A recent decision in the Supreme Court of Queensland has highlighted the need for attention to detail in drafting demands and notices under contractual instruments.
The Facts
Santos Ltd (Santos) and Fluor Australia Pty Ltd (Fluor) were parties to an engineering, procurement and construction (EPC) contract. As security for Fluor complying with its obligations under the EPC contract, Fluor arranged for a performance security for AU$55 million to be issued by BNP Paribas (BNPB). Under the terms of the performance security, Santos was required to issue a demand letter in the form attached in Annex A to the performance security.
Relevantly, the form attached in Annex A required the demand to expressly state that the signee of the demand was an authorised signatory of Santos.
The performance security expired on 31 December 2017. On 21 December 2017, Santos issued a demand on the performance security. The demand was signed by ‘Santos Limited, Rob Simpson, General Manager Development’.
BNPB refused to pay on the demand on the basis that the demand did not state that the Rob Simpson was an authorised signatory of Santos.
Santos argued that the placement of Mr Simpson's signature under the words 'Santos Limited’ with his name and position, demonstrated that he purported to sign as an authorised representative, and that the inclusion of the words ‘authorised signatory’ were unnecessary.
The Ruling
Jackson J found the Mr Simpson’s signature coupled with the description of his position did not amount to a representation that he was an authorised signatory of Santos and that BNPB was entitled to refuse to pay out the performance security on the presented demand.
His Honour stated that it was important to consider the commercial context of performance securities and why they are issued. Under the terms of such instruments the contractual counter-party (in this case, Fluor) would usually be required to indemnify the financial institution paying out on the demand. The financial institution’s entitlement to that indemnity will therefore depend upon it strictly observing the terms of the financial instrument. In the circumstances, it is of critical importance that the financial institution pay only upon a complying demand so that the financial institution does not compromise its right to indemnity from the contractual counter-party. The signature of Rob Simpson coupled with a description of his position did not amount to a representation that Mr Simpson was an authorised signatory of Santos.
In reaching his decision, His Honour noted that consideration of the requirements ought not be a mere mechanical process, but one that needed to be considered intelligently and using judgement. The absence of a clear statement that the signatory was an authorised signatory was ‘not a mere mechanical omission’.
The Lesson
If you are, or intend to be, the beneficiary of a performance security under a contract, there are two important lessons to take away from this case:
- If you want an unconditional, on demand performance security, pay attention to the drafting of the performance security and the contract to make sure that this is what you actually get. Check that the terms of the performance security do not require the issuing financial institution to enquire as to the correctness or validity of any demand on the performance security.
- If you already hold a performance security, before you take any steps to demand payment under the security, read the security instrument and the contract carefully. Understand the formal requirements of those documents and ensure that the demand strictly complies with those requirements.
If you need help, get in contact with us. It is our job to pay attention to detail.