As a general rule, financial institutions request collateral (of whatever kind) or a personal guarantor in extending credit, except for short-term credit transactions with a borrower of high credit standing. In case of long-term loans that are repetitively issued, collateral or guarantee may be replaced or released for the sake of transaction. In this regard, the duty of the creditor to preserve collateral comes into question. Financial institutions, in their credit agreement or collateral agreement, include a special clause that exempts the guarantor from the duty to preserve collateral and restricts the exercise of subrogated right under partial indemnification. This facilitates credit transactions with the debtor, in that it allows financial institutions to release or replace collateral and guarantee without the permission of the guarantor or the guarantor of secured mortgage. Since such exemption agreement between financial institutions and the guarantor is not in breach of good faith and public policy, it is deemed valid and is supported by court rulings. However, even if the validity of the exemption clause is accepted in general, the claim for its validation is not to be acknowledged without restrictions. Exemption clause has strong contrat d’adhésion and if the collateral can be replaced or released freely based on the agreement between financial institution and the debtor, it may inflict unexpected damage on the guarantor or the guarantor of secured mortgage and even unfairly shift the responsibility on them in certain circumstances. In such cases, it is natural that certain restriction should be imposed. That is to say, if the creditor’s claim for validity of the special clause is in breach of good faith or is abuse of power, its validity should be restricted and the subrogee should be exempted from its liabilities. Furthermore, standards that suit the demand of facilitating credit transaction while protecting the weak should be established, based on reasonable interpretation.

As a general rule, financial institutions request collateral (of whatever kind) or a personal guarantor in extending credit, except for short-term credit transactions with a borrower of high credit standing. In case of long-term loans that are repetitively issued, collateral or guarantee may be replaced or released for the sake of transaction. In this regard, the duty of the creditor to preserve collateral comes into question. Financial institutions, in their credit agreement or collateral agreement, include a special clause that exempts the guarantor from the duty to preserve collateral and restricts the exercise of subrogated right under partial indemnification. This facilitates credit transactions with the debtor, in that it allows financial institutions to release or replace collateral and guarantee without the permission of the guarantor or the guarantor of secured mortgage. Since such exemption agreement between financial institutions and the guarantor is not in breach of good faith and public policy, it is deemed valid and is supported by court rulings. However, even if the validity of the exemption clause is accepted in general, the claim for its validation is not to be acknowledged without restrictions. Exemption clause has strong contrat d’adhésion and if the collateral can be replaced or released freely based on the agreement between financial institution and the debtor, it may inflict unexpected damage on the guarantor or the guarantor of secured mortgage and even unfairly shift the responsibility on them in certain circumstances. In such cases, it is natural that certain restriction should be imposed. That is to say, if the creditor’s claim for validity of the special clause is in breach of good faith or is abuse of power, its validity should be restricted and the subrogee should be exempted from its liabilities. Furthermore, standards that suit the demand of facilitating credit transaction while protecting the weak should be established, based on reasonable interpretation.

Civil Act Article 485, The Duty of the Creditor to Preserve Collateral, Exemption Agreement, The Validity of the Exemption Clause