Mona Co., Ltd. (LLC, Attorneys Kim Un-soo et al., Counsel for the defendant-appellant)

Korean Standards Bank (Attorneys Kim Su-soo et al., Counsel for the plaintiff-appellant)

December 12, 2012

Seoul Central District Court Decision 2008Gahap10807 Decided November 29, 2010

1. The part against the plaintiff in the judgment of the first instance, including a claim added and expanded in the trial, shall be modified as follows:

A. The Defendant shall pay to the Plaintiff KRW 1,884,229,023 with 5% interest per annum from November 15, 2012 to February 6, 2013, and 20% interest per annum from the next day to the day of full payment.

B. The plaintiff's remaining claims are dismissed.

2. Of the total litigation costs, 80% is borne by the Plaintiff, and the remainder 20% is borne by the Defendant, respectively.

3. Paragraph 1(a) of this Article may be provisionally executed.

1. Purport of claim

The defendant shall pay to the plaintiff 9,421,145,15 won and its equivalent at the rate of 20% per annum from the day following the day of service of a copy of the application for amendment of the claim of this case to November 14, 2012 (the plaintiff added a claim for return of unjust enrichment due to the defendants' non-performance of the notice of exercise of options at the trial, and the plaintiff shall be deemed to additionally regard the selective claim. In addition, the plaintiff withdraws the lawsuit of the part of the claim for confirmation of existence of the previous obligation at the trial, and expands the claim for the monetary claim).

2. Purport of appeal

The judgment of the court of first instance is revoked. The defendant shall pay to the plaintiff 5,899,450,000 won and the amount equivalent to 20% per annum from the day following the day of service of a copy of the application for amendment of the claim as of June 25, 2010 to the day of complete payment. It is confirmed that there is no obligation between the plaintiff and the defendant to pay 1,785,680,000 won to the plaintiff based on the currency option contract as of November 21, 2007, and the obligation to pay 1,64,300,000 won to the defendant based on the currency option contract as of January 11, 2008.

1. Quotation of judgment of the first instance;

The reasoning for this Court’s explanation concerning this case is as follows: (a) the part of “whether the Plaintiff’s mother violates the obligation to protect the customer” was used in the first instance court’s judgment, Chapters 5 through 59, and 17, respectively; and (b) the part pertaining to the claim for return of unjust enrichment on the ground of the Plaintiff’s non-performance of the notification of exercise of options added by the court of first instance is identical to the part corresponding to the Plaintiff’s judgment in the first instance court’s judgment, and thus, (c) the same is acceptable pursuant to the main sentence of Article 420 of the CPA.

2. Whether the Plaintiff violated the duty of protecting customers

(a) Facts of recognition;

1) The Plaintiff is a stock-listed corporation established on December 28, 1967 for the main purpose of the manufacture, sale, export, etc. of phrases and office equipment, and is a company with the total amount of KRW 1,32.8 billion as of December 31, 2007, annual sales of KRW 1,91.9 billion.

2) After having experienced foreign currency conversion loss at the time of the IMF, the Plaintiff prepared and operated exchange risk management rules for the prevention of exchange risk, separately organized and operated a exchange risk management team, and some of the employees received foreign exchange risk training.

3) The Plaintiff’s export amount of approximately KRW 21.2 billion out of approximately KRW 169.7 billion in 2005, approximately KRW 21.1 billion in sales in 2006, approximately KRW 168.5 billion in sales in 2007, approximately KRW 18.8 billion in sales in 2007, and KRW 18.9 billion in sales in 2008, KRW 24.8 billion in sales in 2006. Meanwhile, the Plaintiff’s sales amount of USD 1,953,423, USD 774,932, USD 2007; USD 1,957,9375,938-1,208; and USD 36.7,000 in sales amount at the time of 2006, USD 36,000 in the case of 207, the average of USD 1,537,938-138,297.

4) The Defendant: (a) was the Plaintiff’s main transaction bank that has entered into a main transaction relationship with the Plaintiff for more than 20 years; (b) visited the Plaintiff on February 2006, and provided an overall explanation on the monetary option transaction contract that may raise the exchange rate; (c) on May 8, 2006, the Defendant presented a variety of transaction proposal regarding each product for a variety of periods, types of monetary options products, and explained the structure of each product by telephone, email, e-mail, etc.; and (d) explained the examples of specific loss amount and profit amount arising from exchange rate fluctuations at the time of entering into the instant contract. Furthermore, the Defendant provided the Plaintiff with information on exchange rate prospects at most of the domestic and foreign financial institutions, etc. that have predicted a decline in exchange rates, and presented the prospects of exchange rates at any time based on the exchange rate prospects at the government or domestic and foreign institutions.

5) Before entering into the instant contract, the Plaintiff entered into 12 US currency option contracts with the Defendant, Korea Bank, and HSBC bank, etc. on August 1, 2007, and entered into a 27 US currency option contract with the Defendant, including the instant contract, including, but not limited to, 8,100,000 dollars per month from May 8, 2006 to January 22, 2008 (the details are as follows) with five banks including the Defendant, including, but not limited to, a currency option contract with other four banks, such as foreign exchange banks and CBC banks, etc., on August 1, 207, the contract amount to be settled as of the end of 2007 came to be KRW 950,00 per month (90,000 options).

본문내 포함된 표 순번 계약일 은행 상품명 계약기간 (월) 계약금액 (달러,월) 손익(원) 비고 (레버리지, KO 등) 1 06. 5. 8. 피고 Windowed KIKO Turbo Participating FWD with Rebate 12 25만 9,075,000 L:2배/KO 2회 2 06. 5. 16. 피고 Windowed KIKO Turbo Participating FWD with Rebate 12 25만 28,750,000 L:2배/KO 5회 3 06. 8. 3. 피고 Windowed KIKO Turbo Participating FWD with Rebate 12 25만 58,125,000 L:2배/KO 11회 4 07. 1. 5. 피고 Windowed KIKO Turbo Participating FWD with Rebate 12 25만 21,925,000 L:2배/KO 1회 5 07. 1. 18. 우리은행 (KIKO) 12 25만 L:2배 6 07. 2. 13. 피고 Win. KO Bonus Part. FWD w/ Rebate + Anytime KO At-Expiry KI Part. FWD w/Rebate 24 25만(B파트 : 50만) 58,250,000 L:2배/KO 1회 7 07. 3. 5. 우리은행 (KIKO) 25만 L:2배 8 07. 4. 18. HSBC (KIKO) 12 50만 L:2배 9 07. 4. 30. 피고 Win. KO Bonus Part. FWD + Anytime KO At-Expiry KI Call Sell 24 25만(B파트: 50만) 17,250,000 L:2배/KO 1회 10 07. 5. 17. 피고 Windowed KI Enhanced Participating Forward + Anytime KO At-Expiry KI Call Sell 24 30만(B파트: 60만) 7,230,000 L:2배/KI 1회 11 07. 5. 18. 피고 Windowed KI Enhanced Participating Forward + Anytime KO At-Expiry KI Call Sell 36 30만(B파트: 60만) 18,750,000 L:2배/ 12 07. 5. 18. 우리은행 50만 L:2배 13 07. 8. 1. 피고 Windowed KIKO Turbo Participating Forward + Anytime KO At-Expiry KI Call Sell 24 25만(B파트: 50만) 8,853,750 L:2배/ 14 07. 8. 10. 피고 Windowed KIKO Turbo Participating Forward + Anytime KO At-Expiry KI Call Sell 24 25만(B파트: 50만) 11,315,000 L:2배 15 07. 8. 16. 피고 Windowed KIKO Turbo Participating Forward + Anytime KO At-Expiry KI Call Sell 24 25만(B파트: 50만) 14,020,000 L:2배 16 07. 8. 24. 씨티은행 (KIKO) 12 20만 L:2배 17 07. 10. 30. 우리은행 (Redemption) 24 50만 L:2배 18 07. 11. 13. 씨티은행 (KIKO) 12 40만 L:2배 19 07. 11. 15. 외환은행 (KIKO) 12 30만 L:2배 20 07. 11. 21. 피고 Windowed KIKO Turbo Participating Forward + Anytime KO At-Expiry KI Call Sell 24 30만(B파트: 60만) L:2배 21 07. 12. 17. 외환은행 (KIKO) 12 30만 L:2배 22 07. 12. 18. 우리은행 (KIKO) 12 50만 L:2배 23 08. 1. 3. 피고 Put Spread + Anytime KO Call Sell 20 30만(B파트: 60만) L:2배 24 08. 1. 7. HSBC (KIKO) 12 60만 L:2배 25 08. 1. 9. 씨티은행 (KIKO) L:2배 26 08. 1. 11. 피고 Windowed KIKO Turbo Participating Forward + Anytime KO At-Expiry KI Call Sell 21 25만(B파트: 50만) L:2배 27 08. 1. 22. 우리은행 (KIKO) 12 100만 L:2배

6) The Plaintiff entered into another currency option contract prior to the conclusion of the instant contract, which entered into between the Plaintiff and the Defendant, had experienced losses by selling the amount corresponding to the mileage upon the fulfillment of the conditions set forth in the instant contract on August 17, 2007 and the instant contract on August 1, 2007. In addition, the Plaintiff’s employee Nonparty 3 (the team leader) primarily took charge of concluding and negotiating the instant contract with the Defendant, based on the understanding of the structure and content of various currency option products proposed by the Defendant, Nonparty 3 voluntarily presented major terms and conditions of the contract, such as the contract amount, i.e., e., during the process of exchange rate fluctuations, and i., during the period of exchange rate fluctuations.

7) At the time of concluding the instant contract, the Plaintiff did not inform the Defendant of the fact that the Plaintiff entered into a currency option contract with another bank. However, the Plaintiff informed an accounting firm of all the details of the currency option transaction, reported them to the Financial Supervisory Commission and the quarterly and halfyearly report sent to the Korea Stock Exchange, and accordingly, the Plaintiff’s audit report on the financial statements prepared on December 31, 2007 as of December 31, 2007 included all the details of the currency option contract entered into with another bank.

[Ground of recognition] In the absence of dispute, entry of Gap's 4, 5, 54, 59, 60, 62 through 68, 60, 62 through 68, 80, Eul's 14 through 18, 27, 50, 53, 54, 56, 58, 65, 67, 93 through 95, Eul's 18 (including each number), witness of the first instance court, non-party 3 and 4's testimony, and the purport of the whole pleadings

B. Occurrence of liability for damages

1) The over-the-counter derivatives, such as the instant contract, are new forms of contracts developed through various information and high-tech financial engineering utilizing expertise, such as transaction principles in the foreign exchange market, prospects for exchange rate fluctuations, and valuation of options values. Not only exchange risk management, but also financial instruments for investment or speculation may be used as well as exchange risk management, and any loss incurred therefrom may be unlimitedly expanded if the occurrence of a situation different from the prediction is not secured at the date of settlement.

Therefore, a financial institution is obligated not to actively recommend transactions involving excessive risk, taking into account various circumstances, such as customer’s transaction purpose, transaction experience, and financial standing, when selling the same monetary option product. In a case where a customer appears to demand transaction terms and conditions inappropriate for himself/herself without properly recognizing the risk accompanied by the monetary option product, it is reasonable to deem that the financial institution has a duty to clearly notify the risk (Principle of suitability).

In addition, in order for an enterprise, a non-financial expert, to make a reasonable determination and decision under his/her own responsibility, it is necessary to receive appropriate transaction information from a financial institution that sells financial products as an expert in terms of complex terms and conditions, structure, risk, etc. Therefore, when trading over-the-counter derivatives with a general customer, a financial institution is obligated to protect customers by clearly explaining the characteristics of the product, major contents, and risks associated with the transaction so that the other party can properly evaluate the structure

2) According to the above facts, inasmuch as the Plaintiff experienced foreign currency conversion loss at the time of IMF as it was an enterprise to be punished for export, and there was a need for exchange risk management. In the situation where most financial institutions, etc. at the time, expect the continuous decline in the exchange rate, the instant contract is a structure that guarantees the exchange rate higher than simple futures exchange when the exchange rate drops in a stable manner, and thus is able to bring profits to the Plaintiff, and thus, it cannot be said that the instant contract was structurally disadvantageous to the Plaintiff. Furthermore, the Plaintiff was not only the instant contract but also the Plaintiff, as well as the Defendant and other financial institutions, has entered into multiple currency options contracts with the Defendant and other financial institutions, and provided several explanations about the instant contract in the process of concluding the contract. The Plaintiff was aware of the profits through the fulfillment of the terms and conditions of put option options, and experienced melt-out. Thus, at the time of entering into the instant contract.

However, as seen earlier, the instant OTC derivatives contract is a new type of contract developed by high-level financial engineering using various information, such as transaction principles in foreign exchange markets, prospect of exchange rate fluctuations, appraisal of options value, etc. As such, not only can it be used as exchange risk management, but also can it be used as financial products for investment or speculation. In the event there is a risk of unlimited increase in losses incurred by the Plaintiff’s sales of USD 2480,000 and USD 860,000 were the maximum monthly sales in 206, and there were no significant changes in the amount of contracts between the Plaintiff and the Plaintiff at least 70,000,0000,0000,0000 won and 70,0000,0000,0000,0000,000,000,0000,000,000,000,000,000.

In addition, the instant contract is designed with a total of 6 cases up to 2 times. The actual export performance or foreign currency inflows fall short of 1.5 times. When the exchange rate comes to an increase, the risk of the Plaintiff’s above loss increase due to the increase in the rate of exchange rate fluctuations. In particular, if there are no goods ($ entry into export), it is necessary to pay attention to the Plaintiff, i.e., more actively attract the above risk and carefully examine the Plaintiff’s own effort. However, the Defendant’s 6 call option contract amount of 1.8 times per month, which is 1.2 times per month average of USD 1.6,000,000,000 per month, and 2.8 times per month per month, which is 1.8 months per month, after which the contract was entered into at least 200 times per month, the average contract amount of USD 13,14,15, and 200,000,000 per month per month and 3.5 months per month per month per month, it was concluded.

Comprehensively taking account of the aforementioned circumstances, the Defendant emphasized that there was no cost to pay for the decline in exchange rates at the time of entering into the instant contract, and did not provide specific explanation on the risk due to the rapid increase in exchange rates or the degree of losses incurred therefrom, and violated the suitability principle and the duty to explain by soliciting the instant contract, which appears inappropriate in light of the size or form of the Plaintiff’s inputs or the amount of losses incurred therefrom. Accordingly, the Defendant is liable to compensate the Plaintiff for the damages incurred by the Plaintiff due to its violation of the aforementioned suitability principle and

C. Scope of damages

1) It is reasonable to view that the Plaintiff’s loss incurred due to the Defendant’s breach of the suitability principle and the duty to explain in entering into the instant contract was the Plaintiff’s transaction loss due to the instant contract. However, there is no dispute between the parties that the Plaintiff’s loss due to the instant contract was KRW 9,421,145,115

Meanwhile, the above damages include the part arising from exchange rate fluctuations within the extent reasonably anticipated at the time of entering into the contract of this case. However, the damages related to this part are losses that would not have occurred if the contract of this case was not concluded, and thus, they are included in the damages suffered by the plaintiff due to the violation of the suitability principle and the duty to explain of the defendant.

2) On the other hand, in the conclusion of the instant contract, the Plaintiff, while carefully reviewing the content, structure, characteristics, risk, and the trend of economic and exchange rates, etc. of the instant contract, was negligent due to the Defendant’s solicitation while neglecting to make a decision thereon. In particular, the global financial crisis that occurred at the time of the Plaintiff’s occurrence of losses due to the instant contract, which led to a significant impact on the global financial crisis, and it appears that it was difficult for the Defendant to predict the same degree of exchange rate at the time of the conclusion of the instant contract, taking into account the following circumstances: (a) the amount of damages that the Defendant is liable to compensate for to the Plaintiff shall be limited to 20% of the above amount of losses arising from the instant contract.

3) Therefore, the Defendant is obligated to pay to the Plaintiff 1,884,229,023 won (9,421,145,115 won x 20%) and damages for delay at each rate of 20% per annum under the Civil Act from November 15, 2012 to February 6, 2013, the date following the delivery date of a copy of the application for modification of the purport of the claim as of November 14, 2012 sought by the Plaintiff.

3. Matters to be judged additionally;

A. Summary of the plaintiff's assertion

According to the monetary option transaction agreement delivered by the Defendant to the Plaintiff when entering into the instant contract, the exercise of options shall be based on the method of notifying the exercise of rights from 9:0 am to 5:30 am in the Republic of Korea, which is the time for giving notice of the due date of each option maturity, from 9:0 am in the Republic of Korea, and if not giving notice of the exercise, the exercise of options shall be deemed to have been waived. However, since the Defendant did not give notice of the exercise of options from 9:0 am in the Republic of Korea, which is the time for giving notice of the due date of each of the instant contract, from 9:0 am in the Republic of Korea to 30:0 am in the Republic of Korea, which is the time for giving notice of the exercise of options, all the Defendant’

B. Determination

However, according to the evidence No. 197 of the monetary option transaction agreement as alleged by the plaintiff, "the exercise of options is established when the purchaser notifies the seller of the exercise by verbal or other unlawful means during the day on which the exercise is held or during the exercise period. In the absence of such notice by the last day of the exercise period, the purchaser shall be deemed to waive the exercise of options." Article 1 (9) of the said agreement provides, "The time for notice of the exercise means the time when the seller can receive notice of the exercise, and unless otherwise specified in the transaction certificate, it means the time between 9:0 p.m. and 5:0 p.m. 30:0 p.m. of the Republic of Korea." Article 1 (10) of the said agreement provides, "The notice of the exercise means the notice of the cancellation of the exercise to exercise the monetary option sent by the purchaser to the purchaser."

However, according to the Plaintiff’s certificate of transaction of currency option (A) and the effect that “if the terms and conditions of the instant currency option contract are met and the terms and conditions of the instant currency option contract are not fulfilled, this transaction certificate will take precedence over the other parties if the terms and conditions of the instant currency option contract are mutually applicable.” This provision provides that the parties’ rights and obligations are determined at fixed rate of exchange, regardless of whether the parties’ rights and obligations are exercised or at the time of the notice of the exercise of the option, and the time of the exercise of the said contract is significant if the parties’ profits and losses are determined at the time of the notice of the exercise of the option, the instant currency option contract shall be deemed to have been concluded with the parties to the instant currency option contract, regardless of the time of the notice of the exercise of the option option, and if the parties’ profits and losses are automatically determined at the market rate of exchange or exchange rate of exchange, it shall be deemed that the parties’ profits are not necessarily necessary to exercise the option option.

Therefore, it cannot be deemed that the settlement amount under the instant contract that the Plaintiff paid to the Defendant, on the ground that the Defendant did not notify the Defendant of the exercise of the options does not constitute a legal cause. Therefore, the Defendant’s assertion on this part cannot be accepted on a different premise.

4. Conclusion

Therefore, the plaintiff's claim is justified within the above scope of recognition, and the remainder is dismissed as it is without merit. Since the judgment of the court of first instance is unfair with different conclusions, the plaintiff's appeal and the claim extended in the court of first instance shall be accepted in part, and the judgment of the court of first instance shall be modified as above, and it is so decided as per Disposition.

Judges Park Jong-nam (Presiding Judge)

1) Meanwhile, the audit report on the financial statements prepared as of December 31, 2006 as of December 31, 2006 includes both the currency option transaction for 2006, which was concluded at the time, and the currency option transaction for 3 US dollars with the Defendant (see, e.g., “18. contingent obligations and important contractual terms” in evidence A No. 66-1).