Is payment under your bank guarantee really guaranteed?

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

Asmaa Hasanein, Lawyer