[1] The degree of duty of explanation required for a financial institution to conduct a financial transaction which requires professional knowledge and analysis ability such as forward exchange transactions with ordinary customers

[2] The case holding that although a financial institution violated the duty of customer protection when it entered into the first forward forward forward exchange contract with a customer and did not provide sufficient explanation of the special risks involved in the contract, since it appears that the customer was well aware of the special risks of the forward forward exchange contract at the time of concluding the second forward forward forward forward forward forward forward forward forward forward exchange contract, it cannot be deemed that the financial institution is not separately obligated to explain them

[1] A financial institution managing customer’s assets bears the duty of due care as a good manager. As such, a financial institution must identify in advance the purpose of investment, investment experience, risk preference, scheduled investment period, etc. of a customer and invite him/her to make an investment. In light of the purpose of investment examined, it is liable to compensate for losses incurred to the customer’s property by allowing the investor to engage in transactions that cause excessive risks to the customer. However, on the sole basis of the fact that an investor’s investment in a certain product or adoption of a certain investment strategy is merely with a high risk, it cannot be readily concluded that a financial institution unfairly recommended an investment in violation of the suitability principle. An investor cannot be said to have avoided all anticipated risks and at the same time at the same time, an association of risk and an earning rate cannot be selected by itself in light of the purpose of investment. In addition, when a financial institution carries out a financial transaction that requires specialized knowledge and analysis, such as a general customer and futures trading, the other party is sufficiently aware of the major risk inherent in the transaction structure and potential risks and its potential losses.

[2] The case holding that although a financial institution violated the duty to protect customers by explaining to some extent the function of the primary forward hedging in concluding the primary forward exchange contract linked to a foreign fund with customers, but did not explain the special risks accompanying the said forward exchange contract, the above customer did not terminate the fund on the maturity date of the primary forward exchange contract and did not explain the meaning of the forward exchange contract and the occurrence details of the settlement amount in settling only the forward exchange contract, and at that time, it seems that the above financial institution had been well aware of the special risks of the forward forward exchange contract, it cannot be deemed that the financial institution bears the duty to explain the special risks of the forward forward exchange contract separately when concluding the second forward forward forward forward exchange contract with the maturity and exchange rate compared to the first forward forward forward forward exchange contract.

[1] Articles 2 and 750 of the Civil Act / [2] Articles 2 and 750 of the Civil Act

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

Han Bank (Law Firm Democratic, Attorneys Yoon Jae-sik et al., Counsel for the plaintiff-appellant)

Daejeon High Court Decision 2009Na9940 decided June 9, 2010

Of the part against the defendant in the judgment of the court below, 111,178,354 won and damages for delay are reversed, and this part of the case is remanded to the Daejeon High Court. The plaintiff's appeal and the remainder of the defendant's appeal are all dismissed.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Financial institutions' obligation to protect customers;

A financial institution that manages a customer’s assets is obligated to perform the duty of due care as a good manager. As such, a financial institution must grasp the purpose of investment, investment experience, risk preference, scheduled investment period, etc. of the customer and select appropriate investment methods and encourage the investor to make an investment. In light of the purpose of investment in question, it is liable to compensate for losses incurred to the customer’s property by causing excessive risk to the customer. However, it cannot be readily concluded that a financial institution unfairly solicits an investment in violation of the suitability principle solely on the ground that the investor’s investment in a certain product or adopting a certain investment strategy is with a high risk. An investor cannot be readily concluded that a financial institution unfairly solicits an investment in violation of the suitability principle. An investor may not be expected to realize a high yield at the same time while avoiding any possible risk, and an association of risk and return on investment is bound to choose an association of risk and return on its own in consideration of investment purpose. In addition, when a financial institution carries out a financial transaction that requires specialized knowledge and analysis, such as trading structure and risk inherent in trading and potential losses.

2. As to the primary forward exchange contract:

A. The defendant's liability for damages arises

According to the reasoning of the judgment below, where foreign currency assets, etc. are traded to cover the risk of loss due to exchange rate fluctuation, exchange hedge is conducted. Of the first forward forward forward exchange contract, the part that intends to sell foreign currency assets to be held as of the base date shall be compared to the occurrence of loss due to exchange rate decline instead of waiver of profit arising from exchange rate increase. The part that wishes to sell foreign currency assets as at the base date to exchange at an agreed exchange rate shall be liable to settle the difference between actual exchange rate and exchange rate difference between actual exchange rate to be sold and the agreed exchange rate. The court below determined that, in light of the aforementioned circumstances where exchange rate increase above as of actual exchange rate increase above, financial goods with strong speculative nature and are not goods easily accessible to the general public without experience in investment, and that at least one customer who did not have basic knowledge about futures exchange contracts should not easily understand the structure and risks of exchange contracts, and thus, the court below determined that there is no specific explanation of the above risk of exchange agreement between the Plaintiff and the Defendant, as to whether to enter into a forward exchange contract.

Examining the circumstances cited by the court below in light of the aforementioned legal principles, the above determination by the court below is just, and there is no error of law by misapprehending the legal principles on the duty to protect customers of financial institutions. The defendant's ground of appeal on this issue is rejected

B. Scope of the defendant's liability for damages

According to the reasoning of the judgment below, the court below determined to the purport that the scope of damages that the defendant is liable for is limited to the damages caused by the special risk of the above futures exchange contract among the total damages suffered by the plaintiff under the first futures exchange contract, i.e., the part causing losses from the fund of this case, which is limited to the damages caused by the gift exchange contract for the United Nations not owned by the plaintiff on the base date, and the remainder, i.e., the exchange marginal profits that the plaintiff failed to recover due to the effects of the exchange hedging on the remaining appraised value of the fund of this case, are based on the basic function of the above futures exchange contract, and it is difficult to view the relevant part as the result of the defendant's violation of the duty to explain. In light of the circumstances cited by the court below, the above judgment of the court below is just

Meanwhile, the determination of the rate of fact-finding or negligence with respect to the degree of fault of the parties related to tort falls under the exclusive authority of the fact-finding court unless it is deemed that it is considerably unreasonable in light of the principle of equity (see Supreme Court Decisions 2000Da34426, Jan. 10, 2003; 2007Da34654, Jun. 26, 2008, etc.). In light of all the circumstances cited by the court below in its reasoning, it is insufficient to limit the defendant's liability for damages to 70% of the damages suffered by the plaintiff to the extent that it is considerably unreasonable in light of the principle of equity. Accordingly, both the plaintiff and the defendant's grounds for appeal with respect thereto are unacceptable.

3. As to the second forward forward exchange contract of this case

According to the reasoning of the lower judgment and evidence duly admitted by the lower court, the Plaintiff entered into a forward forward exchange contract with Defendant 2 at an exchange rate of 80,000,000,000 won (hereinafter “Defendant 2”). The Plaintiff, upon the Non-Party 2’s solicitation that was nine months after entering into the forward forward forward exchange contract with Defendant 2 at an exchange rate of 80,000,000 won (hereinafter “instant forward exchange rate of 10,000,000 won”) and the Plaintiff did not know that it would have been 5,000 won and would have been 10,000 won at an exchange rate of 20,000,000 won (hereinafter “instant forward exchange rate of 2,000,000 won”). The Plaintiff did not have any duty to exchange the said forward forward forward exchange contract with Defendant 2 at an exchange rate of 9,000,000 won (hereinafter “instant exchange rate of 1,000 won”).

Nevertheless, the court below partially recognized the defendant's liability for damages arising from the fact that the plaintiff did not enter into a forward exchange contract prior to the first forward exchange contract, and the defendant's employee recommended the plaintiff to enter into the second forward forward exchange contract but did not explain special risks of the second forward exchange contract. The court below erred in the misapprehension of legal principles as to the financial institution's obligation to protect customers, which affected the conclusion of the judgment. The defendant's ground of appeal pointing this out is with merit.

Meanwhile, insofar as it is deemed that the Defendant’s duty to explain or protect the secondary futures exchange contract cannot be acknowledged, the Plaintiff’s ground of appeal premised on the above breach of such duty cannot be accepted without further review.

4. Conclusion

Therefore, among the judgment below, the part that recognized the Defendant’s liability to pay KRW 111,178,354 and delay damages therefor as to the second forward exchange contract is reversed, and this part of the case is remanded to the court below for a new trial and determination. The Plaintiff’s appeal and the remainder of the Defendant’s appeal are all dismissed. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Ahn Dai-hee (Presiding Justice)