Eternity Sky Investments Ltd v Xiaomin Zhang

Consumer status is assessed objectively by reference to the particular transaction, not the individual’s subjective motive or general personal circumstances. In a company guarantee, a functional link with the company is a factor in deciding whether the guarantor acted for business purposes. A close connection under section 74 of the Consumer Rights Act 2015 concerns the contract’s connection with the United Kingdom, is assessed flexibly, and is determined when the contract is concluded. A core term is transparent where the relevant average consumer can understand its broad economic consequences. If an unfair consumer term were established, the statutory consequence that it is not binding would not be balanced against the policy favouring enforcement of arbitration awards.

Eternity Sky sought enforcement in England of a Hong Kong arbitration award requiring Mrs Zhang to pay HK$500 million under a personal guarantee supporting a Hong Kong convertible bond issue. Bright J granted enforcement, holding that Mrs Zhang was a consumer but that the guarantee lacked a close connection with the United Kingdom and that its core obligations were transparent and prominent: [2023] EWHC 1964 (Comm).

Mrs Zhang appealed on close connection and transparency. Eternity Sky served a respondent’s notice challenging the finding that she was a consumer and arguing that enforcement would not have been contrary to public policy even if the Consumer Rights Act 2015 applied. The central issues concerned consumer status, close connection, transparency, fairness and public policy.

The appeal was dismissed. Males LJ gave the leading judgment, with which Dingemans LJ and Falk LJ agreed.

1. Consumer status. The question under section 2 of the Consumer Rights Act 2015 is objective and transaction-specific. It concerns the purpose for which the individual entered the particular contract, not the individual’s subjective motive or general role in life. A functional link with the company is not a separate test, but a factor in assessing business purpose. A non-negligible shareholding means a holding conferring influence or control, rather than one valuable only in monetary terms. Mrs Zhang’s guarantee supported a substantial corporate bond issue. Her and her husband’s shareholdings were treated together under the applicable regulatory regime, and she regularly signed business documents for their enterprise. She therefore acted mainly for business purposes and was not a consumer.
2. Close connection. Section 74 of the Consumer Rights Act 2015 requires a close connection between the contract and the United Kingdom. The test is not the closest-connection test under the Rome I Regulation, although the nature and strength of connections must be examined. Residence is relevant but neither decisive nor paramount. The guarantee concerned Hong Kong funding, was probably concluded in Hong Kong, was performed through payment to Hong Kong, and was subject to Hong Kong arbitration. Its connection with the United Kingdom was not close.
3. Transparency. Under section 64, transparency includes intelligibility of the term’s economic consequences. The relevant average consumer varies with the nature and context of the transaction. A reasonably well-informed, observant and circumspect person entering a guarantee for a major corporate bond issue would understand the broad personal liability for the bond amount and interest. Further documents or legal advice were not necessary to understand that liability. Clause 2 was transparent.
4. Fairness. The obligation to pay upon default by the principal debtor is the essence of a guarantee. A clearly expressed standard obligation to repay the funding, where the extent of liability was apparent, did not create a significant imbalance contrary to good faith. Clause 2 was not unfair.
5. Public policy. Conditionally, if the statutory requirements had been satisfied and the term were unfair, section 62 would make it non-binding. There would then be no balancing exercise between that statutory consumer-protection rule and the policy favouring enforcement of arbitration awards under section 103(3) of the Arbitration Act 1996.

• Court of Appeal (Civil Division): In [2024] EWCA Civ 630, the appeal was dismissed. The court held that Mrs Zhang was not a consumer, that the guarantee lacked a close connection with the United Kingdom, and that the relevant term was transparent and fair.
• High Court, Commercial Court: Bright J’s decision is reported at [2023] EWHC 1964 (Comm). The judge held that Mrs Zhang was a consumer, but refused to set aside enforcement because the guarantee lacked a close connection with the United Kingdom.