Eternity Sky Investments Ltd v Xiaomin Zhang

The Court of Appeal considered whether enforcement in England of a Hong Kong arbitration award should be refused on public policy grounds under section 103(3) of the Arbitration Act 1996 because the guarantor was a "consumer" protected by the Consumer Rights Act 2015. The principal legal issues were (i) whether the individual guarantor was a consumer as an objective matter (applying the CJEU "functional link" approach), (ii) whether the personal guarantee had a "close connection" with the United Kingdom for the purposes of section 74 CRA, and (iii) whether the core liability clause in the guarantee was "transparent and prominent" (section 64 CRA) and, if not, unfair under section 62 CRA.

The court held that, objectively, the guarantor acted for business purposes and so was not a consumer: she signed guarantees as part of her role as one half of the principal shareholder couple in a Hong Kong listed group and had a practice of signing business documents at her husband’s request (the "functional link" test). Even proceeding on the alternative assumption that she was a consumer, the guarantee was not closely connected to the United Kingdom because consideration and performance were Hong Kong-centred and the contract was governed and to be enforced in Hong Kong; post-contract events do not determine close connection. Finally, the court held the core clause was transparent and prominent to the relevant average consumer (a person entering into guarantees of this type) and, in any event, not unfair. The appeal was dismissed and enforcement upheld.

Background and parties:

• Eternity Sky Investments Ltd (subscriber/creditor) obtained a Hong Kong arbitration award against Mrs Xiaomin Zhang under a personal guarantee executed in 2016 to secure a HK$500 million convertible bond subscription to Chong Sing Fin Tech Holdings Group Ltd. The arbitrator in Hong Kong found Mrs Zhang liable and awarded HK$500 million with interest and costs.
• Eternity Sky sought enforcement in England under section 101 of the Arbitration Act 1996. Mrs Zhang resisted enforcement invoking public policy under section 103(3), asserting consumer protection under the Consumer Rights Act 2015.

Procedural posture: This was an appeal to the Court of Appeal from Mr Justice Bright in the Commercial Court ([2023] EWHC 1964 (Comm)). The appellant challenged the judge’s rejection of her arguments that the CRA applied and that the core guarantee clause was not transparent and therefore unfair.

Nature of the claim / relief sought: Mrs Zhang sought refusal of recognition and enforcement of the New York Convention award on public policy grounds because (she alleged) as a consumer she was entitled to the CRA’s protection and the core liability clause was not transparent and therefore unfair and non-binding.

Issues before the Court of Appeal:

1. Whether Mrs Zhang was a consumer under section 2 CRA (objective inquiry; relevance of any "functional link" such as shareholding or de facto control).
2. Whether the guarantee had a "close connection" with the United Kingdom so as to engage section 74 CRA despite a Hong Kong law choice.
3. Whether clause 2 (the guarantee/liability clause) was transparent and prominent under section 64 CRA and therefore excluded from assessment for fairness; if not, whether it was unfair under section 62.
4. Whether public policy required refusal of enforcement even if the CRA applied and the clause were unfair.

Court’s reasoning (concise):

• Consumer status: the court applied the objective, functional test from CJEU authority (Costea, Tarcău, Dumitraş) and concluded Mrs Zhang acted for business purposes. She and her husband formed the principal shareholder couple in Chong Sing; under the applicable listing/regulatory regime her husband’s shareholding was treated as linked to hers and the guarantee was supplied because of that combined position. She had a pattern of signing business documents at her husband’s request. On that objective basis she was not a consumer.
• Close connection: even if she were a consumer, the guarantee was overwhelmingly connected to Hong Kong — negotiated, performed (funds advanced in Hong Kong), governed by Hong Kong law and subject to Hong Kong arbitration. Residence in the United Kingdom is a relevant but not decisive connection; post-contractual events are not relevant to the close-connection inquiry, which is to be assessed at contract formation.
• Transparency and fairness: the court applied the average-consumer standard adapted to the specific transaction. The relevant average consumer for this type of guarantee would be reasonably well-informed and circumspect and would understand the economic effect (liability for the subscribed amount). Clause 2 was transparent and prominent and, in any event, not unfair.
• Public policy and enforcement: enforcement of New York Convention awards attracts a narrow public policy exception. Even so, if the CRA had applied and a term were unfair the court could not reconcile enforcement with the statutory rule that an unfair term is not binding; but on the facts enforcement was appropriate.

Result: Appeal dismissed; enforcement of the Hong Kong award permitted.

Appeal dismissed. The Court of Appeal concluded (1) on the objective, functional test the guarantor was not a consumer because she acted in connection with a business enterprise as one half of the principal shareholder couple and had a practice of signing business documents; (2) alternatively, the personal guarantee did not have a close connection with the United Kingdom because consideration, performance, governing law and arbitration were Hong Kong-centred and the close-connection test is assessed at the time of contract formation; (3) clause 2 of the guarantee was transparent and prominent to the relevant average consumer and was not unfair; and (4) therefore recognition and enforcement of the Hong Kong award under the Arbitration Act 1996 was not contrary to public policy.

Appeal from the Commercial Court (Mr Justice Bright) High Court of Justice, Business and Property Courts, King’s Bench Division: [2023] EWHC 1964 (Comm) – to the Court of Appeal, judgment [2024] EWCA Civ 630.