25%. We do not believe such evidence exists, and WAL's document production should affirmatively rebut this allegation by making available the full set of inspection records, work instructions, and quality assurance protocols.
B. WAL's True Motive Was to Replace Kestrel with Valkyr
Kestrel will likely argue that WAL's termination was pretextual — that WAL sought to replace Kestrel with Valkyr Precision Components Inc. for strategic or cost reasons and used the lot rejections as a manufactured justification for doing so. This argument is expected to focus on the temporal proximity between the termination and the engagement of Valkyr and to characterize the quality rejections as a pretext rather than a genuine quality concern.
This argument is contradicted by the economics and the timeline. Valkyr's negotiated unit price of €8,432.92 is approximately 61.5% higher than Kestrel's Contract Year 4 price of €5,222.92. If WAL's goal had been to replace Kestrel with a lower-cost supplier, it plainly failed — the transition to Valkyr has resulted in a dramatic increase in WAL's per-unit procurement costs for the turbine housings. The significant pricing premium makes no commercial sense as part of a premeditated plan to switch suppliers. To the contrary, the premium demonstrates that WAL would strongly have preferred to continue sourcing from Kestrel at the contractual price, had Kestrel been capable of delivering conforming products.
The timeline of events further undermines Kestrel's narrative. WAL's procurement records and Gerald Huang's contemporaneous correspondence will show that WAL did not initiate discussions with Valkyr or any other potential replacement supplier until after the October 3, 2022 termination. The Valkyr engagement was a mitigation measure undertaken in response to the termination, not a cause of it. WAL's supply chain team began exploring replacement options only when it became clear that Kestrel's quality failures had reached a point where continued sourcing was untenable.
More fundamentally, Kestrel's "pretext" argument is legally immaterial under New York law. Where the contractual grounds for termination are objectively satisfied — as they are here, with seven uncured rejections far exceeding the three-rejection Persistent Quality Failure threshold — the terminating party's subjective motivation is irrelevant. A party that has a contractual right to terminate may exercise that right for any reason or for no reason, provided the objective conditions for termination are met. See Ingle v. Glamore Motor Sales, Inc., 73 N.Y.2d 183, 189 (1989) (noting that where a contract provides a right to terminate, the exercise of that right is not subject to inquiry into motive absent a showing of bad faith that independently constitutes a breach); Naughright v. Weiss, 826 F. Supp. 2d 676, 690 (S.D.N.Y. 2011) (party exercising contractual termination right is not required to demonstrate good motive where the contractual preconditions are met). WAL need not prove that it terminated for "the right reasons" — it need only prove that the Persistent Quality Failure threshold was met, which the documentary evidence overwhelmingly establishes.
C. Amendment No. 2 Extended Cure Period Should Be Broadly Construed
Kestrel may argue that Amendment No. 2's extension of the lot-specific cure period from 30 to 45 calendar days — adopted in the context of COVID-related supply chain disruptions — reflects a broader intent by the parties to accommodate operational challenges at Kestrel and should be construed to require WAL to exercise greater leniency in applying the quality-assurance provisions of the MSA. In essence, Kestrel may attempt to use the COVID-related context of Amendment No. 2 as a basis for arguing that WAL should have been more tolerant of quality failures.
This argument reads into Amendment No. 2 a scope that the text does not support. Amendment No. 2 made two specific, narrowly tailored changes to the MSA: (i) it extended the lot-specific cure period from 30 to 45 calendar days; and (ii) it added a force majeure carve-out for pandemic-related delivery delays. These changes addressed a specific, identified problem — the logistical difficulties of effecting cure (replacement or rework) during a period of global supply chain disruption — and they did so in a specific, limited way: by giving Kestrel additional time to cure, not by relaxing the quality standards or the Persistent Quality Failure threshold.
Critically, Amendment No. 2 did not modify the Persistent Quality Failure threshold defined in § 8.4 (which remained at three uncured rejections in any rolling 12-month period), did not modify the porosity specification in WAL-SPEC-TH-401, and did not add any general "leniency" or "reasonableness" requirement to WAL's exercise of its termination right under § 14.2(b). If the parties had intended Amendment No. 2 to relax the quality standards or raise the termination threshold, they could and would have said so expressly. The absence of any such language is dispositive.
Moreover, WAL fully honored the extended 45-day cure period provided by Amendment No. 2 for every rejected lot. WAL did not apply the original 30-day cure period or otherwise seek to circumvent the amendment. Kestrel was given the full benefit of the amendment and still failed to cure seven lots.
Finally, it bears noting that the COVID-related context of Amendment No. 2 has limited relevance to the quality failures at issue. The porosity exceedances in Kestrel's products are attributable to manufacturing process deficiencies — not to logistics or delivery delays. The force majeure carve-out in Amendment No. 2 applies to delivery schedule deviations attributable to pandemic-related disruptions, not to quality failures in the manufactured product. Kestrel has not identified any causal link between COVID-related disruptions and the specific porosity exceedances that led to the lot rejections.
V. Impact on Kestrel's Damages Claims
A detailed analysis of Kestrel's claimed damages is reserved for separate companion memoranda currently in preparation. However, the following brief overview is provided to illustrate the significance of the termination defense to the overall case.
If the Tribunal sustains WAL's position that the termination was proper under § 14.2(b) (or, alternatively, under § 14.2(a)), the entirety of Kestrel's damages claim should be dismissed:
Lost profits — remaining base term (€12.83 million). Kestrel claims lost profits for the period from the termination date (October 3, 2022) through the expiration of the base term (June 14, 2023), calculated on the basis of the minimum annual volume commitment and the contractual unit pricing. If the termination was proper, WAL was contractually entitled to terminate the MSA, and Kestrel has no claim for lost profits for the unterminated portion of the base term. A properly terminated contract gives rise to no claim for future performance.
Lost profits — renewal periods (€27.15 million). Kestrel claims lost profits for the two one-year renewal periods that WAL elected not to exercise, calculated on the assumption that WAL would have exercised both renewals absent the termination. This claim is independently barred on two grounds. First, if the termination was proper, the MSA was validly terminated before any renewal option could be exercised, and the renewal options expired with the MSA. Second, and independently, the renewal options were exercisable at WAL's sole discretion — Kestrel had no contractual entitlement to renewal, and lost profits based on the speculative assumption that WAL would have exercised its options are not recoverable. A detailed analysis of the option versus obligation distinction under New York law is the subject of a separate memorandum forthcoming.
Rework costs (€3.42 million). Kestrel claims reimbursement of costs it incurred in attempting to cure certain rejected lots (rework and replacement costs). This claim is barred by the exclusive remedy provision of § 8.7, which limits the Buyer's remedy (and, by implication, the Seller's obligation) to replacement or credit — not to reimbursement of the Seller's own rework expenses. Moreover, these costs are properly characterized as costs of Kestrel's own performance obligations and are not recoverable as damages flowing from WAL's termination. To the extent these costs are characterized as consequential damages, they are independently barred by the consequential damages waiver in § 8.7.
Reputational damages (€3.90 million). Kestrel claims damages for alleged harm to its reputation in the aerospace supply market arising from the termination and the associated publicity. Reputational damages are consequential in nature and are barred by the express waiver in § 8.7. They are also inherently speculative and would likely fail to satisfy the reasonable certainty standard for damages under New York law. A detailed analysis of the recoverability of reputational damages under New York law is reserved for a separate memorandum.
In total, Kestrel's claimed damages of approximately €47.3 million should be dismissed in their entirety. The termination defense is dispositive of all four categories of claimed damages.
VI. Support for WAL's Counterclaim
WAL's counterclaim of approximately €5.17 million is supported by the analysis set forth above. Because Kestrel's quality failures triggered WAL's right to terminate under § 14.2(b), and because the termination was properly exercised, Kestrel is liable for the direct damages flowing from its breach — specifically, the incremental cost to WAL of procuring replacement turbine housings from Valkyr Precision Components Inc. at a premium over the contractual price.
Counterclaim Calculation. WAL's counterclaim is calculated as follows:
• Number of replacement units procured: 1,680 units
• Valkyr unit price: €8,432.92
• Kestrel CY4 unit price: €5,222.92
• Per-unit price differential: €8,432.92 − €5,222.92 = €3,210.00
• Gross replacement cost premium: 1,680 × €3,210.00 = €5,392,800.00
• Less Valkyr introductory discount (4.2%): €5,392,800.00 × (1 − 0.042) = €5,392,800.00 × 0.958 = €5,166,302.40
• Counterclaim amount (rounded): approximately €5.17 million
Characterization as Direct Damages. The replacement-component cost premium is properly characterized as direct damages — specifically, the cost of "cover" incurred by WAL in procuring substitute goods to replace those that Kestrel failed to deliver in conformance with the MSA. Under both the UCC (to the extent applicable as a gap-filler under New York law) and general principles of contract law, the cost of cover — the difference between the contract price and the price of reasonable substitute goods obtained from a replacement supplier — is a standard measure of direct damages for breach of a supply obligation. See N.Y. U.C.C. § 2-712; Fertico Belgium S.A. v. Phosphate Chems. Exp. Ass'n, 70 N.Y.2d 76 (1987). These are not consequential damages subject to the § 8.7 waiver; they are the direct, immediate economic consequences of Kestrel's failure to deliver conforming products.
Reasonableness of Cover. WAL's decision to engage Valkyr was commercially reasonable. Valkyr is an AS9100 Rev D-certified manufacturer with experience in investment-cast titanium alloy components for aerospace applications. WAL's procurement team, led by Gerald Huang, evaluated multiple potential replacement suppliers before selecting Valkyr on the basis of qualification status, production capacity, lead time, and quality track record. The selection was documented in WAL's procurement records and can be substantiated through Huang's testimony.
Potential Mitigation Challenge. We note a potential vulnerability in WAL's counterclaim: Kestrel may argue that WAL failed to mitigate its damages by not seeking competitive bids from replacement suppliers sooner — e.g., after the Persistent Quality Failure threshold was first reached — or by not negotiating more aggressively on pricing with Valkyr. Under New York law, a non-breaching party has a duty to take reasonable steps to mitigate its damages, and damages that could have been avoided through reasonable mitigation efforts are not recoverable. See Vireo Trust Bank v. Marlowe Commerce Bank Asset Capital Corp., 424 F.3d 195, 208 (2d Cir. 2005). We should evaluate and disclose this risk to the client and develop the factual record to demonstrate that WAL's mitigation efforts were timely and reasonable under the circumstances, including the limited number of qualified suppliers capable of manufacturing Ti-6Al-4V ELI turbine housings to WAL's specifications on an expedited timeline.
VII. Conclusions and Recommendations
Based on the foregoing analysis, I reach the following conclusions and recommendations:
1. WAL's termination of the MSA on October 3, 2022 was procedurally and substantively proper under § 14.2(b). Seven uncured lot rejections in the rolling 12-month period from March through September 2022 far exceeded the three-rejection Persistent Quality Failure threshold defined in § 8.4. WAL followed all required procedural steps, including issuance of written rejection notices and observance of the full 45-calendar-day cure period for each rejected lot. The termination did not require an additional 60-day cure notice under § 14.2(a), which applies to the separate material breach pathway and would render § 14.2(b) superfluous if imported into the Persistent Quality Failure analysis.
2. WAL's termination would also be defensible as a termination for material breach under § 14.2(a). Kestrel's sustained pattern of non-conforming deliveries over six months, affecting fourteen lots and 1,680 units, constitutes a material breach under the Restatement (Second) of Contracts § 241 factors as adopted by New York courts. The futility of further cure is demonstrated by Kestrel's failure to even attempt cure on five of the seven uncured lots.
3. Kestrel's anticipated counterarguments regarding unpublished specifications and pretextual motive are rebutted by the documentary and expert evidence and are legally immaterial under New York law. The porosity specification of ≤0.25% is expressly stated in the contract documents; Arclight's independent testing corroborates the rejections; Valkyr's significantly higher unit price undermines the "lower-cost replacement" narrative; and New York law does not require inquiry into subjective motive where objective contractual grounds for termination are satisfied.
4. The termination defense is the linchpin of the case. If sustained, it eliminates the entirety of Kestrel's €47.3 million damages claim and supports WAL's €5.17 million counterclaim for replacement-component costs.
5. Recommendations for next steps:
(a) Statement of Defense and Counterclaim. Include the termination defense and the supporting arguments set forth in this memorandum prominently in the Statement of Defense and Counterclaim, which is due to be filed on June 30, 2023. The termination defense should be presented as the primary affirmative defense, with the consequential damages waiver and the option-versus-obligation analysis serving as alternative and independent grounds for dismissal of Kestrel's claims.
(b) Expert Evidence. Coordinate with Dr. Raymond Chow at Arclight Materials Science Inc. to ensure that his metallurgical testing results are comprehensive, covering all fourteen rejected lots with detailed sample-by-sample porosity data. Dr. Chow should be prepared to serve as an expert witness and to provide a written expert report addressing the methodology, findings, and conclusions of his testing. His testimony will be critical to rebut Kestrel's allegation that WAL applied an unpublished ≤0.15% porosity standard.
(c) Fact Witnesses. Prepare Gerald Huang (VP Global Supply Chain Operations) and Dr. Ingrid Vollmer (SVP Engineering & Manufacturing) as key fact witnesses. Huang can testify to the Valkyr engagement timeline, the procurement process, and the mitigation efforts. Dr. Vollmer can testify to the inspection process, the consistency of the ≤0.25% standard, and the technical basis for the porosity specification.
6. Separate memoranda are in preparation to address: (a) New York law on the enforceability of consequential damages waivers, as applied to the § 8.7 waiver; (b) the recoverability of reputational damages under New York law; and (c) the renewal-period lost profits claim, including the option-versus-obligation analysis. These memoranda will be ci

MEMORANDUM

ENGAGEMENT NO.: 1019-00001

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