Eternity Sky Investments Ltd -v- Xiaomin Zhang [2024] EWCA Civ 630
The Court of Appeal has agreed with the Commercial Court that enforcement of a Hong Kong arbitration award was not contrary to public policy.
The decision highlights that there is a public policy in favour of enforcing arbitration awards in accordance with the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention) and that the public policy exception under Article V (2)(b) of the New York Convention is relatively narrow and will be interpreted restrictively.
The background facts
The claimant is a BVI company registered in Hong Kong where it conducts its business. It claimed under a personal guarantee provided by the defendant to guarantee the obligations of a company, Chong Sing, under a subscription agreement pursuant to which Chong Sing agreed to issue convertible bonds to the claimant in the amount of about HK$ 500 million.
Chong Sing was a Cayman Islands company listed on the Hong Kong stock exchange. It was effectively managed and controlled by the defendant’s (deceased) husband. The company carried on no business in the UK.
The defendant was and is resident in the UK but had previously been resident in HK. Her husband was resident in HK.
The defendant had no active involvement in the management of Chong Sing or any of her husband’s other companies. However, at the request of her husband, she signed documents from time to time, including personal guarantees, in relation to his businesses. She submitted that, in some cases, she was provided with no more than the signature page of a business document, but she trusted her husband and signed as requested.
The personal guarantee in question was expressly governed by HK law and provided for arbitration before a sole arbitrator in HK in accordance with the UNCITRAL Arbitration Rules. The defendant maintained that she did not read any of the terms of the guarantee and did not take legal advice before signing.
Three years after the bonds issue took place, Chong Sing defaulted under the subscription agreement and failed to redeem the bonds. The defendant remained the sole living guarantor, her husband having passed away.
Arbitration proceedings
The claimant demanded payment under the guarantee. The defendant did not pay and commenced HK arbitration, seeking declarations that:
(a) the arbitration agreement, alternatively the guarantee as a whole, was not valid or binding for lack of agreement and intention to be legally bound; alternatively
(b) the guarantee was rescinded on grounds of undue influence; or
(c) the guarantee was rescinded as an unconscionable bargain.
The sole arbitrator dismissed the defendant’s claims and upheld the claimant’s counterclaim for HK$500 million plus interest and costs.
Enforcement proceedings
The New York Convention is given effect in England and Wales under s.101 Arbitration Act 1996 (Act 1996). S.103 of the Act 1996 sets out the grounds on which recognition and enforcement of a NYC award may be refused. S.103(3) provides:
“Recognition or enforcement of the award may also be refused if the award is in respect of a matter which is not capable of settlement by arbitration, or if it would be contrary to public policy to recognise or enforce the award.”
The claimant obtained an order from the English Court on a without notice basis, giving leave to enforce the award pursuant to s.101.
The defendant sought to have the order set aside, arguing that she was a “consumer” within the UK Consumer Rights Act (CRA) and, therefore, entitled to certain protections under the CRA.
Among other things and in broad terms, the CRA provides that unfair contract terms are not binding on a consumer, that certain contractual terms must be transparent and prominent if they are to apply and that in certain instances, the application of a foreign law to the contract might deprive the consumer of protections afforded by the CRA. In such a case, the CRA will apply notwithstanding the choice of foreign law if the contract has a sufficiently close connection with the UK.
The Commercial Court decision
The Court found that the defendant was a consumer within the meaning of the CRA. However, the personal guarantee’s connections with HK were overwhelming. Therefore, there was no “close connection” with the UK making the CRA applicable and so the award should be enforced.
The Court did, however, state that the defendant’s contractual obligations as guarantor under the guarantee were not unfair under the CRA. Furthermore, the choice of HK law and arbitration in the guarantee was not of itself unfair.
While the Court did not need to decide the issue, it commented that had the defendant’s rights been infringed under the CRA, it was unlikely that the award could have been enforced.
The Court of Appeal decision
The Court of Appeal decided that the defendant did not act as a consumer when entering into the personal guarantee. The defendant personally guaranteed a corporate convertible bond issue for the raising of a very substantial amount of money. Without the guarantee, the funding would not have been provided. The defendant, or any reasonable person in her position, would have understood that. Therefore, the defendant acted wholly or mainly for business purposes when she entered into the personal guarantee.
The Court of Appeal added that the giving of a personal guarantee in this case was not a one-off event but formed part of a regular pattern of the defendant signing business documents, including personal guarantees, at her husband’s request. In those circumstances it was fair to conclude that the defendant had a practice of signing business documents when requested to do so, to support what was, in effect, a business enterprise in which she was involved together with her husband; and that she signed the personal guarantee for that purpose.
Even if this were wrong, the Court of Appeal held that the guarantee had no close connection with the UK such that the CRA would apply. It was a contract for the provision of funding to a HK company, which was performed when the funds were made available to the company in Hong Kong. The guarantee was not concluded in the UK. The claimant did not direct its business to the UK or carry on any activities in the UK. If the guarantee was called upon, the demand would be for payment to the claimant’s bank account in HK. Therefore, the connection with the UK represented by the defendant’s residence was weak.
The Court of Appeal further found that the guarantee provision complained of was both transparent and prominent. It was intelligible to the relevant average consumer. It was also not unfair.
The Court of Appeal concluded that the award should be enforced.
Comment
The Court of Appeal emphasised that this was not a typical consumer contract or even a typical contract of guarantee. A person entering into such a contact as this was expected to read it and have a good understanding of both the guarantee and the bonds issue and what signing the guarantee meant in terms of accepting personal liability in the event the company defaulted.
However, the Court of Appeal did comment that had the guarantee not been binding under the CRA, that would have been the end of the matter. There would be no scope in those circumstances for the Court to undertake a balancing exercise between two competing public policies, the policy of enforcing arbitration awards on the one hand and the policy of effective consumer protection on the other.
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