The London High Court has issued a ruling against Citibank in the Citi vs. Mercuria case. Citi was looking for compensation of US$270mn from trader Mercuria Energy in relation to warehouse receipts delivered by Citi on  July 22, 2014.

The judge found that Citi is not entitled to compensation from Mercuria for the unpaid price of the metal because “Citi’s tender of endorsed warehouse receipts was not good delivery of metal”.

As GTR reported, the case was centred on repurchasing agreements – or repos. In the Chinese port of Qingdao, Citi purchased metal from Mercuria and sold it back with an interest rate. After a fraud case involved the Chinese trading company Decheng allegedly using fake warehouse receipts in Qingdao to borrow multiple times against a single instance of metals, Citi demanded early repayment, which Mercuria rejected.

In relation to a separate transaction, the judge also held that Citi is liable to pay Mercuria damages for failing to deliver metal, but is not liable to reimburse the price because Mercuria has not terminated the transaction. Citi is also not liable for damages for non-delivery in respect of the other transactions because it was not under an obligation to make delivery.

Citi is however entitled to terminate the repo agreements. The ruling also stated that the Bring Forward Event (BFE) notices were valid, that the payment obligations to which they gave rise have not been suspended, and that Mercuria is in continuing breach of those obligations.

Citi says that it “will vigorously pursue compensation from Mercuria for failure to deliver or safeguard the metal once further facts are established”.

According to experts, this could have been a landmark ruling. “It was widely expected that a judgment adverse to Citi in this case would have serious repercussions in the repo market with banks refusing to participate in repo transactions without a wholesale re-examination of how the transfer of title in these transactions works and who is to bear the risk of problems with the commodity at storage,” says Linos Choo, partner at DLA Piper UK and head of shipping and trade finance litigation. “However, the English Court has confirmed that provided Banks operate the bring forward provisions promptly, the trader can be made liable for the price notwithstanding that the bank may still be unable to deliver the commodity because it has been subjected to a fraud at the point of storage,” he adds.

In an interview with GTR in February, Geoffrey Wynne commented: “The point is that you can do warehouse financing, but you need to be more careful about the party […] Everybody working in the business should do more due diligence, not just rely on a piece of paper sometimes.”