The idea in short:
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Yesterday the Court of Appeal in Queensland found oil and gas provider Santos’ call on a bank guarantee that its EPC Contractor, Fluor Australia Pty Ltd provided under its EPC Contract for Santos’ GLNG Project, was invalid because Santos’ letter of demand did not include the words “Authorised signatory of Santos Limited” underneath the signatory of the letter.
- The bank guarantee required the demand to be issued in the form of a pro forma annexed to the bank guarantee which included the words ““Authorised signatory of Santos Limited” underneath the signatory section of the letter.
- The court found that a ‘strict compliance’ principle applies to bank guarantees and noted that whilst the ‘strict compliance’ principle is not a rigid rule, and must be applied intelligently, not mechanically, in Santos’ case, the application of that principle required the words “authorised representative” to appear underneath the signatory of the demand, with the absence of those words making the demand invalid.
- The bank guarantee since expired, meaning Santos has lost the ability to be paid the $55m under the bank guarantee.
- To avoid finding yourself in the same situation ensure you carefully review the terms of any bank guarantee you intend to call on before doing so. If it contains any specific requirements about how the demand is to be made, for example, any specific form the demand must appear in, or that the demand must be delivered in any particular way, comply with those requirements.
- If the bank guarantee is silent as to any particular form of demand requirements, seek legal advice about the content of the demand notice and who should sign it to ensure no valid argument can be made by the bank that the demand was not properly made.
- If you can avoid it, do not leave calling the bank guarantee to just days before its expiry date (as occurred in this case, being the last week before the 2015 Christmas/New Year holiday period). Calling on a bank guarantee well before its expiry date will afford you the ability to cure any defect complained of by the bank about the demand by simply re-issuing the demand to address the issue raised, avoiding unnecessary protracted legal argument.
The idea in detail:
Santos has for some time been in a dispute with its EPC Contractor, Fluor Australia Pty Ltd, regarding Fluor’s performance on Santos’ GLNG project (the Project). The dispute is significant, with Santos filing a claim in the Supreme Court of Queensland against Fluor in December 2016 claiming $1.4bn from Fluor.
A bank guarantee was issued by bank, BNP Parabis, to secure the performance of Fluor Australia Pty Ltd under its EPC contract on the Project.
It was an unconditional bond to pay money upon demand by Santos and contained the following text [our underline]:
“(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.”
The pro forma letter attached to the bank guarantee read:
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 30th January, 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 (10 days prior to the expiry of the bank guarantee and just before the imminent Christmas/New Year holiday period), Santos delivered a letter of demand to BNP Parabis dated 18 December 2015 which sought to call on the bank guarantee.
It was placed on Santos’ letterhead and read as follows:
“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 words “Authorised signatory of Santos Limited” did not appear in Santos’ letter of demand underneath Mr Simpson’s signature.
The bank argued this meant the demand was invalid and refused to pay on the bank guarantee. The bank guarantee expired shortly after the demand was made, so Santos sued in the Supreme Court of Queensland to enforce its demand against the bank.
The Supreme Court of Queensland found that a legal principle of ‘strict compliance’ applies to banking instruments and requires an issuer (the bank in this instance) to only accept documents that comply strictly with the requirements stipulated in a banking instrument (in this case the bank guarantee).
It was noted that the principle of strict compliance is not a rigid rule, and rather it must be applied intelligently, not mechanically, however it was nonetheless determined that the failure of Santos to include the words “authorised signatory” underneath the signatory of the letter was fatal to its demand adopting the following reasoning:
“[19]
The purpose of the instrument is to operate as a bond by a financial institution of worth that will unconditionally pay the amount promised to the named beneficiary when presented with a complying demand. The instrument is given as security for the performance by the beneficiary’s contractual counter-party, the contractor, of an underlying construction contract. The contractual counter-party, or someone at its request, will usually promise to indemnify the issuing financial institution for any amount paid under the bond to the beneficiary. The financial institution’s entitlement to indemnity will depend on the terms of the contract between it and the indemnifier. Usually, the financial institution must pay without reference to the indemnifier or the beneficiary’s contractual counter-party, upon a complying demand. It is also usual that payment must be made immediately upon demand. In these senses, the bond is said to be “as good as cash” for the beneficiary. Accordingly, it is of critical importance that the financial institution pay only upon a complying demand, that entitles the financial institution to indemnity from the indemnifier, and that a complying demand must strictly comply with the requirements of the instrument for payment.[20]
In such a context, in my view, the signature by Mr Simpson coupled with the description of his position did not amount to a representation that he was an authorised representative or authorised signatory (if there be any difference) of the plaintiff. The position description did not represent anything about Mr Simpson’s authority, per se. It follows, in my view, that the demand did not constitute a notice in writing purporting to be signed by an authorised representative of the plaintiff in compliance with paragraph (c) and Annex A.”
Santos appealed that decision to the Supreme Court of Queensland – Court of Appeal.
The Court of Appeal yesterday [5 February 2019] dismissed the appeal by holding that whilst the intelligent application of the ‘strict compliance principle’ did not necessitate strict adherence to the precise same language used in the pro-forma letter in all respects, it did in this case require the words “authorised signatory” to appear below the signatory of the letter because Santos’ signatory of the demand along with his position description did not amount to a representation that he was an ‘authorised representative’, and the bank was required to look for a statement in the demand of the signatory’s authority to make it, so the absence of the words ‘authorised representative’ made the demand invalid.
The practical take-aways for industry are simple:
- To avoid finding yourself in the same situation, ensure you carefully review the terms of any bank guarantee you intend to call on before doing so. If it contains any specific requirements about how the demand is to be made, for example, any specific form, or it delivered in any particular way, comply with those requirements.
- If the bank guarantee is silent as to any particular form of demand requirements, seek legal advice about the content of the demand notice and who should sign it to ensure no valid argument can be made by the bank that the demand was not properly made.
- If you can avoid it, do not leave calling the bank guarantee to just days before its expiry date (as occurred in this case, close to the 2015 Christmas holidays period). Calling on a demand well before the expiry date will afford you the ability to cure any defect complained of by the bank after you make the demand by simply re-issuing the demand fixing the complaints raised and avoiding unnecessary protracted legal argument.
Had Santos taken the above steps, it would now have an additional $55m in its possession from the proceeds of the bank guarantee. The alternative and unfortunate present reality for Santos is that after 3 years of legal argument against a contractor it is seperately suing for more than $1bn, and a likely small fortune spent in legal fees, that is not the case and the bank guarantee has expired so no further demand against it can be made.
