Santos Limited v BNP Paribas  QSC 105
Performance securities issued by banks are commonly deployed on construction projects. They are said to be “as good as cash”. If Santos’ recent experience in the Queensland Supreme Court is a guide, that’s not universally the case. The autonomy principle – that the obligations of the bank under an unconditional performance security not be qualified by reference to the terms of the underlying contract – is well embedded in Australian law. Even so, making a demand on a bank guarantee is more than a simple mechanical exercise.
The form of the demand was annexed to the performance security and included the words:
Authorised signatory of
At issue was whether the actual demand was compliant with the annexed demand because it did not purport to be signed by an authorised representative of Santos. The actual demand was signed by a person (over their typed name) whose position in the company was then described. So, was that sufficient to establish that person to be the authorised signatory of Santos?
Where it is of critical importance that the bank pay only upon a complying demand and that a complying demand must strictly comply with the requirements of the security instrument, the signature coupled with the description of the signatory’s position, according to the Court, did not amount to a representation that he was so authorised. The position description did not represent anything about the signatory’s authority:
“…There is no room for documents which are almost the same, or which will do just as well. Business could not proceed securely on any other lines. … the principle of strict compliance applies after the instrument has been construed, and it is not a rigid rule. It must be applied intelligently, not mechanically” (Court’s emphasis)
On the bank’s summary judgment application, the Court was satisfied that the absence of a statement that demonstrated the authority of the signatory was not a mere mechanical omission. The bank was not obliged to pay because the demand did not comply with the requirements of the performance security.
While the time for appeal has not yet expired, his Honour Mr Justice Jackson’s reasons provide helpful reminder that calling on a performance security is a serious step. No matter how simple such a demand might appear at face value, each and every aspect of the demand will attract detailed scrutiny. Mechanical replication of the words on the page will not always suffice. Rather, one must discern, intelligently, the objective intention that those words seek to convey. If they show that the bank is concerned to establish appropriate authority, then be prepared to address that point before you make the call.
31 May 2018