Bank guarantees are frequently given as security in commercial transactions because they are widely regarded as being ‘like cash’. However, the Queensland Court of Appeal’s recent decision in Santos Limited v BNP Paribas confirms that compliance with the terms of a bank guarantee is an essential precondition to payment on demand.

Santos decision

In Santos Limited v BNP Paribas [2019] QCA 11, Santos sought to call on a bank guarantee, demanding payment of $55 million.

The bank guarantee required the demand to be in a specified form and to be signed by an authorised signatory of the beneficiary.

Santos changed some of the wording of the form and, critically, did not state in the demand that the signatory was an authorised signatory.

The failure to include the reference to an authorised signatory (as required by the specified form) was fatal.

The Court noted the commercial purpose of bank guarantees to be ‘as good as cash’, however, having regard to the terms of the security, the substantial departure from the specified form rendered the demand ineffective.

COMMENTS 

The decision serves as a timely reminder that the beneficiary of a bank guarantee must pay careful attention to the terms of the underlying contract and bank guarantee before making a demand.