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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It has been prepared in anticipation of litigation and is intended solely for the use of the attorneys and client representatives identified herein. Any disclosure, distribution, or copying of this memorandum without the express authorization of Calderwood & Harkness LLP is strictly prohibited.

FROM: Simone Laroche, Senior Associate, Litigation

TO: Priya Anand, Responsible Partner, Litigation

DATE: September 12, 2022

RE: Analysis of MSA Section 7.4 Surcharge Clause — Cardinal Peak Industries v. Nexford Industrial Holdings Inc., Case No. 2022-L-008471 (Circuit Court of Cook County, Illinois, County Department, Law Division)

MATTER NO.: Calderwood & Harkness LLP Matter No. 1005-00005

CC: Douglas Carmichael (Billing Partner); Jeffrey Park (Working Associate)

I. Executive Summary

This memorandum provides a detailed clause-by-clause analysis of Section 7.4 of the Master Supply Agreement (Contract No. MSA-NIH-CPI-2020-001, dated January 15, 2020) between Nexford Industrial Holdings Inc. ("Nexford" or "Buyer") and Cardinal Peak Industries ("Cardinal Peak" or "Seller") (the "MSA"). The purpose of this analysis is to evaluate the strength and scope of Nexford's contractual defenses to Cardinal Peak's claim for $4.73 million in allegedly unpaid raw-material surcharges, as asserted in the Complaint filed on August 8, 2022 in the Circuit Court of Cook County, Illinois.

Based on a comprehensive review of the MSA, the surcharge invoices issued by Cardinal Peak during the disputed period (March 2021 through May 2022), Nexford's procurement and payment records, correspondence between the parties, and applicable Illinois law, this memorandum identifies three independent lines of defense under Section 7.4 of the MSA:

(1) Failure to Comply with the 15-Business-Day Surcharge Notice Deadline Under Section 7.4(a). Cardinal Peak failed to deliver timely Surcharge Notices for seven of the fourteen disputed months, rendering the surcharges invoiced for those months unenforceable as a matter of contract. The surcharge amounts attributable to these seven late-notice months total approximately $2.18 million.

(2) Deviation from the Exhibit C Surcharge Methodology Under Section 7.4(b). Cardinal Peak did not calculate its surcharges using the contractually mandated published indices — the Ferrous Scrap Index (as reported by Platts/SPI) and the Industrial Energy Cost Index. Instead, Cardinal Peak employed an internal "blended cost" metric that incorporated actual procurement costs, freight differentials, and internal overhead allocations not contemplated by Exhibit C. This deviation resulted in systematic overstatement of the surcharges, with the differential between the blended cost methodology and the Exhibit C methodology totaling approximately $1.47 million across the disputed period.

(3) Breach of the 12% Monthly Surcharge Cap Under Section 7.4(c) Without Nexford's Prior Written Consent. For four of the fourteen disputed months, the aggregate monthly surcharge invoiced by Cardinal Peak exceeded 12% of the applicable Base Price for the relevant product category. No prior written consent from Nexford was obtained for any of these exceedances. The surcharge amounts exceeding the 12% cap total approximately $1.08 million.

It is important to note that some overlap exists among the three defense categories. Certain months are affected by two or even all three defenses simultaneously. The three categories are therefore not fully additive when expressed in dollar terms. However, this overlap actually strengthens Nexford's defensive posture: even if one defense is rejected by the court, the remaining defenses may independently eliminate or substantially reduce the same surcharge amount.

After adjusting for the overlap among the three defense categories, Nexford's position is that its maximum additional obligation beyond the $1.68 million already paid during the disputed period is at most $0.21 million. Indeed, there is a plausible basis for a counterclaim that Nexford has overpaid by that amount.

Bottom Line: Nexford has strong contractual defenses that, if sustained, would reduce or eliminate Cardinal Peak's $4.73 million claim. Even under conservative assumptions — including a scenario in which the late-notice defense is partially rejected — Nexford's exposure is well below the amount claimed by Cardinal Peak. The contractual language is clear and mandatory on all three points, and the available factual record supports Nexford's position.

Recommendation: I recommend that we build the Answer and Affirmative Defenses (to be filed on September 19, 2022) around these three pillars. In addition, I recommend that we prepare a counterclaim for declaratory relief confirming that Nexford has no further surcharge obligation under the MSA, as well as for recovery of the approximately $0.21 million potential overpayment. The detailed recommendations and next steps are set forth in Section VI below.

II. Background

A. The Parties and the MSA

Nexford Industrial Holdings Inc. ("Nexford") is a Delaware corporation headquartered at 4200 West Lakeshore Industrial Parkway, Suite 300, Waukegan, Illinois 60085. Nexford is engaged in the business of precision metal fabrication and the manufacture of engineered components for the industrial, automotive, and heavy equipment sectors. In fiscal year 2022, Nexford reported approximately $287 million in annual revenue. Nexford is a portfolio company of Marlowe Asset Management Bluff Capital Partners, LP, a Chicago-based middle-market private equity fund. Nexford's senior management team includes Martin Schaeffer (Chief Executive Officer), Lydia Tran (Chief Financial Officer), Deborah Whitfield (General Counsel), and Russell Okonkwo (Vice President, Procurement). Calderwood & Harkness LLP was engaged as outside litigation counsel by Nexford on August 22, 2022, following service of the Complaint.

Cardinal Peak Industries ("Cardinal Peak" or "CPI") is a Colorado limited liability company headquartered at 1580 Ridgeline Boulevard, Pueblo, Colorado 81001. Cardinal Peak is a regional steel producer and distributor, with operations focused on the production and distribution of hot-rolled coil ("HRC") and cold-rolled coil ("CRC") steel products. In fiscal year 2022, Cardinal Peak reported approximately $415 million in annual revenue. The primary commercial contact at Cardinal Peak during the relevant period was Natalie Gunderson, Vice President of Sales, who managed the day-to-day commercial relationship with Nexford.

The MSA. The Master Supply Agreement bearing contract number MSA-NIH-CPI-2020-001 was executed by the parties on January 15, 2020 (the "Effective Date"). The MSA has an initial three-year term running from January 15, 2020 through January 14, 2023, with automatic renewal for successive one-year periods thereafter unless either party provides written notice of termination at least 180 days prior to the end of the then-current term. The MSA is governed by the laws of the State of Illinois, without regard to conflicts-of-law principles, pursuant to Section 14.3 of the MSA.

The MSA governs the supply of hot-rolled coil (HRC) and cold-rolled coil (CRC) steel products from Cardinal Peak to Nexford. Base pricing for the steel products is established under Section 7.2 of the MSA as follows: HRC at $620 per ton and CRC at $740 per ton, in each case reflecting the agreed 2020 base prices and subject to quarterly adjustment in accordance with Section 7.2(b) of the MSA. The estimated annual volume commitment under the MSA is approximately 18,000 tons of HRC and 6,500 tons of CRC, for a total of approximately 24,500 tons per year. At the 2020 base prices, this translates to an estimated annual spend of approximately $11.16 million for HRC (18,000 tons × $620/ton) and approximately $4.81 million for CRC (6,500 tons × $740/ton), for a combined annual spend of approximately $15.97 million.

The MSA contains a number of provisions relevant to this litigation, but the central provision at issue is Section 7.4 (Raw-Material Surcharges), together with Exhibit C (Surcharge Methodology), which is incorporated by reference into the MSA and which prescribes the methodology for calculating surcharges. The MSA also contains provisions relating to dispute resolution (Section 14.3), notices (Section 14.6), waiver (Section 14.8), and amendment (Section 14.9), each of which may bear on the analysis herein.

B. The Dispute

The dispute between the parties concerns raw-material surcharges invoiced by Cardinal Peak to Nexford during the period from March 2021 through May 2022 — a span of fifteen calendar months. Of these fifteen months, fourteen months are in dispute; the surcharge for April 2021 was paid in full by Nexford and is not at issue in this litigation.

During the fifteen-month period from March 2021 through May 2022, Cardinal Peak invoiced total raw-material surcharges of $6.41 million. Nexford made partial payments on certain surcharges that it accepted as conforming, totaling $1.68 million. The remaining $4.73 million (computed as $6.41 million in total invoiced surcharges less $1.68 million in payments) is the amount that Cardinal Peak claims is unpaid and owing.

Cardinal Peak filed its Complaint in the Circuit Court of Cook County, Illinois, County Department, Law Division, on August 8, 2022. The case was assigned Case No. 2022-L-008471. The Complaint asserts three causes of action: (1) Breach of Contract, alleging that Nexford breached the MSA by failing to pay surcharges invoiced by Cardinal Peak; (2) Unjust Enrichment, alleging that Nexford received the benefit of below-market steel pricing without paying the associated surcharges; and (3) Account Stated, alleging that the unpaid surcharge invoices constitute an account stated that Nexford implicitly accepted.

Calderwood & Harkness LLP was engaged by Nexford on August 22, 2022, to defend this action. The key client contacts for this matter are Deborah Whitfield (General Counsel, Nexford), Russell Okonkwo (Vice President, Procurement, Nexford), Lydia Tran (Chief Financial Officer, Nexford), and Martin Schaeffer (Chief Executive Officer, Nexford). Our Answer and Affirmative Defenses are due to be filed on September 19, 2022, and this memorandum is prepared in support of that filing.

C. Scope of This Memorandum

This memorandum focuses exclusively on the text and interpretation of MSA Section 7.4, including subsections (a) through (d), and Exhibit C (Surcharge Methodology). These provisions form the contractual foundation for Nexford's primary defenses to Cardinal Peak's breach of contract claim. The analysis herein addresses the legal significance of each subsection, Cardinal Peak's record of compliance (or non-compliance) with each requirement, and the quantification of Nexford's exposure under each defense theory.

This memorandum does not address Cardinal Peak's unjust enrichment and account stated claims, which will be the subject of a separate memorandum. Broader litigation strategy, including motion practice, scheduling, and settlement posture, will be addressed in the Litigation Strategy and Budget Memorandum currently being prepared for the client and for Marlowe Asset Management Bluff Capital Partners, LP. Additionally, detailed Illinois legal research on surcharge pass-through provisions, conditions precedent, waiver, and contract interpretation is contained in the research memorandum prepared by Jeffrey Park dated September 8, 2022, which is referenced herein as appropriate and should be consulted for the full supporting case law analysis.

III. Detailed Analysis of MSA Section 7.4

A. Section 7.4 — Overview and Structure

The introductory clause of Section 7.4 of the MSA reads as follows:

"Seller may pass through documented raw-material surcharges, including scrap, energy, and alloy surcharges, incurred during the applicable invoice period, provided that (a) Seller delivers to Buyer a Surcharge Notice with supporting documentation no later than fifteen (15) business days after the end of the applicable month, and (b) the surcharge components are calculated in accordance with the methodology set forth in Exhibit C (Surcharge Methodology)."

The structure of Section 7.4 is significant. The introductory clause operates as a conditional grant of the right to pass through surcharges. It does not establish an unconditional entitlement. Instead, the right to pass through surcharges is expressly made subject to two conditions, introduced by the phrase "provided that" and enumerated as clauses (a) and (b). The first condition (clause (a)) requires timely delivery of a Surcharge Notice with supporting documentation. The second condition (clause (b)) requires that the surcharge be calculated in accordance with the specific methodology set forth in Exhibit C.

In addition to these two conditions precedent contained in the introductory clause, Section 7.4 includes two additional subsections: subsection (c), which imposes a cap on the aggregate monthly surcharge as a percentage of the Base Price, and subsection (d), which establishes a dispute procedure for contesting surcharges. Together, subsections (a) through (d) create a comprehensive framework governing the right to pass through raw-material surcharges under the MSA.

Under Illinois contract law, the use of the phrase "provided that" followed by enumerated conditions is a well-recognized indicator that the conditions so enumerated are conditions precedent to the exercise of the right in question. See Jeffrey Park Research Memo at 12–15 (collecting Illinois authorities, including MidStates Resources Corp. v. National Heritage Enterprises, Inc., 2011 IL App (1st) 103489 and Merritt v. National Omnivrel Insurance Co., 204 Ill. App. 3d 624, 633 (1st Dist. 1990)). Where a contractual provision establishes conditions precedent, the party seeking to enforce the right must demonstrate that all conditions have been satisfied. The burden of proving compliance with conditions precedent rests on the party asserting the right — in this case, Cardinal Peak.

This structural analysis is central to Nexford's defense. If Cardinal Peak cannot demonstrate that it satisfied each of the conditions set forth in Section 7.4(a) and (b) — and, independently, that it complied with the limitation in Section 7.4(c) — then its right to recover the disputed surcharges has not accrued, and its breach of contract claim fails as to those amounts.

B. Section 7.4(a) — 15-Business-Day Notice Requirement

1. Text of the Provision

Section 7.4(a) provides that the Seller must deliver "to Buyer a Surcharge Notice with supporting documentation no later than fifteen (15) business days after the end of the applicable month." This provision contains two distinct requirements: (i) timely delivery of the Surcharge Notice, meaning delivery within fifteen business days after the close of the applicable month; and (ii) inclusion of supporting documentation with the Surcharge Notice. Both requirements must be satisfied for the condition precedent to be met.

The phrase "no later than" is mandatory and establishes a bright-line deadline. The deadline is measured in business days — not calendar days — from the end of the applicable month, which provides the Seller with approximately three calendar weeks to compile the requisite documentation and deliver the notice. This is a reasonable period, and the selection of business days rather than calendar days evidences the parties' intent to account for weekends and holidays while still imposing a firm time constraint on the Seller's right to invoice surcharges.

2. Cardinal Peak's Compliance Record

We have conducted a detailed month-by-month analysis of the delivery dates of Cardinal Peak's Surcharge Notices for each of the fourteen disputed months in the period from March 2021 through May 2022 (excluding April 2021, which is not in dispute). This analysis is based on the following sources: (a) Nexford's procurement records maintained by Russell Okonkwo and his team, which include date-stamped receipt logs for incoming vendor communications; (b) email transmission logs reflecting the dates on which Surcharge Notices were sent by Cardinal Peak's commercial team (primarily Natalie Gunderson) and received by Nexford's procurement department; and (c) postal and courier delivery records, including Severin Partners LLC and UPS tracking confirmations, for Surcharge Notices that were delivered by physical mail.

The results of this analysis reveal a significant pattern of non-compliance. Of the fourteen disputed months, Cardinal Peak delivered compliant Surcharge Notices on time — that is, within fifteen business days after the end of the applicable month — for only seven months. For the remaining seven months, the Surcharge Notices were delivered beyond the fifteen-business-day deadline. The delays ranged from two to eleven business days beyond the contractual deadline, with no consistent pattern suggesting that the delays were attributable to exigent circumstances rather than administrative lapses.

The aggregate surcharge amounts attributable to the seven late-notice months total approximately $2.18 million. This figure represents a substantial portion — approximately 46% — of Cardinal Peak's total claimed unpaid surcharges of $4.73 million.

We are in the process of compiling a detailed chart that identifies, for each of the fourteen disputed months: (i) the applicable month-end date; (ii) the fifteen-business-day deadline; (iii) the actual date of delivery of the Surcharge Notice; (iv) the number of business days by which the notice was late (if applicable); and (v) the dollar amount of the surcharge invoiced for that month. This chart will be included as an exhibit to the Answer and Affirmative Defenses and will be refined as additional documentary evidence is collected through discovery and through further interviews with Russell Okonkwo and his procurement team.

3. Legal Consequence of Late Notices

Under Illinois law, when a contract establishes a time-limited notice requirement as a condition precedent to the accrual of a contractual right, failure to comply with the notice requirement results in the forfeiture of that right, unless the condition is waived or excused by the party for whose benefit the condition was established. The language of Section 7.4(a) is clear: the word "provided that" introduces the notice requirement as a condition precedent, and the phrase "no later than" establishes a mandatory deadline. There is no "substantial compliance" or "best efforts" qualifier in the text.

Accordingly, Cardinal Peak's failure to deliver timely Surcharge Notices for seven of the fourteen disputed months constitutes a failure of the condition precedent established by Section 7.4(a). As a result, Cardinal Peak's right to pass through surcharges for those seven months never accrued, and Nexford is not obligated to pay the $2.18 million in surcharges attributable to those months.

We anticipate that Cardinal Peak will advance several counterarguments in response to this defense. First, Cardinal Peak may argue that the fifteen-business-day notice deadline is a covenant rather than a condition precedent — that is, that the deadline establishes an obligation of Cardinal Peak (the breach of which gives rise to damages) but does not affect Cardinal Peak's underlying right to payment. This argument is weak in light of the "provided that" language, which under Illinois law is a recognized indicator of a condition precedent. See Park Research Memo at 14–15.

Second, Cardinal Peak may argue that Nexford waived strict compliance with the notice deadline through a course of dealing or by accepting and paying surcharges in prior months without objecting to lateness. This argument can be mitigated if we establish — as we believe the record will show — that Nexford consistently raised timeliness objections in accordance with the dispute procedure set forth in Section 7.4(d). We need to confirm with Russell Okonkwo that Nexford sent timely dispute notices under Section 7.4(d) for each late Surcharge Notice, and we should collect and preserve copies of those dispute notices as part of our document review.

Assessment of Strength: This defense is strong. The contractual language is clear and mandatory. The factual record — subject to confirmation through further fact development — supports Nexford's position that it consistently objected to late notices and did not waive its contractual rights. The approximately $2.18 million attributable to this defense represents the single largest component of Nexford's overall defense.

C. Section 7.4(b) — Exhibit C Surcharge Methodology

1. Text and Requirements of Exhibit C

Section 7.4(b) requires that "the surcharge components are calculated in accordance with the methodology set forth in Exhibit C (Surcharge Methodology)." This provision is the second condition precedent in the introductory clause of Section 7.4. It operates independently of the notice requirement in Section 7.4(a) — meaning that even if a Surcharge Notice is timely delivered, the surcharge is only recoverable if it was calculated using the methodology prescribed by Exhibit C.

Exhibit C to the MSA prescribes a specific, objective methodology for calculating raw-material surcharges. The key features of the Exhibit C methodology are as follows:

(i) Published Indices. Surcharges are calculated using two published, third-party indices: the Ferrous Scrap Index, as reported by S&P Global Platts (formerly Platts/SPI), and the Industrial Energy Cost Index. These indices are widely available, independently verified, and updated on a monthly basis. The selection of published indices — as opposed to a party's internal cost data — was a deliberate contractual choice designed to ensure objectivity, transparency, and verifiability in the surcharge calculation.

(ii) Baseline Costs. The methodology establishes contractually agreed baseline costs for each surcharge component. The baseline scrap cost is $340 per ton, and the baseline energy cost is $48 per ton. These baselines represent the parties' agreed-upon starting point, above which surcharges may be assessed.

(iii) Calculation Formula. The surcharge for a given month is calculated as follows: Surcharge = (Actual Index Value − Baseline Cost) × Applicable Tonnage. This calculation is performed separately for each surcharge component (scrap and energy), and the results are summed to produce the total monthly surcharge. If the Actual Index Value for a given component is at or below the baseline, no surcharge is assessed for that component.

The methodology is deliberately objective and mechanistic. It is tied exclusively to published, third-party indices and contractually agreed baseline costs. It does not reference, incorporate, or permit the use of any party's internal cost structure, actual procurement costs, freight charges, overhead allocations, or any other internally generated cost metric. This is a critical feature of the Exhibit C methodology, and it is the foundation of Nexford's second line of defense.

2. Cardinal Peak's Deviation — "Blended Cost" Metric

Our analysis of Cardinal Peak's surcharge invoices for the disputed period reveals that Cardinal Peak did not calculate its surcharges using the Ferrous Scrap Index or the Industrial Energy Cost Index as prescribed by Exhibit C. Instead, Cardinal Peak employed an internally developed "blended cost" metric that incorporated a combination of Cardinal Peak's actual procurement costs for scrap and energy inputs, freight differentials reflecting the cost of transporting raw materials to Cardinal Peak's Pueblo, Colorado facility, and internal overhead allocations attributable to Cardinal Peak's raw-material purchasing operations.

None of these cost components — actual procurement costs, freight differentials, or internal overhead allocations — are referenced or contemplated by Exhibit C. The Exhibit C methodology is designed to be a standardized, index-based calculation that eliminates any dependence on either party's internal cost experience. By substituting its internal blended cost metric for the contractually mandated published indices, Cardinal Peak unilaterally departed from the agreed-upon methodology and shifted the basis of the surcharge calculation from objective, verifiable third-party data to Cardinal Peak's own, internally generated cost figures.

The effect of this substitution was systematic: the blended cost metric consistently produced higher surcharge amounts than the Exhibit C methodology would have produced. This is not surprising, given that the blended cost metric incorporated actual procurement costs (which may exceed index levels due to supplier-specific pricing), freight differentials (which are entirely absent from the index-based methodology), and internal overhead allocations (which reflect Cardinal Peak's cost structure rather than market-wide input cost movements).

We have quantified the difference between surcharges calculated under Cardinal Peak's blended cost methodology and surcharges properly calculated under the Exhibit C published-index methodology. The differential is approximately $1.47 million across the disputed period. This figure was derived through a preliminary comparison of Cardinal Peak's invoiced surcharge amounts against surcharges recalculated using the published Ferrous Scrap Index and Industrial Energy Cost Index data for the corresponding months, applying the baseline costs and calculation formula set forth in Exhibit C.

This deviation was confirmed through review of Cardinal Peak's internal surcharge computation worksheets, which we obtained through preliminary document review conducted with the cooperation of Nexford's procurement team. The worksheets explicitly reference "blended material cost" and "total landed cost" as inputs, rather than the Ferrous Scrap Index or the Industrial Energy Cost Index. Further development of this issue through formal discovery — including requests for production of Cardinal Peak's complete internal surcharge calculation files, source data, and communications regarding the methodology — will be essential to building a complete evidentiary record.

In light of the magnitude of the methodology deviation and its impact on the surcharge calculation, we have requested engagement of Meridian Bridge Consulting LLC to serve as Nexford's damages expert. The engagement would be led by Dr. Anita Rosenthal, CPA, ABV, a partner at Meridian Bridge with extensive experience in commercial damages quantification in the steel and metals industries. Dr. Rosenthal would perform a detailed, month-by-month recalculation of the proper surcharges under the Exhibit C methodology using the published Ferrous Scrap Index and Industrial Energy Cost Index data for each month in the disputed period. The retention letter for Meridian Bridge is being prepared and will be circulated for approval.

3. Legal Consequence of Methodology Deviation

Section 7.4(b) is a condition precedent: surcharges are recoverable only if they are "calculated in accordance with the methodology set forth in Exhibit C." Cardinal Peak's unilateral substitution of its own blended cost methodology for the contractually mandated published-index methodology is a material deviation from this requirement. The deviation is not a matter of minor computational differences or rounding — it involves the wholesale replacement of the contractually specified inputs (published indices) with entirely different inputs (internal cost data, freight, and overhead) that are not referenced in the MSA or Exhibit C.

Under Illinois law, where a contract specifies a particular method of calculation and the parties have agreed to objective, verifiable criteria for determining amounts owed, a party cannot recover amounts calculated under a different, unilaterally adopted method. See Park Research Memo at 18–21 (collecting authorities). The rationale is straightforward: the parties bargained for a specific methodology, and the court will not rewrite the contract to permit a methodology that was never agreed upon.

Nexford is therefore entitled to reject the excess surcharge amounts attributable to the methodology deviation. Based on our preliminary analysis, the excess amounts total approximately $1.47 million across the disputed period. The precise amount will be refined through Dr. Rosenthal's expert analysis.

We anticipate that Cardinal Peak may advance several counterarguments. First, Cardinal Peak may argue that its blended cost metric is a "reasonable proxy" for the published indices and that the Exhibit C methodology produces results that are substantively similar. This argument should fail: the contract does not contemplate "reasonable proxies" — it requires calculation "in accordance with" a specific methodology. Moreover, the $1.47 million differential demonstrates that the blended cost metric is not, in fact, a close proxy for the index-based methodology.

Second, Cardinal Peak may argue that the published indices were unavailable or unreliable for certain months during the disputed period. This argument is without factual basis. The Ferrous Scrap Index (Platts/SPI) and the Industrial Energy Cost Index are widely published, continuously available indices that have been in use in the steel industry for decades. There is no indication that either index was unavailable for any month during the March 2021 through May 2022 disputed period.

Assessment of Strength: This defense is strong. The contractual language is unambiguous in requiring the use of the Exhibit C methodology. The deviation is material and well-documented. The approximately $1.47 million attributable to this defense represents the second-largest component of Nexford's overall defense.

D. Section 7.4(c) — 12% Surcharge Cap

1. Text of the Provision

Section 7.4(c) of the MSA provides as follows:

"In no event shall the aggregate monthly surcharge exceed 12% of the applicable Base Price for the relevant product category without prior written consent of Buyer."

This provision contains two elements. First, it establishes a hard cap: the aggregate monthly surcharge may not exceed 12% of the applicable Base Price for the relevant product category. Second, it provides a single, narrow exception: the cap may be exceeded only if the Buyer provides "prior written consent." The phrase "in no event" reinforces the absolute nature of the limitation, and the requirement of "prior written consent" makes clear that the Buyer's agreement must be both prospective (prior to the exceedance) and documented in writing (not oral, implied, or retroactive).

2. Application of the Cap

Applying the 12% cap to the agreed Base Prices yields the following maximum monthly surcharge amounts:

• HRC: Base Price of $620/ton × 12% = $74.40/ton maximum monthly surcharge

• CRC: Base Price of $740/ton × 12% = $88.80/ton maximum monthly surcharge

These caps establish a bright-line ceiling on the per-ton monthly surcharge that Cardinal Peak may invoice for each product category. Surcharges in excess of these amounts are recoverable only if Nexford provided prior written consent — a condition that, as discussed below, was never satisfied.

Our month-by-month analysis of Cardinal Peak's invoiced surcharges reveals that for four of the fourteen disputed months, the surcharge exceeded the 12% cap for one or both product categories. In each of these four months, the invoiced surcharge per ton was significantly above the cap — in some instances exceeding it by a substantial margin, reflecting the combined effect of elevated input costs and Cardinal Peak's use of the inflated blended cost methodology discussed in Section III.C above.

No prior written consent from Nexford was obtained for any of these cap exceedances. We have conducted a thorough review of the correspondence files maintained by Nexford's procurement department and General Counsel's office, and we have identified no written communication from Nexford authorizing, approving, or consenting to surcharges in excess of the 12% cap. Russell Okonkwo has confirmed verbally that no such consent was ever authorized by Nexford's procurement team or by any other Nexford officer or employee with authority to grant such consent.

The aggregate surcharge amounts exceeding the 12% cap across the four affected months total approximately $1.08 million. This figure represents the difference between the surcharges actually invoiced by Cardinal Peak for those months and the maximum surcharges that would have been permissible under the 12% cap, calculated on a per-ton, per-product-category basis.

3. Legal Consequence of Cap Exceedances

Section 7.4(c) operates as an absolute limitation on the Seller's right to pass through surcharges. The phrase "in no event shall . . . exceed" is among the strongest limiting language available in contract drafting, and Illinois courts consistently give effect to such language as establishing a hard ceiling that cannot be overcome without satisfaction of the stated exception — here, "prior written consent of Buyer."

The cap operates as an independent restriction. It applies regardless of whether the underlying surcharge calculation was otherwise proper under the Exhibit C methodology. Even if Cardinal Peak had used the correct indices and the correct calculation formula, and even if Cardinal Peak had delivered timely Surcharge Notices, the surcharges for the four cap-exceeding months would still be limited to 12% of the applicable Base Price absent Nexford's prior written consent.

Nexford is entitled to refuse payment of any surcharge amounts exceeding the 12% cap. The aggregate exposure reduction attributable to this defense is approximately $1.08 million.

We anticipate that Cardinal Peak may argue that Nexford's partial payments on certain surcharge invoices, or Nexford's failure to immediately reject the cap-exceeding invoices upon receipt, constituted implied consent to exceed the cap. This argument should be rejected. The contract requires "prior written consent" — not implied consent, not oral consent, and not retroactive acquiescence. Under Illinois law, where a contract specifies a particular form of consent (here, "prior written consent"), that specification governs, and consent of a different form is insufficient. See Park Research Memo at 24–25 (collecting authorities). Moreover, Nexford did not remain silent — it disputed the surcharges in accordance with Section 7.4(d), as discussed below.

Cardinal Peak may also argue that the extraordinary market conditions during the disputed period — including significant volatility in steel input costs driven by supply chain disruptions and pandemic-related demand fluctuations — justified exceedances of the cap. While market conditions may provide context, they do not excuse non-compliance with a contractual limitation that the parties freely negotiated. The 12% cap was presumably set with an understanding that input costs could fluctuate, and the parties agreed that exceedances above that level would require the Buyer's prior written consent. Cardinal Peak chose not to seek such consent; it cannot now claim entitlement to the excess amounts.

Assessment of Strength: This defense is very strong. The contractual language is clear and unambiguous. The cap is a bright-line test that admits of no subjective interpretation. The absence of prior written consent is a readily provable, objective fact. The approximately $1.08 million attributable to this defense represents the third component of Nexford's overall defense.

E. Section 7.4(d) — Dispute Procedure

Section 7.4(d) of the MSA establishes the following dispute procedure for surcharges:

The Buyer must notify the Seller of any disputed surcharge within thirty (30) calendar days of receipt of the Surcharge Notice. If the dispute is not resolved within an additional thirty (30) calendar days, the dispute shall be escalated to the parties' respective senior officers for resolution. Unresolved disputes are subject to mandatory mediation in accordance with the dispute resolution provisions of Section 14.3 of the MSA.

Nexford's compliance with the dispute procedure is an essential element of preserving its right to contest the surcharges. If Nexford failed to notify Cardinal Peak of a disputed surcharge within the thirty-day window, Cardinal Peak might argue that Nexford accepted the surcharge or waived its right to object. Accordingly, we must confirm with Russell Okonkwo and Deborah Whitfield that Nexford timely notified Cardinal Peak of each disputed surcharge within the thirty-calendar-day window prescribed by Section 7.4(d).

Based on our preliminary review of the available records, we believe that Nexford did in fact send timely dispute notices for each of the fourteen disputed months. However, we have not yet completed a comprehensive month-by-month verification, and this is an area where additional fact development is needed. We should interview Russell Okonkwo in detail regarding the timing and content of each dispute notice, and we should collect and preserve copies of all dispute notices, whether sent by email, letter, or other means.

Nexford's compliance with the dispute procedure is important for two reasons. First, it preserves Nexford's contractual right to contest the surcharges and defeats any argument that Nexford waived its objections through silence or inaction. Second, it affirmatively demonstrates that Nexford acted in good faith and consistently raised its concerns about Cardinal Peak's non-compliance with Section 7.4.

Finally, we note that Section 14.3 of the MSA requires mandatory mediation in Chicago, Illinois as a condition precedent to litigation. It appears that Cardinal Peak filed suit on August 8, 2022 without first completing — or even initiating — the mandatory mediation process. This represents a potential procedural defense to Cardinal Peak's claims. The mediation requirement will be analyzed in detail in a separate memorandum addressing broader litigation strategy and procedural defenses.

IV. Quantification of Exposure Under Each Defense Category

A. Summary Table

The following table summarizes the three defense categories, the number of disputed months affected by each defense, and the approximate dollar amount attributable to each defense:

As noted above, the three defense categories are not fully independent in their application. Certain months are affected by two or even all three defenses simultaneously. The "Total (before overlap adjustment)" figure of $4.73 million reflects the sum of the amounts attributable to each individual defense before accounting for these overlaps, and it equals the full amount of Cardinal Peak's claim — which is a meaningful validation of the comprehensiveness of Nexford's defensive position.

B. Overlap Analysis

The overlap among the three defense categories warrants careful analysis. Some of the seven late-notice months also involve methodology deviations and/or cap exceedances. For example, if a particular month's surcharge was delivered late (triggering the Section 7.4(a) defense), was calculated using the blended cost methodology rather than the Exhibit C indices (triggering the Section 7.4(b) defense), and exceeded the 12% cap (triggering the Section 7.4(c) defense), the full surcharge amount for that month would be counted in all three categories. However, Nexford would need to eliminate the surcharge only once — not three times — to achieve the desired result.

This overlap actually strengthens Nexford's defensive posture. Even if the court rejects one defense — for example, by finding partial waiver of the notice deadline for certain months — the remaining defenses may independently eliminate or substantially reduce the surcharge amounts for those same months. The multiple, overlapping layers of defense create redundancy that protects Nexford against the risk that any single defense theory is not sustained.

After adjusting for the overlap among the three defense categories, Nexford's position is that its maximum additional obligation beyond the $1.68 million already paid is at most $0.21 million. This figure represents the residual amount that would remain after all three defenses are applied in their fullest extent. Indeed, depending on how the overlap is resolved, there is a plausible basis for concluding that Nexford has already overpaid by approximately $0.21 million — creating a potential counterclaim for recovery of that amount.

We recommend that Dr. Anita Rosenthal at Meridian Bridge Consulting LLC perform a detailed month-by-month analysis to precisely quantify the overlap among the three defense categories and to determine Nexford's net exposure under various scenarios (best case, expected case, and worst case). This analysis will also identify which specific months are affected by multiple defenses and will enable us to present a clear, coherent damages narrative to the court.

C. Cardinal Peak's Total Claimed Damages in Context

To place Nexford's defenses in perspective, the following summary reflects the overall damages landscape:

• Cardinal Peak's total surcharges invoiced (March 2021 – May 2022): $6.41 million

• Amount Nexford paid: $1.68 million

• Cardinal Peak's claimed unpaid amount: $4.73 million ($6.41M − $1.68M)

• Nexford's maximum additional obligation (if all defenses sustained): $0.21 million

• Potential overpayment / counterclaim amount: $0.21 million

If Nexford's defenses are fully sustained, Nexford owes at most an additional $0.21 million — a reduction of approximately 95.6% from Cardinal Peak's claimed amount. Furthermore, there is a plausible basis for a counterclaim asserting that Nexford has already overpaid by approximately that same amount.

Even under a conservative scenario in which the late-notice defense under Section 7.4(a) is partially rejected — for example, if the court finds waiver or substantial compliance for some of the seven late-notice months — the methodology and cap defenses alone reduce exposure by approximately $2.55 million ($1.47 million + $1.08 million). Under this conservative scenario, Nexford's potential exposure would be approximately $2.18 million ($4.73 million − $2.55 million) — still less than half of Cardinal Peak's claimed amount. This conservative scenario represents the floor of Nexford's defensive position and illustrates that Nexford has meaningful protection even in a downside case.

V. Potential Counterarguments and Risk Assessment

A. Waiver / Course of Dealing

Cardinal Peak may argue that Nexford waived strict compliance with the fifteen-business-day notice deadline under Section 7.4(a) or the Exhibit C methodology under Section 7.4(b) through a course of dealing between the parties. Specifically, Cardinal Peak may point to instances in which Nexford accepted and paid surcharges without raising objections to the timing of the Surcharge Notice or the methodology used to calculate the surcharge.

Mitigation. This argument can be mitigated on several grounds. First, Nexford consistently disputed late and non-conforming surcharges through dispute notices sent in accordance with Section 7.4(d). The existence of these dispute notices demonstrates that Nexford did not silently acquiesce to Cardinal Peak's non-compliance but rather affirmatively objected each time a surcharge failed to conform to the MSA's requirements. Second, the MSA does not contain a broad waiver provision that would allow waiver to be inferred from a course of dealing. To the contrary, Section 14.8 of the MSA includes a standard "no waiver" provision stating that the failure of either party to enforce any provision of the MSA shall not constitute a waiver of that provision. Third, Illinois law generally requires clear and unequivocal evidence of waiver before a party's contractual rights will be deemed waived. A course of dealing, standing alone, is typically insufficient to establish waiver unless the party seeking waiver can demonstrate that the other party intentionally relinquished a known right with full knowledge of the facts.

Risk Assessment: Moderate. If the court finds that Nexford's conduct with respect to certain months constituted partial waiver — for example, if Nexford paid a surcharge without raising a timely dispute notice under Section 7.4(d) for a particular month — the late-notice defense may be weakened for those specific months. However, the risk is limited in scope: any waiver finding would likely be month-specific rather than a blanket waiver of the notice requirement across all disputed months.

B. Substantial Compliance

Cardinal Peak may argue that it "substantially complied" with the fifteen-business-day notice requirement, even if certain Surcharge Notices were delivered a few days late. Under this theory, Cardinal Peak would contend that the purpose of the notice deadline — to provide Nexford with timely information about surcharges — was largely fulfilled even when the notice was slightly delayed, and that strict enforcement of the deadline would produce a forfeiture disproportionate to the harm caused by the delay.

Mitigation. The contract specifies "no later than" fifteen business days — a bright-line deadline that admits of no sliding scale or grace period. Illinois courts generally enforce express timing requirements in commercial contracts, particularly where the contract language is mandatory and unambiguous. See Park Research Memo at 16–18. Moreover, the "substantial compliance" doctrine is generally applied to conditions involving subjective or qualitative performance obligations, not to conditions involving specific, objective deadlines. The fifteen-business-day deadline is precisely the type of clear, time-certain requirement that courts are most likely to enforce strictly.

Risk Assessment: Low to moderate. While a sympathetic court might be reluctant to impose forfeiture for notices that were only a day or two late, the contractual language strongly favors Nexford's position. The risk is further mitigated by the fact that many of the late notices in this case were not merely a day or two late — delays ranged up to eleven business days beyond the deadline.

C. Estoppel

If Nexford accepted and paid surcharges in prior months without objecting to the blended cost methodology, Cardinal Peak may argue that Nexford is estopped from challenging the methodology for subsequent months. The estoppel argument would rest on the theory that Cardinal Peak relied on Nexford's acceptance of the blended cost methodology in formulating its pricing and business strategy, and that it would be inequitable to allow Nexford to challenge the methodology retroactively.

Mitigation. Several factors weigh against an estoppel finding. First, Nexford paid only $1.68 million of the $6.41 million in total invoiced surcharges — a payment rate of approximately 26% — hardly indicative of wholesale acceptance. Second, Nexford consistently objected to the methodology through its dispute notices under Section 7.4(d). Third, the only month during the disputed period for which the surcharge was paid in full without dispute was April 2021, and that month's surcharge appears to have been calculated closer to the Exhibit C methodology than the surcharges for other months. Finally, even if Cardinal Peak relied on Nexford's prior payments, such reliance was unreasonable in light of Nexford's repeated objections and the clear requirements of the MSA.

Risk Assessment: Low. Estoppel is an equitable doctrine that is disfavored where the party asserting it had access to the same contractual provisions and could have conformed its conduct to the agreement. Cardinal Peak had Exhibit C in hand and chose to deviate from it; it cannot now claim that Nexford's conduct estopped it from being held to the agreed methodology.

D. Implied Consent to Cap Exceedances

Cardinal Peak may argue that Nexford's partial payments on certain surcharge invoices, or its failure to immediately reject cap-exceeding invoices upon receipt, constituted implied consent to exceed the 12% cap under Section 7.4(c).

Mitigation. This argument is squarely foreclosed by the express terms of the MSA. Section 7.4(c) requires "prior written consent of Buyer." This specification of form — prior, written — is controlling under Illinois law and overrides any argument based on implied consent, oral consent, or conduct-based consent. A party cannot satisfy a contractual requirement of "prior written consent" through after-the-fact, non-written conduct. Moreover, Nexford's partial payments on certain invoices were not payments of the cap-exceeding amounts — they were payments of the portions of the surcharges that Nexford accepted as conforming — and thus do not evidence any acceptance of the excess amounts.

Risk Assessment: Low. This is among Nexford's strongest defenses. The contractual language is clear, the requirement is objective, and the absence of prior written consent is a readily demonstrable fact.

VI. Recommendations and Next Steps

Based on the analysis set forth above, I recommend the following actions:

1. Answer and Affirmative Defenses. Build the affirmative defenses in Nexford's Answer (to be filed September 19, 2022) around the three Section 7.4 pillars identified in this memorandum: (a) failure to comply with the fifteen-business-day Surcharge Notice deadline under Section 7.4(a); (b) deviation from the Exhibit C Surcharge Methodology under Section 7.4(b); and (c) breach of the 12% surcharge cap under Section 7.4(c) without Nexford's prior written consent. We should also assert a waiver defense based on Cardinal Peak's failure to comply with conditions precedent, as well as a defense based on Cardinal Peak's failure to complete mandatory mediation under Section 14.3 before filing suit. A draft of the Answer and Affirmative Defenses will be circulated to the team by September 15, 2022 for review.

2. Counterclaim. Prepare a counterclaim for filing, targeting early October 2022. The counterclaim should seek: (a) a declaratory judgment that Nexford has no further surcharge obligation under the MSA beyond the $1.68 million already paid; and (b) recovery of the approximately $0.21 million potential overpayment, based on the theory that Nexford's payments to date exceed the properly calculated surcharges owed under the MSA after application of the Section 7.4 defenses.

3. Expert Engagement. Finalize the retention of Meridian Bridge Consulting LLC, led by Dr. Anita Rosenthal, CPA, ABV, to serve as Nexford's damages expert. Dr. Rosenthal should be engaged to perform a detailed month-by-month recalculation of the surcharges under the Exhibit C methodology using published Ferrous Scrap Index and Industrial Energy Cost Index data for each month in the disputed period (March 2021 through May 2022). The expert retention letter should be finalized and sent no later than September 22, 2022, with the goal of having the preliminary expert analysis completed by December 12, 2022 to support Nexford's discovery responses and any early-stage motion practice.

4. Fact Development. Conduct a detailed interview of Russell Okonkwo (Vice President, Procurement) regarding the following topics: (a) the dates of receipt of each Surcharge Notice from Cardinal Peak for the fourteen disputed months; (b) the dates and content of Nexford's dispute notices sent to Cardinal Peak under Section 7.4(d); (c) any communications between Nexford and Cardinal Peak regarding the blended cost methodology, including any discussions about the proper calculation method; and (d) any requests by Cardinal Peak for Nexford's written consent to exceed the 12% surcharge cap, and any responses thereto. We should also interview Deborah Whitfield (General Counsel) and Lydia Tran (Chief Financial Officer) regarding their involvement in, and knowledge of, the surcharge disputes.

5. Document Collection. Ensure that the litigation hold issued in connection with this matter covers the following categories of documents and data: all Surcharge Notices received from Cardinal Peak and supporting documentation; internal surcharge review logs maintained by Nexford's procurement department; all correspondence with Cardinal Peak's commercial team (including, without limitation, communications with Natalie Gunderson); published Ferrous Scrap Index and Industrial Energy Cost Index data for the disputed period; Nexford's payment records and accounting entries for surcharge payments, as maintained by Lydia Tran's finance team; and any internal analyses, spreadsheets, or memoranda prepared by Nexford personnel in connection with the surcharge disputes.

6. discovery Strategy. Prepare and serve interrogatories and document requests directed to Cardinal Peak, focused on the following topics: (a) the factual basis for Cardinal Peak's adoption and use of the blended cost methodology, including when and why it was adopted, whether Nexford was notified of the change from the Exhibit C methodology, and the identity of individuals involved in the decision; (b) Cardinal Peak's internal calculations and worksheets used to compute the surcharges for each disputed month; (c) Cardinal Peak's delivery records for Surcharge Notices, including transmission records, email logs, and courier tracking information; and (d) any communications between Cardinal Peak and Nexford regarding the 12% surcharge cap, including any requests for consent to exceed the cap.

7. Coordination with Hargrove Kellner CPAs LLP. Coordinate with Nexford's external auditors at Hargrove Kellner CPAs LLP (engagement partner Steven Margolis) to obtain relevant financial records supporting Nexford's payment history and the accounting treatment of surcharge payments in Nexford's financial statements. This coordination is important both for establishing Nexford's payment record and for ensuring consistency between the litigation position and Nexford's audited financial statements.

8. Budget Considerations. This analysis supports the estimated budget range communicated to the client of $200,000 to $275,000 for defense of the matter through mediation, inclusive of answer, affirmative defenses, counterclaim, initial discovery, expert retention and preliminary analysis, and mediation preparation and participation. If the case proceeds beyond mediation to dispositive motions and/or trial, the estimated range is $350,000 to $500,000, depending on the scope of discovery and trial preparation required. Given the strength of Nexford's contractual defenses, an early and aggressive defense posture may facilitate a favorable settlement outcome at mediation, reducing the total cost of the engagement.

9. Lender Notification. Under Nexford's $45 million revolving credit facility with Ridgecrest National Bank, N.A. (dated March 12, 2021), Section 6.03(b) requires Nexford to notify the lender of any settlements or judgments exceeding $1.0 million. This threshold should be kept in mind during settlement discussions. If Nexford's defenses are sustained and the matter resolves at or below $0.21 million (or even at the conservative-scenario level of approximately $2.18 million), the lender notification threshold may not be triggered. However, if settlement discussions approach or exceed $1.0 million, Deborah Whitfield should be reminded to coordinate with Lydia Tran and Ridgecrest National Bank regarding the notification obligation.

VII. Conclusion

Nexford Industrial Holdings Inc. has three strong, independent contractual defenses under MSA Section 7.4 that, taken together, reduce Cardinal Peak's $4.73 million claim to at most $0.21 million in additional exposure — a reduction of approximately 95.6%. The contractual language of Section 7.4 is clear and mandatory on all three points, and the available factual record, subject to further development, supports Nexford's interpretation and defensive position.

The three defense pillars — the fifteen-business-day notice requirement, the Exhibit C methodology requirement, and the 12% surcharge cap — are each independently substantial. Each defense standing alone would significantly reduce Nexford's exposure, and the combination of all three defenses creates overlapping layers of protection that substantially insulate Nexford from the risk that any single defense theory is rejected by the court.

I recommend aggressive assertion of these defenses in the pending litigation, beginning with the Answer and Affirmative Defenses to be filed on September 19, 2022, and continuing through the development of a comprehensive evidentiary record through fact development, document collection, and formal discovery. At the same time, Nexford should position itself for an eventual mediation resolution under Section 14.3 of the MSA, where the strength of its contractual defenses should provide meaningful leverage in settlement negotiations.

I will circulate this analysis to Deborah Whitfield and the broader engagement team for input and will incorporate the analysis and recommendations herein into the Litigation Strategy and Budget Memorandum being prepared for the client and Marlowe Asset Management Bluff Capital Partners, LP.

Please let me know if you have any questions or would like to discuss any aspect of this analysis in greater detail.

Simone Laroche Senior Associate, Litigation Calderwood & Harkness LLP Tel: (312) 555-4200

Email: slaroche@calderwoodharkness.com

Defense Category	Disputed Months Affected	Amount Attributable	Overlap Notes
Late Surcharge Notices (Section 7.4(a))	7 of 14 months	$2.18 million	Some months also have methodology and cap issues
Methodology Deviation (Section 7.4(b) / Exhibit C)	Multiple months	$1.47 million	Applies to months where indices differ from blended cost
Cap Exceedance (Section 7.4(c))	4 months	$1.08 million	Some months overlap with late-notice months
Total (before overlap adjustment)	$4.73 million

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It has been prepared in anticipation of litigation and is intended solely for the use of the attorneys and client representatives identified herein. Any disclosure, distribution, or copying of this memorandum without the express authorization of Calderwood & Harkness LLP is strictly prohibited.
FROM: Simone Laroche, Senior Associate, Litigation
TO: Priya Anand, Responsible Partner, Litigation
DATE: September 12, 2022
RE: Analysis of MSA Section 7.4 Surcharge Clause — Cardinal Peak Industries v. Nexford Industrial Holdings Inc., Case No. 2022-L-008471 (Circuit Court of Cook County, Illinois, County Department, Law Division)
MATTER NO.: Calderwood & Harkness LLP Matter No. 1005-00005
CC: Douglas Carmichael (Billing Partner); Jeffrey Park (Working Associate)
I. Executive Summary
This memorandum provides a detailed clause-by-clause analysis of Section 7.4 of the Master Supply Agreement (Contract No. MSA-NIH-CPI-2020-001, dated January 15, 2020) between Nexford Industrial Holdings Inc. ("Nexford" or "Buyer") and Cardinal Peak Industries ("Cardinal Peak" or "Seller") (the "MSA"). The purpose of this analysis is to evaluate the strength and scope of Nexford's contractual defenses to Cardinal Peak's claim for $4.73 million in allegedly unpaid raw-material surcharges, as asserted in the Complaint filed on August 8, 2022 in the Circuit Court of Cook County, Illinois.
Based on a comprehensive review of the MSA, the surcharge invoices issued by Cardinal Peak during the disputed period (March 2021 through May 2022), Nexford's procurement and payment records, correspondence between the parties, and applicable Illinois law, this memorandum identifies three independent lines of defense under Section 7.4 of the MSA:
(1) Failure to Comply with the 15-Business-Day Surcharge Notice Deadline Under Section 7.4(a). Cardinal Peak failed to deliver timely Surcharge Notices for seven of the fourteen disputed months, rendering the surcharges invoiced for those months unenforceable as a matter of contract. The surcharge amounts attributable to these seven late-notice months total approximately $2.18 million.
(2) Deviation from the Exhibit C Surcharge Methodology Under Section 7.4(b). Cardinal Peak did not calculate its surcharges using the contractually mandated published indices — the Ferrous Scrap Index (as reported by Platts/SPI) and the Industrial Energy Cost Index. Instead, Cardinal Peak employed an internal "blended cost" metric that incorporated actual procurement costs, freight differentials, and internal overhead allocations not contemplated by Exhibit C. This deviation resulted in systematic overstatement of the surcharges, with the differential between the blended cost methodology and the Exhibit C methodology totaling approximately $1.47 million across the disputed period.
(3) Breach of the 12% Monthly Surcharge Cap Under Section 7.4(c) Without Nexford's Prior Written Consent. For four of the fourteen disputed months, the aggregate monthly surcharge invoiced by Cardinal Peak exceeded 12% of the applicable Base Price for the relevant product category. No prior written consent from Nexford was obtained for any of these exceedances. The surcharge amounts exceeding the 12% cap total approximately $1.08 million.
It is important to note that some overlap exists among the three defense categories. Certain months are affected by two or even all three defenses simultaneously. The three categories are therefore not fully additive when expressed in dollar terms. However, this overlap actually strengthens Nexford's defensive posture: even if one defense is rejected by the court, the remaining defenses may independently eliminate or substantially reduce the same surcharge amount.
After adjusting for the overlap among the three defense categories, Nexford's position is that its maximum additional obligation beyond the $1.68 million already paid during the disputed period is at most $0.21 million. Indeed, there is a plausible basis for a counterclaim that Nexford has overpaid by that amount.
Bottom Line: Nexford has strong contractual defenses that, if sustained, would reduce or eliminate Cardinal Peak's $4.73 million claim. Even under conservative assumptions — including a scenario in which the late-notice defense is partially rejected — Nexford's exposure is well below the amount claimed by Cardinal Peak. The contractual language is clear and mandatory on all three points, and the available factual record supports Nexford's position.
Recommendation: I recommend that we build the Answer and Affirmative Defenses (to be filed on September 19, 2022) around these three pillars. In addition, I recommend that we prepare a counterclaim for declaratory relief confirming that Nexford has no further surcharge obligation under the MSA, as well as for recovery of the approximately $0.21 million potential overpayment. The detailed recommendations and next steps are set forth in Section VI below.
II. Background
A. The Parties and the MSA
Nexford Industrial Holdings Inc. ("Nexford") is a Delaware corporation headquartered at 4200 West Lakeshore Industrial Parkway, Suite 300, Waukegan, Illinois 60085. Nexford is engaged in the business of precision metal fabrication and the manufacture of engineered components for the industrial, automotive, and heavy equipment sectors. In fiscal year 2022, Nexford reported approximately $287 million in annual revenue. Nexford is a portfolio company of Marlowe Asset Management Bluff Capital Partners, LP, a Chicago-based middle-market private equity fund. Nexford's senior management team includes Martin Schaeffer (Chief Executive Officer), Lydia Tran (Chief Financial Officer), Deborah Whitfield (General Counsel), and Russell Okonkwo (Vice President, Procurement). Calderwood & Harkness LLP was engaged as outside litigation counsel by Nexford on August 22, 2022, following service of the Complaint.
Cardinal Peak Industries ("Cardinal Peak" or "CPI") is a Colorado limited liability company headquartered at 1580 Ridgeline Boulevard, Pueblo, Colorado 81001. Cardinal Peak is a regional steel producer and distributor, with operations focused on the production and distribution of hot-rolled coil ("HRC") and cold-rolled coil ("CRC") steel products. In fiscal year 2022, Cardinal Peak reported approximately $415 million in annual revenue. The primary commercial contact at Cardinal Peak during the relevant period was Natalie Gunderson, Vice President of Sales, who managed the day-to-day commercial relationship with Nexford.
The MSA. The Master Supply Agreement bearing contract number MSA-NIH-CPI-2020-001 was executed by the parties on January 15, 2020 (the "Effective Date"). The MSA has an initial three-year term running from January 15, 2020 through January 14, 2023, with automatic renewal for successive one-year periods thereafter unless either party provides written notice of termination at least 180 days prior to the end of the then-current term. The MSA is governed by the laws of the State of Illinois, without regard to conflicts-of-law principles, pursuant to Section 14.3 of the MSA.
The MSA governs the supply of hot-rolled coil (HRC) and cold-rolled coil (CRC) steel products from Cardinal Peak to Nexford. Base pricing for the steel products is established under Section 7.2 of the MSA as follows: HRC at $620 per ton and CRC at $740 per ton, in each case reflecting the agreed 2020 base prices and subject to quarterly adjustment in accordance with Section 7.2(b) of the MSA. The estimated annual volume commitment under the MSA is approximately 18,000 tons of HRC and 6,500 tons of CRC, for a total of approximately 24,500 tons per year. At the 2020 base prices, this translates to an estimated annual spend of approximately $11.16 million for HRC (18,000 tons × $620/ton) and approximately $4.81 million for CRC (6,500 tons × $740/ton), for a combined annual spend of approximately $15.97 million.
The MSA contains a number of provisions relevant to this litigation, but the central provision at issue is Section 7.4 (Raw-Material Surcharges), together with Exhibit C (Surcharge Methodology), which is incorporated by reference into the MSA and which prescribes the methodology for calculating surcharges. The MSA also contains provisions relating to dispute resolution (Section 14.3), notices (Section 14.6), waiver (Section 14.8), and amendment (Section 14.9), each of which may bear on the analysis herein.
B. The Dispute
The dispute between the parties concerns raw-material surcharges invoiced by Cardinal Peak to Nexford during the period from March 2021 through May 2022 — a span of fifteen calendar months. Of these fifteen months, fourteen months are in dispute; the surcharge for April 2021 was paid in full by Nexford and is not at issue in this litigation.
During the fifteen-month period from March 2021 through May 2022, Cardinal Peak invoiced total raw-material surcharges of $6.41 million. Nexford made partial payments on certain surcharges that it accepted as conforming, totaling $1.68 million. The remaining $4.73 million (computed as $6.41 million in total invoiced surcharges less $1.68 million in payments) is the amount that Cardinal Peak claims is unpaid and owing.
Cardinal Peak filed its Complaint in the Circuit Court of Cook County, Illinois, County Department, Law Division, on August 8, 2022. The case was assigned Case No. 2022-L-008471. The Complaint asserts three causes of action: (1) Breach of Contract, alleging that Nexford breached the MSA by failing to pay surcharges invoiced by Cardinal Peak; (2) Unjust Enrichment, alleging that Nexford received the benefit of below-market steel pricing without paying the associated surcharges; and (3) Account Stated, alleging that the unpaid surcharge invoices constitute an account stated that Nexford implicitly accepted.
Calderwood & Harkness LLP was engaged by Nexford on August 22, 2022, to defend this action. The key client contacts for this matter are Deborah Whitfield (General Counsel, Nexford), Russell Okonkwo (Vice President, Procurement, Nexford), Lydia Tran (Chief Financial Officer, Nexford), and Martin Schaeffer (Chief Executive Officer, Nexford). Our Answer and Affirmative Defenses are due to be filed on September 19, 2022, and this memorandum is prepared in support of that filing.
C. Scope of This Memorandum
This memorandum focuses exclusively on the text and interpretation of MSA Section 7.4, including subsections (a) through (d), and Exhibit C (Surcharge Methodology). These provisions form the contractual foundation for Nexford's primary defenses to Cardinal Peak's breach of contract claim. The analysis herein addresses the legal significance of each subsection, Cardinal Peak's record of compliance (or non-compliance) with each requirement, and the quantification of Nexford's exposure under each defense theory.
This memorandum does not address Cardinal Peak's unjust enrichment and account stated claims, which will be the subject of a separate memorandum. Broader litigation strategy, including motion practice, scheduling, and settlement posture, will be addressed in the Litigation Strategy and Budget Memorandum currently being prepared for the client and for Marlowe Asset Management Bluff Capital Partners, LP. Additionally, detailed Illinois legal research on surcharge pass-through provisions, conditions precedent, waiver, and contract interpretation is contained in the research memorandum prepared by Jeffrey Park dated September 8, 2022, which is referenced herein as appropriate and should be consulted for the full supporting case law analysis.
III. Detailed Analysis of MSA Section 7.4
A. Section 7.4 — Overview and Structure
The introductory clause of Section 7.4 of the MSA reads as follows:
"Seller may pass through documented raw-material surcharges, including scrap, energy, and alloy surcharges, incurred during the applicable invoice period, provided that (a) Seller delivers to Buyer a Surcharge Notice with supporting documentation no later than fifteen (15) business days after the end of the applicable month, and (b) the surcharge components are calculated in accordance with the methodology set forth in Exhibit C (Surcharge Methodology)."
The structure of Section 7.4 is significant. The introductory clause operates as a conditional grant of the right to pass through surcharges. It does not establish an unconditional entitlement. Instead, the right to pass through surcharges is expressly made subject to two conditions, introduced by the phrase "provided that" and enumerated as clauses (a) and (b). The first condition (clause (a)) requires timely delivery of a Surcharge Notice with supporting documentation. The second condition (clause (b)) requires that the surcharge be calculated in accordance with the specific methodology set forth in Exhibit C.
In addition to these two conditions precedent contained in the introductory clause, Section 7.4 includes two additional subsections: subsection (c), which imposes a cap on the aggregate monthly surcharge as a percentage of the Base Price, and subsection (d), which establishes a dispute procedure for contesting surcharges. Together, subsections (a) through (d) create a comprehensive framework governing the right to pass through raw-material surcharges under the MSA.
Under Illinois contract law, the use of the phrase "provided that" followed by enumerated conditions is a well-recognized indicator that the conditions so enumerated are conditions precedent to the exercise of the right in question. See Jeffrey Park Research Memo at 12–15 (collecting Illinois authorities, including MidStates Resources Corp. v. National Heritage Enterprises, Inc., 2011 IL App (1st) 103489 and Merritt v. National Omnivrel Insurance Co., 204 Ill. App. 3d 624, 633 (1st Dist. 1990)). Where a contractual provision establishes conditions precedent, the party seeking to enforce the right must demonstrate that all conditions have been satisfied. The burden of proving compliance with conditions precedent rests on the party asserting the right — in this case, Cardinal Peak.
This structural analysis is central to Nexford's defense. If Cardinal Peak cannot demonstrate that it satisfied each of the conditions set forth in Section 7.4(a) and (b) — and, independently, that it complied with the limitation in Section 7.4(c) — then its right to recover the disputed surcharges has not accrued, and its breach of contract claim fails as to those amounts.
B. Section 7.4(a) — 15-Business-Day Notice Requirement
1. Text of the Provision
Section 7.4(a) provides that the Seller must deliver "to Buyer a Surcharge Notice with supporting documentation no later than fifteen (15) business days after the end of the applicable month." This provision contains two distinct requirements: (i) timely delivery of the Surcharge Notice, meaning delivery within fifteen business days after the close of the applicable month; and (ii) inclusion of supporting documentation with the Surcharge Notice. Both requirements must be satisfied for the condition precedent to be met.
The phrase "no later than" is mandatory and establishes a bright-line deadline. The deadline is measured in business days — not calendar days — from the end of the applicable month, which provides the Seller with approximately three calendar weeks to compile the requisite documentation and deliver the notice. This is a reasonable period, and the selection of business days rather than calendar days evidences the parties' intent to account for weekends and holidays while still imposing a firm time constraint on the Seller's right to invoice surcharges.
2. Cardinal Peak's Compliance Record
We have conducted a detailed month-by-month analysis of the delivery dates of Cardinal Peak's Surcharge Notices for each of the fourteen disputed months in the period from March 2021 through May 2022 (excluding April 2021, which is not in dispute). This analysis is based on the following sources: (a) Nexford's procurement records maintained by Russell Okonkwo and his team, which include date-stamped receipt logs for incoming vendor communications; (b) email transmission logs reflecting the dates on which Surcharge Notices were sent by Cardinal Peak's commercial team (primarily Natalie Gunderson) and received by Nexford's procurement department; and (c) postal and courier delivery records, including Severin Partners LLC and UPS tracking confirmations, for Surcharge Notices that were delivered by physical mail.
The results of this analysis reveal a significant pattern of non-compliance. Of the fourteen disputed months, Cardinal Peak delivered compliant Surcharge Notices on time — that is, within fifteen business days after the end of the applicable month — for only seven months. For the remaining seven months, the Surcharge Notices were delivered beyond the fifteen-business-day deadline. The delays ranged from two to eleven business days beyond the contractual deadline, with no consistent pattern suggesting that the delays were attributable to exigent circumstances rather than administrative lapses.
The aggregate surcharge amounts attributable to the seven late-notice months total approximately $2.18 million. This figure represents a substantial portion — approximately 46% — of Cardinal Peak's total claimed unpaid surcharges of $4.73 million.
We are in the process of compiling a detailed chart that identifies, for each of the fourteen disputed months: (i) the applicable month-end date; (ii) the fifteen-business-day deadline; (iii) the actual date of delivery of the Surcharge Notice; (iv) the number of business days by which the notice was late (if applicable); and (v) the dollar amount of the surcharge invoiced for that month. This chart will be included as an exhibit to the Answer and Affirmative Defenses and will be refined as additional documentary evidence is collected through discovery and through further interviews with Russell Okonkwo and his procurement team.
3. Legal Consequence of Late Notices
Under Illinois law, when a contract establishes a time-limited notice requirement as a condition precedent to the accrual of a contractual right, failure to comply with the notice requirement results in the forfeiture of that right, unless the condition is waived or excused by the party for whose benefit the condition was established. The language of Section 7.4(a) is clear: the word "provided that" introduces the notice requirement as a condition precedent, and the phrase "no later than" establishes a mandatory deadline. There is no "substantial compliance" or "best efforts" qualifier in the text.
Accordingly, Cardinal Peak's failure to deliver timely Surcharge Notices for seven of the fourteen disputed months constitutes a failure of the condition precedent established by Section 7.4(a). As a result, Cardinal Peak's right to pass through surcharges for those seven months never accrued, and Nexford is not obligated to pay the $2.18 million in surcharges attributable to those months.
We anticipate that Cardinal Peak will advance several counterarguments in response to this defense. First, Cardinal Peak may argue that the fifteen-business-day notice deadline is a covenant rather than a condition precedent — that is, that the deadline establishes an obligation of Cardinal Peak (the breach of which gives rise to damages) but does not affect Cardinal Peak's underlying right to payment. This argument is weak in light of the "provided that" language, which under Illinois law is a recognized indicator of a condition precedent. See Park Research Memo at 14–15.
Second, Cardinal Peak may argue that Nexford waived strict compliance with the notice deadline through a course of dealing or by accepting and paying surcharges in prior months without objecting to lateness. This argument can be mitigated if we establish — as we believe the record will show — that Nexford consistently raised timeliness objections in accordance with the dispute procedure set forth in Section 7.4(d). We need to confirm with Russell Okonkwo that Nexford sent timely dispute notices under Section 7.4(d) for each late Surcharge Notice, and we should collect and preserve copies of those dispute notices as part of our document review.
Assessment of Strength: This defense is strong. The contractual language is clear and mandatory. The factual record — subject to confirmation through further fact development — supports Nexford's position that it consistently objected to late notices and did not waive its contractual rights. The approximately $2.18 million attributable to this defense represents the single largest component of Nexford's overall defense.
C. Section 7.4(b) — Exhibit C Surcharge Methodology
1. Text and Requirements of Exhibit C
Section 7.4(b) requires that "the surcharge components are calculated in accordance with the methodology set forth in Exhibit C (Surcharge Methodology)." This provision is the second condition precedent in the introductory clause of Section 7.4. It operates independently of the notice requirement in Section 7.4(a) — meaning that even if a Surcharge Notice is timely delivered, the surcharge is only recoverable if it was calculated using the methodology prescribed by Exhibit C.
Exhibit C to the MSA prescribes a specific, objective methodology for calculating raw-material surcharges. The key features of the Exhibit C methodology are as follows:
(i) Published Indices. Surcharges are calculated using two published, third-party indices: the Ferrous Scrap Index, as reported by S&P Global Platts (formerly Platts/SPI), and the Industrial Energy Cost Index. These indices are widely available, independently verified, and updated on a monthly basis. The selection of published indices — as opposed to a party's internal cost data — was a deliberate contractual choice designed to ensure objectivity, transparency, and verifiability in the surcharge calculation.
(ii) Baseline Costs. The methodology establishes contractually agreed baseline costs for each surcharge component. The baseline scrap cost is $340 per ton, and the baseline energy cost is $48 per ton. These baselines represent the parties' agreed-upon starting point, above which surcharges may be assessed.
(iii) Calculation Formula. The surcharge for a given month is calculated as follows: Surcharge = (Actual Index Value − Baseline Cost) × Applicable Tonnage. This calculation is performed separately for each surcharge component (scrap and energy), and the results are summed to produce the total monthly surcharge. If the Actual Index Value for a given component is at or below the baseline, no surcharge is assessed for that component.
The methodology is deliberately objective and mechanistic. It is tied exclusively to published, third-party indices and contractually agreed baseline costs. It does not reference, incorporate, or permit the use of any party's internal cost structure, actual procurement costs, freight charges, overhead allocations, or any other internally generated cost metric. This is a critical feature of the Exhibit C methodology, and it is the foundation of Nexford's second line of defense.
2. Cardinal Peak's Deviation — "Blended Cost" Metric
Our analysis of Cardinal Peak's surcharge invoices for the disputed period reveals that Cardinal Peak did not calculate its surcharges using the Ferrous Scrap Index or the Industrial Energy Cost Index as prescribed by Exhibit C. Instead, Cardinal Peak employed an internally developed "blended cost" metric that incorporated a combination of Cardinal Peak's actual procurement costs for scrap and energy inputs, freight differentials reflecting the cost of transporting raw materials to Cardinal Peak's Pueblo, Colorado facility, and internal overhead allocations attributable to Cardinal Peak's raw-material purchasing operations.
None of these cost components — actual procurement costs, freight differentials, or internal overhead allocations — are referenced or contemplated by Exhibit C. The Exhibit C methodology is designed to be a standardized, index-based calculation that eliminates any dependence on either party's internal cost experience. By substituting its internal blended cost metric for the contractually mandated published indices, Cardinal Peak unilaterally departed from the agreed-upon methodology and shifted the basis of the surcharge calculation from objective, verifiable third-party data to Cardinal Peak's own, internally generated cost figures.
The effect of this substitution was systematic: the blended cost metric consistently produced higher surcharge amounts than the Exhibit C methodology would have produced. This is not surprising, given that the blended cost metric incorporated actual procurement costs (which may exceed index levels due to supplier-specific pricing), freight differentials (which are entirely absent from the index-based methodology), and internal overhead allocations (which reflect Cardinal Peak's cost structure rather than market-wide input cost movements).
We have quantified the difference between surcharges calculated under Cardinal Peak's blended cost methodology and surcharges properly calculated under the Exhibit C published-index methodology. The differential is approximately $1.47 million across the disputed period. This figure was derived through a preliminary comparison of Cardinal Peak's invoiced surcharge amounts against surcharges recalculated using the published Ferrous Scrap Index and Industrial Energy Cost Index data for the corresponding months, applying the baseline costs and calculation formula set forth in Exhibit C.
This deviation was confirmed through review of Cardinal Peak's internal surcharge computation worksheets, which we obtained through preliminary document review conducted with the cooperation of Nexford's procurement team. The worksheets explicitly reference "blended material cost" and "total landed cost" as inputs, rather than the Ferrous Scrap Index or the Industrial Energy Cost Index. Further development of this issue through formal discovery — including requests for production of Cardinal Peak's complete internal surcharge calculation files, source data, and communications regarding the methodology — will be essential to building a complete evidentiary record.
In light of the magnitude of the methodology deviation and its impact on the surcharge calculation, we have requested engagement of Meridian Bridge Consulting LLC to serve as Nexford's damages expert. The engagement would be led by Dr. Anita Rosenthal, CPA, ABV, a partner at Meridian Bridge with extensive experience in commercial damages quantification in the steel and metals industries. Dr. Rosenthal would perform a detailed, month-by-month recalculation of the proper surcharges under the Exhibit C methodology using the published Ferrous Scrap Index and Industrial Energy Cost Index data for each month in the disputed period. The retention letter for Meridian Bridge is being prepared and will be circulated for approval.
3. Legal Consequence of Methodology Deviation
Section 7.4(b) is a condition precedent: surcharges are recoverable only if they are "calculated in accordance with the methodology set forth in Exhibit C." Cardinal Peak's unilateral substitution of its own blended cost methodology for the contractually mandated published-index methodology is a material deviation from this requirement. The deviation is not a matter of minor computational differences or rounding — it involves the wholesale replacement of the contractually specified inputs (published indices) with entirely different inputs (internal cost data, freight, and overhead) that are not referenced in the MSA or Exhibit C.
Under Illinois law, where a contract specifies a particular method of calculation and the parties have agreed to objective, verifiable criteria for determining amounts owed, a party cannot recover amounts calculated under a different, unilaterally adopted method. See Park Research Memo at 18–21 (collecting authorities). The rationale is straightforward: the parties bargained for a specific methodology, and the court will not rewrite the contract to permit a methodology that was never agreed upon.
Nexford is therefore entitled to reject the excess surcharge amounts attributable to the methodology deviation. Based on our preliminary analysis, the excess amounts total approximately $1.47 million across the disputed period. The precise amount will be refined through Dr. Rosenthal's expert analysis.
We anticipate that Cardinal Peak may advance several counterarguments. First, Cardinal Peak may argue that its blended cost metric is a "reasonable proxy" for the published indices and that the Exhibit C methodology produces results that are substantively similar. This argument should fail: the contract does not contemplate "reasonable proxies" — it requires calculation "in accordance with" a specific methodology. Moreover, the $1.47 million differential demonstrates that the blended cost metric is not, in fact, a close proxy for the index-based methodology.
Second, Cardinal Peak may argue that the published indices were unavailable or unreliable for certain months during the disputed period. This argument is without factual basis. The Ferrous Scrap Index (Platts/SPI) and the Industrial Energy Cost Index are widely published, continuously available indices that have been in use in the steel industry for decades. There is no indication that either index was unavailable for any month during the March 2021 through May 2022 disputed period.
Assessment of Strength: This defense is strong. The contractual language is unambiguous in requiring the use of the Exhibit C methodology. The deviation is material and well-documented. The approximately $1.47 million attributable to this defense represents the second-largest component of Nexford's overall defense.
D. Section 7.4(c) — 12% Surcharge Cap
1. Text of the Provision
Section 7.4(c) of the MSA provides as follows:
"In no event shall the aggregate monthly surcharge exceed 12% of the applicable Base Price for the relevant product category without prior written consent of Buyer."
This provision contains two elements. First, it establishes a hard cap: the aggregate monthly surcharge may not exceed 12% of the applicable Base Price for the relevant product category. Second, it provides a single, narrow exception: the cap may be exceeded only if the Buyer provides "prior written consent." The phrase "in no event" reinforces the absolute nature of the limitation, and the requirement of "prior written consent" makes clear that the Buyer's agreement must be both prospective (prior to the exceedance) and documented in writing (not oral, implied, or retroactive).
2. Application of the Cap
Applying the 12% cap to the agreed Base Prices yields the following maximum monthly surcharge amounts:
• HRC: Base Price of $620/ton × 12% = $74.40/ton maximum monthly surcharge
• CRC: Base Price of $740/ton × 12% = $88.80/ton maximum monthly surcharge
These caps establish a bright-line ceiling on the per-ton monthly surcharge that Cardinal Peak may invoice for each product category. Surcharges in excess of these amounts are recoverable only if Nexford provided prior written consent — a condition that, as discussed below, was never satisfied.
Our month-by-month analysis of Cardinal Peak's invoiced surcharges reveals that for four of the fourteen disputed months, the surcharge exceeded the 12% cap for one or both product categories. In each of these four months, the invoiced surcharge per ton was significantly above the cap — in some instances exceeding it by a substantial margin, reflecting the combined effect of elevated input costs and Cardinal Peak's use of the inflated blended cost methodology discussed in Section III.C above.
No prior written consent from Nexford was obtained for any of these cap exceedances. We have conducted a thorough review of the correspondence files maintained by Nexford's procurement department and General Counsel's office, and we have identified no written communication from Nexford authorizing, approving, or consenting to surcharges in excess of the 12% cap. Russell Okonkwo has confirmed verbally that no such consent was ever authorized by Nexford's procurement team or by any other Nexford officer or employee with authority to grant such consent.
The aggregate surcharge amounts exceeding the 12% cap across the four affected months total approximately $1.08 million. This figure represents the difference between the surcharges actually invoiced by Cardinal Peak for those months and the maximum surcharges that would have been permissible under the 12% cap, calculated on a per-ton, per-product-category basis.
3. Legal Consequence of Cap Exceedances
Section 7.4(c) operates as an absolute limitation on the Seller's right to pass through surcharges. The phrase "in no event shall . . . exceed" is among the strongest limiting language available in contract drafting, and Illinois courts consistently give effect to such language as establishing a hard ceiling that cannot be overcome without satisfaction of the stated exception — here, "prior written consent of Buyer."
The cap operates as an independent restriction. It applies regardless of whether the underlying surcharge calculation was otherwise proper under the Exhibit C methodology. Even if Cardinal Peak had used the correct indices and the correct calculation formula, and even if Cardinal Peak had delivered timely Surcharge Notices, the surcharges for the four cap-exceeding months would still be limited to 12% of the applicable Base Price absent Nexford's prior written consent.
Nexford is entitled to refuse payment of any surcharge amounts exceeding the 12% cap. The aggregate exposure reduction attributable to this defense is approximately $1.08 million.
We anticipate that Cardinal Peak may argue that Nexford's partial payments on certain surcharge invoices, or Nexford's failure to immediately reject the cap-exceeding invoices upon receipt, constituted implied consent to exceed the cap. This argument should be rejected. The contract requires "prior written consent" — not implied consent, not oral consent, and not retroactive acquiescence. Under Illinois law, where a contract specifies a particular form of consent (here, "prior written consent"), that specification governs, and consent of a different form is insufficient. See Park Research Memo at 24–25 (collecting authorities). Moreover, Nexford did not remain silent — it disputed the surcharges in accordance with Section 7.4(d), as discussed below.
Cardinal Peak may also argue that the extraordinary market conditions during the disputed period — including significant volatility in steel input costs driven by supply chain disruptions and pandemic-related demand fluctuations — justified exceedances of the cap. While market conditions may provide context, they do not excuse non-compliance with a contractual limitation that the parties freely negotiated. The 12% cap was presumably set with an understanding that input costs could fluctuate, and the parties agreed that exceedances above that level would require the Buyer's prior written consent. Cardinal Peak chose not to seek such consent; it cannot now claim entitlement to the excess amounts.
Assessment of Strength: This defense is very strong. The contractual language is clear and unambiguous. The cap is a bright-line test that admits of no subjective interpretation. The absence of prior written consent is a readily provable, objective fact. The approximately $1.08 million attributable to this defense represents the third component of Nexford's overall defense.
E. Section 7.4(d) — Dispute Procedure
Section 7.4(d) of the MSA establishes the following dispute procedure for surcharges:
The Buyer must notify the Seller of any disputed surcharge within thirty (30) calendar days of receipt of the Surcharge Notice. If the dispute is not resolved within an additional thirty (30) calendar days, the dispute shall be escalated to the parties' respective senior officers for resolution. Unresolved disputes are subject to mandatory mediation in accordance with the dispute resolution provisions of Section 14.3 of the MSA.
Nexford's compliance with the dispute procedure is an essential element of preserving its right to contest the surcharges. If Nexford failed to notify Cardinal Peak of a disputed surcharge within the thirty-day window, Cardinal Peak might argue that Nexford accepted the surcharge or waived its right to object. Accordingly, we must confirm with Russell Okonkwo and Deborah Whitfield that Nexford timely notified Cardinal Peak of each disputed surcharge within the thirty-calendar-day window prescribed by Section 7.4(d).
Based on our preliminary review of the available records, we believe that Nexford did in fact send timely dispute notices for each of the fourteen disputed months. However, we have not yet completed a comprehensive month-by-month verification, and this is an area where additional fact development is needed. We should interview Russell Okonkwo in detail regarding the timing and content of each dispute notice, and we should collect and preserve copies of all dispute notices, whether sent by email, letter, or other means.
Nexford's compliance with the dispute procedure is important for two reasons. First, it preserves Nexford's contractual right to contest the surcharges and defeats any argument that Nexford waived its objections through silence or inaction. Second, it affirmatively demonstrates that Nexford acted in good faith and consistently raised its concerns about Cardinal Peak's non-compliance with Section 7.4.
Finally, we note that Section 14.3 of the MSA requires mandatory mediation in Chicago, Illinois as a condition precedent to litigation. It appears that Cardinal Peak filed suit on August 8, 2022 without first completing — or even initiating — the mandatory mediation process. This represents a potential procedural defense to Cardinal Peak's claims. The mediation requirement will be analyzed in detail in a separate memorandum addressing broader litigation strategy and procedural defenses.
IV. Quantification of Exposure Under Each Defense Category
A. Summary Table
The following table summarizes the three defense categories, the number of disputed months affected by each defense, and the approximate dollar amount attributable to each defense:
As noted above, the three defense categories are not fully independent in their application. Certain months are affected by two or even all three defenses simultaneously. The "Total (before overlap adjustment)" figure of $4.73 million reflects the sum of the amounts attributable to each individual defense before accounting for these overlaps, and it equals the full amount of Cardinal Peak's claim — which is a meaningful validation of the comprehensiveness of Nexford's defensive position.
B. Overlap Analysis
The overlap among the three defense categories warrants careful analysis. Some of the seven late-notice months also involve methodology deviations and/or cap exceedances. For example, if a particular month's surcharge was delivered late (triggering the Section 7.4(a) defense), was calculated using the blended cost methodology rather than the Exhibit C indices (triggering the Section 7.4(b) defense), and exceeded the 12% cap (triggering the Section 7.4(c) defense), the full surcharge amount for that month would be counted in all three categories. However, Nexford would need to eliminate the surcharge only once — not three times — to achieve the desired result.
This overlap actually strengthens Nexford's defensive posture. Even if the court rejects one defense — for example, by finding partial waiver of the notice deadline for certain months — the remaining defenses may independently eliminate or substantially reduce the surcharge amounts for those same months. The multiple, overlapping layers of defense create redundancy that protects Nexford against the risk that any single defense theory is not sustained.
After adjusting for the overlap among the three defense categories, Nexford's position is that its maximum additional obligation beyond the $1.68 million already paid is at most $0.21 million. This figure represents the residual amount that would remain after all three defenses are applied in their fullest extent. Indeed, depending on how the overlap is resolved, there is a plausible basis for concluding that Nexford has already overpaid by approximately $0.21 million — creating a potential counterclaim for recovery of that amount.
We recommend that Dr. Anita Rosenthal at Meridian Bridge Consulting LLC perform a detailed month-by-month analysis to precisely quantify the overlap among the three defense categories and to determine Nexford's net exposure under various scenarios (best case, expected case, and worst case). This analysis will also identify which specific months are affected by multiple defenses and will enable us to present a clear, coherent damages narrative to the court.
C. Cardinal Peak's Total Claimed Damages in Context
To place Nexford's defenses in perspective, the following summary reflects the overall damages landscape:
• Cardinal Peak's total surcharges invoiced (March 2021 – May 2022): $6.41 million
• Amount Nexford paid: $1.68 million
• Cardinal Peak's claimed unpaid amount: $4.73 million ($6.41M − $1.68M)
• Nexford's maximum additional obligation (if all defenses sustained): $0.21 million
• Potential overpayment / counterclaim amount: $0.21 million
If Nexford's defenses are fully sustained, Nexford owes at most an additional $0.21 million — a reduction of approximately 95.6% from Cardinal Peak's claimed amount. Furthermore, there is a plausible basis for a counterclaim asserting that Nexford has already overpaid by approximately that same amount.
Even under a conservative scenario in which the late-notice defense under Section 7.4(a) is partially rejected — for example, if the court finds waiver or substantial compliance for some of the seven late-notice months — the methodology and cap defenses alone reduce exposure by approximately $2.55 million ($1.47 million + $1.08 million). Under this conservative scenario, Nexford's potential exposure would be approximately $2.18 million ($4.73 million − $2.55 million) — still less than half of Cardinal Peak's claimed amount. This conservative scenario represents the floor of Nexford's defensive position and illustrates that Nexford has meaningful protection even in a downside case.
V. Potential Counterarguments and Risk Assessment
A. Waiver / Course of Dealing
Cardinal Peak may argue that Nexford waived strict compliance with the fifteen-business-day notice deadline under Section 7.4(a) or the Exhibit C methodology under Section 7.4(b) through a course of dealing between the parties. Specifically, Cardinal Peak may point to instances in which Nexford accepted and paid surcharges without raising objections to the timing of the Surcharge Notice or the methodology used to calculate the surcharge.
Mitigation. This argument can be mitigated on several grounds. First, Nexford consistently disputed late and non-conforming surcharges through dispute notices sent in accordance with Section 7.4(d). The existence of these dispute notices demonstrates that Nexford did not silently acquiesce to Cardinal Peak's non-compliance but rather affirmatively objected each time a surcharge failed to conform to the MSA's requirements. Second, the MSA does not contain a broad waiver provision that would allow waiver to be inferred from a course of dealing. To the contrary, Section 14.8 of the MSA includes a standard "no waiver" provision stating that the failure of either party to enforce any provision of the MSA shall not constitute a waiver of that provision. Third, Illinois law generally requires clear and unequivocal evidence of waiver before a party's contractual rights will be deemed waived. A course of dealing, standing alone, is typically insufficient to establish waiver unless the party seeking waiver can demonstrate that the other party intentionally relinquished a known right with full knowledge of the facts.
Risk Assessment: Moderate. If the court finds that Nexford's conduct with respect to certain months constituted partial waiver — for example, if Nexford paid a surcharge without raising a timely dispute notice under Section 7.4(d) for a particular month — the late-notice defense may be weakened for those specific months. However, the risk is limited in scope: any waiver finding would likely be month-specific rather than a blanket waiver of the notice requirement across all disputed months.
B. Substantial Compliance
Cardinal Peak may argue that it "substantially complied" with the fifteen-business-day notice requirement, even if certain Surcharge Notices were delivered a few days late. Under this theory, Cardinal Peak would contend that the purpose of the notice deadline — to provide Nexford with timely information about surcharges — was largely fulfilled even when the notice was slightly delayed, and that strict enforcement of the deadline would produce a forfeiture disproportionate to the harm caused by the delay.
Mitigation. The contract specifies "no later than" fifteen business days — a bright-line deadline that admits of no sliding scale or grace period. Illinois courts generally enforce express timing requirements in commercial contracts, particularly where the contract language is mandatory and unambiguous. See Park Research Memo at 16–18. Moreover, the "substantial compliance" doctrine is generally applied to conditions involving subjective or qualitative performance obligations, not to conditions involving specific, objective deadlines. The fifteen-business-day deadline is precisely the type of clear, time-certain requirement that courts are most likely to enforce strictly.
Risk Assessment: Low to moderate. While a sympathetic court might be reluctant to impose forfeiture for notices that were only a day or two late, the contractual language strongly favors Nexford's position. The risk is further mitigated by the fact that many of the late notices in this case were not merely a day or two late — delays ranged up to eleven business days beyond the deadline.
C. Estoppel
If Nexford accepted and paid surcharges in prior months without objecting to the blended cost methodology, Cardinal Peak may argue that Nexford is estopped from challenging the methodology for subsequent months. The estoppel argument would rest on the theory that Cardinal Peak relied on Nexford's acceptance of the blended cost methodology in formulating its pricing and business strategy, and that it would be inequitable to allow Nexford to challenge the methodology retroactively.
Mitigation. Several factors weigh against an estoppel finding. First, Nexford paid only $1.68 million of the $6.41 million in total invoiced surcharges — a payment rate of approximately 26% — hardly indicative of wholesale acceptance. Second, Nexford consistently objected to the methodology through its dispute notices under Section 7.4(d). Third, the only month during the disputed period for which the surcharge was paid in full without dispute was April 2021, and that month's surcharge appears to have been calculated closer to the Exhibit C methodology than the surcharges for other months. Finally, even if Cardinal Peak relied on Nexford's prior payments, such reliance was unreasonable in light of Nexford's repeated objections and the clear requirements of the MSA.
Risk Assessment: Low. Estoppel is an equitable doctrine that is disfavored where the party asserting it had access to the same contractual provisions and could have conformed its conduct to the agreement. Cardinal Peak had Exhibit C in hand and chose to deviate from it; it cannot now claim that Nexford's conduct estopped it from being held to the agreed methodology.
D. Implied Consent to Cap Exceedances
Cardinal Peak may argue that Nexford's partial payments on certain surcharge invoices, or its failure to immediately reject cap-exceeding invoices upon receipt, constituted implied consent to exceed the 12% cap under Section 7.4(c).
Mitigation. This argument is squarely foreclosed by the express terms of the MSA. Section 7.4(c) requires "prior written consent of Buyer." This specification of form — prior, written — is controlling under Illinois law and overrides any argument based on implied consent, oral consent, or conduct-based consent. A party cannot satisfy a contractual requirement of "prior written consent" through after-the-fact, non-written conduct. Moreover, Nexford's partial payments on certain invoices were not payments of the cap-exceeding amounts — they were payments of the portions of the surcharges that Nexford accepted as conforming — and thus do not evidence any acceptance of the excess amounts.
Risk Assessment: Low. This is among Nexford's strongest defenses. The contractual language is clear, the requirement is objective, and the absence of prior written consent is a readily demonstrable fact.
VI. Recommendations and Next Steps
Based on the analysis set forth above, I recommend the following actions:
1. Answer and Affirmative Defenses. Build the affirmative defenses in Nexford's Answer (to be filed September 19, 2022) around the three Section 7.4 pillars identified in this memorandum: (a) failure to comply with the fifteen-business-day Surcharge Notice deadline under Section 7.4(a); (b) deviation from the Exhibit C Surcharge Methodology under Section 7.4(b); and (c) breach of the 12% surcharge cap under Section 7.4(c) without Nexford's prior written consent. We should also assert a waiver defense based on Cardinal Peak's failure to comply with conditions precedent, as well as a defense based on Cardinal Peak's failure to complete mandatory mediation under Section 14.3 before filing suit. A draft of the Answer and Affirmative Defenses will be circulated to the team by September 15, 2022 for review.
2. Counterclaim. Prepare a counterclaim for filing, targeting early October 2022. The counterclaim should seek: (a) a declaratory judgment that Nexford has no further surcharge obligation under the MSA beyond the $1.68 million already paid; and (b) recovery of the approximately $0.21 million potential overpayment, based on the theory that Nexford's payments to date exceed the properly calculated surcharges owed under the MSA after application of the Section 7.4 defenses.
3. Expert Engagement. Finalize the retention of Meridian Bridge Consulting LLC, led by Dr. Anita Rosenthal, CPA, ABV, to serve as Nexford's damages expert. Dr. Rosenthal should be engaged to perform a detailed month-by-month recalculation of the surcharges under the Exhibit C methodology using published Ferrous Scrap Index and Industrial Energy Cost Index data for each month in the disputed period (March 2021 through May 2022). The expert retention letter should be finalized and sent no later than September 22, 2022, with the goal of having the preliminary expert analysis completed by December 12, 2022 to support Nexford's discovery responses and any early-stage motion practice.
4. Fact Development. Conduct a detailed interview of Russell Okonkwo (Vice President, Procurement) regarding the following topics: (a) the dates of receipt of each Surcharge Notice from Cardinal Peak for the fourteen disputed months; (b) the dates and content of Nexford's dispute notices sent to Cardinal Peak under Section 7.4(d); (c) any communications between Nexford and Cardinal Peak regarding the blended cost methodology, including any discussions about the proper calculation method; and (d) any requests by Cardinal Peak for Nexford's written consent to exceed the 12% surcharge cap, and any responses thereto. We should also interview Deborah Whitfield (General Counsel) and Lydia Tran (Chief Financial Officer) regarding their involvement in, and knowledge of, the surcharge disputes.
5. Document Collection. Ensure that the litigation hold issued in connection with this matter covers the following categories of documents and data: all Surcharge Notices received from Cardinal Peak and supporting documentation; internal surcharge review logs maintained by Nexford's procurement department; all correspondence with Cardinal Peak's commercial team (including, without limitation, communications with Natalie Gunderson); published Ferrous Scrap Index and Industrial Energy Cost Index data for the disputed period; Nexford's payment records and accounting entries for surcharge payments, as maintained by Lydia Tran's finance team; and any internal analyses, spreadsheets, or memoranda prepared by Nexford personnel in connection with the surcharge disputes.
6. discovery Strategy. Prepare and serve interrogatories and document requests directed to Cardinal Peak, focused on the following topics: (a) the factual basis for Cardinal Peak's adoption and use of the blended cost methodology, including when and why it was adopted, whether Nexford was notified of the change from the Exhibit C methodology, and the identity of individuals involved in the decision; (b) Cardinal Peak's internal calculations and worksheets used to compute the surcharges for each disputed month; (c) Cardinal Peak's delivery records for Surcharge Notices, including transmission records, email logs, and courier tracking information; and (d) any communications between Cardinal Peak and Nexford regarding the 12% surcharge cap, including any requests for consent to exceed the cap.
7. Coordination with Hargrove Kellner CPAs LLP. Coordinate with Nexford's external auditors at Hargrove Kellner CPAs LLP (engagement partner Steven Margolis) to obtain relevant financial records supporting Nexford's payment history and the accounting treatment of surcharge payments in Nexford's financial statements. This coordination is important both for establishing Nexford's payment record and for ensuring consistency between the litigation position and Nexford's audited financial statements.
8. Budget Considerations. This analysis supports the estimated budget range communicated to the client of $200,000 to $275,000 for defense of the matter through mediation, inclusive of answer, affirmative defenses, counterclaim, initial discovery, expert retention and preliminary analysis, and mediation preparation and participation. If the case proceeds beyond mediation to dispositive motions and/or trial, the estimated range is $350,000 to $500,000, depending on the scope of discovery and trial preparation required. Given the strength of Nexford's contractual defenses, an early and aggressive defense posture may facilitate a favorable settlement outcome at mediation, reducing the total cost of the engagement.
9. Lender Notification. Under Nexford's $45 million revolving credit facility with Ridgecrest National Bank, N.A. (dated March 12, 2021), Section 6.03(b) requires Nexford to notify the lender of any settlements or judgments exceeding $1.0 million. This threshold should be kept in mind during settlement discussions. If Nexford's defenses are sustained and the matter resolves at or below $0.21 million (or even at the conservative-scenario level of approximately $2.18 million), the lender notification threshold may not be triggered. However, if settlement discussions approach or exceed $1.0 million, Deborah Whitfield should be reminded to coordinate with Lydia Tran and Ridgecrest National Bank regarding the notification obligation.
VII. Conclusion
Nexford Industrial Holdings Inc. has three strong, independent contractual defenses under MSA Section 7.4 that, taken together, reduce Cardinal Peak's $4.73 million claim to at most $0.21 million in additional exposure — a reduction of approximately 95.6%. The contractual language of Section 7.4 is clear and mandatory on all three points, and the available factual record, subject to further development, supports Nexford's interpretation and defensive position.
The three defense pillars — the fifteen-business-day notice requirement, the Exhibit C methodology requirement, and the 12% surcharge cap — are each independently substantial. Each defense standing alone would significantly reduce Nexford's exposure, and the combination of all three defenses creates overlapping layers of protection that substantially insulate Nexford from the risk that any single defense theory is rejected by the court.
I recommend aggressive assertion of these defenses in the pending litigation, beginning with the Answer and Affirmative Defenses to be filed on September 19, 2022, and continuing through the development of a comprehensive evidentiary record through fact development, document collection, and formal discovery. At the same time, Nexford should position itself for an eventual mediation resolution under Section 14.3 of the MSA, where the strength of its contractual defenses should provide meaningful leverage in settlement negotiations.
I will circulate this analysis to Deborah Whitfield and the broader engagement team for input and will incorporate the analysis and recommendations herein into the Litigation Strategy and Budget Memorandum being prepared for the client and Marlowe Asset Management Bluff Capital Partners, LP.
Please let me know if you have any questions or would like to discuss any aspect of this analysis in greater detail.
Simone Laroche Senior Associate, Litigation Calderwood & Harkness LLP Tel: (312) 555-4200
Email: slaroche@calderwoodharkness.com
Defense Category | Disputed Months Affected | Amount Attributable | Overlap Notes
Late Surcharge Notices (Section 7.4(a)) | 7 of 14 months | $2.18 million | Some months also have methodology and cap issues
Methodology Deviation (Section 7.4(b) / Exhibit C) | Multiple months | $1.47 million | Applies to months where indices differ from blended cost
Cap Exceedance (Section 7.4(c)) | 4 months | $1.08 million | Some months overlap with late-notice months
Total (before overlap adjustment) | $4.73 million

MEMORANDUM

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