Aaron Benstead and Annie Luong

Make a compliant demand or risk losing $55million

Aaron Benstead and Annie Luong

21 February, 2019

Building and construction contracts

A recent Queensland Court of Appeal decision handed down earlier this month reinforces the need for beneficiaries of bank guarantees to strictly follow the procedure for drawing down bank guarantees, otherwise it would be left with nil.

Santos Ltd (Santos) was denied the ability to draw down the bank guarantee given to it by BNP Paribas (BNP) to secure the performance of contractor Fluor Australia Pty Ltd, because it failed to include the words “authorised signatory of” Santos Ltd in its letter of demand.  The Court of Appeal held the strict compliance principle applied and that the signatory’s signature coupled with his position description, was insufficient to represent that he was an authorised signatory of Santos.

This decision is an important reminder for beneficiaries of performance securities to carefully review and comply with any express requirements of the performance security when issuing demands.

Background

 An unconditional bank guarantee was given to Santos by BNP to secure the performance of contractor, Fluor Australia Pty Ltd, in providing engineering and design services to Santos’ coal seam gas extraction project.

The performance security contained the following clause setting out the circumstance in which BNP was liable to pay the security to Santos:

“Should the Financial Institution [BNP] receive a notice in writing in the form of the letter attached to this Bank Guarantee (amended as applicable), purporting to be signed by an authorised representative of the Beneficiary [Santos]…, the Financial Institution must make that payment to the Beneficiary…”

In December 2015, Santos made demand for the $55 million bank guarantee but BNP refused to meet the demand on the basis that Santos’ demand omitted the words “authorised signatory of” Santos Ltd.  The letter of demand was merely signed by an authorised representative under the words “Santos Limited – GLNG Upstream project” and included the signatory’s role description as “General Manager Development“.

At Trial

Santos and BNP sought summary judgment against each other.  Santos’ application was on the basis that its demand met the requirements of the performance guarantee and BNP on the basis that it did not.

Justice Jackson ordered judgment in favour of BNP.  His Honour considered the principles in Simic v New South Wales Land and Housing Corporation,1 stating that the sole concern of the issuer of the security is to provide security as it was contracted to do and to determine whether the specified event triggering its obligation to pay had arisen.  His Honour stated:

“The principle of strict compliance, which was “fundamental to the efficacy and dependability” of such instruments, necessitated that an issuer of a security should only accept documents which complied strictly with the requirements stipulated in the instrument.  The principle applied after construction of the instrument, and rather than being a “rigid rule” was to be “applied intelligently, not mechanically”.

His Honour found that the signature, coupled with the description of the signatory’s position did not amount to a representation that the signatory was an authorised representative of Santos.  The position description did not represent the signatory’s authority as required by the terms of the bank guarantee.  Absent proper compliance with the terms of the bank guarantee, BNP was not obliged to pay Santos the $55 million.

The bank guarantee subsequently expired which meant that Santos lost its ability to be paid $55 million under the bank guarantee.

On Appeal

 Santos appealed to the Court of Appeal on the basis that the trial judge had:

  1. not given sufficient weight to the words “amended as applicable” in the instrument; and
  2. had proceeded on the basis that the demand must include the words “authorised representative” or “authorised signatory” in order to contain a representation that the signatory was the authorised signatory of Santos.

 The Court of Appeal dismissed the appeal by holding that whilst intelligent application of the “strict compliance principle” did not strictly necessitate adherence to the same language used in the pro-forma letter, it nevertheless required the words “authorised signatory” to appear below the letter because a signature coupled with the position description did not adequately represent that the signatory was the authorised representative of Santos.

Key points to take away

  1.  Ensure that you carefully review and understand the requirements of the terms of any bank guarantee and that if there are any express requirements, make sure it is strictly followed. If you are unsure, always seek legal advice before taking steps to draw down a bank guarantee.
  2. Avoid using words that do not strictly meet the requirements of the demand because this will put the validity of the demand at risk.
  3. Make sure you leave sufficient amount of time and do not leave the calling of the bank guarantee at the last minute. Santos submitted its demand less than 12 days before the bank guarantee was due to expire.

 

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References

1 (2016) 260 CLR 85.