diff --git a/rhodecode/lib/vcs/backends/hg/repository.py b/rhodecode/lib/vcs/backends/hg/repository.py
--- a/rhodecode/lib/vcs/backends/hg/repository.py
+++ b/rhodecode/lib/vcs/backends/hg/repository.py
@@ -78,7 +78,7 @@ class MercurialRepository(BaseRepository
         # because sometimes we init the repos with config we need to meet
         # special requirements
         self.config = config if config else self.get_default_config(
-            default=[('extensions', 'largefiles', '1')])
+            default=[('extensions', 'largefiles', '')])
         self.with_wire = with_wire or {"cache": False}  # default should not use cache
 
         self._init_repo(create, src_url, do_workspace_checkout)
@@ -632,6 +632,7 @@ class MercurialRepository(BaseRepository
         Returns the commit id of the merge and a boolean indicating if the
         commit needs to be pushed.
         """
+
         source_ref_commit_id = source_ref.commit_id
         target_ref_commit_id = target_ref.commit_id
 
@@ -755,6 +756,7 @@ class MercurialRepository(BaseRepository
 
         log.debug('Executing merge_repo with %s strategy, dry_run mode:%s',
                   'rebase' if use_rebase else 'merge', dry_run)
+
         if target_ref.commit_id not in self._heads():
             return MergeResponse(
                 False, False, None, MergeFailureReason.TARGET_IS_NOT_HEAD,
@@ -857,6 +859,8 @@ class MercurialRepository(BaseRepository
                 needs_push = False
             except RepositoryError as e:
                 log.exception('Failure when doing local merge on hg shadow repo')
+                metadata['unresolved_files'] = 'no unresolved files found'
+
                 if isinstance(e, UnresolvedFilesInRepo):
                     all_conflicts = list(e.args[0])
                     max_conflicts = 20
diff --git a/rhodecode/tests/vcs/test_hg.py b/rhodecode/tests/vcs/test_hg.py
--- a/rhodecode/tests/vcs/test_hg.py
+++ b/rhodecode/tests/vcs/test_hg.py
@@ -414,12 +414,12 @@ TODO: To be written...
     def test_local_merge(self, vcsbackend_hg):
         target_repo = vcsbackend_hg.create_repo(number_of_commits=1)
         source_repo = vcsbackend_hg.clone_repo(target_repo)
-        vcsbackend_hg.add_file(target_repo, 'README_MERGE1', 'Version 1')
+        vcsbackend_hg.add_file(target_repo, b'README_MERGE1', b'Version 1')
         target_repo = MercurialRepository(target_repo.path)
         target_rev = target_repo.branches['default']
         target_ref = Reference(
             type='branch', name='default', commit_id=target_rev)
-        vcsbackend_hg.add_file(source_repo, 'README_MERGE2', 'Version 2')
+        vcsbackend_hg.add_file(source_repo, b'README_MERGE2', b'Version 2')
         source_repo = MercurialRepository(source_repo.path)
         source_rev = source_repo.branches['default']
         source_ref = Reference(
@@ -686,8 +686,8 @@ TODO: To be written...
     def test_merge_rebase_source_is_updated_bookmark(self, vcsbackend_hg):
         target_repo = vcsbackend_hg.create_repo(number_of_commits=1)
         source_repo = vcsbackend_hg.clone_repo(target_repo)
-        vcsbackend_hg.add_file(target_repo, 'README_MERGE1', 'Version 1')
-        vcsbackend_hg.add_file(source_repo, 'README_MERGE2', 'Version 2')
+        vcsbackend_hg.add_file(target_repo, b'README_MERGE1', b'Version 1')
+        vcsbackend_hg.add_file(source_repo, b'README_MERGE2', b'Version 2')
 
         imc = source_repo.in_memory_commit
         imc.add(FileNode(b'file_x', content=safe_bytes(source_repo.name)))
@@ -698,7 +698,7 @@ TODO: To be written...
         target_commit = target_repo.get_commit()
         source_commit = source_repo.get_commit()
 
-        vcsbackend_hg.add_file(source_repo, 'LICENSE', 'LICENSE Info')
+        vcsbackend_hg.add_file(source_repo, b'LICENSE', b'LICENSE Info')
 
         default_branch = target_repo.DEFAULT_BRANCH_NAME
         bookmark_name = 'bookmark'