Credit companies’ failure of duty investigation member shops

In this blog, I already posted vast and stable connection between many creditors and rogue traders on 15h August 2007. Thereafter, it was made clear that considerable credit companies did not execute suitable investigation before the rogue traders had been punished by administrative bodies by virtue of illegal practices. It was reported on 27 August 2007 by the METI. [1] The Yomiuri Shimbun pointed out that the failure caused the result spreading consumer detriment. [2]

Finding

In present, the reform of the Installment Sales Law is considering in the Industrial Structure Panel of the METI; this finding was reported in the 7th conference by the METI. The finding was based the result concerning 42 punished traders during August 2005 to March 2007; these traders were member shops of 91 credit companies. Before the rogue traders were punished by administrative bodies, the number of credit companies who received complaints of customers was 58; but 22 companies did not deal with these claims sufficiently. Several credit companies had discharged the member shop contracts with these traders prior to the administrative punishment; but the number of credit companies who neglected sufficient examination to unscrupulous traders was only 4 of 22 whereas the number of credit company that conducted the investigation was 31 of 36.

Commentary

The METI intention revealing this finding is not clear. The finding makes it clear the negligence of investigation of the duty the credit companies. In other word, the METI would imply that if the investigating duty were performed sufficiently and honestly, related consumer detriment had been prevented. This perception has possibility might lead to the conclusion that the necessary legislation is not to enact the lender liability, but to strengthen the duty of investigation and supervision of credit companies. But the recognition must be doubted. The implementation of investigating and supervising the member shop by credit companies is possible only to impose the connected liability to the credit company: the credit companies might avoid their liabilities, insisting to execute their duty of investigation and supervision to their member shops; but who can prove and confirm suitably the reality of their commentary?; and who believe the result?

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[1] http://www.meti.go.jp/committee/materials/downloadfiles/g70827a10j.pdf

[2] http://www.yomiuri.co.jp/national/news/20070828i501.htm

what’s valued the personal data related to beauty?

The Tokyo Higher court on 29th August 2007 upheld the original court decision[1] that approved the victim’s damage claim[2]; but the court rejected the 14 plaintiff’s argument that the loss of mental distress should be estimated more. Approved amount of damages was from 22,000 yen to 35,000 yen as same as the original court decision.

Facts

The defendant Y1 was a major company managing an esthetic salon, which provide services such as facial, expiration and slimming treatment. the co-defendant Y2 was a computer maintenance company. The plaintiffs were individuals who provided their personal data through the defendant’s web pages during 2000 to 2002; the data provided by the plaintiffs was a name, an occupation, a date of birth, a geological address, an e-mail address, a telephone number and so on; the defendant retained these data on his server.In 2002, the defendant maintenance company transferred these data to another server requested by the defendant beauty company. But the co-defendant company failed to set up necessary authorization to the transferred data file in the defendant server. As a result, these data was in the situation where anybody could view them by accessing several web pages on the defendant website; actually some of the data flowed out of server and such fact was posted on a message board in internet. However, the defendant only apologized to the victims on website, excepting sending e-mails to them.

Original decision

The Tokyo district court decision on 8th February 2007 approved the plaintiffs’ mental distress damage claims due to the infringement of their privacy: the plaintiff’s name, address and telephone number was the information for identification; this information was known in certain extent and used by the measure of communication; but the information made it possible for a person to contact the plaintiffs, therefore the expectation of plaintiff not to be known it should be protected as well as other information such as occupation, age and gender; moreover the fact that the plaintiffs provided their personal information to the esthetic salon was not known generally and was the information to be protected. In conclusion, these data was the information that plaintiffs expected not to be known in general, thus the all of information concerned should be protected by the privacy right of the plaintiffs.

Appeal court decision

The plaintiffs insisted that the original court did not evaluate the importance correctly. But as above mentioned, the appeal court did not take account of these arguments.

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[1] http://homepage3.nifty.com/tbc-higai/hanketsu.pdf

[2] http://www.asahi.com/national/update/0828/TKY200708280411.html

The mental distress damages caused by price reduction of a flat

If a business can not sell a flat in certain price, he might usually consider the price reduction. The practice would be permitted by the private company, unless he promised to the previous purchaser not to sell it by reducing price or the reduced price was so massive. If the seller is public body and the sales price is significant lower than the previous one, is it possible for the preceding purchaser to claim somewhat damage to the seller? The Osaka Appeal court decision on April 13^th 2007[1][2], was concerning such case.

Facts

The defendant was Hyogo Prefectural Housing Corporation; the plaintiffs of 82 peoples were the purchasers of the flats from the defendant. After Hanshin earthquake disaster in 1995, the local government had built and provided many apartments to the victims.  This apartment impugned was one of them, which had 12 stories with 203 flats. The government, however, had the unsold stock of 70 flats in the apartment, he decided to reduce the price by 46% and sold remaining flats completely, four years later; the reduced price was also lower than the market price by 10%; as a result, the value of previous purchased flats plunged down suddenly and significantly. Accordingly, the plaintiffs claimed damages of 8,000,000 yen each to the defendant on this litigation; the claimed damage consisted of both the loss equivalent with decreased value and mental distress.

Decision

The Kobe District Court rejected the plaintiffs’ claim completely. The Osaka Appeal court on April 13th, 2007 also rejected the argument of property damage of claimant; the court indicated that the possible loss affected with price reduction sales might not be consecutively hereafter. Mental distress damageHowever, the appeal court admitted the mental distress damage of the claimants of 1,100,000 yen each, overturned the Kobe District court decision. The appeal court blamed the defendant’s sales practice was against good faith: the local government, as the public entity, owed the obligation to sell their properties in proper price not to harm the reasonable interest of previous purchaser; however, the defendant reduced the sales price materially compared with the previous selling price and it injured the interest of previous purchasers of flats; the conclusion was not different, even if the government was necessary to sell these flats.

Requirement of protection

Did the court admit the breach of good faith after the contract was performed? As far as the news release, the requirements of protecting right of previous customers are not clear.

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[1] http://www.yomiuri.co.jp/homeguide/news/20070414hg01.htm

[2] http://mediajam.info/topic/68475　

Vast connection between creditors and rogue traders

Our government is about to introduce the connected lender liability of credit provider by revision of the Installment Sales Act. [1]  Meanwhile, seven major credit companies formed the member shop contracts with total number of 184 rogue traders that were punished by administrative sanctions on the Specific Commercial Transaction Act, since august 2005. The revealed number of member shops is remarkable; “Quark” is 40; “Orient Corporation” is 38; “Aplus” is 32; and “Life” is 32. It was reported by The Yomiuri Shimbun on August 15th 2007[2]

Meaning of pre-existing agreement

Based on the pre-existing member shop agreement concerning credit providing, the creditor provides the loan to the consumer who purchases goods or services from the member shop. By the pre-existing agreement, member shops can do more effective marketing and sales promotion to consumers who have not enough money to make purchasing; sellers can sell more easily expensive products to consumers.

Code of conduct

The Credit Providers Association, which compiles the code of conduct, says that they control the member credit companies to restrict to form agreement with rogue traders; if creditors form the member shop agreements with the rogue traders who are taken administrative sanction by certain critical offence, the creditors has to state the fact into his website by the code of conduct. it was imposed since august 2005. The reason why the association had imposed the duty to member creditors could be sought to the rapid increase of elderly consumer claims concerning home repair services scams by doorstep selling.

Why the result is reported now?

Japan Federation of Bar Associations and member bar association have been strongly demanding to introduce the connected lender liability clause like the CCA (art.75) of UK. Our government eventually is about to consider inserting such liability clause in spite of strong resistance by the creditors. On the other hand, the creditors have been insisting that they already have effective code of conduct, and it is sufficient enough. Whilst the METI is necessary to persuade the credit providers resisting law reform, this finding is effective assistance for the METI to accomplish the law reform.

Is the consumer relieved by the law reform?

Recent court case regarding credit dispute was found the news release on 7^th August 2007; [3] 10 victims filed lawsuits to the Aomori District; these plaintiffs claimed to stop payment of their loan to the credit providers.

Facts

The plaintiffs were all women in their 20th to 50th and they formed fake document concerning both purchasing and credit with Japanese Kimono shop;However, the facts of this case are still ambiguous in the article on news release. Why did the plaintiffs make fake contract documents? There are possible two types; the plaintiffs also were misled by the shop; or although the customers knew the credit contract was counterfeit, they agreed to form it. the shop, which was already in bankruptcy factually since last September, was binding the pre-existing member shop agreements with several creditors that promised the shop to provide loan for the purchasing by their customers.

Misled case

For instance, customers might be asked by the shop to make contract documents again, because it is necessary to revise both purchasing and credit contracts; in other case, the shop may claim to make document again by virtue of the existing of error in former contract document. In both cases, credit providers confirm the customers both of the existence and the contents of the contract formed with the shop by telecommunication. to prevent the confusion of the customers, the shop usually instructs the customer to answer “yes” to the telecommunication from the credit provider. The answer is not correct; therefore the customer’s answer seems to assist the shop’s fraud. Although the customers have no perception of assisting fraud, his act may be regarded as negligence.The Fukuoka Appeal Court decision on July 6th 2004[4] upheld the original court decision and rejected the repayment claim by the credit provider. In this case, member shop asked his customer to make document again for the purpose of revising previous contract of purchasing. The court concluded that the purchasing contract of customer was void by virtue of mistake; therefore the customer legitimately could refuse repayment based on Article 30-4 of the Installment Sales Act. [5]

Complicity case

In the latter case, the act of the shop is apparently fraud against the credit companies. At first glance, the plaintiffs also seem confederates of the fraud. On the contrary, the customer might owe the  criminal charge to the credit providers. In these cases, the shops usually promise the customer to perform the repayment of loan: the customers might not refuse the wish of the shop, because the customers have continuous relationship and reliance with the shop and so that they believed his representation. Is it possible for the customer to insist refusing repayment claim of the credit provider by virtue of the mistake of the purchasing contract?

Argument of the plaintiff

According to the petition, the plaintiffs seem to argue two reason to refuse there repayment: concealment of true intention and breach of good faith. first, Article 93 of Civil Code  states:“ The validity of the manifestation of intention shall not be impaired even if the person who makes the manifestation knows that it does not reflect his/her true intention; provided, however, that, in cases the other party knew, or could have known, the true intention of the person who makes the manifestation, such manifestation of intention shall be void.” The plaintiffs states the credit agreement is void by virtue of the concealment of true intention for the plaintiffs to form the credit contract with credit provider as same as member shop.Secondly, the plaintiffs may insist the breach of good faith; the credit providers have duty of investigation to the member shop with regard to both business status and the financial status continuously; the credit companies, however, fail to perform their duties intentionally or in negligence, therefore the credit companies can not claim repayment to the plaintiff. In past similar court cases, there are some court decisions approving the customer’s claim to refuse repayment: Kushiro Summery court decision on 23th March 2000, Fukuoka District court decision on 9th September 1986, Tokyo District court decision on 25th October 1990, Osaka District court decision on 28th January 1999. However each court ruling reduced the claim of customer based on his contributing negligence.

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[1] http://www.meti.go.jp/committee/materials/downloadfiles/g70626c03j.pdf

[2] http://www.yomiuri.co.jp/national/news/20070815it01.htm

[3] http://www.toonippo.co.jp/news_too/nto2007/20070811091825.asp

[4] http://www.kokusen.go.jp/hanrei/data/200510.html

[5] http://www.houko.com/00/01/S36/159.HTM

Consumer detriment inquiries in Tokyo, in fiscal 2006

The Tokyo Metropolitan Government compiled the report in terms of consumer inquiries that the government received and dealt with in fiscal 2006.[1] The result of statistics and analysis was reported on August 6th 2007.[2]

Feature

The number of consultation decreased from 151,424 to 136,692, compared with previous fiscal year. The basis of decline seems of the descent of fraudulent payment claim. The figure is lessening from 45241 in 2005 to 30,538 in 2006.However, it seems to be difficult that such scams are eradicated. The Yomiuri Shimbun (newspaper) reported the recent scam on August 10th, 2007.[3]

“A man from Kasukabe, Saitama Prefecture, was defrauded of 37.7 million yen in an apparent telephone fraud, transferring money on 61 occasions to designated bank accounts, it was learned Thursday. The man, 54, filed a report with the police Wednesday. According to the police, the company employee received a telephone call from a man who claimed to have personal information for sale, such as name lists, in early June. The caller told the employee that his personal information had been compromised, and that he could ensure the information was not shared if he paid 30,000 yen. The man then paid the money to the caller’s designated account. However, he continued to receive phone calls until Monday from other men who said they had faced difficulties removing the compromised data, and other companies were holding his personal information.”

Other particularity[4]

But, the elderly people are targeted by rogue traders continuously in high level; the average damage is 2,390,000 yen; it is almost 1.6 times compared with average inquiring consumers.The number of consultation regarding multiple-indebtedness is also serious problem in Tokyo as well as in the rural area.The claims concerning to a financial services are rapidly expanding; especially, insurance claims were enlarged to 1.2 times compared with previous year.

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[1] http://www.shouhiseikatu.metro.tokyo.jp/sodan/tokei/h18_sodan.html

[2] http://www.shouhiseikatu.metro.tokyo.jp/

[3] http://www.yomiuri.co.jp/dy/national/20070810TDY02008.htm

[4] http://www.metro.tokyo.jp/INET/CHOUSA/2007/08/DATA/60h86100.pdf

Fantastic!!! Court Decision with regard to a money lending case

The Osaka Appeal Court showed the amazing decision concerning the restoration claim of the plaintiff to the defendant consumer loan company.

Unjustified enrichment claim

As noted previously, our current money lending business law still approves the business to be able to retain the interest up to 29.72% under certain requirement whereas the interest rate restriction law prohibits forming contract over 20% as maximum rate. The law requires the business to keep the particular documents as premise of retaining the excessive repayment beyond the interest rate restriction law (art.43): the contract document (art.18) and every copy of receipts described the detail of capital reimbursement and interest repayment (art.18).On the other hand, our domestic court rulings also admit the restoration claim of the unjustified enrichment by a borrower, if the excessive repayment is not executed by the borrower’s true and voluntary intention and perception.

Remarkable decision

Osaka appeal court decision on July 31th, 2007 [1] stated that the demand of repayment of excessive interest was similar to the deception: the business could have perception that the business’s reimbursement claim was not based on legal support.

The decision also indicated that the business should be regarded illegal: the defendant held the documents required by the money lending business law only for several months; the defendant, notwithstanding, was continuing to ask the plaintiff for the excessive repayment, although the defendant knew  that he could not retain it legitimately.

Eventually,the court ordered the payment of 150,000 yen as the mental damage of the plaintiff against the defendant in addition to the lawyer fee based on the tort law.

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[1] http://pub.idisk-just.com/fview/6or0KDy617UqQPBBoeMjjujsfs0Tw6eHrhzBKQ8Xv5LpQzcs6DnUFQ

Pro forma definition of Consumer

UCPD

The Unfair Commercial Practices Directive (2005/29/EC) defines a consumer as any natural person who, in commercial practices covered by this Directive, is acting for purposes which are outside his trade, business, craft or profession. As long as obeying this definition, a corporate body is always not included in the notion of consumer. If a corporate body acts for purpose other than his business.

CCA

The definition of a consumer, business and consumer contract is not different from afore mentioned definition of the UCPD and the UK law; sec. 2 of the Consumer Protection (Cancellation of Contracts Concluded away from Business Premises) Regulations 1987.

Article 2 (Definitions) of the CCA[1]

(1) The term “Consumer” as used in this Act shall mean individual(s) (however, the same shall not apply in cases where said individual becomes a party to a contract as a business or for the purpose of business).

(2) The term “Business Operator” as used in this Act shall mean juridical person(s), association(s) and individual(s) who become a party to a contract as a business or for the purpose of business.(3) The term “Consumer Contract” as used in this Act shall mean contract(s) concluded between consumers on the one hand and business operators on the other.If the contractual party is a corporate body, he can not enjoy the protection of the act, even if the formed contract is outside his business. However, if the contracting party is a natural person, the act is applied to the contract as long as the contract is primarily formed outside his business.

SCTA

The doorstep selling is within the scope of the Specific Commercial Trading Act. The act does not contain the word of a consumer; the act describes only the “customer”. What is the difference between a consumer in the CCA and a customer in the SCTA?

The SPTA has an exemption clause concerning the scope of the trading applied;  therefore the wording of customer has almost same meaning of  the consumer:

Article 26(Exclusion from application)

 (1) The provisions of the preceding three sections shall not apply to the following sales or offer of services that fall under Door-to-Door Sales, Mail Order Sales, or Telemarketing Sales:(i) sales or offer of services pertaining to a sales contract or a Service Contract concluded by a person who made an application for it, the purchaser, or the service recipient for the purpose of business or as business;

Fact and original court decision

The plaintiff, who was a car dealer, bought a fire extinguisher from the defendant company by doorstep selling. Thereafter, a plaintiff cancelled the contract based on the SCTA.The Kobe District Court, original court, rejected the argument of the plaintiff, because he was a business person and the contract was out of the scope of the application of the SCTA.

Appeal court decision

The Osaka Appeal Court overturned the original court decision and approved the claim of execution of cancellation right based on the SCTA by a business person who formed the contract of purchasing a fire extinguisher, on July 30, 2003.[2]: the plaintiff was a car sales and repairing company and did not dealt with the sales of extinguisher; therefore the inspection of the appliance was also not within his business or the purpose of his business; the circumstance was not different even if the plaintiff’s company was necessary to equip with the extinguisher in his business place; the claimant had to implement installing the outfit by the fire-fighting law.

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[1] http://www.cas.go.jp/jp/seisaku/hourei/data/CCA.pdf

[2] http://www.hyogoben.or.jp/hanrei/pdf/0002.pdf

Doorstep selling is attractive for business practices

The doorstep selling practice seems apparent that it causes the consumer detriment by unfair or deceptive commercial practices.

Statistics

The national consumer affairs centre published the result of queries of fiscal 2006 to the consumer affairs centre, on August 2, 2007.[1] According to the report, the doorstep selling (68,010) is best practice to establish communication with consumers for exploiting them; secondary, the solicitation by phone (57,737) is pretty effective manner. The business of doorstep selling invite elderly women to purchase “futon” (9%), newspaper (8.2%) and water purification system (7.3); the phone selling businesses tend to target the middle age males and females, offering them the learning or the entertainment materials (10.8%), consumer loan (8.5%) or  getting qualification school.

Online sales

The electronic commerce practice (25,558) is behind the dialogue measure of sales; the targeting consumer is youth males; the products are online information by internet (43.3%) or mobile phone (28.5%).

 “Appointment sales”

So called” appointment sales” means that the businesses invite consumers to the business premise or other places such as coffee shops and solicit the purchasing; the targeted group is youth salaried workers; and goods or services are accessories (31.2%), multiple membership (25.0%) or other goods (4.4%).Our domestic law includes such sales practice within the notion of the doorstep selling.

It seems particular legislation comparing with other countries;

Act

Article 2 (Definitions) of the Specific Commercial Trading Act (Ordinance of the Ministry of International Trade and Industry No. 89 of November 24, 1976)

(1) The term “Door-to-Door Sales” as used in this chapter shall mean the following: (i) sales of Designated Goods or Designated Rights or offer of Designated Services, where a seller or a party that provides services as a business (hereinafter referred to as a “Service Provider”) receives an application for entering into a sales contract or a contract for offer of services for value (hereinafter referred to as a “Service Contract”)or concludes a sales contract or a Service Contract at a place…. specified by an Ordinance of the Ministry of Economy, Trade and Industry(hereinafter referred to as a “Place of Business, etc.”);

Regulation

Article 1(Place of Business, etc.) of the Regulations for Enforcement of the Act on Specified Commercial Transactions

A place specified by an Ordinance of the Ministry of Economy, Trade and Industry referred to in Article 2(1)(i) of the Act on Specified Commercial Transactions (hereinafter referred to as the “Act”)shall be any of the places listed in the following items:

(i) a business office;(ii) an agency;

Order

Article 1(Solicitation method used for Specified Customer) of the Order for Enforcement of the Act on Specified Commercial Transactions (Cabinet Order No. 295 of November 24, 1976)

A method specified by a Cabinet Order as prescribed in Article 2(1)(ii) of the Act on Specified Commercial Transactions(hereinafter referred to as the “Act”)shall be a method that falls under any of the following:

(i) to request a person to visit the Place of Business or other specified place without telling the person that the purpose is to solicit the sales contract or the Service Contract, by means of telephone, postal mail, correspondence delivery prescribed in Article 2(2) of the Act on Letter Service by Private Business Operators (Act No. 99 of 2002)made by a general correspondence delivery operator prescribed in Article 2(6) of the same Act or a specified letter delivery operator prescribed in Article 2(9) of the same Act (hereinafter referred to as “Correspondence Delivery”), telegraph, transmission using a facsimile machine, or an electromagnetic means prescribed in Article 11(2) of the Act (hereinafter referred to as the “electromagnetic means”), or by distributing fliers or pamphlets or calling with a loudspeaker from outside of the residence, or by visiting the residence; or

(ii) to request a person to visit the Place of Business or other specified place by telling the person that he/she may conclude the sales contract or the Service Contract under more advantageous terms than others, by means of telephone, postal mail, Correspondence Delivery, telegraph, transmission using a facsimile machine, or an electromagnetic means, or by visiting the residence (excluding a case where the request is made to a person with which there were transactions concerning said sales or offer of services prior to the date of such request).

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[1] http://www.kokusen.go.jp/pdf/n-20070802_2.pdf (Japanese)

How should be considered the civil effect of the mistake of adverting on the website?

The Tokyo District Court ruling answered the question, on August 3rd, 2007.

Facts

The plaintiff was the sales company of the satellite navigation system. Although the sales prices of the products on the company’s website were 131,000 yen, the company indicated 13,100 yen by mistake. As a result, in 3 days, about 3,000 people put their orders purchasing the products as price following the advertising via internet. As soon as noticing the misrepresentation, the company communicated to the applicants via e-mail, stated that the company could not accept the applicant’s orders due to the mistake of pricing. However, 44 purchasers amongst the applicants asked performing the contracts at the price presented on web-site; so the sales company filed a petition to confirm the invalid of the contracts in questioned.

Decision

The court concluded that these contracts are void due to the mistake (art.90 of civil code):Comment the plaintiff, on the website, never committed special offer reducing price whereas other similar products of the plaintiff were sold as the price over 100,000 yen; under the circumstances, the applicants had noticed or were likely to notice the mistake on the advertising.

Comment

As long as the article in the newspaper,[1] the court seems to approve the invalid of the contract. However, to be invalid of the contract by virtue of mistake is premises that the contract was formed legally. To approve the conclusion, it is necessary that the advertising of goods on website is deemed to be the offer to the contracts. But this idea is not in accordance with theories in academia; the advertising of products on web-site are only invitation to the contract; in this case, there may not exist the effective declaration of acceptances with the plaintiff corresponding to the offer by the defendants. I would like to comment this ruling after viewing the original decision.

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[1] http://www.yomiuri.co.jp/national/news/20070803it13.htm

Eexplanation duty based on suitability rule

Concerning the suitability rule and explanation duty, The Osaka District Court decision on July 26th, 2007 showed the interesting judgment. The ruling admitted the breach of the explanatory duty by the defendant securities company and approved the plaintiff’s damage claim, although it denied the offence of suitability rule.

Facts

The plaintiff was a dentist, born in 1927. She had no experience of securities transaction until then; she held the securities as a heritage of her father. The defendant securities company invited her to sell these securities assets and purchase other securities. However, she eventually suffered huge amount of loss by these transactions, and therefore she sued damage incurred by the transaction of the 6 mutual funds and knock-in-bond (“Nikkei average knock-in-bond”).

Ruling

The ruling did not accept the claim of the breach of suitability rule argued by the plaintiff: she had experiences until some transaction in questioned and ability to understand the details of the tracings concerned, in addition to the sufficient assets; moreover, she had intention of the investment and accumulated her experiences until those transactions in questioned.

mutual funds case

First of all, the court said that the mutual funds concerned had a nature of high risk compared with other securities, thus the general customers had difficulty to foresee the fluctuation of price compared with usual stocks; the financial product so called “the knock-in-bond” also was quite difficult for general customers to understand the structure of the products in addition to the hardship of foreseeing the fluctuation of income in future. Secondly, the court pointed out her inexperience until these transactions and the insufficiency of her intention bearing the loss by high risk transaction.Thirdly, the court indicated the failure of the confirmation by the defendant with regards to the inexperience and objectives of her investment, and denoted the lack of explanation about the elements affecting the investor’s profit such as the employment details of mutual funds in questioned.While she purchased the mutual funds of about 50,000,000 yen immediately after selling her inheritance stocks, she never revealed any anxiety to the defendant company; therefore, the court concluded that she had never understood the true risk of the mutual funds at the time when he purchased.

Knock-in-bond case

The court also said that she had never comprehended the structure as well as the risk of the knock-in-bond: she had not intention of high risk trading originally; moreover, the trading was carried on when she was busy on nursing her mother, and therefore she could not pay attention to the fluctuation of the price; she, nonetheless, purchased the bond of about 40,000,000 from money of selling her home without expressing any concern to the defendant; it proved that she never had substantial recognition to the structure and true risk of the product.

Negligence of explanatory duty

The court stated that the defendant executed ordinary explanation of the risk of the products in addition to delivering the prospectuses and brochures concerned, but the degree of explanation was not enough: whilst the defendant should get her recognition of particular risk of each products, he failed to execute such duty; the employee in charge did not examine her experience of securities transaction and her objectives of this investment, when  inviting her these products with high risk one after another; on the other hand, the plaintiff purchased the products recommended without any questions one after another; under this circumstance the employee in charge could and should notice the lack of efficient perception and understanding over these products in the plaintiff; if the employee in charge confirmed the plaintiff’s particularity sufficiently, , he could have dealt with the transactions, changing the products from low risk to high risk and adding the amount of investment gradually, along with her progressing of ability and recognition;  but the employee failed those duties. And the court concluded that the defendant failed to execute the explanation duty.

Contributory negligence

The ruling, however, pointed out the existence of contributory negligence in the plaintiff: although the plaintiff gained ordinary explanation concerning products recommended, she purchased them without sufficient consideration; she did not read the brochure and the report during transactions; and she dealt with substantial transactions before and after the trading in questioned; therefore the court has reduced plaintiff’s compensation for damages to 30 percent.

Comment

It is question that whilst the court admitted the explanation duty, it denied the offense of suitability rule. Concerning to the basis of the explanation duty, the court seems to find it into good faith principle. However, it is possible to find the basis of the explanation duty into the suitability rule.The suitability rule is defined as the principle that the trader should recommend the transaction complied with the particularity of the customer: knowledge, information, experience, ability, objective and financial status.As the premise of considering whether the customer has suitability, the business should investigate the particularity of the customer. If the customer is judged not suitable to the transaction concerned, the business should give an advice to halt the transaction to the customer; if the customer does not accept the advice, the customer is not suitable to the transaction and the business should refuse the transaction. In this case, the defendant company did not examine the particularity of the plaintiff at all; therefore the court should indicate the offence of the investigation duty as an element of suitability rule. In another word, the court should approve the argument of the breach of suitability rule by the plaintiff.  Even if the customer has suitability to the securities transaction generally, it does not mean that the customer is equipping with the suitability against particular transaction.When the customer is presumed to be lack of knowledge, information and experience to the transaction recommended, the business should provide the sufficient information and make him accumulate the experience until the customer is able to understand the structure of the transaction and bear the risk and execute his informed decision.This means that the explanation duty is derived from the notion of suitability rule. The explanation duty in this case should have been considered at the duty based on the suitability rule.