Mercuria v. Citibank: the implications for commodity repo transactions

Feature | 26 May 2015

By Anna Koshy, Associate, Sullivan & Worcester UK LLP (pictured)

After nearly six months, the eagerly-awaited judgment in the Mercuria v. Citibank case was issued on Friday 22 May 2015. This article considers what effect, in our opinion, this case will have for commodity repos, both commercially and legally.

In short, Mercuria won and is not obliged to purchase around US$271m worth of metals from Citibank. This was on the basis that Citibank could not make good delivery of the metals to Mercuria merely by tendering warehouse receipts, since there was no attornment (i.e. acknowledgment from the third party holding the goods of the transfer to Mercuria). However, it was also held that Mercuria had materially breached certain provisions of the agreements between the parties by failing to purchase the metal on the relevant due dates in accordance with its obligations under the documents (even though Citibank would not have been able to make valid delivery) and Citibank is therefore entitled to terminate the master agreements between the parties.

The case centred on a series of sales and repurchases of metal between Mercuria and Citibank. It is interesting for the commodity market because the case deals specifically with a commodity repo structure between a bank and a trader. Generally, the “true sale” nature of commodity repo transactions (i.e. the transfer of title from one party to the other by way of sale, rather than the creation of a potentially unsecured loan obligation) is a key part of these structures. Although the true sale analysis was not central to the arguments between the parties and was not discussed in the judgment, the good news is that the judge (while acknowledging the commercial effect of the transactions was that Citibank provided financing to Mercuria) stated that “it is common ground that [these repo transactions] were true sales in which title and risk passed to Citi” (para 2). In our view, the recognition that the title and risk passed between the parties (not just a secured interest) is an important one and is a positive result for ongoing and future commodity repos. However, there are still a number of points to note from this case in respect of how these transactions should be documented and structured. 


Citibank and Mercuria entered into a series of sale and repurchase transactions in relation to metal stored in warehouses. The general terms of each sale (a Sale) and each repurchase (a Forward Sale) were governed by master agreements between the parties, and the details of each particular transaction were documented in short confirmations. Some important points to note about this structure are as follows:

(a)   a Bring Forward Event (BFE) would occur if (amongst other things) any storage facility in which the commodities were stored was no longer able to “safely or satisfactorily (in the reasonable opinion of Citi) store the Metal”. Following a BFE, either party was entitled to serve a BFE notice and its effect was that the date of the Forward Sale specified in the BFE notice would be brought forward;

(b)   on each Forward Sale date, Citibank gave certain warranties to Mercuria, including that Citibank had good title to the metal; and

(c)   a Termination Event (TE) would occur if (amongst other things) any event occurred which could have a material adverse effect on a party’s ability to comply with its obligations under the transactions. The effect of a TE was that the non-defaulting party could refuse to make payment or delivery of metal until the corresponding obligations of the other party has been completed.

The metal being sold and purchased by the parties was stored in various warehouses in China, including in the ports of Qingdao and Penlai. In May 2014 there were reports of a fraud in the warehouses in Qingdao. It was alleged that a Chinese trader had colluded with certain employees of the port companies in Qingdao to issue fraudulent warehouse receipts and secure the same lots of metal multiple times, leading to competing claims for the goods. The fraud transpired to be on a huge scale and the Chinese authorities imposed a lock down on the affected warehouses. No interested parties, including owners and inspectors were allowed access to the warehouses. The investigation is still ongoing.

Certain transactions between Mercuria and Citibank were affected by these events and as a result:

  • On 9 June 2014, Citibank served a BFE notice on Mercuria and purported to bring forward the Forward Sale date of a number of transactions, in an aggregate value of around US$271m. Citibank claimed that it had performed its delivery obligations under those Forward Sales by transferring blank endorsed warehouse receipts to Mercuria. Mercuria refused to pay for the goods on the new Forward Sale dates because they disputed the validity of the BFE notices on technical grounds and said that Citibank could not transfer title in respect of goods which it did not know existed merely by delivery of warehouse receipts; and

  • On 11 July 2014, Mercuria served a TE notice on Citibank saying that the events in China could reasonably be expected to materially affect Citibank’s ability to sell back the metals. Citibank agreed that a TE had occurred but contended that the TE notice did not apply to any payment obligations that arose before the TE notice was served (i.e. the obligations to repurchase under the BFE notices).

Mercuria started proceedings against Citibank to confirm Mercuria’s right not to purchase the goods on the new Forward Sale dates for the reasons set out above. Citibank issued a counterclaim contending that (amongst other things) it had made proper delivery of the metal and it is entitled to terminate the master agreements because of the non-payment by Mercuria in accordance with the BFE notices.

The judgment

The key issues covered in the judgment are as follows:

  1. Whether Citibank made valid delivery of the goods to Mercuria by the transfer of blank endorsed warehouse receipts.

Under the Sale of Goods Act 1979 (SGA) delivery is the “voluntary transfer of possession from one person to another” (s61(1) SGA). The SGA goes on to state that if the goods are in the possession of a third party at the time of a sale there is no delivery “unless and until the third person acknowledges to the buyer that he holds the goods on his behalf” (s29(4) SGA). This is called attornment. Citibank argued that although there was no attornment in this case, it was not required under the terms of the master agreements. Instead it was contractually agreed that the tender of endorsed warehouse receipts amounted to “deemed” delivery and, furthermore, the master agreements specifically stated that confirmation from the owner of the storage facility was not required for a sale to Mercuria to take effect.

Phillips J concluded that the master agreements did in fact require actual delivery by Citibank, not just deemed delivery by tendering warehouse receipts. He cited a number of reasons, including that:

(a)   The interpretation of the delivery obligations on Mercuria required actual delivery, and the term “delivery” could not be read in different ways for each party. As such, the obligation of both parties  was to “deliver the metal”, not just deliver documents;

(b)   Upon a sale, the transaction documents required delivery of a release confirmation from the storage operator or a document of title. An endorsed warehouse receipt is not a document of title under English law. Even though in the “Title Documents” section of the confirmations Citibank was entitled to deliver a warehouse receipt, this was interpreted as reference to a receipt issued by the warehouse operator, not merely delivery of a warehouse receipt by Citibank;

(c)   both the transfer of risk in the metal to Citibank upon a sale, and the obligation of Mercuria to procure insurance in respect of the goods it sold to Citibank, would be undermined if Citibank was only required to make deemed delivery and get paid, even if the metal had been lost; and

(d)   the representations and warranties that Citibank was required to give in relation to each Forward Sale at delivery (including that it had good title to, and the right to possession of, the relevant metal) would be “at best false and might even be regarded as fraudulent” (para 71) if Citibank could perform its delivery obligations without knowing whether or not the underlying metal existed at the time of such delivery.

As such, Citibank did not make proper delivery of the metal to Mercuria. If Mercuria was required to pay the purchase price for the metal, it would then immediately have a claim against Citibank for failure to deliver. Therefore, Mercuria was not liable to pay for the goods.  

Given the above conclusions (in particular, that the master agreements required actual delivery), Phillips J did not go on to consider whether the requirement for an attornment to effect delivery in accordance with the provisions of the SGA can be voluntarily contracted out of, or whether it is mandatory. However, this will be an interesting question for lawyers to consider in the coming months as there are likely to be a number of existing repurchase agreements documented in a similar way to the Citibank/Mercuria master agreements, where the parties have been proceeding on the assumption that attornment is not a mandatory requirement and have agreed different delivery requirements.

  1. Whether the BFE notices were valid, and whether the TE notice affected Mercuria’s existing payment obligations

This was a rather technical argument based on whether, “in the reasonable opinion of Citibank”, the storage operator was no longer safely able to store the metal. The judge held that the BFE notices were valid and effective, and that the TE notice did not suspend Mercuria’s accrued payment obligations which arose as a result of the BFE notices before the date of the TE notice.

  1. Whether Citibank was entitled to terminate the master agreements

Phillips J found that Mercuria had committed a material breach of the master agreements by failing to pay the US$271m due under the BFE notices on the relevant due dates, and this was a repudiation of the Master Agreements. As such, Citibank was entitled to terminate the master agreements and that right was not affected by Citibank’s inability to perform its delivery obligations if Mercuria had paid. We note that if Citibank were to terminate the agreements, this would almost certainly trigger cross-defaults under Mercuria’s loan obligations.

Lessons to be learnt

Many repurchase transactions in the market are governed by English law given the comparatively favourable treatment of true sale transactions compared with certain other jurisdictions. Where a sale of goods is governed by English law, even where the goods are located outside England, the sale must comply with the requirements of English law to ensure a true sale of the goods. The delivery of goods to the buyer should therefore be effected by an attornment. Since the question of whether the attornment requirement can be contracted out of was not answered, and this point was central to the analysis in the judgment, it would be advisable for parties to ensure that attornment is completed in each case. One way to achieve this would be for the warehouse operator to issue a confirmation (for example, in the form of a holding certificate) following each sale and repurchase, under which the warehouse operator acknowledges to the buyer that he holds the goods on his behalf. In fact, in some jurisdictions, this kind of acknowledgment by the warehouse operator is required for a transfer of title. We note that where the goods are located outside England, it is also advisable to comply with the sale, transfer and delivery requirements in the relevant jurisdiction. Any drafting around how delivery is made should be clear and consistent between the parties.

Financial institutions that are purchasing commodities from counterparties should also be careful about giving representations and warranties in relation to goods they are selling back. In many transactions (as was the case with Mercuria), the counterparty will be responsible for monitoring the goods on behalf of the financial institution under a form of services agreement so the counterparty should generally be able to satisfy itself with repurchasing without any warranties. The reference in the judgment to the risk of any such warranties being false or fraudulent should be heeded carefully by financial institutions.

Furthermore, financial institutions should consider being very clear in the drafting of bring forward events or equivalent, and termination events or equivalent, to avoid arguments as to whether such events are properly called, if those situations should arise. There was much consideration in the judgment as to whether the occurrence of the BFE was properly held “in the opinion of Citibank” and whether such opinion was held “reasonably”.


For many players in the commodity repo market the difficult question, for which unfortunately there does not seem to be an easy answer, is how to protect against sophisticated fraud generally. However, it is useful that this case supported the possibility of transfer of title between parties and was able to provide some guidance on a suitable structure under English law, which is good news for financial institutions doing repurchase transactions under English law. Although the true sale analysis was not the focus of the judgment, there are some important points to be taken away on the structure of these transactions, including the need to affect delivery by attornment. This case also serves as a reminder of why financial institutions should carefully consider how to mitigate the risks of being an owner of commodities.

It is interesting to note that this case related to a narrow part of the overall dealings between the parties so this may not be the end of the litigation between Citibank and Mercuria. In fact Phillips J acknowledged that when the investigation into the fraud is completed, Citibank may have claims against Mercuria for breaches of warranties or under the services agreement entered into between the two parties. 

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Key points
  1. This judgment appears to support the recognition of repurchase arrangements as a true sale under English law.

  2. The outcome underlines the fact that banks entering into repurchase arrangements take risk on the goods during their period of ownership. Contractual means of mitigating ownership risks must be documented carefully. Banks should be wary of giving representations in respect of goods they sell back to their counterparties beyond those they can control.

  3. As a matter of English statutory law, where two parties enter into the sale and purchase of goods held by a third party, attornment by that third party (being an acknowledgment that such party holds the goods for the purchaser) is an essential requirement of effecting actual delivery of those goods. It is not clear whether it is possible to contract out of these statutory requirements.

  4. As between Citibank and Mercuria, this is unlikely to be the last we see of this dispute. Citibank have already announced that they intend to vigorously pursue compensation from Mercuria. We and the market will certainly watch the outcome of any future litigation with interest.

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