LONDON—A London court ruled Friday that Citigroup Inc.
isn't entitled to payment in a $270 million dispute with
commodities trader Mercuria Energy Group.
The case has been closely watched by banks and traders involved
in so-called sale-and-repurchase, or repo, agreements of the kind
between Citi and Mercuria. It could change the way banks view risk
when entering into these kind of financing arrangements.
The dispute revolves around a series of transactions since 2013
in which Mercuria sold metal to Citi with an agreement to buy it
back later at a higher price. The sale was essentially a way for
Citi to make a loan to Mercuria, with the metal as collateral.
Problems arose last year, when a fraud scandal emerged at the
two Chinese ports where the copper and aluminum stocks underpinning
the deals were stored. The two ports were closed as Chinese
authorities investigated whether local traders had used stockpiles
of metals to secure multiple loans from Chinese and foreign
banks.
It isn't clear what has happened to the metal Mercuria sold
Citi.
Citi and Mercuria aren't accused of wrongdoing.
As news of the issues at the ports began to trickle out, the
banks and traders with metal stored there scrambled to assess the
damage.
In June Citi demanded early repayment for its deals with
Mercuria. The trading house responded with a legal challenge.
Almost a year later on Friday, a London judge upheld Citi's
right to terminate the transactions early, but found that Mercuria
shouldn't have to pay back the $270 million in dispute because the
bank had been unable to deliver back the metal.
"The judgment is a very positive one for Mercuria and clearly
vindicates the position they have taken since the start of the
case," Peter Bennett, a partner at Mercuria's law firm Stephenson
Harwood LLP, said in a news release.
The case is far from closed though and Citi has vowed to
continue to pursue its claim.
"Citi will vigorously pursue compensation from Mercuria for
failure to deliver or safeguard the metal once further facts are
established," the bank said.
"This judgment will shape the future of the inventory finance
activity for commodities," one seasoned commodity banker said.
Write to Sarah Kent at sarah.kent@wsj.com
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