Arbitration and consumer rights: the Eternity Sky appeal and personal guarantees

In Eternity Sky Investments Ltd v Xiaomin Zhang (with the CMA as intervener) [2024] EWCA Civ 630, the English Court of Appeal upheld an arbitration award challenged on grounds of public policy (effective consumer protection). In dismissing the appeal, the Court of Appeal also reversed the High Court's finding that Mrs Zhang was acting as a consumer when she entered into a personal guarantee to secure a HK$500 million corporate convertible bond issue.

Background

The factual background to this case is summarised in our earlier blogpost on the first instance decision here. In short, the dispute arose out of a personal guarantee (Guarantee) given by Mrs Zhang for the benefit of Eternity Sky. The Guarantee was intended to secure the obligations of Chong Sing Fin Tech Holdings Group Limited (Chong Sing) under a subscription agreement by which Chong Sing issued convertible bonds to Eternity Sky. Chong Sing was managed and controlled by Mrs Zhang's deceased husband, although Mrs Zhang had a 0.4% shareholding in in the company. Chong Sing failed to redeem the bonds and defaulted. Eternity Sky sought to recover its debt from Mrs Zhang under the Guarantee, and Mrs Zhang did not pay the amount demanded.

In the Hong Kong seated arbitration, the sole arbitrator determined that the Guarantee was binding and ordered Mrs Zhang to pay the debt to Eternity Sky. Eternity Sky obtained permission to enforce the award in England, and Mrs Zhang applied for the enforcement order to be set aside on the grounds that enforcement would be contrary to English public policy within s103(3) of the English Consumer Rights Act 2015 (CRA), arguing that she was acting as a consumer.

The Commercial Court found that Mrs Zhang was a consumer within the meaning of the CRA. However, the judge held that the Guarantee was not closely connected with the UK (and that it was much more closely connected with Hong Kong) and therefore fell outside the CRA regime. The judge also concluded (obiter) that the core provisions of the Guarantee and the choice of governing law and dispute resolution clauses were transparent and prominent and therefore did not need to be assessed for fairness under the CRA.

The Appeal

Mrs Zhang appealed, relying on the following two grounds:

1. That the Court was wrong to conclude that the Guarantee did not have a close connection with the UK; and
2. That the core provisions of the Guarantee were not transparent and prominent and were in fact unfair.

Eternity Sky also contended that the Court was wrong to find that Mrs Zhang was acting as a consumer when entering into the Guarantee.

Decision

Was Mrs Zhang a consumer?

Under the CRA, whether Mrs Zhang was to be regarded as a consumer depended on whether, in entering into the Guarantee, she acted ‘for purposes that are wholly or mainly outside [her] trade, business, craft or profession’. This was an objective question, taking into account the sphere of activity in which the Guarantee took place.

Although the first instance judge considered that Mrs Zhang had acted for purposes of a private nature – her marriage – because she played no active part in the activities of her husband's companies – the Court of Appeal commented that this confused motive and purpose. Whether Mrs Zhang was acting as a consumer depended on her status in relation to the Guarantee, and not in relation to other aspects of her life. This is because a counterparty needs to know if they are dealing with a consumer, so this cannot depend on subjective considerations such as an individual's motivation.

Here, the sphere of activity in which Mrs Zhang entered into the Guarantee was a corporate convertible bond issue for the raising of a very substantial amount of money (HK$500 million). It was in her capacity as one half of the ‘majority shareholding couple’ under the applicable regulatory regime that Mrs Zhang was requested to and did in fact sign the Guarantee. Without the Guarantee, the funding would not have been provided, and a reasonable person in her position would have understood that. Accordingly, the transaction was of a business and not a private nature, and Mrs Zhang was not a consumer. Despite this finding, the Court of Appeal addressed the remaining questions on the basis that Mrs Zhang was a consumer.

Did the guarantee have a close connection with the United Kingdom?

Mrs Zhang argued that the Guarantee had a close connection with the UK because Mrs Zhang was a UK resident, the Guarantee provided for any notice or demand to be sent to her London address, and enforcement was likely to take place there.

The Court noted that the term "close connection" was deliberately vague and had to be interpreted flexibly. Residence is typically regarded as a relevant connection with a contract because consumers usually buy goods to be provided to them in the country where they are resident. However, this was not a typical consumer contract. It was a contract for the provision of funding to a Hong Kong company. Unlike typical consumer contracts, Eternity Sky did not direct its activities to the UK or carry on any business in the UK and no part of its performance took place there. The Guarantee was not concluded in the UK and performance was likely to take place in Hong Kong.

Overall, the first instance judge was entitled to conclude that the nature and strength of the connection between the Guarantee and the UK was not a close one.

Were the core provisions transparent?

Mrs Zhang relied on a comment made by the first instance judge that the details of Mrs Zhang's obligations may have been obscure without access to further documents and legal advice. Eternity Sky argued that the essence of the Guarantee was simple and easy to understand, and the average consumer providing such a guarantee, securing a HK$500 million bond issue, could be expected to read and understand the relevant documents.

The Court of Appeal was concerned with the "average consumer who might enter into a contract of this particular type". This was not a typical consumer contract: it was to be expected that a person entering into such a contract would take the trouble to read it and have a good understanding of what a personal guarantee is and what a bonds issue is, including that they were accepting liability to repay the funding. The judge was therefore right to say that although the detail of the obligations undertaken by Mrs Zhang might be obscure without access to further documents and legal advice, their broad effect was clear. The requirement of transparency was satisfied.

The Court of Appeal also held (obiter) that the core provisions were not unfair, because (among others), the obligation to pay in the event of default by the principal debtor is the essence of a guarantee, and does not result in a significant imbalance in the parties' rights and obligations under the contract.

Finally, the Court of Appeal commented that had Mrs Zhang overcome the various hurdles (i.e. proven that she was a consumer, that the Guarantee had a close connection with the UK and its core term was lacking in transparency and unfair), then the Guarantee would not have been binding. Accordingly, enforcing the award would have been contrary to public policy and there would not have been any scope for the exercise of discretion or balancing of the competing public policies of consumer protection versus the enforcement of arbitral awards.

Comment

This case is another helpful addition to the growing body of case law concerning the interaction of international arbitration and consumer protection. It contains helpful guidance on the meaning of "consumer" and its application to the context of personal guarantees given for business purposes. In this case, the individual was not able to rely on their personal "status" as a consumer to avoid their binding obligations and, ultimately, enforcement of the arbitration award. The case also provides helpful clarification of the Court's approach to other questions that arise under the CRA, including the close connection, transparency and fairness tests.