Arbitration and Consumer Rights: Court of Appeal Upholds Award Enforcement in Personal Guarantee Case

10 June 2024

In Eternity Sky v Zhang [2024] EWCA Civ 630, the Court of Appeal dismissed an appeal by Mrs Xiaomin Zhang ("Mrs Zhang"), who sought to resist the enforcement of an arbitration award obtained by Eternity Sky Investments Ltd ("Eternity Sky"), on the grounds that it infringed her rights under the Consumer Rights Act 2015 (the "CRA").

Background

In May 2016, Chong Sing Fin Tech Holdings Group Ltd ("Chong Sing"), a Hong Kong listed company, issued HK$500 million in convertible bonds to Eternity Sky. Mrs Zhang, and her husband Mr Zhang (who was Chong Sing's largest individual shareholder), each provided a personal guarantee (the "Personal Guarantee") to Eternity Sky as security for Chong Sing's obligations.

In May 2019, Chong Sing failed to redeem bonds and in September 2019, Mr Zhang passed away, leaving Mrs Zhang as the sole living guarantor. When Eternity Sky sought payment from Mrs Zhang under the Personal Guarantee, Mrs Zhang commenced arbitration proceedings against Eternity Sky in Hong Kong under the UNCITRAL Arbitration Rules, seeking declarations that the arbitration agreement, or the Personal Guarantee as a whole, were not valid or binding for lack of agreement and intention to be legally bound, or alternatively, that the Personal Guarantee was rescinded on the grounds of either undue influence or unconscionable bargain. Eternity Sky counterclaimed for a debt of HK$500 million due under the Personal Guarantee. The Tribunal issued an award (the "Award") dismissing all of Mrs Zhang's claims and granting Eternity Sky's counterclaim.

Eternity Sky subsequently obtained an order to enforce the Award in England, pursuant to section 101 of the Arbitration Act 1996 (the "AA"), on an ex parte basis. Although Mrs Zhang did not challenge the Award in Hong Kong (the seat of the arbitration), she applied to set aside the order enforcing the Award in England, relying on the public policy ground under section 103(3) of the AA and her alleged status as a "consumer" under section 2(3) of the CRA.

The first instance judge held that Mrs Zhang was a consumer for the purposes of the CRA, but that (i) the Personal Guarantee did not have a "close connection" with the UK under section 74 of the CRA; (ii) the terms of the Personal Guarantee were transparent and prominent under section 64 of the CRA; and (iii) the terms of the Personal Guarantee were not unfair within the meaning of section 62 of the CRA. We covered this judgment in our previous briefing on Navigating Arbitration with Consumers.

Mrs Zhang was granted permission to appeal, and Eternity Sky was granted permission to cross-appeal, against certain findings made by the first instance judge. The following issues were before the Court of Appeal:

Was Mrs Zhang a consumer?
Did the Personal Guarantee have a close connection with the UK?
Was clause 2 of the Personal Guarantee (which sets out the guarantee) transparent and prominent?
Was clause 2 of the Personal Guarantee unfair?
If so, should the Award nevertheless be enforced?

Mrs Zhang needed to prevail on all five issues in order for her appeal to succeed.

The Court of Appeal's judgment

In a unanimous decision of the Court of Appeal, Males LJ, with whom Dingemans and Falk LJJ agreed, found in favour of Eternity Sky on issues (1) to (4) and dismissed Mrs Zhang's appeal.

Issue (1): Was Mrs Zhang a consumer?

Mrs Zhang had succeeded on this point at first instance. However, the Court of Appeal arrived at a different conclusion, finding that Mrs Zhang was acting wholly or mainly for business purposes when she entered into the Personal Guarantee, and therefore, not as a consumer.

While the first instance judge had found that Mrs Zhang "acted for purposes of a private nature – fundamentally, her marriage", Males LJ drew a distinction between Mrs Zhang's private motive on one hand, and her business purpose on the other, the latter of which was to be assessed by an objective standard. Viewed objectively, the Personal Guarantee was a contract of a business nature, entered into to facilitate a HK$500 million corporate convertible bond issuance.

Males LJ then considered whether there was any "functional link" between Mrs Zhang and Chong Sing. In doing so, his Lordship clarified that this was not a separate or independent question, but a factor to be considered in applying the business purposes test. The first instance judge held that there was no such functional link, on the basis that Mrs Zhang's 90 million shares in Chong Sing (representing about 0.39% of the company's issued shares) did not amount to a non-negligible shareholding. Males LJ placed greater emphasis on Mrs Zhang's role as "one half of the 'majority shareholder couple'", including the fact that she was regarded as beneficially interested in her husband's shares.

Although the Court's finding that Mrs Zhang was not a consumer would have been sufficient to dismiss the appeal, Males LJ nevertheless proceeded to consider the remaining issues, as though Mrs Zhang were a consumer.

Issue (2) to (4):

The Court of Appeal upheld the High Court's findings on these grounds, principally for the same reasons given by the first instance judge. We discuss the first instance judgment in further detail our previous briefing.

Issue (5): Should the Award nevertheless be enforced?

Finally, the Court considered whether it would have nevertheless dismissed the appeal, had Mrs Zhang prevailed on issues (1) to (4), on account of the general policy in favour of enforcing arbitration awards. Males LJ concluded that if Mrs Zhang had cleared the hurdles of showing that she was a consumer who had entered into a consumer contract, which had a close connection with the UK and whose terms were lacking in transparency and unfair, then the CRA would unequivocally provide that such a term would not be binding on the consumer, without any scope for balancing the competing policy interests.

Comment

The facts of this case were unusual to say the least. As Males LJ remarked in the judgment, they sounded "like the facts of a students' moot". Far from the typical consumer contract for the supply of goods or services, the contract in question was a personal guarantee for a HK$500 million convertible bond issuance by a publicly listed Hong Kong company.

Had the agreement instead been a 'typical consumer contract', more akin to that in Payward Inc v Chechetkin [2023] EWHC 1780 (Comm), and had Mrs Zhang cleared the CRA hurdles, then this case could have been one of the rare instances where the English Court's pro-arbitration and pro-enforcement approach would have been outweighed by other competing policy interests. It serves as a reminder to businesses who deal directly with consumers of the need for carefully considered dispute resolution clauses. While there is a place for arbitration agreements in business-to-consumer contracts, businesses will need to ensure that key terms such as the seat of the arbitration and the governing law are appropriate for the profile of their user base.

Lei Shi, Thomas Walsh, Tania Tse, Haoyang Zhang and Karen Choi from Clifford Chance Hong Kong and Mainland China acted for Eternity Sky in the arbitration proceedings.

Marie Berard, Laura Hasson and Robert Shu from Clifford Chance London, Lei Shi from Clifford Chance Mainland China, David Lewis KC of Twenty Essex and Gemma Morgan of Quadrant Chambers acted for Eternity Sky in the English High Court and Court of Appeal proceedings.