Calling on performance security: Is the requirement of strict compliance form over substance?

June 7, 2018

The recent Queensland Supreme Court case of Santos Limited v BNP Paribas [2018] QSC 105 demonstrates the importance of strict compliance with requirements when calling on performance security.

 

Fluor Australia Pty Ltd (Fluor) was contracted to perform works for Santos Limited (Santos) under an engineering procurement and construction contract. Fluor provided security for its performance under the contract, in the form of an unconditional bond to pay Santos on demand.

 

In late 2015 Santos demanded payment under the unconditional bond, in the amount of $55 million, by the relevant the financial institution, BNP Paribas (BNP). However, BNP did not pay any amount to Santos. Santos therefore claimed payment of $55 million in Court. Both Santos and BNP cross-applied for summary judgment on the basis that the other’s case had no real prospect of success.

 

Jackson J granted summary judgment in favour of BNP and held that BNP was not obliged to pay Santos, because Santos’ demand did not comply with the required form of a demand, which was annexed to the performance security.

 

The performance security provided, amongst other things, that the demand must be in writing and signed by a signatory stated to be an authorised signatory of Santos. However, Santos’ demand was signed by a Mr Simpson, described as “General Manager Development”.

 

There was no dispute about whether Mr Simpson lacked the authority to sign the demand. Rather, BNP submitted that the demand issued by Santos was non-compliant because it did not expressly state that Mr Simpson was the authorised signatory of Santos.

 

In considering the commercial context and the purpose for which instruments such as the performance security are issued, Jackson J noted that where the financial institution must pay the beneficiary immediately on demand and then seek to be indemnified, as in this case, it is important that the bank only pay on a demand which complies strictly with the requirements of the instrument.

 

Jackson J found that the absence of a statement indicating that Mr Simpson was an authorised signatory of Santos, was not a “mere mechanical omission”. Rather, the demand was non-compliant and BNP was not required to pay Santos on the demand.

 

The facts of this case serve as a reminder to contracting parties that banks will be entitled to ‘strict compliance’ in demands made on an ‘on demand’ performance bond.

 

The full decision can be found here.

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