Mercuria Energy Trading Pte Ltd and Another v Citibank NA and Another
| Jurisdiction | England & Wales |
| Judge | Mr Justice Phillips |
| Judgment Date | 22 May 2015 |
| Neutral Citation | [2015] EWHC 1481 (Comm) |
| Docket Number | Case No: 2014 Folio 709 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 22 May 2015 |
[2015] EWHC 1481 (Comm)
Mr Justice Phillips
Case No: 2014 Folio 709
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Graham Dunning QC, David Davies and Stuart Cribb (instructed by Stephenson Harwood LLP) for the Claimants
Daniel Toledano QC, Richard Mott and Oliver Butler (instructed by Norton Rose Fulbright LLP) for the Defendants
Hearing dates: 3, 4, 5, 8, 9 and 10 December 2014
The central issue in these proceedings is whether bankers have complied with the re-delivery requirements of repo transactions in relation to cargoes of metal by delivering endorsed warehouse receipts to their counterparty, notwithstanding that (i) there is uncertainty as to the existence of the metal and (if it exists) the bankers' title to it, and (ii) the warehouse operators have not attorned to (that is, have not acknowledged that they hold the goods on behalf of) the counterparty as required by s29(4) of the Sale of Goods Act 1979 ("the Act").
In late May 2014 the defendants (together, "Citi") held 27 sets of warehouse receipts issued to Citi's order, evidencing ownership and right to possession of aluminium and copper stored in warehouses in the Chinese ports of Qingdao, Penglai and Shanghai. The metal had been purchased from the first claimant ("Mercuria") pursuant to a series of 'obligated' repo transactions, governed by the terms of two Master Agreements executed on 24 May 2013. In each case, pursuant to forward transactions entered at the same time as the sale transaction, Citi was obliged to sell and Mercuria obliged to buy Equivalent Metal (" metal of the same brand and quality and stored in the same location") at a specified future date at a higher price, the common expectation and practice being that the same metal would be re-delivered 'in warehouse' (that is to say, the metal would not leave the warehouse during the transaction, delivery and re-delivery being effected by a transfer of constructive possession). Although the intended commercial effect of the repo transactions was that Citi provided finance to Mercuria on the security of Mercuria's inventory of metal, it is common ground that they were true sales in which title and risk had passed to Citi.
On 28 May 2014 evidence began to emerge of a significant fraud in relation to metal supposed to be stored in Qingdao and Penglai. Although investigations are ongoing, it appears that substantial quantities of metal may be missing from the warehouses or may be the subject of 'multiple pledging' whereby the same lot of metal has been used as the subject matter for multiple repo transactions and/or as security for multiple loans. Eighteen of the repo transactions related to metal that is supposed to be in the relevant warehouse in Qingdao and Penglai: one of those transactions was completed on 4 June 2014, subject to a reservation of rights on either side.
On 9 June 2014 Citi served notices purporting to exercise a power under the Master Agreements to bring forward the sale date of all the forward transactions to one Banking Day after receipt (although on 16 June 2014 they 'suspended' the notices in relation to metal stored in Shanghai and Mercuria voluntarily repurchased that metal early, leaving 17 transactions outstanding). Mercuria served its own notice on 11 July 2014, declaring a Termination Event, which had the effect of requiring Citi to deliver Equivalent Metal before Mercuria was obliged to pay the price. On 22 July Citi purported to deliver the metal to Mercuria by tendering warehouse receipts issued to Citi, endorsed in blank. Citi did not issue release instructions to the warehouse operators, who have not attorned to Mercuria.
Mercuria commenced these proceedings on 12 June 2014, seeking (in the Particulars of Claim) declarations that the notices served by Citi were invalid and/or superseded by its own notice of 11 July 2014 and that, in any event, Citi had not performed its delivery obligations by tendering endorsed warehouse receipts. Citi rejects those contentions and counterclaims the price specified in the forward sales, totalling about US$271m. Citi further claims that it is, in any event, entitled to terminate the Master Agreements.
In due course, once the timing, nature and extent of any fraud becomes clearer, there may well be the need for further litigation to determine whether Mercuria or Citi breached warranties as to title in relation to the repos. Citi may also have claims against Mercuria under Services Agreements (also dated 24 May 2013) pursuant to which Mercuria owed certain obligations to Citi in relation to storage of the metal. There may also be insurance claims and/or claims against third parties. Mercuria and Citi have agreed that the trial of the issues addressed in this judgment shall not preclude any subsequent claims between them and that neither party will contend that it is an abuse or otherwise oppressive for any such claim to be brought by fresh proceedings or amendment of these proceedings.
It follows that, whilst the contrary may be argued at a later stage, Citi accepts that its current claim to have made valid re-delivery to Mercuria and for judgment for the price of the metal must proceed on the assumptions (i) that Citi acquired good title to and constructive possession of the metal purchased from Mercuria; and (ii) that thereafter the metal may have been stolen or pledged to third parties so that Citi may not have had good title to pass to Mercuria. Citi's case is that, even if it did not have good title to the metal, it was nevertheless entitled to fulfil its delivery obligations under the Forward Sales by tendering to Mercuria the warehouse receipts which purported to show that the metal was held to Citi's order, a position that, it contends, is consistent with its role as financier.
The background facts
The background facts and chronology are almost entirely common ground. The summary below is drawn from the Agreed Facts, the Agreed Chronology and from the witness statement of Georgina Baker ("Mrs Baker"), Global Co-Head of Commodities Inventory Management at the second defendant ("CGML") and the documents to which she refers.
(a) The parties
Mercuria is a commodities trading company incorporated in Singapore. It is an indirect subsidiary of the second claimant, a company incorporated in Cyprus. The second claimant is joined in these proceedings as guarantor of Mercuria's obligations to Citi under the Master Agreements. No separate issue arises in respect of that guarantee, the second claimant's liability to Citi therefore being coextensive with that of Mercuria.
The Mercuria Group is one of the largest energy and commodity trading businesses in the world, with an annual turnover in excess of US$100 billion. It recently acquired the physical commodities trading business of JP Morgan. It is headquartered in Geneva and has offices in 38 countries.
The defendants are members of the well-known Citigroup group of companies. The first defendant ("CBNA") is a national banking association organised under the laws of the USA. CGML is a company incorporated in this jurisdiction.
(b) The Master Agreements
On 24 May 2013 Mercuria entered a "Master Agreement relating to sales and purchases of metal" with each of CBNA and CGML. Apart from the difference in Citi entity, the Master Agreements are identical in all relevant respects. They are governed by English law and provide for the courts of England to have exclusive jurisdiction over any disputes.
The Master Agreements are 'umbrella' agreements, governing the terms on which Citi and Mercuria enter repo transactions, each consisting of a Sale Transaction and a Forward Sale, the details being recorded in a Sale Confirmation and a Forward Sale Confirmation despatched by Citi to Mercuria after agreement.
Clause 4.3 of the Master Agreements (in which Mercuria is referred to as "Counterparty") puts it beyond doubt that the Transactions are true sales of metal, providing as follows:
" (B) Upon any sale of Metal to Citi … notwithstanding any arrangements relating to the Forward Sale of Equivalent Metal … full title to and ownership of (and risk to) the Metal specified in the relevant Sale Confirmation will pass to Citi at the time of payment in full of the Sale Settlement Amount…
(C) Citi will have the right to sell, pledge, rehypothecate, assign, use, commingle or otherwise dispose of, or otherwise use in its business any Metal sold to it, free from any claim right of any nature whatsoever, as long as Citi will be in a position to deliver Equivalent Metal to Counterparty …"
The Master Agreements provide for Sale Transactions and Forward Sales to be settled as follows:
" 5. Settlement of Sale Transaction
5.1 Delivery of Metal
On the Sale Date of a Sale Transaction Counterparty shall deliver Metal to Citi conforming to the Transaction Details for such Transaction, in the manner set out in Clause 7.2 (or, in the case where Counterparty suffers a Termination Event and so long as it is continuing, in the manner set out in Clause 7.4), by 4.00 p.m. on the Sale Date of that Sale Transaction.
5.2 Payment of Sale Settlement Amount
Following compliance by Counterparty pursuant to Clause 5.1 above, Citi shall pay the Sale Settlement Amount to Counterparty (or to its order), in the manner set out in Clause 7.1 (or, in the case where Counterparty suffers a Termination Event which is continuing, in the manner set out in Clause 7.4), on the Sale Date of the Sale Transaction.
6. Settlement of Forward Sale
…
6.3 Settlement and Delivery of Metal
On the Sale Date of a...
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