Consumer Arbitration: Close connection required to rely on public policy defence as a consumer in England

In Eternity Sky Investments Ltd v Mrs Xiaomin Zhang [2023] EWHC 1964 (Comm), the English Commercial Court has refused an application to set aside an order for enforcement of an arbitration award on the grounds of public policy. The basis for this rejection was the Court’s finding that there was no “close connection” between the case itself and the UK, although the Court also made some interesting and important obiter remarks regarding foreign arbitrators applying UK law. 

This ruling follows the recent Commercial Court judgment in Payward v Chechetkin¹  (Payward), which we have discussed in detail previously and which is available to read here. That case concerned an international award in favour of Payward, the owner of the Kraken cryptocurrency exchange, which the Court refused to enforce on public policy grounds because the defendant was a consumer. Mrs Zhang’s case was distinguished from Payward on a number of key points and gives some welcome further analysis of the points raised in Payward, with both judgments having been delivered by Mr Justice Bright. 

In this case, the defendant, Mrs Zhang and her husband owned shares in a company (Chong Sing) which was incorporated in the Cayman Islands but registered in and operated from Hong Kong. Mrs Zhang’s husband ran the company from Hong Kong and owned approximately 18% of the equity. Mrs Zhang lived in London and took no part in running the business, although she owned approximately 0.4% of the company’s shares.   

In 2016, the company made a bond issue, after which Eternity Sky subscribed for convertible bonds on the terms of a subscription agreement, which included Hong Kong as the governing law and an arbitration clause providing for Hong Kong seated arbitration. Around this time, both Mrs Zhang and her husband signed similar personal guarantees in favour of Eternity Sky, which guaranteed the company’s obligations under the subscription agreement (the Guarantee). 

Subsequently a liquidator was appointed to Chong Sing and shortly after this Mr Zhang died. These events led to Eternity Sky obtaining a HK$5 million award against Mrs Zhang under the Guarantee in a Hong Kong seated arbitration. Eternity Sky then launched enforcement proceedings under s101 of the English Arbitration Act (Act) on a without notice basis and the Court granted an order for enforcement of the award. 

Mrs Zhang applied to have the enforcement order set aside on the grounds that she was a consumer and therefore enforcement of the award would be contrary to English public policy pursuant to s103(3) of the English Consumer Rights Act 2015 (CRA). She argued that certain terms of the Guarantee (including the arbitration and governing law clauses) were unfair within the meaning of the CRA. 

The court identified two main issues to be determined in addressing the merits of Mrs Zhang’s application:
(i) whether or not Mrs Zhang was a consumer within the meaning of the CRA, and; 
(ii) whether or not there was a sufficiently close connection between the Guarantee and the UK.

Was Mrs Zhang a consumer?

In determining whether Mrs Zhang could be classed as a consumer, Mr Justice Bright applied the test formulated in the CJEU case of Tarcău.² This test was whether the claimant had entered into the contract for a purpose regarded as outside of their trade or profession. The Court determined that Mrs Zhang had at all times acted in a private capacity and also at the behest of her husband. The Court also noted that a 0.4% shareholding is not one that constitutes or could give rise to, a functional link between the personal guarantee and the company supported by it. Therefore, that shareholding alone could not lift Mrs Zhang out of the “consumer” bracket. 

Was there a close connection to the UK?

Justice Bright was at pains to say that the close connection test was not concerned with Mrs Zhang’s connection to the UK, but rather it was concerned with the connection between the Guarantee itself and the UK. Counsel for Mrs Zhang argued that her being resident in London gave rise to an obvious close connection between the Guarantee and the UK. 

Eternity Sky conceded that this did indeed constitute a connection with the UK, but argued further that it was obvious that the Guarantee was far more closely connected to Hong Kong. In support of this assertion, Eternity Sky referenced the fact that the subscription agreement, which gave rise to the Guarantee, involved two Hong Kong-based companies and that any prospective operation of the contract was to take place in Hong Kong with payment in Hong Kong dollars. 

Mr Justice Bright found the connections to Hong Kong to be so overwhelming as to essentially render Mrs Zhang’s connection to the UK incidental. The Court further noted that Eternity Sky conducted no business in the UK, did not seek customers or guarantors in the UK and did not contract with Mrs Zhang because she happened to be resident in the UK. The contract was formed for an entirely non-UK related reason, namely that Mrs Zhang was married to Mr Zhang, who controlled Chong Sing. 

The Court’s conclusion on this point was that the CRA did not apply, because the connection between the Guarantee and the UK was not sufficiently close.  In coming to this conclusion, the Court held that if it were to find that any connection to the UK, however slight, would lead to the application of the CRA, then this would vitiate an agreement between two parties on their choice of law. He said that a further point for the disapplication of the CRA was the principle in Article 4.3 of Rome I³  which required a Court, in the absence of the parties having chosen a governing law, to consider whether a contract was manifestly “more closely connected” to one country than another. 

Fairness

The effect of the Court’s findings that a sufficiently close connection to the UK was not present in this case, meant that the fairness of the provisions in question was a moot point. However, the Court did opine on the question of fairness in obiter remarks. 

The Judge said that if the CRA had been triggered by a close connection to the UK, the choice of Hong Kong law would only be deemed unfair if it were to give rise to a significant imbalance in the consumers rights, which it did not on this occasion. The Judge distinguished this case from his own ruling in Payward, on the basis that the arbitrator in that case had failed to examine the application of the CRA and if they had, they would have found that the choice of Californian law gave rise to a significant imbalance in the consumer’s rights. 

An argument was also raised by Mrs Zhang deriving from the Court of Appeal’s decision in Soleymani v Nifty Gateway⁴ (Nifty), which involved a stay of a New York arbitration in favour of English litigation. The Court in that case found that the public importance of decisions “vindicating (or not) consumers’ rights” meant that the case should be ruled upon in a public court, rather than decided in an arbitral tribunal. Justice Bright rejected this argument, saying that while the findings of a private tribunal which could not create decisions of precedential value, may ruffle the feathers of the English public and legal scholars, these findings did not cause injustice to Mrs Zhang. 

In a further deviation from the judgment in Nifty, the Court also found that foreign arbitrators could in fact deal with issues of English law under certain circumstances. Justice Bright remarked that arbitrators in Hong Kong were very adept at applying English law, especially when they receive submissions from English leading counsel, which they did in this case. This is a welcome development for those wishing to rely on foreign arbitration clauses given the Court’s remarks in Payward and Nifty, to the effect that the best place for English law to be applied, was in English Courts.  

Comment

This Judgment is a stark warning to parties seeking to forum shop in order to avoid enforcement of arbitration awards against them. It should go some way in dispelling the worries that may have been felt by corporations that use foreign arbitration clauses in their terms and conditions, following the decision in Payward. 

Consumers who are based outside of England & Wales will not be able to use a mere incidental connection to the UK in order avoid enforcement of an award. It has now become clear that the courts will take a much more nuanced approach to the enforcement of foreign arbitral awards against consumers, than might initially have been feared. 

There are a number of elements to achieving a successful enforcement action and potential pitfalls at every stage of the enforcement process. 

Assuming an individual is classified as a consumer, which now appears to be a relatively low threshold to meet, the focus then shifts to considering whether there is a sufficiently close connection to the UK. We can see from Mrs Zhang’s case that mere residence in a country will not constitute a close connection, especially in cases where the agreement in question is manifestly more connected to one country than another. This guards against what Justice Bright calls a “mere incidental” connection triggering the application of the CRA.

Even if a close connection is found with the UK and the application of the CRA is triggered, it seems there are steps a corporation can take to ensure that an arbitral award can robustly withstand any challenge that may be made against its validity with respect to UK consumer law. One such measure could be ensuring that an arbitrator takes into account the CRA when assessing the fairness of a particular contractual term, or of the contract as a whole. It is clear that the English courts are open to this approach, but it remains to be seen how broadly this principle will be applied, given the relative adeptness of Hong Kong arbitrators in applying English law.

This judgment is likely to be influential in an Irish context also, as English Judgments are viewed as persuasive, notwithstanding the fact that they are not binding on Irish courts. This acknowledged influence, coupled with the similarity between the CRA and the Irish Consumer Rights Act 2022, makes it very likely that the approach taken in Zhang would be followed by the Irish Courts. 

With thanks to David Bourke for his assistance with this article.

For more information, please contact  Dario Dagostino, Partner, Sarah Murphy, Partner, Joe Kelly, Partner Paula Gibbs, Senior Associate, Aisling Ennis, Associate or your usual A&L Goodbody Disputes & Investigations team contact.

Date published: 5 September 2023

¹  Payward Inc v Chechetkin [2023] EWHC 1780 (Comm)

 ² Tarcău Banca Comerciala Intesa Sanpaolo Romania SA (Case C-74/15) 

 ³ Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I)

 ⁴ Soleymani v Nifty Gateway LLC [2022] EWCA Civ 1297