ARTICLE
3 September 2024

Personal Guarantees v Consumer Law

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Barnes Law

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Barnes Law was founded by Yulia Barnes in 2019. Barnes Law are a law boutique in the heart of Mayfair, London. We provide an exclusive and personally tailored service to national and international clients, serial founders and HNWIs. Our team of dedicated and hard-working professionals resolves the most complex legal challenges faced by businesses.
In Eternity Sky Investments Ltd v Xiaomin Zhang [2024] EWCA Civ 630, the English Court of Appeal upheld a Hong Kong arbitration award, ruling that the UK Consumer Rights Act did not apply. Mrs. Zhang was deemed a non-consumer, and the guarantee's connection to Hong Kong was stronger than to the UK.
United Kingdom Consumer Protection

In the case of Eternity Sky Investments Ltd v Xiaomin Zhang [2024] EWCACiv 630, the English Court of Appeal dismissed an attempt to set aside a Hong Kong arbitration award on the grounds of public policy. The argument was that upholding the award would be contrary to the public policy and a disregard of the UK consumer rights. The Court of Appeal rejected the position of the first instance court and determined that the relevant consumer protection provisions did not apply because the applicant was not considered a consumer.

The Background

The case arose from a dispute over the enforcement of a personal guarantee signed by Mrs. Xiaomin Zhang. Mrs. Zhang had provided a personal guarantee to Eternity Sky Investments Ltd ("Eternity Sky")as part of a financial arrangement involving her husband's company, Chong SingFin Tech Holdings Group Limited ("Chong Sing") - a Cayman Island entity listed on the Hong Kong Stock Exchange. Eternity Sky Investments had subscribed to convertible bonds worth HK$500 million, with the personal guarantee being a condition precedent to the transaction. The guarantee stipulated that Mrs. Zhang would be liable for the repayment of the funds advanced to Chong Sing in the event of a default. Both the Guarantee and the related contracts included provisions for Hong Kong governing law and Hong Kong arbitration.

Mrs. Zhang, a London resident with a minority shareholding in Chong Sing (about 0,39%), signed a personal guarantee at her husband's request, who was the largest individual shareholder.

Chong Sing was unable to redeem the bonds and subsequently defaulted. Shortly after, Mr. Zhang's death occurred, prompting Eternity Sky to pursue the debt recovery from Mrs. Zhang.

Mrs. Zhang challenged the enforceability of the guarantee on several grounds in the English Commercial Court, primarily arguing that she signed the document in a personal capacity under request and consequent influence of her husband and therefore should be protected under consumer protection laws, specifically the Consumer Rights Act 2015 ("CRA"). Additionally, she argued that the guarantee had a close connection to the United Kingdom, her place of residence, which should invoke the application of the CRA.

Although the first instance judge proclaimed that Mrs. Zhang was a consumer under CRA, Mrs Zhang's London residence was an insufficient connection with the UK to engage application of the CRA 2015.

The Decision

The Court of Appeal had to consider once again whether Mrs. Zhang acted as a consumer and if the personal guarantee was connected closely enough to the United Kingdom to warrant the application of the CRA. Furthermore, the court had to decide on the transparency and fairness of the guarantee clause.

Consumer Status

The court first examined whether Mrs. Zhang was acting as a consumer when she entered into the personal guarantee. In this context, the court referred to the established objective question to determine the consumer:

‘...whether that person acted for purposes related to his trade, business or profession or because of functional links he has with that company, such as a directorship or a non-negligible shareholding, or whether he acted for purposes of a private nature.'

The Guarantee was issued in the context of a corporate convertible bond offering, aimed at raising significant capital. A reasonable person in Mrs. Zhang's position would have understood that the funding was contingent on the Guarantee, making it appear as a business transaction. Mrs. Zhang and her husband were the main shareholders of ChongSing (CS), and under the company's regulatory framework, Mrs. Zhang was seen as having a beneficial interest in her husband's shares. The Guarantee's terms reflected their combined shareholdings, establishing a sufficient "functional link" between Mrs. Zhang and CS. Additionally, Mrs. Zhang signing the Guarantee was consistent with a pattern of her routinely signing business documents at her husband's request. Therefore, Mrs. Zhang was deemed not to be acting purely as a consumer but in a business capacity.

Close Connection to the UK

The court then considered whether the personal guarantee had a close connection with the United Kingdom. Despite Mrs. Zhang's residence in London, the court held that the guarantee was more closely connected with Hong Kong. The bond issue and the transaction documents were governed by Hong Kong law and subject to arbitration in Hong Kong. The only connection to the UK was Mrs. Zhang's residency, which the court deemed incidental and insufficient to satisfy the close connection test required by the CRA.

Transparency and Fairness of the Guarantee

Regarding the transparency of the personal guarantee, the court upheld the lower court's finding that the clause was intelligible and clear to the average consumer. The essence of the guarantee, which involved a substantial financial commitment in the event of default by Chong Sing, was considered to be within the understanding of a reasonably well-informed, observant, and cautious consumer.

Takeaways

This case underscores the significance of the context in which a personal guarantee is provided. The court's decision to pay particular attention to the nature of the contract, linking it to Mrs. Zhang's beneficial ownership, highlights that the level of personal involvement and diligence, which she claimed to be limited due to trust in the decision of her husband, might be less relevant in the establishing a consumer protection.

Furthermore, despite Mrs. Zhang's residence in the UK, the governing law of the guarantee was Hong Kong, emphasising the need for clear jurisdictional understanding in international financial agreements. This case reaffirms that the place of residence of one of the parties is not necessarily determinative of the 'close connection' when the agreement has ties to the jurisdiction both by the relevant contractual close and primary place of the parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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