"Close enough not good enough" in the Queensland Court of Appeal: notice must be issued by a duly authorised representative or signatory of the claimant

In brief

The case of Santos Limited v BNP Paribas [2019] QCA 11 concerned an appeal to the Queensland Court of Appeal against an order of His Honour Jackson J in the Queensland Supreme Court. His Honour had previously dismissed the Appellant Santos Limited's (Santos) application for summary judgment on a claim for payment of $55 million due under a performance security issued by the Respondent, BNP Paribas (BNP). Upholding the decision in the Court of Appeal, Her Honour Holmes CJ (Fraser and Morrison JJA agreeing) determined that the notice issued was defective as it had failed to comply with the draft letter attached to the performance security, and therefore dismissed the appeal with costs.

Performance security and draft letter

A performance security is defined as an unconditional bond or undertaking by the issuer to pay money of an agreed amount at the request of the claimant where arising (see Wood Hall Limited v Pipeline Authority (1979) 141 CLR 443 (at page 445), cited in Santos Limited v BNP Paribas [2018] QSC 105 (at [2]) (Jackson J)). BNP had issued a performance security in the form of a bank guarantee to Santos for the purposes of securing the performance of a contractor (Fluor Australia Pty Ltd), which was to provide engineering and design services to Santos for the purposes of one of its Coal Seam Gas extraction projects. The performance security was initially issued by BNP in the amount of approximately $75 million on 30 January 2012. That amount was later revised down to $55 million by Santos. A draft letter was attached to the performance security as a "template" document that Santos was to use in the event that it wished to make a claim on the bank guarantee. Santos subsequently sought to make a claim on the guarantee in terms different to that of the attached draft letter. 

Letter of demand

On 18 December 2015, Santos issued a "letter of demand" which stated the words "Santos GLNG Project" rather than using Santos' official letterhead. The document was drafted in terms largely different to that of the draft letter, demanding payment of $55 million as owed under the bank guarantee issued by BNP. Critically, the letter was signed off as follows:

"Yours sincerely,

Santos Limited - GLNG Upstream Project

[handwritten signature]

Rob Simpson

General Manager Development"

BNP refused to meet Santos' demand on the basis that it was defective as its maker had not purported to appear as a duly authorised representative or signatory of the claimant. Moreover, the demand had not contained the official letterhead of the claimant and had not been drafted in terms contemplated by the draft letter. 

Application for summary judgment

Both parties brought an application for summary judgment against each other pursuant to rule 293 of the Uniform Civil Procedure Rules 1999 (Qld). Santos proceeded on the basis that the demand had met the requirements of the performance security issued. BNP proceeded on the basis that the notice was defective and the demand was therefore non-compliant. Jackson J gave judgment for BNP on Santos' claim.

Grounds of appeal

Santos contended that Jackson J had erred in law with respect to two matters. First, that His Honour had found Mr Simpson's signature, when coupled with his position description, had not amounted to the necessary representation of authority required of the claimant, and second, that His Honour had failed to consider the demand as a whole, or to give consideration to the demand in the context in which it was given. Conversely, BNP contended that Santos had failed to meet the requirements of the performance security in that it had not been issued on a "Santos Limited" letterhead; second, that it had failed to identify Santos as the necessary person desiring payment under the performance security issued; and third, that it had failed to properly identify the performance security itself.

Santos relied on the authority provided in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 (at [38]) (Pacific Carriers) that both express and implied authorisations were representations which were considered equally actionable at law. Santos argued on account of the authority provided in Pacific Carriers that it was possible for a principal to equip its agents "with a certain title, status and facilities" and permit that agent with the ability "to act in a certain manner without taking proper safeguards against misrepresentation". Santos further argued that "the principle of strict compliance had a bearing on [the] construction" of the performance security, such that "any suggestion that performance securities were to be construed more strictly than other commercial instruments was wrong." Put alternatively, the consideration as to whether the notice was compliant or not was one that required an intelligent, rather than mechanical application of the principle of strict compliance. 

Conversely, BNP relied on the principles of strict compliance in that Santos had been bound to provide notice as claimant in the precise form of the draft letter attached to the guarantee. The Court ultimately agreed, stating that the purported authority of the signatory "had to be manifest … on the face of the document", such that "[if] the signature alone were sufficient to convey the purport[ed] authority, the requirement of [a] signature by an authorised representative … would be rendered otiose".

Proper construction of the performance security

Strict compliance

The Court of Appeal opined that the principle of strict compliance relieves the issuer of the security from any necessity to look beyond whether the party making the demand has met the stipulations within the guarantee in question and instead allows the issuer of the security to take the claim that has been made at face value and in accordance with the security provided to the claimant. As Jackson J had held below, the Chief Justice referred to the High Court's decision in Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85 (at [88]-[99]) (Simic) where the plurality stated:

"[The] issuer … is not required or intended to be concerned with the terms of the underlying contract. … The issuer's sole concern is to provide security in accordance with its contract with its customer and, when the security is issued, to see whether there has occurred the event stipulated in the instrument on which the issuer's obligation to pay arises. 

In effect, such securities "create a type of currency" and are treated as being "as good as cash". Instruments of this nature are essential to international commerce and, in the absence of fraud, should be allowed to be honoured free from interference by the courts."

Principle of autonomy

As issuer of the security, BNP was not required to concern itself with the terms of the underlying contract of whether the contractor had in fact performed its obligations. Rather, its sole concern was to provide security as it was contracted to do, and determine whether or not the specified event triggering its obligation to pay had arisen. The High Court stated in Simic (at [85]) [emphasis added]:

"Subject to fraud perpetrated by a beneficiary, [the] unconditional promise to pay on demand is independent of any underlying transaction and any other contract. [The] principle of autonomy reflects that those instruments, by their nature, stand alone. Not only are they equivalent to cash, but, by their terms, they also require that the obligations of the issue are not determined by reference to the underlying contract. The principle of autonomy dictates that the surrounding circumstances and commercial purpose of the [underlying contract] are different from those of the [instrument as issued]."

Commercial context

It is also relevant to note that Jackson J at first instance states that regard must be had to the commercial context in which instruments such as performance securities are issued and the purposes for which they are issued. His Honour quoted from the High Court in a recent restatement on the general rules of construction for commercial contracts in Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544 (at page 551, [16]) [emphasis added]:

"It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it."

Conclusion

When it comes to issuing notice, it appears that "close enough" will not be "good enough". 

As Viscount Sumner once stated in Equitable Trust Co of New York v Dawson Partners Ltd [1927] 2 Lloyd's Rep 49 (at 52), put simply:

"[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." 

Her Honour Chief Justice Holmes states that effective notice on behalf of the claimant requires:

• a positive representation on the part of the maker of the notice that they are, in fact, a duly authorised representative and signatory of the claimant; and 
• that the authority upon which the notice is provided by the claimant must be manifest on the face of the document.

Courts are now unlikely to look to the extrinsic considerations of a matter, nor tolerate arguments of implied authorisation stemming from the performance of an underlying contract existing between the parties. Courts are now likely to take a strict approach in circumstances where failure to include specific statements of authorisation have occurred, even where administrative error or mechanical omission have infected a notice issued by a claimant.