Property Law - The 55 million dollar question – When is close enough not good enough?

“Close enough is goodenough” - It’s the adage the perennial corner cutters of the world live by.

For some, close enough is good enough. However, if you were to ask Santos Limited right now, they have about 55 million reasons as to why close enough was definitely not good enough.  

In the recent case Santos Limited v BNP Paribas [2019] QCA 11, Queensland’s Court of Appeal confirmed that Santos Limited (Santos) were not able to recover payment under an unconditional performance security issued by BNP Paribas (BNP) to Santos (“the Bank Guarantee”) to secure the performance of a contractor, Fluor Australia Pty Ltd.

Santos were prevented from recovering under the Bank Guarantee on the basis that Santos had failed to comply strictly with a condition of the Bank Guarantee.  

So how did that happen exactly?

Background

On or about 18 December 2015, Santos made demand to BNPParibas (BNP) for $55 million pursuant to the Bank Guarantee. The BankGuarantee was varied over time and was set to expire on 31 December 2015.

The Bank Guarantee contained a clause which stated (ouremphasis added):

“Should the Financial Institution [BNP] 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 [Santos], 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.”

A draft letter was attached to the Bank Guarantee.

Issue

The demand issued by Santos mostly complied with the aboveclause and draft letter attached to the Bank Guarantee but was signed by RobSimpson, General Manager Development of “SantosLimited – GLNG Upstream Project”. The demand did not state that Rob Simpsonwas an authorised representative, but instead stated his position within Santos.

BNP refused to comply with the demand as the demand did notinclude the words “authorised signatoryof Santos Limited”.

Chief Justice Holmes of the Court of Appeal ultimately foundthat the combination of the signatory’s signature and position within Santosdid not satisfy the above clause of the Bank guarantee, as the signatory didnot purport to be an authorised representative of Santos, which was consideredto be an essential term under the Bank Guarantee.

Takeaways

In the hearings of this matter in both the Supreme Court of Queensland and the Queensland Court of Appeal, in depth discussion took place regarding High Court authority Simic v New South Wales Land and House Corporation (2016) 260 CLR 85, which provides that securities (like this Bank Guarantee) are ‘as good as cash’.

However, the principle prevailing from Santos Limited v BNP Paribas is that, where a demand for a bankguarantee does not comply with its agreed formal requirements or essentialterms, then the bank guarantee may not be ‘asgood as cash’.  In fact, if a compliantdemand is not made before the bank guarantee expires it is not even worth thepaper it is written on.

We strongly recommend that you and your business adopt best practices and strictly adhere to any requirements that may apply to any bank guarantee (even if you believe they are unnecessary, because as Santos found out, they just might be crucial).

If you are ever unsure as to what your obligations are under a bank guarantee (or any agreement) or how to strictly comply with them, we strongly recommend seeking legal advice, because as you have read, close enough just may not be good enough.

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The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.