10/06/2024

Who are the consumers of arbitration?

In Eternity Sky Investments Ltd v Zhang, the Court of Appeal addressed whether enforcement of a Hong Kong arbitration award should be refused by the English Court on grounds of public policy.

The judgment will be of particular interest to those dealing with individuals, especially high-net-worth individuals, who are parties to arbitration agreements, as well as of more general interest in relation to the resistance of arbitration award enforcement on grounds of public policy.

Background

Mrs Zhang had signed a personal guarantee in support of a convertible bond issue by a Hong Kong-listed company in which she and her husband were described as ‘the majority shareholder couple’. Mrs Zhang lost an HK arbitration that she had initiated to try to invalidate the guarantee, and was held liable to pay Eternity Sky HK$500 million (approximately £64 million) plus interest. She now sought to resist enforcement of the award under s 103(3) Arbitration Act 1996 on the grounds that it was contrary to public policy, because the core term of the guarantee was contrary to her rights under the Consumer Rights Act 2015 (the CRA).

Decision

The judge below had found that Mrs Zhang was a ‘consumer’, even if not a typical one. In the Court of Appeal, Males LJ, with whom Dingemans LJ and Falk LJ agreed, reversed this finding, holding that she had acted wholly or mainly for business purposes when entering into the guarantee. The question of whether she was a ‘consumer’ fell to be determined objectively, taking into account the ‘sphere of activity’ in which the guarantee took place, namely the corporate convertible bond issue to obtain funding of HK$500 million. It was also legitimate to take into account Mrs Zhang’s husband’s shareholding, in which the applicable Hong Kong Stock Exchange regulatory regime considered her to have a beneficial interest.

As the guarantee was governed by foreign law, in this case HK law, it required a ‘close connection with the UK’ if the CRA was to apply. The court upheld the decision of the judge that the guarantee lacked the necessary ‘close connection with the UK’. The key was the connection of the contract with the UK, not the connection of the consumer with the UK. While the majority of consumer contracts entered into with UK residents will have a ‘close connection with the UK’, the many factors connecting this guarantee with HK meant that it did not have a close connection with the UK.

The court also upheld the judge’s further finding that the core term of the guarantee was transparent and so not subject to the ‘substantive unfairness’ test in the CRA. This involved analysis of the ‘average consumer’ test under the CRA, which is relevant to whether a term is sufficiently transparent. Males LJ said at [115]: “It may be that to distinguish between the average consumer who takes out membership of ‘a gym club which is not a high end facility’ and one who takes out membership of a more up-market gym involves unnecessary fine tuning, but the principle that the standard of the average consumer is variable and depends on the nature of the transaction and the context in which it is concluded is undoubtedly sound”.

The court also upheld the judge’s finding that the core term was, in any event, not unfair.

Finally, the court reiterated the narrow scope of the public policy exception as a ground upon which to resist enforcement of New York arbitration awards, in particular given English law’s pro-arbitration policy in favour of enforcement. Males LJ at [137–138] endorsed previous comments that “English law recognises an important public policy in the enforcement of arbitral awards and the courts will only refuse [enforcement] in a clear case”, and that “the public policy ground should be given a restrictive interpretation”.

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David Lewis KC, leading Gemma Morgan of Quadrant Chambers, appeared on behalf of Eternity Sky, instructed by Clifford Chance.

For more, see a previous Twenty Essex briefing, ‘Is the consumer always right? When international arbitration meets consumer protection’, on the interaction between consumer protection and the support for international arbitration under English law .