How three missing words cost $55 million

Construction Litigation, Contract Administration

Does a demand on performance security need to strictly comply with the formal requirements of the instrument?

Or is near enough good enough?

This was the question the Court had to consider recently, with a hefty sum of $55 million riding on the outcome.

Unfortunately for the claimant, the Court found that strict compliance with formal process is necessary for a valid claim on a performance security.

For the parties involved, this meant that a demand for payment of $55 million under a performance security was invalid.

Santos Limited v BNP Paribas [2018] QSC 105 (21 May 2018)

Santos Limited (Santos) engaged Fluor Australia Pty Ltd (Fluor) on the Gladstone LNG Upstream Project in North Queensland.

Fluor provided performance security in the form of an unconditional bond issued by BNP Paribas (BNP).

The performance security was due to expire on 31 December 2015.

On 21 December 2015, Santos issued a demand to BNP for payment of $55 million pursuant to the performance security.

BNP refused to pay any amount to Santos because Santos’ demand did not strictly comply with the formal requirements of the performance security instrument.

The performance security contained the form of demand required to be used. The form ended with:

“Yours faithfully
Authorised signatory of Santos Limited.”

The demand issued by Santos ended with:

“Yours sincerely,
Santos Limited – GLNG Upstream Project
Rob Simpson
General Manager Development”

The issue was not that the signatory lacked actual authority to sign the demand on behalf of Santos.

Rather, it was that the demand did not expressly state that he was the “authorised signatory of” Santos Limited.

The Decision

According to the Court, it was of critical importance that a financial institution only pays on a demand which strictly complies with the requirements of the performance security – near enough is not good enough.

This is because of the commercial context in which performance securities of this nature are issued.

The financial institution undertakes unconditionally to pay the amount promised to the named beneficiary when presented with a complying demand. Usually, payment is made immediately by the financial institution upon demand. This is why the bond is said to be “as good as cash.” Accordingly, it is imperative that a financial institution is obliged to act only when there is strict compliance with the performance security.

As Santos’ demand failed to state that it was signed by an “authorised signatory of” Santos, it did not strictly comply with the security instrument.
BNP was not obliged to pay the security amount of $55 million.

What you need to do

If you hold performance security under a construction contract, before you take any steps to demand payment under the security, you need to ensure that the demand is properly made. This includes ensuring that the demand strictly complies with the formal requirements set out in the performance security.

Read the security instrument and the contract carefully, and document a checklist of the requirements that you need to meet, including forms, notices and processes that might need to be followed.
If you have provided performance security under a construction contract which is cashed by the beneficiary, you may have grounds to challenge the demand for payment on the basis that it was not validly made, for failing to comply with the formal requirements.

If you’re not sure what is required in relation to a performance security, get in touch with us.

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