Be Aware of the Legal Consequences of Issuing Guarantee Cheques in UAE

banking law

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February 03, 2021

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The bank Guarantee in UAE is governed under Civil Transaction law No 5 of 1985 owing to its commercial nature heedless of the capacity of the party to whom such an instrument is issued or the reason for which it is issued. The concerned article by Civil lawyers of Dubai not only discuss the meaning of guarantee cheque but the legal consequences surrounding such cheques when issued in UAE. Concept of Bank Guarantee:

The issuance of bank guarantee give rise to a separate and independent obligation for the bank issuing such instrument i.e. the guarantor and the principal debtor. It is regarded to be an autonomous liability issued by the guarantor to the creditor, also known as the beneficiary, by the principal debtor.

There will be no effect of the issuance of any type of transaction or underlying contract between the beneficiary or the principal debtor on the bank guarantee. Irrespective of any type of understanding or contract between any of the three parties i.e. the guarantor, the principal debtor or the beneficiary or irrespective of the position of the principal debtor, the guarantor will remain bound to the bank guarantee.

The guarantor is assumed to be another principal debtor distinctive of the actual principal debtor and they both are not each others agent or representatives. A joint as well as a several liability is created on the part of both the guarantor and principal debtor and are regarded to be mutually exclusive of each other. This is considered to be a paramount difference between the guarantee and the bank guarantee, since unlike the bank guarantee, a guarantee give rise to incidental obligation.

Legality of Bank Guarantee:

1. Amount of Bank Guarantee: The UAE law does not consider a bank guarantee without any amount as legal. It is expressly provided that a bank guarantee should be of a specified amount.

2. Time Limit of Bank Guarantee: The time limit is not a necessary constituent according to the law of UAE for the Bank Guarantee. But if the time duration is present in the instrument, then it will on its own get expired on the lapse of such time period. Also under article 418 of the CTL, there is a chance of eliminating the obligation on the part of the guarantor when the case involved includes no renewal of the instrument before the expiry of the guarantee or when the beneficiary has not made a request of payment within the prescribed time. In addition to this, it is implied that where the time factor is absent, then the general law of limitation will apply on the bank guarantee. But since such limitation period is also absent, it is taken to be 10 years from the date of issuance of such instrument.

3. Assignment of the instrument: Article 416 enumerates that the instrument will not be valid in the hands of the third party as long as the beneficiary has assigned it to the third party without a prior consent from the guarantor. In addition to the requirement of the consent, it is provided that such a consent should be in writing. Moreover, such a right can be given to the beneficiary by the guarantor at the time of signing the bank guarantee by making it a part of the guarantee. Also the principle of assigning the bank guarantee to the third party involves that once the beneficiary has assigned the instrument to the third party, the third party will now become a new beneficiary and will replace the old ones from their place. This means that the beneficiary will have to part with all the rights and claims in connection with the instrument to the third party and the guarantor will also be liable to the third party alone and will have to discharge their duties towards the third party on their request.

4. Invocation of Bank Guarantee: The beneficiary is the sole party which can invoke the bank guarantee and based on this invocation, the bank has the obligation to pay to the beneficiary irrespective of any default or act or omission by the principal debtor in this regard. Primarily, this instrument is supposed to be without any conditions, but if such a condition is present, which requires a beneficiary to act upon the condition in a certain manner or submit any documents to the bank, then in that case, the bank will not be fulfilling the payment request until and unless such an act is done or submission is made to the bank. Such conditions are said to be mentioned in the bank guarantee itself and it is the responsibility of the guarantor to prove that such a condition is not fulfilled. The Court order is the only exception where the bank can refuse to pay the beneficiary on the successful invocation of the instrument, otherwise, the bank has to make all payments with respect to the invocation.

5. Payment: on the invocation of the bank guarantee, the guarantor should make all the payments due with respect to the guarantee, within the time period mentioned in the guarantee. Thus, it is the duty of all the three parties i.e. the guarantor, the beneficiary and the principal debtor to set up a time limit for the guarantor for the payment upon the request of the beneficiary.

6. Injunction: There may be some exceptional cases where an annexation is levied on the bank guarantee amount by the court with the guarantor. It is provided under article 416 that only the serious and exceptional grounds can attract such interim injunction against the guarantor on the appeal of the principal debtor and is subjected to the opinion of the court. This provision was held to be legal by the Court of Cessation in an appeal no. 247/2007, where it was held by the court that the court will not stop the bank from paying the beneficiary on the request of the principal debtor until and unless there is a compelling and exceptional reason to do so, on the part of the principal debtor.

7.Failure of making payment: In the cases where the guarantor fails to make the payment against the bank guarantee, the beneficiary can file an application against the guarantor for the same in the court. In addition to this, owing to the fact of independent obligations of both the beneficiary as well as the guarantor, there is no need for the beneficiary to file a case against the principal debtor before filing a case against the guarantor.

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