Newsletter | July 2016, Issue 2
	BANKING
	Korean Legislature Introduces New Rules to Apply to Kun-Guarantees under the Amended Korean Civil Code
	Effective February 4, 2016, by way of the amended Korean Civil Code (the “KCC”), the Korean legislature introduced the new KCC requirements that would govern the substance and form of the Korean-law guarantees.
	The new KCC requirements applies to any new guarantee contracts, or any existing guarantee contracts that are renewed after February 4, 2016.
	Below, we have summarized some key aspects of the amended KCC that would have an impact on the guarantees widely used in the market, and the relevant legal issues associated with this change.
	Authentication and Maximum Guarantee Amount
	According to the amended KCC, as far as the authentication of a guarantee, including Kun-guarantee, is concerned, the guarantee is enforceable when it is authenticated by either a handwritten signature, or by name stamp and seal affixed to the guarantee.
	Electronic signature or other forms of digital communication conveying one’s intent to guarantee another person’s financial obligation would not be enforceable.
	If the parties are amending an existing guarantee, and such amendment would make it less favorable to the guarantor, the same authentication standard described above would apply (Article 428-2 of the amended KCC).
	In addition, while the amended KCC does not challenge the basic tenet of a Kun-guarantee,1 the new KCC clause mandates more specificity in the guarantee form. Accordingly, the maximum guarantee amount should be spelled out in a written form to protect the guarantor from bearing an unexpectedly large amount of guarantee obligation (Article 428-3 of the amended KCC).
	Practical Implications on Guarantees
	In Korea, there have been certain restrictions on guarantees to prevent a guarantor from being liable for an amount substantially exceeding reasonable expectation. This was made possible by enforcing the Special Law on Guarantor Protection (the “SLGP”).
	The SLGP is only applicable to individual guarantors, not institutional ones, with respect to the guarantees that were provided without any consideration as a personal favor for one’s friends or relatives. In other words, various restrictions under the SLGP were not applicable to the institutional guarantees that are quite common in the market (in particular, Korean parent company’s guarantee of a loan extended by a foreign bank to its overseas subsidiary).
	However, under the amended KCC, the requirements that are similar to the SLGP regarding the authentication and maximum guarantee amount may apply to corporate guarantors (regardless of domestic or foreign companies) to the extent they are using a Korean law governed Kun-guarantee.
	For example, if a corporate guarantor enters into a Kun-guarantee contract that is governed by Korean law, and does not specify the maximum guarantee amount in writing, or, if such a corporate guarantor fails to specify such amount in writing when renewing an existing Kun-guarantee contract after February 4, 2016, that Kun-guarantee contract may not be enforceable against the guarantor, even if the underlying, guaranteed obligations are clearly defined and easily discernable.
	In addition to the issues surrounding authentication and maximum guarantee amount as described above, the new rules may have some implications for the indemnity clause that is commonly found in the guarantees.
	Typically, this indemnity provision provides that the guarantor would indemnify the lender, not just for the guaranteed amount, but for anything extra that may arise from it. This is usually the case, even if such guaranteed debt (primary debt of the principal obligor) turns out to be unenforceable, cancelled, exempted, or reduced for any reason, including for certain legal restrictions.
	However, there could be some differences of opinion as to whether the enforceability of this indemnity would be restricted or even denied if the court deems it as a contractual circumvention of the amended KCC. That interpretation may be conceivable if the court views the indemnity clause as a means to allow the banks to recover from a corporate guarantor an amount in excess of the explicitly stated maximum guarantee amount.
	Suggestions
	Therefore, it is advisable to fix the maximum guarantee amount at the initial stage of negotiating and drafting a Korean-law governed Kun-guarantee contract. It is also advisable to closely monitor any judgment rendered by the court with respect to the validity of indemnity provision in a Kun-guarantee.
	1 In other words, the guarantor can provide credit enhancement with respect to the currently undetermined financial obligations of the obligor, even if the underlying obligation is of an unknown quantity.
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	If you have any questions regarding this article, please contact below:
	Sang Hwan Lee shlee@kimchang.com Keun-Chul SONG keunchul.song@kimchang.com
	For more information, please visit our website:
	www.kimchang.com Banking Practice Group