Japan Intercollegiate Negotiation & Arbitration Competition
Round A – Arbitration 2014

Team Australia(English 2)

SUMMARY OF PLEADINGSI.

Red Corp. (‘Red’) must reimburse US$1 million to Blue Inc. (‘Blue’) for the
department store penalties.

II.

Blue is under no obligation to pay Red either US$500,000 for the air freight expenses
or US$1.5 million for the chocolate.

III.

Blue is under no obligation to pay Red US$30 million in relation to representations
and warranties in Article 4 of the Stock Purchase Agreement.

IV.

Blue has not violated Article 9 of the Stock Purchase Agreement and is under noobligation to pay Red US$500,000 or revoke its investment in Arbitria Coffee.

V.

Red must pay an additional Stock Purchase Price of US$200 million to Blue, in
accordance with Article 2.2 of the Stock Purchase Agreement.

CHOCOLATE CASEI.

RED MUST REIMBURSE US$1 MILLION TO BLUE FOR THE
DEPARTMENT STORE PENALTIES

1.

This pleading demonstrates that:A.
Red failed to perform its obligations under the chocolate contract of
10 December 2013 (‘the contract’) by failing to ship the Goods by
10 January 2014;
B.
Blue extended the period for performance but Red breached this modified
agreement by failing to deliver the second shipment of Goods; andC.
Blue is entitled to damages in the amount of US$1 million as a result of Red’s
non-performance.

A.

RED FAILED TO PERFORM ITS CONTRACTUAL OBLIGATIONS BY
FAILING TO SHIP THE GOODS BY 10 JANUARY 20142.
Red agreed to the express obligation to ship the Goods by 10 January 2014 at the Portof Negotown [Exhibit 6, Art 3.2]. The contract also stipulated that time of shipment ordelivery is of the essence [Exhibit 6, Art 3.3]. Despite this, Red failed to meet the shipping
deadline of 10 January 2014 [Record, para 31]. This failure constituted non-performance ofRed’s obligations [UNIDROIT Art 7.1.1].
3.
Red states that since the letter of credit was not yet advised, a seller may refuse toperform its obligations under Negoland law [Exhibit 9]. However, Negoland law is notapplicable to the contract because the parties have chosen the UNIDROIT Principles as thegoverning law of the contract [Exhibit 6, Art 7] and there is no reference to any otherdomestic law in the contract. Consequently, the UNIDROIT Principles operate to the
exclusion of any particular national law and the Tribunal is not bound to follow the legal
precedent of Negoland [UNIDROIT Preamble, Comment 4(a)].

1Japan Intercollegiate Negotiation & Arbitration Competition
Round A – Arbitration 2014

Team Australia(English 2)

4.
Alternatively, in the event that the legal precedent of Negoland is applicable to thecontract, Red cannot rely on the precedent to excuse their non-performance. Red had previous
dealings with Negoland Bank and knew the standard time it would take to advise a letter ofcredit. Despite receiving advice that Blue had requested the issuance of the letter of credit on
19 December 2013 [Record, para 30], Red took no action in contacting Negoland Bank
before the upcoming Christmas and New Year holiday period, and did not follow up on theletter of credit until 7 January 2014. Even further, Red did not press Negoland Bank to findthe letter of credit until 8 January 2014. Given the contract expressly stated that time was ofthe essence [Exhibit 6, Art 3.3] and Red knew that it would take two full days from receipt ofthe letter of credit to the completion of loading [Record, para 31], Red should have mademore expedient endeavours to contact Negoland Bank with regards to the letter of credit.
Accordingly, Red did not take reasonable steps to ensure the letter of credit was advised anddid not inform Blue of the issues with the letter of credit until after the shipping deadline[Record, para 32]. Consequently, Red breached its duty to act in good faith and fair dealing[UNIDROIT Art 1.7] as well as the duty of best efforts [UNIDROIT Art 5.1.4(2)].
B.

BLUE EXTENDED THE PERIOD FOR PERFORMANCE BUT RED
BREACHED THIS MODIFIED AGREEMENT BY FAILING TO DELIVER
THE SECOND SHIPMENT OF GOODS

5.
Given the failure of Red to meet the initial shipping deadline, Swan telephoned
Emerald to renegotiate the shipping arrangements so that the goods would be delivered ontime [Record, para 32]. Swan stated that the only way for Red to make timely performance
was to use air freight [Record, para 32]. Blue granted an additional period of time for
performance [UNIDROIT Art 7.1.5] to allow Red to complete performance via air freight.
6.
Red cannot rely on Article 9 to claim the oral agreement did not constitute a valid
amendment to the contract [Exhibit 6, Art 9]. Blue relied on the representations made by
Swan during the phone conversations to cure Red’s non-performance and granted an
additional period for performance in good faith rather than immediately seeking damages orresorting to any other remedy [UNIDROIT Art 7.1.5(2)]. Moreover, since this conduct has led
Blue to rely on the validity of the agreement, Red cannot assert that the agreement was not
modified because it could not be orally modified [UNIDROIT Art 2.1.18].
7.
Red did not deliver the second shipment of chocolates in accordance with theamended contract. Red cannot claim that they performed delivery of the Goods by handing
over the chocolates to the freighter [Exhibit 9]. The oral agreement that Blue will pay for the
chocolates by remittance ‘after the receipt of the goods’ [Record, para 32] implies thatdelivery is not performed until Blue receives the goods. Thus the chocolates remained under
the responsibility of Red when handed over to the air carrier and delivery was not validly
performed.
8.
Red cannot rely on force majeure to escape liability for non-performance [Exhibit 6,
Art 6]. In Article 6, the term ‘force majeure’ is defined as ‘such acts, happenings, causes or
circumstances as … war, civil disturbance, labor difficulties or direction of a governmental
authority which are beyond the reasonable control of the party affected.’ Contracts must be
interpreted according to the common intention of the parties [UNIDROIT Art 4.1]. Here, thecommon intention of the parties appears to be to limit the scope of force majeure to failure ordelay caused by human intervention. A meteorological event such as a lightning strike would
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Japan Intercollegiate Negotiation & Arbitration Competition
Round A – Arbitration 2014

Team Australia(English 2)

not fall under this definition. Moreover, as in Arbitral Award [UNILEX Database,
30.11.2006] the occurrence of the lightning strike may have been foreseeable. Red should
also be liable for its non-performance as it failed to give notice to Blue of its inability toperform due to the warehouse fire [UNIDROIT Art 7.4.1(3); Arbitral Award UNILEX
Database, 30.11.2006].
C.

BLUE IS ENTITLED TO DAMAGES IN THE AMOUNT OF US$1 MILLION
AS A RESULT OF RED’S NON-PERFORMANCE9.
Due to Red’s failure to deliver the second shipment, Blue was forced to pay
US$1 million in penalties to the department stores [Record, para 33]. Blue is entitled to fullcompensation in the amount of US$1 million for the harm sustained as a result of Red’s nonperformance [UNIDROIT Arts 7.4.1; 7.2.4]. The penalty was reasonably foreseeable[UNIDROIT Art 7.4.4] and sufficiently certain [UNIDROIT Art 7.4.3] as both parties knew ofthe department store penalty when entering into the contract [Record, para 32].

II.

BLUE IS UNDER NO OBLIGATION TO PAY RED US$500,000 IN
AIR FREIGHT OR US$1.5 MILLION FOR THE UNDELIVEREDCHOCOLATE

10.

This pleading demonstrates that Blue is under no obligation to pay Red US$500,000
in air freight expenses because:A.
The parties amended their contract and agreed on new shipping arrangements
on 11 January 2014;
B.
Red cannot rely on Article 9 of the contract to assert there was no oral
agreement to modify the shipping arrangements; andC.
Given the valid amendment of contract, Red cannot rely on Article 5 of thecontract.

11.

This pleading also demonstrates that Blue is under no obligation to pay Red
US$1.5 million for the undelivered chocolate:D.
Since Red failed to perform, Blue has no obligation to pay for goods notreceived and is entitled to terminate the contract.

A.

THE PARTIES AGREED TO NEW SHIPPING ARRANGEMENTS IN THE
PHONE CALL BETWEEN EMERALD AND SWAN OF 11 JANUARY 2014

A.1 The parties amended their contract
12.
Due to Red’s failure to conform to the original agreement, Blue had no choice but toagree to the new arrangements. Both parties agreed to the new transport arrangements by air
freight and agreed that Red would bear the cost of US$500,000 [supra, para 5]. In proposing
the air freight, Red was attempting to cure its breach for non-performance at its own expense
as is consistent with the UNIDROIT Principles [UNIDROIT Art 7.4.1(1)]. The agreement
reached during the telephone conversation effectively modified the initial agreement in thecontract with regards to the transport of the Goods.
A.2 The parties intended for Red to cover the costs of air freight13.
The parties intended that Red would bear the cost of the air freight. In construing theparties’ intention, regard is to be had to all the relevant circumstances surrounding thecontract [UNIDROIT Art 4.3]. During the phone conversation, Emerald said to Swan that it3

Japan Intercollegiate Negotiation & Arbitration Competition
Round A – Arbitration 2014

Team Australia(English 2)

would be preferable to pay the cost of the air freight than to pay the full amount of penalties
for which Red would be liable for late delivery [Record, para 32]. Swan replied to this, ‘You
may be right’. Swan’s statement clearly evinces an understanding that Red would therefore
cover the cost.
14. Any reasonable business person would have the same interpretation from this exchange[UNIDROIT Art 4.2(2); Arbitral Award 83, International Court of Arbitration of the
Chamber of Industry and Commerce of the Russian Federation, 2008]. If Swan had intended
that Blue cover the cost of air freight, commercial prudence and good faith would require that
he object to Emerald’s suggestion [ICC Award Case No. 8908, ICC International Court of
Arbitration, Milano, 1998]. Swan’s affirmation shows that Red intended to pay for the air
freight.
15.
The Tribunal is also able to look to the parties’ subsequent conduct to determine thecommon intention of the parties [UNIDROIT Art 4.3(c); Franklins Pty Ltd v Metcash Trading
Ltd [2009] NSWCA 407]. In the period following the phone conversation between Emerald
and Swan, there was no correspondence of any form suggesting that Blue was liable to pay
for the air freight or asking for payment. Indeed, it was not until 15 April 2014, in response to
a communication from Blue, that Red even suggested that Blue was liable to pay the air
freight costs [Exhibit 9].
A.3 Red is acting inconsistently in claiming that Blue must bear the air freight costs
16.
Red is acting inconsistently by alleging that Blue must pay the freight costs andshould be precluded from doing so [UNIDROIT Art 1.8]. During the phone conversation,
there was a clear understanding that Red would cover the air freight costs. Red paid thefreight charge [Record, para 33], and the issue was never raised again until prompted by aletter from Blue [Exhibit 8]. It was therefore reasonable for Blue to rely on this behaviour that
it would not pay the freight charge. For Red to claim the costs months later, in contradiction
to the agreement during the phone call, amounts to inconsistent behaviour and is contrary to
the standard of good faith required in international trade [UNIDROIT Arts 1.7; 1.8; ArbitralAward, Ad hoc Arbitration, 04.03.2004 UNILEX Database].
B.

RED CANNOT RELY ON ARTICLE 9 OF THE CONTRACT TO ASSERTTHERE WAS NO ORAL AGREEMENT TO MODIFY THE SHIPPING TERMS
DURING THE PHONE CONVERSATION

B.1

Red cannot rely on Article 9 of the contract to assert there was no oral agreement
to modify the shipping terms during the phone conversation
17.
Red might try to assert that any agreement reached between Swan and Emerald during
the phone conversation was invalid pursuant to Article 9 of the contract [Exhibit 6, Art 9].
While the contract states that no provision can be amended ‘except by a writing, signed by theparties hereto’, the Tribunal cannot rely on this article to invalidate the parties’ subsequent
agreement during the phone call because a party cannot assert a no-oral modification clause toinvalidate an agreement where its conduct has led the other party to rely on the validity of thatagreement [UNIDROIT Art 2.1.18; GEC Marconi Systems Pty Ltd v BHP Information
Technology Pty Ltd & Ors [2003] FCA 50]. As a result of Red’s failure to meet the shipping
date, the parties had no choice but to renegotiate the shipping terms. Blue relied on the newagreement reached by the parties in the phone conversation. For Red to assert that the
representations made by Swan during the call are not effective because they were not inwriting would amount to inconsistent behaviour [supra, para 16]. At no stage did Red send
4

Japan Intercollegiate Negotiation & Arbitration Competition
Round A – Arbitration 2014

Team Australia(English 2)

any written document to Blue contradicting, clarifying or amending the agreement reached in
the phone conversation. This evinces the parties’ intention to be bound by the agreement
reached by Emerald and Swan and the Tribunal must give full effect to the parties’ intention.
C.

GIVEN THE VALID AMENDMENT OF CONTRACT, RED CANNOT RELY
ON ARTICLE 5 OF THE CONTRACT

C.1

Given that the parties validly amended their contract, Red cannot rely on
Article 5 of the contract to assert that Blue must pay for the air freight18.
Article 5 of the contract stipulates that any new freight costs incurred by the seller are
to be reimbursed by the buyer. However, as a result of the subsequent agreement during thephone conversation between Emerald and Swan [Record, para 32], Article 5 has been validly
modified. The agreement as to the new mode of transport and that Red will bear the cost ofthis, supersedes the original term in the contract.
C.2

In the alternate, Red cannot rely on Article 5 of the contract to assertthat Blue must pay for the air freight because the increased costs are not‘reasonable’
19.
Even if the Tribunal were to find that Red could rely on Article 5 of the contract, Red
is not entitled to claim US$500,000 because the amount is not reasonable. The original
shipping price for the goods was US$100,000 [Record, para 32]. Article 5 of the contract wasdrafted so as to contemplate additional surcharges and customs duties, which often arise when
two parties contract for the international sales of Goods. It may be reasonable for a seller to
ask for reimbursement for increases in customs excise duties that become payable after theconclusion of the contract or were not accounted for. However, Red is claiming
reimbursement for an entirely different mode of shipment that costs five times the amount of
the shipping method originally agreed to. Even though transport by air freight may benecessary for Red to perform on time, it is Red’s fault that original shipping date was not met.
Further, the parties would never have contemplated such a large increase in costs at the timeof the conclusion of the contract.
D.

SINCE RED FAILED TO PERFORM, BLUE HAS NO OBLIGATION TO PAYFOR GOODS NOT RECEIVED AND IS ENTITLED TO TERMINATE THE
CONTRACT20.

Payment by Blue was dependent on performance by Red [supra, para 7].

21.
On 18 January 2014, Blue received the first shipment and paid Red US$1.5 million in
conformity with the parties’ agreement [Record, para 33]. However, Blue did not receive thesecond shipment as Red failed to perform its obligation to deliver [UNIDROIT Art 7.1.1].
Failure to deliver the second shipment of goods amounted to fundamental non-performance[UNIDROIT Art 7.3.1(2)]. Blue was substantially deprived of what it had expected to receive
under the contract [UNIDROIT Art 7.3.1, Comment 3]. Blue had contracted with Red fordelivery of US$3 million of custom chocolates to on-sell to department stores. By failing todeliver the second shipment, Blue was unable to resell the goods for a profit and instead
incurred penalties from the department stores. As such, Blue was entitled to terminate thecontract with Red for the remaining shipment [UNIDROIT Art 7.3.1(1)]. The agreement forthe second batch was validly terminated and timely notice was given [Record, para 33]. The
Tribunal must not find Blue liable to pay for goods that it never received.

5

Japan Intercollegiate Negotiation & Arbitration Competition
Round A – Arbitration 2014

Team Australia(English 2)

M&A CASE
III.

BLUE IS UNDER NO OBLIGATION TO PAY RED US$30
MILLION IN RELATION TO ARTICLE 4 OF THE STOCKPURCHASE AGREEMENT

22.

This pleading demonstrates that:A.
Blue is not in violation of its obligations under Article 4 of the Stock Purchase
Agreement (‘the agreement’); andB.
In the alternate, the damages of US$30 million should be decreased.

A.

BLUE IS NOT IN VIOLATION OF ITS OBLIGATIONS UNDER ARTICLE 4
OF THE AGREEMENT

A.1
There were no outstanding investigations or basis for any investigations
23.
On 15 December 2012 [Exhibit 5, Art 4(1)], there were no outstanding orders,judgments, injunctions, awards or decrees from any of the relevant bodies or claims, actions,suits or investigations. The Arbitria Ministry of Health and Welfare were not conducting
investigations into Blue Drink at that time. The Ministry had merely notified Blue Drink of its
receipt of the complaints and its intention to ‘keep an eye on any new development’ [Record,para 39].
24.
As at 15 December 2012, there was no scientific or medical basis for any such action
as Blue Drink had ran a series of rigorous tests on Blue Slim. These tests were held over afour-week period in response to customer complaints [Record, para 39]. They did notconfirm any particular stomach problem ‘linked to overconsumption, even when substantial
amounts of Blue Slim were consumed day after day’. [Record, para 39] Thus, Blue Drink
thoroughly investigated the complaints and found no basis for further investigation by the
Ministry.
25.
Blue had disclosed notice to Red of the complaints by consumers and any possible
revocation by the Ministry in the process of due diligence in May 2012 [Record, para 39].
During the 15 October 2012 meeting, Pat Red (Red’s CEO) thanked Kelly Blue (Blue’s CEO)for assisting with the due diligence process and said that Red ‘did not find any issue’ to standin the way of the acquisition [Record, para 19]. In the process of due diligence, led by Red’s
expert, the disclosure by Blue of the complaints and Ministry’s action would have beensignificant to Red as the buyer of the company. In fact, it was discussed in great detail in thedue diligence report [Exhibit 13]. Thus, these comments by Pat Red, display that Red bothpossessed knowledge of the Ministry’s scrutiny and did not perceive this to be a problem.
26.
The representation in Article 4 must be interpreted by reference to Red and Blue’scommon intention [UNIDROIT Art 4.1(1)]. This may be determined by reference to theirpreliminary negotiations [UNIDROIT Art 4.3(a)]. Here, the common intention of the parties
was that Article 4 be read in light of the disclosure by Blue during the due diligence process.
Pat Red’s statements infer that Red intended to enter into the agreement in spite of the
Ministry’s monitoring of Blue Slim. Both parties therefore interpreted Blue’s representations
in Article 4(xiii) [Exhibit 5] to refer to any claims and investigations outside of the Ministry’s
scrutiny.
6

Japan Intercollegiate Negotiation & Arbitration Competition
Round A – Arbitration 2014

Team Australia(English 2)

A.2 Blue had no undisclosed liabilities
27.
Blue warranted that Blue Drink had no liabilities or obligations, including guaranties
for any liability or obligations of third parties [Exhibit 5, Article 4(1)(ix)]. Red may argue that‘liability’ here should be defined broadly and include anything likely to be a disadvantage toRed. However, there is no clear definition of the term ‘liability’ in the agreement. Therefore,‘liability’ can be defined in light of factors such as the meaning commonly given to the term
[UNIDROIT Art 4.3(e)] and reasonableness [UNIDROIT Art 4.8(d)]. ‘Liability’ in this context
commonly refers to outstanding financial liabilities. Additionally, here it is followed by theterms related to this meaning, such as ‘contingent liability’ and ‘guaranty’. Using thisdefinition, Blue Drink had no liabilities or contingent liabilities as of 15 December 2012. Bluewas not in breach of Article 4(1)(ix).
A.3 There was no adverse change to Blue Drink
28.
There was no adverse actual or threatened change to the condition, financial orotherwise of Blue Drink between 31 December 2011 and 15 January 2013 [Exhibit 5,
Article 4(1)(xiii)]. Red may argue that this article was breached because the potential
revocation of the Designated Health Food Status was a threatened adverse change to Blue
Drink. The provisions surrounding this article refer to outstanding legal claims [Exhibit 5,
Article 4(1)(xii)] and full disclosure [Exhibit 5, Article 4(1)(xiv)]. Read in this general context,
as required by the UNIDROIT commentary [UNIDROIT Art 4.4, Comments 1 and 2], thearticle refers to quantifiable, empirical and practical change. The possibility of revocation by
the Arbitria Ministry of Health and Welfare remained the same during the relevant period andtherefore the warranty was correct. Additionally, the Ministry did not mention the possibilityof withdrawal of Blue Slim’s Designated Health Food Status. In its communication with Bluein 2012, the Ministry merely referred to its receipt of the complaints and that it would monitor
developments [Record, para 39]. This was not a serious, substantial threat of adverse change
to Blue Drink. More importantly, rather than the underlying cause of the threat of revocation,
the only change that occurred in the relevant period was Blue’s knowledge of the consumer
complaints [Record, para 39]. Rigorous tests were conducted that produced no scientificevidence that these complaints were substantiated [Record, para 39]. As such, the guarantee
was not violated because there was no such change to the condition of Blue Drink.
A.4 Blue fully disclosed all relevant information
29.
Blue warranted that it did not omit any facts in the written information provided to
Red in relation to the transaction, and the information Blue provided was not false or
misleading [Exhibit 5, Article 4(1)(xiv)]. Red argues that in written communication attachedto the agreement, Blue did not mention any circumstances surrounding the stomach problem
issue [Exhibit 14]. However, Blue did not mislead Red with respect to this issue, according to
Article 4(1)(xiv) because Blue had disclosed both the existence of consumer complaints andthe Ministry’s communication with Blue Drink to Red’s advisor [Record, para 39]. Red’s due
diligence report contained a section regarding the risks related to the Designated Health Food
Status [Exhibit 13]. Therefore, the warranty was not violated as Blue did not omit any
information or provide any false or misleading information.
B.

THE DAMAGES OF US$30 MILLION SHOULD BE DECREASED30.
Blue shall bear responsibility for violating any of the representations and warranties
outlined in the agreement [Exhibit 5, Art 4(2)]. Thus, Red argues that as a result of Blue’s
misrepresentation, Red is able to claim US$30 million due to loss of sales [Exhibit 14].
7

Japan Intercollegiate Negotiation & Arbitration Competition
Round A – Arbitration 2014

Team Australia(English 2)

However, Blue merely misrepresented that the written information did not contain any
omissions [Exhibit 5, Art 4(1)(xiv)]. As outlined above, Red already knew of both theexistence of consumer complaints and the Ministry’s communication with Blue Drink[Record, para 39]. Blue should not bear the responsibility for this, as its breach of Article 4
did not cause a loss of US$30 million. Rather, the Ministry’s revocation and Red’s inaction
with regards to its knowledge of the stomach issue caused the loss.

IV.

BLUE HAS NOT BREACHED ARTICLE 9 OF THE AGREEMENT
AND IS UNDER NO OBLIGATION TO PAY RED US$500,000 OR
REVOKE INVESTMENT IN ARBITRIA COFFEE

31.

This pleading demonstrates that:A.
Blue has not breached Article 9.1 of the agreement; andB.
Blue has not breached Article 9.2 of the agreement.

A.

BLUE HAS NOT BREACHED ARTICLE 9.1 OF THE AGREEMENT

A.1
The no competition requirements of Article 9 should be interpreted narrowly
32.
The extensive and expansive language of Article 9 unfairly limits the businessprospects of Blue unless interpreted narrowly. The parties would not have commonly
intended to prevent Blue from participating in all ‘similar’ businesses [UNIDROIT
Art 4.1(1)]. A reasonable person in their position would interpret Article 9 to only limit Blue
from carrying on a business that is in ‘direct competition’ with Red.
A.2

Alternatively, Arbitria Coffee’s products are not ‘similar to or competitive with’Red’s products
33.
The phrase ‘competitive with’ shall be interpreted in line with the meaning commonly
given to it in the trade concerned [UNIDROIT Art 4.3]. As such, the term ‘competitive with’should be interpreted in the context of mergers & acquisitions (‘M&A’).
34.
The SSNIP test is an international economic standard of market definition commonly
applied in M&A [OECD, Market Definition 2012, 30; European Commission ‘Commission’s
Notice for the Definition of the Relevant Market 1997; ASEAN Competition Policy,‘Guidelines on Market Definition’; United States Merger Guidelines; ACCC Merger
Guidelines]. The SSNIP test assesses the cross-elasticity of demand by assessing whether
customers would switch to other available substitute products in response to a hypothetical,
small (5-10%) but permanent increase in price of the product in question. It is reasonable todeduce that if Red Drinks increased their prices by 5-10% for one year their consumers would
not substitute Red Drinks with Arbitria Coffee’s diet coffee, for reasons that are now
illustrated.
35.
The diet coffee drink produced by Arbitria Coffee and Red Drink are substantiallydifferent [Record, para 36]. Red Slim is a beverage that helps block fat absorption anddissolve fat in the body [Record, para 9]. The weight loss benefits of the diet coffee are an
auxiliary, rather than a primary, benefit of consuming the beverage. The diet coffee andenergy drinks have ‘substantial, noticeable differences in physical characteristics’ [Japan Taxes on Alcoholic Beverages]. These beverages are not in competition as they do not ‘offer
alternative ways of satisfying the same consumer demand in the marketplace’ [United States Transitional Safeguard Measure on Combed Cotton Yarn From Pakistan, [96]-[98]]. In
accordance with Arnotts Limits v TPC, ‘There are many people who sometimes drink tea and,8

Japan Intercollegiate Negotiation & Arbitration Competition
Round A – Arbitration 2014

Team Australia(English 2)

at other times, coffee… The fact is that tea and coffee are distinct beverages, for each ofwhich there is a distinct demand’ [(1990) 97 ALR 555]. As an example, Red Drink might beused as a mixer in an alcoholic cocktail. Arbitria’s diet coffee drink would not be used in thisway [Korea - Taxes on Alcoholic Beverages].
A.3
Alternatively, Arbitria Coffee is not an affiliate of Blue
36.
Where a matter is not covered by the UNIDROIT principles that govern the contractof the parties, the law should be interpreted with reference to the intentions of the parties[UNIDROIT Art 4.1]. The parties’ use of the term ‘affiliate’ can be interpreted with reference
to the Companies Act of Arbitria, as the contract was intended to bind Blue (a company listed
in Arbitria). Under that Act, an affiliate is ‘a company on which another company may
exercise substantial influence over financial and business policy decisions’. This definition
may be applied as a ‘reasonable usage known and observed by both parties’ [UNIDROIT
Art 1.9(2)].
37.
Blue’s dealings with Arbitria Coffee do not constitute substantial influence. Blue also
does not substantially control the management of Arbitria Coffee – its relationship with Sam
Jackson does not constitute substantial control [Record, para 36]. Blue’s investment of
US$5 million grants it a holding of 25% of the company’s share; this amount will not allow to
exercise substantial influence over the decisions of Arbitria Coffee.
38.
Similarly, the agreement for use of the Central Research Centre is limited in time
duration and Arbitria Coffee paid a reasonable amount of rent in exchange for such use. This,
this does not constitute a ‘service’ provided by Blue to Arbitria Coffee. Renting a researchfacility does not entail any exercise of control over what is researched there. In addition,
production of the coffee drink would have occurred, albeit at a later time, if Blue had notsupplied the research facility: thus the arrangement has not substantially influenced the courseof Arbitria Coffee’s business (despite the cancellation of the loan with AbuAbu Bank).
B.

BLUE HAS NOT BREACHED ARTICLE 9.2 OF THE AGREEMENT

39.
Bob Orange’s decision to leave Red Drink was due to internal conflicts. Orange
resigned from Red Drink after an altercation with Lee led to the refusal of his reasonable
requests for additional time and funding to create a new flavour of Red Drink [Record,para 35]. Blue had no involvement with Orange’s departure or subsequent hiring by Arbitria
Coffee [Record, para 36].

V.

RED MUST PAY AN ADDITIONAL STOCK PURCHASE PRICEOF US$200 MILLION, IN ACCORDANCE WITH ARTICLE 2.2
OF THE AGREEMENT

40.

This pleading demonstrates that:A.
Red has breached Article 8 of the agreement; andB.
As a result, Red must compensate Blue US$200 million.

9

Japan Intercollegiate Negotiation & Arbitration Competition
Round A – Arbitration 2014
A.

Team Australia(English 2)

RED HAS BREACHED ART 8 OF THE AGREEMENT

A.1
Red caused material harm to Blue’s interest in an additional payment
41.
Pursuant to Article 2 of the agreement, if the EBITDA of Red Drink for the 2013
and/or 2014 exceeded a threshold of US$110 million, Red must make an additional purchaseprice payment to Blue of 8 times the excess.
42.
Red Drink contracted with Nego Drink to be the distributor and the contract terms
included sale at 40% of the standard price, even though Red was offered to contract at 50%[Record, para 25]. As a result, the EBITDA in 2013 was US$20 million less than it would
have been if it contracted at 50% [Exhibit 17], causing the EBITDA in 2013 to be
US$10 million less than the threshold. Therefore Red’s business decision materially harmed
Blue’s interest in an additional payment of US$80 million.
43.
For 2014, Red did not meet Bob Orange’s condition to withdraw his resignation andconsequently did not prevent him from quitting [Record, para 35]. Therefore Bob Orange’s
work in realigning the taste of Red Drink to Nego consumers’ taste buds came to a halt and anegative impression of Red Drink’s products quickly circulated [Record, para 35].
Furthermore, Red did not adopt measures to prevent the revocation of the Designated Health
Food Status, despite being aware of the risks of revocation when performing due diligence[Exhibit 14]. Consequently, the status was revoked and sales plummeted [Record, para 38].
These two business decisions, as well as the decision to contract at 40% rather than 50%,
meant that the EBITDA in 2014 was US$45 million less than it would have been [Exhibit 17].
Since the EBITDA for 2014 was US$30 million less than the threshold in Article 2, Blue’sinterest in an additional payment of US$120 million was materially harmed.
A.2
These acts and omissions are not reasonable business judgments
44.
During the contract discussions between Red and Blue on 15 October 2012 regarding
the proposal for a contingent payment, Red’s sole objection when Blue sought an assurance
that Red would not manipulate its operating results was in regards to reasonable investments[Record, para 19]. Accordingly, the exemption for a ‘reasonable business judgment’ was due
to Red’s fear that its investments would be seen to manipulate operating results to reduceBlue’s contingent payments [UNCITRAL Arts 4.1(1); 4.3(a)]. A reasonable businessjudgment under Article 8 therefore refers to reasonable investments, pursuant to thepreliminary negotiations between the parties. None of the aforementioned acts and omissions
involves investments and therefore this exemption does not apply.
45.
Moreover, in accordance with the meaning commonly given to these terms, a‘reasonable business judgment’ can be interpreted as a decision that a reasonable business inRed’s position would make if it were facing similar circumstances and were acting in goodfaith and in the best interests of the company [UNCITRAL Arts 4.1(2); 4.3(e); ICC
International Court of Arbitration, Case No 10335; Principles of Corp. Governance § 4.01(c)(1994)].
46.
Red accepted a contract with Nego Drink without negotiating with Negoland Bottlers
at all, even though Negoland Bottlers stated that they were willing to compromise about theiroffer and strongly desired the contract [Record, para 24]. A reasonable business in theposition of Red would have made Nego Drink and Negoland Bottlers compete to obtain the

10Japan Intercollegiate Negotiation & Arbitration Competition
Round A – Arbitration 2014

Team Australia(English 2)

distributor contract for Red Drink in Negoland. In doing so, Red would have ensured that it
obtained the best deal, in the interests of the company.
47.
Red considered Bob Orange’s presence as ‘extremely critical’ to the operations andsuccess of Red Drink and did not wish to pursue the takeover without an agreement that hewould continue working with the business [Record, para 20]. Red was also aware that thework that Bob Orange was conducting was vital for increased sales [Record, para 27] andthat he would require a greater budget for his R&D work [Record, para 20]. A discussion
with other Red Drink employees would have demonstrated the reasonableness of his request
for an increase in the budget [Record, para 35]. As such, the decision to reject Bob Orange’s
condition to withdraw his resignation was hastily made [Record, para 35] and without properconsideration. This is not a decision that would have been made by a reasonable business insimilar situations, as it was reasonably foreseeable that Bob Orange’s resignation would
significantly detriment the business.
48.
Red undertook due diligence [Exhibit 13] in May 2012 and received letters ofcomplaint after the takeover [Record, para 39]. Therefore, Red had knowledge of thepotential for the Ministry to revoke the Designated Health Food Status. Yet, they did not act
to counter these issues. This is the very opposite of a reasonable business judgment decisionbecause by not responding to complaints and fixing the issues, the directors opened thebusiness to the threat of this revocation. Although Red had knowledge of tests conducted byBlue from April to May 2012 countered the allegations made by the complaints [Exhibit 13],these tests were conducted two years before the Designated Health Status was revoked. Red
Drink continued to receive complaints and in this situation, a reasonable business would haveconducted its own tests in the interim two years in response to these continuing complaints.
B.

RED MUST PAY US$200 MILLION IN DAMAGES

49.
Blue is entitled to damages totalling US$200 million as compensation for the gain that
it was deprived of by Red’s breach of Article 8 of the agreement [UNCITRAL Arts 7.4.1;
7.4.2(1)].

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