Santos Limited v BNP Paribas

BNP Paribas issued a performance security to Santos Limited. The performance security specified that payment would be made upon 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 the Beneficiary”. The draft letter contained the words “authorised signatory of” after the signature and before the words “Santos Limited”. Santos Limited delivered a demand which did not contain those words, but rather a description of the position of the signatory within Santos Limited. BNP Paribas refused to meet the demand. The Court of Appeal held that “intelligent application of the strict compliance principle required BNP Paribas to look for a statement of the signatory’s authority”.  Accordingly, the failure to include those words meant that the demand did not meet the requirements of the performance security.

Holmes CJ and Fraser and Morrison JJA

5 February 2019

In 2012, BNP Paribas signed and delivered to Santos Limited a performance security. [1]. Its purpose was to secure the performance of a contractor in providing services to Santos Limited’s coal seam gas extraction project. [1], [4]. As amended, the amount secured by the performance security was $55,000,000. [1], [14]. Under the performance security BNP Paribas was the “Financial Institution” and Santos Limited was the “Beneficiary”. [2]. The clause of the performance security which set out the circumstances in which BNP Paribas was liable to pay the security amount to Santos Limited was as follows:

“Should the Financial Institution receive 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 the Beneficiary, that the Beneficiary desires payment to be made of any part or the whole of the Security Amount, the Financial Institution must make that payment to the Beneficiary immediately without reference to the Contractor and notwithstanding any notice given by the Contractor not to pay same.” [2].

A draft letter was attached to the performance security. [3]. Relevantly, the draft letter ended in the following way:

“Yours faithfully

.................

Authorised signatory of

Santos Limited” [3].

Santos Limited delivered a letter of demand, together with the performance security and amending documents, to BNP Paribas in December 2015. [5]. Relevantly, the letter ended in the following way:

“Yours sincerely,

Santos Limited – GLNG Upstream Project

[a handwritten signature appeared]

Rob Simpson

General Manager Development” [5].

BNP Paribas refused to meet the demand, and one of the bases on which it did so was that the letter was defective because its maker did not purport to be authorised to make it. [5]. Santos Limited and BNP Paribas sought summary judgment against each other in the Supreme Court. [6]. Santos Limited sought summary judgment on the basis that its demand met the requirements of the performance security, and BNP Paribas sought summary judgment on the basis that it did not. [6]. At first instance, Jackson J granted BNP Paribas’ application for summary judgment. [7]. The presently relevant basis for the decision was that Mr Simpson’s signature, with the description of his position, did not amount to a representation that he was an authorised representative or authorised signatory of Santos Limited. [8].

Santos Limited appealed. [9]–[10]. Holmes CJ (with whom Fraser and Morrison JJA agreed) commenced by noting that in construing the requirements imposed by the performance security, it is relevant to consider its commercial purpose, namely that it is to be “as good as cash”, in the sense of being capable of being honoured with expedition and ease on the presentation of a complying demand. [18]. The strict compliance principle – which necessitates that an issuer of a security should only accept documents which comply strictly with the requirements stipulated in the instrument – relieves the issuer of the necessity to look beyond whether the party making the demand has met the stipulations of the performance security. [18]. The Chief Justice held that Santos Limited was required by the performance security to deliver “a letter of demand on the face of which all essential matters appeared, without any obligation, or indeed entitlement, in BNP Paribas to supplement any deficiency with conjecture or investigation”. [18].

The Chief Justice held that the clause in the performance security contained three requirements for the demand: (i) that it be a notice in writing that Santos Limited sought payment of the security amount; (ii) that it be in the form of the draft letter, amended as applicable; and (iii) that it purport to be signed by an authorised representative of Santos Limited. [19]. Her Honour held that the second requirement was that the demand contain the “essential features” of the draft letter. [20]. Her Honour continued:

“The effect of the expression ‘amended as applicable’ can only, in context, refer to the insertion and addition of detail, not the omission of any of those features. While some of the features of the letter – for example the formula of “yours faithfully” for the close – are clearly inessential, that cannot be said of the statement of authority to sign, which is the expression of one of the three matters which the performance security specified as necessary. The draft letter, by containing the words ‘Authorised signatory of Santos Limited’, makes it clear that an express statement of authority is required. Cases concerning representations of authority by holding out in various ways are, in consequence, irrelevant here. The use of the word ‘purporting’ in [the third requirement] is qualified and illuminated by the terms of the draft letter. Its role is to make it clear that the issuer need be concerned only with whether the required representation appears, not with questions of actual authority.” [20].

Her Honour held that an intelligent application of the strict compliance principle required BNP Paribas to look for a statement of the signatory’s authority. [22]. Mr Simpson’s signature, coupled with his position description, did not amount to a representation that he was an authorised representative or authorised signatory. [22]. Her Honour held that the words “General Manager Development” merely indicated that he held a particular position in the company. [22]. Accordingly, the letter of demand contained no statement of his authority to sign on Santos Limited’s behalf. [22]. Her Honour concluded that for BNP Paribas in the absence of such a statement to resort to inference would have been to disregard the requirement for strict compliance. [22].

Accordingly, the appeal was dismissed. [23].

M J Hafeez-Baig