Performance securities and strict compliance

In Santos Limited v BNP Paribas [2019] QCA 11, Queensland’s Court of Appeal dismissed an appeal against the rejection of a claim by Santos Ltd (Santos) under a performance guarantee.  Santos had made a claim for payment of the amount of $55,000,000 as due and owing under a “bank guarantee” signed by BNP Paribas (BNP). BNP did not pay the security amount, as it contended that the form of the demand was deficient. Both Santos and BNP made cross-applications for summary judgment. At first instance, Jackson J dismissed Santos’ claim, and ordered judgment for BNP.[1]

The performance security on which Santos relied contained the following clause which outlined the circumstance in which BNP was liable to pay the security amount to Santos:[2]

“(c) Should the Financial Institution 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, that the Beneficiary desires payment to be made of any part or the whole of the Security Amount, the Financial Institution must make that payment to the Beneficiary immediately without reference to the Contractor and notwithstanding any notice given by the Contractor not to pay same.”

A draft letter in the following terms (Annex A) was attached to the performance security:

Annex “A”

“(insert Santos Limited letterhead)

To:

BNP Paribas

60 Castlereagh Street

Sydney NSW 2000

date:

Attention: Head of Operations

Dear Sir/Madam

Contractor – Bank Guarantee

We refer to the Bank Guarantee issued by you in our favour and dated 30thJanuary, 2012 in relation to the EPC Contract.

We hereby demand payment under the Bank Guarantee of (insert amount).

Please make payment of this sum to the account of (insert) at (account number).

Capitalised words and expressions used in this demand shall have the same meanings as are ascribed to them in the Bank Guarantee.

Yours faithfully

……………..

Authorised signatory of

Santos Limited”

On 21 December 2015, Santos delivered a demand to BNP in the following terms:

Santos

GLNG Project”

“Dear Sir or Madam,

Performance Payment Security – Bank Guarantee No 120054 – Gladstone LNG Upstream Project EPC Contract

We refer to the above noted Bank Guarantee (copy appended) issued by you in our favour dated 8 January 2014 and with an expiry date of 31 December 2015 (Amendment No. 2).

We hereby demand payment under the Bank Guarantee of Australian Dollars Fifty-five Million only (AUD 55,000,000.00).

Please make payment of this sum to the account of Santos Limited per the details below:

[the account details were set out].

Capitalised words and expressions used in this demand shall have the same meanings as are ascribed to them in the Bank Guarantee.

Yours sincerely,

Santos Limited – GLNG Upstream Project

[a handwritten signature appeared]

Rob Simpson

General Manager Development

The dispute between the parties turned on whether Santos’ demand of 21 December 2015 was in the form of Annex A and whether it purported to be signed by an authorised representative of Santos. In particular, BNP refused to meet the demand on the basis that its maker did not purport to be authorised to make it.

On appeal, Santos said that the requirement of “purporting” in paragraph (c) of the performance security was synonymous with “representing”. What was required was the substance of the representation, rather than the use of the actual words “authorised” or “representative”. The issue was whether Santos’ demand conveyed authorisation – it was unnecessary that those express words be used: [12]. Santos relied on the observations of the plurality in Simic v New South Wales Land and Housing Corporation that the principle of strict compliance must be applied intelligently, not mechanically.[3] Santos argued that to insist on complete adherence to the wording of Annex A would be absurd, and all that BNP had to be concerned with was the appearance of what purported to be a signature by an authorised representative: [14].

BNP argued that Santos’ demand was defective because it was not in the precise form of Annex A. It was necessary for Santos to use Santos’ letterhead and the express words “authorised signatory of Santos Limited” in the signature block. Alternatively, if literal adherence to Annex A was unnecessary, the requirement of purported authority in paragraph (c) together with the form of Annex A led to a construction of the performance security as requiring an express statement of authority. If the signature alone were sufficient to convey the purporting of authority, the requirement of signature “by an authorised representative” in paragraph (c) would be rendered otiose: [16].

BNP’s claim that Santos’ demand was defective was based entirely on form. Both parties agreed that the issue was not whether or not Rob Simpson was in fact an authorised representative of Santos – rather, whether Santos’ demand was sufficient to convey a representation that Rob Simpson was an authorised representative.

The Court dismissed Santos’ appeal. Chief Justice Holmes gave the leading judgment, with which Fraser JA and Morrison JA agreed. Her Honour held that Santos’ demand did not comply with the requirements of the performance security and in doing so made some observations that provide guidance on the construction and operation of performance securities in the form of ‘bank guarantees’:

  • it is relevant to consider the commercial purpose of the performance security of being “as good as cash”[4]and capable of being honoured with expedition and ease on the presentation of a complying demand;
  • the principle of strict compliance, which is applied after the performance security has been construed, requires the issuer to only accept documents that comply strictly with the requirements stipulated in the instrument. If, as in this case, the stipulations are concerned entirely with the form and content of the demand, then the demand must contain on its face all essential matters, without any obligation on the issuer to supplement any deficiency with conjecture or investigation;
  • the second requirement of paragraph (c) of the performance security – namely, that Santos provide written notice in the form of Annex A – was particularly important in the Court’s acceptance of BNP’s construction of the instrument. This requirement of paragraph (c) meant that the demand was required to adhere to the form of Annex A, which by containing the words “authorised signatory of Santos Limited” made clear that an express statement of authority was required;
  • Rob Simpson’s signature and position title on Santos’ demand did not amount to a representation that he was an authorised signatory or representative of Santos. It merely indicated that he held a particular position in the company and said nothing as to his authority in that role: [22].

The Court’s decision provides a useful update on the principle of strict compliance in relation to performance securities, and a practical example of its intelligent, not mechanical, application when dealing with issues of form. Parties must be cautious to ensure strict compliance with any prescribed form or wording requirements to ensure any demands are valid.

 

[1] Santos Limited v BNP Paribas [2018] QSC 105.

[2] By the terms of the performance security, Santos was defined as the “Beneficiary” and BNP was defined as the “Financial Institution”. The first third party in the proceeding was defined as the “Contractor”.

[3] Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85 at [99].

[4] Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85, [5] (French CJ).

 

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