Reed Smith Client Alerts

A recent decision by the highest court in Queensland, Australia, serves as a good reminder that when seeking to make a call on a performance bond or bank guarantee, there must be strict adherence to its terms – otherwise, the issuer may be entitled to ignore the demand. This alert looks at recent Australian and English cases and the importance of strict compliance when it comes to calls on performance bonds.

The purpose of on-demand performance bonds is to provide a quick self-help remedy without having to prove that a default has in fact occurred. For this reason, the courts have consistently taken the view that the requirements of such bonds must be complied with strictly before the issuing bank or financial institution is required to make a payment.

This approach was confirmed in the recent case of Santos Limited v. BNP Paribas,1 which centered on the following:

  • Santos Limited (Santos) was provided with a performance bond issued by BNP Paribas on behalf of Fluor Australia Pty Ltd. The bond’s value was AUD 55 million.
  • Santos could make a call on the bond by issuing a notice “in the form of the letter attached … purporting to be signed by an authorised representative of [Santos]”.
  • The attached letter included the following signature block:

“Yours faithfully
Authorised signatory of Santos Limited”

  • Santos’ letter of demand issued on 18 December 2015 was, however, signed off as follows:

“Yours sincerely,

Santos Limited – GLNG Upstream Project
Rob Simpson
General Manager Development”

  • BNP Paribas refused to meet the demand, arguing that it was defective in that, among other things, it did not purport to have been signed by an authorised representative of Santos.

The Queensland Court of Appeal agreed that Santos’ demand was invalid on the basis that the demand for payment had to meet the essential elements set out in the draft letter – and one of those elements was the inclusion of a statement as to the signatory’s authority. The Court of Appeal found that a signature accompanied by a description of that person’s role in the company was not sufficient in this respect and BNP Paribas therefore did not have to pay out the sum demanded by Santos.

Previous cases in Australia have followed the same approach. In Simic v. NSW Land and Housing Corp,2 Australia’s highest court confirmed that strict compliance with the requirements of a bond is necessary. In this case, the performance bond mistakenly referred to “New South Wales Land & Housing Department trading as Housing NSW” (a body that did not exist). When NSW Land and Housing Corp made a demand under the performance bond and referred to its actual name, the bank refused to make a payment.

The court held that the bank’s refusal to accept the demand was justified because the bank would not be able to determine that the entity named in the demand was the same as the entity named in the performance bond. The court did, however, rectify the wording of the performance bond to reflect the correct name, so that NSW Land and Housing Corp could make a subsequent valid demand.

These decisions may seem harsh at first; however, there are sound reasons for ensuring strict compliance with the terms of security documents. It must be remembered that the issuing banks or financial institutions are not privy to the circumstances of the underlying contract and are unable to investigate the circumstances giving rise to the demand – all they can do before paying out potentially significant sums which they may not be able to recover, is to ensure that the demand received complies with the provisions of the bond.