English Commercial Court Rejects Public Policy Challenge to Hong Kong Arbitration Award

At a Glance

• This is the second decision by the Commercial Court in a matter of months concerning public policy challenges to arbitration awards.
• This case demonstrates the factors that the English court will consider when determining whether a foreign-law governed contract has a “close connection” with the UK for the purposes of the CRA 2015.

In Eternity Sky Investments Ltd v Mrs Xiaomin Zhang [2023] EWHC 1964 (Comm), the English Commercial Court refused to set aside an order for the enforcement of an arbitration award made in Hong Kong. The court rejected the argument that certain provisions of the underlying contract, including its provision for Hong Kong law and Hong Kong arbitration, were unfair under English consumer legislation and that enforcement would therefore be contrary to English public policy. The court also found that the underlying contract did not have a sufficiently “close connection” with the UK to engage English consumer legislation anyway.

This is the second decision by the Commercial Court in a matter of months concerning public policy challenges to arbitration awards. We considered the first, Payward Inc and others v Chechetkin [2023] EWHC 1780 (Comm), which involved similar issues, in a previous alert.

Background

Chong Sing Fin Tech Holdings Group Limited (Chong Sing) made a bond issue, and Eternity Sky Investments Ltd (Eternity Sky) subscribed HK$500,000,000 of convertible bonds under a subscription agreement. Mrs Zhang signed a personal guarantee (Guarantee) in favour of Eternity Sky, guaranteeing Chong Sing’s obligations under the subscription agreement. Mrs Zhang did not read the Guarantee before signing it and did not obtain legal advice on its terms. The subscription agreement and the Guarantee were governed by Hong Kong law, with disputes referred to arbitration at the Hong Kong International Arbitration Centre (HKIAC). Mrs Zhang lived in London and owned approximately 0.4% of Chong Sing. Her husband, who lived in Hong Kong and ran Chong Sing’s business, owned approximately 18%.

Chong Sing was liquidated, and Mrs Zhang commenced arbitration in Hong Kong against Eternity Sky, seeking a declaration that the Guarantee was unenforceable. The arbitrator issued an award, ordering Mrs Zhang to pay Eternity Sky the sum of HK$500,000,000 plus interest and costs. Mrs Zhang applied to the English courts to have the order set aside, arguing that enforcement would be contrary to English public policy because the Consumer Rights Act 2015 (CRA 2015) applied and the Guarantee contained unfair terms, specifically the substantive guarantee terms and the provision for Hong Kong law and Hong Kong arbitration.

The Commercial Court made three main findings.

1. Mrs Zhang was a “consumer” for the purposes of the CRA 2015

   Mrs Zhang was found to have acted for purposes of a private nature (her marriage to Mr Zhang), not because of a functional link with Chong Sing. The effect of Mrs Zhang’s shareholding (0.4%) on her decision-making could only ever have been marginal.

2. However, the Guarantee did not have a “close connection” with the UK

   Eternity Sky conducts no business in the UK, does 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 Guarantee was much more closely connected with Hong Kong, where the transaction was “centred, devised and regulated” and where performance by Mrs Zhang (payment to Eternity Sky) would take place. Without a close connection with the UK, the CRA 2015 did not apply.

3. The choice of Hong Kong law and HKIAC arbitration was not unfair

   Although the CRA 2015 was found not to apply, the court nevertheless considered the fairness test under the CRA 2015.

   The choice of Hong Kong law would only be unfair under the CRA 2015 if it gave rise to a significant imbalance that would not otherwise exist. The content of Hong Kong law is very similar to that of English law. Otherwise, the only difference caused by Hong Kong law, instead of English law, was that Mrs Zhang had to engage local lawyers in Hong Kong. This was not significant for Mrs Zhang. She had the financial means to pay, and she had established connections in Hong Kong.

   Regarding the choice of HKIAC arbitration, the mere fact that a consumer contract provides for disputes to be resolved by arbitration does not make it unfair. Nor does the fact that the arbitration took place in private and created no precedent. Furthermore, Hong Kong lawyers are adept at applying English law, especially (as in the present case) when they receive submissions from English leading counsel. It was also noted that Mrs Zhang had a limited command of the English language. Arbitrating in Hong Kong meant that she could use lawyers with whom she could communicate more readily than with English lawyers based solely in London.

Commentary

The same judge heard and delivered judgement in Eternity Sky and Payward, but with different outcomes.

In Payward, the English Commercial Court refused to enforce a California-seated arbitration award, on the basis that enforcement would contravene UK public policy as embodied in the CRA 2015 and the Financial Services and Markets Act 2000 (FSMA). The parties had chosen California law, but there was a close connection between the underlying contract and the UK, so the CRA 2015 applied. The court held that the California choice of law clause was unfair for several reasons, principally because it deprived the consumer of the right to bring a claim under FSMA, which he would have had under English law, which would have applied but for the contractual choice of law clause.

In Eternity Sky, Mrs Zhang’s London residence alone was insufficient to create a close connection between the Guarantee and the UK. Even if the CRA 2015 had applied, the terms of the Guarantee were found not to be unfair to Mrs Zhang.

This case demonstrates the factors that the English court will consider when determining whether a foreign-law governed contract has a “close connection” with the UK for the purposes of the CRA 2015. It also provides helpful guidance on how the court will apply the fairness test to contractual terms, including choice of law and arbitration clauses.