The Supreme Court of Korea’s Decisions on the Fraud Exception in a Demand Guarantee (Focusing on East Gas Seeds Industry Co. v. Korea Exchange Bank Case (2014))

A demand guarantee is an irrevocable undertaking to pay the beneficiary upon presentation of a demand complying with the terms of the guarantee. A demand guarantee, a relatively recent creation, is widely used in contracts for international sales of goods, in overseas construction contracts, and in shipbuilding contracts. The independence principle, the prominent feature of a demand guarantee, provides certainty of payment, but has brought significant problems into international transactions. Therefore, many jurisdictions recognize the fraud exception as well as the independence principle in a demand guarantee. There have been only two cases decided by the Supreme Court of Korea as to the independence principle and the fraud exception in a demand guarantee in international transactions. The Yuwon Construction Co. case of 1995 recognized the fraud exception and admitted payment refusal of a demand guarantee. The East Gas Seeds Industry Co. case of 2014 affirmed the fraud exception of the Yuwon Construction case, but in reality remanded the decision of the Yuwon Construction Co. case as to the practical ambit of the fraud exception.