Legal Risks in Performance Security: Lessons from Santos v Fluor for Energy Sector Investors

The energy sector's reliance on large-scale infrastructure projects—ranging from liquefied natural gas (LNG) terminals to renewable energy grids—demands not only technical precision but also legal rigor. Yet, as the landmark Santos v Fluor litigation has shown, even the most meticulously negotiated contracts can unravel over seemingly minor procedural missteps. For investors, the case underscores a critical truth: in the world of performance security, legal form often trumps substance.

The Perils of Strict Compliance

In 2019, the Queensland Court of Appeal delivered a sobering verdict in Santos Limited v BNP Paribas. The court ruled that Santos' attempt to draw down a $55 million performance bond—issued by BNP Paribas to secure Fluor's obligations under a coal seam gas project—was invalid. The flaw? The demand letter, though signed by a senior executive, failed to explicitly state that the signatory was an “authorised representative” of Santos. The court emphasized that performance security is a “self-contained financial instrument,” enforceable only if demands strictly adhere to its terms.

This decision has profound implications for capital certainty. Energy projects, by their nature, involve high upfront costs and long timelines. A rejected performance bond claim can delay dispute resolution for years, eroding investor returns and destabilizing project timelines. For instance, the Santos v Fluor litigation has already cost both parties over $120 million in legal fees, with the dispute still unresolved as of 2025.

The Strategic Case for Legal Review Protocols

The Santos case is not an outlier. Across the energy sector, performance bonds are increasingly scrutinized for procedural flaws. A 2023 study by the Australian Institute of Company Directors found that 34% of performance bond disputes in the construction and energy sectors involved rejected claims due to non-compliance with form requirements.

For investors, this reality demands a shift in due diligence. Traditional risk assessments often focus on technical feasibility and market demand, but contractual compliance must now be a cornerstone of evaluation. Key steps include:
1. Clarity in Signatory Authority: Contracts should explicitly define who qualifies as an “authorised representative” for performance bond demands, including examples of acceptable titles and documentation.
2. Pre-Approval of Demand Templates: Standardised templates for performance bond claims, reviewed by legal counsel, can preempt disputes over form.
3. Contingency Planning: Investors should negotiate clauses allowing for alternative dispute resolution (ADR) if a demand is rejected, ensuring that project timelines remain protected.

The Broader Risks of Judicial Referrals

The Santos v Fluor case also highlights a growing trend: the use of judicial referrals to resolve complex disputes. In 2021, the Queensland Supreme Court referred the bulk of the case to a panel of expert referees, a process that Fluor argued lacked procedural fairness. While such referrals aim to expedite resolution, they often lack the transparency and safeguards of traditional litigation. For investors, this introduces another layer of uncertainty. A 2024 report by the Australian Law Reform Commission noted that 22% of referred cases in the energy sector resulted in rejected referee reports, forcing parties back to court and inflating costs.

Investment Advice: Prioritize Legal Certainty

Energy investors must treat legal due diligence as a strategic asset, not a compliance checkbox. This means:
- Engaging Specialized Counsel: Legal teams with expertise in performance security and construction law should be involved early in contract drafting.
- Demanding Flexibility in Dispute Clauses: Contracts should include mechanisms for renegotiation if a performance bond demand is rejected, avoiding protracted litigation.
- Monitoring Regulatory Trends: As courts increasingly adopt referral processes, investors must stay informed about procedural changes that could impact dispute resolution.

Conclusion

The Santos v Fluor litigation is a cautionary tale for energy investors. It reveals how a single procedural oversight can derail billions in capital and delay critical infrastructure. Yet it also offers a roadmap for resilience: by embedding legal rigor into every stage of project development, investors can transform risk into competitive advantage. In an industry where margins are thin and timelines are unforgiving, the cost of legal certainty is far less than the cost of uncertainty.

For those who act now, the lesson is clear: in the energy sector, as in law, the devil is in the details—and the details matter.