This was the catch line of Gerald “Jerry” Maguire. It is also a phrase that could be applied to those making a claim under performance security. Whether the money has to be shown or not is often a matter of fact and degree and sometimes requires determination by the Courts.
A recent decision handed down by the Queensland Supreme Court of Appeal highlights the importance for an issuer of a “bank guarantee” in the nature of an unconditional bond to ensure a written demand for payment complies with all the requirements before issuing payment.
In Santos Limited v BNP Paribas [2019] QCA 11, Santos Limited (Santos) issued a letter of demand to BNP Paribas for payment of $55 million, being the full amount said to be owing under a performance security given to Santos by BNP Paribas (the Demand). BNP Paribas refused to pay the amount demanded on the basis that the Demand was defective – it was not on the letterhead of Santos and the signatory of the Demand did not purport to be authorised to make it.
The Court of Appeal held the Demand was invalid as the signatory to it, along with a description of his position in the company, did not amount to a representation that he was an authorised signatory of Santos.
The Bank Guarantee
Fluor Australia Pty Limited (Fluor) was engaged by Santos to provide engineering and design services in relation to Santos’ coal seam gas extraction project. That engagement required Fluor to provide a bank guarantee for $55 million as security for Fluor’s performance under the engagement. The form of the bank guarantee was in the nature of an unconditional bond (the Guarantee).
The Guarantee, required BNP Paribas to pay $55 million to Santos if a letter of demand was received in the form of the draft attached to the Guarantee, that purported to be signed by an authorised representative of Santos.
The Demand
The dispute arose in December 2015, when Santos sent the Demand, together with the Guarantee and required documents demanding BNP Paribas pay $55 million to it pursuant to the terms of the Guarantee.
BNP Paribas refused to meet the Demand, asserting that the Demand did not strictly comply with the draft attached to the Guarantee. The words “authorised signatory of Santos Limited” were included in the draft attached to the Guarantee, however they were not used in the Demand submitted by Santos. The Demand included a signature and the signatory’s position in Santos (namely, General Manager Development). Nor was the Demand on the letterhead of Santos.
“I’ll tell you why you don’t have your $55 million”
The Court determined that in construing the Guarantee, it is relevant to consider the commercial purpose of it. Given a performance security is considered “as good as cash”, the principle of strict compliance is fundamental to the dependability of any Guarantee and duly relieved BNP Paribas “of the necessity to look beyond whether the party making the demand had met the stipulations” of the Guarantee.
The principle of strict compliance needs to be “applied intelligently” when concerning the form and content of the Demand. The Court held that an intelligent application of the principle of strict compliance required Santos to deliver a letter of demand which complied with all “essential matters” on its face, and did not require BNP Paribas to make their own inquiries.
The Court found that there was no representation that the Demand was executed by an “authorised representative” of Santos, notwithstanding the position of the signatory was specified.
Identifying the position of the signatory (General Manager Development), “merely indicated that he held a particular position in the company and said nothing as to his authority in that role.” The Demand therefore did not contain any statement of authority to sign on behalf of Santos, and as a result, BNP Paribas could reject the demand for payment.
The Court found that the failure to put the Demand on Santos letterhead did not impact on the validity of the Demand. The letterhead upon which the Demand is based is therefore not an essential matter.
As the Guarantee had expired by the time the Court made its determination, Santos was unable to reissue the Demand.
Where does this leave you?
For an issuer of a performance security, it is important to properly review any letter purporting to be a demand for payment under the performance security and to consider the authority of the signatory to that demand.
To claimants under such performance security it is important to ensure that any demands complies with all essential matters, importantly by ensuring that the person signing the demand has the requisite authority which must be readily apparent on the face of the demand itself.
Only those demands that strictly comply with the essential matters will result in an obligation on the part of the security provider to “show the money”.
For more information please contact Dajana Malnersic or Richard Lyne on 02 9234 1500.