Eternity Sky Investments Ltd v Zhang

Factual and Procedural Background

The appeal concerns the enforcement of a Hong Kong arbitration award under section 101 of the Arbitration Act 1996, which incorporates the New York Convention. The Appellant, Mrs Zhang, argued enforcement should be refused on public policy grounds, asserting she was a consumer under the Consumer Rights Act 2015 (CRA), that the CRA applied despite the choice of Hong Kong law due to a 'close connection' with the United Kingdom, and that a key contract term was not transparent and unfair, rendering it non-binding. The arbitration arose from a personal guarantee Mrs Zhang provided for obligations of a Hong Kong company, Chong Sing, under a subscription agreement for convertible bonds issued in Hong Kong.

Mrs Zhang’s husband was the effective controller of Chong Sing, a Cayman Islands company listed on the Hong Kong Stock Exchange. Mrs Zhang resided in the United Kingdom at the time of the guarantee but had previously lived in Hong Kong. She signed the personal guarantee without legal advice, typically signing business documents at her husband’s request. The guarantee was governed by Hong Kong law and arbitration was to take place in Hong Kong.

Chong Sing defaulted on bond repayments in 2019 and was wound up in the Cayman Islands. Eternity Sky Investments Ltd ("Eternity Sky") sought payment from Mrs Zhang under the guarantee, leading to arbitration in Hong Kong. The arbitrator found Mrs Zhang understood the guarantee’s nature and purpose, rejected claims of undue influence and unconscionability, and awarded Eternity Sky the principal sum, interest, and costs.

Eternity Sky then sought enforcement of the award in the United Kingdom. Mrs Zhang applied to set aside enforcement, relying on the public policy ground under section 103(3) of the Arbitration Act 1996, invoking her status as a consumer under the CRA and arguing the relevant contract term was unfair and non-transparent.

Legal Issues Presented

1. Whether Mrs Zhang was a 'consumer' within the meaning of the Consumer Rights Act 2015 when entering into the personal guarantee.
2. Whether the personal guarantee had a 'close connection' with the United Kingdom such that the CRA applied despite the choice of Hong Kong law.
3. Whether clause 2 of the personal guarantee was transparent and prominent, thus excluded from fairness assessment under section 62 of the CRA.
4. If not transparent, whether clause 2 was unfair under the test set out in section 62 of the CRA.
5. Whether, if clause 2 was unfair, enforcement of the arbitration award should nevertheless be refused on public policy grounds under section 103(3) of the Arbitration Act 1996.

Arguments of the Parties

Appellant's Arguments

• Mrs Zhang contended she was a consumer under the CRA because she acted for purposes mainly outside trade or business.
• She argued the CRA applied despite the choice of Hong Kong law because the personal guarantee had a close connection with the UK.
• Clause 2 of the guarantee was not transparent, as it did not allow the average consumer to understand the economic consequences without reference to other documents and legal advice.
• Consequently, clause 2 was unfair and not binding on her under section 62 of the CRA.
• She submitted that enforcement should be refused on public policy grounds due to the unfairness.

Respondent's Arguments

• Eternity Sky argued Mrs Zhang was not a consumer because she had a functional link to the company by virtue of her non-negligible shareholding combined with her husband's shares and her regular signing of business documents.
• The personal guarantee did not have a close connection with the UK; it was overwhelmingly connected to Hong Kong.
• Clause 2 was transparent and prominent to the relevant average consumer, who would understand the nature and consequences of the guarantee.
• Clause 2 was not unfair, being a standard term necessary to the guarantee.
• Even if the CRA applied and clause 2 was unfair, enforcement should not be refused on public policy grounds; the public policy in favor of enforcing arbitration awards was strong and balancing was required.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
London Borough of Newham v Khatun [2004] EWCA Civ 55, [2005] QB 37	Interpretation of consumer protection legislation and its broad scope, including contracts for land.	Used to highlight the dominant purpose of consumer protection legislation and its broad application.
Asturcom Telecomunicaciones SL v Nogueira [2012] 1 CMLR 34	Consumer protection provisions under the Directive are mandatory and of public policy status.	Emphasised that consumer protection is a significant aspect of public policy relevant to enforcement of awards.
Tarcau v Banca Comerciala Intesa Sanpaolo România SA (Case C-74/14)	Definition of consumer in the context of personal guarantees; introduction of 'functional link' test.	Applied to assess whether Mrs Zhang acted as a consumer or for business purposes in giving the guarantee.
Costea v SC Volksbank România SC (Case C-110/14), [2016] 1 WLR 814	Objective and functional test for consumer status, independent of individual knowledge.	Supported the court’s objective approach to determining consumer status in this case.
Dumitras v BRD Groupe Société Générale (Case C-534/15)	Confirmed the 'functional link' test and its application to personal guarantees.	Used to distinguish business and private purposes and to assess Mrs Zhang's status.
Commission v Kingdom of Spain (Case C-70/03)	Interpretation of 'close connection' under the Directive and its flexible, fact-specific nature.	Guided the court’s analysis of the close connection test under the CRA.
BNP Paribas Personal Finance SA v VE [2022] 1 CMLR 3	Transparency requires terms to be intelligible to the average consumer, including economic consequences.	Informed the court’s assessment of clause 2’s transparency.
OFT v Ashbourne Management Services Ltd [2011] EWHC (Ch)	Standard for the average consumer varies with the nature of the contract.	Helped define the relevant average consumer for the personal guarantee context.
Director General of Fair Trading v First National Bank Plc [2001] UKHL 52, [2002] 1 AC 481	Test for unfair terms causing significant imbalance contrary to good faith.	Applied to determine whether clause 2 was unfair.
Aziz v Caixa d'Estalvis de Catalunya [2013] 3 CMLR 5	Assessment of unfairness and good faith in consumer contracts.	Supported the court’s conclusion on the fairness of the guarantee term.
Deutsche Schachtbau-und Tiefbohr GmbH v Shell International Petroleum Co Ltd [1990] 1 AC 295	Public policy grounds for refusing enforcement of arbitration awards are narrow and to be approached with caution.	Reinforced the narrow scope of public policy exceptions to enforcement.
RBRG Trading (UK) Ltd v Sinocore International Co Ltd [2018] EWCA Civ 838, [2018] 1 CLC 874	Public policy ground for refusing enforcement should be given restrictive interpretation.	Supported the court’s approach to balancing public policy in enforcement.
Ang v Reliantco Investments Ltd [2019] EWHC 879 (Comm), [2020] QB 582	Discussion on when certain contracts are inherently business activities for consumer status.	Referenced in assessing whether personal guarantees are inherently business activities.
AMT Futures Ltd v Marzillier [2014] EWHC 1085 (Comm), [2015] QB 699	Fact-specific nature of determining consumer status in investment contexts.	Used to illustrate the fact-specific approach to consumer status.

Court's Reasoning and Analysis

The court undertook a detailed, stepwise analysis of the issues raised on appeal. It first considered the question of whether Mrs Zhang was a consumer under the CRA. Applying the objective and functional test established by the CJEU in cases such as Costea and Tarcau, the court examined Mrs Zhang’s role and purpose in entering into the personal guarantee. Although the judge below had found her to be a consumer acting out of private motives (marriage), the court held that the relevant inquiry is objective and focuses on the nature of the transaction and the capacity in which the individual acted. Given Mrs Zhang’s significant combined shareholding with her husband, her regular signing of business documents, and the business nature of the guarantee securing a substantial corporate bond issue, the court found that she acted for business purposes and thus was not a consumer.

Next, the court addressed whether the personal guarantee had a close connection with the United Kingdom so as to trigger application of the CRA despite the choice of Hong Kong law. The court emphasized that the connection must be between the contract and the UK, not merely the consumer’s residence. It rejected the submission that residence was paramount and held that the guarantee’s overwhelming connections to Hong Kong, including its issuance, governing law, arbitration location, and the nature of the underlying transaction, meant the guarantee did not have a close connection with the UK. The court also rejected reliance on post-contractual events such as Mrs Zhang’s acquisition of UK citizenship or enforcement proceedings in the UK, holding that the connection must be assessed at the time the contract was concluded.

The court then considered whether clause 2 of the personal guarantee was transparent and prominent. Drawing on the CRA’s definitions and relevant case law, the court explained that transparency requires the term to be intelligible to the average consumer of the relevant class, including an ability to understand economic consequences. The court held that the relevant average consumer for this type of substantial corporate guarantee would be reasonably well-informed and circumspect, and would understand the broad effect of clause 2 without needing legal advice. Clause 2 was thus transparent and prominent, excluding it from fairness assessment under section 62 of the CRA.

On the issue of fairness, the court applied the established test from Director General of Fair Trading v First National Bank and Aziz. It found that clause 2 did not cause a significant imbalance contrary to good faith. The obligation to pay in the event of default was fundamental to the guarantee and clearly expressed. The court rejected the notion that the term was unfair.

Finally, the court addressed whether enforcement of the award should be refused on public policy grounds under section 103(3) of the Arbitration Act 1996. It acknowledged the public policy importance of consumer protection but emphasized the strong public policy favoring enforcement of arbitration awards. The public policy exception is narrow and to be applied restrictively. The court held that since Mrs Zhang was not a consumer and the term was not unfair, there was no basis to refuse enforcement. Even if the CRA applied and the term was unfair, the statute provides that an unfair term is not binding, precluding any balancing exercise in enforcement.

Holding and Implications

The appeal was dismissed. The court held that Mrs Zhang was not a consumer under the Consumer Rights Act 2015, the personal guarantee did not have a close connection with the United Kingdom, and clause 2 of the guarantee was transparent, prominent, and not unfair. Consequently, enforcement of the Hong Kong arbitration award was properly ordered and should not be refused on public policy grounds.

The direct effect of this decision is to uphold enforcement of the arbitration award against Mrs Zhang. No new precedent was set beyond the application of established principles on consumer status, the close connection test, transparency and fairness of contract terms, and the narrow scope of public policy exceptions to enforcement of arbitration awards.