The devil is in the detail when enforcing bank guarantees

Strict compliance is paramount if a party wants to exercise any rights they may have to demand upon a bank guarantee. A recent Supreme Court case in Queensland highlighted that a failure to strictly comply with any requirements may mean the demand fails[1].

In Santos Limited v BNP Paribas [2018] QSC 106, Fluor Australia Pty Ltd (Fluror) had arranged for BNP Paribus (BNP) to issue a bank guarantee in favour of Santos Limited (Santos) to support Fluor’s obligation under an engineering procurement, construction and associated works contract.

The requirements to call upon the guarantee was for the payment to be made on receipt of a notice of writing that was attached to the bank guarantee (Annexed Letter) that was to be signed by an authorised signatory of Santos, and for this to be specifically stated.  Upon receipt of the written notice, the financial institution must make the payment to the beneficiary without reference to the contractor and notwithstanding any notice given by the contractor not to pay the same.

Santos had made a demand upon BNP for $55 million under the bank guarantee. The bank guarantee was a standard form that required BNP to make payments on demand without reference to Fluror.

Santos had made the demand in the form of the Annexed Letter signed by “Rob Simpson, General Manager Development.” BNP had refused to pay the demand on the basis that it was not signed by a person who was described as the authorised signatory of Santos but rather General Manager Development, and accordingly Santos had not strictly followed the form stipulated by the guarantee.

Santos had argued that the placement of Mr Simpson’s signature under the words “Santos Limited’ with his name and position would demonstrate that he had purported to sign as an authorised representative and that the inclusion of the work ‘authorised signatory’ was not necessary.

Despite the authority of the signatory not being disputed, it was sufficient for the Court to rule that the demand was not properly made as the issuer of the bank guarantee should only accept documents that strictly comply with the stipulated requirements. The Court noted that it was important to have regards to the commercial context in which an instrument is issued and the purpose of it being used.

Jackson J held that there was no reasonable prospect of success and ordered a summary judgment in favour of BNP. In arriving at his decision, his Honour noted that it was important to have regard to the commercial context in which an instrument is issued and the purpose of it being used.

His Honour had relied upon the High Court’s decision in Simic v New South Wales Land and Housing Corporation,[2] which the Court had considered the compliance of a demand under a performance bond and 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.”[3] [Emphasis added]

The High Court in Simic v New South Wales Land and Housing Corporation,[4] had quoted 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.” [5]

The Court also cited the High Court case of Ecosse Property Pty Ltd v Fee Dee Nominees Pty Ltd (2017) 343 ALR 58 which had reinforced the principle that “the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean.”[6]

The cited cases reinforced the strict approach and strict compliance to bank guarantees or other forms of performance security. In applying the above principles, the Court had rejected the implication that any person signing the demand was purported to be an authorised signatory as it was not strictly compliant when considering the commercial context and the implications of the bank guarantee.

The case highlights that beneficiaries of bank guarantees and other performance securities must ensure that they comply with the full requirements in any demand, especially in a commercial context. It is important to ensure that both parties are well informed and understand the relevant provisions in their contract that governs the demand for payment under such instruments.

If you have any questions on bank guarantees and how they may affect you, please do not hesitate to contact Morrissey Law & Advisory.

This article was prepared by Michael Morrissey and Mary Ann Wen.

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

[2] (2016) 260 CLR 85.

[3] Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85 at 115-116.

[4] (2016) 260 CLR 85.

[5] (2016) 260 CLR 85, 115-116 [97].

[6] (2017) 343 ALR 58, 63 [16].

Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.