[1] The degree of duty to explain borne by financial institutions when concluding a forward exchange contract

[2] The case holding that a financial institution is liable for damages which did not provide sufficient explanation on the special risk of futures exchange contracts linked to foreign funds

[1] A financial institution has the duty of care to protect customers so that they can make reasonable decisions as to whether to newly enter into a futures exchange contract based on their information or not to maintain a futures exchange contract, by clearly explaining the characteristics of a futures exchange contract, such as the possibility of exchange rates fluctuations, methods of settlement of forward exchange contracts, and materials that are easily stated in good faith about risk under a futures exchange contract, etc., in consideration of the customer’s occupation, age, investment experience, and existence of prior knowledge about a futures exchange contract, etc.

[2] The case holding that a financial institution is liable to compensate a financial institution for any loss arising from a futures exchange contract corresponding to the part of the loss incurred by the fund, i.e., the high risk of a futures exchange contract, out of the total loss suffered by the customer according to the above futures exchange contract, on the ground that it violated its duty to protect customers by explaining the special risk of a futures exchange transaction related to a foreign fund in a way that customers can understand, or without providing any data stating such risk, in a manner that customers can understand, and making it enter into a futures exchange contract only with a general explanation of the employee in charge

[1] Article 750 of the Civil Act / [2] Article 750 of the Civil Act

Plaintiff (Attorney Lee Dong-sik, Counsel for plaintiff-appellant)

Han Bank Co., Ltd. (Law Firm Democratic, Attorneys White-soo, Counsel for defendant-appellant)

Daejeon District Court Decision 2009Gahap6008 Decided November 19, 2009

May 12, 2010

1. Of the judgment of the court of first instance, the part against the defendant ordering payment in excess of the amount ordered below is revoked and the plaintiff's claim corresponding to the revoked part is dismissed.

The defendant shall pay to the plaintiff 114,732,305 won with 5% interest per annum from February 19, 2009 to June 9, 2010, and 20% interest per annum from the next day to the day of full payment.

2. The plaintiff's appeal and the defendant's remaining appeal are all dismissed.

3. The total costs of the lawsuit shall be four minutes, which shall be borne by the Plaintiff, and the remainder by the Defendant, respectively.

1. Purport of claim

The defendant shall pay to the plaintiff 475,466,954 won with 5% interest per annum from February 19, 2009 to the delivery date of a copy of the complaint of this case, and 20% interest per annum from the next day to the full payment date.

2. Purport of appeal

A. The plaintiff's purport of appeal

The part against the plaintiff corresponding to the money ordered to be paid under the judgment of the first instance shall be revoked.

The defendant shall pay 149,921,418 won to the plaintiff.

B. The defendant's purport of appeal

The part against the defendant in the judgment of the first instance is revoked, and the plaintiff's claim corresponding to the above revocation is dismissed.

1. Facts of recognition;

A. Fund transaction contract

(1) Since 1994, the Plaintiff traded variable pension insurance, financial bonds, and negotiable certificates of deposit at the Daejeonsan Branch of Defendant Bank, and began to invest in the fund, which is indirect investment product, from February 6, 2007.

(2) On February 6, 2007, upon Non-Party 2’s recommendation, the Plaintiff subscribed to Japan’s currency 51,480,051N (Korean currency KRW 400,000,000 at the time, KRW 777,00,00,000; hereinafter the exchange rate shall be expressed as 100,00,000) which deducts the amount of 514,801N from the fees, as the remaining Japanese currency 50,965,250 UN (Korean currency KRW 396,00,000) (hereinafter the “instant fund”).

(b) A forward exchange contract;

(1) The fund of this case is a foreign asset management company, which collects funds in Korea and invests in foreign assets, and is recovered in the same currency when they are redeemed, thereby creating a risk of loss arising from exchange rate fluctuations. In order to reduce the risk of loss arising from exchange rate fluctuations, the fund of this case was used in exchange hedge devices to sell the foreign currency in the future at the exchange rate determined in advance by the investor.

(2) On November 16, 2007, when nine months have elapsed since the Plaintiff subscribed to the instant fund, the Plaintiff entered into a gift exchange agreement with Nonparty 1 (the Nonparty in the judgment of the Supreme Court), who is an employee of the Defendant, to sell an amount equivalent to the investment principal at the futures exchange rate set in advance at the maturity (hereinafter “the first gift exchange agreement”). The first gift exchange agreement is to be purchased from the Plaintiff on February 18, 2008, at the exchange rate of KRW 83.18,00,000,000, whose exchange rate was 50,965,250,000.

(3) On February 18, 2008, the maturity date of the first forward exchange contract, the Plaintiff deposited the said money with the Defendant bank after hearing that, in order to settle only a forward exchange contract without cancelling the fund due to the higher exchange rate than the exchange rate anticipated at the maturity date, the Plaintiff shall pay KRW 21,991,506 as the difference settlement amount depending on the difference between the market exchange rate and the forward exchange rate at the time of February 18, 2008, the maturity date. At the time, the amount assessed by the Fund was 39,199,145.76 United Nations, and the market exchange rate was 876.33 won.

(4) On February 18, 2008, the Plaintiff paid KRW 21,991,506 for the settlement of exchange loss and then renewed the forward exchange contract. On February 18, 2008, the Plaintiff visited the place of origin at the Daejeon District of the Defendant Bank around the end of February 18, 2008 and drafted a document of forward exchange contract (hereinafter “second forward forward exchange contract”). The second forward exchange contract is to purchase KRW 50,965,250, Japan’s currency from the Plaintiff on February 18, 2009, an exchange rate of KRW 890,68, which is an exchange rate.

(5) On February 17, 2009, the day immediately before the maturity date of the second forward forward forward forward exchange contract, the Plaintiff settled the second forward forward forward exchange contract based on 1,582.94 won at the market exchange rate of February 17, 2009, which is February 17, 2009, with the Plaintiff expressed to the Defendant an intention to terminate the instant fund and the second forward forward exchange contract. The amount of KRW 352,812,039 [=50,965,250 x 250 x 1,582.94 - the market exchange rate of February 17, 2009 - the forward forward exchange rate of KRW 890.68 - the forward forward exchange rate of less than KRW 1,582.68 - the forward forward exchange rate of less than KRW 890) was incurred, and the amount of the appraised value of the fund was assessed to the Defendant on February 17, 2009.

(6) On February 17, 2009, the Plaintiff paid KRW 52,215,921, which occurred after February 17, 2009, excluding legal holidays, as exchange losses, to five days after the Plaintiff expressed an intention of termination on the instant fund and the secondary futures exchange contract.

[Ground of recognition] A without dispute, Gap evidence Nos. 1, 2, 5, 6, 9, 13, Eul evidence No. 1, non-party 1's testimony of non-party 1 of the first instance court, the result of the plaintiff's first instance court's questioning, the purport of whole pleadings

2. Determination

A. Characteristics of the gift exchange contract of this case

(1) The purpose of this case is to seek exchange hedging in cases where foreign currency assets, etc. are traded, thereby causing the risk of loss arising from exchange fluctuation. The fund is an offshore fund mainly investing in securities, etc. issued by a foreign company, and the appraised value of the underlying asset of the fund is bound to change from time to time according to economic situation, etc. Therefore, in cases where the value of the underlying asset becomes fixed and conclusive, it is difficult to estimate in advance losses or profits arising from exchange exchange transactions, and in addition to whether the fund itself’s profits or losses are generated, there may be characteristics that increase in the scope of exchange loss or exchange marginal profits due to exchange rate increase or decline.

(2) In other words, even if a forward exchange contract is concluded and executed in advance, where the exchange rate drops even if the value of an underlying asset changes, there is a difference in the value of the underlying asset. However, as in the instant case, where losses are incurred from the fund and the exchange rate increases, the part of a forward exchange contract corresponding to the portion of the loss incurred from the fund (which is a forward exchange contract for any currency not held by the country) is inherent in the special risk that is likely to bear a large amount of additional settlement due to the exposure to the risk of exchange fluctuation.

B. The defendant's breach of duty to explain occurs.

(1) A futures exchange contract that sells foreign exchange to be held at the time of the base date may prepare for losses arising from exchange rates decline instead of giving up profits arising from exchange rates increase (i.e., reduction of risks and expansion of risks). On the contrary, a futures exchange contract that sells foreign exchange not held at the time of the base date is a major financial product with a high speculative nature, which bears an obligation to settle the difference between exchange rates and market exchange rates at the time of the base date, in the event of an increase of exchange rates, multiplied by the difference between the futures exchange rate and the market exchange rates at the time of the base date, and is not a product with strong speculative nature (i.e., expansion of risks as in this case). A customer with no basic knowledge of the futures exchange contract is able to enter into a futures exchange contract only with a comprehensive explanation made at the window of a financial institution on the futures exchange contract without proper knowledge of the structure or characteristics of the futures exchange contract or at least with reasonable understanding of the risk, possibility, possibility, etc. of exchange agreements between the customer and the customer.

(2) In light of the above characteristics of the gift exchange contract of this case, the Defendant bank has a duty to fully explain to the Plaintiff such special risks of the gift exchange contract linked to the foreign fund in addition to the function of the basic exchange hedge of the gift exchange contract.

(3) In light of the following circumstances that are acknowledged by adding all the arguments to the evidence mentioned above and the statement stated in Gap evidence Nos. 11 and 12, the defendant explained to the plaintiff about the basic exchange hedge function of the futures exchange contract in concluding each of the instant futures exchange contract, but did not explain to the plaintiff about the above special risks of the instant futures exchange contract.

(A) The Plaintiff had no experience in a futures exchange contract before the first futures exchange contract, and was solicited by Nonparty 1 during the term of the Fund contract of this case to enter into a forward exchange contract.

(B) The instant futures exchange contract is likely to cause damage and the scope of damage, compared to the case where only the fund was subscribed to according to the exchange rate and the degree of profit and loss of the fund at maturity. Accordingly, it must present and explain the data on the trend of exchange rate fluctuations at that time and the forecast of exchange rate at the maturity of the futures exchange contract. However, in concluding each of the instant futures exchange contracts, the Defendant did not fully explain the trend of exchange rate fluctuations, the risk diversification following the conclusion of the gift exchange contract, and the possibility of expanding risk.

(C) Nonparty 1 solicited the Plaintiff to enter into the first forward forward exchange contract by explaining that the exchange rate falls when the exchange rate falls due to the decline. However, Nonparty 1 would not have any specific predicted the scope of losses that the Plaintiff may incur in the course of settling forward the forward forward exchange contract (in particular, the scope of losses that may incur in the event of an increase in the exchange rate due to the loss in the fund transaction, such as this case), or that it would not have any proper awareness of the risks associated with the forward forward exchange contract.

(D) In concluding the first forward exchange contract with the Plaintiff, the Defendant did not simply prepare a foreign exchange transaction agreement and a forward exchange transaction agreement, and did not simply give a brief statement as to the risk of a forward exchange transaction or to settle the risk of a forward exchange transaction in any way according to the future exchange rate fluctuation.

(E) The gift exchange contract prepared by the Plaintiff in the course of entering into the first gift exchange contract with the Defendant includes the purport of the general contract that “the Plaintiff entered into the first gift exchange contract with the Defendant, and the contents of the foreign exchange transaction agreement shall be applied in principle, unless otherwise specified in the contract.” The foreign exchange transaction agreement only contains the Plaintiff’s signature on the column stating “the basic terms and conditions for the foreign exchange transaction have been received, and the important contents have been explained,” and there is no stipulation that reflects the characteristics of the gift exchange contract, such as where the customer would settle the difference between the foreign exchange price and the market rate at the time of the base date when the exchange rate comes to maturity or falls, compared to the foreign exchange rate in the foreign exchange transaction transaction through the forward exchange contract.”

(4) In concluding a futures exchange contract between the Plaintiff and the Plaintiff, it is reasonable to deem that the Defendant violated the duty of customer protection in making a futures exchange contract by explaining, in a way that the Plaintiff could understand the special risk of the futures exchange transaction linked to a foreign fund, or providing any data stating such risk in the manner that the Plaintiff could understand, and instead providing a general explanation of the employee in charge, and thus, the Defendant is liable to compensate for damages suffered by the Plaintiff as it failed to explain such risk. As such, the scope of damages that the Defendant is liable to compensate is limited to damages arising from the Plaintiff’s high degree of risk in the forward exchange contract, i.e., a futures exchange contract corresponding to the portion of the losses incurred from the fund (which is not held at the base date), among the total losses arising from the forward exchange contract (the Plaintiff’s assertion that the total losses should be compensated by the Defendant, but the remaining part, i.e., the value of the fund’s remaining losses, which did not result in the Plaintiff’s failure to recover as a result of the Plaintiff’s violation of the duty to explain.

C. Limitation on liability

(1) However, the Plaintiff understood the basic structure, function, etc. of futures exchange transactions through the explanation by Nonparty 1, who is an employee of the Defendant, and thus, in concluding a futures exchange contract linked to a foreign fund, the Plaintiff is negligent by neglecting to carefully grasp the structure and characteristics of such futures exchange contract, risks, and trends of economic and exchange rates, etc., and by neglecting to do so.

(2) In particular, the Plaintiff’s negligence should be taken into account in determining the amount of damages that the Defendant is liable for, in determining the amount of damages due to the Defendant’s failure to accurately understand the risk of additional losses arising from the forward forward exchange contract, even if it was more likely that additional losses may arise due to the experience of settling accounts for the first forward exchange contract at the time of the conclusion of the second forward exchange contract.

(3) On the other hand, in relation to a forward exchange contract, the global financial crisis that the Plaintiff suffered large losses from exchange losses adjacent to the investment principal has greatly been promoted in the U.S. Western base situation. This may not be easily predicted at the time of the conclusion and renewal of a forward exchange contract. Therefore, it is reasonable to take these circumstances into account for the fair allocation of damages.

(4) In light of the above Plaintiff’s negligence, the scope of damages that the Defendant is liable to compensate for to the Plaintiff shall be limited to 70% of the damages recognized above in the case of the first forward forward exchange contract, and to 50% of the damages recognized above in the case of the second forward forward exchange contract is reasonable in principle.

D. Sub-committee

Therefore, the Defendant is liable to compensate the Plaintiff for damages for the loss amounting to 5,077,073 won (=1,766,104.24 UN (i.e., 50,965,250-N - 39,145.76N) 】 exchange rate increase rate of 43.15 won (i.e., market exchange rate of February 18, 2008 - market exchange rate of 876.33.33. - agreed exchange rate of 83.18) equivalent to 70% of the loss amount of the first forward forward forward forward forward exchange contract with 22,356,708 won (i.e., rate of 32,120,404 UN) (i., rate of exchange rate of 50,250N - 184,846, 2986) - rate of exchange rate of 25.186% (i.e., 2097. -18., 2096.

3. Conclusion

Therefore, the plaintiff's claim of this case shall be accepted within the scope of the above recognition, and the remaining claims shall be dismissed as it is without merit. Since the part against the defendant who ordered payment in excess of the above recognized amount among the judgment of the court of first instance which concluded a different conclusion is unfair, it shall be revoked and the plaintiff's claim corresponding to the revoked part shall be dismissed. The remaining appeal of the defendant and the plaintiff's appeal shall be dismissed as it is

Judges Cho Jong-young (Presiding Judge)