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    Has a word ever cost you $18 million?

    Mar 6, 2019 10:27:41 AM

    Santos Ltd, Australia’s second largest independent oil and gas producer, recently lost an appeal in the Supreme Court of Queensland: Court of Appeal against BNP Paribas.

    Santos’ appealed an order which dismissed their application for summary judgment on a claim for payment of $55,000,000 which Santos claimed to be owed under a performance security given by BNP Paribas.

    The background is that Santos entered into a contract with Fluor Australia Pty Ltd to provide a number of services in relation to the ‘GLNG’ Natural Gas Project.

    As part of this relationship, a performance security was issued to secure the performance of the contractor. This performance security was issued in the form of a bank guarantee which contained a clause stipulating the circumstances in which the security was to be paid to Santos.

    The ‘clause c’ noted that:

    “Should the Financial Institution (BNP) receive a notice in writing in the form of the letter attached to the Bank Guarantee, purporting to be signed by an authorised representative of the Beneficiary (Santos), that the Beneficiary desires payment to be made of any part of the whole of the Security Amount, the Financial Institution must make the payment to the Beneficiary immediate without reference to the Contractor, and notwithstanding any notice given by the Contractor not to pay same”.

    The draft letter, necessary to retrieve the $55,000,000, was attached to the Bank Guarantee and clearly complied with the 'clause c'.

    In December 2015 Santos delivered a letter of demand to BNP, which sought to have the bank Guarantee paid. This letter was not on a Santos letterhead and did not include the phrase “Authorised signatory of”

    BNP refused to meet the demand on the basis that it was defective because it was not on a Santos letterhead and did not contain the phrase “Authorised signatory of”.

    Santos and BNP commenced proceedings against each other on the basis of summary judgment. BNP won those proceedings and His Honour noted that the commercial circumstances of the security.

    His Honour cited Simic v New South Wales Housing Corporation in which the High Court set out the principles applicable to demands on performance securities. The issuer of a security of this kind did not have to concern themselves with the contractors performance but whether the specific event triggering the obligation to pay had arisen.

    On the facts, His Honour concluded that the absence of compliance with regards to the letter of demand was reason enough for BNP to not comply with the payment of the performance security.

    The Court of Appeal concluded that “the letter of demand contained no statement of his authority to sign on Santos Limited’s behalf. For BNP Paribas in the absence of such a statement to resort to inference would have been to disregard the requirement for strict compliance.”

    In short, the Court of Appeal upheld the judgment at first instance on the basis that the letter of demand sent by Santos to BNP Paribas was defective as it did not state that the author was an Authorised Signatory of Santos Ltd.

    When you next hear the saying stick and stones can break my bones but words cannot hurt me, just think of Santos. Those three words cost them $55,000,000.

    The Takeaways

    1. When seeking to enforce Bank Guarantees or Personal Guarantees strict compliance is necessary;
    2. Reviewing contracts at the time of enforcement if crucial;
    3. If you are a Director of a Company and the Board has decided to grant authority to representatives of the Company, careful consideration needs to be given to the extent of that authority and the manner it is used.

    If you would like advice from our Corporate team, click here

    If you would like to see the case, click here.

    This is not legal advice. 

    Photo by Johannes Havn from Pexels