PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP INTERNAL MEMORANDUM
TO: Priya Anand, Partner; Douglas Carmichael, Partner
FROM: Patrick Gallagher, Associate; Simone Laroche, Associate
DATE: November 14, 2022
RE: Analysis of Indemnification Provisions (Sections 11.4 and 11.5) — Teaming Agreement dated June 12, 2019, between Whitmore Aerospace LLC and Hargrove-Dalton Defense Systems, Inc.
CLIENT: Whitmore Aerospace LLC
MATTER: Whitmore Aerospace LLC — Indemnity Dispute with Hargrove-Dalton Defense Systems, Inc.
I. Executive Summary
This memorandum analyzes whether Section 11.4 of the Teaming Agreement dated June 12, 2019 (the "Teaming Agreement"), between Whitmore Aerospace LLC ("WAL") and Hargrove-Dalton Defense Systems, Inc. ("HDDS"), obligates WAL to indemnify HDDS for $14,726,583 in cost overruns identified by the Defense Contract Management Agency ("DCMA") in its Contracting Officer's Preliminary Determination ("COPD") dated August 1, 2022. HDDS demanded indemnification for the full COPD amount in a formal demand letter dated September 9, 2022, signed by William Fong, HDDS's Senior Vice President, Contracts & Procurement. This memorandum was prepared at the request of Priya Anand in connection with the engagement strategy for potential declaratory judgment litigation and in anticipation of adversarial proceedings.
Bottom-Line Conclusion. WAL has strong defenses against HDDS's indemnification demand, and we recommend that WAL resist the demand and, consistent with the engagement strategy previously discussed, proceed to file a declaratory judgment action in the United States District Court for the Southern District of New York. Section 11.4(b) of the Teaming Agreement contains an express causation requirement — specifically, it limits WAL's indemnification obligation to losses arising from government cost-disallowance claims only "to the extent such claim is caused by Team Member's acts or omissions." HDDS has not satisfied, and on the current record cannot satisfy, this causation requirement.
Moreover, the demand is overbroad in two independent and significant respects. First, HDDS seeks the full $14,726,583, including $1,909,142 attributable to work packages other than Work Package 4 ("WP-4"), for which WAL bears no contractual responsibility whatsoever. Both subsections of Section 11.4 are expressly limited to losses arising from "Team Member's Work Package," and the non-WP-4 overruns fall outside any plausible reading of WAL's indemnification obligation. Second, HDDS treats the COPD — a preliminary, non-final administrative determination currently being contested by HDDS itself — as a triggering event under Section 11.4(b), when the clause requires a "claim by the U.S. Government" that costs are "unallowable, unreasonable, or otherwise subject to disallowance." No formal Contracting Officer's Final Decision ("COFD") has issued, and no costs have been formally disallowed. While this timing defense may become moot upon issuance of a COFD, it is a presently viable basis for resisting the demand.
Even assuming arguendo that Section 11.4(b) is triggered, WAL's aggregate liability under the Teaming Agreement is capped at $88,992,000 under Section 11.5 (calculated as 120% of the $74,160,000 WP-4 contract value). The current demand of $14,726,583 is well within this cap, representing approximately 16.5% of the ceiling. However, the cap's existence is analytically significant: it confirms that the parties contemplated a bounded, proportional indemnity regime and did not intend open-ended liability exposure for the team member. The cap would become directly relevant if the dispute widens — for example, if HDDS asserts additional claims for consequential or delay damages, or if the DCMA's final determination increases the scope of WP-4 overruns.
The Teaming Agreement is governed by New York law, per Section 18.1, without regard to conflicts-of-law principles. Under New York law, indemnification clauses are construed strictly against the party seeking indemnification, and the indemnitee bears the burden of establishing that the clause covers the claimed losses. The "caused by" language in Section 11.4(b) imports a causation requirement more demanding than the broader "arising out of" or "relating to" formulations used elsewhere in the clause, further limiting HDDS's ability to shift the full COPD amount onto WAL.
This memorandum addresses the following topics in detail:
(A) the text and structure of Sections 11.4 and 11.5 of the Teaming Agreement;
(B) the trigger conditions under Section 11.4(a) (negligence, willful misconduct, or material breach) and Section 11.4(b) (government cost-disallowance claims);
(C) the causation requirement in Section 11.4(b) and WAL's factual defenses as to each category of cost overrun;
(D) force-majeure and commercial-impracticability arguments related to titanium price escalation;
(E) the distinction between a preliminary DCMA determination and a final Contracting Officer's decision, and the implications for the "claim" trigger under Section 11.4(b);
(F) the allocation issue — that is, HDDS's improper inclusion of non-WP-4 overruns in its demand; and
(G) the Section 11.5 aggregate liability cap and its strategic significance.
II. Background
A. The Parties and the Teaming Agreement
Whitmore Aerospace LLC. WAL is a Virginia limited liability company headquartered at 4200 Commerce Park Drive, Suite 600, Chantilly, Virginia 20151. WAL is an aerospace and defense manufacturer specializing in precision-machined turbine components, integrated propulsion sub-assemblies, and structural airframe parts. The company was founded in 2006 by Marcus J. Whitmore and Elaine Whitmore. As of fiscal year 2022, WAL reports annual revenue of approximately $287 million and employs approximately 1,400 people across its Chantilly headquarters, its primary manufacturing facility in Manassas, Virginia, and satellite operations in Huntsville, Alabama. WAL holds an active SECRET-level facility security clearance issued by the Defense Counterintelligence and Security Agency and maintains a robust quality management system certified to AS9100D. WAL has served as a subcontractor and team member on range Department of Defense programs, including fixed-wing airframe components, rotary-wing structural assemblies, and missile propulsion subsystems.
Hargrove-Dalton Defense Systems, Inc. HDDS is a Delaware corporation headquartered at 1100 Garrison Boulevard, Suite 2200, Bethesda, Maryland 20817. HDDS is a large prime defense contractor engaged in systems integration, avionics design and manufacturing, and airframe manufacturing and final assembly. As of fiscal year 2022, HDDS reports annual revenue of approximately $3.4 billion and employs approximately 12,500 people across its corporate headquarters, its primary manufacturing and integration facility in Palmdale, California, and additional sites in Fort Worth, Texas, and Melbourne, Florida. HDDS regularly serves as prime contractor on major Department of Defense acquisition programs and has extensive experience managing large contractor teams, including multi-tier subcontractor and team-member arrangements.
The Teaming Agreement. The Teaming Agreement was executed on June 12, 2019, between HDDS (as "Team Lead") and WAL (as "Team Member"). The purpose of the Teaming Agreement was to establish the respective roles, responsibilities, and obligations of the parties in pursuing and performing the Advanced Tactical Airframe Program ("ATAP"), a major U.S. Air Force acquisition program for the development and low-rate initial production of a next-generation tactical airframe platform. Under the Teaming Agreement, WAL was assigned responsibility for Work Package 4 ("WP-4"), which encompasses the fabrication and delivery of titanium structural assemblies — specifically, the wing-box substructure, center fuselage longerons, and bulkhead fittings — for the ATAP airframe. WAL's share of the overall contract value is 18% of the target cost, representing $74,160,000 (calculated as 18% of the $412,000,000 target cost under the prime contract). The Teaming Agreement is a substantial and detailed agreement running approximately seventy-five pages, exclusive of exhibits, and addresses, inter alia, intellectual property rights, data rights, export control compliance, security obligations, technical performance requirements, and the indemnification and limitation-of-liability provisions that are the subject of this memorandum.
B. The Underlying Government Contract
The underlying government contract is Prime Contract No. FA8620-19-C-0337, awarded by the United States Air Force, Air Force Life Cycle Management Center ("AFLCMC"), Wright-Patterson Air Force Base, Ohio. The Program Executive Officer for the ATAP program is Colonel Brian T. Matsuda, USAF. The contract is structured as a Cost-Plus-Incentive-Fee ("CPIF") contract, with the following key financial parameters:
• Target cost: $412,000,000
• Target fee: 8% ($32,960,000)
• Ceiling price: $470,000,000
• Share ratio (overruns): 70% government / 30% contractor
• Share ratio (underruns): 60% government / 40% contractor
The period of performance runs from September 1, 2019, through August 31, 2024 (five base years), with two one-year option periods that, if exercised, would extend performance through August 31, 2026. Contract administration is performed by DCMA Northern Virginia, and the Administrative Contracting Officer ("ACO") is Lt. Col. Sandra M. Vickers, USAF.
The CPIF contract structure is significant to the present dispute. Under a CPIF arrangement, the government reimburses the contractor for allowable, allocable, and reasonable costs incurred in contract performance, subject to the ceiling price. Cost overruns above the target cost are shared between the government and the contractor in accordance with the share ratio. The government bears 70% of cost overruns, while the contractor (here, HDDS as prime contractor) bears 30%. This cost-sharing mechanism means that HDDS's actual financial exposure under the prime contract for the $14,726,583 in identified overruns is significantly less than the full COPD amount — specifically, 30% of the overruns, or approximately $4,417,975. The fact that HDDS is seeking indemnification from WAL for the full $14,726,583 — rather than for HDDS's 30% share — raises additional questions about the propriety and good faith of the demand, although we note that the Teaming Agreement's indemnification provisions do not expressly address how the CPIF share ratio interacts with the indemnification obligation. This is an issue we may wish to explore further.
C. The DCMA Contracting Officer's Preliminary Determination
On August 1, 2022, ACO Lt. Col. Sandra M. Vickers issued a Contracting Officer's Preliminary Determination ("COPD") identifying $14,726,583 in total cost overruns on the ATAP program. The COPD is a preliminary administrative assessment of cost performance and does not constitute a final Contracting Officer's Final Decision ("COFD") under the Contract Disputes Act ("CDA"), 41 U.S.C. §§ 7101–7109. The COPD narrative attributes the overruns to the following work packages and root causes:
Total Cost Overruns Identified: $14,726,583
Of this amount, the COPD attributes $12,817,441 (approximately 87.03%) to WP-4 — the titanium structural assemblies that fall within WAL's scope of work under the Teaming Agreement — and $1,909,142 (approximately 12.97%) to other work packages assigned to HDDS and other team members.
The COPD narrative identifies the following root causes for the WP-4 overruns, with approximate figures:
• Titanium raw-material cost escalation: approximately $4,200,000. The COPD attributes this overrun to significant increases in the cost of titanium raw stock, including Ti-6Al-4V forgings and Ti-6Al-4V bar stock, which exceeded the cost estimates used to develop the target cost at contract award. The COPD notes that titanium prices increased substantially during the 2020–2022 period due to global supply-chain disruptions, pandemic-related production curtailments, and geopolitical instability affecting key titanium-producing regions.
• Rework due to non-conforming machining tolerances: approximately $5,100,000. The COPD attributes this overrun to rework costs incurred when machined titanium components were found to be outside specified engineering tolerances. The COPD narrative does not clearly attribute fault for the non-conformances — it notes the existence of rework but does not specify whether the non-conformances resulted from manufacturing error by WAL, specification deficiencies, or some other cause.
• Schedule delays causing idle-labor charges: approximately $2,300,000. The COPD attributes this overrun to periods of production standstill on the WP-4 production line, resulting in idle-labor charges that were incurred while the production workforce was available but unable to perform productive work. Again, the COPD does not clearly assign fault for the delays.
• Engineering change proposal ("ECP") implementation costs: approximately $1,200,000. The COPD attributes this overrun to costs incurred in implementing government-directed engineering changes that were flowed down to WAL through HDDS. The COPD notes that several ECPs were issued during the performance period that affected WP-4 component designs and required retooling and requalification.
• Total WP-4 overruns: approximately $12,800,000 (which, with rounding, corresponds to the $12,817,441 figure used elsewhere in the COPD).
It is important to note that the COPD is a preliminary finding. It identifies cost overruns and provides a narrative discussion of contributing factors, but it does not make formal determinations of allowability or allocability, and it does not direct the disallowance of specific costs. The COPD is, in essence, a precursor to the formal administrative review process that will culminate in a COFD, if one is issued.
D. HDDS's Indemnification Demand
On September 9, 2022, HDDS transmitted a formal indemnification demand letter to WAL, signed by William Fong, HDDS's Senior Vice President, Contracts & Procurement. The demand letter cited Section 11.4 of the Teaming Agreement as the contractual basis for the demand and sought indemnification in the amount of $14,726,583 — the full COPD amount, without limitation to the $12,817,441 attributable to WP-4. The demand letter asserted, in substance, that all WP-4 overruns are WAL's responsibility under Section 11.4 and that WAL must also "backstop" HDDS against the entire COPD amount. The demand letter stated that HDDS expected WAL to respond within thirty days and reserved HDDS's rights to pursue "all available remedies, including recovery of attorneys' fees and costs under Section 11.6 of the Teaming Agreement."
WAL's outside counsel at that time (Harold Reeves of Ashford & Reeves LLP, WAL's government contracts regulatory counsel) responded on September 23, 2022, rejecting the demand in its entirety and outlining several of the defenses discussed in this memorandum. HDDS did not accept WAL's position, and the matter was escalated to the senior executive negotiation process contemplated by Section 18.3 of the Teaming Agreement.
E. Pre-Litigation Dispute Resolution Steps
Pursuant to Section 18.3 of the Teaming Agreement, the parties engaged in senior executive negotiations. Two meetings were held:
• September 30, 2022: An in-person meeting at HDDS's Bethesda headquarters, attended by Marcus J. Whitmore (WAL CEO) and William Fong (HDDS SVP Contracts & Procurement), along with their respective counsel. The parties discussed the demand, the factual bases for WAL's defenses, and the possibility of a negotiated resolution. No agreement was reached.
• October 14, 2022: A follow-up meeting held via videoconference. The parties reiterated their respective positions. HDDS maintained its demand for the full $14,726,583. WAL rejected the demand and proposed that the parties defer any indemnification determination until the DCMA administrative process concludes. HDDS rejected WAL's proposal, asserting that its right to indemnification was already triggered and that delay would be prejudicial.
On October 21, 2022, WAL proposed non-binding mediation under Section 18.3 of the Teaming Agreement, which provides that after the senior executive negotiation period, the parties "may" submit their dispute to non-binding mediation before initiating litigation. On October 28, 2022, HDDS declined WAL's mediation proposal, asserting that the mediation clause is permissive — using the word "may" rather than "shall" — and therefore does not require HDDS's consent. HDDS further stated that it intended to pursue all available legal remedies if WAL did not satisfy the indemnification demand.
The thirty-day senior executive negotiation period has expired without resolution. The permissive mediation step has been declined by HDDS. Accordingly, the dispute resolution prerequisites to litigation under Section 18.3 have been satisfied, and WAL is free to initiate litigation.
Separately, we note that HDDS filed a formal response to the COPD and a request for a COFD with the ACO on October 15, 2022. In that filing, HDDS itself disputes certain aspects of the DCMA's cost-overrun allocation. The fact that HDDS is simultaneously contesting the COPD before DCMA while demanding indemnification from WAL based on the very same COPD findings underscores the preliminary and contested nature of the underlying government determination.
III. Text of Key Contractual Provisions
Before proceeding to the legal analysis, we set forth the full text of the contractual provisions at issue. The text is quoted from the fully executed Teaming Agreement dated June 12, 2019.
A. Section 11.4 — Indemnification
Section 11.4 provides in full:
"Team Member shall indemnify, defend, and hold harmless Team Lead from and against any and all Losses arising out of or relating to (a) Team Member's negligent acts or omissions, willful misconduct, or material breach of this Agreement in the performance of Team Member's Work Package, or (b) any claim by the U.S. Government that costs incurred under Team Member's Work Package are unallowable, unreasonable, or otherwise subject to disallowance, to the extent such claim is caused by Team Member's acts or omissions."
Several structural observations are pertinent. Section 11.4 establishes two distinct trigger categories, each with its own operative language and scope:
Subsection (a) addresses losses arising from WAL's "negligent acts or omissions, willful misconduct, or material breach of this Agreement in the performance of Team Member's Work Package." This subsection is fault-based and requires HDDS to establish that WAL engaged in one of three categories of culpable conduct — negligence, willful misconduct, or material breach — in performing WP-4.
Subsection (b) addresses losses arising from "any claim by the U.S. Government that costs incurred under Team Member's Work Package are unallowable, unreasonable, or otherwise subject to disallowance." This subsection is not inherently fault-based; it is triggered by a government claim of cost disallowance. However, critically, subsection (b) includes a proportional causation qualifier: the indemnification obligation applies only "to the extent such claim is caused by Team Member's acts or omissions." This qualifier significantly narrows the scope of subsection (b) and distinguishes it from an absolute or strict-liability indemnification obligation.
Both subsections are tied to "Team Member's Work Package" — a defined term that, in the context of WAL's participation, means WP-4 (titanium structural assemblies). Losses arising from work packages other than WP-4 are outside the scope of Section 11.4 entirely.
The term "Losses" is defined in Section 1.1 of the Teaming Agreement to mean "any and all claims, demands, actions, causes of action, losses, damages, liabilities, judgments, settlements, penalties, fines, costs, and expenses, including reasonable attorneys' fees and costs of investigation." This is a broad definition, but its breadth is constrained by the specific trigger conditions of subsections (a) and (b).
B. Section 11.5 — Limitation of Liability
Section 11.5 provides in full:
"Notwithstanding Section 11.4, Team Member's aggregate liability under this Section 11 shall not exceed 120% of the value of Team Member's Work Package."
The calculated cap is:
120% × $74,160,000 = $88,992,000
This cap applies to WAL's "aggregate liability under this Section 11" — meaning it encompasses all claims arising under Section 11.4(a), Section 11.4(b), and any other indemnification subsections within Article 11 of the Teaming Agreement. The current demand of $14,726,583 is well within this cap. However, the cap's existence is significant for several reasons discussed in Section VIII below.
C. Section 18.1 — Governing Law
Section 18.1 provides:
"This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to its conflicts-of-law principles."
Accordingly, all questions of contract interpretation arising under the Teaming Agreement are governed by the substantive law of the State of New York.
D. Other Relevant Provisions
Several other provisions of the Teaming Agreement are relevant to the present dispute:
Section 18.2 — Forum Selection. Section 18.2 provides that any litigation arising under the Teaming Agreement shall be brought in the United States District Court for the Southern District of New York or the Supreme Court of the State of New York, New York County. Both parties consent to personal jurisdiction in these forums and waive any objections based on inconvenient forum. This provision supports WAL's filing of a declaratory judgment action in the Southern District of New York.
Section 18.3 — Dispute Resolution. Section 18.3 establishes a tiered dispute-resolution process. First, the parties are required to engage in senior executive negotiations for a period of thirty days. Second, the parties "may" submit the dispute to non-binding mediation. Third, if the dispute is not resolved through negotiation or mediation, either party may initiate litigation in the forums specified in Section 18.2. As noted above, the senior executive negotiation period has concluded without resolution, and HDDS has declined WAL's mediation proposal. The Teaming Agreement does not contain a mandatory arbitration clause.
Section 11.6 — Attorneys' Fees. Section 11.6 provides that in any action to enforce the indemnification provisions of Article 11, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs. HDDS's demand letter referenced this provision, signaling HDDS's intention to seek attorneys' fees if it prevails. This provision is a double-edged sword: if WAL prevails in a declaratory judgment action establishing that it is not liable under Section 11.4, WAL may be entitled to recover its own attorneys' fees from HDDS.
IV. Analysis of Section 11.4(a): Negligence, Willful Misconduct, or Material Breach
A. Elements Required
Section 11.4(a) requires HDDS to establish that WAL committed "negligent acts or omissions, willful misconduct, or material breach of this Agreement in the performance of [WAL's] Work Package," and that the claimed losses "aris[e] out of or relat[e] to" such conduct. This is a fault-based trigger that imposes a meaningful burden of proof on HDDS.
Under well-settled New York law, the party seeking contractual indemnification bears the burden of demonstrating that the indemnification clause covers the claimed losses. See Tonking v. Port Auth. of N.Y. & N.J., 3 N.Y.3d 486, 490 (2004) (holding that the indemnitee bears the burden of establishing entitlement under a contractual indemnification clause); Hooper Assocs., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 491–92 (1989) (holding that indemnification agreements are strictly construed and that the intention to indemnify must be "unmistakably clear" from the language of the contract). Accordingly, HDDS must affirmatively prove, by a preponderance of the evidence, that WAL committed negligent acts or omissions, willful misconduct, or material breach in performing WP-4 — and that the claimed losses arose from such conduct. WAL is not required to disprove negligence; rather, HDDS must prove it.
The "arising out of or relating to" causation language is admittedly broad, and New York courts have construed such language to encompass claims that have a reasonable connection or nexus to the specified conduct. See Broad St., LLC v. Gulf Ins. Co., 37 A.D.3d 126, 131 (1st Dep't 2006). However, this broad causal language does not relieve HDDS of the threshold requirement to establish the underlying fault — that is, that WAL acted negligently, engaged in willful misconduct, or materially breached the Teaming Agreement. Without proof of such fault, Section 11.4(a) is simply not triggered, regardless of the breadth of the causal nexus.
B. Application to the Facts
We analyze each category of WP-4 cost overrun identified in the COPD to assess whether HDDS can establish the fault elements required by Section 11.4(a).
Titanium Raw-Material Cost Escalation (~$4.2 million). The COPD attributes approximately $4.2 million in overruns to increases in the cost of titanium raw materials, including Ti-6Al-4V forgings and bar stock. This cost escalation is not attributable to any negligent act or omission by WAL. Titanium prices were driven by global market forces, including pandemic-related supply-chain disruptions, production curtailments at major titanium smelters, and geopolitical instability in key titanium-producing regions (particularly the disruption of Russian titanium exports following the imposition of international sanctions). WAL did not control the global titanium market and could not have prevented or mitigated these price increases through the exercise of reasonable care. Moreover, WAL did not control the procurement specifications or approved supplier lists for titanium raw materials — these were largely dictated by HDDS's prime contract requirements and the applicable government specifications (e.g., AMS 4928 and AMS 4935 for Ti-6Al-4V forgings). WAL procured titanium from the approved sources at prevailing market prices. There is no basis to characterize this cost escalation as negligence, willful misconduct, or material breach by WAL.
Rework Due to Non-Conforming Machining Tolerances (~$5.1 million). The COPD attributes approximately $5.1 million in overruns to rework costs necessitated by machined titanium components that failed to meet specified engineering tolerances. WAL's position — which is supported by contemporaneous correspondence between WAL's engineering team and HDDS's program office — is that the non-conformances resulted from ambiguities and errors in the engineering specifications provided by HDDS as Team Lead. Specifically, WAL contends that HDDS-supplied engineering drawings contained inconsistent tolerance callouts for certain critical interface dimensions on the wing-box substructure components, and that WAL machined the components in good-faith accordance with the specifications as written. When HDDS subsequently identified the non-conformances and issued revised specifications with clarified tolerance requirements, WAL was required to rework the affected components — at significant cost — to meet the revised specifications. If the rework was necessitated by defective or ambiguous specifications originating from HDDS, then the resulting cost overruns cannot be attributed to WAL's negligence. To the contrary, the overruns would be attributable to HDDS's own failure to provide accurate and unambiguous engineering specifications to its team member.
We note, however, that this defense is fact-intensive and will require a thorough document review. HDDS may attempt to argue that WAL should have identified the specification ambiguities before beginning production and sought clarification, or that the non-conformances resulted from WAL's own manufacturing errors rather than specification deficiencies. Resolving this factual dispute will require examination of the specification change history, engineering change notices, non-conformance reports (NCRs), material review board (MRB) dispositions, and the correspondence between WAL's and HDDS's engineering teams during the relevant production periods.
Schedule Delays / Idle-Labor Charges (~$2.3 million). The COPD attributes approximately $2.3 million in overruns to idle-labor charges incurred during periods of production standstill on the WP-4 production line. WAL contends that these delays resulted from HDDS's late delivery of government-furnished equipment ("GFE") and government-furnished information ("GFI") that were necessary for WAL to maintain its production schedule. Specifically, WAL asserts that certain GFE items — including jigs, fixtures, and tooling — were delivered weeks or months behind the scheduled delivery dates, and that certain GFI items — including updated interface control documents and coordination drawings — were similarly delayed. During these periods, WAL's production workforce was on standby, unable to perform productive work, resulting in the idle-labor charges identified in the COPD.
If the schedule delays were caused by HDDS's failure to deliver GFE and GFI on time — a responsibility that falls squarely on the Team Lead under the Teaming Agreement — then the resulting idle-labor overruns are not attributable to WAL's acts or omissions and cannot constitute negligence, willful misconduct, or material breach by WAL. Indeed, WAL would have a strong argument that HDDS caused these overruns through its own failure to perform its Team Lead obligations. Contemporaneous schedule correspondence, GFE/GFI delivery logs, and production status reports will be key evidence supporting this defense.
ECP Implementation Costs (~$1.2 million). The COPD attributes approximately $1.2 million in overruns to costs incurred in implementing government-directed engineering change proposals ("ECPs") that were flowed down through HDDS to WAL. ECPs are, by definition, externally imposed changes directed by the government customer. WAL did not initiate these changes, did not have discretion to reject them, and incurred the implementation costs as a necessary consequence of complying with government-directed requirements flowed down through the prime contract. There is no conceivable basis on which ECP implementation costs could be characterized as negligent acts or omissions, willful misconduct, or material breach by WAL. To the extent HDDS contends otherwise, WAL's defense on this point is exceptionally strong.
Conclusion on Section 11.4(a). On the current factual record, HDDS has not identified — and the COPD does not establish — any negligent act or omission, willful misconduct, or material breach by WAL in the performance of WP-4. None of the four categories of WP-4 cost overruns is attributable to WAL's culpable conduct. Titanium price escalation was driven by global market forces; rework costs were driven by specification deficiencies originating from HDDS; schedule delays and idle-labor charges were caused by HDDS's late delivery of GFE/GFI; and ECP implementation costs were imposed by government-directed changes. Section 11.4(a) is not triggered on the current record, and HDDS would bear the burden of establishing otherwise in any litigation.
V. Analysis of Section 11.4(b): Government Cost-Disallowance Claims
A. Elements Required
Section 11.4(b) establishes a second, independent trigger for WAL's indemnification obligation. It requires:
(1) a "claim by the U.S. Government that costs incurred under Team Member's Work Package are unallowable, unreasonable, or otherwise subject to disallowance"; and
(2) that "such claim is caused by Team Member's acts or omissions."
These two requirements operate conjunctively — both must be satisfied before WAL's indemnification obligation under subsection (b) is triggered. Moreover, the obligation is proportional: it applies only "to the extent" the government's claim is caused by WAL's acts or omissions. We address each element in turn.
B. Whether the COPD Constitutes a "Claim" Under Section 11.4(b)
The nature of the COPD. The COPD issued by ACO Lt. Col. Vickers on August 1, 2022, is a Contracting Officer's Preliminary Determination. Under the Contract Disputes Act, 41 U.S.C. §§ 7101–7109, and the implementing regulations at FAR Part 33, the COPD is an interim administrative step in the government's cost-review process. It identifies potential cost issues and invites the contractor's response, but it does not constitute a final agency determination. Critically, the COPD is not independently appealable to the Armed Services Board of Contract Appeals ("ASBCA") or the United States Court of Federal Claims ("COFC"). Only a Contracting Officer's Final Decision ("COFD") constitutes a final, binding determination that triggers the contractor's rights of appeal. See 41 U.S.C. § 7103(a)(3) (requiring the contracting officer to issue a "written decision" on contractor claims); see also Garrett v. Gen. Elec. Co., 987 F.2d 747, 749 (Fed. Cir. 1993) (distinguishing between preliminary determinations and final decisions under the CDA).
The preliminary nature of the COPD is underscored by the fact that HDDS itself filed a formal response and request for a COFD with the ACO on October 15, 2022, in which HDDS disputed certain aspects of the DCMA's cost-overrun allocation. If HDDS regarded the COPD as a final, authoritative government determination, it would not be contesting the COPD's findings before the very same administrative body. HDDS's own conduct demonstrates that the COPD is a contested, non-final administrative finding — not a "claim" with definitive legal consequence.
Contract interpretation: the meaning of "claim." Under New York contract-interpretation principles, undefined terms in a contract are given their "ordinary and commonly understood meaning." See Greenfield v. Philles Records, Inc., 98 N.Y.2d 562, 569 (2002). Where a contract is used in a specialized industry — such as government contracting — courts may also look to the term's meaning within that industry context. See Law Debenture Trust Co. of N.Y. v. Maverick Tube Corp., 595 F.3d 458, 466 (2d Cir. 2010) (interpreting contract terms in the context of the relevant industry usage).
In the government-contracting context, a "claim" connotes a formal demand or assertion with legal consequence — specifically, a written assertion seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to the contract. See FAR 2.101 (defining "claim" for purposes of the CDA); 41 U.S.C. § 7103(a). A preliminary administrative finding that identifies potential cost issues but does not formally demand payment, disallow costs, or direct a cost adjustment does not meet this standard. The COPD identifies $14,726,583 in potential cost overruns, but it does not direct HDDS to repay any amount, does not formally disallow any costs, and does not demand any specific relief. It is a preliminary identification of potential issues, not a claim.
WAL's argument. WAL has a strong argument that Section 11.4(b) is not yet triggered because the COPD does not constitute a "claim by the U.S. Government" that costs are "unallowable, unreasonable, or otherwise subject to disallowance." Three specific points support this argument:
(a) No costs have been formally disallowed. The COPD identifies potential overruns but does not direct the disallowance of specific costs.
(b) The administrative process is ongoing. HDDS has filed a response and COFD request, and the DCMA is continuing its review. The COPD's findings may be revised, reduced, or withdrawn in the course of this process.
(c) HDDS itself disputes the COPD's findings. The fact that HDDS is contesting the COPD undermines HDDS's simultaneous assertion that the COPD triggers WAL's indemnification obligation. It is incongruous for HDDS to argue that a preliminary finding it is actively disputing constitutes a "claim" sufficient to trigger indemnification.
HDDS's likely counterargument. HDDS may argue that the COPD constitutes a "claim" because it represents an official government position, issued by the ACO, identifying specific cost overruns and their root causes. HDDS may contend that "claim" should be read broadly to encompass any formal government assertion that costs are problematic, not just a final disallowance. HDDS may also argue that the COPD identifies costs as "subject to disallowance" — the precise language of Section 11.4(b) — even if formal disallowance has not yet occurred. There is some textual support for this argument: Section 11.4(b) uses the phrase "otherwise subject to disallowance," which could be read to encompass costs that are at risk of disallowance, not only costs that have been finally disallowed.
Assessment. WAL has a strong argument that Section 11.4(b) is not yet triggered. However, this defense may become moot if and when the ACO issues a COFD formally disallowing costs or directing a cost adjustment. At that point, the COFD would almost certainly constitute a "claim by the U.S. Government" within the meaning of Section 11.4(b). Accordingly, this is best characterized as a timing defense — it is presently viable and may serve to delay or defeat HDDS's current demand, but it does not provide a permanent bar to indemnification. WAL should press this argument vigorously in any near-term proceedings while simultaneously developing the causation defense, which is WAL's strongest and most durable line of defense regardless of the DCMA administrative timeline.
C. The Causation Requirement: "Caused by Team Member's Acts or Omissions"
The causation requirement in Section 11.4(b) is the most critical element of WAL's defense and represents WAL's strongest argument against the indemnification demand.
Textual analysis. The operative language of Section 11.4(b) provides that WAL's indemnification obligation applies only "to the extent such claim is caused by Team Member's acts or omissions." This language performs two distinct functions. First, it imposes a substantive causation requirement: the government's cost-disallowance claim must be "caused by" WAL's conduct — not merely correlated with or temporally related to WAL's conduct, but actually caused by it. Second, the phrase "to the extent" creates a proportional limitation: even if WAL's conduct caused some portion of the government's claim, WAL's indemnification obligation extends only to that proportional share, not to the entirety of the claim.
New York law on "caused by" language. Under New York law, the phrase "caused by" in an indemnification clause is interpreted to require proximate or direct causation — a standard that is meaningfully narrower than the broader "arising out of" or "relating to" formulations commonly used in contractual indemnification clauses. New York courts have consistently distinguished between these formulations. The phrase "arising out of" is the broadest standard and requires only that there be some causal connection or relation between the indemnified losses and the specified conduct. See Maroney v. N.Y. Cent. Mut. Fire Ins. Co., 5 N.Y.3d 467, 471 (2005). The phrase "caused by," by contrast, requires a direct causal link — the specified conduct must be a proximate cause of the claimed losses. See Consolidated Edison, Inc. v. Allstate Ins. Co., 98 N.Y.2d 208, 218 (2002) (distinguishing between broad and narrow causation language in insurance and indemnification contexts).
The distinction is critical here. Section 11.4 uses both formulations in a single sentence: losses must "aris[e] out of or relat[e] to" the specified categories, but the subsection (b) indemnification obligation is limited to government claims "caused by" WAL's acts or omissions. The parties' use of the narrower "caused by" language in subsection (b) — in the same sentence that uses the broader "arising out of or relating to" formulation — is strong textual evidence that the parties intended a heightened causation standard for the government cost-disallowance trigger. This reading is consistent with the well-established New York canon of construction that different terms used in the same agreement are presumed to have different meanings. See Two Guys from Harrison-N.Y., Inc. v. S.F.R. Realty Assocs., 63 N.Y.2d 396, 403 (1984).
Application to each cost-overrun category. We apply the "caused by" standard to each of the four categories of WP-4 overruns identified in the COPD.
1. Titanium Raw-Material Cost Escalation (~$4.2 million)
The titanium price escalation was driven by global market forces entirely outside WAL's control. The period from 2020 through 2022 witnessed extraordinary disruptions in the global titanium supply chain, driven by the COVID-19 pandemic (which curtailed production at major smelters and disrupted international logistics), the Russian invasion of Ukraine in February 2022 (which threatened the availability of Russian titanium exports, a significant source of aerospace-grade titanium), and general inflationary pressures affecting industrial commodities worldwide. These macroeconomic forces were not "caused by" any act or omission of WAL.
WAL procured titanium raw materials in accordance with the Teaming Agreement's specifications and from approved suppliers. WAL did not control the global titanium market, did not set the prices charged by titanium suppliers, and could not reasonably have been expected to insulate the program from macroeconomic commodity-price fluctuations. Moreover, the titanium procurement specifications and approved supplier lists were largely dictated by HDDS's prime contract requirements and the applicable government material specifications. WAL had no discretion to source titanium from alternative, lower-cost suppliers not on the approved list.
In light of these facts, the titanium price escalation was not "caused by" WAL's acts or omissions within the meaning of Section 11.4(b). WAL has a very strong defense on this category of overruns.
We also note that this category may be amenable to a force-majeure or commercial-impracticability defense, which we discuss in Section VI below.
2. Rework Due to Non-Conforming Machining Tolerances (~$5.1 million)
As discussed in Section IV.B above, WAL contends that the non-conformances that necessitated rework were caused by ambiguous or erroneous engineering specifications provided by HDDS as Team Lead. WAL's engineering team performed machining operations in good-faith reliance on the specifications as written. When HDDS subsequently identified dimensional non-conformances — after having itself revised or clarified the applicable specifications — WAL was required to rework the affected components at significant cost.
If WAL's factual contention is correct — that is, if the non-conformances were caused by HDDS's specification errors rather than by WAL's manufacturing deficiencies — then the resulting overruns were not "caused by" WAL's acts or omissions. To the contrary, they were caused by HDDS's own failure to provide accurate and unambiguous engineering data to its team member.
We emphasize, however, that this defense is fact-intensive and will require a comprehensive document review and, if the matter proceeds to litigation, discovery. The key documents include:
• The original engineering specifications issued by HDDS to WAL for WP-4 components;
• All engineering change notices ("ECNs") and specification revisions issued during the relevant production periods;
• Non-conformance reports ("NCRs") and material review board ("MRB") dispositions for the affected components;
• Correspondence between WAL's and HDDS's engineering teams regarding specification ambiguities, tolerance callouts, and requests for clarification; and
• WAL's internal manufacturing records, including machining inspection reports and quality control documentation.
We have requested that WAL begin assembling these documents for our review. The strength of this defense will depend on the documentary record.
HDDS may attempt to argue that WAL should have identified the specification ambiguities before commencing production and sought written clarification from HDDS. HDDS may also argue that some of the non-conformances resulted from WAL's own manufacturing errors (e.g., tooling wear, operator error, or process drift) rather than from specification deficiencies. If HDDS can establish that some portion of the rework was caused by WAL's manufacturing processes rather than by specification errors, then WAL may bear proportional liability for that portion under the "to the extent" language. Conversely, if the documentary record establishes that the specifications were indeed ambiguous or erroneous, WAL's defense is strong.
Assessment: Strong defense, but fact-intensive. This category represents the area of greatest factual uncertainty and is likely to be the most heavily contested in any litigation.
3. Schedule Delays / Idle-Labor Charges (~$2.3 million)
WAL contends that the schedule delays causing idle-labor charges were attributable to HDDS's late delivery of government-furnished equipment ("GFE") and government-furnished information ("GFI"). Under the Teaming Agreement, HDDS, as Team Lead, was responsible for flowing down GFE and GFI from the government to team members in accordance with the program schedule. WAL's production schedule for WP-4 was dependent on the timely receipt of certain GFE items (including jigs, fixtures, and tooling) and GFI items (including updated interface control documents, coordination drawings, and assembly sequence instructions).
WAL's position, supported by contemporaneous schedule correspondence, is that multiple GFE and GFI deliverables were delayed by weeks or months beyond their scheduled delivery dates. During these delay periods, WAL's production workforce was on standby — available and being compensated, but unable to perform productive work because the necessary GFE/GFI was not available. The resulting idle-labor charges were a direct and foreseeable consequence of the GFE/GFI delays.
If the delays were caused by HDDS's failure to deliver GFE/GFI on time, then the resulting idle-labor overruns were not "caused by" WAL's acts or omissions. WAL could not fabricate titanium structural assemblies without the necessary tooling and engineering data, and it cannot be held responsible for production standstills caused by the Team Lead's failure to provide essential inputs.
The key evidence supporting this defense includes:
• GFE/GFI delivery schedules specified in the Teaming Agreement and the integrated master schedule;
• Actual GFE/GFI delivery dates and any delivery delay notices issued by HDDS or the government;
• WAL's production status reports documenting periods of standstill and the reasons therefor;
• Correspondence between WAL and HDDS regarding GFE/GFI availability and schedule impacts; and
• WAL's labor records and cost-accounting data documenting idle-labor charges during the delay periods.
Assessment: Strong defense. The GFE/GFI delivery records should provide clear, objective evidence of whether HDDS delivered the required items on schedule. If the records confirm late delivery, this defense is compelling.
4. ECP Implementation Costs (~$1.2 million)
The ECP implementation costs arose from government-directed engineering changes that were flowed down through HDDS to WAL. Engineering change proposals are a standard feature of defense acquisition programs, particularly on developmental programs like ATAP. When the government directs a design change, the contractor (and its team members) must implement the change, which may require retooling, requalification, design modification, and additional fabrication or rework. The costs of implementing government-directed ECPs are inherently externally imposed and cannot be attributed to WAL's acts or omissions.
WAL did not initiate the ECPs; they originated with the government customer and were flowed down through HDDS. WAL did not have discretion to decline the ECPs; it was contractually obligated to implement them. The resulting implementation costs are a necessary and unavoidable consequence of government-directed changes, and they are not "caused by" WAL's acts or omissions under any reasonable interpretation of that phrase.
Assessment: Very strong defense. This is the category on which WAL's position is most clearly correct, and HDDS would face significant difficulty arguing that government-directed ECP costs were caused by WAL.
D. Proportionality: The "To the Extent" Language
Even if HDDS could establish that some portion of the WP-4 overruns was caused by WAL's acts or omissions, the "to the extent" language in Section 11.4(b) limits WAL's indemnification obligation to only that proportional share. This language creates a proportional, not binary, obligation. WAL is not required to indemnify HDDS for the entirety of a government cost-disallowance claim merely because some fraction of the claim may be attributable to WAL's conduct. Rather, WAL is liable only for the portion of the claim that was actually caused by WAL.
Under New York law, "to the extent" clauses are enforced according to their terms and are understood to create proportional obligations. See In re Coudert Bros., 673 F.3d 180, 192 (2d Cir. 2012) (interpreting "to the extent" as a "limiting clause" that creates a proportional, rather than absolute, obligation); Muzak Corp. v. Hotel Taft Corp., 1 N.Y.2d 42, 46 (1956) (enforcing contractual limitation language according to its plain terms). Courts applying New York law have consistently held that "to the extent" language narrows the scope of an obligation to the proportion attributable to the specified cause or condition.
HDDS's demand for the full $14,726,583 — or even the full $12,817,441 in WP-4 overruns — ignores this proportional limitation. Even if, for example, 20% of the WP-4 overruns were attributable to WAL's acts or omissions and 80% were attributable to market forces, HDDS specifications errors, GFE/GFI delays, and government-directed changes, WAL's indemnification obligation would extend only to 20% of the government's claim. HDDS's all-or-nothing approach is inconsistent with the proportional structure of Section 11.4(b).
VI. Force-Majeure and Commercial Impracticability Defenses
A. Teaming Agreement Force-Majeure Provisions
We have reviewed the Teaming Agreement for a force-majeure clause. Section 15.1 of the Teaming Agreement contains a force-majeure provision that excuses nonperformance caused by events beyond a party's reasonable control, including but not limited to "acts of God, war, terrorism, insurrection, epidemic, pandemic, fire, flood, earthquake, natural disaster, labor disputes, government actions, embargoes, sanctions, and other causes beyond the party's reasonable control." Section 15.1 further provides that the affected party must give prompt written notice of the force-majeure event and must use commercially reasonable efforts to mitigate its effects.
We note that Section 15.1 does not expressly list "commodity-price escalation" or "supply-chain disruption" among the enumerated force-majeure events. However, the clause contains a catch-all provision covering "other causes beyond the party's reasonable control," and the enumerated events include "pandemic" and "government actions" (which would encompass sanctions affecting titanium-producing nations). Accordingly, there is a colorable argument that the titanium price escalation and supply-chain disruptions of the 2020–2022 period fall within the scope of Section 15.1.
However, we note a potential limitation: Section 15.1, by its terms, excuses "nonperformance" — that is, the failure to perform a contractual obligation. It is less clear whether Section 15.1 operates to excuse or reduce an indemnification obligation under Section 11.4. An indemnification obligation is not a performance obligation in the traditional sense; rather, it is a secondary obligation to hold harmless the counterparty from certain losses. HDDS may argue that Section 15.1's force-majeure protection does not apply to indemnification claims. This is an area that would benefit from further research.
B. Application to Titanium Price Escalation
Even absent a contractual force-majeure defense, New York common law recognizes the defense of commercial impracticability. Under UCC § 2-615 (applicable to contracts for the sale of goods, though its principles are applied by analogy in other commercial contexts) and the Restatement (Second) of Contracts § 261, a party's performance may be excused where it has become impracticable due to the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made.
The global titanium supply disruptions of the 2020–2022 period arguably satisfy the elements of a commercial-impracticability defense:
• Occurrence of a supervening event: The COVID-19 pandemic, international sanctions on Russian titanium exports, and resulting supply-chain disruptions constituted supervening events that dramatically affected the cost and availability of aerospace-grade titanium.
• Non-occurrence was a basic assumption: At the time the Teaming Agreement was executed (June 12, 2019), the parties did not foresee — and could not reasonably have been expected to foresee — the magnitude of the supply-chain disruptions that would occur beginning in early 2020.
• Impracticability: The cost of titanium raw materials increased to a level substantially beyond what was contemplated at the time of contracting, rendering WAL's performance at the originally estimated cost impracticable. We note that mere increase in cost is generally not sufficient to establish impracticability under New York law; the cost increase must be extreme and unreasonable. See Maple Farms, Inc. v. City Sch. Dist., 76 Misc. 2d 1080, 1084 (Sup. Ct. Onondaga Cnty. 1974). The magnitude of the titanium price escalation during the 2020–2022 period may satisfy this standard, but further factual development is needed to quantify the precise extent of the price increase relative to the baseline assumption.
Assessment. The force-majeure and commercial-impracticability defenses are supportive but secondary to the Section 11.4(b) causation defense. If WAL prevails on the causation argument — that is, if the court concludes that the titanium price escalation was not "caused by" WAL's acts or omissions — then the force-majeure defense is unnecessary for this category of overruns. However, the force-majeure defense provides an additional layer of protection and may be useful as an alternative argument or in settlement negotiations. We recommend preserving this defense in any declaratory judgment complaint but recognizing that it is not WAL's primary line of defense.
VII. Allocation Issue: WP-4 vs. Non-WP-4 Overruns
A. DCMA's Allocation in the COPD
The COPD identifies total cost overruns of $14,726,583 on the ATAP program. Of this amount, the COPD attributes:
• $12,817,441 (87.03%) to WP-4 — titanium structural assemblies, which is WAL's assigned work package under the Teaming Agreement; and
• $1,909,142 (12.97%) to other work packages — including avionics integration (WP-2), final assembly (WP-5), and software development (WP-7) — none of which are assigned to WAL.
B. HDDS's Demand Encompasses Non-WP-4 Overruns
HDDS's September 9, 2022 demand letter seeks indemnification in the amount of $14,726,583 — the full COPD amount. This figure includes the $1,909,142 in overruns attributable to work packages other than WP-4. There is no basis in the Teaming Agreement for requiring WAL to indemnify HDDS for losses arising from work packages that are not assigned to WAL.
The text of Section 11.4 is unambiguous on this point. Both subsection (a) and subsection (b) are expressly limited to losses arising from "Team Member's Work Package":
• Subsection (a) covers losses arising from WAL's conduct "in the performance of Team Member's Work Package."
• Subsection (b) covers losses arising from government claims "that costs incurred under Team Member's Work Package are unallowable, unreasonable, or otherwise subject to disallowance."
"Team Member's Work Package" is a defined term in the Teaming Agreement. With respect to WAL, it means WP-4 — fabrication and delivery of titanium structural assemblies. Costs incurred under WP-2, WP-5, WP-7, or any other work package are, by definition, not costs incurred "under Team Member's Work Package" and are outside the scope of WAL's indemnification obligation.
C. New York Law on Strict Construction of Indemnification Clauses
Under New York law, indemnification clauses are construed strictly, and an indemnitor is not liable beyond the express scope of the clause. See Hooper Assocs., Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 491–92 (1989) ("[A] party is entitled to full indemnification provided that the intention to indemnify can be clearly implied from the language and purposes of the entire agreement and the surrounding facts and circumstances.") (emphasis in original); Bradley v. Earl B. Feiden, Inc., 8 N.Y.3d 265, 274 (2007) (holding that indemnification agreements must be strictly construed and that the indemnitor's obligation extends only to the losses specified in the agreement). An indemnitor cannot be required to bear losses that fall outside the contractual scope of the indemnification clause, regardless of whether the indemnitee has incurred those losses or faces potential liability for them.
The application of this principle here is straightforward. WAL's indemnification obligation under Section 11.4 extends only to losses arising from WAL's Work Package — WP-4. The $1,909,142 in non-WP-4 overruns identified in the COPD are not within the scope of Section 11.4, and WAL cannot be required to indemnify HDDS for those amounts. HDDS's inclusion of the non-WP-4 overruns in its demand is facially overbroad and unsupported by the contract's plain language.
D. Conclusion on Allocation
Even under HDDS's most aggressive reading of Section 11.4, WAL cannot be held liable for the $1,909,142 in non-WP-4 overruns. This is WAL's clearest and least fact-dependent defense. Unlike the causation defense, which requires a fact-intensive inquiry into the root causes of each category of overruns, the allocation defense turns entirely on the plain language of Section 11.4 and the DCMA's own allocation of overruns between work packages. No factual development is needed to establish that non-WP-4 overruns are outside the scope of WAL's indemnification obligation.
HDDS's demand is facially overbroad by at least $1,909,142. This point should be prominently featured in any declaratory judgment complaint and, if appropriate, in any motion for partial summary judgment or motion to dismiss. It demonstrates that HDDS's demand is not well-founded even on its own terms and calls into question the overall reasonableness and good faith of HDDS's indemnification position.
VIII. Section 11.5 Liability Cap Analysis
A. Calculation
Section 11.5 provides that WAL's "aggregate liability under this Section 11 shall not exceed 120% of the value of Team Member's Work Package." The relevant figures are:
• WAL's Work Package value: $74,160,000 (calculated as 18% × $412,000,000 target cost)
• Liability cap: 120% × $74,160,000 = $88,992,000
• HDDS's current demand: $14,726,583
• Demand as percentage of cap: approximately 16.5%
The current demand is well within the Section 11.5 cap. Acco