Keeping to the letter of bank guarantees

A recent decision of the Supreme Court of Queensland reinforces the need for claimants on a bank guarantee to strictly follow the requirements of the bank guarantee in drawing on it.

In Santos Limited v BNP Paribas [2018] QSC 105, BNP Paribas denied a demand by Santos on a bank guarantee because Santos did not strictly follow the form stipulated by the guarantee. Although the authority of the relevant Santos signatory on the demand was not disputed, the fact that the demand did not stipulate that he was the "authorised signatory" of Santos was sufficient for the court to decide that the demand had not been properly made.

The details of the bank guarantee

Pursuant to a contract between Santos and Fluor Australia Pty Ltd, Fluor procured a bank guarantee in favour of Santos for $55,000,000 to support Fluor's obligations under the contract. The bank guarantee was issued by BNP Paribas on 30 January 2012.

The bank guarantee was in a standard form requiring BNP Paribas to make payment on demand without reference to Fluor. The payment was required to be made by BNP Paribas on receipt of "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 [Santos]…".

The pro forma demand letter attached to the bank guarantee included the following execution block:

"Yours faithfully

………………………….

Authorised signatory of Santos Limited"

On 21 December 2015 Santos submitted a demand for payment of the $55,000,000 to BNP Paribas in the form of the pro forma demand letter. It was signed by an employee of Santos under the following execution block:

"Yours sincerely

[~signature~]

[Employee name]

General Manager Development".

The execution block did not state that the signatory was an "authorised signatory of Santos" as set out in the pro forma demand letter or that he was an "authorised representative" as stipulated in the body of the bank guarantee. Accordingly, BNP Paribas refused to pay under the bank guarantee, concerned that payment on a non-compliant demand may jeopardise its ability to seek indemnification from Fluor.

The arguments for and against stipulating authorised representatives

Both parties accepted that there was no legal requirement for the demand to be signed by a person with any particular authority (eg. an attorney or director).

Santos argued that, as stipulated in the bank guarantee, it only needed to be signed by a person purporting to be an authorised signatory or representative of Santos. The mere fact of signing the demand was in its view sufficient to establish that their employee was purporting to be such a signatory. Santos also argued that the words "authorised signatory" were not critical given that the body of the bank guarantee adopted a different term ("authorised representative").

BNP Paribas on the other hand argued that it was necessary that the demand include a stipulation that the signatory did possess authority to sign the demand, as this was a clear requirement of the bank guarantee both in its body and in the pro forma demand letter.

The Court's analysis of the matter

The Court noted that on-demand bank guarantees occupy an important position in commerce, providing a form of security that is effectively as good as cash. Accordingly, the Court considered that "it is of critical importance that the financial institution pay only upon a complying demand" that must "strictly comply with the requirements of the instrument".

The Court referenced the High Court judgment in Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85 where the court held that:

"an issuer (like a bank) should only accept documents that comply strictly with the requirements stipulated in an instrument of this nature. The principle is fundamental to the efficacy and dependability of [such] banking instruments."

The High Court in Simic also quoted with approval the statement in Equitable Trust Co of New York v Dawson Partners Ltd that "there is no room for documents which are almost the same, or which will do just as well. Business could not proceed securely on any other lines".

The Court did note that the High Court in Simic had also held that "the principle of strict compliance ….is not a rigid rule. It must be applied intelligently, not mechanically". The Court also cited the High Court case of Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 343 ALR 58 which most recently reinforced the well-established principle that "the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean", and that "the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it".

The Court's decision on the matter

While in this case it may have seemed implicit that any person signing the demand was purporting to be an authorised signatory (as argued by Santos), in applying the above principles the Court found that BNP Paribas was right to reject the demand as it did not include an express stipulation that the Santos signatory was an authorised signatory or representative.

In reaching this conclusion the Court held:

"[BNP Paribas] was required to consider the instrument intelligently, not mechanically. In my view, the absence of a statement that the signatory was the authorised representative or the authorised signatory of [Santos] in the demand was not a mere mechanical omission. [BNP Paribas] was not obliged to pay the Security Amount because the demand did not comply with the requirements of the performance security".

What does this mean for beneficiaries of bank guarantees and other performance securities?

The decision of the Queensland Supreme Court in this case highlights the need for beneficiaries of performance securities to carefully reflect the requirements of the performance security in any demand being made. It is clear that issuers of performance securities will be vigilant in ensuring that any demand complies with the requirements of the performance security, and that courts will also support a strict (though not mechanical and uncommercial) reading of those requirements.