The Seoul Central District Court rendered a decision on August 23, 2012 with respect to a case where four small-medium enterprises who suffered losses from KIKO (“knock-in knock-out” – currency option products to hedge foreign exchange risks) agreements claimed the return of unjust gains in a litigation commenced against a bank. The Court’s decision was partially in favor of the plaintiffs by finding that the bank was 60 ~ 70% liable on grounds that it had breached its duty to fully explain the provisions of the KIKO agreements (Seoul Central District Court decision on case no. 2011GaHap7340 rendered on August 23, 2012, and others).

In previous KIKO related cases, there were instances where the companies partially prevailed, but even then, the scope of the bank’s liability in most cases was 30% or less. This case is significant because it is the first decision among KIKO related litigation cases where the companies virtually prevailed.

In particular, this decision is interpreted as expressly shifting the burden of proof with respect to the issue of whether the bank’s duty to explain has been performed. The Court’s holding was to the effect that the bank bears such burden of proof, primarily on grounds that “Article 48 of the Capital Markets and Financial Investment Business Act (the “Act”) shifts the burden of proof to the financial investment company (in this case, the bank) when it has breached its duty to explain, not only as to the amount of losses, but also causation between the breach of such duty and the relevant transactions and resulting losses by having express provisions on the presumption of loss amounts.”

As a result of this decision, it seems more likely that courts will more broadly recognize banks’ scope of liability in KIKO related cases on grounds of a breach of the duty to explain. However, thus far, there is no clear Supreme Court decision on the issue of whether Article 48 of the Act shifts the burden of proof as to causation, and there are opposing views among legal scholars on this issue. Therefore, it seems likely that such issue will be fiercely debated in future cases.