In the case of Santos Limited v BNP Paribas, the failure to print the words “authorised signatory of Santos Limited” in an execution clause meant that a letter of demand for $55 million under a bank guarantee was invalid. The Court upheld the principle of strict compliance, finding that the letter of demand lacked some of the essential requirements outlined in the bank guarantee for making a successful claim under the guarantee.
The decision should serve as a pertinent reminder that the validity of legal documents can turn on technical details that might appear to be minor.
In Santos Limited v BNP Paribas, Santos Limited made a demand against BNP Paribas under an unconditional bank guarantee for $55 million, which had been issued to Santos by BNP to secure the performance of certain obligations by Fluor Australia Pty Ltd.
On the basis that the terms of the demand did not strictly comply with the requirements set out in the bank guarantee, BNP refused to meet the demand. The guarantee stated that BNP was required to pay $55 million to Santos, provided they received a letter of demand “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”.
The draft letter attached in Annexure A to the bank guarantee included the following terms:
Authorised signatory of
However, Santos’s letter of demand issued to BNP did not use those words and was instead signed as:
Santos Limited – GLNG Upstream Project
[a handwritten signature appeared]
General Manager Development
The Court found that strict compliance with the terms of the bank guarantee was needed in order for the demand to be valid.
The case was initially heard in the Queensland Supreme Court, with the trial judge finding that the letter by Santos did not trigger BNP’s obligation to make the $55 million payment. Santos then appealed, but the Queensland Court of Appeal upheld the earlier decision, dismissing Santos’ claim.
The Queensland Court of Appeal noted that there was no particular law governing the execution and terms of a bank guarantee or letter of demand, but the explicit requirement for the letter to be “in the form of the letter attached” and “purporting to be signed by an authorised representative of the Beneficiary” were legally binding.
The Court concluded that there was no way for BNP to confirm that Mr Simpson (the signatory for Santos) was in fact an authorised representative of Santos. This was despite the demand being issued on Santos’s letterhead, the words “Santos Limited” appearing above Mr Simpson’s signature and the statement of Mr Simpson’s position. These factors merely indicated that Mr Simpson was employed by Santos and held a position of General Manager Development in the company, none of which proved his authority to make the demand or sign on behalf of the company.
There are several key takeaways from this case.
- Parties should where possible, use the exact language or words required by the terms of the bank guarantee.
- When making demands on a bank guarantee, it is vital that parties ensure that all of the essential requirements of the demand are strictly adhered to.
- Any words that do not meet the requirements of a demand may lead to the demand being invalidated.
Beneficiaries should carefully review all bank guarantees and similar documents before making a demand. Where possible, a lawyer should be hired to review or draft letters of demand to ensure that they are valid.
Bank guarantees are often provided as security for tenants’ obligations under leases. Currently in Australia, there are some restrictions on landlords calling on the security provided by their tenants in some cases due to the COVID-19 pandemic. Once those restrictions are lifted, we anticipate that landlords of tenants who are unable to recover from the COVID-19 pandemic may need to call on the security provided by their tenants to satisfy their tenants’ obligations under their leases.
Landlords would be well advised to heed this decision – while their mistake may not cost $55 million as it did in this case, it may mean the difference between recovering something or recovering nothing in these straitened times.
If you need advice as to whether this decision may affect you, your demands or your business, please don’t hesitate to contact our Commercial + Property Team.