preliminary-case-assessment-memo.docx

1019-00005 · Whitmore Aerospace LLC · Analysis

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PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT — PREPARED IN ANTICIPATION OF LITIGATION DO NOT DISTRIBUTE WITHOUT PRIOR AUTHORIZATION OF COUNSEL

CALDERWOOD & HARKNESS LLP 600 Lexington Avenue, 28th Floor New York, NY 10022

November 7, 2022

MEMORANDUM

TO: Marcus J. Whitmore, Chief Executive Officer & Managing Member, Whitmore Aerospace LLC Gregory Poole, General Counsel & Vice President, Legal Affairs, Whitmore Aerospace LLC

FROM: Priya Anand, Partner, Calderwood & Harkness LLP

RE: Preliminary Case Assessment — Indemnity Dispute with Hargrove-Dalton Defense Systems, Inc. Arising Under Teaming Agreement Dated June 12, 2019

MATTER REF: Whitmore Aerospace LLC — HDDS Indemnity Dispute (C&H Matter No. 1019-00005)

I. EXECUTIVE SUMMARY

This memorandum provides a preliminary assessment of the legal position of Whitmore Aerospace LLC ("WAL") following the September 9, 2022 indemnification demand served upon WAL by Hargrove-Dalton Defense Systems, Inc. ("HDDS") in the amount of $14,726,583, arising out of cost overruns identified in a Contracting Officer's Preliminary Determination ("COPD") issued by the Defense Contract Management Agency ("DCMA") in connection with the Advanced Tactical Airframe Program ("ATAP"). This memorandum evaluates WAL's principal defenses and recommends the filing of a declaratory judgment action in the United States District Court for the Southern District of New York.

On August 1, 2022, Administrative Contracting Officer Lt. Col. Sandra M. Vickers, USAF, DCMA Northern Virginia, issued the COPD identifying $14,726,583 in total cost overruns on the ATAP program under Prime Contract No. FA8620-19-C-0337. The COPD allocates $12,817,441—approximately 87%—to Work Package 4 ("WP-4"), the titanium structural assembly fabrication work assigned to WAL under the Teaming Agreement between HDDS and WAL dated June 12, 2019. HDDS, as the prime contractor, has demanded that WAL indemnify HDDS for the entirety of the COPD amount—$14,726,583—pursuant to Section 11.4 of the Teaming Agreement, notwithstanding that nearly $1.9 million of the total is attributable to non-WP-4 work packages that were never part of WAL's contractual scope.

Our bottom-line assessment is that WAL has strong defenses on multiple grounds—causation, scope, and ripeness—but faces meaningful litigation risk given the breadth of the indemnity clause in Section 11.4, the magnitude of the claimed overruns, and the factually intensive nature of the causation inquiry. Specifically:

• The causation-limiting language in Section 11.4(b) ("to the extent such claim is caused by Team Member's acts or omissions") provides a robust defense because the evidence available to date indicates that the WP-4 overruns were caused principally by external factors—global titanium supply disruption, HDDS-supplied specification errors, late government-furnished equipment delivery, and HDDS-directed engineering change proposals—rather than by WAL's own acts or omissions.

• The inclusion of $1,909,142 in non-WP-4 overruns in HDDS's demand is plainly overbroad on the face of the contract and should be easily resolved in WAL's favor.

• The COPD is a preliminary determination, not a Contracting Officer's Final Decision ("COFD"), and does not constitute a formal disallowance of costs, raising serious questions about whether HDDS's indemnity demand is ripe.

We recommend that WAL file a declaratory judgment action in the United States District Court for the Southern District of New York pursuant to 28 U.S.C. §§ 2201–2202, seeking a judicial declaration that Section 11.4 of the Teaming Agreement does not obligate WAL to indemnify HDDS for the cost overruns identified in the COPD. Filing promptly—with a target date in late November 2022—will allow WAL to seize the tactical initiative, control the narrative, and lock in the contractually designated New York forum before HDDS initiates its own action in a potentially less favorable jurisdiction.

The parties have already exhausted the pre-litigation dispute resolution steps contemplated by the Teaming Agreement. Senior executive negotiations were held on September 30, 2022 and October 14, 2022, between Marcus J. Whitmore (WAL) and William Fong, SVP Contracts & Procurement (HDDS), without resolution. WAL proposed non-binding mediation on October 21, 2022 under Section 18.3 of the Teaming Agreement, but HDDS declined on October 28, 2022, taking the position that the mediation clause is permissive ("may") rather than mandatory. While we believe HDDS's interpretation of the mediation clause is correct based on the plain text, the refusal to mediate underscores that the dispute-resolution sequence contemplated by Section 18.3—negotiation followed by optional mediation followed by litigation—has been substantially complied with, and the path to judicial action is clear.

The balance of this memorandum provides a detailed factual background, outlines the proposed declaratory judgment strategy, assesses WAL's principal defenses, quantifies WAL's litigation risk exposure, and identifies collateral considerations relating to insurance, lender covenants, financial reporting, and the government contracting relationship.

II. BACKGROUND

A. The Parties

Whitmore Aerospace LLC. WAL is a Virginia limited liability company with its principal place of business at 4200 Commerce Park Drive, Suite 600, Chantilly, Virginia 20151. Founded in 2006 by Marcus J. Whitmore and Elaine Whitmore, WAL is an aerospace and defense manufacturer specializing in precision-machined turbine components, integrated propulsion sub-assemblies, and structural airframe parts. WAL's products are used across a range of military and commercial aerospace platforms, and the company has established itself as a leading supplier of high-tolerance titanium and specialty alloy components for defense applications.

WAL generated approximately $287 million in revenue in fiscal year 2022 and employs approximately 1,400 people across its primary manufacturing facility in Chantilly, Virginia, and a secondary facility in Huntsville, Alabama. WAL holds an active SECRET-level facility security clearance and is subject to contract administration by DCMA Northern Virginia. Marcus J. Whitmore serves as Chief Executive Officer and Managing Member. Elaine Whitmore serves as Chief Financial Officer. Gregory Poole serves as General Counsel and Vice President, Legal Affairs. Catherine Soo-Hyun Park serves as Vice President, Government Contracts & Compliance.

Hargrove-Dalton Defense Systems, Inc. HDDS is a Delaware corporation with its principal place of business at 1100 Garrison Boulevard, Suite 2200, Bethesda, Maryland 20817. HDDS is a major prime defense contractor specializing in systems integration, avionics, and airframe manufacturing for the United States Department of Defense and allied foreign governments. The company generated approximately $3.4 billion in revenue in fiscal year 2022 and employs approximately 12,500 people across multiple domestic and international locations. HDDS is a publicly traded company listed on the New York Stock Exchange.

Key HDDS personnel relevant to this matter include: Jonathan R. Hargrove, Chairman of the Board of Directors; Diana Castellano, President & Chief Executive Officer; William Fong, Senior Vice President, Contracts & Procurement; and Renee Aldrich, Vice President & Associate General Counsel (Litigation).

HDDS is represented in this matter by Voss, Trager & Kendall LLP ("VTK"), located at 900 17th Street NW, Suite 800, Washington, D.C. 20006. The lead partner on the matter is Leonard Trager, with support from senior associate Megan Forsythe. VTK is a well-regarded defense contracting litigation firm with substantial experience in government contracts disputes and subcontractor indemnification matters.

B. The Prime Contract and the ATAP Program

The dispute arises under Prime Contract No. FA8620-19-C-0337—the Advanced Tactical Airframe Program, commonly referred to by its program acronym "ATAP." The contracting agency is the United States Air Force, Air Force Life Cycle Management Center ("AFLCMC"), located at Wright-Patterson Air Force Base, Ohio. The Program Executive Officer is Col. Brian T. Matsuda, USAF.

The ATAP program concerns the design, development, and initial low-rate production of advanced titanium-composite hybrid airframe structures for next-generation tactical aircraft. The program is classified at the SECRET level and represents a significant investment by the Air Force in advanced airframe technologies intended to reduce weight, improve structural integrity, and enhance survivability for the next generation of tactical fighter and strike aircraft.

The Prime Contract is structured as a cost-plus-incentive-fee ("CPIF") contract with the following financial parameters:

Under the CPIF structure, the government and the contractor share cost risk according to the share ratios specified above. For cost overruns exceeding the target cost, the government absorbs 70% and the contractor absorbs 30%. The ceiling price of $470,000,000 establishes the maximum amount the government will pay; any costs exceeding the ceiling are borne entirely by the contractor. This cost-sharing structure is relevant to the dispute because it means that HDDS's actual financial exposure on cost overruns is limited to its 30% contractor share—yet HDDS has demanded that WAL indemnify it for the full amount of the overruns identified in the COPD without any apparent adjustment for the government's cost-sharing obligation.

HDDS is the prime contractor under the ATAP program and bears overall responsibility for program management, systems integration, and delivery of the completed airframe structures to the Air Force.

C. The Teaming Agreement

WAL's participation in the ATAP program is governed by a Teaming Agreement executed on June 12, 2019, between HDDS (designated as the "Team Lead") and WAL (designated as a "Team Member"). The Teaming Agreement defines WAL's scope of work, compensation structure, and the rights and obligations of the parties with respect to each other and to the Prime Contract.

WAL's Scope of Work. Under the Teaming Agreement, WAL is responsible for the fabrication and delivery of titanium structural assemblies under Work Package 4 ("WP-4"). WP-4 encompasses three principal deliverables: the wing-box substructure, center fuselage longerons, and bulkhead fittings. These are high-precision titanium components that must be manufactured to exacting tolerances and subjected to rigorous quality assurance protocols before delivery to HDDS for integration into the overall airframe assembly.

WAL's Share of Contract Value. WAL's share of the target contract value is 18%, calculated as $412,000,000 × 0.18 = $74,160,000. This figure represents the baseline value against which several contractual provisions—including the liability cap discussed below—are calculated.

Key Contractual Provisions. The following provisions of the Teaming Agreement are central to the dispute:

Section 11.4 (Indemnification). Section 11.4 is the core provision at issue. It provides, in pertinent part:

"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."

Two features of Section 11.4 warrant emphasis. First, the indemnity is structured as a two-pronged obligation: subsection (a) covers negligence, willful misconduct, and material breach, while subsection (b) addresses government claims regarding cost unallowability or unreasonableness. Second—and critically for WAL's defense—subsection (b) contains an express causation qualifier: "to the extent such claim is caused by Team Member's acts or omissions." This language limits WAL's indemnification obligation to those government claims that are caused by WAL's own conduct, as distinguished from claims caused by HDDS, the government, third parties, or force-majeure events.

Section 11.5 (Limitation of Liability). Section 11.5 establishes an aggregate liability cap on WAL's total indemnification and other liability obligations under the Teaming Agreement. The cap is set at 120% of the WP-4 value, calculated as $74,160,000 × 1.20 = $88,992,000. While no present claim approaches this cap, the provision serves as an important contractual backstop limiting WAL's maximum theoretical exposure.

Section 11.6 (Attorneys' Fees). Section 11.6 provides that the prevailing party in any dispute arising under the indemnification provisions of Article 11 is entitled to recover its reasonable attorneys' fees and costs from the non-prevailing party. This is a bilateral fee-shifting provision that increases the financial stakes for both parties—it incentivizes meritorious claims and penalizes unfounded ones.

Section 18.1 (Governing Law). The Teaming Agreement is governed by the laws of the State of New York, without regard to conflicts-of-law principles. This choice-of-law provision is significant because New York law will govern the interpretation of Section 11.4 and the parties' respective indemnification obligations.

Section 18.2 (Forum Selection). Section 18.2 contains a mandatory forum-selection clause providing that any litigation arising under or relating to the Teaming Agreement "shall be brought exclusively in" the United States District Court for the Southern District of New York or New York State Supreme Court, New York County. The use of the mandatory "shall be brought exclusively in" formulation, as opposed to a permissive "may be brought in" formulation, renders this a mandatory forum-selection clause that will be given presumptive enforceability under both federal and New York law.

Section 18.3 (Dispute Resolution). Section 18.3 establishes a multi-step dispute-resolution sequence. The parties are required to engage in a 30-day period of senior executive negotiation as the first step. If the negotiation does not resolve the dispute, the parties "may" (not "shall") submit the dispute to non-binding mediation. If the dispute is not resolved through mediation—or if the parties elect not to mediate—either party may initiate litigation in accordance with Section 18.2. Notably, Section 18.3 does not contain a mandatory arbitration provision; the ultimate dispute-resolution mechanism is litigation.

D. The DCMA Cost-Overrun Determination

On August 1, 2022, Administrative Contracting Officer Lt. Col. Sandra M. Vickers, USAF, DCMA Northern Virginia, issued a Contracting Officer's Preliminary Determination identifying $14,726,583 in total cost overruns on the ATAP program. The COPD was issued pursuant to DCMA's ongoing administration and audit responsibilities under Prime Contract No. FA8620-19-C-0337.

The COPD allocates the total overrun amount between WAL's WP-4 work package and other program work packages as follows:

The COPD narrative identifies four root-cause categories for the WP-4 overruns, with approximate dollar allocations as follows:

Each of these root-cause categories is directly relevant to WAL's causation defense, as discussed in detail in Section IV.A below. Importantly, the COPD narrative attributes the overruns to a combination of factors—some internal to WAL's operations, some external to WAL and attributable to HDDS or the broader supply-chain environment—but does not clearly assign fault or causation to any single party.

The COPD is a preliminary determination. It is critical to understand that the COPD does not constitute a final agency decision. It is not a Contracting Officer's Final Decision under the Contract Disputes Act ("CDA"), 41 U.S.C. § 7103. Rather, it represents the ACO's initial assessment of cost overruns and is subject to further administrative review, revision, or reversal. The COPD invites the contractor (HDDS) to submit a formal response, and the administrative review process contemplates the possibility that the preliminary findings may be modified, reduced, or withdrawn entirely upon further analysis.

HDDS filed a formal response to the COPD and a request for a Contracting Officer's Final Decision with DCMA on October 15, 2022. As of the date of this memorandum, the administrative review remains ongoing, and no COFD has been issued. The ultimate disposition of the DCMA review—including the final determination of the amount and allocation of any disallowable costs—remains uncertain and could materially affect both the quantum of HDDS's indemnity demand and the legal viability of that demand under Section 11.4.

E. HDDS's Indemnification Demand

On September 9, 2022, HDDS served upon WAL a formal indemnification demand letter, signed by Renee Aldrich, VP & Associate General Counsel (Litigation), demanding that WAL indemnify HDDS in the amount of $14,726,583 pursuant to Section 11.4 of the Teaming Agreement. HDDS asserts that all cost overruns identified in the COPD are WAL's responsibility under the indemnification provision and demands payment within sixty (60) days.

Two aspects of HDDS's demand are noteworthy and legally significant. First, HDDS demands indemnification for the full $14,726,583 COPD amount—not merely the $12,817,441 allocated to WP-4. This means HDDS seeks to recover from WAL the $1,909,142 attributable to non-WP-4 work packages—work packages that were never part of WAL's contractual scope and that were performed by HDDS itself or by other subcontractors. There is no colorable basis under the Teaming Agreement for requiring WAL to indemnify HDDS for overruns on work that WAL did not perform and for which WAL had no contractual responsibility.

Second, HDDS's demand is based on the COPD—a preliminary determination—rather than a COFD. As discussed above, the COPD does not constitute a final disallowance of costs, and the administrative review process remains pending. HDDS's demand thus seeks to trigger an indemnification obligation based on a preliminary agency finding that is expressly subject to revision.

F. Pre-Litigation Dispute Resolution

Following receipt of the September 9, 2022 indemnification demand, the parties engaged in the dispute-resolution process contemplated by Section 18.3 of the Teaming Agreement.

Senior Executive Negotiations. Senior executive negotiations were held on two occasions: September 30, 2022 and October 14, 2022. The negotiations were conducted between Marcus J. Whitmore, CEO of WAL, and William Fong, SVP Contracts & Procurement of HDDS. During the September 30 meeting, WAL outlined its position that the indemnity demand was overbroad, premature, and unsupported by the causation analysis required under Section 11.4(b). HDDS maintained its demand in full. At the October 14 follow-up meeting, the parties remained at an impasse, with HDDS declining to reduce its demand or to agree to defer the matter pending the COFD.

Proposed Mediation. On October 21, 2022, WAL proposed non-binding mediation of the dispute pursuant to Section 18.3 of the Teaming Agreement. WAL suggested the engagement of a neutral mediator with defense-contracting industry experience and proposed several potential mediators for HDDS's consideration.

On October 28, 2022, HDDS declined WAL's mediation proposal. In its response, HDDS took the position that the mediation provision in Section 18.3 is permissive ("may") rather than mandatory, and that HDDS is not obligated to participate in mediation prior to litigation. We believe HDDS's interpretation of the mediation clause is correct based on the plain text of Section 18.3, which states that the parties "may submit the dispute to non-binding mediation," employing the permissive "may" rather than the mandatory "shall." However, HDDS's refusal to mediate—and its continued insistence on the full $14,726,583 demand without any willingness to negotiate in good faith—could be contested as a failure to engage meaningfully in the dispute-resolution process and may be relevant to the court's exercise of discretion in entertaining the declaratory judgment action.

In any event, the dispute-resolution sequence contemplated by Section 18.3—negotiation (completed), optional mediation (proposed and declined), and litigation—has been substantially complied with. There is no contractual impediment to initiating judicial proceedings.

III. DECLARATORY JUDGMENT ACTION STRATEGY

A. Statutory Basis

We recommend that WAL initiate a declaratory judgment action pursuant to the Declaratory Judgment Act, 28 U.S.C. §§ 2201–2202. Section 2201 authorizes federal courts, "[i]n a case of actual controversy within its jurisdiction," to "declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought." Section 2202 provides that further necessary or proper relief based on a declaratory judgment "may be granted, after reasonable notice and hearing, against any adverse party whose rights have been determined by such judgment."

The threshold requirement for a declaratory judgment action is the existence of an "actual controversy" between the parties that is "of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." MedImmune, Inc. v. Pemberton Partners LLC, 549 U.S. 118, 127 (2007). Here, the existence of an actual, justiciable controversy is beyond dispute. HDDS has served a formal, specific indemnification demand of $14,726,583 upon WAL. The parties have engaged in and exhausted the contractual dispute-resolution process without reaching agreement. HDDS has declined to mediate. The parties' positions are firmly entrenched and diametrically opposed—HDDS demands full indemnification, while WAL contends that it has no indemnification obligation under Section 11.4 as properly construed. This is precisely the type of concrete, present dispute that the Declaratory Judgment Act is designed to address.

While the decision to entertain a declaratory judgment action is discretionary with the district court, several factors strongly favor the exercise of jurisdiction here. First, the forum-selection clause in Section 18.2 designates the Southern District of New York as the agreed-upon forum, making it an appropriate and natural venue for resolving the parties' contract dispute. Second, the indemnity demand is concrete, specific, and substantial in amount, presenting no risk of the court issuing an advisory opinion. Third, both parties need clarity regarding their respective contractual obligations—particularly in light of the pending DCMA administrative review, which could take months or years to resolve—so that they can plan accordingly and assess their financial positions. The existence of these factors, taken together, supports the court's exercise of discretionary jurisdiction over the declaratory judgment action.

B. Forum and Jurisdiction

Forum Selection. The Teaming Agreement's forum-selection clause, Section 18.2, provides that any litigation arising under or relating to the Agreement "shall be brought exclusively in" the United States District Court for the Southern District of New York or New York State Supreme Court, New York County. We recommend filing in the Southern District of New York to invoke federal jurisdiction and to take advantage of the district's robust commercial docket and experienced judiciary.

The enforceability of Section 18.2 is well-established under controlling law. In Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas, 571 U.S. 49 (2013), the Supreme Court held that mandatory forum-selection clauses are presumptively enforceable and should be "given controlling weight in all but the most exceptional cases." A mandatory forum-selection clause—one that uses language such as "shall be brought exclusively in"—requires litigation to be conducted in the designated forum unless the party opposing enforcement can demonstrate that the clause is invalid due to fraud, overreaching, or that enforcement would contravene a strong public policy. No such circumstances are present here. Both parties are sophisticated commercial entities that negotiated the forum-selection clause at arm's length, and enforcement of the clause implicates no public-policy concerns. Accordingly, Section 18.2 should be given controlling effect, ensuring that the Southern District of New York is the proper and exclusive forum for this dispute.

Subject-Matter Jurisdiction. Subject-matter jurisdiction in the Southern District of New York will be established under diversity of citizenship, 28 U.S.C. § 1332. WAL is a Virginia limited liability company whose members are citizens of Virginia—for diversity purposes, an LLC is a citizen of every state in which any of its members is a citizen, and all of WAL's members are Virginia citizens. HDDS is a Delaware corporation with its principal place of business in Maryland—making it a citizen of both Delaware and Maryland. There is therefore complete diversity of citizenship between the parties. The amount in controversy—$14,726,583, the amount of HDDS's indemnification demand—well exceeds the jurisdictional minimum of $75,000.

We note that federal question jurisdiction might also be available given the government-contract context of the underlying dispute, but diversity jurisdiction provides the cleaner and more straightforward jurisdictional basis and avoids any potential arguments regarding the scope of federal question jurisdiction over what is fundamentally a contract-interpretation dispute between private parties.

Personal Jurisdiction. Personal jurisdiction over HDDS in the Southern District of New York is established by consent through the forum-selection clause. By agreeing in Section 18.2 to litigate exclusively in the Southern District of New York, HDDS has consented to the personal jurisdiction of that court. Additionally, HDDS is likely subject to general personal jurisdiction in New York given its nationwide operations, substantial business contacts in New York, and the presence of HDDS's New York offices and operations. HDDS should have no basis to challenge personal jurisdiction.

C. Proposed Claims

We recommend filing the complaint as a single-count declaratory judgment action. The single-count structure is appropriate because the dispute centers on the interpretation and application of a single contractual provision—Section 11.4 of the Teaming Agreement—and a declaratory judgment is the most efficient and focused mechanism for resolving the parties' disagreement.

Count I — Declaratory Judgment would seek the following specific declarations from the Court:

1. No Indemnification Obligation. That Section 11.4 of the Teaming Agreement does not obligate WAL to indemnify HDDS for the cost overruns identified in the COPD dated August 1, 2022, because the conditions precedent to WAL's indemnification obligation—including the causation requirement of Section 11.4(b)—have not been satisfied.

2. Causation Limitation. That even if Section 11.4 applies to the cost overruns at issue, WAL's indemnification obligation extends only to overruns "caused by" WAL's acts or omissions, and the record evidence establishes that the WP-4 cost overruns were caused by factors external to WAL—including global titanium supply disruption, HDDS-supplied engineering specification errors, HDDS's failure to timely deliver government-furnished equipment, and HDDS-directed engineering change proposals—and not by WAL's acts or omissions.

3. Overbreadth of Demand. That HDDS's indemnification demand of $14,726,583 is overbroad because it includes $1,909,142 in cost overruns attributable to non-WP-4 work packages, for which WAL bears no contractual responsibility under the Teaming Agreement and for which WAL has no conceivable indemnification obligation.

This declaratory relief, if granted in full, would resolve the dispute comprehensively in WAL's favor. Even partial declaratory relief—such as a declaration that WAL has no liability for the non-WP-4 overruns—would significantly reduce WAL's exposure and position WAL favorably for any further negotiations or proceedings.

D. Timing

We recommend filing the declaratory judgment complaint promptly, with a target filing date in late November 2022. Expeditious filing is strategically important for several reasons.

First, filing before HDDS initiates its own action ensures that WAL controls the narrative and the forum. If HDDS files first—whether in the contractually designated forum or elsewhere—WAL would be placed in a defensive posture and could face procedural complications under the first-filed rule. While the mandatory forum-selection clause in Section 18.2 should prevent HDDS from successfully litigating in any forum other than the Southern District of New York or New York County Supreme Court, filing first avoids the expense and delay of litigating a transfer motion and ensures that WAL shapes the framing of the dispute from the outset.

Second, filing first allows WAL to present the dispute on WAL's terms—as a contract-interpretation question regarding the scope and applicability of the indemnity clause—rather than on HDDS's terms, which would frame the matter as a straightforward indemnification enforcement action. This framing advantage is significant, particularly in the context of a declaratory judgment action where the court's discretionary evaluation of the dispute's posture is a factor.

Third, the passage of time without resolution risks creating uncertainty and financial statement complications for WAL. Prompt initiation of judicial proceedings provides a structured path toward resolution and allows WAL's auditors and lenders to assess the dispute within a defined procedural framework.

We will prepare a draft verified complaint and supporting documents for your review within the next ten business days, with the goal of finalizing and filing by the end of November 2022.

IV. ASSESSMENT OF WAL'S PRINCIPAL DEFENSES

A. Defense One: Section 11.4(b) Causation Requirement Not Satisfied

The strongest and most consequential of WAL's defenses is that the causation requirement of Section 11.4(b) has not been—and cannot be—satisfied. Section 11.4(b) limits WAL's indemnification obligation to government claims that costs are "unallowable, unreasonable, or otherwise subject to disallowance, to the extent such claim is caused by Team Member's acts or omissions." This is a causation-limited indemnity, not a strict-liability backstop or an unconditional guarantee. The phrase "to the extent caused by" is a well-recognized contractual limitation that restricts the indemnitor's obligation to losses that are actually and proximately caused by the indemnitor's own conduct.

Under New York law, which governs the Teaming Agreement pursuant to Section 18.1, causation-limiting language in indemnification clauses is given full effect. See Levine v. Shell Oil Co., 28 N.Y.2d 205, 211 (1971) (holding that indemnification clauses are enforced in accordance with their terms and that language limiting indemnification to losses caused by the indemnitor's acts precludes recovery for losses caused by other factors). The "to the extent caused by" qualifier narrows the scope of the indemnitor's obligation and places the burden on the indemnitee—here, HDDS—to demonstrate that the claimed losses were in fact caused by the indemnitor's acts or omissions.

A category-by-category analysis of the WP-4 overruns identified in the COPD reveals that each overrun category has a plausible—and in some cases, compelling—causation defense:

Titanium Raw-Material Cost Escalation (approximately $4,200,000). The COPD identifies approximately $4.2 million in cost overruns attributable to escalation in the price of titanium raw materials. This cost increase was driven by a well-documented global titanium supply disruption that affected the entire aerospace and defense industry during the relevant period. The disruption was caused by a combination of geopolitical factors, pandemic-related supply-chain bottlenecks, and increased demand across multiple sectors—none of which were within WAL's control.

WAL did not control titanium raw-material pricing. The Teaming Agreement does not make WAL the guarantor of commodity prices, and WAL's role as the fabricator of titanium structural assemblies does not extend to managing or hedging the global titanium supply chain. The cost escalation was an external market phenomenon, not the product of WAL's acts or omissions. Moreover, WAL may be able to argue that the titanium price escalation constitutes a force-majeure event outside its control—depending on the terms of the Teaming Agreement's force-majeure provision (Section 14.1, which we are reviewing in detail)—further insulating WAL from indemnification liability for this category of overrun.

HDDS may counter-argue that WAL was responsible for procuring titanium raw materials for WP-4 and therefore bore the risk of price escalation. However, this argument conflates procurement responsibility with causation. The fact that WAL procured the titanium does not mean WAL caused the price increase. The causation inquiry under Section 11.4(b) requires HDDS to demonstrate that WAL's acts or omissions caused the cost overrun—not merely that the overrun occurred in connection with WAL's work package.

Rework Due to Non-Conforming Machining Tolerances (approximately $5,100,000). This is the largest single overrun category and the one presenting the most significant factual dispute. The COPD identifies approximately $5.1 million in costs attributable to rework necessitated by non-conforming machining tolerances—i.e., manufactured parts that failed to meet the specified dimensional tolerances and required rework or scrappage.

WAL's position is that the non-conformances resulted from errors and ambiguities in the engineering specifications provided to WAL by HDDS. As the Team Lead and the design authority for the ATAP program, HDDS was responsible for providing WAL with complete, accurate, and unambiguous engineering drawings, specifications, and technical data packages. WAL manufactured WP-4 components to the specifications provided by HDDS. If those specifications contained errors—such as tolerance call-outs that were internally inconsistent, references to superseded material specifications, or geometric dimensioning and tolerancing ("GD&T") annotations that were ambiguous—then the resulting non-conformances were caused by HDDS's specification errors, not by WAL's manufacturing processes.

This defense is factually intensive and will require detailed technical evidence. We will need to engage a manufacturing engineering expert to analyze the HDDS-supplied specifications, identify specific errors or ambiguities, and establish a causal link between the specification deficiencies and the machining non-conformances. WAL's internal quality assurance records, non-conformance reports, corrective action requests, and correspondence with HDDS's engineering team will be critical documentary evidence. We recommend that WAL immediately begin compiling and organizing these materials.

We acknowledge that HDDS will likely argue that any specification errors should have been identified by WAL during its incoming inspection and technical review processes, and that WAL's failure to identify and raise the errors constitutes WAL's own negligence. This is a fact-specific argument that will depend on the nature and discoverability of the specification errors, WAL's contractual obligations with respect to incoming specification review, and industry standards for the responsibilities of a subcontractor receiving engineering specifications from a prime contractor. On balance, we believe WAL's position is defensible—a subcontractor is generally entitled to rely on the specifications provided by the prime contractor, and the obligation to identify specification errors typically rests with the design authority—but this is the area of greatest factual vulnerability.

Schedule Delays and Idle-Labor Charges (approximately $2,300,000). The COPD identifies approximately $2.3 million in cost overruns attributable to schedule delays that resulted in idle-labor charges at WAL's manufacturing facility. WAL contends—and the available evidence supports—that these delays were caused by HDDS's late delivery of government-furnished equipment ("GFE") to WAL's Chantilly facility.

Under the Prime Contract, certain specialized tooling, fixtures, and test equipment were designated as GFE and were to be provided to WAL by HDDS (as the prime contractor and custodian of GFE). HDDS was responsible for the timely flow-down of GFE to WAL's facility in accordance with the integrated master schedule. Delays in GFE delivery—caused by HDDS's own procurement and logistics failures—disrupted WAL's production schedule, resulting in periods during which WAL's production workforce was idle or underutilized while awaiting the necessary GFE. The resulting idle-labor charges are a direct and foreseeable consequence of HDDS's failure to deliver GFE on schedule.

This causation defense is strong and should be relatively straightforward to establish with documentary evidence. WAL's production scheduling records, GFE delivery logs, HDDS delivery notices and delay correspondence, and idle-labor cost records should provide a clear evidentiary trail linking the HDDS GFE delays to the idle-labor charges. We recommend that Catherine Park's team compile these records promptly.

Engineering Change Proposal Implementation Costs (approximately $1,200,000). The COPD identifies approximately $1.2 million in cost overruns attributable to the implementation of engineering change proposals ("ECPs"). WAL's position is that the ECPs in question were originated by HDDS and/or the government—not by WAL—and were directed to WAL for implementation as directed changes. Under standard defense-contracting principles and the terms of the Teaming Agreement, cost growth resulting from directed changes is the responsibility of the party directing the change, not the party implementing it.

WAL implemented the directed ECPs in good faith and in accordance with the change-order process established under the Teaming Agreement. The resulting cost growth was a natural and foreseeable consequence of the directed changes and should not be treated as a cost overrun attributable to WAL's acts or omissions. Documentation of the ECP origination, direction, and implementation process—including formal change orders, ECP logs, and related correspondence—should be readily available and will support this defense.

Overall Strength of the Causation Defense. Taking all four overrun categories together, WAL has a strong factual basis for arguing that the WP-4 cost overruns were caused by factors external to WAL—global market conditions, HDDS specification errors, HDDS logistics failures, and HDDS/government-directed changes—rather than by WAL's own acts or omissions. The causation defense is WAL's strongest argument and, if successful, would eliminate WAL's indemnification obligation entirely (or reduce it to a de minimis amount if any residual overruns are found to be WAL-caused).

The principal risk associated with this defense is that it is factually intensive and will ultimately be resolved based on the evidentiary record—including expert testimony, documentary evidence, and potentially the testimony of HDDS and DCMA personnel. The outcome is inherently uncertain, as it depends on the trier of fact's assessment of competing causation narratives. Nevertheless, the evidence available to date strongly supports WAL's position. We recommend that WAL immediately begin the process of marshaling the relevant documentary and testimonial evidence to support this defense.

B. Defense Two: Overbreadth — Demand Includes Non-WP-4 Overruns ($1,909,142)

WAL's second principal defense is that HDDS's indemnification demand is overbroad on its face because it includes $1,909,142 in cost overruns attributable to work packages other than WP-4.

This defense is grounded in the plain text of Section 11.4. Both subsections (a) and (b) of Section 11.4 expressly limit WAL's indemnification obligation to losses arising out of or relating to "Team Member's Work Package." WAL's Work Package under the Teaming Agreement is WP-4—and only WP-4. WAL had no involvement in the performance of any other work package on the ATAP program. WAL did not perform, supervise, manage, or have any contractual responsibility for the work that generated the $1,909,142 in non-WP-4 overruns.

Under the most basic principles of contract interpretation, WAL cannot be required to indemnify HDDS for losses arising from work that WAL did not perform and for which WAL bears no contractual responsibility. The non-WP-4 overruns are, by definition, outside the scope of WAL's indemnification obligation under Section 11.4, regardless of how broadly one might read the indemnity clause.

We note that HDDS's September 9, 2022 demand letter makes no effort to justify the inclusion of the non-WP-4 overruns in the demand. It simply demands the full COPD amount without differentiation. This suggests either an overreach by HDDS or an oversight in the preparation of the demand—either way, it undermines the credibility of HDDS's position and reinforces the impression that the demand is not carefully tailored to the contractual terms.

Strength of Defense. This defense is very strong—likely the strongest and most easily established of WAL's three principal defenses. It is based squarely on the plain language of the contract and does not depend on disputed factual issues. It is an excellent candidate for early resolution through a motion for partial summary judgment, which could reduce WAL's maximum exposure from $14,726,583 to $12,817,441 at an early stage of the litigation.

Even under the broadest conceivable reading of Section 11.4—one that stretches the "arising out of or relating to" language to its maximum breadth—it is not possible to attribute the non-WP-4 overruns to WAL's Work Package. These overruns arose from entirely separate work performed by different parties on different components of the ATAP program.

C. Defense Three: DCMA Finding Is Preliminary — No Formal Disallowance

WAL's third defense is that the COPD is a preliminary determination that has not been finalized, and that WAL's indemnification obligation under Section 11.4(b) has not been triggered because there has been no formal disallowance of costs.

Under the Contract Disputes Act, 41 U.S.C. § 7103, a Contracting Officer's Final Decision is required before costs are formally disallowed and before the contractor's administrative appeal rights are triggered. The COPD issued by ACO Vickers on August 1, 2022 is, by its own terms, a "Preliminary Determination"—it is the ACO's initial assessment of cost overruns, issued for the purpose of inviting the contractor's response and initiating the administrative review process. It does not constitute a final agency action, and it is expressly subject to revision upon further review.

Section 11.4(b) is triggered by "any claim by the U.S. Government that costs incurred under Team Member's Work Package are unallowable, unreasonable, or otherwise subject to disallowance." WAL can argue that a preliminary determination does not constitute a "claim" within the meaning of this provision—or, at minimum, that WAL's indemnification obligation does not mature until the government's position is finalized through a COFD. This argument is supported by the general principle that contingent obligations do not ripen until the contingency occurs. Until the government makes a final determination that the costs are in fact unallowable or unreasonable, there is no crystallized "claim" for WAL to indemnify against.

HDDS filed a formal response and COFD request with DCMA on October 15, 2022. The administrative review is ongoing, and the outcome remains uncertain. The COFD could confirm, modify, increase, decrease, or entirely withdraw the COPD findings. Any of these outcomes would materially affect the quantum and viability of HDDS's indemnity demand.

Strength of Defense. This defense is of moderate strength. Its principal value lies in timing and litigation strategy—it supports an argument for deferring the resolution of the indemnity dispute until the DCMA administrative review is complete, and it provides a basis for seeking a stay of the declaratory judgment action pending the COFD. The primary-jurisdiction doctrine further supports this approach, as the DCMA is the agency with specialized expertise in government contract cost-allowability determinations, and the court should defer to the DCMA's final determination before adjudicating the scope of the private indemnification obligation.

However, we recognize that this defense may defer rather than eliminate WAL's potential liability. If the COFD ultimately confirms the COPD findings—or confirms them in substantial part—HDDS will renew its indemnity demand and WAL's causation-based defenses will become the dispositive issue. Nevertheless, the passage of time is strategically valuable to WAL, as it allows the DCMA review process to narrow the dispute and potentially reduce WAL's exposure.

V. RISK ASSESSMENT

A. HDDS's Likely Counterclaim

HDDS will almost certainly respond to WAL's declaratory judgment action by filing a counterclaim seeking affirmative relief. The counterclaim will likely include a claim for contractual indemnification under Section 11.4 of the Teaming Agreement, seeking the full $14,726,583 (or, more defensibly, the $12,817,441 WP-4 portion). HDDS will frame the indemnity obligation as broad, arguing that WAL—as the performing entity for WP-4—bears responsibility for all cost overruns associated with that work package.

HDDS will also likely seek attorneys' fees under Section 11.6, which provides that the prevailing party in any dispute arising under the indemnification provisions of Article 11 is entitled to recover its reasonable attorneys' fees and costs. This fee-shifting provision is bilateral and applies to both parties. If HDDS prevails on its indemnification claim, it will seek to recover its attorneys' fees from WAL. Conversely, if WAL prevails on the declaratory judgment action, WAL will be entitled to recover its attorneys' fees from HDDS.

HDDS's counterclaim will argue that the "to the extent caused by" language in Section 11.4(b) is satisfied because WAL was the entity performing WP-4 and therefore WAL's "acts or omissions" in performing WP-4 are, by definition, the cause of any cost overruns on that work package. This is a circular argument that conflates the performance of work with causation of cost overruns, but it is the most straightforward reading that HDDS can advance, and it will need to be rebutted with detailed factual evidence regarding the actual root causes of the overruns.

We should anticipate and prepare for HDDS's counterclaim from the outset. Our complaint should be drafted with the counterclaim in mind, and our factual allegations should be detailed enough to support WAL's affirmative defenses to the anticipated counterclaim while preserving flexibility for discovery.

B. Exposure Analysis

The following table summarizes WAL's potential financial exposure across a range of scenarios:

The maximum theoretical exposure under the Teaming Agreement is $88,992,000, representing the Section 11.5 aggregate liability cap of 120% of the WP-4 value. However, no claim currently approaches this level, and this cap is relevant only as an absolute contractual ceiling.

HDDS's claimed amount is $14,726,583—the full COPD amount. As discussed above, $1,909,142 of this amount relates to non-WP-4 work packages and should not survive scrutiny under the overbreadth defense. If WAL prevails on the non-WP-4 defense—as we expect—the maximum amount at risk drops to $12,817,441.

The realistic exposure range is $0 to $12,817,441, depending on the outcome of the causation analysis. The lower end of this range assumes that WAL prevails fully on its causation defense—i.e., the court finds that none of the WP-4 overruns were "caused by" WAL's acts or omissions. The upper end assumes that WAL fails on all causation defenses and is found liable for the full WP-4 portion. In our preliminary assessment, WAL has credible causation defenses across all four overrun categories, and a complete defense is a realistic possibility—but the factually intensive nature of the causation inquiry introduces meaningful uncertainty.

Best case: A full declaratory judgment in WAL's favor—finding no indemnification obligation—would result in zero liability for WAL and would entitle WAL to recover its attorneys' fees from HDDS under Section 11.6.

Worst case: If WAL is found liable for the full WP-4 portion ($12,817,441) and HDDS prevails on its fee-shifting claim, WAL could face total exposure of approximately $13.5–$14 million (including HDDS's estimated attorneys' fees). Liability for the non-WP-4 overruns ($1,909,142) remains unlikely even in the worst case.

Attorneys' Fees. The bilateral fee-shifting provision in Section 11.6 is a significant factor in the risk calculus. If WAL prevails, it can recover its litigation costs—potentially $1.8–$2.4 million, based on our estimated budget—from HDDS. If HDDS prevails, it can recover its fees from WAL—potentially a comparable or even larger amount, given VTK's billing rates. This provision increases the stakes for both sides and should factor into any settlement discussions.

C. Impact of DCMA Administrative Review

The outcome of the DCMA administrative review—and specifically the Contracting Officer's Final Decision when issued—will have a significant impact on the declaratory judgment action and on the parties' respective litigation positions.

If the COFD confirms the COPD in full: This would strengthen HDDS's position that there exists a government "claim" triggering Section 11.4(b). However, even a confirming COFD would not resolve the causation question—WAL's causation defenses would remain fully available, and the central issue would continue to be whether the overruns were "caused by" WAL's acts or omissions. A confirming COFD would, however, eliminate WAL's ripeness/prematurity defense.

If the COFD reduces the WP-4 allocation or total overrun amount: This would directly reduce the quantum of HDDS's indemnity demand and proportionally reduce WAL's potential exposure. A significant reduction could also create opportunities for settlement.

If the COFD finds no disallowable costs: This would effectively moot HDDS's entire indemnification demand. If the government ultimately determines that the costs at issue are allowable and reasonable, there would be no government "claim" to trigger Section 11.4(b), and HDDS would have no basis for an indemnity demand under that provision.

Given the potential for the COFD to materially affect—or entirely resolve—the private indemnification dispute, we recommend that WAL consider seeking a stay of the declaratory judgment action pending the issuance of the COFD. A stay would be strategically attractive for several reasons: (1) it defers substantial litigation costs during a period when the underlying factual predicate for the indemnity demand may shift; (2) the COFD may narrow the scope of the dispute or eliminate it entirely; and (3) the primary-jurisdiction doctrine supports deference to DCMA on the cost-allowability questions that underlie the indemnity dispute, as DCMA has specialized expertise in evaluating government-contract cost issues that exceeds the expertise of a generalist federal court.

We note that Ashford & Reeves LLP—specifically Harold Reeves and Natalie Cheng—is advising WAL on the regulatory and administrative aspects of the DCMA review, including the preparation of WAL's input to HDDS's COFD response. Close coordination between Calderwood & Harkness and Ashford & Reeves will be essential to ensure that WAL's litigation strategy and administrative strategy are aligned and mutually reinforcing.

D. Governing Law Considerations

The Teaming Agreement is governed by New York law pursuant to Section 18.1, without regard to conflicts-of-law principles. Several features of New York law are relevant to the dispute.

Indemnity Clause Enforcement. New York courts generally enforce indemnity clauses as written, applying standard principles of contract interpretation. Clear and unambiguous contractual language is given effect according to its plain meaning, without resort to extrinsic evidence. See W.W.W. Associates, Inc. v. Giancontieri, 77 N.Y.2d 157, 162 (1990). Where indemnity language is ambiguous, New York courts construe the clause against the indemnitee—i.e., the party seeking indemnification—consistent with the general principle that indemnity provisions are strictly construed. See Hooper Associates, Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 491 (1989).

Causation-Limiting Language. New York courts enforce causation-limiting language in indemnity clauses. Where an indemnity clause contains a "to the extent caused by" or similar qualifier, the indemnitee bears the burden of demonstrating that the losses claimed fall within the scope of the indemnity, including the required causation nexus. This is favorable to WAL, as it places the onus on HDDS to prove that the WP-4 overruns were caused by WAL's acts or omissions—a burden that HDDS may struggle to meet on the current evidentiary record.

Anti-Indemnification Statutes. New York's anti-indemnification statutes, such as N.Y. General Obligations Law § 5-322.1 (which voids certain indemnification provisions in construction contracts that purport to indemnify a party against its own negligence), do not apply to aerospace and defense teaming agreements. Section 5-322.1 is limited by its terms to contracts relating to the construction, alteration, repair, or maintenance of buildings, structures, and other improvements to real property. The ATAP Teaming Agreement is a defense-industry teaming arrangement, not a construction contract, and § 5-322.1 has no application here.

Choice-of-Law Issues. We do not anticipate any choice-of-law challenges. Both parties expressly consented to the application of New York law in Section 18.1, and the parties' choice of law will be respected under both New York and federal choice-of-law principles so long as the chosen state has a reasonable relationship to the transaction—a requirement easily satisfied given the New York forum-selection clause and the parties' agreement to resolve disputes in New York.

VI. COLLATERAL CONSIDERATIONS

A. Insurance Coverage

WAL tendered HDDS's September 9, 2022 indemnification demand to Meridian Surety & Insurance Group ("Meridian") on September 22, 2022, seeking coverage and a defense under WAL's applicable insurance policies.

The potentially relevant policies are:

• Directors & Officers Liability Policy — Policy No. MSI-DO-2022-07814; aggregate limit of liability $10,000,000; retention $250,000.

• Commercial General Liability Policy — Policy No. MSI-CGL-2021-33291; aggregate limit of liability $25,000,000; self-insured retention $500,000.

On November 1, 2022, Meridian issued a reservation-of-rights letter in response to WAL's tender. In the reservation letter, Meridian reserves its rights to deny coverage based on two policy exclusions: (1) the contractual-liability exclusion (Exclusion (b) on the CGL form), which excludes coverage for liability assumed by the insured under a contract or agreement, and (2) the government-contract exclusion (Endorsement GC-04), which excludes coverage for losses arising from or relating to the performance of government contracts or subcontracts. Meridian is not currently providing a defense or funding any aspect of WAL's response to the HDDS demand.

The coverage prospects are uncertain. The contractual-liability exclusion is a standard feature of CGL policies and is specifically designed to exclude coverage for liabilities that the insured voluntarily assumes through contractual indemnification provisions—precisely the type of liability at issue here. The government-contract exclusion in Endorsement GC-04 presents an additional barrier that may independently preclude coverage regardless of the contractual-liability exclusion. Both exclusions present significant challenges to WAL's coverage position.

Nevertheless, we recommend that WAL continue to engage with Meridian and press for a definitive coverage determination. The reservation-of-rights letter is not a denial, and there may be arguments available under the specific policy language that could overcome or narrow the application of the exclusions. A separate insurance coverage analysis memorandum is being prepared by Simone Laroche of Calderwood & Harkness and will be provided under separate cover.

B. Lender Notification

WAL maintains a $75 million senior secured revolving credit facility with Ridgeline National Bank, N.A. (the "Credit Facility"), governed by a credit agreement dated March 15, 2021. Section 6.07(b) of the credit agreement contains a litigation-disclosure covenant that requires WAL to provide written notice to Ridgeline of any claims, actions, or proceedings threatened against or affecting WAL that reasonably could be expected to result in liability exceeding $5,000,000, within fifteen (15) business days of the borrower becoming aware of such claim.

WAL timely delivered the required notice to David Kreutz, Senior Vice President, Defense & Aerospace Lending, Ridgeline National Bank, on September 28, 2022—within the fifteen-business-day window following receipt of HDDS's September 9, 2022 demand. The notice described the nature of the HDDS demand, the underlying COPD, and WAL's preliminary assessment of the dispute.

Supplemental notice to Ridgeline will be required upon the filing of the declaratory judgment action. We recommend that Gregory Poole coordinate the supplemental notice with David Kreutz to ensure that Ridgeline is kept informed of material developments in the litigation as they occur.

As of the date of this memorandum, WAL has approximately $31.2 million drawn on the Credit Facility. No event of default exists, and the Credit Facility remains fully available. Compliance with the Credit Facility covenants—including the litigation-disclosure covenant—is important to maintaining WAL's liquidity and operational stability during the pendency of the dispute. Any failure to comply with the notification requirement could, in the worst case, trigger a technical event of default, although we consider this risk to be remote given WAL's timely initial notice.

C. Financial Statement Impact

WAL's outside auditor, Pinnacle Advisory Partners LLC ("Pinnacle"), will need to evaluate the HDDS indemnity contingency under Accounting Standards Codification ("ASC") 450 (formerly FAS 5)—Contingencies—in connection with the fiscal year 2022 audit. Thomas Brennan, CPA, is the engagement partner at Pinnacle responsible for the WAL audit.

Under ASC 450, a loss contingency must be accrued (i.e., recognized as a liability on the balance sheet) if it is "probable" that a loss has been incurred and the amount of the loss can be reasonably estimated. If a loss is "reasonably possible" but not "probable," disclosure in the financial statement footnotes is required, but accrual is not. If a loss is "remote," neither accrual nor disclosure is required.

Our preliminary assessment is that the HDDS indemnity contingency is "reasonably possible" rather than "probable" given the strength of W

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT — PREPARED IN ANTICIPATION OF LITIGATION DO NOT DISTRIBUTE WITHOUT PRIOR AUTHORIZATION OF COUNSEL
CALDERWOOD & HARKNESS LLP 600 Lexington Avenue, 28th Floor New York, NY 10022
November 7, 2022
MEMORANDUM
TO: Marcus J. Whitmore, Chief Executive Officer & Managing Member, Whitmore Aerospace LLC Gregory Poole, General Counsel & Vice President, Legal Affairs, Whitmore Aerospace LLC
FROM: Priya Anand, Partner, Calderwood & Harkness LLP
RE: Preliminary Case Assessment — Indemnity Dispute with Hargrove-Dalton Defense Systems, Inc. Arising Under Teaming Agreement Dated June 12, 2019
MATTER REF: Whitmore Aerospace LLC — HDDS Indemnity Dispute (C&H Matter No. 1019-00005)
I. EXECUTIVE SUMMARY
This memorandum provides a preliminary assessment of the legal position of Whitmore Aerospace LLC ("WAL") following the September 9, 2022 indemnification demand served upon WAL by Hargrove-Dalton Defense Systems, Inc. ("HDDS") in the amount of $14,726,583, arising out of cost overruns identified in a Contracting Officer's Preliminary Determination ("COPD") issued by the Defense Contract Management Agency ("DCMA") in connection with the Advanced Tactical Airframe Program ("ATAP"). This memorandum evaluates WAL's principal defenses and recommends the filing of a declaratory judgment action in the United States District Court for the Southern District of New York.
On August 1, 2022, Administrative Contracting Officer Lt. Col. Sandra M. Vickers, USAF, DCMA Northern Virginia, issued the COPD identifying $14,726,583 in total cost overruns on the ATAP program under Prime Contract No. FA8620-19-C-0337. The COPD allocates $12,817,441—approximately 87%—to Work Package 4 ("WP-4"), the titanium structural assembly fabrication work assigned to WAL under the Teaming Agreement between HDDS and WAL dated June 12, 2019. HDDS, as the prime contractor, has demanded that WAL indemnify HDDS for the entirety of the COPD amount—$14,726,583—pursuant to Section 11.4 of the Teaming Agreement, notwithstanding that nearly $1.9 million of the total is attributable to non-WP-4 work packages that were never part of WAL's contractual scope.
Our bottom-line assessment is that WAL has strong defenses on multiple grounds—causation, scope, and ripeness—but faces meaningful litigation risk given the breadth of the indemnity clause in Section 11.4, the magnitude of the claimed overruns, and the factually intensive nature of the causation inquiry. Specifically:
• The causation-limiting language in Section 11.4(b) ("to the extent such claim is caused by Team Member's acts or omissions") provides a robust defense because the evidence available to date indicates that the WP-4 overruns were caused principally by external factors—global titanium supply disruption, HDDS-supplied specification errors, late government-furnished equipment delivery, and HDDS-directed engineering change proposals—rather than by WAL's own acts or omissions.
• The inclusion of $1,909,142 in non-WP-4 overruns in HDDS's demand is plainly overbroad on the face of the contract and should be easily resolved in WAL's favor.
• The COPD is a preliminary determination, not a Contracting Officer's Final Decision ("COFD"), and does not constitute a formal disallowance of costs, raising serious questions about whether HDDS's indemnity demand is ripe.
We recommend that WAL file a declaratory judgment action in the United States District Court for the Southern District of New York pursuant to 28 U.S.C. §§ 2201–2202, seeking a judicial declaration that Section 11.4 of the Teaming Agreement does not obligate WAL to indemnify HDDS for the cost overruns identified in the COPD. Filing promptly—with a target date in late November 2022—will allow WAL to seize the tactical initiative, control the narrative, and lock in the contractually designated New York forum before HDDS initiates its own action in a potentially less favorable jurisdiction.
The parties have already exhausted the pre-litigation dispute resolution steps contemplated by the Teaming Agreement. Senior executive negotiations were held on September 30, 2022 and October 14, 2022, between Marcus J. Whitmore (WAL) and William Fong, SVP Contracts & Procurement (HDDS), without resolution. WAL proposed non-binding mediation on October 21, 2022 under Section 18.3 of the Teaming Agreement, but HDDS declined on October 28, 2022, taking the position that the mediation clause is permissive ("may") rather than mandatory. While we believe HDDS's interpretation of the mediation clause is correct based on the plain text, the refusal to mediate underscores that the dispute-resolution sequence contemplated by Section 18.3—negotiation followed by optional mediation followed by litigation—has been substantially complied with, and the path to judicial action is clear.
The balance of this memorandum provides a detailed factual background, outlines the proposed declaratory judgment strategy, assesses WAL's principal defenses, quantifies WAL's litigation risk exposure, and identifies collateral considerations relating to insurance, lender covenants, financial reporting, and the government contracting relationship.
II. BACKGROUND
A. The Parties
Whitmore Aerospace LLC. WAL is a Virginia limited liability company with its principal place of business at 4200 Commerce Park Drive, Suite 600, Chantilly, Virginia 20151. Founded in 2006 by Marcus J. Whitmore and Elaine Whitmore, WAL is an aerospace and defense manufacturer specializing in precision-machined turbine components, integrated propulsion sub-assemblies, and structural airframe parts. WAL's products are used across a range of military and commercial aerospace platforms, and the company has established itself as a leading supplier of high-tolerance titanium and specialty alloy components for defense applications.
WAL generated approximately $287 million in revenue in fiscal year 2022 and employs approximately 1,400 people across its primary manufacturing facility in Chantilly, Virginia, and a secondary facility in Huntsville, Alabama. WAL holds an active SECRET-level facility security clearance and is subject to contract administration by DCMA Northern Virginia. Marcus J. Whitmore serves as Chief Executive Officer and Managing Member. Elaine Whitmore serves as Chief Financial Officer. Gregory Poole serves as General Counsel and Vice President, Legal Affairs. Catherine Soo-Hyun Park serves as Vice President, Government Contracts & Compliance.
Hargrove-Dalton Defense Systems, Inc. HDDS is a Delaware corporation with its principal place of business at 1100 Garrison Boulevard, Suite 2200, Bethesda, Maryland 20817. HDDS is a major prime defense contractor specializing in systems integration, avionics, and airframe manufacturing for the United States Department of Defense and allied foreign governments. The company generated approximately $3.4 billion in revenue in fiscal year 2022 and employs approximately 12,500 people across multiple domestic and international locations. HDDS is a publicly traded company listed on the New York Stock Exchange.
Key HDDS personnel relevant to this matter include: Jonathan R. Hargrove, Chairman of the Board of Directors; Diana Castellano, President & Chief Executive Officer; William Fong, Senior Vice President, Contracts & Procurement; and Renee Aldrich, Vice President & Associate General Counsel (Litigation).
HDDS is represented in this matter by Voss, Trager & Kendall LLP ("VTK"), located at 900 17th Street NW, Suite 800, Washington, D.C. 20006. The lead partner on the matter is Leonard Trager, with support from senior associate Megan Forsythe. VTK is a well-regarded defense contracting litigation firm with substantial experience in government contracts disputes and subcontractor indemnification matters.
B. The Prime Contract and the ATAP Program
The dispute arises under Prime Contract No. FA8620-19-C-0337—the Advanced Tactical Airframe Program, commonly referred to by its program acronym "ATAP." The contracting agency is the United States Air Force, Air Force Life Cycle Management Center ("AFLCMC"), located at Wright-Patterson Air Force Base, Ohio. The Program Executive Officer is Col. Brian T. Matsuda, USAF.
The ATAP program concerns the design, development, and initial low-rate production of advanced titanium-composite hybrid airframe structures for next-generation tactical aircraft. The program is classified at the SECRET level and represents a significant investment by the Air Force in advanced airframe technologies intended to reduce weight, improve structural integrity, and enhance survivability for the next generation of tactical fighter and strike aircraft.
The Prime Contract is structured as a cost-plus-incentive-fee ("CPIF") contract with the following financial parameters:
Under the CPIF structure, the government and the contractor share cost risk according to the share ratios specified above. For cost overruns exceeding the target cost, the government absorbs 70% and the contractor absorbs 30%. The ceiling price of $470,000,000 establishes the maximum amount the government will pay; any costs exceeding the ceiling are borne entirely by the contractor. This cost-sharing structure is relevant to the dispute because it means that HDDS's actual financial exposure on cost overruns is limited to its 30% contractor share—yet HDDS has demanded that WAL indemnify it for the full amount of the overruns identified in the COPD without any apparent adjustment for the government's cost-sharing obligation.
HDDS is the prime contractor under the ATAP program and bears overall responsibility for program management, systems integration, and delivery of the completed airframe structures to the Air Force.
C. The Teaming Agreement
WAL's participation in the ATAP program is governed by a Teaming Agreement executed on June 12, 2019, between HDDS (designated as the "Team Lead") and WAL (designated as a "Team Member"). The Teaming Agreement defines WAL's scope of work, compensation structure, and the rights and obligations of the parties with respect to each other and to the Prime Contract.
WAL's Scope of Work. Under the Teaming Agreement, WAL is responsible for the fabrication and delivery of titanium structural assemblies under Work Package 4 ("WP-4"). WP-4 encompasses three principal deliverables: the wing-box substructure, center fuselage longerons, and bulkhead fittings. These are high-precision titanium components that must be manufactured to exacting tolerances and subjected to rigorous quality assurance protocols before delivery to HDDS for integration into the overall airframe assembly.
WAL's Share of Contract Value. WAL's share of the target contract value is 18%, calculated as $412,000,000 × 0.18 = $74,160,000. This figure represents the baseline value against which several contractual provisions—including the liability cap discussed below—are calculated.
Key Contractual Provisions. The following provisions of the Teaming Agreement are central to the dispute:
Section 11.4 (Indemnification). Section 11.4 is the core provision at issue. It provides, in pertinent part:
"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."
Two features of Section 11.4 warrant emphasis. First, the indemnity is structured as a two-pronged obligation: subsection (a) covers negligence, willful misconduct, and material breach, while subsection (b) addresses government claims regarding cost unallowability or unreasonableness. Second—and critically for WAL's defense—subsection (b) contains an express causation qualifier: "to the extent such claim is caused by Team Member's acts or omissions." This language limits WAL's indemnification obligation to those government claims that are caused by WAL's own conduct, as distinguished from claims caused by HDDS, the government, third parties, or force-majeure events.
Section 11.5 (Limitation of Liability). Section 11.5 establishes an aggregate liability cap on WAL's total indemnification and other liability obligations under the Teaming Agreement. The cap is set at 120% of the WP-4 value, calculated as $74,160,000 × 1.20 = $88,992,000. While no present claim approaches this cap, the provision serves as an important contractual backstop limiting WAL's maximum theoretical exposure.
Section 11.6 (Attorneys' Fees). Section 11.6 provides that the prevailing party in any dispute arising under the indemnification provisions of Article 11 is entitled to recover its reasonable attorneys' fees and costs from the non-prevailing party. This is a bilateral fee-shifting provision that increases the financial stakes for both parties—it incentivizes meritorious claims and penalizes unfounded ones.
Section 18.1 (Governing Law). The Teaming Agreement is governed by the laws of the State of New York, without regard to conflicts-of-law principles. This choice-of-law provision is significant because New York law will govern the interpretation of Section 11.4 and the parties' respective indemnification obligations.
Section 18.2 (Forum Selection). Section 18.2 contains a mandatory forum-selection clause providing that any litigation arising under or relating to the Teaming Agreement "shall be brought exclusively in" the United States District Court for the Southern District of New York or New York State Supreme Court, New York County. The use of the mandatory "shall be brought exclusively in" formulation, as opposed to a permissive "may be brought in" formulation, renders this a mandatory forum-selection clause that will be given presumptive enforceability under both federal and New York law.
Section 18.3 (Dispute Resolution). Section 18.3 establishes a multi-step dispute-resolution sequence. The parties are required to engage in a 30-day period of senior executive negotiation as the first step. If the negotiation does not resolve the dispute, the parties "may" (not "shall") submit the dispute to non-binding mediation. If the dispute is not resolved through mediation—or if the parties elect not to mediate—either party may initiate litigation in accordance with Section 18.2. Notably, Section 18.3 does not contain a mandatory arbitration provision; the ultimate dispute-resolution mechanism is litigation.
D. The DCMA Cost-Overrun Determination
On August 1, 2022, Administrative Contracting Officer Lt. Col. Sandra M. Vickers, USAF, DCMA Northern Virginia, issued a Contracting Officer's Preliminary Determination identifying $14,726,583 in total cost overruns on the ATAP program. The COPD was issued pursuant to DCMA's ongoing administration and audit responsibilities under Prime Contract No. FA8620-19-C-0337.
The COPD allocates the total overrun amount between WAL's WP-4 work package and other program work packages as follows:
The COPD narrative identifies four root-cause categories for the WP-4 overruns, with approximate dollar allocations as follows:
Each of these root-cause categories is directly relevant to WAL's causation defense, as discussed in detail in Section IV.A below. Importantly, the COPD narrative attributes the overruns to a combination of factors—some internal to WAL's operations, some external to WAL and attributable to HDDS or the broader supply-chain environment—but does not clearly assign fault or causation to any single party.
The COPD is a preliminary determination. It is critical to understand that the COPD does not constitute a final agency decision. It is not a Contracting Officer's Final Decision under the Contract Disputes Act ("CDA"), 41 U.S.C. § 7103. Rather, it represents the ACO's initial assessment of cost overruns and is subject to further administrative review, revision, or reversal. The COPD invites the contractor (HDDS) to submit a formal response, and the administrative review process contemplates the possibility that the preliminary findings may be modified, reduced, or withdrawn entirely upon further analysis.
HDDS filed a formal response to the COPD and a request for a Contracting Officer's Final Decision with DCMA on October 15, 2022. As of the date of this memorandum, the administrative review remains ongoing, and no COFD has been issued. The ultimate disposition of the DCMA review—including the final determination of the amount and allocation of any disallowable costs—remains uncertain and could materially affect both the quantum of HDDS's indemnity demand and the legal viability of that demand under Section 11.4.
E. HDDS's Indemnification Demand
On September 9, 2022, HDDS served upon WAL a formal indemnification demand letter, signed by Renee Aldrich, VP & Associate General Counsel (Litigation), demanding that WAL indemnify HDDS in the amount of $14,726,583 pursuant to Section 11.4 of the Teaming Agreement. HDDS asserts that all cost overruns identified in the COPD are WAL's responsibility under the indemnification provision and demands payment within sixty (60) days.
Two aspects of HDDS's demand are noteworthy and legally significant. First, HDDS demands indemnification for the full $14,726,583 COPD amount—not merely the $12,817,441 allocated to WP-4. This means HDDS seeks to recover from WAL the $1,909,142 attributable to non-WP-4 work packages—work packages that were never part of WAL's contractual scope and that were performed by HDDS itself or by other subcontractors. There is no colorable basis under the Teaming Agreement for requiring WAL to indemnify HDDS for overruns on work that WAL did not perform and for which WAL had no contractual responsibility.
Second, HDDS's demand is based on the COPD—a preliminary determination—rather than a COFD. As discussed above, the COPD does not constitute a final disallowance of costs, and the administrative review process remains pending. HDDS's demand thus seeks to trigger an indemnification obligation based on a preliminary agency finding that is expressly subject to revision.
F. Pre-Litigation Dispute Resolution
Following receipt of the September 9, 2022 indemnification demand, the parties engaged in the dispute-resolution process contemplated by Section 18.3 of the Teaming Agreement.
Senior Executive Negotiations. Senior executive negotiations were held on two occasions: September 30, 2022 and October 14, 2022. The negotiations were conducted between Marcus J. Whitmore, CEO of WAL, and William Fong, SVP Contracts & Procurement of HDDS. During the September 30 meeting, WAL outlined its position that the indemnity demand was overbroad, premature, and unsupported by the causation analysis required under Section 11.4(b). HDDS maintained its demand in full. At the October 14 follow-up meeting, the parties remained at an impasse, with HDDS declining to reduce its demand or to agree to defer the matter pending the COFD.
Proposed Mediation. On October 21, 2022, WAL proposed non-binding mediation of the dispute pursuant to Section 18.3 of the Teaming Agreement. WAL suggested the engagement of a neutral mediator with defense-contracting industry experience and proposed several potential mediators for HDDS's consideration.
On October 28, 2022, HDDS declined WAL's mediation proposal. In its response, HDDS took the position that the mediation provision in Section 18.3 is permissive ("may") rather than mandatory, and that HDDS is not obligated to participate in mediation prior to litigation. We believe HDDS's interpretation of the mediation clause is correct based on the plain text of Section 18.3, which states that the parties "may submit the dispute to non-binding mediation," employing the permissive "may" rather than the mandatory "shall." However, HDDS's refusal to mediate—and its continued insistence on the full $14,726,583 demand without any willingness to negotiate in good faith—could be contested as a failure to engage meaningfully in the dispute-resolution process and may be relevant to the court's exercise of discretion in entertaining the declaratory judgment action.
In any event, the dispute-resolution sequence contemplated by Section 18.3—negotiation (completed), optional mediation (proposed and declined), and litigation—has been substantially complied with. There is no contractual impediment to initiating judicial proceedings.
III. DECLARATORY JUDGMENT ACTION STRATEGY
A. Statutory Basis
We recommend that WAL initiate a declaratory judgment action pursuant to the Declaratory Judgment Act, 28 U.S.C. §§ 2201–2202. Section 2201 authorizes federal courts, "[i]n a case of actual controversy within its jurisdiction," to "declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought." Section 2202 provides that further necessary or proper relief based on a declaratory judgment "may be granted, after reasonable notice and hearing, against any adverse party whose rights have been determined by such judgment."
The threshold requirement for a declaratory judgment action is the existence of an "actual controversy" between the parties that is "of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." MedImmune, Inc. v. Pemberton Partners LLC, 549 U.S. 118, 127 (2007). Here, the existence of an actual, justiciable controversy is beyond dispute. HDDS has served a formal, specific indemnification demand of $14,726,583 upon WAL. The parties have engaged in and exhausted the contractual dispute-resolution process without reaching agreement. HDDS has declined to mediate. The parties' positions are firmly entrenched and diametrically opposed—HDDS demands full indemnification, while WAL contends that it has no indemnification obligation under Section 11.4 as properly construed. This is precisely the type of concrete, present dispute that the Declaratory Judgment Act is designed to address.
While the decision to entertain a declaratory judgment action is discretionary with the district court, several factors strongly favor the exercise of jurisdiction here. First, the forum-selection clause in Section 18.2 designates the Southern District of New York as the agreed-upon forum, making it an appropriate and natural venue for resolving the parties' contract dispute. Second, the indemnity demand is concrete, specific, and substantial in amount, presenting no risk of the court issuing an advisory opinion. Third, both parties need clarity regarding their respective contractual obligations—particularly in light of the pending DCMA administrative review, which could take months or years to resolve—so that they can plan accordingly and assess their financial positions. The existence of these factors, taken together, supports the court's exercise of discretionary jurisdiction over the declaratory judgment action.
B. Forum and Jurisdiction
Forum Selection. The Teaming Agreement's forum-selection clause, Section 18.2, provides that any litigation arising under or relating to the Agreement "shall be brought exclusively in" the United States District Court for the Southern District of New York or New York State Supreme Court, New York County. We recommend filing in the Southern District of New York to invoke federal jurisdiction and to take advantage of the district's robust commercial docket and experienced judiciary.
The enforceability of Section 18.2 is well-established under controlling law. In Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas, 571 U.S. 49 (2013), the Supreme Court held that mandatory forum-selection clauses are presumptively enforceable and should be "given controlling weight in all but the most exceptional cases." A mandatory forum-selection clause—one that uses language such as "shall be brought exclusively in"—requires litigation to be conducted in the designated forum unless the party opposing enforcement can demonstrate that the clause is invalid due to fraud, overreaching, or that enforcement would contravene a strong public policy. No such circumstances are present here. Both parties are sophisticated commercial entities that negotiated the forum-selection clause at arm's length, and enforcement of the clause implicates no public-policy concerns. Accordingly, Section 18.2 should be given controlling effect, ensuring that the Southern District of New York is the proper and exclusive forum for this dispute.
Subject-Matter Jurisdiction. Subject-matter jurisdiction in the Southern District of New York will be established under diversity of citizenship, 28 U.S.C. § 1332. WAL is a Virginia limited liability company whose members are citizens of Virginia—for diversity purposes, an LLC is a citizen of every state in which any of its members is a citizen, and all of WAL's members are Virginia citizens. HDDS is a Delaware corporation with its principal place of business in Maryland—making it a citizen of both Delaware and Maryland. There is therefore complete diversity of citizenship between the parties. The amount in controversy—$14,726,583, the amount of HDDS's indemnification demand—well exceeds the jurisdictional minimum of $75,000.
We note that federal question jurisdiction might also be available given the government-contract context of the underlying dispute, but diversity jurisdiction provides the cleaner and more straightforward jurisdictional basis and avoids any potential arguments regarding the scope of federal question jurisdiction over what is fundamentally a contract-interpretation dispute between private parties.
Personal Jurisdiction. Personal jurisdiction over HDDS in the Southern District of New York is established by consent through the forum-selection clause. By agreeing in Section 18.2 to litigate exclusively in the Southern District of New York, HDDS has consented to the personal jurisdiction of that court. Additionally, HDDS is likely subject to general personal jurisdiction in New York given its nationwide operations, substantial business contacts in New York, and the presence of HDDS's New York offices and operations. HDDS should have no basis to challenge personal jurisdiction.
C. Proposed Claims
We recommend filing the complaint as a single-count declaratory judgment action. The single-count structure is appropriate because the dispute centers on the interpretation and application of a single contractual provision—Section 11.4 of the Teaming Agreement—and a declaratory judgment is the most efficient and focused mechanism for resolving the parties' disagreement.
Count I — Declaratory Judgment would seek the following specific declarations from the Court:
1. No Indemnification Obligation. That Section 11.4 of the Teaming Agreement does not obligate WAL to indemnify HDDS for the cost overruns identified in the COPD dated August 1, 2022, because the conditions precedent to WAL's indemnification obligation—including the causation requirement of Section 11.4(b)—have not been satisfied.
2. Causation Limitation. That even if Section 11.4 applies to the cost overruns at issue, WAL's indemnification obligation extends only to overruns "caused by" WAL's acts or omissions, and the record evidence establishes that the WP-4 cost overruns were caused by factors external to WAL—including global titanium supply disruption, HDDS-supplied engineering specification errors, HDDS's failure to timely deliver government-furnished equipment, and HDDS-directed engineering change proposals—and not by WAL's acts or omissions.
3. Overbreadth of Demand. That HDDS's indemnification demand of $14,726,583 is overbroad because it includes $1,909,142 in cost overruns attributable to non-WP-4 work packages, for which WAL bears no contractual responsibility under the Teaming Agreement and for which WAL has no conceivable indemnification obligation.
This declaratory relief, if granted in full, would resolve the dispute comprehensively in WAL's favor. Even partial declaratory relief—such as a declaration that WAL has no liability for the non-WP-4 overruns—would significantly reduce WAL's exposure and position WAL favorably for any further negotiations or proceedings.
D. Timing
We recommend filing the declaratory judgment complaint promptly, with a target filing date in late November 2022. Expeditious filing is strategically important for several reasons.
First, filing before HDDS initiates its own action ensures that WAL controls the narrative and the forum. If HDDS files first—whether in the contractually designated forum or elsewhere—WAL would be placed in a defensive posture and could face procedural complications under the first-filed rule. While the mandatory forum-selection clause in Section 18.2 should prevent HDDS from successfully litigating in any forum other than the Southern District of New York or New York County Supreme Court, filing first avoids the expense and delay of litigating a transfer motion and ensures that WAL shapes the framing of the dispute from the outset.
Second, filing first allows WAL to present the dispute on WAL's terms—as a contract-interpretation question regarding the scope and applicability of the indemnity clause—rather than on HDDS's terms, which would frame the matter as a straightforward indemnification enforcement action. This framing advantage is significant, particularly in the context of a declaratory judgment action where the court's discretionary evaluation of the dispute's posture is a factor.
Third, the passage of time without resolution risks creating uncertainty and financial statement complications for WAL. Prompt initiation of judicial proceedings provides a structured path toward resolution and allows WAL's auditors and lenders to assess the dispute within a defined procedural framework.
We will prepare a draft verified complaint and supporting documents for your review within the next ten business days, with the goal of finalizing and filing by the end of November 2022.
IV. ASSESSMENT OF WAL'S PRINCIPAL DEFENSES
A. Defense One: Section 11.4(b) Causation Requirement Not Satisfied
The strongest and most consequential of WAL's defenses is that the causation requirement of Section 11.4(b) has not been—and cannot be—satisfied. Section 11.4(b) limits WAL's indemnification obligation to government claims that costs are "unallowable, unreasonable, or otherwise subject to disallowance, to the extent such claim is caused by Team Member's acts or omissions." This is a causation-limited indemnity, not a strict-liability backstop or an unconditional guarantee. The phrase "to the extent caused by" is a well-recognized contractual limitation that restricts the indemnitor's obligation to losses that are actually and proximately caused by the indemnitor's own conduct.
Under New York law, which governs the Teaming Agreement pursuant to Section 18.1, causation-limiting language in indemnification clauses is given full effect. See Levine v. Shell Oil Co., 28 N.Y.2d 205, 211 (1971) (holding that indemnification clauses are enforced in accordance with their terms and that language limiting indemnification to losses caused by the indemnitor's acts precludes recovery for losses caused by other factors). The "to the extent caused by" qualifier narrows the scope of the indemnitor's obligation and places the burden on the indemnitee—here, HDDS—to demonstrate that the claimed losses were in fact caused by the indemnitor's acts or omissions.
A category-by-category analysis of the WP-4 overruns identified in the COPD reveals that each overrun category has a plausible—and in some cases, compelling—causation defense:
Titanium Raw-Material Cost Escalation (approximately $4,200,000). The COPD identifies approximately $4.2 million in cost overruns attributable to escalation in the price of titanium raw materials. This cost increase was driven by a well-documented global titanium supply disruption that affected the entire aerospace and defense industry during the relevant period. The disruption was caused by a combination of geopolitical factors, pandemic-related supply-chain bottlenecks, and increased demand across multiple sectors—none of which were within WAL's control.
WAL did not control titanium raw-material pricing. The Teaming Agreement does not make WAL the guarantor of commodity prices, and WAL's role as the fabricator of titanium structural assemblies does not extend to managing or hedging the global titanium supply chain. The cost escalation was an external market phenomenon, not the product of WAL's acts or omissions. Moreover, WAL may be able to argue that the titanium price escalation constitutes a force-majeure event outside its control—depending on the terms of the Teaming Agreement's force-majeure provision (Section 14.1, which we are reviewing in detail)—further insulating WAL from indemnification liability for this category of overrun.
HDDS may counter-argue that WAL was responsible for procuring titanium raw materials for WP-4 and therefore bore the risk of price escalation. However, this argument conflates procurement responsibility with causation. The fact that WAL procured the titanium does not mean WAL caused the price increase. The causation inquiry under Section 11.4(b) requires HDDS to demonstrate that WAL's acts or omissions caused the cost overrun—not merely that the overrun occurred in connection with WAL's work package.
Rework Due to Non-Conforming Machining Tolerances (approximately $5,100,000). This is the largest single overrun category and the one presenting the most significant factual dispute. The COPD identifies approximately $5.1 million in costs attributable to rework necessitated by non-conforming machining tolerances—i.e., manufactured parts that failed to meet the specified dimensional tolerances and required rework or scrappage.
WAL's position is that the non-conformances resulted from errors and ambiguities in the engineering specifications provided to WAL by HDDS. As the Team Lead and the design authority for the ATAP program, HDDS was responsible for providing WAL with complete, accurate, and unambiguous engineering drawings, specifications, and technical data packages. WAL manufactured WP-4 components to the specifications provided by HDDS. If those specifications contained errors—such as tolerance call-outs that were internally inconsistent, references to superseded material specifications, or geometric dimensioning and tolerancing ("GD&T") annotations that were ambiguous—then the resulting non-conformances were caused by HDDS's specification errors, not by WAL's manufacturing processes.
This defense is factually intensive and will require detailed technical evidence. We will need to engage a manufacturing engineering expert to analyze the HDDS-supplied specifications, identify specific errors or ambiguities, and establish a causal link between the specification deficiencies and the machining non-conformances. WAL's internal quality assurance records, non-conformance reports, corrective action requests, and correspondence with HDDS's engineering team will be critical documentary evidence. We recommend that WAL immediately begin compiling and organizing these materials.
We acknowledge that HDDS will likely argue that any specification errors should have been identified by WAL during its incoming inspection and technical review processes, and that WAL's failure to identify and raise the errors constitutes WAL's own negligence. This is a fact-specific argument that will depend on the nature and discoverability of the specification errors, WAL's contractual obligations with respect to incoming specification review, and industry standards for the responsibilities of a subcontractor receiving engineering specifications from a prime contractor. On balance, we believe WAL's position is defensible—a subcontractor is generally entitled to rely on the specifications provided by the prime contractor, and the obligation to identify specification errors typically rests with the design authority—but this is the area of greatest factual vulnerability.
Schedule Delays and Idle-Labor Charges (approximately $2,300,000). The COPD identifies approximately $2.3 million in cost overruns attributable to schedule delays that resulted in idle-labor charges at WAL's manufacturing facility. WAL contends—and the available evidence supports—that these delays were caused by HDDS's late delivery of government-furnished equipment ("GFE") to WAL's Chantilly facility.
Under the Prime Contract, certain specialized tooling, fixtures, and test equipment were designated as GFE and were to be provided to WAL by HDDS (as the prime contractor and custodian of GFE). HDDS was responsible for the timely flow-down of GFE to WAL's facility in accordance with the integrated master schedule. Delays in GFE delivery—caused by HDDS's own procurement and logistics failures—disrupted WAL's production schedule, resulting in periods during which WAL's production workforce was idle or underutilized while awaiting the necessary GFE. The resulting idle-labor charges are a direct and foreseeable consequence of HDDS's failure to deliver GFE on schedule.
This causation defense is strong and should be relatively straightforward to establish with documentary evidence. WAL's production scheduling records, GFE delivery logs, HDDS delivery notices and delay correspondence, and idle-labor cost records should provide a clear evidentiary trail linking the HDDS GFE delays to the idle-labor charges. We recommend that Catherine Park's team compile these records promptly.
Engineering Change Proposal Implementation Costs (approximately $1,200,000). The COPD identifies approximately $1.2 million in cost overruns attributable to the implementation of engineering change proposals ("ECPs"). WAL's position is that the ECPs in question were originated by HDDS and/or the government—not by WAL—and were directed to WAL for implementation as directed changes. Under standard defense-contracting principles and the terms of the Teaming Agreement, cost growth resulting from directed changes is the responsibility of the party directing the change, not the party implementing it.
WAL implemented the directed ECPs in good faith and in accordance with the change-order process established under the Teaming Agreement. The resulting cost growth was a natural and foreseeable consequence of the directed changes and should not be treated as a cost overrun attributable to WAL's acts or omissions. Documentation of the ECP origination, direction, and implementation process—including formal change orders, ECP logs, and related correspondence—should be readily available and will support this defense.
Overall Strength of the Causation Defense. Taking all four overrun categories together, WAL has a strong factual basis for arguing that the WP-4 cost overruns were caused by factors external to WAL—global market conditions, HDDS specification errors, HDDS logistics failures, and HDDS/government-directed changes—rather than by WAL's own acts or omissions. The causation defense is WAL's strongest argument and, if successful, would eliminate WAL's indemnification obligation entirely (or reduce it to a de minimis amount if any residual overruns are found to be WAL-caused).
The principal risk associated with this defense is that it is factually intensive and will ultimately be resolved based on the evidentiary record—including expert testimony, documentary evidence, and potentially the testimony of HDDS and DCMA personnel. The outcome is inherently uncertain, as it depends on the trier of fact's assessment of competing causation narratives. Nevertheless, the evidence available to date strongly supports WAL's position. We recommend that WAL immediately begin the process of marshaling the relevant documentary and testimonial evidence to support this defense.
B. Defense Two: Overbreadth — Demand Includes Non-WP-4 Overruns ($1,909,142)
WAL's second principal defense is that HDDS's indemnification demand is overbroad on its face because it includes $1,909,142 in cost overruns attributable to work packages other than WP-4.
This defense is grounded in the plain text of Section 11.4. Both subsections (a) and (b) of Section 11.4 expressly limit WAL's indemnification obligation to losses arising out of or relating to "Team Member's Work Package." WAL's Work Package under the Teaming Agreement is WP-4—and only WP-4. WAL had no involvement in the performance of any other work package on the ATAP program. WAL did not perform, supervise, manage, or have any contractual responsibility for the work that generated the $1,909,142 in non-WP-4 overruns.
Under the most basic principles of contract interpretation, WAL cannot be required to indemnify HDDS for losses arising from work that WAL did not perform and for which WAL bears no contractual responsibility. The non-WP-4 overruns are, by definition, outside the scope of WAL's indemnification obligation under Section 11.4, regardless of how broadly one might read the indemnity clause.
We note that HDDS's September 9, 2022 demand letter makes no effort to justify the inclusion of the non-WP-4 overruns in the demand. It simply demands the full COPD amount without differentiation. This suggests either an overreach by HDDS or an oversight in the preparation of the demand—either way, it undermines the credibility of HDDS's position and reinforces the impression that the demand is not carefully tailored to the contractual terms.
Strength of Defense. This defense is very strong—likely the strongest and most easily established of WAL's three principal defenses. It is based squarely on the plain language of the contract and does not depend on disputed factual issues. It is an excellent candidate for early resolution through a motion for partial summary judgment, which could reduce WAL's maximum exposure from $14,726,583 to $12,817,441 at an early stage of the litigation.
Even under the broadest conceivable reading of Section 11.4—one that stretches the "arising out of or relating to" language to its maximum breadth—it is not possible to attribute the non-WP-4 overruns to WAL's Work Package. These overruns arose from entirely separate work performed by different parties on different components of the ATAP program.
C. Defense Three: DCMA Finding Is Preliminary — No Formal Disallowance
WAL's third defense is that the COPD is a preliminary determination that has not been finalized, and that WAL's indemnification obligation under Section 11.4(b) has not been triggered because there has been no formal disallowance of costs.
Under the Contract Disputes Act, 41 U.S.C. § 7103, a Contracting Officer's Final Decision is required before costs are formally disallowed and before the contractor's administrative appeal rights are triggered. The COPD issued by ACO Vickers on August 1, 2022 is, by its own terms, a "Preliminary Determination"—it is the ACO's initial assessment of cost overruns, issued for the purpose of inviting the contractor's response and initiating the administrative review process. It does not constitute a final agency action, and it is expressly subject to revision upon further review.
Section 11.4(b) is triggered by "any claim by the U.S. Government that costs incurred under Team Member's Work Package are unallowable, unreasonable, or otherwise subject to disallowance." WAL can argue that a preliminary determination does not constitute a "claim" within the meaning of this provision—or, at minimum, that WAL's indemnification obligation does not mature until the government's position is finalized through a COFD. This argument is supported by the general principle that contingent obligations do not ripen until the contingency occurs. Until the government makes a final determination that the costs are in fact unallowable or unreasonable, there is no crystallized "claim" for WAL to indemnify against.
HDDS filed a formal response and COFD request with DCMA on October 15, 2022. The administrative review is ongoing, and the outcome remains uncertain. The COFD could confirm, modify, increase, decrease, or entirely withdraw the COPD findings. Any of these outcomes would materially affect the quantum and viability of HDDS's indemnity demand.
Strength of Defense. This defense is of moderate strength. Its principal value lies in timing and litigation strategy—it supports an argument for deferring the resolution of the indemnity dispute until the DCMA administrative review is complete, and it provides a basis for seeking a stay of the declaratory judgment action pending the COFD. The primary-jurisdiction doctrine further supports this approach, as the DCMA is the agency with specialized expertise in government contract cost-allowability determinations, and the court should defer to the DCMA's final determination before adjudicating the scope of the private indemnification obligation.
However, we recognize that this defense may defer rather than eliminate WAL's potential liability. If the COFD ultimately confirms the COPD findings—or confirms them in substantial part—HDDS will renew its indemnity demand and WAL's causation-based defenses will become the dispositive issue. Nevertheless, the passage of time is strategically valuable to WAL, as it allows the DCMA review process to narrow the dispute and potentially reduce WAL's exposure.
V. RISK ASSESSMENT
A. HDDS's Likely Counterclaim
HDDS will almost certainly respond to WAL's declaratory judgment action by filing a counterclaim seeking affirmative relief. The counterclaim will likely include a claim for contractual indemnification under Section 11.4 of the Teaming Agreement, seeking the full $14,726,583 (or, more defensibly, the $12,817,441 WP-4 portion). HDDS will frame the indemnity obligation as broad, arguing that WAL—as the performing entity for WP-4—bears responsibility for all cost overruns associated with that work package.
HDDS will also likely seek attorneys' fees under Section 11.6, which provides that the prevailing party in any dispute arising under the indemnification provisions of Article 11 is entitled to recover its reasonable attorneys' fees and costs. This fee-shifting provision is bilateral and applies to both parties. If HDDS prevails on its indemnification claim, it will seek to recover its attorneys' fees from WAL. Conversely, if WAL prevails on the declaratory judgment action, WAL will be entitled to recover its attorneys' fees from HDDS.
HDDS's counterclaim will argue that the "to the extent caused by" language in Section 11.4(b) is satisfied because WAL was the entity performing WP-4 and therefore WAL's "acts or omissions" in performing WP-4 are, by definition, the cause of any cost overruns on that work package. This is a circular argument that conflates the performance of work with causation of cost overruns, but it is the most straightforward reading that HDDS can advance, and it will need to be rebutted with detailed factual evidence regarding the actual root causes of the overruns.
We should anticipate and prepare for HDDS's counterclaim from the outset. Our complaint should be drafted with the counterclaim in mind, and our factual allegations should be detailed enough to support WAL's affirmative defenses to the anticipated counterclaim while preserving flexibility for discovery.
B. Exposure Analysis
The following table summarizes WAL's potential financial exposure across a range of scenarios:
The maximum theoretical exposure under the Teaming Agreement is $88,992,000, representing the Section 11.5 aggregate liability cap of 120% of the WP-4 value. However, no claim currently approaches this level, and this cap is relevant only as an absolute contractual ceiling.
HDDS's claimed amount is $14,726,583—the full COPD amount. As discussed above, $1,909,142 of this amount relates to non-WP-4 work packages and should not survive scrutiny under the overbreadth defense. If WAL prevails on the non-WP-4 defense—as we expect—the maximum amount at risk drops to $12,817,441.
The realistic exposure range is $0 to $12,817,441, depending on the outcome of the causation analysis. The lower end of this range assumes that WAL prevails fully on its causation defense—i.e., the court finds that none of the WP-4 overruns were "caused by" WAL's acts or omissions. The upper end assumes that WAL fails on all causation defenses and is found liable for the full WP-4 portion. In our preliminary assessment, WAL has credible causation defenses across all four overrun categories, and a complete defense is a realistic possibility—but the factually intensive nature of the causation inquiry introduces meaningful uncertainty.
Best case: A full declaratory judgment in WAL's favor—finding no indemnification obligation—would result in zero liability for WAL and would entitle WAL to recover its attorneys' fees from HDDS under Section 11.6.
Worst case: If WAL is found liable for the full WP-4 portion ($12,817,441) and HDDS prevails on its fee-shifting claim, WAL could face total exposure of approximately $13.5–$14 million (including HDDS's estimated attorneys' fees). Liability for the non-WP-4 overruns ($1,909,142) remains unlikely even in the worst case.
Attorneys' Fees. The bilateral fee-shifting provision in Section 11.6 is a significant factor in the risk calculus. If WAL prevails, it can recover its litigation costs—potentially $1.8–$2.4 million, based on our estimated budget—from HDDS. If HDDS prevails, it can recover its fees from WAL—potentially a comparable or even larger amount, given VTK's billing rates. This provision increases the stakes for both sides and should factor into any settlement discussions.
C. Impact of DCMA Administrative Review
The outcome of the DCMA administrative review—and specifically the Contracting Officer's Final Decision when issued—will have a significant impact on the declaratory judgment action and on the parties' respective litigation positions.
If the COFD confirms the COPD in full: This would strengthen HDDS's position that there exists a government "claim" triggering Section 11.4(b). However, even a confirming COFD would not resolve the causation question—WAL's causation defenses would remain fully available, and the central issue would continue to be whether the overruns were "caused by" WAL's acts or omissions. A confirming COFD would, however, eliminate WAL's ripeness/prematurity defense.
If the COFD reduces the WP-4 allocation or total overrun amount: This would directly reduce the quantum of HDDS's indemnity demand and proportionally reduce WAL's potential exposure. A significant reduction could also create opportunities for settlement.
If the COFD finds no disallowable costs: This would effectively moot HDDS's entire indemnification demand. If the government ultimately determines that the costs at issue are allowable and reasonable, there would be no government "claim" to trigger Section 11.4(b), and HDDS would have no basis for an indemnity demand under that provision.
Given the potential for the COFD to materially affect—or entirely resolve—the private indemnification dispute, we recommend that WAL consider seeking a stay of the declaratory judgment action pending the issuance of the COFD. A stay would be strategically attractive for several reasons: (1) it defers substantial litigation costs during a period when the underlying factual predicate for the indemnity demand may shift; (2) the COFD may narrow the scope of the dispute or eliminate it entirely; and (3) the primary-jurisdiction doctrine supports deference to DCMA on the cost-allowability questions that underlie the indemnity dispute, as DCMA has specialized expertise in evaluating government-contract cost issues that exceeds the expertise of a generalist federal court.
We note that Ashford & Reeves LLP—specifically Harold Reeves and Natalie Cheng—is advising WAL on the regulatory and administrative aspects of the DCMA review, including the preparation of WAL's input to HDDS's COFD response. Close coordination between Calderwood & Harkness and Ashford & Reeves will be essential to ensure that WAL's litigation strategy and administrative strategy are aligned and mutually reinforcing.
D. Governing Law Considerations
The Teaming Agreement is governed by New York law pursuant to Section 18.1, without regard to conflicts-of-law principles. Several features of New York law are relevant to the dispute.
Indemnity Clause Enforcement. New York courts generally enforce indemnity clauses as written, applying standard principles of contract interpretation. Clear and unambiguous contractual language is given effect according to its plain meaning, without resort to extrinsic evidence. See W.W.W. Associates, Inc. v. Giancontieri, 77 N.Y.2d 157, 162 (1990). Where indemnity language is ambiguous, New York courts construe the clause against the indemnitee—i.e., the party seeking indemnification—consistent with the general principle that indemnity provisions are strictly construed. See Hooper Associates, Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 491 (1989).
Causation-Limiting Language. New York courts enforce causation-limiting language in indemnity clauses. Where an indemnity clause contains a "to the extent caused by" or similar qualifier, the indemnitee bears the burden of demonstrating that the losses claimed fall within the scope of the indemnity, including the required causation nexus. This is favorable to WAL, as it places the onus on HDDS to prove that the WP-4 overruns were caused by WAL's acts or omissions—a burden that HDDS may struggle to meet on the current evidentiary record.
Anti-Indemnification Statutes. New York's anti-indemnification statutes, such as N.Y. General Obligations Law § 5-322.1 (which voids certain indemnification provisions in construction contracts that purport to indemnify a party against its own negligence), do not apply to aerospace and defense teaming agreements. Section 5-322.1 is limited by its terms to contracts relating to the construction, alteration, repair, or maintenance of buildings, structures, and other improvements to real property. The ATAP Teaming Agreement is a defense-industry teaming arrangement, not a construction contract, and § 5-322.1 has no application here.
Choice-of-Law Issues. We do not anticipate any choice-of-law challenges. Both parties expressly consented to the application of New York law in Section 18.1, and the parties' choice of law will be respected under both New York and federal choice-of-law principles so long as the chosen state has a reasonable relationship to the transaction—a requirement easily satisfied given the New York forum-selection clause and the parties' agreement to resolve disputes in New York.
VI. COLLATERAL CONSIDERATIONS
A. Insurance Coverage
WAL tendered HDDS's September 9, 2022 indemnification demand to Meridian Surety & Insurance Group ("Meridian") on September 22, 2022, seeking coverage and a defense under WAL's applicable insurance policies.
The potentially relevant policies are:
• Directors & Officers Liability Policy — Policy No. MSI-DO-2022-07814; aggregate limit of liability $10,000,000; retention $250,000.
• Commercial General Liability Policy — Policy No. MSI-CGL-2021-33291; aggregate limit of liability $25,000,000; self-insured retention $500,000.
On November 1, 2022, Meridian issued a reservation-of-rights letter in response to WAL's tender. In the reservation letter, Meridian reserves its rights to deny coverage based on two policy exclusions: (1) the contractual-liability exclusion (Exclusion (b) on the CGL form), which excludes coverage for liability assumed by the insured under a contract or agreement, and (2) the government-contract exclusion (Endorsement GC-04), which excludes coverage for losses arising from or relating to the performance of government contracts or subcontracts. Meridian is not currently providing a defense or funding any aspect of WAL's response to the HDDS demand.
The coverage prospects are uncertain. The contractual-liability exclusion is a standard feature of CGL policies and is specifically designed to exclude coverage for liabilities that the insured voluntarily assumes through contractual indemnification provisions—precisely the type of liability at issue here. The government-contract exclusion in Endorsement GC-04 presents an additional barrier that may independently preclude coverage regardless of the contractual-liability exclusion. Both exclusions present significant challenges to WAL's coverage position.
Nevertheless, we recommend that WAL continue to engage with Meridian and press for a definitive coverage determination. The reservation-of-rights letter is not a denial, and there may be arguments available under the specific policy language that could overcome or narrow the application of the exclusions. A separate insurance coverage analysis memorandum is being prepared by Simone Laroche of Calderwood & Harkness and will be provided under separate cover.
B. Lender Notification
WAL maintains a $75 million senior secured revolving credit facility with Ridgeline National Bank, N.A. (the "Credit Facility"), governed by a credit agreement dated March 15, 2021. Section 6.07(b) of the credit agreement contains a litigation-disclosure covenant that requires WAL to provide written notice to Ridgeline of any claims, actions, or proceedings threatened against or affecting WAL that reasonably could be expected to result in liability exceeding $5,000,000, within fifteen (15) business days of the borrower becoming aware of such claim.
WAL timely delivered the required notice to David Kreutz, Senior Vice President, Defense & Aerospace Lending, Ridgeline National Bank, on September 28, 2022—within the fifteen-business-day window following receipt of HDDS's September 9, 2022 demand. The notice described the nature of the HDDS demand, the underlying COPD, and WAL's preliminary assessment of the dispute.
Supplemental notice to Ridgeline will be required upon the filing of the declaratory judgment action. We recommend that Gregory Poole coordinate the supplemental notice with David Kreutz to ensure that Ridgeline is kept informed of material developments in the litigation as they occur.
As of the date of this memorandum, WAL has approximately $31.2 million drawn on the Credit Facility. No event of default exists, and the Credit Facility remains fully available. Compliance with the Credit Facility covenants—including the litigation-disclosure covenant—is important to maintaining WAL's liquidity and operational stability during the pendency of the dispute. Any failure to comply with the notification requirement could, in the worst case, trigger a technical event of default, although we consider this risk to be remote given WAL's timely initial notice.
C. Financial Statement Impact
WAL's outside auditor, Pinnacle Advisory Partners LLC ("Pinnacle"), will need to evaluate the HDDS indemnity contingency under Accounting Standards Codification ("ASC") 450 (formerly FAS 5)—Contingencies—in connection with the fiscal year 2022 audit. Thomas Brennan, CPA, is the engagement partner at Pinnacle responsible for the WAL audit.
Under ASC 450, a loss contingency must be accrued (i.e., recognized as a liability on the balance sheet) if it is "probable" that a loss has been incurred and the amount of the loss can be reasonably estimated. If a loss is "reasonably possible" but not "probable," disclosure in the financial statement footnotes is required, but accrual is not. If a loss is "remote," neither accrual nor disclosure is required.
Our preliminary assessment is that the HDDS indemnity contingency is "reasonably possible" rather than "probable" given the strength of W

MEMORANDUM

I. EXECUTIVE SUMMARY

II. BACKGROUND

III. DECLARATORY JUDGMENT ACTION STRATEGY

IV. ASSESSMENT OF WAL'S PRINCIPAL DEFENSES

V. RISK ASSESSMENT

VI. COLLATERAL CONSIDERATIONS

Record

Parties

Dates

Amounts