In Eternity Sky Investments Ltd v. Zhang,1 the Commercial Court refused an application to set aside an enforcement order in respect of an award made in a Hong Kong-seated arbitration on the grounds that enforcement would be contrary to English public policy – specifically, consumer protections enshrined in the Consumer Rights Act 2015. In reaching its conclusion, the Commercial Court held that the Consumer Rights Act did not apply, as although the applicant was a consumer and lived in the UK, the transaction was much more closely connected with Hong Kong. The Commercial Court also expressed the view (obiter) that inclusion of an arbitration clause in a contract with a consumer does not automatically entail that the clause will be deemed unfair and thus unenforceable.
The underlying claim related to a guarantee given by XiaominZhang to Eternity Sky in respect of a bond issue made by Chong Sing Holdings FinTech Group Limited, a company run by Zhang's husband. Eternity Sky entered into an agreement under which it subscribed to 5 million Hong Kong dollars of convertible bonds in Chong Sing, and at the same time, Zhang signed a personal guarantee for the benefit of Eternity Sky. Zhang lived in London, but both agreements had Hong Kong governing law and arbitration clauses.
When Chong Sing was liquidated, Zhang commenced arbitration proceedings in Hong Kong against Eternity Sky, seeking a declaration that the guarantee was unenforceable. Eternity Sky counterclaimed and obtained an award for 5 million Hong Kong dollars against Zhang. Subsequently, Eternity Sky brought enforcement proceedings in England and Wales against Zhang under section 101 of the Arbitration Act 1996. Permission was given for enforcement.
Zhang then applied to the Commercial Court to set aside the enforcement order, pursuant to section 103(3) of the Arbitration Act 1996, on the grounds that enforcement would be contrary to English public policy. Zhang argued that she was a consumer within the meaning of the Consumer Rights Act, and that the jurisdiction (Hong Kong-seated arbitration) and applicable law (Hong Kong law) provisions within the guarantee were unfair and therefore in contravention of the act.
The Commercial Court's judgment
In reaching a decision, Mr. Justice Bright considered three questions:
- Was Zhang a consumer?
- Did the guarantee have a 'close connection' with the UK?
- Did the guarantee contain unfair terms?
1. Was Zhang a consumer?
The judge applied the test established in Tarcau Banca Comerciala Intesa Sanpaolo Romania SA2regarding the status of guarantors providing personal guarantees in support of companies.3 In Tarcau, the Court of Justice of the European Union held that the guarantor's status depended on ' ... whether that person acted for purposes relating to his trade, business or profession or because of functional links he has with that company, such as a directorship or a non-negligible shareholding, or whether he acted for purposes of a private nature'.
The judge concluded that Zhang had not acted for purposes relating to her trade or profession, but rather, for purposes of a private nature – fundamentally providing a guarantee for her husband. Although Zhang held 0.4% in Chong Sing, the Commercial Court held that this did not constitute or give rise to any functional link with the company. Therefore, Zhang was a consumer within the meaning of the Consumer Rights Act.
2. Did the guarantee have a 'close connection' with the UK?
Under section 74 of the Consumer Rights Act, where a contract applies the law of a non- European Economic Area state but there is a 'close connection' with the UK, the act's requirement for contract terms to be fair nevertheless applies, despite the choice of law clause.
The judge clarified that the relevant test was not whether Zhang was sufficiently connected to the UK as a consumer, but rather, whether the guarantee had a sufficiently close connection with the UK.
The judge considered that while there was a connection with the UK by virtue of Zhang being a resident of London, the guarantee was much more closely connected with Hong Kong. This was where the transaction was 'centred, devised and regulated' – and where performance by Zhang would take place. Eternity Sky conducted no business in the UK, did not seek customers or guarantors in the UK, and did not contract with Zhang because she happened to be resident in the UK. It contracted with her for an entirely non-UK related reason – namely, because she was married to Mr. Zhenxin Zhang. The guarantee's connection with the UK was 'essentially incidental' and, without a sufficiently close connection, the Consumer Rights Act did not apply.
The judge considered whether his conclusion would have been different if the parties had not included a choice of law clause in favour of Hong Kong and concluded that that would not have made any difference.
3. Did the guarantee contain unfair terms?
Although the judge found that the Consumer Rights Act did not apply, he helpfully went on to consider whether the guarantee contained clauses which contravened the requirement of fairness under section 62 of the Consumer Rights Act.
In respect of the core term of the personal guarantee (i.e., the guarantee itself), the judge held that the term was indeed transparent and prominent. In his assessment, the judge considered the concept of an 'average consumer' (under sections 62 and 64 of the Consumer Rights Act). Notably, he found that what should be assessed is not an average consumer who might enter into any typical consumer contract, but rather, the average consumer who might enter into a consumer contract of this particular type, holding that the relevant clauses were transparent and prominent to such an average consumer.
The judge then considered that the choice of law clause would only be unfair if it resulted in a significant imbalance that would otherwise not exist. Given that the content of Hong Kong law is very similar to that of English law, the only difference caused by the choice of law clause was that Zhang had to instruct lawyers in Hong Kong. Given Zhang's financial means and established connections in Hong Kong, this was not significant for or unfair to Zhang.
As to the arbitration clause, the judge stated that the fact that a consumer contract provides for disputes to be resolved in arbitration does not in itself make it unfair – rather, it is a question for the relevant national court to decide in every case. He went on to distinguish the case from Soleymani v. Nifty Gateway LLC,4 where the Court of Appeal had to consider the unfairness of a clause providing for arbitration in New York. Firstly, the nature of the respective applications and the issues to be considered were different – the public importance of court (as opposed to private arbitral tribunal) decisions on consumer rights, for example, was relevant in the Soleymani case but not in this one. Secondly, unlike Soleymani (who did not want to arbitrate in New York), Zhang herself had commenced the arbitration proceedings in Hong Kong. And thirdly, while the Court of Appeal in Soleymani had considered that English courts were better placed than a New York tribunal to adjudicate upon UK consumer protection rights, the Commercial Court was of the view that arbitrators in Hong Kong are very adept at applying English law, which they do with regularity. In these circumstances, the judge held that the arbitration clause had not caused injustice to Zhang.
This decision is noteworthy in light of Mr. Justice Bright's recent decision in Payward Inc. v. Chechetkin5 (examined in this October 2023 On the Record blog post), which considered similar issues but came to different conclusions. In that case, Mr. Justice Bright refused to enforce an arbitral award from an arbitral tribunal seated in California, as he held that the Consumer Rights Act did apply, and that the choice of law and jurisdiction clauses were unfair, as they deprived the consumer of the right to bring a claim under the Financial Services and Markets Act 2020 (which they otherwise would have been able to do under English law).
This case helpfully demonstrates that residence alone is not sufficient for establishment of a close connection, so not every contract concerning a consumer in the UK will fall within the remit of the Consumer Rights Act, and not all arbitral awards relating to consumer contracts will be unenforceable in the UK – especially not contracts that are 'entirely atypical in the consumer context'.
This case does, of course, turn on its own (atypical) facts. Any supplier of goods or services in or into the UK should bear in mind that the English courts will – more likely than not – hold arbitration clauses in contracts with UK consumers to be unenforceable.
1.  EWHC 1964.
2. Case C-74/14.
3. As the Consumer Rights Act was enacted to give effect to EC Directive 93/13 on unfair terms in consumer contracts, and to replace the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contract Regulations 1999, there is a body of European case law that is relevant to this interpretation.
4.  EWCA Civ 1297.
5.  EWHC 1780.
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