Shortcuts in drafting can have disastrous consequences
The recent case of Santos Limited v. BNP Paribas[1] demonstrates the need for extreme caution and care in drafting commercial documents, in this case, a demand letter made pursuant to a bank guarantee.
The facts
Briefly, Santos contracted with a building contractor for a multi-million dollar gas project at Gladstone. Pursuant to the contract, the building contractor provided a bank guarantee to secure its obligations under the contract with BNP Paribas bank. The bank guarantee (after amendment) was for $55 million.
10 days before the expiry of the bank guarantee, Santos made demand of BNP Paribas for the sum of $55 million under the bank guarantee. Unfortunately, the letter of demand issued to the bank fell short of the requirements of the bank guarantee in several respects.
The terms of the bank guarantee were important. They required any letter of demand to be in the form of the letter attached to the bank guarantee and to contain a statement that the signatory was signing the demand as an authorised representative of Santos Limited.
The most important defect in Santos’ letter of demand was that instead of using the words “Yours faithfully … Authorised signatory of Santos Limited”, as required by the pro forma letter attached to the bank guarantee, it was signed “Yours sincerely, Santos Limited – GLNG Upstream Project [signature] Rob Simpson General Manager Development”.
Court’s findings
The Queensland Court of Appeal held that such a method of signing was defective and non-compliant with the terms of the bank guarantee. Importantly:
It was the terms of the bank guarantee itself, and not the general law, which determined the form and content of any letter of demand. One of those terms required an express statement that the signatory was an authorised representative of Santos Limited.
Bank guarantees and related documents are strictly construed. Although not every word must be precisely reproduced on all occasions, the requirements of the form must be complied with. This fits with the commercial purpose of bank guarantees being “as good as cash”. It also accords with general commercial practice – namely, that in order for the bank to preserve its right to an indemnity from the contractor for the amount being paid out, the bank was entitled to require that the demand comply strictly with the bank guarantee’s terms.
Santos’ failure to sign off the letter correctly, and by explicitly stating the signatory was an authorised signatory of Santos Limited, was fatal. It was one of the few things the terms of the bank guarantee stated were essential.
When it comes to preparing documents, this case shows that the simplest failure can have catastrophic consequences. In this case, it was the inability of Santos to draw on a $55 million bank guarantee.
Take home lesson
When drafting demands under contracts, careful attention ought to be given to the wording of the demand and the strict requirements of the contract.
The article is of a general nature only. For particular legal problems, it is always best to seek one-to-one professional advice. If you have any questions or if we can be of assistance with any of the above, please contact Tony Scoglio or David Tooth on (07) 3833 2100 or info@scogliolaw.com.au.
[1] [2018] QSC 105