DRAFT — PRIVILEGED AND CONFIDENTIAL / ATTORNEY WORK PRODUCT
INTERNATIONAL COURT OF ARBITRATION OF THE INTERNATIONAL CHAMBER OF COMMERCE
ICC Case No. 27914/MHM
KESTREL DYNAMICS GmbH Claimant
v.
WHITMORE AEROSPACE LLC Respondent
RESPONDENT WHITMORE AEROSPACE LLC'S ANSWER TO REQUEST FOR ARBITRATION AND COUNTERCLAIM
Date: December 12, 2022
Prepared by: Simone Laroche, Senior Associate Jeffrey Park, Associate
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I. INTRODUCTION
1. Respondent Whitmore Aerospace LLC ("WAL" or "Respondent") respectfully submits this Answer to the Request for Arbitration filed by Kestrel Dynamics GmbH ("Kestrel" or "Claimant") on November 7, 2022, pursuant to Article 5 of the Rules of Arbitration of the International Chamber of Commerce (2021 edition) (the "ICC Rules"). Simultaneously with this Answer, WAL asserts a Counterclaim against Kestrel, as set forth in Section VII below, seeking damages in the amount of €5.17 million arising from Kestrel's persistent delivery of non-conforming products in breach of its contractual obligations.
2. WAL is a Delaware limited liability company headquartered at 4200 Wilson Boulevard, Suite 1100, Arlington, Virginia 22203. WAL is a leading aerospace and defense manufacturer specializing in propulsion systems and structural airframe components for both military and commercial aviation applications. In fiscal year 2022, WAL generated annual revenue of approximately $1.87 billion and employed approximately 6,400 individuals across its design, engineering, manufacturing, and administrative operations. WAL is led by its Chief Executive Officer, Marcus J. Whitmore III, and maintains manufacturing facilities in Virginia, Texas, and California, serving major airframe integrators and defense agencies in the United States and internationally.
3. Kestrel is a German limited liability company (Gesellschaft mit beschränkter Haftung) registered in Stuttgart, Germany, under German Trade Register Number HRB 745621 (Amtsgericht Stuttgart), with its registered office at Industriestraße 88, 70565 Stuttgart, Germany. Kestrel is a precision-machined aerospace components supplier, specializing in the manufacture of titanium and nickel-alloy turbine housings and high-temperature exhaust assemblies for the aerospace industry. In fiscal year 2022, Kestrel reported annual revenue of approximately €312 million and employed approximately 1,800 individuals. Kestrel is managed by its Managing Director (Geschäftsführer), Friedrich Brenner.
4. WAL categorically denies that it committed any material breach of the Master Supply Agreement for Titanium Alloy Turbine Housings dated June 15, 2018 (the "MSA"), as alleged in the Request for Arbitration. The allegations set forth by Kestrel fundamentally mischaracterize the factual record and distort the contractual framework governing the parties' relationship. WAL's conduct throughout the performance of the MSA was at all times consistent with its contractual rights and obligations.
5. On the contrary, it was Kestrel — not WAL — that repeatedly and persistently failed to deliver products conforming to the agreed-upon engineering specifications. Between March and September 2022, WAL rejected fourteen (14) separate lots of titanium alloy turbine housings manufactured by Kestrel, each of which failed to meet the express porosity specification of ≤0.25% set forth in WAL-SPEC-TH-401, Appendix C, Table 3 — a specification that formed a core quality requirement of the MSA and was well known to Kestrel from the inception of the contractual relationship. Kestrel failed to cure seven (7) of these rejections within the contractually prescribed 45-calendar-day cure period, thereby constituting a "Persistent Quality Failure" as defined in Section 8.4 of the MSA, as amended.
6. WAL's termination of the MSA on October 3, 2022, by issuance of a written Notice of Termination for Cause, was procedurally and substantively proper under Section 14.2(b) of the MSA. WAL exercised its termination right only after Kestrel's quality failures became persistent and systemic, and only after exhausting the contractual cure mechanisms available to Kestrel. WAL's decision to terminate was not pretextual, was not made in bad faith, and was not motivated by any desire to replace Kestrel with an alternative supplier on more favorable terms — as Kestrel has baselessly alleged.
7. As a direct result of Kestrel's persistent delivery of non-conforming products, WAL has suffered material harm. WAL was compelled to source 1,680 replacement units of Ti-6Al-4V ELI titanium alloy turbine housings from an alternative supplier, Valkyr Precision Components Inc. ("Valkyr"), at a significant cost premium. WAL's Counterclaim seeks recovery of €5.17 million, representing the direct and foreseeable cost differential between the contract price under the MSA and the replacement cost incurred by WAL as a consequence of Kestrel's breaches.
8. WAL respectfully requests that the Tribunal dismiss Kestrel's Request for Arbitration in its entirety, deny all relief sought by Kestrel, and award WAL the damages and costs set forth in its Counterclaim and in Section VIII of this Answer.
II. JURISDICTIONAL AND PROCEDURAL MATTERS
A. Arbitration Agreement
9. Section 22.3 of the MSA contains the arbitration agreement governing this dispute. That provision states, in relevant part:
"Any dispute arising out of or in connection with this Agreement, including any question regarding its existence, validity, or termination, shall be referred to and finally resolved by arbitration under the Rules of Arbitration of the International Chamber of Commerce (2021 edition) by three (3) arbitrators. The seat of arbitration shall be New York, New York. The language of the arbitration shall be English."
10. WAL confirms the existence and validity of the arbitration agreement set forth in Section 22.3 of the MSA. WAL acknowledges that this dispute falls within the scope of the arbitration clause and consents to the jurisdiction of the Tribunal constituted pursuant to the ICC Rules. WAL further confirms that the arbitration is properly to be conducted before a three-member tribunal, with the seat of arbitration in New York, New York, and in the English language.
11. WAL does not raise any objection to the jurisdiction of the Tribunal or to the admissibility of Kestrel's Request for Arbitration at this time. WAL reserves all rights, however, to raise jurisdictional or admissibility objections with respect to any particular claim or counterclaim, or any aspect thereof, as the proceedings develop.
B. Governing Law
12. Section 22.1 of the MSA provides that the MSA is governed by the laws of the State of New York, United States of America, without regard to principles of conflict of laws that would direct the application of the laws of any other jurisdiction. That provision states:
"This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York."
13. WAL confirms that the MSA is governed by New York law and that the substantive rights and obligations of the parties, including all questions of contractual interpretation, breach, and remedy, are to be determined in accordance with New York law. WAL reserves all rights and defenses available to it under New York law, including, without limitation, rights and defenses arising under the Uniform Commercial Code as adopted in New York.
C. Respondent's Nomination of Co-Arbitrator
14. Pursuant to Article 12(4) of the ICC Rules, WAL has nominated the Honorable Robert A. Castillo, retired judge of the United States District Court for the Southern District of New York, as Respondent's co-arbitrator. WAL's nomination is set forth in WAL's separate letter to the ICC Secretariat dated December 19, 2022, which includes Judge Castillo's curriculum vitae, statement of independence and impartiality, and confirmation of availability. Judge Castillo brings extensive experience in complex commercial disputes, including matters involving the aerospace and defense industry, and WAL is confident that he will serve the Tribunal with distinction.
15. WAL notes that, pursuant to Section 22.3 of the MSA and Article 12(5) of the ICC Rules, the Presiding Arbitrator (chair of the Tribunal) is to be appointed by agreement of the two party-nominated co-arbitrators, or, failing such agreement within thirty (30) days of the confirmation of the second co-arbitrator, by the ICC Court. WAL is prepared to cooperate with Claimant and the co-arbitrators in the selection of a Presiding Arbitrator and encourages a consensual process to that end.
D. Identification of Counsel
16. WAL is represented in this arbitration by Calderwood & Harkness LLP, a full-service international law firm with offices at 600 Lexington Avenue, New York, NY 10022 and 1750 K Street NW, Washington, DC 20006. The attorneys responsible for this matter are as follows:
• Responsible Partner: Theodore Langston
• Billing Partner: Vivienne St. Claire
• Lead Associate: Simone Laroche, Senior Associate
• Working Associate: Jeffrey Park, Associate
• Engagement Number: 1019-00001
17. All communications regarding this arbitration should be directed to Theodore Langston at Calderwood & Harkness LLP, 600 Lexington Avenue, New York, NY 10022, telephone: +1 (212) 558-4000, email: t.langston@calderwoodharkness.com. Copies of all filings and correspondence should also be transmitted to Simone Laroche at s.laroche@calderwoodharkness.com and Jeffrey Park at j.park@calderwoodharkness.com.
III. THE PARTIES
A. Respondent — Whitmore Aerospace LLC
18. Whitmore Aerospace LLC is a limited liability company organized and existing under the laws of the State of Delaware, with its principal office and headquarters located at 4200 Wilson Boulevard, Suite 1100, Arlington, Virginia 22203, United States of America. WAL's registered agent for service of process in Delaware is Penmark Industries, located at 1209 Orange Street, Wilmington, Delaware 19801.
19. WAL is engaged in the design, engineering, manufacture, and sale of aerospace and defense products, with a particular focus on propulsion systems and structural airframe components for military and commercial aviation platforms. WAL's products are incorporated into a range of fixed-wing aircraft, rotary-wing aircraft, and unmanned aerial systems operated by the United States Department of Defense, allied foreign governments, and major commercial airlines. WAL maintains manufacturing facilities in Manassas, Virginia; San Antonio, Texas; and El Segundo, California, supported by engineering and research centers in Arlington, Virginia and Huntsville, Alabama.
20. The key personnel relevant to this arbitration include:
• Marcus J. Whitmore III — Chief Executive Officer. Mr. Whitmore has served as CEO of WAL since 2012 and is responsible for the overall strategic direction and management of the company.
• Dana Prescott — Vice President and General Counsel. Ms. Prescott oversees WAL's legal affairs, including all commercial contracting, litigation, and regulatory compliance matters.
• Gerald Huang — Vice President, Global Supply Chain Operations. Mr. Huang is responsible for WAL's procurement, supplier management, and supply chain logistics functions, including the management of the relationship with Kestrel under the MSA.
• Dr. Ingrid Vollmer — Senior Vice President, Engineering and Manufacturing. Dr. Vollmer oversees WAL's engineering design specifications, manufacturing processes, and quality assurance programs, including the WAL Quality Control Procedure WAL-QCP-100 that governs incoming inspection of supplier-furnished components.
B. Claimant — Kestrel Dynamics GmbH
21. Based on publicly available information and WAL's own records, Kestrel Dynamics GmbH is a limited liability company (Gesellschaft mit beschränkter Haftung) organized and existing under the laws of the Federal Republic of Germany, with its registered office at Industriestraße 88, 70565 Stuttgart, Germany. Kestrel is registered with the Stuttgart Commercial Register (Handelsregister) under number HRB 745621 (Amtsgericht Stuttgart).
22. Kestrel is engaged in the manufacture and sale of precision-machined aerospace components, specializing in titanium and nickel-alloy turbine housings and high-temperature exhaust assemblies for the aerospace industry. Kestrel operates manufacturing facilities in Stuttgart and Friedrichshafen, Germany, and supplies components to aerospace manufacturers and integrators in Europe, North America, and Asia.
23. The key personnel relevant to this arbitration include:
• Friedrich Brenner — Managing Director (Geschäftsführer). Mr. Brenner is the principal executive officer of Kestrel and is responsible for the company's overall management and operations.
• Luisa Erdmann — Commercial Director. Ms. Erdmann oversees Kestrel's commercial relationships, including the negotiation and administration of supply agreements with customers such as WAL.
• Dr. Stefan Voss — Head of Quality Assurance. Dr. Voss is responsible for Kestrel's quality management system, including its AS9100 Rev D certification, and for ensuring that Kestrel's products conform to customer specifications.
IV. FACTUAL BACKGROUND
A. The Master Supply Agreement
24. On June 15, 2018, WAL and Kestrel entered into a Master Supply Agreement for Titanium Alloy Turbine Housings (reference number WAL-KDG-MSA-2018-0615) (the "MSA"). Under the MSA, WAL engaged Kestrel as a supplier of Ti-6Al-4V ELI (Extra Low Interstitials) titanium alloy turbine housings (the "Products"), to be manufactured by Kestrel in accordance with WAL's engineering specifications designated WAL-SPEC-TH-401 through WAL-SPEC-TH-409. A true and complete copy of the MSA is annexed hereto as Exhibit R-1.
25. The MSA was negotiated over a period of approximately five months, from January through May 2018, by experienced commercial and technical representatives of both parties. WAL's negotiating team was led by Gerald Huang (then Director of Strategic Sourcing) and included representatives from WAL's engineering, quality assurance, and legal departments. Kestrel's negotiating team was led by Luisa Erdmann and included Dr. Stefan Voss and external legal counsel. The MSA was executed after extensive due diligence by both parties, including WAL's on-site qualification audit of Kestrel's Stuttgart manufacturing facility conducted in March 2018.
26. The principal terms of the MSA are as follows:
(a) Term. The initial term of the MSA was five (5) years, commencing on June 15, 2018 and expiring on June 14, 2023. The MSA provided for two (2) optional one-year renewal periods, each exercisable solely at WAL's discretion upon written notice to Kestrel not later than ninety (90) days prior to the expiration of the then-current term.
(b) Scope and Products. Kestrel agreed to manufacture and deliver Ti-6Al-4V ELI titanium alloy turbine housings in accordance with WAL's engineering specifications WAL-SPEC-TH-401 through WAL-SPEC-TH-409. The Products were intended for incorporation into WAL's advanced turbofan propulsion systems used in both military and commercial aviation platforms. Each specification set forth detailed dimensional tolerances, material composition requirements, surface finish criteria, and, critically, metallurgical integrity standards including porosity limits.
(c) Volume Commitments. WAL committed to a minimum annual purchase volume of 2,400 units and a maximum annual purchase volume of 3,600 units per contract year, subject to adjustment by mutual written agreement. Kestrel agreed to maintain manufacturing capacity sufficient to meet WAL's maximum volume requirements.
(d) Pricing. Unit pricing was established at €4,850.00 per unit for Contract Year 1 (June 15, 2018 through June 14, 2019), with a fixed annual escalation of 2.5%, compounded, as set forth in Section 5.2 of the MSA. The resulting unit prices for each contract year were as follows:
At the minimum annual volume of 2,400 units, the aggregate value of the MSA over the five-year initial term was approximately €61.2 million.
(e) Delivery Terms. Products were to be delivered DDP (Delivered Duty Paid) to WAL's manufacturing facility at 8500 Coppermine Road, Manassas, Virginia 20110, United States, in accordance with Incoterms 2020. Kestrel bore full responsibility for transportation, customs clearance, and delivery of the Products to WAL's facility in conforming condition.
(f) Quality Standards. The MSA required Kestrel to maintain AS9100 Rev D certification at all times during the term of the MSA. Each lot of Products delivered to WAL was subject to incoming inspection by WAL in accordance with WAL Quality Control Procedure WAL-QCP-100. WAL was required to accept or reject each lot within fifteen (15) business days of delivery. The quality standards applicable to the Products were set forth in WAL's engineering specifications, which were incorporated by reference into the MSA as contractual requirements.
B. Key Contractual Provisions
27. Several provisions of the MSA are of particular importance to this dispute and warrant detailed discussion.
28. Section 8.4 — Rejection and Cure. Section 8.4 of the MSA established the procedures governing WAL's right to reject non-conforming lots of Products and Kestrel's corresponding right and obligation to cure. Under Section 8.4, if WAL rejected a lot for non-conformance with the applicable engineering specifications, Kestrel was required to replace or rework the rejected lot within a specified cure period. As originally executed, the cure period was thirty (30) calendar days from the date of WAL's written notice of rejection. The MSA further provided that three (3) or more uncured rejections — i.e., rejections for which Kestrel failed to deliver conforming replacement or reworked Products within the cure period — in any rolling twelve (12) month period would constitute a "Persistent Quality Failure," triggering WAL's right to terminate the MSA for cause under Section 14.2(b).
29. Section 8.7 — Exclusive Remedy / Consequential Damages Waiver. Section 8.7 of the MSA addressed the remedies available to WAL in the event of quality failures and contained a mutual waiver of consequential damages. Specifically, upon a quality failure, WAL's remedies were limited to (i) replacement of the non-conforming Products, (ii) credit against future orders, or (iii) upon a Persistent Quality Failure, termination of the MSA under Section 14.2(b). Section 8.7 further provided that:
"IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL, PUNITIVE, OR EXEMPLARY DAMAGES, INCLUDING BUT NOT LIMITED TO LOST PROFITS, LOST REVENUE, LOSS OF BUSINESS OPPORTUNITIES, OR REPUTATIONAL HARM, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, OR ANY OTHER THEORY OF LIABILITY, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES."
30. Section 14.2 — Termination for Cause. Section 14.2 of the MSA set forth the grounds and procedures for termination of the MSA for cause. Under Section 14.2(a), either party could terminate the MSA upon a material breach by the other party that remained uncured for sixty (60) days following written notice specifying the nature of the breach and demanding cure. Under Section 14.2(b), WAL had the specific right to terminate the MSA upon the occurrence of a Persistent Quality Failure, as defined in Section 8.4. The termination right under Section 14.2(b) was separate from and in addition to the general termination-for-cause right under Section 14.2(a), and was not subject to a separate 60-day cure period, the cure mechanism for individual lot rejections being addressed in Section 8.4 itself.
31. Porosity Specification. WAL-SPEC-TH-401, Appendix C, Table 3 expressly states that the maximum permissible porosity level in each turbine housing unit is ≤0.25% by volume. This porosity specification was a critical quality requirement, as excessive porosity in titanium alloy turbine housings can compromise the structural integrity and fatigue life of the component, creating an unacceptable safety risk in propulsion system applications. The porosity specification was agreed upon during the qualification process preceding the execution of the MSA, was set forth in the engineering specifications incorporated by reference into the MSA, and was well known to Kestrel from the outset of the contractual relationship. A copy of the relevant excerpt from WAL-SPEC-TH-401, Appendix C, Table 3 is annexed hereto as Exhibit R-4.
C. Amendments to the MSA
32. During the term of the MSA, the parties entered into two formal amendments, each executed in accordance with the MSA's amendment procedures.
33. Amendment No. 1 (February 10, 2020). Amendment No. 1 to the MSA was executed on February 10, 2020. This amendment had two principal purposes. First, it added a new engineering specification, WAL-SPEC-TH-410, covering a high-temperature variant of the turbine housing designed for WAL's next-generation military turbofan engine program. Second, Amendment No. 1 increased the maximum annual purchase volume from 3,600 units to 4,000 units per contract year to accommodate the anticipated demand for the new high-temperature variant. All other terms and conditions of the MSA remained unchanged. A true and complete copy of Amendment No. 1 is annexed hereto as Exhibit R-2.
34. Amendment No. 2 (September 3, 2021). Amendment No. 2 to the MSA was executed on September 3, 2021. This amendment was negotiated and agreed upon in response to the global supply chain disruptions caused by the COVID-19 pandemic, which had created significant logistics challenges for both parties. Amendment No. 2 extended the cure period under Section 8.4 of the MSA from thirty (30) calendar days to forty-five (45) calendar days, recognizing that Kestrel's ability to rework or replace non-conforming lots had been materially affected by transportation delays, raw material shortages, and workforce disruptions. Amendment No. 2 also added a force majeure carve-out specifically addressing pandemic-related delays in delivery schedules. All other terms and conditions of the MSA, including the definition of Persistent Quality Failure and the porosity specification, remained unchanged. A true and complete copy of Amendment No. 2 is annexed hereto as Exhibit R-3.
35. WAL notes that the extension of the cure period from thirty (30) to forty-five (45) calendar days was a significant concession by WAL, made in good faith to accommodate Kestrel's operational difficulties during the pandemic. The extended cure period gave Kestrel substantially more time to address any quality deficiencies in its products. Despite this accommodation, Kestrel still failed to cure seven (7) of fourteen (14) lot rejections during the March–September 2022 period, as detailed below.
D. Kestrel's Quality Failures: March–September 2022
36. Between March 7, 2022 and September 19, 2022, WAL's incoming inspection team identified and rejected fourteen (14) separate lots of Products delivered by Kestrel, totaling 1,680 units. Each rejected lot was inspected in accordance with WAL Quality Control Procedure WAL-QCP-100, which prescribes standardized metallurgical testing protocols, including microstructural analysis, radiographic inspection, and quantitative porosity measurement using image analysis of polished cross-sections in accordance with ASTM E2109 and ASTM B311 methodologies.
37. WAL's incoming inspection under WAL-QCP-100 identified porosity levels in the rejected lots ranging from 0.19% to 0.38% by volume. While certain individual sample measurements within some lots fell at or below the 0.25% threshold, the lot-level porosity determinations — which are the operative measure under WAL-SPEC-TH-401, Appendix C, Table 3 — exceeded the contractual maximum of ≤0.25% in each of the fourteen (14) rejected lots. The non-conformances were not marginal or isolated; in several lots, porosity levels reached 0.35% to 0.38%, representing a deviation of 40% to 52% above the contractual limit.
38. WAL's internal findings were independently corroborated by metallurgical testing conducted by Meridian Materials Testing Laboratories, Inc. ("Meridian Labs"), an independent, ISO/IEC 17025-accredited testing laboratory located in Gaithersburg, Maryland. Meridian Labs tested representative samples from each of the fourteen rejected lots and confirmed that porosity levels exceeded the ≤0.25% contractual specification in every instance. Meridian Labs' test reports are available for submission to the Tribunal and will be provided in WAL's Statement of Defense and Counterclaim.
39. Following each lot rejection, WAL provided Kestrel with written notice of rejection in accordance with Section 8.4 of the MSA, identifying the specific non-conformance (i.e., excess porosity), the applicable specification, the measured porosity levels, and the deadline for cure. Copies of the fourteen lot rejection notices are annexed hereto as Exhibit R-6.
40. Of the fourteen (14) rejected lots, Kestrel failed to cure seven (7) within the 45-calendar-day amended cure period prescribed by Section 8.4 of the MSA, as modified by Amendment No. 2. In certain instances, Kestrel provided replacement units that themselves failed to meet the porosity specification upon re-inspection; in other instances, Kestrel simply failed to deliver replacement units within the cure period. The correspondence and documentation relating to the cure periods and the seven uncured rejections are annexed hereto as Exhibit R-7.
41. The seven (7) uncured rejections within the rolling twelve-month period from March 7, 2022 through September 19, 2022 far exceeded the Persistent Quality Failure threshold of three (3) uncured rejections in any rolling twelve-month period, as defined in Section 8.4 of the MSA. WAL submits that there can be no genuine dispute that a Persistent Quality Failure occurred under the MSA.
E. WAL's Notice of Termination
42. On October 3, 2022, WAL issued a written Notice of Termination for Cause to Kestrel, pursuant to Section 14.2(b) of the MSA. The Notice of Termination was addressed to Mr. Friedrich Brenner, Managing Director of Kestrel, and was delivered by international courier with signature confirmation and by electronic mail to Mr. Brenner, Ms. Luisa Erdmann, and Dr. Stefan Voss. A true and complete copy of the Notice of Termination is annexed hereto as Exhibit R-8.
43. The Notice of Termination specifically cited the occurrence of a Persistent Quality Failure under Section 8.4 of the MSA, identified the seven (7) uncured lot rejections giving rise to the Persistent Quality Failure, and stated that the MSA was terminated effective as of the date of the notice, October 3, 2022, in accordance with Section 14.2(b). The termination was based on the documented record of Kestrel's quality failures and was made in strict compliance with the procedural and substantive requirements of the MSA.
44. WAL rejects in the strongest terms Kestrel's allegation that the termination was pretextual, manufactured, or motivated by any purpose other than the protection of WAL's legitimate business interests in the face of a persistent pattern of quality non-conformance. The factual record demonstrates beyond any reasonable dispute that Kestrel's quality failures were real, documented, independently verified, and of a magnitude and frequency that warranted termination under the express terms of the MSA.
F. WAL's Mitigation — Engagement of Valkyr Precision Components Inc.
45. Following Kestrel's persistent quality failures, and in order to maintain continuity of supply for its propulsion system programs, WAL undertook a commercially reasonable search for an alternative supplier of Ti-6Al-4V ELI titanium alloy turbine housings. After evaluating several potential suppliers, WAL engaged Valkyr Precision Components Inc. ("Valkyr"), a precision machining company based at 4401 East Irvington Road, Tucson, Arizona 85714, as a replacement supplier. Valkyr is an AS9100 Rev D-certified manufacturer with established capabilities in titanium alloy machining for aerospace applications.
46. WAL's engagement of Valkyr was a commercially reasonable mitigation step taken after and in response to Kestrel's quality failures — not, as Kestrel has alleged, a pretext for termination. WAL did not begin negotiations with Valkyr until after the fifth uncured lot rejection, at which point it had become apparent that Kestrel's quality problems were systemic and unlikely to be resolved in the near term. WAL's supply agreement with Valkyr was not executed until after the Notice of Termination was issued to Kestrel on October 3, 2022.
47. WAL incurred significant premium costs in sourcing replacement components from Valkyr, as a consequence of Valkyr's need to undertake qualification activities, tooling procurement, and expedited production scheduling to meet WAL's urgent requirements. The details of WAL's replacement costs and the resulting damages are set forth in the Counterclaim below in Section VII.
V. ANSWER TO CLAIMANT'S REQUEST FOR ARBITRATION
A. General Denial
48. WAL denies each and every allegation contained in the Request for Arbitration filed by Kestrel on November 7, 2022, except to the extent that any allegation is expressly admitted herein. To the extent that any allegation of the Request for Arbitration is not specifically addressed in this Answer, such allegation is deemed denied. WAL specifically and unequivocally denies that it committed any material breach of the MSA, that it wrongfully terminated the MSA, or that it is liable to Kestrel for any damages whatsoever.
B. Response to Specific Allegations
1. Denial of Wrongful Rejection.
49. WAL denies that it wrongfully rejected the fourteen (14) lots of Products identified in the Request for Arbitration. Each rejection was based on objective, documented, and independently verified non-conformance with the contractual porosity specification of ≤0.25% as expressly stated in WAL-SPEC-TH-401, Appendix C, Table 3. The porosity specification is a clearly defined, quantitative standard that leaves no room for subjective interpretation or discretionary judgment by WAL's inspection team.
50. WAL's incoming inspections were conducted in strict accordance with WAL-QCP-100, which sets forth standardized, repeatable testing protocols consistent with ASTM E2109 and ASTM B311 methodologies. The inspections were performed by qualified metallurgical technicians under the supervision of WAL's Quality Assurance Engineering group, and the results were documented in contemporaneous inspection reports that will be produced to the Tribunal.
51. WAL categorically denies Kestrel's allegation that WAL applied any unpublished, extraneous, or undisclosed quality criteria in its inspections or rejection decisions. The ≤0.25% porosity standard is expressly stated in the contractual specifications that were incorporated by reference into the MSA, were provided to Kestrel at the time of contract execution, and were the subject of detailed technical discussions between the parties' respective engineering teams during the qualification process. Kestrel was fully aware of this specification and, indeed, had been meeting it successfully throughout Contract Years 1 through 3 before its quality deteriorated in Contract Year 4.
52. WAL further denies any allegation that its testing methodology was flawed, biased, or improperly calibrated. WAL's internal test results were independently confirmed by Meridian Materials Testing Laboratories, Inc., an ISO/IEC 17025-accredited laboratory with no affiliation to WAL or any interest in the outcome of this dispute.
2. Denial of Wrongful Termination.
53. WAL denies that its Notice of Termination for Cause dated October 3, 2022 was wrongful, pretextual, or based on fabricated or exaggerated quality deficiencies. The termination was proper under Section 14.2(b) of the MSA, which confers upon WAL the express right to terminate the MSA upon the occurrence of a Persistent Quality Failure as defined in Section 8.4.
54. The undisputed record establishes that seven (7) lot rejections went uncured within the 45-calendar-day amended cure period between March and September 2022. Seven uncured rejections in a rolling twelve-month period far exceed the contractual threshold of three (3) uncured rejections required to trigger a Persistent Quality Failure under Section 8.4. WAL's exercise of its termination right was therefore fully supported by the contractual requirements and the factual record.
55. Kestrel failed to cure five (5) of the seven (7) uncured rejections despite having the full benefit of the extended 45-calendar-day cure period negotiated in Amendment No. 2 — a period that was itself fifty percent (50%) longer than the original 30-calendar-day cure period in the MSA. The remaining two (2) uncured rejections involved instances in which Kestrel delivered replacement units that themselves failed the porosity specification upon re-inspection, demonstrating that the underlying quality problem was systemic and unresolved.
56. WAL denies Kestrel's allegation that the termination was motivated by WAL's desire to replace Kestrel with a lower-cost supplier. As the Counterclaim below makes clear, WAL's replacement costs with Valkyr are substantially higher than the contract price under the MSA — Valkyr's unit price of €8,432.92 exceeds the CY4 MSA price of €5,222.92 by more than 61%. No rational commercial actor would terminate a supply agreement at a lower price in order to engage a replacement supplier at a 61% premium, absent genuine quality concerns warranting termination.
3. Denial of Damages Claims.
57. WAL denies that Kestrel is entitled to any damages, let alone the €47.3 million claimed in the Request for Arbitration. Kestrel's damages claims are without merit, factually unsupported, and barred by the express terms of the MSA.
58. WAL denies each component of Kestrel's damages claim as follows:
(a) Lost Profits for the Remaining MSA Term (CY5): €12.83 million. WAL denies that Kestrel is entitled to lost profits for Contract Year 5. WAL's termination of the MSA on October 3, 2022 was lawful and proper under Section 14.2(b), and Kestrel therefore has no entitlement to profits that it would allegedly have earned during the remainder of the MSA term. Moreover, Kestrel's claimed profit margin of 22.4% is inflated and unsupported by adequate documentation. WAL further notes that, even if the termination were found to be wrongful (quod non), any claim for lost profits would constitute consequential damages barred by the mutual waiver in Section 8.7 of the MSA.
(b) Lost Profits for the Two Optional Renewal Periods: €27.15 million. WAL categorically denies that Kestrel is entitled to any damages attributable to the two optional one-year renewal periods. The renewal options under the MSA were exercisable solely at WAL's discretion, and WAL had no obligation to exercise them. WAL had made no commitment, representation, or assurance to Kestrel that it intended to exercise the renewal options, and Kestrel had no legally cognizable expectation interest in the renewal of the MSA. The inclusion of €27.15 million in renewal-period lost profits — representing more than 57% of Kestrel's total damages claim — is wholly without merit and underscores the speculative and exaggerated nature of Kestrel's claims.
(c) Unreimbursed Rework Costs: €3.42 million. WAL denies that Kestrel is entitled to reimbursement of rework costs. Any rework undertaken by Kestrel was necessitated by Kestrel's own quality failures — i.e., Kestrel's delivery of Products that failed to conform to the contractual porosity specification. Kestrel cannot recover the costs of curing its own breaches from the non-breaching party. Under the MSA's quality remediation framework, the costs of rework and replacement were Kestrel's responsibility as the supplier of non-conforming goods.
(d) Reputational Damages / Lost Business Opportunities: €3.90 million. WAL denies that Kestrel is entitled to reputational damages or damages for lost business opportunities. This component of Kestrel's claim is speculative, unsupported by any objective evidence, and constitutes consequential damages barred by the mutual waiver in Section 8.7 of the MSA. Kestrel has provided no documentation, expert analysis, or other evidence establishing that it lost specific business opportunities or suffered quantifiable reputational harm as a result of WAL's lawful exercise of its termination rights.
VI. AFFIRMATIVE DEFENSES
59. Without waiving or limiting its general denial of Kestrel's claims, WAL asserts the following affirmative defenses.
A. Compliance with § 8.4 Rejection and Cure Procedures
60. WAL complied fully and in all respects with the lot rejection procedures set forth in Section 8.4 of the MSA, as amended by Amendment No. 2. Each of the fourteen (14) rejected lots was inspected and identified as non-conforming within the fifteen (15) business-day acceptance window prescribed by the MSA. For each rejected lot, WAL provided Kestrel with timely written notice of rejection, specifying the nature and extent of the non-conformance, the applicable specification, and the measured porosity levels. Kestrel was afforded the full 45-calendar-day cure period, as amended by Amendment No. 2, to replace or rework each rejected lot.
61. Kestrel failed to cure seven (7) of the fourteen (14) rejected lots within the applicable cure period. In no instance did WAL curtail, accelerate, or otherwise interfere with Kestrel's cure rights. WAL's rejection and notice procedures were procedurally proper, timely, and in accordance with the MSA.
B. Proper Termination Under § 14.2(b) for Persistent Quality Failure
62. WAL exercised its termination right under Section 14.2(b) of the MSA in accordance with the MSA's requirements. The occurrence of seven (7) uncured lot rejections between March and September 2022 — within a single rolling twelve-month period — far exceeded the three-rejection threshold established in Section 8.4 for the triggering of a Persistent Quality Failure. WAL's termination was based squarely on the contractual definition of Persistent Quality Failure and was neither pretextual nor in bad faith.
63. WAL submits that the contractual language is clear and unambiguous: a Persistent Quality Failure is defined as three or more uncured rejections in any rolling twelve-month period, and Section 14.2(b) confers upon WAL the right to terminate the MSA upon the occurrence of a Persistent Quality Failure. WAL exercised this right after seven uncured rejections — more than double the threshold — and only after it had become evident that Kestrel's quality problems were persistent and systemic. The termination was a lawful exercise of a contractual right, not a wrongful act.
C. Consequential Damages Waiver — § 8.7
64. Section 8.7 of the MSA contains an express mutual waiver of consequential damages, including but not limited to lost profits, lost revenue, loss of business opportunities, and reputational harm. This waiver is set forth in conspicuous, capitalized language and was a negotiated term of the MSA agreed upon by two sophisticated commercial parties, each represented by experienced counsel.
65. The overwhelming majority of Kestrel's damages claim — specifically, the claims for lost profits during the remaining MSA term (€12.83 million), lost profits during the optional renewal periods (€27.15 million), and reputational damages and lost business opportunities (€3.90 million), totaling €43.88 million or approximately 92.8% of Kestrel's total claim — consists of consequential damages that are expressly barred by Section 8.7 of the MSA.
66. The consequential damages waiver in Section 8.7 is enforceable under New York law. It is well established under New York law that sophisticated commercial parties may agree to limit or exclude consequential damages, and that such agreements will be enforced according to their terms. See, e.g., Metropolitan Life Ins. Co. v. Noble Lowndes Int'l, Inc., 84 N.Y.2d 430, 436 (1994); Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 22 N.Y.3d 799 (2014). The waiver was a material term of the MSA, reflected in the parties' negotiated allocation of risk, and Kestrel cannot now disavow it.
D. Discretionary Nature of Renewal Options
67. The two one-year renewal options under the MSA were expressly exercisable solely at WAL's discretion, upon written notice by WAL to Kestrel not later than ninety (90) days prior to the expiration of the then-current term. The MSA imposed no obligation on WAL to exercise the renewal options and no conditions or criteria governing WAL's decision whether to renew.
68. WAL had no obligation, express or implied, to exercise the renewal options, and Kestrel had no legally cognizable expectation interest in the renewal of the MSA beyond the initial five-year term. The renewal options were, by their express terms, unilateral options exercisable at the sole discretion of WAL, and WAL's decision not to exercise them (or its inability to exercise them following a lawful termination) gives rise to no liability to Kestrel.
69. Kestrel's claim for €27.15 million in lost profits attributable to the two optional renewal periods is therefore without merit. Even if the termination were found to be wrongful (quod non), Kestrel would bear the burden of proving that WAL would have exercised the renewal options — a burden that Kestrel cannot meet, given the discretionary nature of the options and the absence of any commitment by WAL to renew.
E. Failure to Mitigate
70. To the extent that Kestrel claims any damages arising from WAL's termination of the MSA — which WAL denies — Kestrel has failed to mitigate its losses. Under New York law, a party claiming breach of contract has a duty to take reasonable steps to minimize its damages. See Wilmot v. State, 32 N.Y.2d 164, 168-69 (1973).
71. Upon receipt of WAL's Notice of Termination on October 3, 2022, Kestrel had a duty to take reasonable steps to mitigate its losses, including by seeking alternative customers for its titanium alloy turbine housing products or by redeploying its manufacturing capacity to other product lines. The record indicates that Kestrel took no meaningful steps to mitigate its damages in the period following the termination. To the extent Kestrel's claimed damages include losses that could have been avoided through reasonable mitigation efforts, such damages are not recoverable.
F. Speculative and Unsubstantiated Damages
72. Kestrel's damages claims are grossly overstated, speculative, and unsupported by adequate evidence. Kestrel's claimed profit margin of 22.4% on the MSA — upon which its lost profits calculations are based — is inflated and has not been substantiated by any credible financial documentation or expert analysis. WAL reserves the right to challenge this figure through discovery and expert testimony.
73. The reputational damages claim of €3.90 million is particularly lacking in objective basis. Kestrel has not identified any specific customer, contract, or business opportunity that it lost as a result of WAL's termination of the MSA, nor has it provided any methodology for quantifying the alleged reputational harm. This claim is inherently speculative and should be rejected.
G. Reservation of Rights
74. WAL expressly reserves the right to assert additional affirmative defenses as the proceedings develop, additional facts become known through discovery and document production, and the Tribunal issues procedural orders governing the further conduct of the arbitration. WAL's failure to assert any particular defense in this Answer shall not be deemed a waiver of that defense.
VII. COUNTERCLAIM
A. Introduction to Counterclaim
75. Pursuant to Article 5(5) of the ICC Rules, WAL asserts a Counterclaim against Kestrel for damages in the amount of €5.17 million arising from Kestrel's breach of the MSA. WAL's Counterclaim arises out of the same contract and the same factual circumstances as Kestrel's claims and is properly within the scope of the arbitration agreement set forth in Section 22.3 of the MSA.
B. Basis for Counterclaim
76. Kestrel breached the MSA by persistently delivering Products that failed to conform to the contractual porosity specification of ≤0.25% set forth in WAL-SPEC-TH-401, Appendix C, Table 3. As set forth in Section IV.D above, between March 7, 2022 and September 19, 2022, WAL rejected fourteen (14) lots of Products totaling 1,680 units, each of which exceeded the contractual porosity limit. Kestrel failed to cure seven (7) of these rejections within the amended 45-calendar-day cure period. Kestrel's persistent delivery of non-conforming Products constitutes a material breach of the MSA, including but not limited to Kestrel's obligations under Sections 3.1 (conformance with specifications), 7.2 (quality warranty), and 8.1 (delivery of conforming goods) of the MSA.
77. As a direct result of Kestrel's breaches, WAL was left without a source of supply for 1,680 units of Ti-6Al-4V ELI titanium alloy turbine housings that it required for its propulsion system manufacturing programs. WAL was compelled to source replacement components from an alternative supplier, Valkyr Precision Components Inc., at a significant cost premium, as detailed below.
C. Quantification of Damages
78. WAL's damages on its Counterclaim consist of the cost premium incurred in procuring 1,680 replacement units of turbine housings from Valkyr, as compared to the contract price under the MSA. The damages are calculated as follows:
(a) Valkyr's unit price: €8,432.92 per unit. This price reflects the premium associated with Valkyr's need to undertake qualification activities, procure tooling, and implement expedited production scheduling to meet WAL's urgent requirements.
(b) Kestrel's CY4 contract price under the MSA: €5,222.92 per unit.
(c) Per-unit price premium: €8,432.92 − €5,222.92 = €3,210.00 per unit.
(d) Gross replacement cost premium: 1,680 units × €3,210.00 = €5,392,800.00.
(e) Less: Valkyr introductory discount. Valkyr offered WAL a one-time introductory discount of 4.2% on the aggregate purchase price for the first order of replacement units. Applying this discount to the gross replacement cost premium: €5,392,800.00 × 0.958 = €5,166,322.40.
(f) Total Counterclaim: Approximately €5.17 million.
79. Documentation supporting WAL's Counterclaim calculation, including the supply agreement with Valkyr, Valkyr's pricing schedule, and WAL's purchase orders, is annexed hereto as Exhibit R-9.
D. Legal Basis
80. WAL's Counterclaim is grounded in well-established principles of contract law. Kestrel's delivery of non-conforming Products constitutes a breach of the MSA, and WAL is entitled to recover its direct damages — namely, the cost premium incurred in procuring replacement goods from an alternative supplier — as a foreseeable and direct consequence of Kestrel's breach.
81. Under New York law, the measure of damages for breach of a contract for the sale of goods includes, inter alia, the difference between the contract price and the market price (or actual cover price) of substitute goods, together with incidental damages. See N.Y. U.C.C. § 2-712 (buyer's right to cover); see also N.Y. U.C.C. § 2-713. WAL's Counterclaim seeks precisely this measure of damages: the difference between the contract price under the MSA and the actual price paid to Valkyr for replacement components.
82. WAL acted reasonably in mitigating its damages by engaging Valkyr as a replacement supplier. WAL conducted a competitive solicitation among multiple qualified aerospace component manufacturers, evaluated each potential supplier's technical capabilities, quality certifications, production capacity, and pricing, and selected Valkyr as the most qualified and cost-effective alternative. Valkyr was the only supplier among those solicited that could meet WAL's delivery schedule while maintaining AS9100 Rev D certification and compliance with WAL's engineering specifications.
83. WAL's Counterclaim damages are direct, not consequential, in nature. The cost premium incurred in sourcing replacement components is a direct and foreseeable consequence of a supplier's delivery of non-conforming goods and represents the paradigmatic "cover" damage recognized under the Uniform Commercial Code. These damages are therefore not barred by the consequential damages waiver in Section 8.7 of the MSA. The mutual waiver of consequential damages was intended to exclude claims for lost profits, lost business opportunities, and similar indirect losses — not to immunize a breaching supplier from liability for the direct cost of replacing its defective products.
VIII. RELIEF REQUESTED
84. For the foregoing reasons, WAL respectfully requests that the Tribunal enter an award as follows:
A. With Respect to Kestrel's Claims
(a) Dismiss Kestrel's Request for Arbitration in its entirety, with prejudice;
(b) Declare that WAL did not commit any material breach of the MSA;
(c) Declare that WAL's termination of the MSA on October 3, 2022 was procedurally and substantively proper under Section 14.2(b) of the MSA, based upon the occurrence of a Persistent Quality Failure as defined in Section 8.4;
(d) Deny all of Kestrel's claims for damages, including without limitation its claims for lost profits during the remaining MSA term (€12.83 million), lost profits during the optional renewal periods (€27.15 million), unreimbursed rework costs (€3.42 million), and reputational damages and lost business opportunities (€3.90 million), totaling €47.3 million.
B. With Respect to WAL's Counterclaim
(e) Award WAL damages in the amount of €5.17 million on its Counterclaim, representing the cost premium incurred by WAL in sourcing replacement Ti-6Al-4V ELI titanium alloy turbine housings from Valkyr Precision Components Inc. as a direct consequence of Kestrel's breach of the MSA;
(f) Award WAL pre-award and post-award interest on its Counterclaim damages at a rate to be determined by the Tribunal.
C. Costs and Fees
(g) Order Kestrel to bear all costs of the arbitration, including the ICC administrative costs and the fees and expenses of the arbitrators;
(h) Order Kestrel to reimburse WAL's reasonable legal costs and expenses incurred in connection with this arbitration, including the fees and disbursements of Calderwood & Harkness LLP and of any experts or consultants retained by WAL.
D. Further Relief
(i) Grant WAL such further and other relief as the Tribunal deems just, equitable, and appropriate in the circumstances.
IX. RESERVATION OF RIGHTS
85. WAL expressly reserves the right to supplement or amend this Answer and Counterclaim as permitted by the ICC Rules and the Tribunal's procedural orders. WAL anticipates submitting a comprehensive Statement of Defense and Counterclaim, supported by documentary evidence, witness statements, and expert reports, at the time and in the manner prescribed by the Tribunal's procedural timetable.
86. WAL further reserves the right to submit additional factual and legal arguments, additional documentary evidence, and expert testimony — including expert testimony on metallurgical, quality assurance, damages, and accounting matters — in its Statement of Defense and Counterclaim and in subsequent submissions throughout the course of these proceedings. Nothing in this Answer shall be construed as a limitation on WAL's right to develop and present its case in full at the appropriate stage of the proceedings.
87. WAL also reserves the right to raise additional affirmative defenses, to challenge the admissibility or weight of Kestrel's evidence, and to seek any procedural or interim relief that may become necessary or appropriate as the arbitration progresses.
X. VERIFICATION AND SIGNATURE
The undersigned counsel, duly authorized to represent Respondent Whitmore Aerospace LLC in this arbitration, hereby verify that the facts set forth in this Answer and Counterclaim are true and correct to the best of their knowledge, information, and belief, based upon a reasonable investigation and upon information provided by their client.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP Counsel for Respondent Whitmore Aerospace LLC
By: ________
Theodore Langston, Partner
By: ________
Vivienne St. Claire, Partner
By: ________
Simone Laroche, Senior Associate
By: ________
Jeffrey Park, Associate
Calderwood & Harkness LLP 600 Lexington Avenue New York, NY 10022 Telephone: +1 (212) 558-4000 Facsimile: +1 (212) 558-4001
1750 K Street NW Washington, DC 20006 Telephone: +1 (202) 263-3000
Dated: December 12, 2022
APPENDIX: LIST OF EXHIBITS
The following exhibits are submitted in support of Respondent's Answer to Request for Arbitration and Counterclaim:
CERTIFICATE OF SERVICE
I, Simone Laroche, Senior Associate at Calderwood & Harkness LLP, counsel for Respondent Whitmore Aerospace LLC, hereby certify that on December 12, 2022, a true and complete copy of the foregoing Respondent Whitmore Aerospace LLC's Answer to Request for Arbitration and Counterclaim, together with all exhibits annexed thereto, was served upon Claimant's counsel and filed with the ICC Secretariat as follows:
Claimant's Counsel:
Haber Reinhardt Schlosser Partnerschaft mbB