PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
June 20, 2023
MEMORANDUM
FROM: Priya Anand, Partner, and Simone Laroche, Senior Associate Calderwood & Harkness LLP 200 South Wacker Drive, Suite 4400 Chicago, IL 60606
TO: Deborah Whitfield, General Counsel, and Martin Schaeffer, CEO Nexford Industrial Holdings Inc. 4200 West Lakeshore Industrial Parkway, Suite 300 Waukegan, IL 60085
CC: Diana Calloway, Principal Marlowe Asset Management Bluff Capital Partners, LP 875 North Michigan Avenue, Suite 3600 Chicago, IL 60611
Douglas Carmichael, Partner Calderwood & Harkness LLP
RE: Mediation Strategy — 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 Matter No. 1005-00005
PRIVILEGE DESIGNATION: This memorandum is a privileged and confidential attorney-client communication and attorney work product. It is prepared in anticipation of mediation and litigation and should not be disclosed to any third party without the prior written consent of counsel. Inadvertent disclosure does not constitute a waiver of any applicable privilege or protection. If you have received this memorandum in error, please contact Priya Anand at Calderwood & Harkness LLP immediately.
I. EXECUTIVE SUMMARY
The purpose of this memorandum is to outline Nexford Industrial Holdings Inc.'s ("Nexford" or the "Company") comprehensive strategy for the full-day mediation session scheduled for August 2, 2023, before the Honorable Catherine Lindström (Ret.), at the Great Lakes Dispute Resolution Center, 150 North Riverside Plaza, Suite 2700, Chicago, IL 60606. This memorandum addresses Nexford's assessment of the parties' respective legal positions, the strengths and weaknesses of the defenses and claims at issue, the range of probable litigation outcomes, and our recommended negotiation approach and settlement parameters.
The mediation arises pursuant to Section 14.3 of the Master Supply Agreement between the parties ("MSA"), which requires mandatory mediation in Chicago, Illinois, before either party may proceed with contested litigation. Consistent with this requirement, the parties filed a joint motion on May 22, 2023 to stay the pending litigation, which the Court granted on June 5, 2023. The mediation therefore proceeds against the backdrop of active litigation that will resume if the parties are unable to reach resolution.
Cardinal Peak's Claim. Cardinal Peak Industries ("Cardinal Peak" or "CPI") claims a total of $4.73 million in unpaid surcharges under the MSA, covering the period from March 2021 through May 2022. In addition, CPI's retained expert, Dr. Theodore Voss of Pinnacle Economics Group LLC, submitted a report dated April 12, 2023, calculating prejudgment interest of approximately $0.38 million through the date of the report, bringing CPI's total damages claim to approximately $5.11 million. This prejudgment interest figure continues to accrue and would increase further through any eventual trial date.
Nexford's Position. Nexford's position is that, based on three independent categories of contractual defense — untimely surcharge notices, deviation from the contractually mandated calculation methodology, and exceedance of the contractual surcharge cap — it owes at most an additional $0.21 million beyond the $1.68 million it has already paid toward surcharges during the disputed period. Nexford has asserted these positions both defensively and through its counterclaim for breach of contract and declaratory relief, which survived CPI's motion to dismiss.
Settlement Recommendation. Calderwood & Harkness recommends that Nexford seek settlement authority of up to $2.0 million. Our target settlement range is $1.5 million to $2.0 million, which represents approximately 32% to 42% of the $4.73 million claimed by Cardinal Peak. We recommend that Nexford's opening mediation position be $0.21 million, consistent with its calculated maximum contractual liability, in order to anchor negotiations and signal the strength of its defenses. This opening position will provide significant room for negotiation while establishing Nexford's view of the merits.
Overall Assessment. Nexford holds strong contractual defenses supported by clear contract language, documentary evidence, and favorable deposition testimony from Cardinal Peak's own witness. However, litigation risk at trial is never zero. Cardinal Peak will present a sympathetic narrative concerning the historically unprecedented volatility in steel commodity prices during the disputed period, and a fact-finder could view Nexford's reliance on strict contractual mechanics less favorably in that context. A settlement in the recommended range would represent a favorable outcome for Nexford, would save significant future legal costs estimated at $100,000 to $225,000, and would provide the business certainty necessary for the Company to redirect its attention to operations and strategic priorities.
The sections that follow set forth in detail the factual background, procedural posture, legal analysis, risk assessment, settlement range analysis, and our recommended negotiation strategy and tactics for the August 2, 2023 mediation.
II. BACKGROUND AND PROCEDURAL POSTURE
A. The Master Supply Agreement
The dispute at the center of this litigation arises from the Master Supply Agreement bearing reference number MSA-NIH-CPI-2020-001, executed on January 15, 2020, between Nexford Industrial Holdings Inc. (as "Buyer") and Cardinal Peak Industries (as "Seller"). The MSA governs the purchase and sale of flat-rolled carbon steel products, principally hot-rolled coil ("HRC") and cold-rolled coil ("CRC"), for use in Nexford's manufacturing operations at its Waukegan and Joliet facilities.
Term. The MSA has an initial three-year term running from January 15, 2020 through January 14, 2023, with automatic one-year renewal periods unless either party provides written notice of termination not fewer than 180 days prior to the expiration of the then-current term. As of the date of this memorandum, the MSA has not been formally terminated and remains nominally in effect, although the commercial relationship between the parties has deteriorated to the point where no new orders have been placed since approximately June 2022.
Base Pricing. The MSA establishes base pricing as follows:
• HRC: $620 per ton (2020 base price)
• CRC: $740 per ton (2020 base price)
These base prices are subject to quarterly adjustment in accordance with Section 7.2 of the MSA, which references published market indices and provides a formula-based escalation mechanism. The quarterly adjustment provisions are not themselves at issue in this dispute; rather, the dispute centers exclusively on the surcharge mechanism set forth in Section 7.4.
Estimated Volumes. The MSA contemplated estimated annual volumes of approximately 18,000 tons of HRC and 6,500 tons of CRC, for a combined annual volume of approximately 24,500 tons. At the applicable base prices, this translates to an estimated annual spend of approximately $15.97 million. The MSA relationship was therefore a significant commercial arrangement for both parties, and the surcharge dispute represents a meaningful fraction of the total contract value.
Surcharge Clause — Section 7.4. The provision at the heart of this litigation is Section 7.4 of the MSA, which permits the Seller to pass through documented raw-material surcharges — specifically, surcharges attributable to increases in scrap metal costs, energy costs, and alloy costs — to the Buyer. Critically, however, Section 7.4 conditions the Seller's right to impose surcharges on the Buyer's compliance with three express requirements:
(a) Timely Surcharge Notice (Section 7.4(a)). Seller must deliver a written Surcharge Notice, accompanied by supporting documentation, to Buyer no later than 15 business days after the end of the applicable month for which the surcharge is being assessed. The notice must specify the surcharge amount, the applicable month, and the cost categories giving rise to the surcharge.
(b) Calculation Methodology (Section 7.4(b) and Exhibit C). The surcharge must be calculated in accordance with the methodology prescribed in Exhibit C to the MSA. Exhibit C specifies the use of the Ferrous Scrap Index as published by Platts/SPI and the Industrial Energy Cost Index as the reference benchmarks for calculating raw-material cost increases. The calculation is performed against a baseline scrap cost of $340 per ton and a baseline energy cost of $48 per ton. The methodology in Exhibit C is detailed and formula-driven, and it was negotiated between the parties' respective procurement and commercial teams prior to execution of the MSA.
(c) Surcharge Cap (Section 7.4(c)). The aggregate monthly surcharge imposed on the Buyer shall not exceed 12% of the applicable Base Price absent the Buyer's prior written consent. For HRC at a $620 base price, this equates to a cap of $74.40 per ton; for CRC at a $740 base price, the cap is $88.80 per ton. This cap was a negotiated protection for Nexford, designed to limit its exposure to extreme commodity price movements within any given month.
Dispute Procedure — Section 7.4(d). The MSA provides that if the Buyer disputes any surcharge, it must notify the Seller of the dispute within 30 calendar days of receipt of the applicable Surcharge Notice. If the parties are unable to resolve the dispute within a reasonable period, unresolved disputes escalate first to the senior officers of the respective parties and then, if still unresolved, to mandatory mediation in accordance with Section 14.3.
Section 14.3 — Mandatory Mediation. Section 14.3 requires that, prior to commencing or proceeding with contested litigation, the parties must participate in good-faith mediation in Chicago, Illinois. The mediation is to be conducted by a mutually agreed neutral or, if the parties cannot agree, by a neutral appointed by a recognized dispute resolution organization. The MSA specifies that Illinois law governs all disputes arising under the agreement.
B. The Surcharge Dispute
The surcharge dispute at issue spans the 15-month period from March 2021 through May 2022. Of this 15-month window, 14 months are in dispute — the exception being April 2021, for which Nexford paid Cardinal Peak's surcharge invoice in full, as discussed in greater detail below.
During this period, the steel industry experienced extraordinary volatility in raw-material costs. Hot-rolled coil prices on the open market surged to historically unprecedented levels, driven by supply chain disruptions related to the COVID-19 pandemic, mill restarts, strong demand from construction and automotive sectors, and energy cost increases. Cardinal Peak asserts that it bore significant cost increases that it was entitled to pass through to Nexford under the MSA's surcharge provisions.
The financial parameters of the dispute are as follows:
Nexford's position is that of the $6.41 million in surcharges invoiced, it was contractually obligated to pay only $1.89 million, and having already paid $1.68 million, its maximum additional exposure is $0.21 million. Nexford's defenses to the remaining $4.52 million claimed rest on the three categories of contractual noncompliance discussed in detail in Section III below.
C. Procedural History
The procedural history of this matter is summarized as follows:
June 10, 2022: Blackwood Stein & Associates LLP, acting as litigation counsel for Cardinal Peak Industries (Garrett Blackwood, lead partner; Megan Hsu, associate), transmitted a formal written demand to Nexford for $4.73 million, asserting that Nexford was in breach of its surcharge payment obligations under the MSA. The demand letter set a 30-day deadline for response and threatened litigation if the matter was not resolved.
July 5, 2022: Deborah Whitfield, General Counsel of Nexford, responded to the demand on behalf of the Company, rejecting Cardinal Peak's claim in its entirety and setting forth Nexford's contractual defenses in summary form. Ms. Whitfield's response also requested the escalation of the dispute to senior officers pursuant to Section 7.4(d) of the MSA, though Cardinal Peak did not respond substantively to this request.
August 8, 2022: Cardinal Peak filed its Complaint in the Circuit Court of Cook County, Illinois, County Department, Law Division, under Case No. 2022-L-008471. The Complaint asserts three causes of action: (1) breach of contract (Count I), alleging failure to pay $4.73 million in contractually owed surcharges; (2) unjust enrichment (Count II), alleging that Nexford was unjustly enriched by receiving steel products at below-market prices without paying the applicable surcharges; and (3) account stated (Count III), alleging that Nexford's failure to timely dispute certain invoices gave rise to an implied agreement on the amounts owed.
August 22, 2022: Nexford engaged Calderwood & Harkness LLP as litigation counsel.
September 19, 2022: Calderwood & Harkness filed Nexford's Answer and Affirmative Defenses, denying the material allegations of the Complaint and asserting, among other things, the three categories of contractual defense (untimely notice, methodology deviation, and surcharge cap exceedance) that form the foundation of Nexford's litigation position.
October 3, 2022: Calderwood & Harkness filed Nexford's Counterclaim, asserting (1) breach of contract by Cardinal Peak based on its failure to comply with the Exhibit C methodology and the surcharge notice requirements, and (2) declaratory relief seeking a judicial determination that Nexford has no further surcharge obligations under the MSA. The Counterclaim seeks recovery of $0.21 million, representing the amount by which Nexford asserts it has overpaid relative to its correctly calculated obligations under the MSA.
November 14, 2022: The Court denied Cardinal Peak's Motion to Dismiss Nexford's Counterclaim, finding that the counterclaim stated plausible claims for breach of contract and declaratory relief. This ruling was a significant early procedural win for Nexford and lends credibility to Nexford's defenses.
December 2022 – April 2023: The parties engaged in written discovery, including interrogatories, requests for production of documents, and fact depositions. Discovery was extensive and produced significant documentary evidence bearing on the surcharge dispute, including Cardinal Peak's internal surcharge computation worksheets, email communications between the parties' procurement teams, and CPI's internal cost records.
January 18, 2023: Deposition of Natalie Gunderson, Vice President of Sales and Commercial at Cardinal Peak Industries. Ms. Gunderson's testimony included several significant admissions, discussed in detail in Section III below, regarding late delivery of surcharge notices, use of a non-conforming calculation methodology, and her lack of awareness of the 12% surcharge cap.
February 7, 2023: Deposition of Russell Okonkwo, Vice President of Procurement at Nexford Industrial Holdings. Mr. Okonkwo testified regarding Nexford's contemporaneous objections to the surcharge invoices, the basis for Nexford's refusal to pay the disputed amounts, and Nexford's understanding of the MSA's surcharge provisions.
March 15, 2023: Expert reports exchanged. Dr. Anita Rosenthal of Meridian Bridge Consulting LLC submitted her expert rebuttal report on behalf of Nexford, quantifying the methodology deviation at approximately $1.47 million and supporting Nexford's position that its maximum additional exposure under the MSA is $0.21 million.
April 12, 2023: Dr. Theodore Voss of Pinnacle Economics Group LLC submitted his expert report on behalf of Cardinal Peak, calculating total damages of $5.11 million (including $0.38 million in prejudgment interest through April 2023).
May 22, 2023: The parties filed a Joint Motion to Stay Litigation Pending Mediation, consistent with the MSA's mandatory mediation requirement under Section 14.3.
June 5, 2023: The Court granted the joint motion and entered an order staying all proceedings pending the outcome of mediation. The stay is effective until 30 days after the mediation is concluded, at which point the parties are directed to file a joint status report.
III. ASSESSMENT OF NEXFORD'S DEFENSES — STRENGTHS
This section provides a detailed assessment of Nexford's affirmative defenses and counterclaim. Each defense is analyzed in terms of its legal basis, supporting evidence, and assessed strength. We believe Nexford enters the mediation from a position of significant contractual strength, which should inform both the negotiation strategy and the settlement parameters.
A. Defense 1: Untimely Surcharge Notices ($2.18 Million)
Contractual Basis. Section 7.4(a) of the MSA requires the Seller to deliver each Surcharge Notice, together with supporting documentation, "no later than fifteen (15) business days after the end of the applicable month." This language is mandatory and unambiguous. It does not provide for extensions, grace periods, or excuses for late delivery. Under well-established Illinois contract law, where a contract condition is stated in mandatory language, compliance with the condition is a prerequisite to the exercise of the associated right.
Factual Basis. Based on documentary evidence obtained during the discovery phase — including email transmittals, certified mail receipts, and CPI's own internal records of surcharge notice dispatch dates — Cardinal Peak failed to meet the 15-business-day deadline for seven (7) of the fourteen (14) disputed months. The delays ranged from a few business days to, in one instance, more than six weeks beyond the contractual deadline.
Dollar Value. The surcharges associated with the seven months in which notices were untimely total approximately $2.18 million. Under Nexford's reading of the contract, Cardinal Peak forfeited its right to collect these surcharges by failing to comply with the express notice condition.
Key Evidence. The documentary record is clear and largely undisputed. Most significantly, Natalie Gunderson acknowledged during her January 18, 2023 deposition that certain Surcharge Notices were delivered after the contractual deadline. While Ms. Gunderson attempted to characterize the delays as immaterial and attributable to administrative processing backlogs, her admissions that notices were late for specific months provide powerful evidence for Nexford's defense. The contemporaneous email records corroborate the dates of delivery and, in several instances, show CPI's own internal communications acknowledging the lateness.
Legal Basis. Under Illinois law, timely notice is a condition precedent to a contracting party's right to exercise a contractual entitlement. See, e.g., Gallagher Corp. v. Russ, 309 Ill. App. 3d 192 (1st Dist. 1999) (enforcing contractual notice deadline as condition precedent); Wil-Shore Motor Sales, Inc. v. City of Elmhurst, 2017 IL App (1st) 161392 (same). Failure to comply with a condition precedent constitutes waiver of the right conditioned upon it, unless the other party has excused or waived the condition through its conduct.
Strength Assessment: This is a strong defense. The contractual language is clear and mandatory, the documentary evidence supports late delivery for seven months, and Ms. Gunderson's admissions bolster the position significantly. The principal risk to this defense is Cardinal Peak's argument that Nexford waived strict compliance through a course of dealing, which is discussed in Section IV.C below.
B. Defense 2: Deviation from Exhibit C Methodology ($1.47 Million)
Contractual Basis. Section 7.4(b) of the MSA requires that all surcharges be "calculated in accordance with the methodology set forth in Exhibit C." Exhibit C, in turn, prescribes a specific formula-based calculation utilizing the Ferrous Scrap Index as published by Platts/SPI and the Industrial Energy Cost Index as the exclusive reference benchmarks. The surcharge for any given month is determined by measuring the variance between the applicable published index values and the contractual baseline costs ($340/ton for scrap and $48/ton for energy), and then applying the resulting surcharge percentage to the applicable Base Price. The methodology is detailed, internally consistent, and leaves little room for alternative interpretation.
Factual Basis. Rather than applying the Exhibit C methodology using the published indices, Cardinal Peak used an internal "blended cost" metric that incorporated CPI's own actual procurement costs for scrap, energy, and alloy inputs. This blended cost metric is not referenced in Exhibit C, was not negotiated as part of the MSA, and was not disclosed to Nexford as the basis for surcharge calculations until it was uncovered during discovery. The use of this non-conforming methodology resulted in surcharges that were systematically higher than those that would have been calculated using the contractually mandated published indices.
Dollar Value. Dr. Anita Rosenthal of Meridian Bridge Consulting LLC, Nexford's retained expert, has quantified the overstatement attributable to the methodology deviation at approximately $1.47 million. Dr. Rosenthal's analysis recalculated each disputed surcharge using the Exhibit C methodology and compared the results to the amounts actually invoiced by Cardinal Peak, isolating the deviation attributable to the use of the blended cost metric.
Key Evidence. This defense is supported by several categories of compelling evidence:
(i) Gunderson Deposition Testimony. Ms. Gunderson acknowledged during her deposition that CPI's surcharge calculations utilized a blended cost metric rather than the published Ferrous Scrap Index and Industrial Energy Cost Index specified in Exhibit C. While she testified that she believed the blended cost metric more accurately reflected CPI's actual costs, she did not dispute that the MSA specifies a different methodology.
(ii) Internal Surcharge Computation Worksheets. discovery produced Cardinal Peak's internal surcharge computation worksheets, which plainly show the use of CPI's proprietary cost data rather than published index values. These worksheets were not shared with Nexford contemporaneously and reflect a methodology that departs from the Exhibit C formula.
(iii) Dr. Rosenthal's Expert Rebuttal Report. Dr. Rosenthal's detailed report provides a month-by-month recalculation of the surcharges using the contractually specified indices and methodology. Her analysis is methodologically sound, internally consistent, and quantifies the methodology deviation at $1.47 million with a high degree of confidence.
Strength Assessment: This is a strong defense. The contract language in Exhibit C is specific and prescriptive. The expert analysis supports the quantification with granular detail. Ms. Gunderson's testimony is a significant admission that CPI did not follow the contractual methodology. The principal risk to this defense is Cardinal Peak's anticipated argument that Exhibit C was a guideline rather than a mandatory formula, which we address in Section IV.D below.
C. Defense 3: Surcharge Cap Exceedance ($1.08 Million)
Contractual Basis. Section 7.4(c) of the MSA provides that the "aggregate monthly surcharge shall not exceed twelve percent (12%) of the applicable Base Price without the prior written consent of Buyer." This provision was specifically negotiated by Nexford's procurement team as a protection against extreme surcharge exposure in any given month. The 12% cap operates as a ceiling on Nexford's surcharge obligation, and the requirement for "prior written consent" to exceed the cap ensures that any exceedance is a conscious, affirmative decision by Nexford.
Factual Basis. For four (4) months during the disputed period, the surcharges invoiced by Cardinal Peak exceeded the 12% cap on an absolute basis:
• HRC 12% cap: $74.40 per ton (12% × $620 base price)
• CRC 12% cap: $88.80 per ton (12% × $740 base price)
In each of these four months, CPI's invoices reflect surcharges that materially exceeded these thresholds. Cardinal Peak has produced no evidence that it obtained Nexford's prior written consent to exceed the 12% cap for any of these months. Nexford's records likewise contain no such consent documents, and Russell Okonkwo testified that no such consent was ever given.
Dollar Value. The aggregate surcharge amounts in excess of the 12% cap across these four months total approximately $1.08 million.
Key Evidence. The evidence supporting this defense is particularly straightforward:
(i) The invoices themselves. CPI's surcharge invoices for the four months in question reflect surcharges that, on their face, exceed 12% of the applicable Base Price. This is a matter of simple arithmetic.
(ii) Absence of written consent. Neither party has produced any written consent from Nexford authorizing surcharges in excess of the 12% cap. The contract requires "prior written consent," and no such document exists.
(iii) Gunderson Deposition Testimony. Ms. Gunderson testified that she was unaware of the 12% cap provision at the time the surcharge invoices were issued. This is a remarkable admission, given that the cap is a central protective feature of the surcharge clause and was presumably negotiated at arm's length.
Strength Assessment: This is a strong defense. The invoices provide clear, mathematical evidence of cap exceedance. The absence of any written consent is dispositive on the contractual question. Ms. Gunderson's lack of awareness of the cap provision suggests that CPI simply did not comply with a material contract term. However, as noted in Section IV.A below, there is some overlap between this defense category and the other two categories, which could affect the cumulative impact if a court declines to credit all three defenses independently.
D. Unjust Enrichment Claim Is Vulnerable
Cardinal Peak asserted unjust enrichment as Count II of its Complaint. Under this theory, CPI alleges that Nexford was unjustly enriched by receiving steel products at prices that did not reflect CPI's actual raw-material costs, and that equity requires Nexford to compensate CPI for the benefit conferred.
This claim faces a fundamental legal barrier. Under well-established Illinois law, a claim for unjust enrichment cannot be maintained where an express contract governs the subject matter of the dispute. See HPI Health Care Servs., Inc. v. Mt. Vernon Hosp., Inc., 131 Ill. 2d 145, 160 (1989); Guinn v. Hoskins Chevrolet, 361 Ill. App. 3d 575, 604 (1st Dist. 2005). The MSA is an express, written contract that specifically governs the parties' rights and obligations with respect to surcharges. The surcharge clause is detailed, was negotiated at arm's length, and leaves no gap that an unjust enrichment claim could fill.
Calderwood & Harkness's internal analysis, set forth in a memorandum dated October 15, 2022, concluded that CPI's unjust enrichment claim should be dismissed on summary judgment. We remain confident in this assessment and expect that a motion for summary judgment on Count II would be successful if the case proceeds to trial.
Strength Assessment: Very strong. This claim would likely not survive a summary judgment motion and provides limited settlement leverage for Cardinal Peak.
E. Account Stated Claim Is Weak
Cardinal Peak asserted account stated as Count III of its Complaint. Under Illinois law, an account stated is an agreement between parties who have prior dealings that the account representing the transactions between them is correct, together with a promise, express or implied, to pay such balance. See Allstate Ins. Co. v. Nwankwo, 2019 IL App (1st) 180756, ¶ 37. A critical element of this claim is acquiescence — the party against whom the account is stated must have accepted or failed to timely dispute the account.
Nexford has a complete defense to this claim. The MSA provides, at Section 7.4(d), that the Buyer must notify the Seller of any surcharge dispute within 30 calendar days. Nexford timely disputed each of the surcharge invoices at issue within the contractual period, and the documentary record includes contemporaneous written objections from Russell Okonkwo and other Nexford procurement personnel. Because Nexford never acquiesced in the invoiced amounts, the fundamental prerequisite for an account stated claim is absent.
Strength Assessment: Strong. Nexford's contemporaneous dispute notifications effectively defeat this claim. Like the unjust enrichment claim, this count provides Cardinal Peak with minimal settlement leverage.
F. Nexford's Counterclaim
On October 3, 2022, Nexford filed a counterclaim against Cardinal Peak asserting two causes of action: (1) breach of contract, based on CPI's failure to comply with the Exhibit C methodology and the Section 7.4(a) notice requirements; and (2) declaratory relief, seeking a judicial determination that Nexford has no further surcharge obligations under the MSA and that the amounts already paid satisfy Nexford's contractual obligations in full. The counterclaim seeks recovery of $0.21 million, representing the amount by which Nexford asserts it has overpaid relative to its correctly calculated obligations.
The counterclaim survived Cardinal Peak's Motion to Dismiss, which the Court denied on November 14, 2022. The Court found that Nexford's counterclaim stated plausible claims and could proceed to discovery and, if warranted, trial.
While the dollar value of the counterclaim is modest in relation to the overall dispute, the counterclaim serves several important strategic functions in the mediation context. First, it signals Nexford's confidence in its contractual position and its willingness to press affirmative claims rather than merely defend. Second, it imposes additional litigation cost on Cardinal Peak, which must defend against the counterclaim while pursuing its own claims. Third, it provides a basis for Nexford to assert that any settlement should account for CPI's potential exposure on the counterclaim, thereby anchoring the discussion closer to Nexford's view of the proper outcome. We recommend emphasizing the counterclaim during the mediation as evidence of good faith and contractual compliance.
IV. ASSESSMENT OF NEXFORD'S POSITION — WEAKNESSES AND RISKS
No litigation position is without risk, and responsible settlement analysis requires a candid assessment of the vulnerabilities in Nexford's position. This section identifies the principal risks and weaknesses that may affect the mediation and, if the case proceeds, the trial outcome.
A. Overlap Among Defense Categories
A significant analytical consideration is that some overlap exists among the three defense categories. The same monthly surcharge invoices may fall into more than one category — for example, a surcharge for a particular month may have been both untimely noticed and calculated using the non-conforming methodology, or may have both exceeded the 12% cap and been based on the blended cost metric. The sum of the three defense categories ($2.18M + $1.47M + $1.08M = $4.73M) equals the full amount of Cardinal Peak's claim, but this arithmetic is in part a function of overlapping application rather than independent reductions.
If the Court or a trier of fact does not credit the defenses cumulatively — that is, if it declines to reduce the same dollar amount twice where two defenses apply to the same invoice — the total reduction could be less than the full sum of the three categories. Nexford's primary litigation position is that it owes at most $0.21 million, but the overlap issue introduces the possibility that a fact-finder could arrive at a higher figure, particularly if it applies only the strongest defense to each invoice and declines to layer multiple defenses on the same amount.
We have addressed this issue in our expert analysis and in the presentation of Nexford's position, but it remains a risk that Cardinal Peak will exploit in negotiations and, if necessary, at trial.
B. Risk of Sympathetic Narrative for Cardinal Peak
During the disputed period of March 2021 through May 2022, the steel industry experienced historically significant volatility and price increases. Hot-rolled coil prices on the open market exceeded $1,900 per ton at their peak, compared to the MSA's base price of $620 per ton. The cost of ferrous scrap surged by comparable magnitudes, and energy costs rose sharply as well. These were real, documented cost increases that affected steel producers across the industry.
Cardinal Peak will argue — and has already argued in its pleadings and expert report — that it incurred legitimate, documented cost increases and that Nexford benefited from receiving steel products at prices substantially below prevailing market rates. CPI will position itself as a supplier that honored its contractual commitment to deliver product at agreed prices even as its costs skyrocketed, and that sought only to pass through the cost increases to which it was contractually entitled.
A fact-finder, particularly a jury, could view Nexford's reliance on strict notice deadlines, mathematical formulas, and percentage caps as an effort to avoid paying for genuine cost increases that it was aware of and from which it benefited. The equitable dimension of this argument should not be underestimated. Even though the MSA's terms are clear, a sympathetic narrative about a supplier absorbing massive cost increases while the buyer refuses to pay surcharges on technical grounds could influence the outcome.
Risk Level: Moderate — this risk is more pronounced in a jury trial setting and somewhat mitigated in a bench trial. However, even a judge may be influenced by the equitable considerations, particularly if CPI can show that Nexford was aware of the extraordinary market conditions and benefited from them.
C. Late Notice Defense May Be Contested
Cardinal Peak will advance two primary arguments against Nexford's untimely notice defense. First, CPI will argue substantial compliance, contending that its notices were only marginally late and that the substance of the notices — including the supporting cost documentation — was otherwise complete and accurate. Under this theory, CPI will argue that the purpose of the 15-business-day deadline was to ensure timely communication and transparency, and that this purpose was satisfied even if the formal delivery was a few days late.
Second, and more significantly, CPI will argue that Nexford waived strict compliance with the notice deadline through a course of dealing. The foundation for this argument is the fact that Nexford paid the April 2021 surcharge in full. CPI may contend that this payment, which covered a month during the disputed period, signals Nexford's willingness to accept surcharges without strict adherence to the 15-business-day deadline. If CPI can establish a pattern of acceptance — even a limited one — an Illinois court could find that Nexford waived its right to insist on strict compliance with the notice deadline for the remaining months.
We note, however, that the April 2021 surcharge presents a distinguishable fact pattern: the surcharge for that month was within the 12% cap and was, upon our review, timely noticed. Accordingly, the payment of the April 2021 surcharge does not necessarily establish a pattern of accepting late or non-conforming notices. We will emphasize this distinction in the mediation and, if necessary, at trial.
Risk Level: Moderate — an Illinois court could find waiver of strict timing compliance if a course-of-dealing pattern is established, though we believe the distinction described above significantly mitigates this risk.
D. Methodology Defense Complexity
While the contract language in Exhibit C clearly favors the use of published indices, the methodology defense presents some complexity that Cardinal Peak will attempt to exploit. Specifically, CPI's blended cost metric arguably captured actual costs that, in certain months, may have exceeded the published index values. In other words, for some months, the published indices may have underestimated the true cost increases that CPI experienced, because CPI's specific procurement mix was more expensive than the market average reflected in the indices.
Cardinal Peak may argue that Exhibit C was intended as a guideline or framework rather than an exclusive and inflexible formula, and that the blended cost metric more faithfully reflected the economic reality of the surcharges. CPI may also point to any informal communications between the parties' procurement teams — emails or conversations in which flexibility on methodology was discussed — to support the argument that the parties did not treat Exhibit C as a rigid constraint.
Additionally, Dr. Theodore Voss's expert report supports Cardinal Peak's damages figure using the blended cost methodology. While we believe Dr. Rosenthal's rebuttal analysis is stronger and more grounded in the contract language, Dr. Voss is a credentialed and experienced expert whose report will need to be directly countered. A "battle of the experts" at trial introduces additional uncertainty into the outcome.
Risk Level: Moderate — the contract language is clear, but the factual complexity and the existence of a competing expert opinion introduce risk.
E. Trial Cost and Duration
If mediation fails and the case proceeds to trial, Nexford should anticipate significant additional costs. Based on our current assessment of the remaining work required — including summary judgment briefing, motions in limine, expert depositions, trial preparation, and trial itself — we estimate additional legal fees in the range of $100,000 to $225,000. This would bring Nexford's total legal expenditure on this matter to approximately $350,000 to $500,000, consistent with the range originally budgeted at the outset of the engagement.
In addition to the financial costs, trial preparation and the trial itself will consume significant management time and attention. Deborah Whitfield, Russell Okonkwo, and potentially Martin Schaeffer would need to be available for trial preparation sessions, deposition defense, and trial testimony over a period of several weeks. The trial would likely take place in early 2024 — approximately 6 to 12 months from now — further extending the duration of this dispute.
The inherent uncertainty of trial outcomes is a fundamental consideration. Even with strong defenses and favorable evidence, there is no guarantee that a judge or jury will reach the outcome Nexford expects. Unexpected rulings on evidentiary motions, credibility assessments, or novel interpretations of contract language can alter the trajectory of a trial in unpredictable ways.
F. Prejudgment Interest Exposure
If Nexford is unsuccessful at trial, the Court would likely award prejudgment interest on the judgment amount. Dr. Voss has calculated prejudgment interest at $0.38 million through April 2023, and this figure continues to accrue. By the time of a likely trial date in early 2024, the prejudgment interest component could increase materially, potentially to $0.50 million or more, depending on the judgment amount and the applicable interest rate.
This accruing exposure provides an additional incentive for Nexford to resolve the dispute through mediation rather than risk a larger judgment that includes a substantial interest component.
V. SETTLEMENT RANGE ANALYSIS
This section provides a structured analysis of the range of probable outcomes at trial, the expected value of the litigation, and the cost-benefit analysis supporting our recommended settlement range. The analysis is designed to provide Nexford's decision-makers with a clear framework for evaluating settlement proposals at the mediation.
A. Nexford's Best-Case Scenario
In Nexford's best-case scenario, the Court accepts all three of Nexford's contractual defenses in full, finds that Cardinal Peak is not entitled to any of the disputed surcharges, and awards Nexford $0.21 million on its counterclaim, representing the overpayment Nexford asserts it has made. The unjust enrichment and account stated claims are dismissed. Nexford's net recovery would be $0.21 million.
This scenario requires the Court to enforce the notice deadline strictly for all seven untimely months, to find that the Exhibit C methodology is the exclusive basis for surcharge calculation, and to enforce the 12% cap without exception. While each of these positions is well-supported, the likelihood of prevailing on all three defenses for all disputed months is inherently uncertain.
Probability Assessment: 15–20%
B. Nexford's Most Likely Trial Outcome Range
In the most probable outcome range, the Court accepts substantial portions of the notice and methodology defenses but finds some overlap among the defense categories, reduces the cumulative effect accordingly, and enforces the cap defense for the months in which the cap was demonstrably exceeded. Under this scenario, the Court may also find that Nexford waived strict notice compliance for one or two months based on a course-of-dealing analysis, or may apply the methodology defense only partially, allowing CPI to recover some portion of the surcharges based on actual cost data.
Under this scenario, the probable trial judgment range is:
Probability of outcome in this range: 50–60%
C. Nexford's Worst-Case Scenario
In the worst-case scenario, the Court rejects or significantly limits the notice defense (finding waiver through course of dealing), determines that the Exhibit C methodology was a guideline rather than an exclusive formula, and awards most or all of Cardinal Peak's claimed surcharges. Under this scenario, Nexford would face a judgment of:
At the extreme end, this scenario could result in a total judgment (including accruing prejudgment interest through a trial in early 2024) that exceeds the $5.11 million calculated in Dr. Voss's report.
Probability: 15–20%
D. Expected Value Calculation
Applying the probability assessments to the range of outcomes yields a weighted expected trial outcome of approximately $1.5 million to $2.0 million. This calculation blends the low-probability best-case and worst-case scenarios with the higher-probability middle range:
• Best case ($0 net after counterclaim recovery) × 17.5% probability = ~($0.04M) credit
• Most likely range ($0.85M – $2.8M, midpoint ~$1.83M) × 55% probability = ~$1.01M
• Worst case ($3.88M – $5.28M, midpoint ~$4.58M) × 17.5% probability = ~$0.80M
• Residual probability (10%) allocated across mid-range scenarios = ~$0.22M
• Weighted expected value: approximately $1.5M – $2.0M
This expected value calculation confirms that a settlement in the range of $1.5 million to $2.0 million is consistent with the risk-adjusted probable outcome of the litigation. Importantly, a settlement in this range achieves this result without incurring the additional legal fees, management distraction, and uncertainty associated with proceeding through trial.
E. Cost-Benefit Summary
The following table summarizes the cost-benefit comparison between settlement at the recommended range and proceeding through trial:
To illustrate the cost-benefit analysis at a specific point, consider a settlement at $1.89 million (the approximate midpoint of the target range):
• Settlement payment: $1.89 million
• Estimated total legal costs through mediation: ~$272,000
• Total cost to Nexford at settlement: ~$2.16 million
• Cardinal Peak's claimed amount: $4.73 million
• Estimated legal costs through trial: ~$450,000
• Total exposure at trial (if full claim awarded): ~$5.18 million
• Gross savings at $1.89M settlement: $2.84 million ($4.73M − $1.89M)
• Net savings (after legal costs): ~$3.02 million ($5.18M − $2.16M)
Even under a more moderate trial outcome scenario, settlement in the recommended range would yield comparable results with the significant additional benefit of certainty and finality.
VI. RECOMMENDED SETTLEMENT AUTHORITY
Based on the foregoing analysis, Calderwood & Harkness requests that Nexford's decision-makers authorize settlement authority as follows:
Settlement Authority: Up to $2.0 million.
This amount represents approximately 42% of the $4.73 million claimed by Cardinal Peak and is at the upper end of the expected value range derived from our probability-weighted analysis. The rationale for this level of authority is as follows:
1. Negotiating Room. An authority ceiling of $2.0 million provides sufficient room to negotiate a favorable deal within the target range. Our opening position of $0.21 million and target range of $1.5 million to $2.0 million will require multiple rounds of concessions, and having clear authority through $2.0 million allows the negotiation team to move fluidly through the process without needing to pause for further approvals.
2. Consistency with Expected Value. The $2.0 million ceiling is consistent with the weighted expected trial outcome of approximately $1.5 million to $2.0 million. A settlement at or below this amount therefore achieves a result equivalent to or better than the risk-adjusted expected outcome, with the added benefits of certainty and finality.
3. Avoidance of Trial Costs. Settlement at or below $2.0 million avoids additional legal fees estimated at $100,000 to $225,000, bringing the total legal expenditure to approximately $243,000–$275,000 rather than $350,000–$500,000.
4. Elimination of Worst-Case Risk. Settlement at $2.0 million eliminates the 15–20% probability of a worst-case trial judgment of $3.88 million to $5.28 million. This tail risk, while modest in probability, represents a potentially severe financial outcome for the Company.
Opening Position: $0.21 million — Nexford's calculated maximum liability, to anchor the negotiation and signal confidence in the contractual defenses.
Target Range: $1.5 million to $2.0 million (approximately 32% to 42% of the claimed amount).
Walk-Away Threshold: Above $2.0 million, absent a compelling reason to increase the authority (e.g., mediator's proposal with significant non-monetary concessions from Cardinal Peak).
Lender Notice Requirement. We note that any settlement exceeding $1.0 million requires notice to Ridgecrest National Bank, N.A. under Section 6.03(b) of the Company's $45 million revolving credit facility dated March 12, 2021. This is an administrative notice requirement and should not affect the settlement strategy or timeline, but Deborah Whitfield's office should prepare the requisite notice in advance so that it can be transmitted promptly upon execution of a settlement agreement.
Sponsor Approval. Diana Calloway at Marlowe Asset Management Bluff Capital Partners, LP, as the Company's financial sponsor, should be consulted and her approval obtained regarding the proposed settlement authority. We will prepare and transmit a formal request for approval to Ms. Calloway by July 18, 2023, as set forth in the pre-mediation action items in Section VIII below.
VII. NEGOTIATION STRATEGY AND TACTICS
A. Opening Presentation to the Mediator
Nexford's opening presentation at the mediation should be structured, clear, and focused on the strength of the contractual defenses. The presentation should cover the following points in a methodical fashion:
1. Three-Pronged Contractual Defense. Present the three categories of defense — untimely notices, methodology deviation, and cap exceedance — in clear, sequential fashion, with supporting documentation for each. The presentation should be visually organized, using summary charts or timelines where appropriate, to convey the scope of CPI's noncompliance.
2. Gunderson Deposition Admissions. Emphasize the key admissions from Natalie Gunderson's January 18, 2023 deposition, including her acknowledgment of late notice delivery, her confirmation that CPI used a blended cost metric not prescribed by Exhibit C, and her statement that she was unaware of the 12% surcharge cap. These admissions are powerful evidence that CPI did not comply with the MSA's requirements and, importantly, was not even aware of certain material provisions.
3. Dr. Rosenthal's Expert Analysis. Present the conclusions of Dr. Anita Rosenthal's rebuttal report, including her quantification of the $1.47 million methodology deviation and her supporting analysis demonstrating that Nexford's maximum additional exposure under a proper application of the MSA is $0.21 million.
4. Weakness of Counts II and III. Briefly address the vulnerability of Cardinal Peak's unjust enrichment and account stated claims, noting that both are likely subject to dismissal on summary judgment and do not strengthen CPI's settlement position.
5. Nexford's Counterclaim. Reference the counterclaim as evidence of Nexford's good faith and its confidence in its contractual position. The survival of the counterclaim after the motion to dismiss is a signal that the Court found Nexford's affirmative claims plausible.
The tone of the opening presentation should be professional, firm, and fact-based. We should avoid personal attacks on opposing counsel or CPI's personnel, and should instead let the strength of the contractual language and the evidence speak for itself.
B. Anticipated Cardinal Peak Arguments and Responses
Based on our assessment of CPI's litigation position and the arguments advanced in its pleadings and expert report, we anticipate the following arguments from Cardinal Peak during the mediation, along with our recommended responses:
CPI Argument 1: Legitimate Cost Increases. CPI will emphasize the magnitude of the documented cost increases during the volatile steel market of 2021–2022, arguing that it incurred real, substantial costs and that Nexford was the beneficiary of below-market pricing.
Response: Acknowledge that the steel market experienced significant volatility, but emphasize that the MSA allocated pricing risk through a specific, negotiated methodology and cap. The surcharge clause was not a general cost-sharing provision; it was a carefully structured mechanism with defined indices, formulas, and limits. Cardinal Peak chose not to follow the agreed-upon methodology and instead used an unauthorized internal metric. The remedy for extraordinary market conditions is renegotiation of the MSA, not unilateral deviation from its terms.
CPI Argument 2: Substantial Compliance with Notice Deadlines. CPI will argue that its notices were only marginally late and that the substance of the notices was complete and accurate, satisfying the purpose of the notice requirement.
Response: Present documentary evidence of the specific late dates for each of the seven untimely months, demonstrating that the delays were not uniformly minor. Emphasize that the MSA uses mandatory language — "no later than" — and does not provide for a substantial compliance standard or a grace period. Under Illinois law, where a contract specifies a deadline in mandatory terms, compliance with that deadline is a condition precedent that cannot be excused by arguing substantial compliance.
CPI Argument 3: Course-of-Dealing Waiver. CPI will argue that Nexford waived strict compliance with the notice deadline through its course of dealing, pointing to the payment of the April 2021 surcharge.
Response: Distinguish the April 2021 surcharge payment on the facts. The April 2021 surcharge was within the 12% cap, was calculated using the correct methodology (or at least did not produce a material variance), and was — upon our review — timely noticed. Payment of a conforming surcharge does not establish a course of dealing that waives compliance for non-conforming surcharges. Furthermore, Nexford timely disputed each of the remaining surcharge invoices, which is inconsistent with waiver.
CPI Argument 4: Dr. Voss's Damages Figure. CPI will present Dr. Voss's $5.11 million damages figure as authoritative and well-supported.
Response: Provide a detailed critique of Dr. Voss's methodology, which relies on Cardinal Peak's internal blended cost data rather than the contractually mandated published indices. Dr. Voss's analysis, while competently prepared, is fundamentally flawed because it accepts as its premise CPI's unauthorized methodology and calculates damages as if that methodology were contractually correct. Dr. Rosenthal's analysis, by contrast, applies the actual contractual formula and reaches a materially different result. The mediator should understand that the gap between the experts is not a disagreement about math, but a disagreement about which methodology the contract requires — and the contract answers that question clearly.
C. Negotiation Phases
We anticipate the mediation will proceed through approximately five phases over the course of the full-day session:
Phase 1 — Morning Session: Joint Opening Statements. The mediation will likely begin with a joint session in which each side presents opening statements to the mediator and to the opposing party. We recommend that Priya Anand deliver Nexford's opening statement, drawing on the themes described in Section VII.A above. The opening should be no longer than 20–25 minutes and should be structured for clarity and impact. We expect Cardinal Peak's opening to be delivered by Garrett Blackwood and to focus heavily on the equitable narrative of legitimate cost increases. After opening statements, the mediator will likely separate the parties into private caucuses.
Phase 2 — Caucus, First Round. In the initial caucus with the mediator, we will present Nexford's opening position of $0.21 million with a detailed supporting analysis, including the three defenses and the expert quantification. We will be transparent with the mediator about the basis for this number while making clear that it represents Nexford's genuine assessment of its contractual liability. We expect the mediator to convey Cardinal Peak's opening demand, which we anticipate will be in the range of $4.0 million to $4.73 million, reflecting a modest discount from its full claim. The first round of offers and counteroffers will serve to establish the parties' respective ranges and signal the degree of flexibility available.
Phase 3 — Caucus, Middle Rounds. The middle rounds will involve incremental movement by both sides. We recommend making concessions slowly and deliberately, tying each concession to a specific risk factor (e.g., "We recognize the overlap issue reduces the cumulative effect of our defenses, and are prepared to increase our offer to $X to account for that risk"). We expect 3–4 rounds of offers and counteroffers during this phase, with the mediator shuttling between the parties and conducting reality-testing in each caucus.
Phase 4 — Afternoon, Final Rounds. If the parties are in the $1.5 million to $2.5 million range by the afternoon, we should push for settlement at or below $2.0 million. At this stage, we recommend considering the use of bracket proposals — a technique in which one party proposes a range (e.g., "We will go to $1.8 million if they come to $2.2 million") to accelerate convergence. We should also consider proposing a structured payment arrangement (e.g., installment payments) to make a slightly higher settlement number more palatable from Nexford's cash flow perspective. A proposal to pay 60% upon execution of the settlement agreement and 40% within 90 days thereafter could be useful in bridging a modest gap.
Phase 5 — Closing. If a settlement is reached, we will insist on the execution of a signed term sheet before the parties leave the mediation. The term sheet should capture the essential settlement terms, including:
• Settlement payment amount and payment schedule
• Full mutual general release of all claims and counterclaims