Balancing Arbitration Awards and Consumer Law: English Court of Appeal gives verdict on when consumer rights would prevent enforcement

When do consumer rights override the enforcement of arbitral awards? In Eternity Sky v Zhang [2024] EWCA Civ 630, the Court of Appeal confirmed that where there is an unfair term in a consumer contract, arbitration awards will not be enforceable. However, on the facts of the case, consumer rights were not engaged, so the award was enforceable.

Background

Mrs Zhang signed a personal guarantee for a HK$500 million bond issue by a Hong Kong company in favour of Eternity Sky. When the bond issuer defaulted, Eternity Sky sought payment from Mrs Zhang. A Hong Kong seated arbitrator found that the guarantee was binding on Mrs Zhang and ordered her to pay Eternity Sky HK$ 500m plus interest and costs.

Eternity Sky obtained an enforcement order from the English High Court under s101 of the Arbitration Act 1996. Mrs Zhang then applied to set aside the order, arguing that it infringed her rights under the Consumer Rights Act 2015 (the CRA).

The High Court rejected Mrs Zhang’s arguments, finding that the CRA did not apply as the personal guarantee did not have a close connection to the UK (see our earlier Perspective on this decision here). Mrs Zhang appealed to the Court of Appeal, with the UK Competition and Markets Authority intervening on consumer protection issues.

Decision on Appeal

The Court of Appeal dismissed the appeal, finding that the arbitration award could be enforced against Mrs Zhang. It addressed five key issues in reaching its decision:

  1. Was Mrs Zhang a consumer?

The Court concluded that Mrs Zhang was not acting as a consumer when she entered into the guarantee. The key factors in this decision were:

  • Was Mrs Zhang acting wholly or mainly for business purposes? It was not suggested that she had a relevant trade or profession. The bond issuer was managed by her husband, and she signed the guarantee at his request. It was accepted that she played no active part in the activities of her husband’s activities and that she was motivated to sign it because she loved and trusted her husband.
  • However, whether she was acting for business purposes is an objective question, not dependent on the knowledge or information which the individual might have, but on all the circumstances, including the terms of the contract and the nature of the goods or services covered. It was necessary to look at the ‘sphere of activity’ in which the transaction took place.
  • Here, the relevant ‘sphere of activity’ was a corporate convertible bond issue for the raising of a very substantial amount of money. A reasonable person in Mrs Zhang’s position would have understood that, without the guarantee, the funding would not have been provided. It was therefore a transaction of a business and not a private nature.
  • There was a ‘functional link’ between Mrs Zhang and the bond issuer given her beneficial interest in her husband’s shares. The guarantee treated Mrs Zhang and her husband together, and she signed it in her capacity as one half of the ‘majority shareholding couple’ under the applicable regulatory regime. It was fair to conclude that she had a practice of signing business documents when requested to do so, to support her husband’s business, and that she signed the guarantee for that purpose.
  • The Court therefore held that she was not a consumer for the purposes of the CRA.

     2. Did the guarantee have a close connection with the UK?

Mrs Zhang argued that the CRA applied despite the choice of Hong Kong law in the guarantee, because the contact had a ‘close connection’ with the UK. However, the Court concluded that there was no close connection: the guarantee was not concluded in the UK, and while Mrs Zhang’s residence in the UK was relevant, it represented a relatively weak connection with the UK and was largely immaterial to the conclusion of the contract.

    3. Was clause 2 of the guarantee transparent and prominent?

Mrs Zhang’s obligation under the guarantee was set out in clause 2 of the contract. Mrs Zhang argued that clause 2 was not transparent and prominent, and therefore fell to be assessed for fairness under the CRA. The Court disagreed, concluding that the essence of this clause was intelligible to the relevant average consumer and therefore satisfied the requirement of transparency.

The key factors here were:

  • The relevant consumer was the average consumer who might enter into a contract of this particular type.
  • Transparency is concerned with the plainness and intelligibility of the contract terms in question, so that the average consumer can understand what they mean and the economic consequences of entering into the transaction.
  • It was obvious on the face of the guarantee that the guarantor was undertaking personal liability in connection with a major bonds issue and the liability was HK$500 million, which the guarantor could potentially be asked to pay together with interest.
  • The reasonably well-informed, observant and circumspect consumer entering into such a guarantee would have understood this without needing to take legal advice. Clause 2 was accordingly intelligible to the relevant average consumer.

      4. Was clause 2 of the guarantee unfair?

Mrs Zhang also argued that clause 2 needed to be assessed for fairness under the CRA. She contended that it was unfair and therefore not binding on her. The Court concluded that clause 2 was not unfair, as:

  • The obligation to pay in the event of a default by the principal debtor is of the essence of a guarantee.
  • The obligation was clearly and unambiguously expressed.
  • The extent of the liability was apparent on the face of the guarantee.

It would therefore have been reasonable for Eternity Sky to assume that Mrs Zhang would agree to the inclusion of clause 2 in the contract.

    5. Should the award nevertheless be enforced?

Finally, Eternity Sky argued that, even if the CRA applied (i.e. Mrs Zhang was a consumer, the contract had a close connection with the UK and clause 2 was lacking in transparency and unfair), consumer protection issues should not override the policy of enforcing arbitration awards because of the ‘technical’ nature of her position as a consumer.

The Court confirmed that:

  • While the public policy exception to enforcement of arbitration awards is relatively narrow, effective consumer protection is an important aspect of public policy.
  • If Mrs Zhang had met the requirements for the CRA to apply, then the guarantee would not have been binding on her and enforcement of the award would have been impermissible.
  • No balancing exercise needs to be undertaken as between the public policy in favour of enforcement of arbitral awards and the public policy in favour of consumer protection. The CRA provides unequivocally that unfair terms are not binding on consumers, and this is a principle of public policy embodied in primary legislation.

Comment

This important Court of Appeal decision offered several key insights:

  1. Consumer protection can engage the public policy exception at s103(3) of the Arbitration Act, potentially barring enforcement of arbitration awards.
  2. The judgment provided valuable guidance on when the CRA applies in the context of arbitration enforcement.
  3. An objective approach should be adopted when assessing whether an individual is a consumer. The key consideration is the contract itself, its terms and the nature and the goods or services covered.
  4. The intervention of the Competition and Markets Authority underlines the broader significance of this case for consumer protection in commercial contexts.

The judgment confirms that while the English courts continue their pro-enforcement approach to arbitration awards, consumers can challenge the enforcement of awards where the relevant tests are met. Businesses involved in high-value transactions with individuals should carefully assess the potential application of consumer protection laws, even in seemingly commercial contexts.