Is payment under your bank guarantee really guaranteed?

6 June 2018
Elliot Raleigh, Partner, Melbourne

An unconditional bank guarantee is widely regarded as being “as good as cash”. However, calling on a bank guarantee requires strict compliance with the wording of the guarantee.

The recent case of Santos Limited v BNP Paribas [2018] QSC 105 demonstrates just how “strict” an approach banks are entitled to take on demands on such instruments.

The Facts

The brief background to this case is as follows:

  • Fluor Australia Pty Ltd (Fluor) arranged for BNP Paribas (BNP) to issue a bank guarantee in favour of Santos Limited (Santos) in support of obligations under an engineering procurement and construction and associated works contract.
  • The bank guarantee was in the form of an unconditional bank guarantee to pay money on demand in writing, such demand to be in the form of a letter attached to the bank guarantee (Annexed Letter) purporting to be signed by an authorised signatory of Santos.
  • Santos made demand upon BNP for $55,000,000 under the bank guarantee in the form of the Annexed Letter signed by “Rob Simpson, General Manager Development”.
  • BNP refused to pay Santos on the basis that the demand was not signed by a person described as an “Authorised signatory of Santos Limited” but rather a “General Manager Development”.
  • Santos argued that Mr Simpson signed under the words “Santos Limited” and his position General Manager Development, and therefore purported to sign as an authorised signatory of Santos.

Decision – strict compliance

Jackson J found the Mr Simpson’s signature coupled with the description of his position did not amount to a representation that he was an authorised signatory of Santos.

As the bank guarantee required that BNP make payment immediately on receipt of a notice in writing in the form of a letter signed by an authorised signatory and the letter was limited to Mr Simpson’s signature along with a description of his position, this did not represent an authority to sign as it did not fulfil strict compliance obligations under the terms of the bank guarantee.

Accordingly, Jackson J held that BNP’s refusal to accept the demand under the bank guarantee was justified as that the issuer of a bank guarantee should only accept documents that strictly comply with the stipulated requirements.

Implications

This case is a timely reminder of the importance in ensuring that parties strictly comply with the provisions of a bank guarantee or any other form of performance security. This case also gives comfort to banks and financial institutions in knowing that they are entitled to take a “strict” approach to demands for payment under such instruments.

 

Authored by:

Elliot Raleigh, Partner, Melbourne

Asmaa Hasanein, Lawyer, Melbourne

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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