banking law

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September 18, 2019

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It is a comfort, which is issued by the issuing bank to the beneficiary in whose favour the guarantee is issued to cover the losses if the principal debtor fails to abide by the terms of the agreement. Generally, it is issued in cases where either party requires strong business commitment and assurances that the other party will fulfil the contractual obligations envisaged in the contract. It is most commonly used collateral in any international business.

UAE being most commonplace for international investors, the usage of bank guarantees is manifestly large in number. The Commercial Lawyers in Dubai has outlined various aspects of bank guarantee and the law of UAE governing the same. Federal Law number 18 of 1992 on Commercial Transactions Law regulates the very aspect of bank guarantee and defines it under Article 411 as follows: "An undertaking issued by the bank to settle the customer's debt to a third party in line with the conditions agreed upon and mentioned in the guarantee, which may be any given point of time or unlimited."

Understanding the concept

Guarantee issued by the bank is considered as a commercial activity irrespective of the person for whom the guarantee is issued. Thus, it is governed by the provisions of Commercial Transactions Law. In addition, it also covers certain aspects of Civil Transactions Law (Federal Law Number 5 of 1985).

Each party involved in the bank guarantee has independent rights and obligations. The issuing bank or the guarantor has distinctive obligations as that of the principal debtor. Importantly, any guarantee issued by the bank is completely separate from the contract or agreement entered into by the parties.

The bank or the guarantor is under an obligation to indemnify the beneficiary regardless of his position and the separate arrangement between the principal debtors or the beneficiary. The guarantor and the principal debtor have independent obligations towards the beneficiary, as the bank guarantee arises joint and separate obligations.

Accordingly, a bank guarantee is eminent from other guarantees mentioned under the Commercial Transactions Law which has the tendency to create contingent obligations dependent on happening of a certain event.

Structure of a Guarantee

In accordance with the Commercial Transactions Law, a bank guarantee should be in a specified format and must entail the following details:

  1. It must be of a certain specified amount. A bank guarantee without a specific amount or a vague amount shall not be enforceable;
  2. There is no obligation to mention the time limit on the guarantee. However, it is pertinent to note that, if there is a time limit mentioned on the guarantee, it shall be deemed expired post the expiration of such time. This is in accordance with Article 418 of the Law, which states that unless otherwise expressly agreed to renew the guarantee prior to the expiry and request for payment is received from the beneficiary, the guarantor should be allowed to discharge the liability vis-a-vis the beneficiary post the expiration of the bank guarantee;
  3. Supposedly, the time limit is not mentioned on the guarantee; it shall be deemed expired in accordance with the UAE law that is 10 years from the date of issuing the guarantee.

It is indeed confirmed by the Commercial Transactions Law, that the Beneficiary is not empowered to assign his rights to any third party under the bank guarantee without the prior written consent of the guarantor. Alternatively, the beneficiary can be offered the right of assignment while finalizing the bank guarantee thereby seeking prior permission of the guarantor to allow the beneficiary to transfer the rights in the bank guarantee.

The right transferred under the bank guarantee allows the assignee act on the position of the beneficiary and possess all the rights as that of the beneficiary. Accordingly, the parties will be liable to the assignee, and the original beneficiary will have no rights or claims on the guarantor or principal debtor, post the transfer.

Invoking the Guarantee

Despite the fact that the issuance of a Bank Guarantee results in joint and a spate liabilities of the Guarantor and the Principal Debtor, the Guarantor is just at risk to pay to the Beneficiary upon the invocation of the Bank Guarantee by the Beneficiary and not upon default or act or oversight by the Principal Debtor. Primarily, a Bank Guarantee ought to be unrestricted; however, if it is subject to any conditions regarding the submission of any documents by the beneficiary, such conditions should be clearly outlined in the bank guarantee. The Beneficiary will not have the capacity to invoke the Bank Guarantee except if such conditions are not met or the required documents are not submitted. It is the obligation of the Guarantor to demonstrate that the Bank Guarantee is liable to such conditions.

Once the beneficiary invokes the guarantee in accordance with the conditions mentioned in the guarantee, the guarantor is obliged to make such payment unless otherwise restricted by order of the competent court. It is, however, important to note that there is no time limit for the guarantor to make payments post the invocation of the bank guarantee. This is generally stipulated in the concerned document and agreed upon by the parties. The law has offered freedom to the parties to decide the time within which the guarantor will make the payments post the invocation of the bank guarantee at the time of issuance or signing the guarantee.

Notwithstanding with the foregoing, if the guarantor fails to abide by the terms of the guarantee and default in making the payment, it shall amount to the violation of the Bank guarantee, which empowers the beneficiary to file civil proceedings against the guarantor to remedy such breach. Importantly, considering the separate obligation of the guarantor, the beneficiary cannot raise a claim against the principal debtor before filing a case against the guarantor. Ergo, the beneficiary can claim the amount from the principal debtor. However, post-filing the case against the guarantor.

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