Mercuria v Citi – High Court Rules On Qingdao Warehouse Financing Case

It is now 12 months since news broke of wide-scale fraud operations linked to the financing of metals in Qingdao, China. The authorities in Qingdao have prohibited access to the port warehouses, and it remains unclear how much metal was stored in those warehouses at the time. The problem is said to have arisen from the activities of a Chinese trading company, Decheng Mining, which used warehouse receipts to obtain multiple loans secured against small quantities of metal. The apparent purpose of the scheme was to utilise trade finance from foreign banks at much lower interest rates than were available from banks in the PRC mainland. Several foreign banks and large trading companies are facing claims, and are engaged in disputes over who should bear the losses.

The first significant decision from a non-Chinese court on one such claim was delivered by Mr Justice Phillips in the English High Court, on 22 May 2015, in the case of Mercuria Energy Trading Pte Ltd and another v Citibank NA and another [2015] EWHC 1481 (Comm). The focus of the dispute was the operation of "repo agreements" (repurchasing agreements) under which Mercuria sold metal that it had purchased from Decheng, to Citibank NA, on the basis that Citi would re-sell the same or equivalent metal back to Mercuria at an agreed future date, at a fixed higher price, the difference in the price being in effect the cost of the finance1. These repo agreements were subject to English law and the jurisdiction of the High Court in London. The judgment contains a useful discussion on potential problems in the drafting of repo agreements, but it also covers points of more general application to the sale of goods and warehouse financing.

Each repo agreement comprised three categories of document:

the Master Agreement, which governed the terms of the transaction the Sale Confirmation for the sale from Mercuria to Citi, and the Forward Sale Confirmation for the re-sale by Citi to Mercuria. At the time the fraud came to light, Citi was holding warehouse receipts issued to itself by international warehousing companies pursuant to the Sale Confirmations. These receipts had in turn been issued on the strength of "rukudans" (port receipts) issued by the port company to the warehouse companies. On 9 June 2014, Citi served notices (known as BFE notices2) to bring forward the Forward Sale date to the next banking day following receipt of the notice. On 11 July, Mercuria served its own notice declaring a...