Legal Case Summaries

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Note: To secure its performance under an engineering contract, Fluor Australia Pty Ltd. (Contractor/Applicant) obtained a AUD 55,000,000 performance security entitled “Bank Guarantee” issued by BNP Paribas (Issuer) in favour of Santos Ltd. (Beneficiary). The Bank Guarantee provided that the “Financial Institution” (Issuer) “unconditionally and irrevocably undertakes to pay on demand and without deduction or set off any sum or sums which may from time to time be demanded by the Beneficiary up to a maximum aggregate sum of ... (Security Amount).” The Opinion is silent as to whether the Bank Guarantee was subject to practice rules. Paragraph (c) of the Bank Guarantee provided:

Should [Issuer] 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 of or the whole of the Security Amount, [Issuer] 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. (Emphasis added)

Beneficiary made a demand for payment which referenced the Bank Guarantee and attached a copy of the Bank Guarantee. It provided account details and was signed:

Santos Limited – GLNG Upstream Project

[signature]

Rob Simpson

General Manager Development

Issuer dishonoured the demand and Beneficiary sued Issuer for wrongful dishonour. Both parties moved for summary judgment. The Supreme Court of Brisbane, Jackson, J., granted summary judgment in favour of Issuer.

Beneficiary claimed that the demand was in the correct form based on the form attached to the performance security (Annex A) which provided: “Authorised signatory of [Beneficiary]”. Issuer denied that the demand complied with the form because the demand did not purport to be signed by an authorised representative.

Issuer contended that paragraph (c) of the Bank Guarantee required it to pay immediately on receipt of a notice in writing in the form prescribed, i.e. Annex A. Moreover, Issuer argued that the terms “purporting to be signed by an authorised representative of the Beneficiary” in the performance security reinforced the conclusion that the proper construction of the instrument was that a notice desiring payment must state on its face “authorised signatory of [Beneficiary]”.

Beneficiary contended that because Rob Simpson’s (Beneficiary Officer) signature appeared under “Santos Limited” and provided his name and position, Beneficiary Officer did purport to sign as an authorised representative and authorised signatory of Beneficiary.

Both parties made reference to the decision of the 2016 High Court of Australia in Simic v. New South Wales Land and Housing Corp.¹ In that case, the performance bond required the demand to be made by, and payment to be made to the “New South Wales Land and Housing Department”. However, there was no such entity in existence. The actual body was the “New South Wales Land and Housing Corporation”. The majority² of the High Court described the principle of strict compliance in these terms:

the principle of strict compliance … it is not a rigid rule. It must be applied intelligently, not mechanically; the issuer must exercise its own judgment about whether the requirements stipulated in the instrument have been satisfied.³ (Emphasis added)

Thus, the Judge concluded that Issuer was “required to consider the instrument intelligently, not mechanically”.⁴ The Judge’s view was that in construing the Bank Guarantee, it was important to have regard to the “commercial context” in which such an instrument was issued and the purposes for which such an instrument was issued. The Judge stated that it is of “critical importance that the financial institution pay only upon a complying demand.” The Judge noted that the issue was not whether the signor lacked actual authority to sign the demand, but rather whether the demand failed to expressly state that Simpson was purportedly an authorised signatory. Both parties agreed that, as a matter of law, no particular form of execution of the demand was required. The Judge concluded that the demand for AUD 55,000,000 failed because it “did not amount to a representation that [Beneficiary Officer] was an authorised representative…of [Beneficiary]”; in other words, “the demand did not constitute a notice in writing purporting to be signed by an authorized representative of [Beneficiary] in compliance with paragraph (c) and Annex A.”

Comment: Santos Ltd v. BNP Paribas is the latest case that uses the expression “intelligently, not mechanically” in relation to the application of the principle of strict compliance. However, whilst bank examiners may now be warned to examine documents “intelligently”, the courts have provided little guidance on the meaning of this approach. Presumably the standard should be clear, sound and reasonable, exercising a standard that reflects banking practice in independent instrument transactions whilst maintaining the bank’s independence and instrument’s value as the “equivalence of cash”.

Text of Demand:

18 December 2015

Our Ref: STO-BNP-EPC-L-006

BNP Paribas

Group Operations – Guarantees

Level 4, 60 Castlereagh Street

Sydney, NSW, 2000 Australia

[…]

Attention: Head of Operations

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:

Bank: ANZ Bank, 121 King William Street, Adelaide SA 5001

BSB: 015-010

Account: 8374-78516

Account Name: Santos Limited Payments Account

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

[signature]

Rob Simpson

General Manager Development

Text of 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

* Solicitor and barrister of the Supreme Court of New South Wales and of the High Court of Australia and a Senior Lecturer at the University of Queensland, TC Beirne School of Law. Dr. Davidson is also a fellow at the Institute of International Banking Law & Practice.

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.