Three missing words just cost $55m…
On Tuesday, Santos, one of Australia’s largest national gas company, lost its appeal over a $55M bank guarantee issued by BNP Paribas, on behalf of Fluor Corporation, and it all turned on three words that were contractually required but were missing from the letter of demand “authorised signatory of”.
In a decision that will be talked about in board meetings across the country, the decision of the Queensland Court of Appeal in Santos Limited v BNP Paribas  QCA 11 is a $55M reminder to companies, legal practitioners and general counsel of the importance of ensuring strict compliance with performance security in the form of a bank guarantee.
While this decision restricted its analysis to performance security, for which the rules are much more stringent, the lessons to be learnt from this judgement have a broader reach. This decision should serve as a cautionary reminder that care should always be given to ensure strict contractual compliance. Close enough is not good enough, and a failure to ensure strict contractual compliance may come at a big cost.
Facts of the case
Santos delivered a letter of demand to BNP Paribas in December 2015 claiming payment under the bank guarantee of $55M. The letter of demand was delivered by Santos with a copy of the performance security, but it had not been placed on Santos letterhead nor did the author specifically purport to have the authority to make the demand.
The pro forma letter of demand should have been signed off as follows:
Authorised Signatory of Santos Limited
But instead, the letter was signed off as follows:
Santos Limited – GLNG Upstream Project
General Manager Development
BNP Paribas refused to meet the demand on the basis that the letter was defective because Mr Simpson did not follow the black letter of the contract and did not explicitly state that he was authorised to make the demand on Santos’ behalf.
Interestingly, there was ultimately no dispute as to whether or not Mr Simpson had the requisite authority, he did, but what BNP Paribas took issue with was the fact that he did not state this clearly and unambiguously in the letter. This, they alleged, made the letter defective and meant that they were not required to make payment in accordance with the demand.
The Court in the first instance agreed with BNP Paribas and ruled that the demand was defective. Santos appealed the decision and lost. On Tuesday, the Queensland Court of Appeal found in favour of BNP Paribas and held that the letter was defective and that it was not required to make payment of the amounts secured by the bank guarantee.
Three simple words left out of a letter of demand and this was ultimately a costly mistake.
Performance security documents are not the only documents where a simple mistake can be a costly one. A Creditors’ Statutory Demand is another document where simple mistakes such as an incorrect address or a misstatement of an amount owed, may be sufficient grounds to set aside a demand.
Decisions such as this will also act as a reminder to lawyers acting for the party who the demand is made of. By looking for these mistakes they may be able to slow or prevent the recovery process for their clients. This adds discomfort and costs to the party seeking to recover monies owed to it, and in the case of Santos resulted in a $55m, plus legal costs, hole in their financials.
It’s a timely reminder that the utmost care should be taken when enforcing demands under contract to ensure that demands comply with the strict requirements of the contract and that all demands follow the black letter of the contract.
Check the contract once, check it twice and make sure that the compliance is right.