A recent decision of the Queensland Supreme Court of Appeal highlights the need for beneficiaries to strictly comply with the terms of a performance security when making a demand to draw on funds.
In Santos Limited v BNP Paribas  QCA 11, Santos Limited made a demand on a bank guarantee to BNP Paribas for the performance of Fluor Corporations. BNP rejected the demand because it was not strictly compliant with the terms of the bank guarantee. BNP claimed it could not be established with certainty that the signatory was authorised on behalf of Santos to make the demand.
|The Court dismissed the appeal and echoed the primary judge’s findings stating a demand must be strictly compliant with the terms of a performance security. Whether a demand is strictly compliant with the requirements will be determined intelligently not mechanically.
Pursuant to a contract between Santos and Fluor, Fluor procured performance security (in the form of a bank guarantee) to secure its obligations in providing engineering and design services to Santos Limited for a coal seam gas extraction.
The performance security was issued on 30 January 2012 for approximately $75 million with an expiry date of 30 June 2013. It was amended twice to extend the term to 31 December 2013 and to reduce the value to $55 million.
The performance security contained the following clause (c) which set out the conditions in which BNP (the Financial Institution) was liable to pay the security to Santos (the Beneficiary):
(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 the same.
The draft letter attached at Annex A to the bank guarantee included the following execution block:
Authorised signatory of
Santos delivered a letter of demand for payment of the $55 million to BNP in the form of the template at Annex A of the bank guarantee, however, it was signed by an employee of Santos under the following execution block:
Santos Limited – GLNG Upstream Project
[a hand written signature]
General Manager Development
BNP refused to meet the demand, on the basis that it could not be determined that the signatory was authorised and the demand was defective. BNP was further concerned it would jeopardise its ability to seek indemnification from Fluor if the demand was accepted.
Santos Limited v BNP Paribas  QSC 105
In the first instance, Santos and BNP sought summary judgements against each other. Santos on the basis that its demand met the conditions of clause (c) and Annex A of the performance security and BNP on the basis that is did not. In particular, BNP claimed Annex A required the demand to include the specific words ‘authorised signatory of Santos Limited’, whereas the letter was signed by Rob Simpson who was described as ‘General Development Manager’. The issue was not whether Mr Simpson lacked authority to sign, but that the demand did not expressly state he was an authorised signatory of Santos.
Santos claimed that because Mr Simpson’s signature was under the words ‘Santos Limited’ and his name and position was stated, he satisfied the requirements of clause (c) by purporting to sign as an authorised representative of Santos.
Neither party claimed that as a matter of law the demand must be in a particular form (except for as specified in the performance security).
The primary judge granted BNP’s application for summary judgment. His Honour noted the importance of having regard to the commercial context in which performance security is issued stating payment must be made immediately upon demand and is said to be ‘as good as cash’.
The Court found it is of critical importance a financial institution pay only upon receiving a compliant demand. His Honour noted a financial institution does not concern itself with the terms of the underlying contract or whether the obligations have been performed, its sole concern is providing security when contracted to do so.
Relying on the High Court decision of Simic v New South Wales Land and Housing Corporation  HCA 47, his Honour concluded the principle of strict compliance applies and it must be ‘applied intelligently not mechanically’.
The Court found the signature of Mr Simpson together with the description of his position did not amount to representation that he was an authorised signature of Santos and therefore the demand did not constitute notice in writing in accordance with clause (c) and Annex A of the bank guarantee.
Santos appealed the Court’s original order on the grounds the primary judge had erred in finding that Mr Simpsons’ signature together with his position description did not amount to representation of his authority to sign and the words ‘authorised signatory of Santos Limited’ were required in the letter for it to constitute a demand.
Santos argued the use of the words ‘amended as applicable’ in clause (c) of the bank guarantee made it clear the demand did not need to strictly follow Annex A. Santos claimed the use of the word ‘purporting’ in clause (c) meant that it was unnecessary to use the words ‘authorised signatory’ in the demand as the law did not discriminate between express and implied representation.
Further, Santos argued the principle of strict compliance was not applied intelligently but mechanically by the primary judge as the letter was clearly a demand by Santos on Santos letterhead, it was impossible that anyone looking at the document could have understood Mr Simpson to be signing for anyone other than Santos.
BNP’s primary argument was that Santos was required to given notice in the precise form of Annex A of the bank guarantee and the words ‘amended as applicable’ in clause (c) only permit Santos to insert details not remove or substitute text.
The Court dismissed the appeal and echoed the primary judge’s findings that an intelligent application of the strict compliance principle required Santos to include a statement of the signatory’s authority.
His Honour stated the strict compliance principle relieves the financial institution of the need to look beyond whether the party making the demand has met the stipulation of the performance security.
The Court found the specific words ‘authorised signatory’ did not need to be used, however, Mr Simpsons’ signature coupled with his position description did not amount to a representation that he was an authorised signatory of Santos.
What does this mean for beneficiaries of performance security?
The decision of the Queensland Supreme Court of Appeal reinforces the need for beneficiaries to review and strictly comply with the requirements of performance security before making a demand. Noting the Courts will apply the strict compliance principle to demands on performance security intelligently and not mechanically.