@eaglejarl,
@OliWhail,
@Velorien - wall o'text here, but it's needed to get my thoughts down.
I've taken some time to put my thoughts together on this. Outside of the matter of Hazou as a character having agency in regards to our plans and how much he's allowed to reject or ignore, I think the big mishandling on your part here is failing to ask the question "Is it appropriate to punish our players for this oversight, and if so how much?" Or if you did ask yourselves that, I think you came to a bad answer. I very much appreciate that you've come up with a rich variant on the Naruto setting where people act as actual characters with consistent motivations and things work in a more rational and realistic manner, but at the same time you have to remember that you're running this as a game rather than a story. People play games to have fun, and even games that have high difficulty need to have a degree of fairness or players will end up getting frustrated and quit.
Punishing players for bad decisions is a time honored tradition for GMs and make games more interesting since automatically winning is boring, but those punishments need to be measured to the mistake to an extent, and unless someone does something spectacularly stupid there needs to be some chance of recovery. Examples:
1. The players decide to enter into one on one combat with a combat spec jonin as a genin. You don't even need to roll for this. Bad End. This is fair because the players did something blatantly and obviously stupid.
2. The players decide to enter the group into combat with another group of around equal rank. You roll the dice. The player character dies, suffers crippling injury, one or more teammates have the same consequences, etc. Given the stated realism and lethality level of the setting this is fair. Entering into combat with an opponent near your level is a gamble. By the same token, it could also be considered fair to give the players a chance to retreat or continue combat if things are going badly, but that's a GM choice.
3. The players make a series of questionable decisions that are not individually lethal, and there are signs that there are problems, but the players maintain the course without correcting.
4. The players forget some small detail in their plan. The GM doesn't remind them of the detail, give no indication that the detail caused a problem before actually having it blow up in their face, and the results are not something the players can recover from. This isn't going to seem fair to the players, and it's what happened here.
When we had the "willing to go very far for Akane" incident things were bad because of it, but we didn't lose anything that was recoverable. It was still a rather hefty punishment for the level of detail, but ultimately I'd say it was fair due to the fact that what we lost (access to Leaf and good will with Leaf, Akane being with the party) was ultimately recoverable - we were able to get out of the kill box even without Hazou giving Jiraiya the right answer to his question due to Keiko giving him a good reason to let us live, and even without Skywalkers we could have worked our way back into Leaf's good graces in the long run. We were also able to recover our team's trust. I find it further fair because of how interesting it ended up being.
Here we did not have any indication that what we did caused a problem until the update the problem actually occured on, not giving us a chance to react to the general problem we caused until it caused unrecoverable problems. We have lost the trust of our team in our judgement due to our mistake causing this big clusterfuck (and I fear it's a permanent loss this time), our squad leader is dead, Kagome may be lost to us as a team member depending on how we go about this (and the team also has lost a great degree of trust in him) and if he isn't lost then Jiraiya will certainly never trust him, and we may have also lost our relationship with Akane. These are not recoverable circumstances IMO, and the lack of any chance to deal with it isn't really fair from a game standpoint since it's entirely reasonable that the players forgot what amounts to one detail in a mountain of details.
I think this would have been far, far more fun and interesting had we been given a chance to recover from this somehow before it became a complete and utter disaster. My suggestion is to retcon the last part of the update and have Kagome stopped before he can complete his murder plot, giving Hazou a chance to talk him down. Minami would be aware of the plot, and it'd certainly cause severe problems with the new team dynamic, but it could ultimately be recovered. It would cause a good amount of drama and opportunities for character growth, but not be something the players would feel is out of proportion for the level of mistake they made.
