1019-00001 · Haber Reinhardt Schlosser Partners · Internal Memoranda

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

TO: Theodore Langston, Partner; Vivienne St. Claire, Partner

FROM: Simone Laroche, Senior Associate

DATE: April 14, 2023

RE: Kestrel Dynamics GmbH v. Whitmore Aerospace LLC — ICC Case No. 27914/MHM — Analysis of Claimant's Renewal-Period Lost Profits Claim (€27.15 Million)

ENGAGEMENT NO.: 1019-00001

I. Executive Summary

This memorandum analyzes the legal and factual basis for the €27.15 million renewal-period lost profits claim asserted by Kestrel Dynamics GmbH ("Kestrel" or "Claimant") against our client, Whitmore Aerospace LLC ("WAL" or "Respondent"), in the pending ICC arbitration styled as Case No. 27914/MHM. The claim relates to two optional one-year renewal periods under the Master Supply Agreement for Titanium Alloy Turbine Housings, dated June 15, 2018 (the "MSA"), and is set forth in Claimant's Statement of Claim at paragraph 92.

The MSA's initial term runs five years, from June 15, 2018 through June 14, 2023. In addition, Section 3.2 of the MSA provides for two optional one-year renewal periods, each exercisable solely at the discretion of WAL as Buyer. Kestrel contends that, but for WAL's allegedly wrongful termination on October 3, 2022, WAL would have exercised both renewal options, and that Kestrel is therefore entitled to the profits it would have earned during those two additional contract years. The renewal-period claim represents the single largest component of Kestrel's total damages demand of €47.3 million — more than 57% of the total amount in controversy.

After a thorough review of the MSA, the parties' course of dealing, the applicable law, and the relevant authorities, this memorandum concludes that Kestrel has no legally cognizable expectation interest in renewal-period profits under New York law, which governs the MSA pursuant to Section 22.1. This conclusion rests on four independent grounds:

(a) The renewal options in Section 3.2 created a unilateral right in WAL, not an obligation. WAL was entitled, but never required, to extend the MSA beyond the initial five-year term. An option is a continuing offer that vests discretion in the holder; the non-holder has no contractual right to compel exercise.

(b) Kestrel had no contractual entitlement to renewal. The MSA contains no automatic renewal or evergreen provision. Absent WAL's affirmative, written exercise of the option at least 90 days prior to expiration of the then-current term, the MSA expires by its own terms. The implied covenant of good faith and fair dealing cannot be deployed to convert a discretionary option into a binding obligation under settled New York law.

(c) New York law does not award lost-profit damages for speculative future contract extensions that were discretionary. Kestrel's renewal-period claim depends on a chain of contingencies — WAL's discretionary decision to renew, Kestrel's satisfactory performance during the renewal periods, continued market demand, and the absence of competitive alternatives — none of which Kestrel can establish with the "reasonable certainty" that New York law requires.

(d) The consequential damages waiver in Section 8.7 of the MSA independently bars recovery of renewal-period lost profits. Lost profits for periods beyond the existing term are paradigmatic consequential damages, and the waiver between these sophisticated commercial parties is enforceable under New York law.

Recommendation. Based on this analysis, we recommend that WAL (i) include a dedicated section in the Statement of Defense and Counterclaim (due June 30, 2023) seeking dismissal or exclusion of the €27.15 million renewal-period claim; (ii) consider seeking a preliminary ruling or bifurcation of the renewal-period issue to narrow the scope of discovery and expert analysis; and (iii) instruct Dr. Nadia Ostrovsky of Ridgeline Economic Consulting LLC to address this claim in her damages rebuttal report, demonstrating the speculative and inflated nature of Professor Langfeld's calculation. If the renewal-period claim is successfully excluded, Kestrel's total damages exposure drops from €47.3 million to approximately €20.15 million — a reduction of nearly 57.5%.

II. Factual Background

A. The MSA and Its Renewal Provisions

The MSA was executed on June 15, 2018, between WAL (as Buyer) and Kestrel (as Seller). The agreement is referenced internally as WAL-KDG-MSA-2018-0615 and bears Kestrel's corresponding reference number KDG-MSA-0618-WAL. The MSA was negotiated over a period of approximately nine months following WAL's issuance of a Request for Proposal (RFP No. WAL-RFP-2017-0093) in September 2017, to which Kestrel was one of four respondents.

Subject Matter. The MSA governs the manufacture and delivery by Kestrel of Ti-6Al-4V ELI (Extra Low Interstitial) titanium alloy turbine housings (the "Products") in accordance with WAL's engineering specifications WAL-SPEC-TH-401 through WAL-SPEC-TH-409. These specifications were subsequently expanded to include WAL-SPEC-TH-410 pursuant to Amendment No. 1 to the MSA, dated February 10, 2020, which added a variant turbine housing design for WAL's next-generation propulsion platform. The Products are precision-engineered components used in WAL's commercial and defense aerospace turbine assemblies, requiring strict compliance with AS9100D quality management standards and adherence to exacting dimensional tolerances, metallurgical composition requirements, and porosity limits.

Initial Term. The MSA provides for an initial term of five years, commencing on June 15, 2018 and expiring on June 14, 2023. This five-year term was structured to align with WAL's production planning cycles and its anticipated program requirements across multiple airframe platforms.

Renewal Clause (Section 3.2). The MSA's renewal provision, Section 3.2, is central to the present analysis and warrants quotation in full:

"Section 3.2 — Renewal. Buyer may, at its sole discretion, extend the term of this Agreement for up to two (2) additional periods of one (1) year each (each, a 'Renewal Period'), upon written notice to Seller no later than ninety (90) calendar days prior to the expiration of the then-current term (or Renewal Period, as applicable). In the event Buyer elects not to extend the term, or fails to deliver written notice of extension within the period specified herein, this Agreement shall expire at the end of the then-current term without further action by either Party."

Several features of this language are critical:

First, the renewal right is vested exclusively in WAL as Buyer. The clause uses the permissive "may" rather than "shall," confirming that exercise is discretionary. The phrase "at its sole discretion" reinforces the unilateral nature of the right.

Second, the clause requires affirmative written notice from WAL at least 90 days before expiration of the then-current term. Absent such notice, the MSA expires automatically. There is no automatic renewal and no evergreen mechanism.

Third, no reciprocal right is granted to Kestrel. Kestrel cannot compel WAL to renew, cannot request mediation or arbitration of WAL's decision not to renew, and is not entitled to any explanation or justification for WAL's election.

Fourth, the clause does not condition renewal on any performance metrics, market conditions, or mutual agreement. It is entirely within WAL's unilateral control, unconstrained by any objective criteria.

Amendments. The MSA was amended twice during the initial term. Amendment No. 1 (February 10, 2020) expanded the scope of Products to include specification WAL-SPEC-TH-410 and increased the maximum annual volume cap from 3,600 to 4,000 units. Amendment No. 2 (September 3, 2021) extended the cure period for quality-related non-conformances from 30 to 45 calendar days (Section 8.4(c)), reflecting the parties' agreement to provide additional time for root-cause analysis and corrective action. Neither amendment altered the renewal provisions of Section 3.2 or the consequential damages waiver in Section 8.7.

B. Key Commercial Terms Relevant to Damages Calculation

Understanding the financial parameters of the MSA is essential to evaluating Kestrel's €27.15 million renewal-period claim.

Volume Commitments. Section 4.1 of the MSA establishes a minimum annual purchase volume of 2,400 units per contract year. This minimum volume commitment was a negotiated term designed to provide Kestrel with production planning certainty and to justify the capital expenditures required to establish a dedicated manufacturing line at Kestrel's Augsburg facility. The maximum annual volume was originally set at 3,600 units but was increased to 4,000 units by Amendment No. 1, reflecting the addition of the WAL-SPEC-TH-410 variant.

Unit Pricing. Section 5.2 establishes a base unit price of €4,850.00 for Contract Year 1 (June 15, 2018 – June 14, 2019), subject to a compound annual escalation of 2.5%. Applying this escalator through the initial term yields the following unit prices:

For purposes of Kestrel's renewal-period damages claim, Professor Langfeld of Rheinsberg Advisory AG (Kestrel's damages expert) has projected the following hypothetical renewal-period unit prices based on the same 2.5% annual escalation:

Claimed Profit Margin. Professor Langfeld's expert report (dated January 15, 2023) asserts that Kestrel's weighted average contribution margin on Products sold under the MSA was 22.4%. This figure is calculated after deducting variable manufacturing costs (raw material, labor, energy, and logistics) but before allocation of certain fixed overhead items. The reliability and methodology underlying this margin figure are subject to challenge and will be addressed separately in Dr. Ostrovsky's rebuttal report.

Delivery Terms. Section 6.1 specifies DDP (Delivered Duty Paid, Incoterms 2020) delivery to WAL's primary assembly facility located at 8500 Coppermine Road, Manassas, Virginia 20110, United States. Under DDP terms, Kestrel bears all costs and risks of transportation, import duties, and customs clearance until the Products are delivered to WAL's facility. This delivery term is relevant to the margin calculation because it means that Kestrel's cost base includes all logistics and customs expenses.

C. Kestrel's Renewal-Period Lost Profits Claim

Kestrel's Statement of Claim, filed on December 1, 2022, asserts total damages of €47.3 million arising from WAL's allegedly wrongful termination of the MSA. Of this total, €27.15 million — or approximately 57.4% — is attributed to lost profits during the two hypothetical renewal periods. This claim is set forth at paragraphs 89 through 96 of the Statement of Claim and is supported by Professor Langfeld's expert report.

Kestrel's Theory of Recovery. Kestrel contends that, but for WAL's alleged wrongful termination on October 3, 2022, the MSA would have continued through the remainder of the initial five-year term and that WAL would thereafter have exercised both of the optional one-year renewal periods provided for in Section 3.2. Kestrel asserts that it is entitled to the profits it would have earned during those two additional years as part of its expectation damages.

Underlying Assumptions. Professor Langfeld's calculation of the €27.15 million renewal-period claim appears to rest on several key assumptions:

(a) WAL would have exercised both renewal options, extending the MSA through June 14, 2025;

(b) During each renewal year, WAL would have ordered the maximum annual volume — either 3,600 units (under the original MSA terms) or 4,000 units (under the Amendment No. 1 cap), with Professor Langfeld's report using the higher figure for at least one of the two renewal years;

(d) Kestrel's contribution margin of 22.4% would have remained constant; and

(e) No disruptions, non-conformances, or alternative sourcing arrangements would have reduced the volume or profitability of Products sold during the renewal periods.

Even a rough mathematical check supports the approximate magnitude of the claim. Taking, for example, the maximum volume of 4,000 units at the CY6 unit price of approximately €5,487.33, total revenue for renewal year 1 would be approximately €21.95 million, yielding a claimed profit at 22.4% margin of approximately €4.92 million. A similar calculation for renewal year 2 at the CY7 unit price yields approximately €5.04 million. However, to reach the total claim of €27.15 million across both years, the claim must incorporate both volume and margin assumptions at the upper end of the possible range, together with other categories of damages or cost savings that Professor Langfeld attributes to the renewal periods (including avoided fixed cost absorption and lost scale efficiencies). We are continuing to analyze the detailed breakdown and will address the specific arithmetic in Dr. Ostrovsky's rebuttal.

Significance of the Renewal-Period Claim. The €27.15 million renewal-period claim is the single largest component of Kestrel's total damages demand. Its exclusion would reduce total claimed damages by more than half and would significantly alter the economic calculus of the arbitration for both parties.

D. WAL's Termination

WAL issued a Notice of Termination for Cause to Kestrel on October 3, 2022 (the "Termination Notice"), invoking Section 14.2(b) of the MSA. Section 14.2(b) permits Buyer to terminate the MSA upon a "Persistent Quality Failure," defined as the occurrence of three or more uncured lot rejections due to non-conformance with the applicable engineering specifications within any rolling 12-month period.

Basis for Termination. The Termination Notice cited seven uncured lot rejections within a rolling 12-month period spanning from March 7, 2022 through September 19, 2022. This number significantly exceeded the three-rejection threshold set forth in Section 8.4 of the MSA. The total number of rejected lots during the relevant period was 14, comprising 1,680 individual turbine housing units. Of these, seven were classified as "uncured" because Kestrel either failed to complete corrective action within the applicable cure period or because the corrective action undertaken proved inadequate upon re-inspection.

Nature of Non-Conformances. The primary non-conformance at issue involved porosity levels exceeding the contractual specification. WAL-SPEC-TH-401, Appendix C, Table 3 establishes a maximum allowable porosity of ≤0.25% (as measured by X-ray computed tomography in accordance with ASTM E1570-19). According to the metallurgical analysis performed by Dr. Raymond Chow of Arclight Materials Science Inc. (WAL's technical expert), the actual porosity levels observed in the rejected lots ranged from 0.19% to 0.38%. While some measurements fell below the 0.25% threshold (and the disposition of those borderline lots is itself a contested factual issue), the lots identified in the Termination Notice all contained units with porosity readings exceeding the specification limit.

Cure Period Failures. Kestrel failed to cure within the 45-day amended cure period (as extended by Amendment No. 2, dated September 3, 2021) for five of the seven uncured lots cited in the Termination Notice. For two additional lots, Kestrel submitted reworked units that were again found non-conforming upon re-inspection at WAL's Manassas facility, rendering the cure attempt unsuccessful.

Kestrel's Position on Termination. Kestrel disputes the validity of the termination, contending (among other things) that (i) certain of the rejections were unjustified because the porosity readings were within normal measurement variability; (ii) WAL failed to follow the contractual dispute resolution procedures for quality disagreements set forth in Section 8.5; and (iii) WAL's real motivation for termination was a desire to shift production to a lower-cost supplier, not genuine quality concerns. These arguments relate to the merits of the wrongful termination claim and are addressed in separate memoranda; the focus of this memorandum is exclusively on whether, even assuming arguendo that the termination was wrongful, Kestrel can recover lost profits for the optional renewal periods.

III. Legal Analysis

A. Nature of the Renewal Options Under New York Law

1. Unilateral Option vs. Bilateral Obligation

The threshold question in evaluating Kestrel's renewal-period lost profits claim is the legal character of the renewal provisions in Section 3.2. As set forth above, Section 3.2 grants WAL the right to "at its sole discretion, extend the term of this Agreement for up to two (2) additional periods of one (1) year each." This language unambiguously creates a unilateral option in favor of WAL. It does not impose an obligation on WAL to renew, nor does it grant Kestrel any right to compel renewal or to participate in the renewal decision.

Under well-settled New York law, an option is a continuing offer — a privilege vested in the option holder to accept or decline the offer at the holder's discretion. See Kaplan v. Lippman, 75 N.Y.2d 320, 324 (1990) (an option "grants the optionee the right, but not the obligation, to enter into the transaction"); Ridgeway Capital Markets v. Itochu Int'l, Inc., 2003 WL 1797847, at *4 (S.D.N.Y. Apr. 4, 2003) (renewal option is an "unexercised right" that does not bind the holder to renew). The critical distinction is between (a) a binding commitment to renew — which would impose mutual obligations on both parties and would give rise to expectation interests on both sides — and (b) a discretionary option to renew — which confers a right only on the holder and creates no enforceable expectation in the non-holder.

The MSA falls squarely into the latter category. The operative language — "may, at its sole discretion" — is among the clearest possible formulations of a discretionary right. New York courts have consistently interpreted such language as vesting unfettered discretion in the option holder. See, e.g., Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., 86 N.Y.2d 685, 695 (1995) (emphasizing that express conditions must be literally performed); Joseph Martin Jr. Delicatessen, Inc. v. Schumacher, 52 N.Y.2d 105, 109 (1981) (options must be construed according to their terms; courts will not supply missing terms to create an obligation where none exists).

The consequences of this characterization are straightforward. WAL, as the option holder, bore no obligation to exercise the renewal options. WAL could have declined to renew for any reason or no reason at all — including reasons having nothing to do with Kestrel's performance, such as changes in WAL's production plans, shifts in the competitive landscape, or the availability of alternative suppliers. Kestrel, as the non-holder, had no contractual right to demand that WAL renew the MSA and no legal basis on which to premise a claim for damages arising from WAL's hypothetical failure to exercise a discretionary right.

This distinction is not merely academic. It is outcome-determinative for the renewal-period damages claim. If the renewal options created no obligation on WAL's part, then Kestrel had no contractual entitlement to the revenue and profits that would have flowed from a renewed MSA. Any claim to such profits is, by definition, a claim for something to which Kestrel was never entitled — and New York law does not permit recovery of damages for the loss of something the claimant never had.

2. No Implied Obligation to Renew

Kestrel may attempt to circumvent the plain language of Section 3.2 by invoking the implied covenant of good faith and fair dealing, arguing that WAL was impliedly obligated to exercise the renewal options in good faith or that WAL's decision-making process regarding renewal was subject to judicial or arbitral review for reasonableness. This argument fails under New York law.

The New York Court of Appeals has repeatedly held that the implied covenant of good faith and fair dealing cannot be used to create contractual rights that are inconsistent with the express terms of the agreement. 511 West 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153 (2002) ("[T]he implied covenant of good faith and fair dealing . . . is not without limits, and no obligation can be implied that would be inconsistent with other terms of the contractual relationship."); Dalton v. Educational Testing Serv., 87 N.Y.2d 384, 389 (1995) (same). Where a contract expressly grants a party the right to act "at its sole discretion," imposing a good-faith limitation on the exercise of that discretion would directly contradict the contract's terms. See Moran v. Erk, 11 N.Y.3d 452, 457 (2008) (implied covenant cannot negate an expressly granted discretionary right).

Section 3.2 of the MSA grants WAL the right to renew "at its sole discretion." Any implied obligation to exercise that discretion in good faith — or, a fortiori, to exercise it at all — would be flatly inconsistent with the express language of the contract. The implied covenant is a gap-filler, not a trump card. It operates to ensure that parties do not act in a manner that deprives the other party of the benefits of the agreement, but it cannot be invoked to confer upon a party a benefit that the agreement itself does not provide. Kestrel had no contractual benefit of renewal — only the possibility that WAL might choose to renew. The implied covenant does not transform that possibility into a right.

Moreover, even if the Tribunal were inclined to examine WAL's course of dealing for indications that renewal was expected or anticipated, the factual record provides no support for such an inference. The MSA was never renewed; indeed, termination occurred during Contract Year 4, well before the question of renewal for CY6 or CY7 would have arisen. There is no history of prior renewals from which to infer a practice or expectation. There is no written communication from WAL suggesting an intent to renew. And, as discussed below, WAL was actively exploring alternative supply arrangements at the time of termination, further undermining any inference that renewal was probable.

B. Expectation Damages and the Requirement of Reasonable Certainty

1. Standard for Lost-Profit Damages Under New York Law

Even assuming, for purposes of argument, that the renewal provisions could theoretically support a damages claim, Kestrel would still be required to prove its lost profits with "reasonable certainty." New York law is unequivocal on this point: lost profits are recoverable only if they are proven with reasonable certainty; they must not be remote, speculative, or contingent upon uncertain future events.

The foundational standard was articulated in Kenford Co. v. County of Erie, 67 N.Y.2d 257, 261 (1986), where the Court of Appeals held that lost profits must be "capable of proof with reasonable certainty" and that "[m]ere speculation or conjecture is not enough." The Court further held that the damages must be the "natural and probable consequence of the breach" and must have been "within the contemplation of the parties at the time of contracting." Id. at 261–62. This standard has been consistently applied in subsequent decisions. See also Ashland Mgmt. Inc. v. Janien, 82 N.Y.2d 395, 403 (1993) (lost profits must be established with a "reasonable basis for their computation"); Bi-Economy Market, Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187, 193 (2008) (recognizing that the reasonable certainty standard applies to all claims for lost-profit damages).

The requirement of reasonable certainty applies not only to the amount of lost profits but also to the fact of their occurrence. Kenford, 67 N.Y.2d at 261. In other words, a claimant must demonstrate not only how much profit it would have earned but also that it would have earned any profit at all. Where recovery depends on a series of contingencies, each of which must be resolved in the claimant's favor, the claim becomes impermissibly speculative.

2. Renewal-Period Profits Are Inherently Speculative

Kestrel's renewal-period lost profits claim is precisely the kind of speculative, multi-contingency claim that the reasonable certainty standard is designed to exclude. The claim depends on the resolution of a chain of contingencies, each of which introduces an additional layer of uncertainty:

(a) WAL's exercise of the first renewal option. The first and most fundamental contingency is that WAL would have decided, at its sole discretion, to exercise the first renewal option for CY6. As discussed above, this decision was entirely within WAL's unilateral control, unconstrained by any contractual obligation, performance metric, or objective criterion. Kestrel has no evidence — and indeed cannot have evidence, because the question never arose — that WAL intended or would have elected to renew.

(b) WAL's exercise of the second renewal option. Even if the first renewal option would have been exercised, the second renewal (for CY7) represents a further, independent contingency. The clause provides for "up to two" additional periods, each requiring a separate written notice at least 90 days before expiration. WAL might have exercised the first renewal but declined the second, or vice versa, or neither.

(c) Kestrel's satisfactory performance during the renewal periods. Kestrel's claim assumes that it would have continued to perform satisfactorily during the renewal periods — that is, that it would not have experienced the quality failures that precipitated the termination in the first instance or any new performance issues. Given the documented history of persistent quality non-conformances (14 rejected lots comprising 1,680 units), this assumption is far from self-evident.

(d) Stable market conditions and continued WAL demand. The claim assumes that WAL's operational needs and market conditions would have remained stable during the renewal periods, generating demand for the maximum contractual volume of Products. In the volatile aerospace supply chain — particularly in the post-pandemic environment and amid shifting defense procurement priorities — such stability cannot be taken for granted.

(e) No engagement of alternative suppliers. The claim assumes that WAL would not have engaged alternative suppliers during the renewal periods to diversify its supply base or obtain more competitive pricing. In fact, the record shows that WAL was already actively exploring alternative sourcing arrangements with Valkyr Precision Components Inc. of Tucson, Arizona, prior to the termination. Even in the "but-for" world posited by Kestrel, WAL's supply diversification strategy would have been a factor in the volume allocated to Kestrel during any renewal period.

Each of these contingencies must be resolved in Kestrel's favor for the renewal-period claim to have any validity. The probability of all five contingencies being resolved favorably is the product of their individual probabilities — a compound probability that, on any realistic assessment, is far too low to satisfy the reasonable certainty standard. New York courts have consistently rejected lost-profit claims that depend on such multi-layered speculation. See Kenford, 67 N.Y.2d at 263–64 (rejecting lost-profit claim where recovery depended on speculative future events); Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 110–11 (2d Cir. 2007) (applying New York law and holding that lost-profit damages must be "not merely speculative, possible, and imaginary" but must be "reasonably certain and directly traceable to the breach"); TADCO Constr. Corp. v. Dormitory Auth. of the State of N.Y., 700 F. Supp. 2d 475, 490 (S.D.N.Y. 2010) (rejecting claim for profits on hypothetical future contract extensions as impermissibly speculative).

Kestrel bears the burden of proving that renewal was a "virtual certainty" or at least "reasonably certain." Given the purely discretionary nature of the option and the absence of any evidence of WAL's intent to renew, Kestrel simply cannot carry this burden.

3. No Historical Pattern of Renewal to Support Inference

A claimant seeking to recover lost profits on a hypothetical contract renewal may attempt to establish reasonable certainty by pointing to a historical pattern of renewals from which the trier of fact could infer that renewal was likely. Such an inference might be supportable where, for example, a supplier and buyer had a long-standing relationship involving multiple contract cycles, each of which was routinely renewed. Cf. Contemporary Mission, Inc. v. Famous Music Corp., 557 F.2d 918, 926 (2d Cir. 1977) (permitting lost-profit award where track record established the certainty of future earnings).

No such pattern exists here. The MSA was the first — and only — contract between WAL and Kestrel. There have been no prior renewals from which to infer a custom or practice. The parties' relationship was, at the time of termination, barely four years old and was characterized by escalating quality disputes. The absence of any renewal history deprives Kestrel of the most persuasive form of circumstantial evidence in support of its renewal-period claim.

Furthermore, the factual record affirmatively undermines any inference that WAL would have renewed. Specifically:

• WAL was actively exploring alternative supply arrangements with Valkyr Precision Components Inc. ("Valkyr"), a Tucson, Arizona-based manufacturer specializing in titanium aerospace components. Internal WAL procurement memoranda (which we expect to introduce through Gerald Huang's testimony) reflect that Valkyr had been identified as a potential second source as early as July 2021, well before the termination of the MSA. The engagement of Valkyr was driven by WAL's supply chain resilience strategy and by concerns about Kestrel's quality performance, and it strongly suggests that even in a "but-for" world without termination, WAL would have been diversifying away from Kestrel rather than committing to an extended supply relationship.

• Professor Langfeld's damages report assumes maximum annual volume during both renewal periods (3,600 or 4,000 units per year) but provides no factual basis for concluding that WAL intended to exercise the renewal options, much less at maximum volume. The report contains no reference to any WAL communication, planning document, or internal decision reflecting an intent to renew. It simply assumes renewal as a premise and then calculates profits on that basis — precisely the kind of speculative methodology that the reasonable certainty standard is designed to preclude.

C. The Consequential Damages Waiver (Section 8.7)

Independent of the foregoing analysis, the consequential damages waiver in Section 8.7 of the MSA provides a separate and sufficient ground for excluding Kestrel's renewal-period lost profits claim.

Section 8.7 of the MSA provides:

"Section 8.7 — Limitation of Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, OR PUNITIVE DAMAGES ARISING OUT OF OR RELATING TO THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO LOST PROFITS, LOST REVENUES, LOSS OF BUSINESS OPPORTUNITY, OR COST OF SUBSTITUTE GOODS OR SERVICES, WHETHER BASED ON WARRANTY, CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, OR ANY OTHER THEORY, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES."

This provision operates as a mutual waiver of consequential damages, and it expressly encompasses "lost profits" among the enumerated categories of excluded damages.

Renewal-Period Lost Profits Are Consequential Damages. Lost profits for periods beyond the existing contractual term are paradigmatic consequential damages. They are not direct damages flowing from any specific act of breach (such as the rejection of a particular lot or the failure to make a particular payment); rather, they represent speculative downstream economic losses resulting from the overall termination of the contractual relationship and the loss of future business opportunity. New York law distinguishes between "general" or "direct" damages — those that are the natural and probable consequence of the breach and that flow directly from the wrongful act — and "special" or "consequential" damages — those that are the indirect result of the breach and that arise from the claimant's particular circumstances. See Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 22 N.Y.3d 799, 805 (2014); Bi-Economy Market, 10 N.Y.3d at 192–93.

Renewal-period lost profits fall squarely on the consequential side of this line. They do not arise from any specific breach event but rather from the hypothetical future consequences of the termination — consequences that depend on a chain of contingencies (as discussed in Part III.B.2 above) and that are, by definition, "indirect" and "downstream" of the breach itself.

Enforceability of the Waiver. Under New York law, consequential damages waivers between sophisticated commercial parties are enforceable and will be given effect according to their terms. Metropolitan Life Ins. Co. v. Noble Lowndes Int'l, Inc., 84 N.Y.2d 430, 436–37 (1994) (enforcing limitation of liability clause between sophisticated commercial parties); see also Biotronik, 22 N.Y.3d at 808–09 (enforcing consequential damages waiver in commercial supply agreement). Both WAL and Kestrel are sophisticated commercial entities represented by counsel throughout the negotiation of the MSA. The waiver was a negotiated term, prominently displayed in all-capitals text, and there is no basis to argue unconscionability, duress, or any other defense to its enforcement.

Accordingly, even if Kestrel could somehow establish that its renewal-period lost profits were sufficiently certain to satisfy the Kenford standard — which, for the reasons set forth above, it cannot — Section 8.7 would independently bar their recovery as consequential damages expressly waived by the parties' agreement.

D. Distinguishing Kestrel's Likely Counterarguments

Based on the Statement of Claim and Professor Langfeld's expert report, Kestrel is likely to advance several counterarguments in an effort to preserve the renewal-period claim. Each is addressed below.

1. "WAL Would Have Renewed Absent Its Own Breach"

Anticipated Argument. Kestrel will likely argue that the proper analytical framework requires the Tribunal to assume that WAL's termination was wrongful (which is the premise of Kestrel's entire case) and that, in the "but-for" world in which WAL had not breached the MSA, WAL would have renewed the agreement for both optional periods. On this theory, the Tribunal should not credit WAL's subjective intent not to renew because that intent was itself a product of the wrongful termination.

Response. This argument, while superficially appealing, fundamentally mischaracterizes the nature of the renewal options and the burden of proof on damages. Even accepting, arguendo, that WAL's termination of the MSA on October 3, 2022 was wrongful, the "but-for" world still requires Kestrel to prove that WAL would have exercised a discretionary option. The mere existence of the option does not establish that it would have been exercised. In the "but-for" world, WAL would still have had the unilateral right to decline to renew — for any reason, including reasons unrelated to the quality disputes, such as changes in production strategy, cost considerations, or the desire to diversify its supply base.

WAL's intent to renew is not established by the absence of a wrongful termination. The MSA is silent on any factors that would compel or even encourage renewal; it vests "sole discretion" in WAL without limitation. Kestrel would need to adduce affirmative evidence — such as internal WAL communications expressing an intent to renew, budget documents allocating funds for renewal-period purchases, or testimony from WAL decision-makers reflecting a plan to continue the relationship — to support the inference that renewal was reasonably certain. No such evidence exists or has been identified in the record to date.

Furthermore, as noted above, WAL was actively pursuing alternative sourcing with Valkyr prior to the termination. The engagement of Valkyr was not precipitated by the quality disputes alone; it reflected a strategic decision to build supply chain redundancy. This evidence undermines the premise that, but for the termination, WAL would have committed to two additional years of exclusive or near-exclusive reliance on Kestrel.

2. "Industry Practice Supports Renewal Expectations"

Anticipated Argument. Kestrel may argue that, in the aerospace supply chain, long-term supplier relationships and contract renewals are customary, and that the Tribunal should infer from industry practice that WAL would have renewed the MSA in the ordinary course.

Response. Industry custom and practice, however widespread, cannot override the express language of the MSA. Under New York law, extrinsic evidence of trade usage or custom may be admissible to supplement or interpret ambiguous contract terms, but it cannot be used to contradict or vary unambiguous provisions. See U.C.C. § 1-303(e) (express terms prevail over course of dealing and usage of trade); see also Nanakuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772 (9th Cir. 1981) (recognizing the hierarchy of express terms over usage of trade under the UCC). Section 3.2 is unambiguous: renewal is at WAL's "sole discretion." No amount of industry-practice evidence can convert this discretionary right into an obligation.

Moreover, even on its own terms, the industry-practice argument is weak. While long-term supplier relationships are common in the aerospace industry, contract renewals are far from automatic. Aerospace OEMs regularly re-compete supply contracts, shift production to alternative sources, and adjust their supply bases in response to cost pressures, quality performance, and strategic considerations. WAL's exploration of Valkyr as an alternative supplier is entirely consistent with standard industry practice and demonstrates that renewal was by no means a foregone conclusion.

3. "The Consequential Damages Waiver Does Not Apply to Wrongful Termination"

Anticipated Argument. Kestrel may argue that Section 8.7 of the MSA, by its context and placement within Article 8 (Quality Assurance and Remedies), applies only to quality-failure-related claims and does not extend to claims arising from WAL's wrongful termination of the MSA. On this reading, the waiver would bar consequential damages claims related to defective lots (e.g., lost downstream profits from late delivery) but would not bar claims for lost profits arising from the termination itself.

Response. This argument depends on a narrow, context-dependent reading of Section 8.7 that is not supported by the waiver's plain language. Section 8.7 waives consequential damages "arising out of or relating to this Agreement" — a broad formulation that is not limited to quality-related claims. The waiver expressly identifies "lost profits" and "loss of business opportunity" among the enumerated categories of excluded damages, without restricting those categories to any particular type of claim or breach. A wrongful termination claim is a claim "arising out of or relating to" the MSA, and the lost profits sought in connection with such a claim are "lost profits" within the meaning of the waiver.

Furthermore, even if the Tribunal were to construe Section 8.7 narrowly, the broader remedial framework of the MSA supports the exclusion of renewal-period lost profits. Section 14.2 (Termination for Cause) does not create a separate damages regime for wrongful termination. It does not provide that a wrongfully terminated party is entitled to consequential damages, nor does it carve out an exception to the general limitation of liability in Section 8.7. The MSA's remedial provisions must be read as an integrated whole, and reading them in that manner confirms that the parties intended the consequential damages waiver to apply broadly.

It is also worth noting that, even under a narrow reading, the characterization of renewal-period lost profits as "consequential" is robust. These damages do not flow directly from any specific act of breach; they are speculative downstream losses that depend on future contingencies. Whether the waiver is read broadly or narrowly, renewal-period lost profits fall within its scope.

IV. Impact on Damages Quantification

Exclusion of the €27.15 million renewal-period lost profits claim would have a transformative effect on the overall damages landscape of this arbitration. Kestrel's total claimed damages of €47.3 million break down as follows:

If the renewal-period claim is excluded, Kestrel's total claimed damages drop from €47.3 million to approximately €20.15 million — a reduction of approximately 57.4%. This reduction alone would fundamentally alter the parties' settlement dynamics and would substantially limit WAL's maximum exposure in the arbitration.

Moreover, the remaining damages categories are themselves subject to significant independent defenses:

Remaining-term lost profits (€12.83 million). This component represents the profits Kestrel claims it would have earned during the balance of the initial five-year term (i.e., from the October 3, 2022 termination through the June 14, 2023 expiration). While this claim has a stronger contractual foundation than the renewal-period claim (because it relates to a period during which the MSA was undisputedly in effect), it is also partially consequential in nature and subject to the Section 8.7 waiver. Moreover, Kestrel's duty to mitigate will reduce the recoverable amount, and the volume and margin assumptions underlying Professor Langfeld's calculation are subject to challenge.

Rework costs (€3.42 million). Kestrel seeks reimbursement for costs it incurred in attempting to rework rejected lots to bring them into conformance with WAL's specifications. However, these costs were incurred as a direct result of Kestrel's own manufacturing defects. A party is not entitled to recover the costs of curing its own non-conforming performance. The rework costs are, in effect, warranty costs that Kestrel was obligated to bear under Section 8.3 of the MSA, which requires Seller to "promptly replace or repair" non-conforming Products at Seller's expense.

Reputational damages (€3.90 million). Kestrel claims reputational harm resulting from the public termination of the MSA, asserting that the termination damaged Kestrel's standing with other aerospace customers. This claim is speculative, difficult to quantify, and independently barred by the consequential damages waiver in Section 8.7. We addressed this claim in detail in the memorandum dated February 15, 2023, and concluded that it is unlikely to survive scrutiny under New York law.

In sum, exclusion of the renewal-period claim not only eliminates Kestrel's single largest damages component but also positions WAL to challenge the remaining claims from a position of substantially reduced exposure.

V. Recommendations

A. Pleading Strategy

In the Statement of Defense and Counterclaim, which is due to be filed on June 30, 2023, we recommend including a dedicated section — prominently positioned and fully briefed — arguing that the €27.15 million renewal-period lost profits claim should be dismissed or excluded on the following grounds:

(1) Lack of reasonable certainty. The renewal-period claim is impermissibly speculative under New York law because it depends on a chain of contingencies — WAL's discretionary decision to renew, Kestrel's continued satisfactory performance, stable market conditions, and the absence of alternative sourcing — none of which Kestrel can prove with reasonable certainty.

(2) Discretionary nature of the renewal options. The renewal options in Section 3.2 are unilateral, discretionary rights vested in WAL. They do not create any contractual entitlement in Kestrel to renewal-period revenue or profits. The implied covenant of good faith and fair dealing cannot be invoked to convert a discretionary option into an obligation.

(3) Consequential damages waiver. Section 8.7 of the MSA expressly waives consequential damages, including lost profits, arising out of or relating to the agreement. Renewal-period lost profits are paradigmatic consequential damages and are barred by this provision.

We further recommend that the Statement of Defense include a request for a preliminary ruling or bifurcation on the renewal-period issue. Under Article 22(1) of the ICC Rules, the Tribunal has discretion to decide issues of jurisdiction and admissibility as preliminary matters, and procedural efficiency would be served by resolving the renewal-period issue before the parties incur the significant costs of discovery and expert analysis on a claim that is legally untenable. Even if the Tribunal declines to rule on the issue as a preliminary matter, the request will signal the strength of WAL's position and may narrow the scope of Procedural Order No. 3 (governing document production and expert evidence).

B. Expert Instructions

We recommend that Dr. Nadia Ostrovsky of Ridgeline Economic Consulting LLC be instructed to address the renewal-period lost profits claim as a discrete section of her damages expert rebuttal report. Specifically, Dr. Ostrovsky should:

• Critique the assumptions underlying Professor Langfeld's €27.15 million calculation, identifying each assumption that lacks factual support or that departs from accepted damages methodology.

• Demonstrate that the claim assumes maximum volume (3,600 or 4,000 units per year) during both renewal periods, despite the absence of any evidence that WAL would have ordered at or near the maximum volume cap. Historical order volumes during the initial term should be analyzed to establish the actual pattern of demand, which may have varied significantly from the contractual maximum.

• Examine and challenge the 22.4% contribution margin figure used by Professor Langfeld, including by analyzing Kestrel's cost structure, raw material costs (Ti-6Al-4V ELI pricing trends during 2022–2025), and operational efficiency data. The margin figure should be tested against Kestrel's audited financial statements and segment-level profitability data.

• Apply a probability-weighted analysis demonstrating the speculative nature of future renewal. By assigning reasonable probability estimates to each contingency in the chain (exercise of the first option, exercise of the second option, satisfactory performance, stable demand, etc.), Dr. Ostrovsky can calculate an expected value for the renewal-period claim that reflects the compounding uncertainty inherent in each contingency. We anticipate that such an analysis will yield an expected value that is a small fraction of the claimed €27.15 million.

In addition, we recommend that Sandra Gillespie of Canfield & Thorpe LLP (forensic accountant) be instructed to review Kestrel's financial records — to the extent they are produced in document production — for evidence bearing on the following questions:

• Whether the 22.4% margin claimed by Professor Langfeld is realistic in light of Kestrel's actual cost experience, including raw material price fluctuations, labor cost increases, and logistics cost escalation under DDP delivery terms.

• Whether Kestrel's renewal-period projections are supportable — i.e., whether Kestrel's own internal financial models, budgets, or business plans included renewal-period revenue from the WAL MSA, and if so, at what volumes and margins.

• Whether Kestrel's financial condition during 2022 would have supported performance at the levels assumed in the renewal-period claim, including capital expenditure requirements, working capital availability, and production capacity constraints.

C. Factual Development

To build the factual record necessary to defeat the renewal-period claim, we recommend the following steps:

Document Production. Through the Redfern Schedule process established by Procedural Order No. 2 (dated March 17, 2023), we should seek production of the following categories of documents from Kestrel:

(a) Any internal Kestrel communications — including emails, memoranda, board presentations, and management reports — discussing the likelihood of MSA renewal, WAL's anticipated decision on renewal, or the probability of continued business with WAL beyond the initial five-year term.

(b) Any communications between Kestrel and WAL regarding renewal discussions or expectations, including any informal inquiries, status updates, or negotiations relating to the potential exercise of the renewal options.

(c) Any Kestrel financial projections, business plans, budgets, or strategic planning documents that did or did not include renewal-period revenue from the WAL MSA. Documents that exclude renewal-period revenue — or that assign a probability of less than 100% to renewal — would be particularly probative, as they would demonstrate that even Kestrel did not regard renewal as a certainty.

(d) Any Kestrel correspondence with lenders, investors, or auditors regarding the MSA and its expected duration, particularly any representations regarding the likelihood of renewal.

Witness Preparation. We should prepare Gerald Huang, WAL's Vice President of Global Supply Chain Operations, to testify regarding the following topics:

• WAL's internal deliberations about renewal of the MSA, including any discussions, analyses, or decision-making processes that occurred (or would have occurred) in connection with the question of whether to exercise the renewal options.

• WAL's strategic rationale for engaging Valkyr Precision Components Inc. as an alternative or second-source supplier for titanium alloy turbine housings, including the timeline of the Valkyr engagement, the scope of Valkyr's qualification process, and the relationship between the Valkyr engagement and WAL's supply diversification strategy.

• WAL's broader supply chain management philosophy, including the factors that WAL typically considers in deciding whether to renew supplier contracts, the role of performance history and quality metrics in renewal decisions, and the frequency with which WAL declines to renew supplier contracts in the aerospace context.

• Any communications between Mr. Huang (or his team) and Kestrel regarding the future of the supply relationship, including whether the topic of renewal was ever raised, discussed, or negotiated between the parties.

Mr. Huang's testimony will be critical in establishing that WAL's decision-making on renewal was genuinely discretionary, that there was no commitment or expectation of renewal, and that the engagement of Valkyr reflected a strategic direction that was inconsistent with full renewal of the Kestrel MSA.

VI. Conclusion

Kestrel's €27.15 million renewal-period lost profits claim is both its largest single damages component and its weakest. The claim rests on the untenable premise that WAL was obligated — rather than merely entitled — to renew the MSA for two additional years. Under New York law, the discretionary renewal options in Section 3.2 create no cognizable expectation interest for Kestrel. WAL had the unilateral right to renew or not, at its sole discretion, and the mere existence of the option does not establish that it would have been exercised. The implied covenant of good faith and fair dealing cannot transform a discretionary option into an enforceable obligation.

The claim is speculative, contingent on multiple uncertain future events — including WAL's discretionary decision to renew, Kestrel's continued satisfactory performance, stable market conditions, and the absence of competitive alternatives — none of which Kestrel can prove with reasonable certainty. The absence of any prior renewal history, combined with WAL's active pursuit of alternative sourcing through Valkyr, further undermines any inference that renewal was reasonably certain.

Finally, the consequential damages waiver in Section 8.7 of the MSA independently bars recovery of renewal-period lost profits. These damages are paradigmatic consequential damages — speculative downstream losses that do not flow directly from any specific breach but rather from the hypothetical future consequences of the termination — and they fall squarely within the scope of the waiver. The waiver is enforceable as a negotiated term between sophisticated commercial parties.

Calderwood & Harkness should aggressively seek dismissal of this claim at every stage of the arbitration — in the Statement of Defense and Counterclaim, through a request for preliminary ruling or bifurcation, in the damages expert reports, and at the merits hearing. Exclusion of the renewal-period claim would reduce Kestrel's total damages demand by more than 57%, from €47.3 million to approximately €20.15 million, fundamentally altering the economic dynamics of this proceeding and strengthening WAL's overall position.

I am available to discuss this analysis at your convenience and to incorporate your feedback into the drafting of the Statement of Defense and Counterclaim.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Simone Laroche Senior Associate International Arbitration & Commercial Litigation Group

CONFIDENTIAL — This memorandum is protected by the attorney-client privilege and the attorney work product doctrine. It has been prepared for the exclusive use of the attorneys and personnel of Calderwood & Harkness LLP in connection with the representation of Whitmore Aerospace LLC in ICC Case No. 27914/MHM. It should not be disclosed to any person outside the firm without the prior written consent of the undersigned. Distribution within the client organization should be limited to individuals with a need to know in connection with this matter.

Contract Year	Period	Unit Price (€)
CY1	June 15, 2018 – June 14, 2019	4,850.00
CY2	June 15, 2019 – June 14, 2020	4,971.25
CY3	June 15, 2020 – June 14, 2021	5,095.53
CY4	June 15, 2021 – June 14, 2022	5,222.92
CY5	June 15, 2022 – June 14, 2023	5,353.49
Hypothetical Period	Unit Price (€)
Renewal Year 1 (CY6)	5,353.49 × 1.025 ≈ 5,487.33
Renewal Year 2 (CY7)	5,487.33 × 1.025 ≈ 5,624.51
Damages Category	Amount (€ million)	% of Total
Renewal-period lost profits (CY6–CY7)	27.15	57.4%
Remaining-term lost profits (CY5 balance)	12.83	27.1%
Rework costs for rejected lots	3.42	7.2%
Reputational damages	3.90	8.2%
Total	47.30	100.0%

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Theodore Langston, Partner; Vivienne St. Claire, Partner
FROM: Simone Laroche, Senior Associate
DATE: April 14, 2023
RE: Kestrel Dynamics GmbH v. Whitmore Aerospace LLC — ICC Case No. 27914/MHM — Analysis of Claimant's Renewal-Period Lost Profits Claim (€27.15 Million)
ENGAGEMENT NO.: 1019-00001
I. Executive Summary
This memorandum analyzes the legal and factual basis for the €27.15 million renewal-period lost profits claim asserted by Kestrel Dynamics GmbH ("Kestrel" or "Claimant") against our client, Whitmore Aerospace LLC ("WAL" or "Respondent"), in the pending ICC arbitration styled as Case No. 27914/MHM. The claim relates to two optional one-year renewal periods under the Master Supply Agreement for Titanium Alloy Turbine Housings, dated June 15, 2018 (the "MSA"), and is set forth in Claimant's Statement of Claim at paragraph 92.
The MSA's initial term runs five years, from June 15, 2018 through June 14, 2023. In addition, Section 3.2 of the MSA provides for two optional one-year renewal periods, each exercisable solely at the discretion of WAL as Buyer. Kestrel contends that, but for WAL's allegedly wrongful termination on October 3, 2022, WAL would have exercised both renewal options, and that Kestrel is therefore entitled to the profits it would have earned during those two additional contract years. The renewal-period claim represents the single largest component of Kestrel's total damages demand of €47.3 million — more than 57% of the total amount in controversy.
After a thorough review of the MSA, the parties' course of dealing, the applicable law, and the relevant authorities, this memorandum concludes that Kestrel has no legally cognizable expectation interest in renewal-period profits under New York law, which governs the MSA pursuant to Section 22.1. This conclusion rests on four independent grounds:
(a) The renewal options in Section 3.2 created a unilateral right in WAL, not an obligation. WAL was entitled, but never required, to extend the MSA beyond the initial five-year term. An option is a continuing offer that vests discretion in the holder; the non-holder has no contractual right to compel exercise.
(b) Kestrel had no contractual entitlement to renewal. The MSA contains no automatic renewal or evergreen provision. Absent WAL's affirmative, written exercise of the option at least 90 days prior to expiration of the then-current term, the MSA expires by its own terms. The implied covenant of good faith and fair dealing cannot be deployed to convert a discretionary option into a binding obligation under settled New York law.
(c) New York law does not award lost-profit damages for speculative future contract extensions that were discretionary. Kestrel's renewal-period claim depends on a chain of contingencies — WAL's discretionary decision to renew, Kestrel's satisfactory performance during the renewal periods, continued market demand, and the absence of competitive alternatives — none of which Kestrel can establish with the "reasonable certainty" that New York law requires.
(d) The consequential damages waiver in Section 8.7 of the MSA independently bars recovery of renewal-period lost profits. Lost profits for periods beyond the existing term are paradigmatic consequential damages, and the waiver between these sophisticated commercial parties is enforceable under New York law.
Recommendation. Based on this analysis, we recommend that WAL (i) include a dedicated section in the Statement of Defense and Counterclaim (due June 30, 2023) seeking dismissal or exclusion of the €27.15 million renewal-period claim; (ii) consider seeking a preliminary ruling or bifurcation of the renewal-period issue to narrow the scope of discovery and expert analysis; and (iii) instruct Dr. Nadia Ostrovsky of Ridgeline Economic Consulting LLC to address this claim in her damages rebuttal report, demonstrating the speculative and inflated nature of Professor Langfeld's calculation. If the renewal-period claim is successfully excluded, Kestrel's total damages exposure drops from €47.3 million to approximately €20.15 million — a reduction of nearly 57.5%.
II. Factual Background
A. The MSA and Its Renewal Provisions
The MSA was executed on June 15, 2018, between WAL (as Buyer) and Kestrel (as Seller). The agreement is referenced internally as WAL-KDG-MSA-2018-0615 and bears Kestrel's corresponding reference number KDG-MSA-0618-WAL. The MSA was negotiated over a period of approximately nine months following WAL's issuance of a Request for Proposal (RFP No. WAL-RFP-2017-0093) in September 2017, to which Kestrel was one of four respondents.
Subject Matter. The MSA governs the manufacture and delivery by Kestrel of Ti-6Al-4V ELI (Extra Low Interstitial) titanium alloy turbine housings (the "Products") in accordance with WAL's engineering specifications WAL-SPEC-TH-401 through WAL-SPEC-TH-409. These specifications were subsequently expanded to include WAL-SPEC-TH-410 pursuant to Amendment No. 1 to the MSA, dated February 10, 2020, which added a variant turbine housing design for WAL's next-generation propulsion platform. The Products are precision-engineered components used in WAL's commercial and defense aerospace turbine assemblies, requiring strict compliance with AS9100D quality management standards and adherence to exacting dimensional tolerances, metallurgical composition requirements, and porosity limits.
Initial Term. The MSA provides for an initial term of five years, commencing on June 15, 2018 and expiring on June 14, 2023. This five-year term was structured to align with WAL's production planning cycles and its anticipated program requirements across multiple airframe platforms.
Renewal Clause (Section 3.2). The MSA's renewal provision, Section 3.2, is central to the present analysis and warrants quotation in full:
"Section 3.2 — Renewal. Buyer may, at its sole discretion, extend the term of this Agreement for up to two (2) additional periods of one (1) year each (each, a 'Renewal Period'), upon written notice to Seller no later than ninety (90) calendar days prior to the expiration of the then-current term (or Renewal Period, as applicable). In the event Buyer elects not to extend the term, or fails to deliver written notice of extension within the period specified herein, this Agreement shall expire at the end of the then-current term without further action by either Party."
Several features of this language are critical:
First, the renewal right is vested exclusively in WAL as Buyer. The clause uses the permissive "may" rather than "shall," confirming that exercise is discretionary. The phrase "at its sole discretion" reinforces the unilateral nature of the right.
Second, the clause requires affirmative written notice from WAL at least 90 days before expiration of the then-current term. Absent such notice, the MSA expires automatically. There is no automatic renewal and no evergreen mechanism.
Third, no reciprocal right is granted to Kestrel. Kestrel cannot compel WAL to renew, cannot request mediation or arbitration of WAL's decision not to renew, and is not entitled to any explanation or justification for WAL's election.
Fourth, the clause does not condition renewal on any performance metrics, market conditions, or mutual agreement. It is entirely within WAL's unilateral control, unconstrained by any objective criteria.
Amendments. The MSA was amended twice during the initial term. Amendment No. 1 (February 10, 2020) expanded the scope of Products to include specification WAL-SPEC-TH-410 and increased the maximum annual volume cap from 3,600 to 4,000 units. Amendment No. 2 (September 3, 2021) extended the cure period for quality-related non-conformances from 30 to 45 calendar days (Section 8.4(c)), reflecting the parties' agreement to provide additional time for root-cause analysis and corrective action. Neither amendment altered the renewal provisions of Section 3.2 or the consequential damages waiver in Section 8.7.
B. Key Commercial Terms Relevant to Damages Calculation
Understanding the financial parameters of the MSA is essential to evaluating Kestrel's €27.15 million renewal-period claim.
Volume Commitments. Section 4.1 of the MSA establishes a minimum annual purchase volume of 2,400 units per contract year. This minimum volume commitment was a negotiated term designed to provide Kestrel with production planning certainty and to justify the capital expenditures required to establish a dedicated manufacturing line at Kestrel's Augsburg facility. The maximum annual volume was originally set at 3,600 units but was increased to 4,000 units by Amendment No. 1, reflecting the addition of the WAL-SPEC-TH-410 variant.
Unit Pricing. Section 5.2 establishes a base unit price of €4,850.00 for Contract Year 1 (June 15, 2018 – June 14, 2019), subject to a compound annual escalation of 2.5%. Applying this escalator through the initial term yields the following unit prices:
For purposes of Kestrel's renewal-period damages claim, Professor Langfeld of Rheinsberg Advisory AG (Kestrel's damages expert) has projected the following hypothetical renewal-period unit prices based on the same 2.5% annual escalation:
Claimed Profit Margin. Professor Langfeld's expert report (dated January 15, 2023) asserts that Kestrel's weighted average contribution margin on Products sold under the MSA was 22.4%. This figure is calculated after deducting variable manufacturing costs (raw material, labor, energy, and logistics) but before allocation of certain fixed overhead items. The reliability and methodology underlying this margin figure are subject to challenge and will be addressed separately in Dr. Ostrovsky's rebuttal report.
Delivery Terms. Section 6.1 specifies DDP (Delivered Duty Paid, Incoterms 2020) delivery to WAL's primary assembly facility located at 8500 Coppermine Road, Manassas, Virginia 20110, United States. Under DDP terms, Kestrel bears all costs and risks of transportation, import duties, and customs clearance until the Products are delivered to WAL's facility. This delivery term is relevant to the margin calculation because it means that Kestrel's cost base includes all logistics and customs expenses.
C. Kestrel's Renewal-Period Lost Profits Claim
Kestrel's Statement of Claim, filed on December 1, 2022, asserts total damages of €47.3 million arising from WAL's allegedly wrongful termination of the MSA. Of this total, €27.15 million — or approximately 57.4% — is attributed to lost profits during the two hypothetical renewal periods. This claim is set forth at paragraphs 89 through 96 of the Statement of Claim and is supported by Professor Langfeld's expert report.
Kestrel's Theory of Recovery. Kestrel contends that, but for WAL's alleged wrongful termination on October 3, 2022, the MSA would have continued through the remainder of the initial five-year term and that WAL would thereafter have exercised both of the optional one-year renewal periods provided for in Section 3.2. Kestrel asserts that it is entitled to the profits it would have earned during those two additional years as part of its expectation damages.
Underlying Assumptions. Professor Langfeld's calculation of the €27.15 million renewal-period claim appears to rest on several key assumptions:
(a) WAL would have exercised both renewal options, extending the MSA through June 14, 2025;
(b) During each renewal year, WAL would have ordered the maximum annual volume — either 3,600 units (under the original MSA terms) or 4,000 units (under the Amendment No. 1 cap), with Professor Langfeld's report using the higher figure for at least one of the two renewal years;
(c) Unit prices during the renewal periods would have continued to escalate at 2.5% per year per Section 5.2;
(d) Kestrel's contribution margin of 22.4% would have remained constant; and
(e) No disruptions, non-conformances, or alternative sourcing arrangements would have reduced the volume or profitability of Products sold during the renewal periods.
Even a rough mathematical check supports the approximate magnitude of the claim. Taking, for example, the maximum volume of 4,000 units at the CY6 unit price of approximately €5,487.33, total revenue for renewal year 1 would be approximately €21.95 million, yielding a claimed profit at 22.4% margin of approximately €4.92 million. A similar calculation for renewal year 2 at the CY7 unit price yields approximately €5.04 million. However, to reach the total claim of €27.15 million across both years, the claim must incorporate both volume and margin assumptions at the upper end of the possible range, together with other categories of damages or cost savings that Professor Langfeld attributes to the renewal periods (including avoided fixed cost absorption and lost scale efficiencies). We are continuing to analyze the detailed breakdown and will address the specific arithmetic in Dr. Ostrovsky's rebuttal.
Significance of the Renewal-Period Claim. The €27.15 million renewal-period claim is the single largest component of Kestrel's total damages demand. Its exclusion would reduce total claimed damages by more than half and would significantly alter the economic calculus of the arbitration for both parties.
D. WAL's Termination
WAL issued a Notice of Termination for Cause to Kestrel on October 3, 2022 (the "Termination Notice"), invoking Section 14.2(b) of the MSA. Section 14.2(b) permits Buyer to terminate the MSA upon a "Persistent Quality Failure," defined as the occurrence of three or more uncured lot rejections due to non-conformance with the applicable engineering specifications within any rolling 12-month period.
Basis for Termination. The Termination Notice cited seven uncured lot rejections within a rolling 12-month period spanning from March 7, 2022 through September 19, 2022. This number significantly exceeded the three-rejection threshold set forth in Section 8.4 of the MSA. The total number of rejected lots during the relevant period was 14, comprising 1,680 individual turbine housing units. Of these, seven were classified as "uncured" because Kestrel either failed to complete corrective action within the applicable cure period or because the corrective action undertaken proved inadequate upon re-inspection.
Nature of Non-Conformances. The primary non-conformance at issue involved porosity levels exceeding the contractual specification. WAL-SPEC-TH-401, Appendix C, Table 3 establishes a maximum allowable porosity of ≤0.25% (as measured by X-ray computed tomography in accordance with ASTM E1570-19). According to the metallurgical analysis performed by Dr. Raymond Chow of Arclight Materials Science Inc. (WAL's technical expert), the actual porosity levels observed in the rejected lots ranged from 0.19% to 0.38%. While some measurements fell below the 0.25% threshold (and the disposition of those borderline lots is itself a contested factual issue), the lots identified in the Termination Notice all contained units with porosity readings exceeding the specification limit.
Cure Period Failures. Kestrel failed to cure within the 45-day amended cure period (as extended by Amendment No. 2, dated September 3, 2021) for five of the seven uncured lots cited in the Termination Notice. For two additional lots, Kestrel submitted reworked units that were again found non-conforming upon re-inspection at WAL's Manassas facility, rendering the cure attempt unsuccessful.
Kestrel's Position on Termination. Kestrel disputes the validity of the termination, contending (among other things) that (i) certain of the rejections were unjustified because the porosity readings were within normal measurement variability; (ii) WAL failed to follow the contractual dispute resolution procedures for quality disagreements set forth in Section 8.5; and (iii) WAL's real motivation for termination was a desire to shift production to a lower-cost supplier, not genuine quality concerns. These arguments relate to the merits of the wrongful termination claim and are addressed in separate memoranda; the focus of this memorandum is exclusively on whether, even assuming arguendo that the termination was wrongful, Kestrel can recover lost profits for the optional renewal periods.
III. Legal Analysis
A. Nature of the Renewal Options Under New York Law
1. Unilateral Option vs. Bilateral Obligation
The threshold question in evaluating Kestrel's renewal-period lost profits claim is the legal character of the renewal provisions in Section 3.2. As set forth above, Section 3.2 grants WAL the right to "at its sole discretion, extend the term of this Agreement for up to two (2) additional periods of one (1) year each." This language unambiguously creates a unilateral option in favor of WAL. It does not impose an obligation on WAL to renew, nor does it grant Kestrel any right to compel renewal or to participate in the renewal decision.
Under well-settled New York law, an option is a continuing offer — a privilege vested in the option holder to accept or decline the offer at the holder's discretion. See Kaplan v. Lippman, 75 N.Y.2d 320, 324 (1990) (an option "grants the optionee the right, but not the obligation, to enter into the transaction"); Ridgeway Capital Markets v. Itochu Int'l, Inc., 2003 WL 1797847, at *4 (S.D.N.Y. Apr. 4, 2003) (renewal option is an "unexercised right" that does not bind the holder to renew). The critical distinction is between (a) a binding commitment to renew — which would impose mutual obligations on both parties and would give rise to expectation interests on both sides — and (b) a discretionary option to renew — which confers a right only on the holder and creates no enforceable expectation in the non-holder.
The MSA falls squarely into the latter category. The operative language — "may, at its sole discretion" — is among the clearest possible formulations of a discretionary right. New York courts have consistently interpreted such language as vesting unfettered discretion in the option holder. See, e.g., Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., 86 N.Y.2d 685, 695 (1995) (emphasizing that express conditions must be literally performed); Joseph Martin Jr. Delicatessen, Inc. v. Schumacher, 52 N.Y.2d 105, 109 (1981) (options must be construed according to their terms; courts will not supply missing terms to create an obligation where none exists).
The consequences of this characterization are straightforward. WAL, as the option holder, bore no obligation to exercise the renewal options. WAL could have declined to renew for any reason or no reason at all — including reasons having nothing to do with Kestrel's performance, such as changes in WAL's production plans, shifts in the competitive landscape, or the availability of alternative suppliers. Kestrel, as the non-holder, had no contractual right to demand that WAL renew the MSA and no legal basis on which to premise a claim for damages arising from WAL's hypothetical failure to exercise a discretionary right.
This distinction is not merely academic. It is outcome-determinative for the renewal-period damages claim. If the renewal options created no obligation on WAL's part, then Kestrel had no contractual entitlement to the revenue and profits that would have flowed from a renewed MSA. Any claim to such profits is, by definition, a claim for something to which Kestrel was never entitled — and New York law does not permit recovery of damages for the loss of something the claimant never had.
2. No Implied Obligation to Renew
Kestrel may attempt to circumvent the plain language of Section 3.2 by invoking the implied covenant of good faith and fair dealing, arguing that WAL was impliedly obligated to exercise the renewal options in good faith or that WAL's decision-making process regarding renewal was subject to judicial or arbitral review for reasonableness. This argument fails under New York law.
The New York Court of Appeals has repeatedly held that the implied covenant of good faith and fair dealing cannot be used to create contractual rights that are inconsistent with the express terms of the agreement. 511 West 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153 (2002) ("[T]he implied covenant of good faith and fair dealing . . . is not without limits, and no obligation can be implied that would be inconsistent with other terms of the contractual relationship."); Dalton v. Educational Testing Serv., 87 N.Y.2d 384, 389 (1995) (same). Where a contract expressly grants a party the right to act "at its sole discretion," imposing a good-faith limitation on the exercise of that discretion would directly contradict the contract's terms. See Moran v. Erk, 11 N.Y.3d 452, 457 (2008) (implied covenant cannot negate an expressly granted discretionary right).
Section 3.2 of the MSA grants WAL the right to renew "at its sole discretion." Any implied obligation to exercise that discretion in good faith — or, a fortiori, to exercise it at all — would be flatly inconsistent with the express language of the contract. The implied covenant is a gap-filler, not a trump card. It operates to ensure that parties do not act in a manner that deprives the other party of the benefits of the agreement, but it cannot be invoked to confer upon a party a benefit that the agreement itself does not provide. Kestrel had no contractual benefit of renewal — only the possibility that WAL might choose to renew. The implied covenant does not transform that possibility into a right.
Moreover, even if the Tribunal were inclined to examine WAL's course of dealing for indications that renewal was expected or anticipated, the factual record provides no support for such an inference. The MSA was never renewed; indeed, termination occurred during Contract Year 4, well before the question of renewal for CY6 or CY7 would have arisen. There is no history of prior renewals from which to infer a practice or expectation. There is no written communication from WAL suggesting an intent to renew. And, as discussed below, WAL was actively exploring alternative supply arrangements at the time of termination, further undermining any inference that renewal was probable.
B. Expectation Damages and the Requirement of Reasonable Certainty
1. Standard for Lost-Profit Damages Under New York Law
Even assuming, for purposes of argument, that the renewal provisions could theoretically support a damages claim, Kestrel would still be required to prove its lost profits with "reasonable certainty." New York law is unequivocal on this point: lost profits are recoverable only if they are proven with reasonable certainty; they must not be remote, speculative, or contingent upon uncertain future events.
The foundational standard was articulated in Kenford Co. v. County of Erie, 67 N.Y.2d 257, 261 (1986), where the Court of Appeals held that lost profits must be "capable of proof with reasonable certainty" and that "[m]ere speculation or conjecture is not enough." The Court further held that the damages must be the "natural and probable consequence of the breach" and must have been "within the contemplation of the parties at the time of contracting." Id. at 261–62. This standard has been consistently applied in subsequent decisions. See also Ashland Mgmt. Inc. v. Janien, 82 N.Y.2d 395, 403 (1993) (lost profits must be established with a "reasonable basis for their computation"); Bi-Economy Market, Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187, 193 (2008) (recognizing that the reasonable certainty standard applies to all claims for lost-profit damages).
The requirement of reasonable certainty applies not only to the amount of lost profits but also to the fact of their occurrence. Kenford, 67 N.Y.2d at 261. In other words, a claimant must demonstrate not only how much profit it would have earned but also that it would have earned any profit at all. Where recovery depends on a series of contingencies, each of which must be resolved in the claimant's favor, the claim becomes impermissibly speculative.
2. Renewal-Period Profits Are Inherently Speculative
Kestrel's renewal-period lost profits claim is precisely the kind of speculative, multi-contingency claim that the reasonable certainty standard is designed to exclude. The claim depends on the resolution of a chain of contingencies, each of which introduces an additional layer of uncertainty:
(a) WAL's exercise of the first renewal option. The first and most fundamental contingency is that WAL would have decided, at its sole discretion, to exercise the first renewal option for CY6. As discussed above, this decision was entirely within WAL's unilateral control, unconstrained by any contractual obligation, performance metric, or objective criterion. Kestrel has no evidence — and indeed cannot have evidence, because the question never arose — that WAL intended or would have elected to renew.
(b) WAL's exercise of the second renewal option. Even if the first renewal option would have been exercised, the second renewal (for CY7) represents a further, independent contingency. The clause provides for "up to two" additional periods, each requiring a separate written notice at least 90 days before expiration. WAL might have exercised the first renewal but declined the second, or vice versa, or neither.
(c) Kestrel's satisfactory performance during the renewal periods. Kestrel's claim assumes that it would have continued to perform satisfactorily during the renewal periods — that is, that it would not have experienced the quality failures that precipitated the termination in the first instance or any new performance issues. Given the documented history of persistent quality non-conformances (14 rejected lots comprising 1,680 units), this assumption is far from self-evident.
(d) Stable market conditions and continued WAL demand. The claim assumes that WAL's operational needs and market conditions would have remained stable during the renewal periods, generating demand for the maximum contractual volume of Products. In the volatile aerospace supply chain — particularly in the post-pandemic environment and amid shifting defense procurement priorities — such stability cannot be taken for granted.
(e) No engagement of alternative suppliers. The claim assumes that WAL would not have engaged alternative suppliers during the renewal periods to diversify its supply base or obtain more competitive pricing. In fact, the record shows that WAL was already actively exploring alternative sourcing arrangements with Valkyr Precision Components Inc. of Tucson, Arizona, prior to the termination. Even in the "but-for" world posited by Kestrel, WAL's supply diversification strategy would have been a factor in the volume allocated to Kestrel during any renewal period.
Each of these contingencies must be resolved in Kestrel's favor for the renewal-period claim to have any validity. The probability of all five contingencies being resolved favorably is the product of their individual probabilities — a compound probability that, on any realistic assessment, is far too low to satisfy the reasonable certainty standard. New York courts have consistently rejected lost-profit claims that depend on such multi-layered speculation. See Kenford, 67 N.Y.2d at 263–64 (rejecting lost-profit claim where recovery depended on speculative future events); Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 110–11 (2d Cir. 2007) (applying New York law and holding that lost-profit damages must be "not merely speculative, possible, and imaginary" but must be "reasonably certain and directly traceable to the breach"); TADCO Constr. Corp. v. Dormitory Auth. of the State of N.Y., 700 F. Supp. 2d 475, 490 (S.D.N.Y. 2010) (rejecting claim for profits on hypothetical future contract extensions as impermissibly speculative).
Kestrel bears the burden of proving that renewal was a "virtual certainty" or at least "reasonably certain." Given the purely discretionary nature of the option and the absence of any evidence of WAL's intent to renew, Kestrel simply cannot carry this burden.
3. No Historical Pattern of Renewal to Support Inference
A claimant seeking to recover lost profits on a hypothetical contract renewal may attempt to establish reasonable certainty by pointing to a historical pattern of renewals from which the trier of fact could infer that renewal was likely. Such an inference might be supportable where, for example, a supplier and buyer had a long-standing relationship involving multiple contract cycles, each of which was routinely renewed. Cf. Contemporary Mission, Inc. v. Famous Music Corp., 557 F.2d 918, 926 (2d Cir. 1977) (permitting lost-profit award where track record established the certainty of future earnings).
No such pattern exists here. The MSA was the first — and only — contract between WAL and Kestrel. There have been no prior renewals from which to infer a custom or practice. The parties' relationship was, at the time of termination, barely four years old and was characterized by escalating quality disputes. The absence of any renewal history deprives Kestrel of the most persuasive form of circumstantial evidence in support of its renewal-period claim.
Furthermore, the factual record affirmatively undermines any inference that WAL would have renewed. Specifically:
• WAL was actively exploring alternative supply arrangements with Valkyr Precision Components Inc. ("Valkyr"), a Tucson, Arizona-based manufacturer specializing in titanium aerospace components. Internal WAL procurement memoranda (which we expect to introduce through Gerald Huang's testimony) reflect that Valkyr had been identified as a potential second source as early as July 2021, well before the termination of the MSA. The engagement of Valkyr was driven by WAL's supply chain resilience strategy and by concerns about Kestrel's quality performance, and it strongly suggests that even in a "but-for" world without termination, WAL would have been diversifying away from Kestrel rather than committing to an extended supply relationship.
• Professor Langfeld's damages report assumes maximum annual volume during both renewal periods (3,600 or 4,000 units per year) but provides no factual basis for concluding that WAL intended to exercise the renewal options, much less at maximum volume. The report contains no reference to any WAL communication, planning document, or internal decision reflecting an intent to renew. It simply assumes renewal as a premise and then calculates profits on that basis — precisely the kind of speculative methodology that the reasonable certainty standard is designed to preclude.
C. The Consequential Damages Waiver (Section 8.7)
Independent of the foregoing analysis, the consequential damages waiver in Section 8.7 of the MSA provides a separate and sufficient ground for excluding Kestrel's renewal-period lost profits claim.
Section 8.7 of the MSA provides:
"Section 8.7 — Limitation of Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, OR PUNITIVE DAMAGES ARISING OUT OF OR RELATING TO THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO LOST PROFITS, LOST REVENUES, LOSS OF BUSINESS OPPORTUNITY, OR COST OF SUBSTITUTE GOODS OR SERVICES, WHETHER BASED ON WARRANTY, CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, OR ANY OTHER THEORY, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES."
This provision operates as a mutual waiver of consequential damages, and it expressly encompasses "lost profits" among the enumerated categories of excluded damages.
Renewal-Period Lost Profits Are Consequential Damages. Lost profits for periods beyond the existing contractual term are paradigmatic consequential damages. They are not direct damages flowing from any specific act of breach (such as the rejection of a particular lot or the failure to make a particular payment); rather, they represent speculative downstream economic losses resulting from the overall termination of the contractual relationship and the loss of future business opportunity. New York law distinguishes between "general" or "direct" damages — those that are the natural and probable consequence of the breach and that flow directly from the wrongful act — and "special" or "consequential" damages — those that are the indirect result of the breach and that arise from the claimant's particular circumstances. See Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 22 N.Y.3d 799, 805 (2014); Bi-Economy Market, 10 N.Y.3d at 192–93.
Renewal-period lost profits fall squarely on the consequential side of this line. They do not arise from any specific breach event but rather from the hypothetical future consequences of the termination — consequences that depend on a chain of contingencies (as discussed in Part III.B.2 above) and that are, by definition, "indirect" and "downstream" of the breach itself.
Enforceability of the Waiver. Under New York law, consequential damages waivers between sophisticated commercial parties are enforceable and will be given effect according to their terms. Metropolitan Life Ins. Co. v. Noble Lowndes Int'l, Inc., 84 N.Y.2d 430, 436–37 (1994) (enforcing limitation of liability clause between sophisticated commercial parties); see also Biotronik, 22 N.Y.3d at 808–09 (enforcing consequential damages waiver in commercial supply agreement). Both WAL and Kestrel are sophisticated commercial entities represented by counsel throughout the negotiation of the MSA. The waiver was a negotiated term, prominently displayed in all-capitals text, and there is no basis to argue unconscionability, duress, or any other defense to its enforcement.
Accordingly, even if Kestrel could somehow establish that its renewal-period lost profits were sufficiently certain to satisfy the Kenford standard — which, for the reasons set forth above, it cannot — Section 8.7 would independently bar their recovery as consequential damages expressly waived by the parties' agreement.
D. Distinguishing Kestrel's Likely Counterarguments
Based on the Statement of Claim and Professor Langfeld's expert report, Kestrel is likely to advance several counterarguments in an effort to preserve the renewal-period claim. Each is addressed below.
1. "WAL Would Have Renewed Absent Its Own Breach"
Anticipated Argument. Kestrel will likely argue that the proper analytical framework requires the Tribunal to assume that WAL's termination was wrongful (which is the premise of Kestrel's entire case) and that, in the "but-for" world in which WAL had not breached the MSA, WAL would have renewed the agreement for both optional periods. On this theory, the Tribunal should not credit WAL's subjective intent not to renew because that intent was itself a product of the wrongful termination.
Response. This argument, while superficially appealing, fundamentally mischaracterizes the nature of the renewal options and the burden of proof on damages. Even accepting, arguendo, that WAL's termination of the MSA on October 3, 2022 was wrongful, the "but-for" world still requires Kestrel to prove that WAL would have exercised a discretionary option. The mere existence of the option does not establish that it would have been exercised. In the "but-for" world, WAL would still have had the unilateral right to decline to renew — for any reason, including reasons unrelated to the quality disputes, such as changes in production strategy, cost considerations, or the desire to diversify its supply base.
WAL's intent to renew is not established by the absence of a wrongful termination. The MSA is silent on any factors that would compel or even encourage renewal; it vests "sole discretion" in WAL without limitation. Kestrel would need to adduce affirmative evidence — such as internal WAL communications expressing an intent to renew, budget documents allocating funds for renewal-period purchases, or testimony from WAL decision-makers reflecting a plan to continue the relationship — to support the inference that renewal was reasonably certain. No such evidence exists or has been identified in the record to date.
Furthermore, as noted above, WAL was actively pursuing alternative sourcing with Valkyr prior to the termination. The engagement of Valkyr was not precipitated by the quality disputes alone; it reflected a strategic decision to build supply chain redundancy. This evidence undermines the premise that, but for the termination, WAL would have committed to two additional years of exclusive or near-exclusive reliance on Kestrel.
2. "Industry Practice Supports Renewal Expectations"
Anticipated Argument. Kestrel may argue that, in the aerospace supply chain, long-term supplier relationships and contract renewals are customary, and that the Tribunal should infer from industry practice that WAL would have renewed the MSA in the ordinary course.
Response. Industry custom and practice, however widespread, cannot override the express language of the MSA. Under New York law, extrinsic evidence of trade usage or custom may be admissible to supplement or interpret ambiguous contract terms, but it cannot be used to contradict or vary unambiguous provisions. See U.C.C. § 1-303(e) (express terms prevail over course of dealing and usage of trade); see also Nanakuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772 (9th Cir. 1981) (recognizing the hierarchy of express terms over usage of trade under the UCC). Section 3.2 is unambiguous: renewal is at WAL's "sole discretion." No amount of industry-practice evidence can convert this discretionary right into an obligation.
Moreover, even on its own terms, the industry-practice argument is weak. While long-term supplier relationships are common in the aerospace industry, contract renewals are far from automatic. Aerospace OEMs regularly re-compete supply contracts, shift production to alternative sources, and adjust their supply bases in response to cost pressures, quality performance, and strategic considerations. WAL's exploration of Valkyr as an alternative supplier is entirely consistent with standard industry practice and demonstrates that renewal was by no means a foregone conclusion.
3. "The Consequential Damages Waiver Does Not Apply to Wrongful Termination"
Anticipated Argument. Kestrel may argue that Section 8.7 of the MSA, by its context and placement within Article 8 (Quality Assurance and Remedies), applies only to quality-failure-related claims and does not extend to claims arising from WAL's wrongful termination of the MSA. On this reading, the waiver would bar consequential damages claims related to defective lots (e.g., lost downstream profits from late delivery) but would not bar claims for lost profits arising from the termination itself.
Response. This argument depends on a narrow, context-dependent reading of Section 8.7 that is not supported by the waiver's plain language. Section 8.7 waives consequential damages "arising out of or relating to this Agreement" — a broad formulation that is not limited to quality-related claims. The waiver expressly identifies "lost profits" and "loss of business opportunity" among the enumerated categories of excluded damages, without restricting those categories to any particular type of claim or breach. A wrongful termination claim is a claim "arising out of or relating to" the MSA, and the lost profits sought in connection with such a claim are "lost profits" within the meaning of the waiver.
Furthermore, even if the Tribunal were to construe Section 8.7 narrowly, the broader remedial framework of the MSA supports the exclusion of renewal-period lost profits. Section 14.2 (Termination for Cause) does not create a separate damages regime for wrongful termination. It does not provide that a wrongfully terminated party is entitled to consequential damages, nor does it carve out an exception to the general limitation of liability in Section 8.7. The MSA's remedial provisions must be read as an integrated whole, and reading them in that manner confirms that the parties intended the consequential damages waiver to apply broadly.
It is also worth noting that, even under a narrow reading, the characterization of renewal-period lost profits as "consequential" is robust. These damages do not flow directly from any specific act of breach; they are speculative downstream losses that depend on future contingencies. Whether the waiver is read broadly or narrowly, renewal-period lost profits fall within its scope.
IV. Impact on Damages Quantification
Exclusion of the €27.15 million renewal-period lost profits claim would have a transformative effect on the overall damages landscape of this arbitration. Kestrel's total claimed damages of €47.3 million break down as follows:
If the renewal-period claim is excluded, Kestrel's total claimed damages drop from €47.3 million to approximately €20.15 million — a reduction of approximately 57.4%. This reduction alone would fundamentally alter the parties' settlement dynamics and would substantially limit WAL's maximum exposure in the arbitration.
Moreover, the remaining damages categories are themselves subject to significant independent defenses:
Remaining-term lost profits (€12.83 million). This component represents the profits Kestrel claims it would have earned during the balance of the initial five-year term (i.e., from the October 3, 2022 termination through the June 14, 2023 expiration). While this claim has a stronger contractual foundation than the renewal-period claim (because it relates to a period during which the MSA was undisputedly in effect), it is also partially consequential in nature and subject to the Section 8.7 waiver. Moreover, Kestrel's duty to mitigate will reduce the recoverable amount, and the volume and margin assumptions underlying Professor Langfeld's calculation are subject to challenge.
Rework costs (€3.42 million). Kestrel seeks reimbursement for costs it incurred in attempting to rework rejected lots to bring them into conformance with WAL's specifications. However, these costs were incurred as a direct result of Kestrel's own manufacturing defects. A party is not entitled to recover the costs of curing its own non-conforming performance. The rework costs are, in effect, warranty costs that Kestrel was obligated to bear under Section 8.3 of the MSA, which requires Seller to "promptly replace or repair" non-conforming Products at Seller's expense.
Reputational damages (€3.90 million). Kestrel claims reputational harm resulting from the public termination of the MSA, asserting that the termination damaged Kestrel's standing with other aerospace customers. This claim is speculative, difficult to quantify, and independently barred by the consequential damages waiver in Section 8.7. We addressed this claim in detail in the memorandum dated February 15, 2023, and concluded that it is unlikely to survive scrutiny under New York law.
In sum, exclusion of the renewal-period claim not only eliminates Kestrel's single largest damages component but also positions WAL to challenge the remaining claims from a position of substantially reduced exposure.
V. Recommendations
A. Pleading Strategy
In the Statement of Defense and Counterclaim, which is due to be filed on June 30, 2023, we recommend including a dedicated section — prominently positioned and fully briefed — arguing that the €27.15 million renewal-period lost profits claim should be dismissed or excluded on the following grounds:
(1) Lack of reasonable certainty. The renewal-period claim is impermissibly speculative under New York law because it depends on a chain of contingencies — WAL's discretionary decision to renew, Kestrel's continued satisfactory performance, stable market conditions, and the absence of alternative sourcing — none of which Kestrel can prove with reasonable certainty.
(2) Discretionary nature of the renewal options. The renewal options in Section 3.2 are unilateral, discretionary rights vested in WAL. They do not create any contractual entitlement in Kestrel to renewal-period revenue or profits. The implied covenant of good faith and fair dealing cannot be invoked to convert a discretionary option into an obligation.
(3) Consequential damages waiver. Section 8.7 of the MSA expressly waives consequential damages, including lost profits, arising out of or relating to the agreement. Renewal-period lost profits are paradigmatic consequential damages and are barred by this provision.
We further recommend that the Statement of Defense include a request for a preliminary ruling or bifurcation on the renewal-period issue. Under Article 22(1) of the ICC Rules, the Tribunal has discretion to decide issues of jurisdiction and admissibility as preliminary matters, and procedural efficiency would be served by resolving the renewal-period issue before the parties incur the significant costs of discovery and expert analysis on a claim that is legally untenable. Even if the Tribunal declines to rule on the issue as a preliminary matter, the request will signal the strength of WAL's position and may narrow the scope of Procedural Order No. 3 (governing document production and expert evidence).
B. Expert Instructions
We recommend that Dr. Nadia Ostrovsky of Ridgeline Economic Consulting LLC be instructed to address the renewal-period lost profits claim as a discrete section of her damages expert rebuttal report. Specifically, Dr. Ostrovsky should:
• Critique the assumptions underlying Professor Langfeld's €27.15 million calculation, identifying each assumption that lacks factual support or that departs from accepted damages methodology.
• Demonstrate that the claim assumes maximum volume (3,600 or 4,000 units per year) during both renewal periods, despite the absence of any evidence that WAL would have ordered at or near the maximum volume cap. Historical order volumes during the initial term should be analyzed to establish the actual pattern of demand, which may have varied significantly from the contractual maximum.
• Examine and challenge the 22.4% contribution margin figure used by Professor Langfeld, including by analyzing Kestrel's cost structure, raw material costs (Ti-6Al-4V ELI pricing trends during 2022–2025), and operational efficiency data. The margin figure should be tested against Kestrel's audited financial statements and segment-level profitability data.
• Apply a probability-weighted analysis demonstrating the speculative nature of future renewal. By assigning reasonable probability estimates to each contingency in the chain (exercise of the first option, exercise of the second option, satisfactory performance, stable demand, etc.), Dr. Ostrovsky can calculate an expected value for the renewal-period claim that reflects the compounding uncertainty inherent in each contingency. We anticipate that such an analysis will yield an expected value that is a small fraction of the claimed €27.15 million.
In addition, we recommend that Sandra Gillespie of Canfield & Thorpe LLP (forensic accountant) be instructed to review Kestrel's financial records — to the extent they are produced in document production — for evidence bearing on the following questions:
• Whether the 22.4% margin claimed by Professor Langfeld is realistic in light of Kestrel's actual cost experience, including raw material price fluctuations, labor cost increases, and logistics cost escalation under DDP delivery terms.
• Whether Kestrel's renewal-period projections are supportable — i.e., whether Kestrel's own internal financial models, budgets, or business plans included renewal-period revenue from the WAL MSA, and if so, at what volumes and margins.
• Whether Kestrel's financial condition during 2022 would have supported performance at the levels assumed in the renewal-period claim, including capital expenditure requirements, working capital availability, and production capacity constraints.
C. Factual Development
To build the factual record necessary to defeat the renewal-period claim, we recommend the following steps:
Document Production. Through the Redfern Schedule process established by Procedural Order No. 2 (dated March 17, 2023), we should seek production of the following categories of documents from Kestrel:
(a) Any internal Kestrel communications — including emails, memoranda, board presentations, and management reports — discussing the likelihood of MSA renewal, WAL's anticipated decision on renewal, or the probability of continued business with WAL beyond the initial five-year term.
(b) Any communications between Kestrel and WAL regarding renewal discussions or expectations, including any informal inquiries, status updates, or negotiations relating to the potential exercise of the renewal options.
(c) Any Kestrel financial projections, business plans, budgets, or strategic planning documents that did or did not include renewal-period revenue from the WAL MSA. Documents that exclude renewal-period revenue — or that assign a probability of less than 100% to renewal — would be particularly probative, as they would demonstrate that even Kestrel did not regard renewal as a certainty.
(d) Any Kestrel correspondence with lenders, investors, or auditors regarding the MSA and its expected duration, particularly any representations regarding the likelihood of renewal.
Witness Preparation. We should prepare Gerald Huang, WAL's Vice President of Global Supply Chain Operations, to testify regarding the following topics:
• WAL's internal deliberations about renewal of the MSA, including any discussions, analyses, or decision-making processes that occurred (or would have occurred) in connection with the question of whether to exercise the renewal options.
• WAL's strategic rationale for engaging Valkyr Precision Components Inc. as an alternative or second-source supplier for titanium alloy turbine housings, including the timeline of the Valkyr engagement, the scope of Valkyr's qualification process, and the relationship between the Valkyr engagement and WAL's supply diversification strategy.
• WAL's broader supply chain management philosophy, including the factors that WAL typically considers in deciding whether to renew supplier contracts, the role of performance history and quality metrics in renewal decisions, and the frequency with which WAL declines to renew supplier contracts in the aerospace context.
• Any communications between Mr. Huang (or his team) and Kestrel regarding the future of the supply relationship, including whether the topic of renewal was ever raised, discussed, or negotiated between the parties.
Mr. Huang's testimony will be critical in establishing that WAL's decision-making on renewal was genuinely discretionary, that there was no commitment or expectation of renewal, and that the engagement of Valkyr reflected a strategic direction that was inconsistent with full renewal of the Kestrel MSA.
VI. Conclusion
Kestrel's €27.15 million renewal-period lost profits claim is both its largest single damages component and its weakest. The claim rests on the untenable premise that WAL was obligated — rather than merely entitled — to renew the MSA for two additional years. Under New York law, the discretionary renewal options in Section 3.2 create no cognizable expectation interest for Kestrel. WAL had the unilateral right to renew or not, at its sole discretion, and the mere existence of the option does not establish that it would have been exercised. The implied covenant of good faith and fair dealing cannot transform a discretionary option into an enforceable obligation.
The claim is speculative, contingent on multiple uncertain future events — including WAL's discretionary decision to renew, Kestrel's continued satisfactory performance, stable market conditions, and the absence of competitive alternatives — none of which Kestrel can prove with reasonable certainty. The absence of any prior renewal history, combined with WAL's active pursuit of alternative sourcing through Valkyr, further undermines any inference that renewal was reasonably certain.
Finally, the consequential damages waiver in Section 8.7 of the MSA independently bars recovery of renewal-period lost profits. These damages are paradigmatic consequential damages — speculative downstream losses that do not flow directly from any specific breach but rather from the hypothetical future consequences of the termination — and they fall squarely within the scope of the waiver. The waiver is enforceable as a negotiated term between sophisticated commercial parties.
Calderwood & Harkness should aggressively seek dismissal of this claim at every stage of the arbitration — in the Statement of Defense and Counterclaim, through a request for preliminary ruling or bifurcation, in the damages expert reports, and at the merits hearing. Exclusion of the renewal-period claim would reduce Kestrel's total damages demand by more than 57%, from €47.3 million to approximately €20.15 million, fundamentally altering the economic dynamics of this proceeding and strengthening WAL's overall position.
I am available to discuss this analysis at your convenience and to incorporate your feedback into the drafting of the Statement of Defense and Counterclaim.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Simone Laroche Senior Associate International Arbitration & Commercial Litigation Group
CONFIDENTIAL — This memorandum is protected by the attorney-client privilege and the attorney work product doctrine. It has been prepared for the exclusive use of the attorneys and personnel of Calderwood & Harkness LLP in connection with the representation of Whitmore Aerospace LLC in ICC Case No. 27914/MHM. It should not be disclosed to any person outside the firm without the prior written consent of the undersigned. Distribution within the client organization should be limited to individuals with a need to know in connection with this matter.
Contract Year | Period | Unit Price (€)
CY1 | June 15, 2018 – June 14, 2019 | 4,850.00
CY2 | June 15, 2019 – June 14, 2020 | 4,971.25
CY3 | June 15, 2020 – June 14, 2021 | 5,095.53
CY4 | June 15, 2021 – June 14, 2022 | 5,222.92
CY5 | June 15, 2022 – June 14, 2023 | 5,353.49
Hypothetical Period | Unit Price (€)
Renewal Year 1 (CY6) | 5,353.49 × 1.025 ≈ 5,487.33
Renewal Year 2 (CY7) | 5,487.33 × 1.025 ≈ 5,624.51
Damages Category | Amount (€ million) | % of Total
Renewal-period lost profits (CY6–CY7) | 27.15 | 57.4%
Remaining-term lost profits (CY5 balance) | 12.83 | 27.1%
Rework costs for rejected lots | 3.42 | 7.2%
Reputational damages | 3.90 | 8.2%
Total | 47.30 | 100.0%

MEMORANDUM

ENGAGEMENT NO.: 1019-00001

CALDERWOOD & HARKNESS LLP

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