Chocolate Case <Issue 1>
Summary of Blue’s Argument
Red Corp. (“Red”) had an obligation to deliver the Chocolate (the “Goods”) by shipping
the Goods by January 10, 2014. However, Red breached its obligation. Despite the factthat Blue Inc. (“Blue”) allowed an additional period for performance to Red, Red did not
perform its obligation within that period. Even if there were no breach on January 10,
Red did not perform the obligation modified by both parties on January 11. Therefore,
Blue is entitled to claim US$1 million in damages caused by such non-performance.
1. Red had an obligation to deliver the Goods by January 10, 2014.
According to Art.1 and Art.3 of the Contract as shown in Exhibit 6 (the “Contract”)
between Red and Blue, Red had an obligation to ship the Goods by January 10, 2014 at thePort of Negotown. The trade term for the Contract is CFR (Incoterms®2010) and it
stipulates, “(The) seller must deliver the goods by placing them on board.” Thus, Red’sdelivery is deemed to have been made when the Goods had been placed on a ship.

2. Red breached its obligation.
Red breached its obligation under the Contract by missing the ship that departed thePort of Negotown on January 10, 2014 for which Red had booked a space (¶31).
Red denies its non-performance by alleging that the final and binding legal precedent of
Negoland (the “Precedent”) says, “if the seller and the buyer agree to settle a transaction by

a letter of credit, the seller…may refuse to perform its obligation thereunder until a letterof credit is advised”. However, since the governing law of the Contract is UNIDROIT
Principles 2010 (“UNIDROIT”) and there was no agreement to comply with the laws andcases of Negoland, Red’s argument should be rejected. Furthermore, as mentioned below,
Red should be liable for its non-performance under UNIDROIT.
(1) Red should be liable for the breach under Art.5.3.3 of UNIDROIT.
Under UNIDROIT, Red’s obligation only takes effect if the Letter of Credit (the “L/C”)
was advised to Red (Art.5.3.1 of UNIDROIT). That is, considering the function of the L/C
securing the payment, the advice of the L/C should be the condition for Red to ship theGoods. In this respect, the Precedent is correct in general. However, in this case, Red
may not rely on the non-fulfilment of the condition. The reason is as follows.
In this case, on December 19, Blue had informed Red that the L/C would arrive in twoor three days, but the advice was not made even on January 9 (¶30, 31). In addition,
Red was the only party that could be aware of the extraordinary situation. Moreover,
Red was the party that chose Negoland Bank as the advising bank. In such a situation,
under principle of good faith, it was Red’s duty to check with Negoland Bank whether it

1had been advised the L/C. However, Red violated its duty by neglecting to check with
Negoland Bank (¶30, 31). Therefore, Red may not rely on the non-fulfilment of thecondition.
(2) Red should not be allowed to withhold its performance under Art.7.1.3 of UNIDROIT.
Art.7.1.3 of UNIDROIT stipulates “Where the parties are to perform simultaneously,

either party may withhold performance until the other party tenders its performance”.
However, Blue’s obligation should be limited to make a request for an issuance of the L/C
since both Arbitria Bank and Negoland Bank are third parties whose acts are beyond
Blue’s control. Blue requested for an issuance of the L/C on December 19 (¶30). Thus,
Red cannot withhold its performance.
Even if it were general understanding that a buyer’s obligation completes when the
L/C is advised to a seller, at least in this case, Red should not be allowed to withhold its
performance. This is because, under the circumstances that Red itself chose Negoland
Bank as the advising bank, withholding its performance by relying on the situation
caused by bank’s failure is against good faith and fair dealing (Official Comments forArt.7.1.3 of UNIDROIT).

3. Blue allowed an additional period for performance to Red (Art.7.1.5 of UNIDROIT).
However, Red did not perform within the period.
In the communication on January 11, Blue allowed Red an additional period of time todeliver the Goods as soon as possible in order to meet the due date of January 31 fordelivery to department stores ( ¶ 32)(Art.7.1.5 of UNIDROIT). However, although the
chocolates worth US$1.5 million had been taken into an aircraft, they were removed to acargo warehouse due to a mechanical problem of the aircraft. In such a situation, it should
be considered that Red’s performance was canceled. The reason is as follows.
The applicable CFR rule stipulates “The seller must deliver the goods…by placing themon board…” Although not expressly provided, once the goods are removed from the ship,delivery should be considered as to be canceled under CFR. If the goods are once placed on
board and replaced by the seller’s will, it is obvious that obligation to deliver would becancelled. It is also obvious that the same cancellation happens when the carrier replaced
them from the ship.
If an interpretation that Red’s delivery has been performed as long as the Goods areunder the responsibility of the Carrier were possible, there would be no difference between
CFR and CPT (Incoterms®2010, The rule which is used irrespective of the mode oftransport selected), which stipulate, “The seller must deliver the goods by handing themover to the carrier…” The most important principle of CFR is not handing them over to thecarrier but placing them on board.
Considering above, even within an additional period, Red did not perform its obligation.

2

4. Even if Red is not liable for breach by reason of its non-performance, the obligation
was modified and Red did not perform it.
Even if there were no non-performance by Red on January 10, its obligation was modified
by an additional oral agreement between both parties. On January 11, Swan from Red said,“I’ll arrange for air cargo right away”. With this communication, both parties agreed tomodify the obligation to deliver the Goods by air as soon as possible to meet the due date ofJanuary 31. Both parties should be precluded by Art.9 of the Contract, as Blue reasonably
did not oppose to Red and paid by remittance for the delivered chocolates in reliance of thestatement above (Art.2.1.18 of UNIDROIT). As written above, since Red did not perform themodified obligation, Red is liable for its breach.

5. Since Red’s failure constitutes “non-performance”, Blue is entitled to claim damagesof US$1 million caused by such non-performance (Art. 7.4.1 to 7.4.4 of UNIDROIT).
(1) According to Art.7.1.5 (2) of UNIDROIT, if due performance has not been made upon

expiry of that period, the aggrieved party may have right to damages caused by suchnon-performance. Since Red’s failure to ship the Goods constitutes non-performance,Blue has right to US$1 million in damages (Art.7.4.1 to 7.4.4 of UNIDROIT).
(2) In this case, since Red did not deliver the half of the Goods to Blue, Blue can claim

US$1 million for the undelivered Goods. Moreover, Blue paid US$1 million to thedepartment stores for an inevitable penalty (¶33), there is a reasonable degree ofcertainty of the harm. Furthermore, Red knew a penalty would arise if delivery had
not been done when Red entered into the Contract (¶32). Therefore, Red was able toforesee that the damages would arise from its non-performance.
6. Hence, Red should pay damages of US$1 million.
<Issue 2>
Summary of Blue’s Argument【1】As stated in Issue 1, Blue allowed Red an additional period of time for performance
to deliver the Goods in order to meet the due date of January 31. However, Red did not
perform it within that period. Since Red’s act constitutes non-performance, Blue isentitled to terminate the Contract for non-performance by Red. Consequently, Blue is not
obligated to pay US$1.5 million for the Goods.
【2】There was an agreement between Red and Blue that Red would pay US$500,000
for the airfare. Even if there were no agreement between Red and Blue, US$500,000 for
airfare is not included in the increased cost stipulated in Art.5 of the Contract(“Increased Cost”). Even if Blue were obligated to reimburse Red, the amount would be3

reduced to US$400,000.
【1】Blue is entitled to terminate the Contract for Red’s non-performance.
As stated in Issue 1, since Red did not perform its obligation within the additional period,
Blue is entitled to terminate the Contract (Art.7.3.1 (3) of UNIDROIT). In addition, therequirement of “fundamental non-performance” in Art.7.3.1 (1) is fulfilled because theContract was concluded in order to deliver Red’s chocolate products to department stores for
the St. Valentine’s Day (¶29) and, “strict compliance” of the delivering date was the “essenceof this Contract” (Art.3.3 of the Contract). Therefore, Blue is entitled to terminate theContract.
Consequently, Blue is not obligated to pay US$1.5 million for the Goods.

【2】
1. There was an agreement between Red and Blue that Red would pay US$500,000 for
the airfare.
In communication on January 11 between Red and Blue, Blue requested Red to pay
US$500,000 for its own cost by saying, “later you can seek damages from Negoland Bank,

which was responsible for delay”. Red responded, “You may be right. I’ll arrange for air
cargo right away” (¶32). This communication formed an agreement between Red and Blue
that Red would claim US$500,000 for the airfare to Negoland Bank and Red would notallege for that fare to Blue.

2. Even if there were no agreement between Red and Blue, US$500,000 for the airfare
is not included in the Increased Cost.
(1) Art.5of the Contract stipulates“Any new, additional

or increased freightrates…incurred by the Seller with respect to the Goods after the conclusion of thisContract, shall be for the account of the Buyer…”.
(2) However, US$500,000 in this case does not correspond to “Any new, additional or

increased freight rates”.
The Contract presupposes marine transportation. Thus, the “Any new, additional or

increased freight rates” should be limited to marine transportations such as increased
cost incurred by an unavoidable change in the sea route. In this case, US$500,000 indamages has incurred because the mode of transportation has changed. Therefore, thecost US$500,000 in this case does not correspond to “Any new, additional or increased

freight rates”.

4(3) Moreover, US$500,000 for the airfare was attributable to Red’s non-performance anddoes not correspond to Increased Cost.
Increased Cost does not include costs incurred unjustly to cover Red’s mistake.
Therefore, US$500,000 for the airfare that was attributable to Red’s non-performance is
not included in Increased Cost.
Hence, Blue is not obligated to pay US$500,000 for the amount Red paid to Negoland Air.

3. Even if Blue is obligated to reimburse to Red, the amount should be reduced to
US$400,000.
Art.5 of the Contract is a provision that determines responsibility for costs that haveincreased. The increased cost in this case is US$400,000, which is calculated by
US$500,000 for the airfare minus US$100,000 for shipping fee. Thus, the amount Blue isobligated to reimburse to Red is no more than US$400,000.

M&A Case <Issue 1>
Summary of Blue’s Argument
Blue represented and warranted the correctness of matters stipulated in Art.4.1 of theStock Purchase Agreement (the “SPA”). However, Blue is not in breach of its obligation
stipulated in Art.4.1 (xiii) of the SPA.
Even if there were a breach of Art.4.1 (xiii) by Blue, Red cannot claim damages under
the principle of good faith.
1. Blue represented and warranted the correctness of matters stipulated in Art.4.1 of
the SPA.
Blue represented and warranted the matters stipulated in Art.4.1 of the SPA. AlthoughBlue does not breach its obligation in relation to any item stipulated in Art.4 of the SPA,
the item (xiii) “No Adverse Change” should be elaborated as follows since Red is expected torely on the item.
With Art.4.1 (xiii) of the SPA, Blue represented and warranted as of December 15, 2012
and as of the Closing Date, that there was no adverse change in the condition of the
TARGET or its business or the assets of the TARGET and no such change is threatened to
the TARGET or its business (Art.4.1 (xiii) of the SPA).
The adverse change should mean an event that has substantial negative impact on
business and to be reported on financial statements or to affect the numbers or descriptionsin the financial statements. The reason is as follows.
Red could know the condition of the TARGET until the fiscal year 2011 with the financial
statements provided by Blue, but not that after 2012. Item (xiii) is for Red to know if there5

is any negative change that should be reflected in the financial statement after December
31, 2011.

2. Blue is not in breach of its obligation stipulated in Art.4.1 (xiii) of the SPA.
There was no adverse change on the condition, financial or otherwise, of the TARGET or
its business or the assets of the TARGET and such change was not threatened to the
TARGET or its business.

(1) There was no adverse change.
In

2012,

Blue

Drink

received

complaints

fromoverconsumption of Blue Slim to stomach problem.

selectconsumers

linkingAlso, Blue Drink received thewarning from the Ministry of Health and Welfare (the “Ministry”) in early 2012 (¶39).
However, as a result of a series of rigorous tests conducted by Blue on Blue Slim, noparticular stomach problem was found and it was scientifically proved that there was noproblem with the quality of the product （¶39). Moreover, the sales volume did notdecrease in the fiscal year of 2012 (Exhibit 2). That is, the corporate value and thereputation of Blue Drink were not affected. Thus, the complaints and the warning from
the Ministry did not have actual negative impact on the management of the Blue Drink’s
business. Therefore, as of the Closing Date, there was no adverse change to the condition,
financial or otherwise, of Blue Drink’s business.

(2) No adverse change was threatened to the business of Blue Drink.
As stated in (1), it was found that there was no problem on the quality of Blue Slim.
More than one year had passed since the execution of the SPA when Blue Slim was
revoked its “Designated Health Food” status, on April 30, 2014 (¶39). Thus, as of theexecution of the SPA and as of the Closing Date, no adverse change was threatened to
Red Drink and its business.
Therefore, Blue is not in breach of Art.4.1 (xiii) of the SPA and all other items listed in
Art.4.1 of the SPA as well.

3. Even if there were a breach of Art.4.1 (xiii) of the SPA by Blue, Red is not entitled toclaim damages.
Art.4.2 of the SPA stipulates that Blue should bear the responsibility for the violation of
the representations and warranties. However, in this case, Red is not entitled to claim
damages under the principle of good faith (Art.1.7 of UNIDROIT). The function ofrepresentations and warranties is to protect a buyer who cannot know all the risks throughthe Due Diligence (the “DD”), such as the risks that are undisclosed to a buyer in the courseof the DD. However, when a buyer is aware of the adverse change of a target, a buyer may

6

protect him/herself by making a request to reduce the purchase price or to include
additional provisions to cover risks during the negotiation for dealing. Considering therelation between the DD and the representations and warranties, claiming damages ex-post
facto, where Red concluded the contract knowing these events is against the principle ofgood faith. In this case, Blue had disclosed the complaints and the warning from the
Ministry to Red in the course of the DD (¶39, Exhibit 13). Moreover, Pat Red, the presidentof Red, said, “they didn’t find any issue that stands in our way” and did not ask Blue to bereflected on the deal (¶19, 21). In these circumstances, under the principle of good faith,
Red should be precluded to argue Blue’s breach of the representations and warranties
relying on the fact that Blue did not make the notice of the complaints and the warningfrom the Ministry on the date of the SPA.

4. Even if Red is entitled to claim the damages, Red’s claim for the damages should be
rejected.
The claimant owes the burden to prove that there is a causal relationship between acreditor’s damage and the non-performance of an obligor. From the fact that Red had
already known the complaints and the warning from the Ministry, it is clear that Red
purchased Blue Drink anyway notwithstanding whether the notice of the complaints andthe warning had been done by Blue or not (¶39). Thus, the Red’s loss was not the result ofBlue’s breach of Art.4.1 (xiii) of the SPA, but due to Red’s business judgment that purchased
the TARGET even though the TARGET had received the complaints and the warning from
the Ministry on Blue Slim. Therefore, there is no causal relationship between the damage
and the breach. Hence, Red’s claim for damages should be rejected.

<Issue 2>
Summary of Blue’s Argument
Blue had an obligation not to run a business similar or competitive to that of the
TARGET. However, Blue did not breach the non-competition clause stipulated in Art.9 of
the SPA dated December 15, 2012.
Even if there were a breach of Art.9.1 of the SPA, Blue ought not to withdraw theinvestment US$5 million to Arbitria Coffee. Moreover, the liquidated damage which Blueis liable to pay should be reduced.
1. Blue had an obligation not to run a business similar or competitive to that of Red
Drink.
Art.9 of the SPA prohibits competition by stipulating, “Blue shall not and Blue shall notallow its affiliates to, directly or indirectly own, manage, operate, control, participate in,perform services for, or otherwise carry on a business similar to or competitive with thebusiness conducted by the TARGET in Arbitria or Negoland”.

72. Blue did not breach its obligation.
(1) The business of Arbitria Coffee is not similar to or competitive with that of the TARGET.
The TARGET conducts soft drink business, but not coffee drink business (¶9, 37).
The coffee drink business is not similar to that of the soft drink, since their beveragecategories differ from one another. When consumers purchase drinks, they first decide
the category of drinks (soft drink, coffee or tea) and choose what to drink. The coffee
drinks and the soft drinks do not compete with each other since consumers purchasethose items in different occasions. Therefore, Red Drink would not lose its customers
even if Arbitria Coffee develops coffee with weight loss benefits. Considering those facts,
the business of Arbitria Coffee is neither similar to nor competitive with that of the
TARGET.

(2) None of Blue’s acts corresponds to the violations stipulated in Art.9.1 of the SPA.
The purpose of the non-competition clause is to prohibit Blue or its affiliates to cause
the loss of value of the TARGET due to the substantial contribution to the business thatis similar to or competitive with that of the TARGET. It is clear that Blue's acts do notconstitute “own, manage, operate, control” the business of the TARGET. Red might
allege Blue participated in or performed services for the business of Arbitria Coffee in
breach of Art.9.1 of the SPA. However, considering the purpose of this clause statedabove, either “participate in” or “perform services for” prohibit acts which may
contribute to the business that is similar to or competitive with that of the TARGET.
In this case, there are no acts by Blue in breach of Art.9.1 of the SPA. Blue acquired
Arbitria Coffee’s stock by investing US$5 million, sent a non-executive director and lenta part of the Central Research Center (¶36). However, the stock Blue acquired composes
only 20% of the share of Arbitria Coffee. Considering the fact that the CEO family owned
56% of its share, Blue does not have influence on the business. Moreover, sending a nonexecutive director was not an act intended to participate in the decision-making of thebusiness. Furthermore, the lending of the Central Research Center was a commercial
rent for half a year and not a single employee of Blue was involved in the development.
Abovementioned acts do not contribute to the development of coffee with weight loss
benefit. Therefore, Blue is not in breach of Art.9.1 of the SPA.

(3) Arbitria Coffee is not an affiliate of Blue.
Red may argue that Arbitria Coffee is an affiliate of Blue, but it is not the case. Since
Art.9 of the SPA stipulates Blue’s obligation, the subject of this article is Blue, an
Arbitrian corporation. Thus, regarding the definition of affiliate, the Companies Act ofArbitria should be applied. The Companies Act of Arbitria defines the term “affiliate” as8

“company on which another company may exercise substantial influence over financial
and business policy decisions” (¶37). In this case, Blue got 20% share of Arbitria Coffeeand sent a non-executive director. However, since the CEO family is the largest
stockholder who still holds 56% of its share, Blue does not have any meaningful
influence on Arbitria Coffee’s management. Also, one non-executive director cannot
influence the management of Arbitria Coffee.
Consequently, since Blue does not have strong influence over financial and business
policy decisions, Arbitria Coffee is not an affiliate of Blue.
For the above reasons, Blue is not in breach of the non-competition clause stipulated in
Art.9 of the SPA dated December 15, 2012.

3. Even if there were a breach of Art.9.1 of the SPA, Blue is not obligated to withdraw
the investment US$5 million to Arbitria Coffee.
Art.7.2.2 (a) of UNIDROIT states, “Where a party who owes an obligation other than one

to pay money does not perform, the other party may require performance, unless (a)performance is impossible in law or in fact”.
Red claims that Blue shall withdraw the investment to Arbitria Coffee.

However,

Arbitria Coffee’s consensus to repurchase its stock is required in order for Blue to withdraw
the capital investment and it is practically impossible to get such consent from Arbitria
Coffee, not a party of this proceeding, and the one who has capital requirements, towithdraw the capital once invested.

Therefore, Blue does not have to withdraw theinvestment to Arbitria Coffee since it is impossible in fact.

4. The liquidated damages shall be reduced.
Art.7.4.13 of UNIDROIT states, “…The specified sum may be reduced to a reasonableamount where it is grossly excessive in relation to the harm resulting from the nonperformance and to the other circumstances”.
In this case, Art.9.2 of the SPA stipulates US$500,000 as liquidated damages in case Blueis in breach its obligation stipulated in Art.9.1 of the SPA. However, there has been nodamage caused by Blue’s breach of Art.9.1 of the SPA. The designated amount wasexcessively high comparing to the actual damages, that is zero. Therefore, the amount ofliquidated damage should be totally or reasonably reduced.

<Issue 3>
Summary of Blue’s Argument
Red had an obligation not to materially harm the interest of Blue in the additional
payment as stipulated in Art.2 of the SPA. However, Blue’s interest was materiallyharmed because of Red’s breach of its obligation on Art.8. Therefore, Red has an

9obligation to pay US$200 million in damages.
1. Red had an obligation not to materially harm the interest of Blue in the additional
payment as stipulated in Article 2 of the SPA.
Art.2.2 of the SPA stipulates that, when EBITDA of Red Drink in the fiscal year 2013
and/or 2014 exceeds US$110,000,000, Red shall pay to Blue equals EBITDA×8 as thecontingent payment. In addition, Art.8 of the SPA stipulates that Red shall not materiallyharm the interest of Blue in the additional payment as stipulated in Article 2.2 of the
SPA.

2. Blue’s interest was materially harmed because of Red’s breach of its obligation in
Art.8 of the SPA.
Red signed the distributorship agreement with Nego Drink at unreasonably low standard
retail price and created circumstances for Orange to leave (¶25, 35). As a result of these
non-reasonable business judgments, Blue lost its interest in additional payment, US$200
million in total in 2013 and 2014. US$200 million is equal to 25% of the upfront price and isobviously a material amount for Blue. The loss of US$200 million had occurred due to Red’s
non-reasonable business judgments.

(1) Red Drink signed the distributorship agreement with Nego Drink.
Red signed a distributorship agreement with Nego Drink at 40% of standard retailprice and it was not reasonable business judgment. Red had negotiated with Negoland
Bottlers and Nego Drink as candidates for a distributor in Negoland (¶23,24).
Negoland Bottlers, which has the same sales force as Nego Drink, offered 50% of
standard retail price, which is 10% higher standard retail price than that of Nego Drink.
However, Red did not continue its effort to negotiate with them in spite of the possibility
to conclude the contract with better conditions. Moreover, Red did not hold thecompetition to get better condition from both candidates. Red’s decision to conclude acontract with Nego Drink was far from the business judgment that a reasonablebusiness person would have made. Therefore, the decision Red made cannot be
considered as a reasonable business judgment.
(2)

Bob Orange resigned from Red Drink.

As a result of Orange’s resignation from Red Drink, Red Drink lost US$600 million(Exhibit 17). Orange was a director in charge of R&D department at Red Drink and awell-known person among the beverage trade (¶35). Red knew Orange was crucial for
Red Drink’ success in business (¶20). Also, Red understood that as long as there was anadequate R&D budget and appropriate environment Orange remained at Red Drink (¶
20).

10

Originally, Orange was allowed to have a period of three months for the improvementof the products (¶27). However, Red Drink suddenly abridged the period for improving
products from three months to two months, refusing Orange’s request for 20% of
increase of the R&D budget, which was a reasonable amount of US$100,000 (¶27, 35).
From these facts, it was clear that Red Drink created the circumstances that Orange had
no choice but to resign. The resignation of Orange caused lackluster sales of Red Slimand Red Energy. Moreover, the improvement of products stopped and no one could
correspond to the Ministry of Health and Welfare when Red Slim’s “Designated Health
Food” status was revoked (¶38).
As a result, Red Drink lost US$600 million as a result of Red’s repeated nonreasonable business judgments. Comparing the lost benefit US$600 million to
US$100,000 which Orange requested for its R&D budget, it is clear that not accepting
the increase of the R&D budget was totally not a reasonable business judgment.

3. Therefore, Red has an obligation to pay US$200 million in damages.
If Red had not made non-reasonable business judgment as mentioned above, EBITDA fora fiscal year 2013 was US$120 million and that of 2014 would be US$125 million and Blue
could have received US$200 million (25 million×8) by Red (Exhibit 7,16). In addition, Red
had acknowledged the damages in case Red breached Art.8 of the SPA (Art.7.4.2 to 7.4.4 of
UNIDROIT).
Hence, Red is obligated to pay US$200 million in damages (Art.7.4.1 of UNIDROIT).

11