The Importance of Sticking to the Letter of the Agreement
24 May 2019
Contracting by Government can be a minefield, with the usual commercial considerations overlaid by expectations on Government to contract in good faith, be model litigants in the event of a dispute and achieve an outcome that meets it obligations to the public.
In traversing that minefield, it can be tempting to only superficially deal with procedural provisions such as those for the giving of notices, dealing with default and the provision and calling on of security.
It is not always that case that the template procedural provisions will be appropriate. Getting the procedural provisions wrong, or not complying with them, can lead to disastrous consequences as was highlighted by the recent case of Santos Limited v BNP Paribas  QCA 11.
Briefly stated, the facts and outcome in the Santos case were:
- Santos and Fluor were parties to an agreement.
- Under the agreement, Fluor was required to provide a bank guarantee in the amount of $55m as security for the performance of Fluor’s obligations under the agreement.
- BNP Paribas issued the bank guarantee at Fluor’s request.
- The bank guarantee provided for payment on receipt of “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 [Santos]…”.
- The template letter attached to the bank guarantee included an execution block to be signed by an “Authorised signatory of Santos Limited”.
- By letter dated 18 December 2015, Santos called on the full amount of the bank guarantee by issuing a notice to BNP Paribas in the form of the template letter, except that the execution block was signed by Santos’ “General Manager Development“. Importantly, it did not contain the words “Authorised signatory of Santos Limited” as provided for in the template letter and did not otherwise state the signatory was an authorised representative of Santos.
- BNP Paribas refused to pay Santos due to Santos’ failure to strictly comply with the procedural (or, as the Court called them, mechanical) requirements of the bank guarantee. BNP Paribas was concerned that if it did pay the amount called upon, it may not be able to recover the monies from Fluor as the procedural requirements in the bank guarantee had not been met.
- At first instance, the Supreme Court of Queensland:
- accepted BNP Paribas’ submissions that it could not be compelled to pay the amount called upon by Santos as a result of Santos’ non-compliance with the procedural requirements of the bank guarantee, specifically Santos’ failure to have the letter issued and signed by an authorised representative; and
- rejected Santos’ submissions that the signing of the letter by its “General Manager Development” directly after Santos’ name was sufficient to demonstrate that the signatory was an authorised representative.
- Santos appealed the decision, and the decision was upheld by the Queensland Court of Appeal.
- The Bank Guarantee had an expiry date of 31 December 2015 (although BNP Paribas argued this was meant to be 31 December 2014), so Santos was not able to call upon the bank guarantee at a later time and lost all benefit of the bank guarantee.
This demonstrates the principle long-applied by the Courts that procedural requirements giving rise to, or related to, the exercise of rights by a party must be strictly complied with if those rights are to be preserved.
Lessons for Santos
Santos may have been in a better position had it either:
- negotiated up front less strict/specific procedural requirements for the calling on of the bank guarantee; or
- properly reviewed the bank guarantee in preparing to call on it, looking at both the terms of the bank guarantee and the template letter attached to it, and fully complying with the procedural requirements.
Lessons for Government
Government is not immune from these issues, and may arguably be held to a higher standard than non-Government parties due to the unique obligations applicable to it.
If Government was in the place of Santos, considering Government is expected to act as a model litigant, the Court would likely take a dim view of Government seeking to enforce a step taken contrary to relevant the procedural provisions of an agreement. This is not to mention the reputational damage that might be caused by the outcome.
Government should take care to ensure that it:
- when negotiating agreements, carefully considers the procedural requirements of any agreement, and whether they are practicable and able to be achieved. For example, can the relevant step be taken in the time and manner specified? Who should be authorised to take the step, and is the drafting too limiting?;
- is aware of any unduly onerous provisions, or provisions which are different from its standard requirements. This may be done by maintaining an exceptions register;
- when assessing a step taken by another party, ensuring that the other party has strictly complied with its obligations. For example, properly reviewing certificates of completion, certificates of insurance or security documents for accuracy and authenticity to ensure that they can be properly relied upon; and
- when taking steps that are governed by procedural requirements, strictly complies with those requirements including (as applicable):
- timing, including allowing sufficient time for service;
- form, especially where the form is stipulated. If no form is stipulated, make the purpose of the notice clear, for example, by referring to the agreement and clause number of the agreement in respect of which the notice is being given;
- terminology, including using the defined terms from the relevant agreement; and
- authority, ensuring that a properly authorised person is issuing the notice.
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.