In Eternity Sky Investments Ltd v Mrs Xiaomin Zhang  EWHC 1964 (Comm), the English Commercial Court has rejected a challenge to an arbitration award on the grounds of public policy. Although the applicant argued that the terms of the underlying contract were unfair for the purposes of English consumer legislation, the court held that there was no “close connection” with the UK and therefore that the legislation did not apply.
The arbitration arose out of a personal Guarantee (Guarantee) given by Mrs Zhang for the benefit of Eternity Sky. The Guarantee related to a bond issue by Chong Sing Fin Tech Holdings Group Limited (Chong Sing), which was based in Hong Kong, although Mrs Zhang was resident in London. Eternity Sky subscribed for convertible bonds on the terms of a subscription agreement, which was governed by Hong Kong law and provided for HKIAC arbitration. Chong Sing was managed and controlled by Mrs Zhang’s husband, although Mrs Zhang had a 0.4% shareholding in in the company.
Chong Sing failed to redeem the bonds and defaulted. Mr Zhang also died shortly thereafter, which meant that Eternity Sky sought to recover its debt from Mrs Zhang under the Guarantee.
Mrs Zhang commenced arbitration proceedings in which she sought declarations that the arbitration agreement and/or the Guarantee were not binding or alternatively had been rescinded. Eternity Sky counterclaimed for its debt. The sole arbitrator rejected Mrs Zhang’s arguments and determined that the Guarantee was binding. Eternity Sky’s counterclaim also succeeded.
Eternity Sky subsequently commenced enforcement proceedings under s101 of the English Arbitration Act (Act) on a without notice basis, and permission was given for enforcement. Mrs Zhang applied for the enforcement order to be set aside on the grounds that enforcement would be contrary to English public policy within s103(3) of the English Consumer Rights Act 2015 (CRA) and CPR 62.18(9). She argued that she was a consumer within the meaning of the CRA and that certain terms of the Guarantee (in particular the arbitration clause, the governing law clause and clause 2 which was the core operative provision of the Guarantee) were unfair within the meaning of that Act. Eternity Sky opposed the application on the grounds that (i) Mrs Zhang was not a consumer within the meaning of the CRA because she had a real business interest in Chong Sing (ii) the CRA was not applicable because of the choice of Hong Kong law and because the Guarantee did not have a close connection with the UK within the meaning of s74(1)(b) of the CRA (iii) in any event, none of the impugned terms was unfair and (iv) even if they were unfair, enforcement should not be refused.
Was Mrs Zhang a consumer?
Mr Justice Bright noted that the applicable test, which was formulated by the CJEU in Tarcău Banca Comerciala Intesa Sanpaolo Romania SA (Case C-74/15) at  was “… 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 determined that Mrs Zhang had acted for the purposes of a private nature – she had signed documents such as this Guarantee at her husband’s request, fundamentally for her marriage. The court also concluded that her 0.4% shareholding did not give rise to any “functional link” and that Mrs Zhang in fact had no involvement in the functioning of Chong Sing. As a result, the judge accepted that she was a consumer within the meaning of the CRA.
Close connection with the UK?
The judge emphasised that the close connection test was concerned with the connections between the Guarantee and the UK, rather than the ties between Mrs Zhang and the UK. Although Mrs Zhang was resident in London and therefore that was an obvious connection between Mrs Zhang and the Guarantee, counsel for Eternity Sky submitted that there was a much closer connection between the Guarantee and Hong Kong. In particular, the subscription agreement (which the Guarantee supported) involved two Hong Kong companies and all payment obligations fell to be performed in Hong Kong, in HK$. The Guarantee was also issued in support of the bond issue, which was regulated under the Hong Kong Stock Exchange’s GEM Listing Rules. The judge also suggested that it was necessary for the Guarantee to be subject to Hong Kong law and Hong Kong arbitration for commercial reasons “and quite possibly for regulatory reasons” too.
Based on the overwhelming connection with Hong Kong, the judge considered that the connection with the UK was not a “close connection” and so the CRA did not apply. He determined that relative closeness was an important consideration, because if residence in the UK were always sufficient to establish a close connection, then this would lead to a situation where parties’ choice of law would not be respected. Conversely, if the parties did not choose a governing law at all, Article 4.3 of Rome I required the court to consider whether the contract was manifestly “more closely connected with a country” other than the one chosen. He concluded: “Thus, if the contract has a close connection with the UK but is manifestly more closely connected with Hong Kong and the parties have consensually agreed to Hong Kong law, they will not get the result they agreed on: they will be stuck with English law, or at least with the Consumer Rights Act 2015. But if they have held back from including a choice of Hong Kong law clause, the Consumer Rights Act 2015 will not apply and Hong Kong law is what they will get – even though it was not in fact expressly stipulated.” Finally, he emphasised that the purpose of s74 of the CRA was to prevent a situation where a trader chooses a foreign law to evade the CRA. In conventional consumer contracts (unlike this one which the judge considered to be atypical), a consumer’s country of residence may well be more significant in answering this question.
Although the judge’s conclusion meant that it was not necessary to consider the question of fairness, he considered (obiter) that none of the provisions in question were unfair. On the choice of Hong Kong law, the judge noted that this choice would only be unfair under the CRA if it gave rise to a significant imbalance, which it did not here. The judge distinguished this case from his own judgment in Payward Inc. v Chechetkin (see our blog here) because in that case, it was the arbitrator’s failure to apply the CRA and therefore to assess the fairness of the terms (which would have included assessing the fairness of the choice of California law), which was unfair.
The judge also considered the fairness of the choice of HKIAC arbitration and emphasised that the mere fact that a consumer contract provides for disputes to be resolved by arbitration does not in itself make it unfair. He clarified that the choice of HKIAC arbitration needed to be viewed through the lens of whether there was any injustice for Mrs Zhang. The judge looked at some of the issues raised in Soleymani v Nifty Gateway (see our blog here) in the decision to stay New York arbitration in favour of English litigation. However, the factors in that case were not relevant here. In particular, he noted that the fact that the arbitration took place in private and did not create decisions of precedential value did not cause injustice. Even if the arbitration had involved concepts of English law, he noted that arbitrators in Hong Kong are very adept at applying English law, especially when they receive submissions from English leading counsel (which they did here) and indeed, Mrs Zhang had commenced HKIAC arbitration herself.
Public policy versus enforcement
Although counsel for Eternity Sky sought to argue that the public policy imperatives underlying s101 of the Act on enforcement should prevail over those of the CRA, this was firmly rejected by the judge, even though this finding was obiter.
This case is a useful practical example of how the English court may apply English consumer legislation to foreign law-governed contracts, including those with arbitration clauses. It is clear that the court will look at each contract on a case by case basis, bearing in mind the underlying purpose of s74 of the CRA, which is to prevent evasion of English consumer legislation by choosing a foreign law. This does not mean, however, that every contract concerning a UK consumer will fall within the remit of the legislation – this will depend on the “close connection” test. As illustrated in this case, the “close connection” test can require an analysis of the relative closeness of two competing jurisdictions.
It is also reassuring to see that the court will take a nuanced approach to the question of the fairness of arbitration in the consumer context – here the judge was very clear that HKIAC arbitration caused no injustice to Mrs Zhang.
For further information, please contact:
Charlie Morgan, Partner, Herbert Smith Freehills