FIFTH INTERNATIONAL ARBITRATION AND
NEGOTIATION MOOT COMPETITIONMEMORANDUM FOR RESPONDENTKYUSHU UNIVERSITYBLUE ELECTRONICS, INC.

RED INDUSTRIES, CO.

ARBITRIA

NEGOLAND

CLAIMANTRESPONDENTEXECUTIVE SUMMARYI.
1.

THE PURPLE INCIDENT

On 1 April 2001, Red Industries Co. (“Red”) and Blue Electronics Inc. (“Blue”)
entered into a five-year Supply Agreement (the “Supply Agreement”) thatgoverned the supply of Model PB-3 (“PB-3”) and Model YR-5 (“YR-5”) largescale integrated circuit (“LSI”) units manufactured by Red exclusively for Blue.
On 21 August 2006, Blue placed a written order for the supply of 30,000 YR-5s to
be delivered by 5 September 2006 (the “Order”). On that date, 30,000 YR-5s weredelivered to and accepted by Blue.

2.

However, when Blue placed the Order, it incorrectly specified YR-5s on the orderform. Upon realizing its mistake when the YR-5s were delivered, Blue placed
another written order for the supply of 30,000 PB-3s on 6 September 2006 (the“September Order”). These PB-3s were delivered to Blue on 30 September. Blueaccepted this delivery but failed to pay the agreed purchase price of 300 million
Arbs.

3.

Red is not liable for any of Blue’s losses. Under the terms of the Supply
Agreement, all orders for PB-3s or YR-5s are to be made in writing. The written
order of 21 August 2006 specified YR-5s. As a result, Blue was unable to meet its
contractual obligation to Purple Mobile Co. (“Purple”) to supply 30,000 mobile
phones requiring PB-3s. Due to this error, Blue was forced to compensate Purple
for its losses in the sum of 300 million Arbs and is now attempting to set-off thatamount against moneys owed by Blue to Red. However, Red acted in good faithand in accordance with its contractual duties in filling the Order, and therefore,
is not liable to Blue for any amount.

4.

In the alternative, should Red be found liable, such liability should be limited tothe damage it actually caused. Blue was grossly negligent in placing the1erroneous Order. Such gross negligence substantially caused Blue’s own loss.
Thus, pursuant to Article 7.4.7 of UNIDROIT 1 , Blue should share in any liabilityTto the extent of its contribution to the harm. Furthermore, Blue failed to mitigate
its damages as required by Article 7.4.8 of UNIDROIT. This lack of mitigation
further limits the extent of any liability that may be apportioned to Red.
II.
5.

THE YELLOW INCIDENT

On 1 September 2005, Blue and Yellow Phone Ltd. (“Yellow”) entered into a Joint
Development Agreement (the “Blue-Yellow Agreement”) to develop Model X.
Accordingly, on 1 November 2005, Blue and Red entered into a joint technology
agreement (the “JT Agreement”) for the development of Model X LSIs. Bothagreements had comprehensive confidentiality provisions, however, the BlueYellow Agreement stipulated liquidated damages in the sum of 500 million Arbs
should there be any breach of confidentiality. The JT Agreement contemplated
the secondment of Mr. Orange (“Orange”), an employee of Blue, to supervise theModel X LSI development project (the “Project”) in cooperation with the project
leader of Red, pursuant to the Employee Secondment Agreement (the“Secondment”).

6.

After Orange prepared a progress report (the “Report”) at the request of Blue, on
his own time and outside of Red’s premises, Confidential Information (asdefined in the JT Agreement) relating to Model X leaked over the internet (the“Leak”). As a result of the Leak, Blue paid Yellow the sum of 500 million Arbs
out of court to settle the latter’s claim for liquidated damages. Blue is now trying
to recover this loss from Red.

1

UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS, 1994 (“UNIDROIT”).

7.

However, Red should not be liable for such loss. Not only was Orange acting
outside of the scope of the JT Agreement and the Secondment, and in Blue’s soleinterests when the Leak occurred, he was acting in direct contravention of Red’s
established and reasonable security measures.

8.

However, in the alternative, should Orange be found to have been acting within
the scope of the Secondment, or should Red’s security measures be deemed
inadequate, Red should not be held fully responsible for Blue’s losses pursuant
to Article 7.4.7 of UNIDROIT. Orange prepared the Report solely for Blue
without the knowledge, cooperation or participation of Red. In doing so, heviolated Red’s security policies under unsafe circumstances. Thus, Blue, acting
through Orange, contributed materially to the risk leading to the Leak. Pursuant
to Article 7.4.7 of UNIDROIT, and in light of the allocation of control overOrange in favor of Blue under the Secondment, Blue should bear at least twothirds of the liability for its loss.

DISCUSSION - THE PURPLE INCIDENT

9.

I.

CONTRACTA.

THE SUPPLY AGREEMENT IS A REQUIREMENTS CONTRACT

The Supply Agreement is a requirements contract. 2 Under this agreement, Redagreed to supply PB-3s and YR-5s, and Blue agreed to purchase the sameaccording to its actual needs during the Supply Agreement’s term. Given thelarge volume of LSIs moving between the two companies, the Supply Agreement
was intended to simplify the previous practice of preparing a new contract foreach individual transaction. The Supply Agreement provides a clear, consistentand contractually-based ordering process that Red and Blue are obliged to follow.
B.

10.

ORDERS SHOULD BE IN WRITING

Article 1(1) of the Supply Agreement clearly requires orders to be made inwriting, stating the product number, quantity and delivery date, along with thesignature of an authorized signatory for Blue. This writing requirement can only
be waived or amended by the written consent of both parties pursuant to
Article 5(3) of the Supply Agreement. To date, Article 1(1) has not been amended
or waived in writing pursuant to Article 5(3), thus the general requirement tosend written orders remains valid 3 .

2A “requirements contract” is “a contract in which a seller promises to supply all the goods or services
that a buyer needs during a specific period and at a set price, in which the buyer promises (explicitly or
implicitly) to obtain those goods or services exclusively from the seller”: Blacks’ Law Dictionary, 1999, p.
324.
3
ICC International Court of Arbitration Zurich, Case No. 9117. ICC International Court of Arbitration
Bulletin, Vol. 10, No. 2, Fall 1999, pp. 96-101.

4

11.

Red’s General Manager (“GM”) reiterated this requirement on 21 August 2006 by
instructing that a written order be sent “as usual”. 4 Blue complied with thisrequest and the Order was faxed shortly thereafter.
C.

12.

WRITTEN ORDERS PREVAIL

Once Blue complied with the requirement to send a written order, Article 1(2) of
the Supply Agreement obligated Red to act in good faith, and exert all“commercially reasonable efforts” to supply the goods indicated therein (i.e.
30,000 YR-5s) at the cost of 10,000 Arbs per unit by the date required. In filling
the Order by 5 September 2006, Red acted in accordance with the terms of the
Supply Agreement. Hence, Red is not liable for any losses sustained by Blue.

13.

Furthermore, the intention of the parties to be bound by the requirements ofArticle 1(1) of the Supply Agreement can be illustrated by a previous transaction
between Red and Blue. Red discovered a mistake in one of Blue’s orders withrespect to the LSI unit description. However, in spite of recognizing that an error
had been made, Red acknowledged that it had no authority to unilaterally
change the content of the order. Consequently, Red required Blue to submit a
new written order form, duly signed, and specifying the correct LSI. Thus,
written orders prevail and Red was obligated to rely on and comply with theOrder as sent.

4

See UNIDROIT, supra note 1, at Article 4.3(b).

II.
14.

DAMAGESIn the event that Red is found liable, such liability should be limited in scope todamages actually caused by Red, and to the losses actually suffered by Blue.
A.

15.

BLUE WAS GROSSLY NEGLIGENT IN PLACING THE MISTAKEN WRITTENORDERThe Order erroneously described the LSI required: Blue needed PB-3s, but
mistakenly ordered YR-5s. In addition, the Order was sent by fax. Yet, in spiteof ample opportunity to do so, and knowing that Red’s GM would be out of thecountry, Blue failed to verify this fax, and the mistake was left undiscovered.
Blue had every opportunity in the two weeks between the placement of the orderand delivery of the YR-5s to rectify its mistake, but did not. Red produced anddelivered the goods requested by the Order. In contrast, the acts and omissionsof Blue constituted gross negligence.

16.

International Tribunals applying UNIDROIT have found that gross negligence isan elementary failure of attention to the consequences of one’s actions that leads
to a performance substantially different from what the other party reasonably
expected. 5 Blue’s acts and omissions were grossly negligent in that it failed to
specify the correct LSI—the most basic requirement of any order between Blueand Red—and failed to notice this mistake for two weeks in spite of theimportance and urgency of the Order.

17.

Blue is attempting to avoid its contractual obligation under the Supply
Agreement to pay Red for the September Order, which was placed upon
discovery of Blue’s original error. According to Article 3.5(2)(b) of UNIDROIT, aparty cannot avoid a contract because of mistake if it was grossly negligent in

5

Arbitral Award of No. 5835 ICC International Court of Arbitration (Rome), June 1996.

committing such mistake.

Thus, by attempting to avoid payment for the

September Order in response to the damage Blue suffered due to its own grossnegligence, Blue is trying to avoid the Supply Agreement in contravention with
UNIDROIT.
B.
18.

BLUE IS LIABLE FOR A SUBSTANTIAL PORTION OF THE DAMAGES

According to the above arguments, Blue’s gross negligence was the substantial
cause of its own losses. Article 7.4.7 of UNIDROIT provides that,
Where the harm is due in part to an act or omission of the aggrieved party or toanother event as to which that party bears the risk the amount of damages shallbe reduced to the extent that these factors have contributed to the harm, having
regard to the conduct of each of the parties.

19.

Blue should be liable for at least 75% of the damages, as Blue substantiallycaused those damages. Thus, Red’s liability should accordingly be reduced to a
maximum of 25%.
C.

20.

BLUE FAILED TO MITIGATE ITS LOSSESRed should only be required to contribute to damages that would have been
awarded if Blue had fulfilled its obligation to mitigate as required by Article 7.4.8of UNIDROIT. Blue failed to mitigate when it rejected Purple’s initial settlement
proposal for the sum of 200 million Arbs. Blue imprudently entered into
arbitration, the outcome of which was uncertain, in total reliance on one lawyer’s
advice, and without seeking a second opinion. The arbitrator then awarded 300
million Arbs to Purple. By refusing to settle, Blue failed to mitigate its damages
by at least 100 million Arbs.

D.

COMPUTATION OF DAMAGES
a. The Settlement: Quantum

21.

Based on the above-mentioned facts, if Blue had reasonably negotiated with
Purple, damages could have been reduced to at least 200 million Arbs. This sum
should thus be the starting point from which any liability of Red is calculated.
b. Apportioned Profit Gained from the Sale of the YR-5s to Yellow

22.

Contemporaneous with the Purple Incident, Blue received an order for YR-5
phones from Yellow and was therefore able to utilize the 30,000 YR-5s incorrectly
ordered on 21 August 2006. Moreover, Blue profited from the sale of these units.
In order to avoid overcompensation of an aggrieved party, damages must be
reduced to the actual loss suffered 6 .

Therefore, pursuant to Article 7.4.2 of

UNIDROIT Blue’s profit should be taken into consideration in determining its
actual loss, which should be reduced accordingly.

6

Sapphire International Petroleum v. National Iranian Oil, ILR 1963, 136, 185 et seq.

DISCUSSION - THE YELLOW INCIDENT
I.
A.

JOINT
TECHNOLOGYAGREMEENTSAND

EMPLOYEESECONDMENT

THE PREPARATION OF THE REPORT FOR BLUE WAS NOT WITHIN THE SCOPE
OF THE JT AGREEMENT AND THE SECONDMENT

23.

The presence of Orange at Red’s facility is attributable solely to the JT Agreement
and the Secondment. Hence, his acts must be examined with close reference tothe scope and purpose of these agreements.

24.

Blue claims that the Leak occurred while Orange was under the management of,and in the course of work for, Red. However, the scope of the Secondment waslimited to supervising the Project in cooperation with the project leader of Red. 7

25.

The Report, however, was prepared at Blue’s request, and solely for Blue’s
purposes (the board meeting of 14 September 2006). It was prepared without theknowledge, cooperation or participation of Red, and was an act beyond the scopeand purpose of the Secondment and the JT Agreement. It was in no way an act
made under the management of, or in the course of work for, Red. Thus, Redcannot be held liable to Blue for the conduct of Orange.
B.

26.

RED COMPLIED WITHREASONABLE STANDARDITSCONFIDENTIALITYOBLIGATIONSTOAIn the event the preparation of the Report is found to be within the scope of theSecondment, Red nevertheless complied with its obligations under the JT
Agreement by taking all reasonable actions to protect Confidential Information,and providing all reasonably required security procedures at its facilities and inconnection with its business activities.

7

Intercollegiate Negotiation Competition Newsletter Vol. 5, No. 2 (2006) (“Newsletter No. 2”), at p. 4;
Problem for the Fifth Annual Intercollegiate Negotiation Competition (“Problem”), at para. 20.

27.

Article 16(1) of the JT Agreement requires each party to take only “reasonableactions” to protect Confidential Information. Similarly, Article 16(2) requires
each party to perform only “reasonably required” security procedures at its
facilities and in connection with its business activities to protect such information.
These provisions clearly reflect the parties’ intention to provide for an objective
standard by which to measure compliance.

Thus, Red’s actions are to bemeasured against nothing more than a reasonableness standard.
28.

In this case, Red took all reasonable actions and procedures to protect
Confidential Information. Red instituted information management regulations
within its facilities, including prohibiting the use of personal computers for the
preparation of company documents, 8 and the removal of internal documentsfrom Red’s premises. 929.

In addition, Red established security policies, conducted employee educationand training on these policies, revised its management structure and maderegular internal security inspections.

These measures were implemented inaccordance with the Negolandic Ministry of Trade and Industry’s information
security guidelines for the manufacturing industry (the “Guidelines”). 10
Negoland is a highly industrialized nation with a focus on high-tech industry. 11
Thus, with respect to information security, the Guidelines must be regarded as
being on par with international practice. Red’s adherence to these Guidelines
clearly indicates Red’s commitment to high standards of information security.

8

Problem, ibid. at para. 21.
Ibid.
10
Newsletter No. 2, supra note 7, at p. 9.
11
Problem, supra note 7, at para. 1.
930.

Blue could not have been unaware of Red’s security measures at the time theparties entered into the JT Agreement.

Hence, Blue itself recognized theadequacy—the reasonableness—of these measures by requiring Orange to comply
with Red’s office regulations under Article 5 of the Secondment. Had Blue been
unsatisfied with the reasonableness of Red’s measures, Blue should have either
required Orange to adhere to another security standard (i.e. one preferred byBlue), or at least notified Red of its concerns.
31.

Moreover, on at least two separate occasions, and in compliance with Red’s
regulations, Orange prepared and sent similar progress reports to Blue without
any leak of Confidential Information. 12 Thus, Red was given no reason to believe
its security measures were inadequate. Until the time of the Leak (occurring
after a breach of Red’s security policies), Red’s security measures had effectively
protected all Confidential Information. Therefore, Red could not be expected to
institute more draconian measures, such as inspecting the bags of its employees.

32.

Therefore, Red’s security measures were reasonable, and in compliance with the
JT Agreement at all times. Accordingly, Red is not liable to Blue.

12

Intercollegiate Negotiation Competition Newsletter Vol. 5, No. 1 (2006), at p. 5.

33.

II.

DAMAGESA.

BLUE CONTRIBUTED MATERIALLY TO ITS LOSSES, THEREBY REDUCING THE
EXTENT OF RED’S LIABILITY

In the event Red is deemed to have breached its obligations under the JT
Agreement, according to Article 7.4.7 of UNIDROIT, Blue cannot recover to theextent that it contributed to its loss.

a. Blue Failed to Take All Reasonable Actions to Protect Confidential
Information
34.

Blue, acting through Orange, failed to take all reasonable actions to protect
Confidential Information of Blue and Red in breach of Articles 16(1) and (2) of
the JT Agreement. In preparing the Report, Orange was acting solely in Blue’sinterest and was subject to Blue’s direction. Orange prepared the Report in his
home, based on internal documents removed from Red’s premises, in grossviolation of Red’s security policies.

35.

Furthermore, there was sufficient notice and time for Orange to prepare theReport in compliance with Red’s information management procedures. Red’s
office closure of 10 September 2006 was posted prominently on its employee
information board for two weeks. 13 If Orange urgently needed to use a computer
during this period, he should have asked Red to provide him with an alternative.
His preoccupation with other matters did not excuse him from compliance with
Red’s policies. In fact, in preparing Blue’s report, Orange acted recklessly andwas willfully blind to the repercussions of violating Red’s security measures. A

13Intercollegiate Negotiation Competition Newsletter Vol. 5, No. 3 (2006), at p. 8.

reasonable person would have been aware of the notorious harm caused by file
exchange software, as widely reported in the media. 14

36.

In the face of apparent risk, Orange acted in gross violation of Red’s policies, andcaused the Leak. By directing Orange to prepare the Report, Blue must be held
responsible for Orange’s actions.
b. Any Damages Owed by Red are Reduced to the Extent that Blue
Contributed to the Creation of Risk of Information Leakage

37.

Red was unaware of the necessity of the Report. 15 Furthermore, Orange did notdisclose to Red his difficulty in preparing the Report before 10 September (theday of the Red office closure). This lack of information rendered it impossible for
Red to accommodate Orange, and to take additional steps to protect the securityof Confidential Information.

38.

Therefore, Blue’s failure to disclose relevant information increased the risk of
information leakage and it is to this extent that Blue cannot claim damages
against Red.
c. Liability for the Leak should be Apportioned in accordance with theSecondment

39.

The Secondment does not expressly state which party, Blue or Red, should bear
responsibility for the actions of Orange during the secondment period. However,in apportioning liability for the Leak between the two parties, reference must be
had to the terms of the Secondment.

14
15

Problem, supra note 7, at para. 1.
Newsletter No. 2, supra note 7, at p. 8.

40.

The Secondment indicates that, as Blue’s representative, Orange waspredominantly under the control of Blue: (1) Blue remained responsible for
Orange’s holidays, benefit package, and severance (Article 5); (2) Blue paid
Orange his salary and bonuses directly (Article 6); (3) Blue remained responsible
for Orange’s health, pension, and employment insurance (and made financial
contributions accordingly) (Article 7); and, (4) Blue paid Orange for all his
commuting costs while working at Red’s facility (Article 8.2). These provisions
clearly indicate that in spite of Orange’s “leave of absence”, Blue exercised
significantly more control over Orange than Red.

41.

In contrast, pursuant to Articles 7 and 8, Red’s responsibilities towards Orange
were limited to the payment of worker’s accident insurance premiums and work
related expenses. This “responsibility” was not reflective of Red’s control overOrange, but rather of the contractual allocation of expenses as between Red andBlue related to the Project, while Orange was on Red’s premises.

42.

Taking the above into consideration, as well as the fact that the Report was
prepared solely for Blue’s purposes, at least two-thirds of any liability for the
Leak should be borne by Blue pursuant to Article 7.4.7 of UNIDROIT.