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Repo transactions - implications for traders and financing banks when the goods cannot be delivered

News / 26-05-2015

Mercuria Energy Trading Pte Ltd and another v. Citibank NA & another [2015] EWHC 1481 (Comm)

The Commercial Court has recently issued judgment in the first round of litigation between commodities trader Mercuria and Citigroup, following the reported fraudulent use of the same stockpiles of metal commodities stored at Qingdao Port, China as collateral for multiple loans. This is the second judgment from the English courts arising out of the widely reported alleged fraud, and comes after the decision in Impala v. Wanxiang, in which a warehouse operator successfully obtained an anti-suit injunction preventing a commodities trader from continuing proceedings against it in China. 

The background facts

Pursuant to two Master Agreements, Mercuria sold quantities of metals to Citigroup under a series of obligated repo transactions, whereby Mercuria was obliged to purchase “Equivalent Metal”, at a specified future date, at a higher price. The metals were variously stored in warehouses in Qingdao, Penglai and Shanghai and Citi’s ownership was evidenced by a number of warehouse receipts (known locally as rukudans) issued to Citi’s order, having been procured by Mercuria from various warehouse operators.

It was common ground that the transactions were true sales, in the sense that risk and title to the metals passed from Mercuria, on the assumption that it had good title to pass to begin with, to Citi under the initial sale. However, there was no intention that the metals would leave the warehouse at any stage and both the sale and the forward sale were to take place by way of documentary transfers of title.

The transactions began to unravel when, in late May 2014, evidence began to emerge that substantial quantities of metal were either missing from the warehouses or were subject to multiple pledges.

The Notices

Once it became aware of the suspected fraud, Citi served notices exercising its contractual right to bring forward the forward sale date (“the Bring Forward Notices”). The effect of the Bring Forward Notices, if validly served, was to require Mercuria to re-purchase the metal one banking day after receipt, paying the full agreed price for the subject metals.

In response, Mercuria served notice declaring that a termination event had occurred (“the Termination Event Notices”), namely that the events in China could reasonably be expected to have a material adverse effect on Citi’s ability to deliver Equivalent Metal pursuant to the forward transactions. If valid, the effect of the Termination Event Notices was to require Citi to deliver Equivalent Metal before Mercuria was obliged to pay the price under the forward transaction.

Citi later purported to deliver the metal to Mercuria, by tendering the warehouse receipts that had been issued to Citi’s order, endorsed in blank. Citi did not, however, instruct the warehouse operator to release the metal to Mercuria.

Mercuria commenced these proceedings seeking declarations that the Bring Forward Notices were invalid and/or were superseded by Mercuria’s Termination Event Notices and, in any event, that Citi had not performed its delivery obligations by tendering endorsed warehouse receipts. 

By contrast, Citi claimed that it was entitled to the price specified in the forward sales agreement – approximately US$270 million. Citi also contended that it was entitled to terminate the Master Agreement. 

Was there a valid delivery of the metals to Mercuria?

The key issue was whether delivery of warehouse receipts endorsed in blank was sufficient to constitute delivery of the metals by Citi to Mercuria under the forward transactions. 

As a matter of English law, in order for there to be an effective delivery of goods that are in the possession of a third party, there must be either (a) a transfer of a document of title, or (b) an attornment by the party in possession of the goods, i.e. an acknowledgement that he holds the goods on behalf of the buyer. In this case, Citi accepted that the warehouse receipts tendered to Mercuria were not documents of title. Neither was there any attornment by the warehouse operators in favour of Mercuria. 

Citi argued that the tender of endorsed warehouse receipts to Mercuria amounted to a “deemed” delivery and that this was sufficient under the contractual arrangements between the parties. This argument was based on the delivery provision of the forward sale agreements, which stated as follows: 

“Delivered by means of in warehouse transfer pre import and/or re-import clearance into any jurisdiction, with irrevocable and unconditional transfer of title and possession, free from any Encumbrance created by Citi, to Counterparty without the need for any confirmation from the owner/operator of the Storage Facility following receipt of payment of the Invoice Value”. 

Citi contended that the underlined wording demonstrated a clear agreement that an attornment by the warehouse operators would not be necessary in order to effect delivery to Mercuria. It followed that Citi’s only obligation under the forward sales was to tender endorsed warehouse receipts. This, Citi said, was not surprising because a lender should be able to obtain repayment on a purely documentary basis, without the need to concern itself with any problems at the storage facility.

The Judge rejected this argument. The clear effect of the Master Agreements was that Citi was obliged to make actual delivery in the sense of transferring constructive possession of the metal. There was nothing in the contracts permitting Citi to fulfil its obligations by delivering documents only, without regard to Citi’s inability to actually deliver constructive possession of the metal. While the above quoted provision of the forward agreements did on its face appear to dispense with the need for an attornment, the Judge held that this could not be reconciled with the clear wording of the Master Agreements and should therefore be rejected. 

It followed that the delivery of endorsed warehouse receipts did not amount to a delivery of the metals by Citi to Mercuria, although it is worth noting that the position could have been different if the documents involved had been documents of title instead of the rukudans (warehouse receipts) tendered by Citi.

The effect of the various notices and Citi’s claim for the price

The Judge held that the Bring Forward Notices were validly served, thus bringing forward Mercuria’s payment obligations to 11 June 2014. He rejected Mercuria’s argument that the Bring Forward Notices were superseded by its own Termination Event Notices. The plain and obvious meaning of the termination provisions in the Master Agreement was to suspend any further payments until delivery was made. This, the Judge found, plainly did not serve to suspend payments that had already accrued due.

This left Citi with a theoretical claim for the price of around US$ 270 million. However, that claim failed on the basis of circuity, in that upon receiving payment of the price, Citi would be obliged to deliver the metals to Mercuria and would be in breach of the forward sales agreements to the extent that it was unable to do so, and liable to reimburse Mercuria for the price paid. 

Citi did, however, retain the right to terminate the Master Agreements on the basis that Mercuria’s failure to pay the sums due pursuant to the Bring Forward Notices was a repudiatory breach, which Citi was entitled to accept as bringing the Master Agreements to an end. 

What next?

While this decision may appear to be something of a no-score draw, this is not the end of the matter. It is likely that there will be further proceedings to examine whether Citi or Mercuria breached their respective warranties of title once the nature and extent of the fraud in Qingdao is known. Further, it remains open to Citi to pursue a claim for potential breaches of Mercuria’s obligations under a separate agreement to arrange secure storage of the metal, once the full facts are known.


Parties involved in repo transactions, both on the trading side and on the side of banks providing finance under such agreements, will monitor any further developments in this case with interest. However, the judgment and more broadly the case itself, sounds a reminder of the importance of risk assessment where cargoes held in foreign jurisdictions are the subject of such repo transactions, but where title and/or right to possession are evidenced only by instruments such as warehouse receipts. The confirmation that a warehouse receipt is not a document of title, thereby requiring an attornment by the warehouse keeper in order to transfer the right to possession, is also an important principle to be borne in mind by all engaged in such commodity financing.

Wai Yue Loh

Wai Yue Loh Partner and Chief Representative of Beijing Office, Beijing, Partner, Hong Kong and Joint Managing Director, Singapore

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