Legal Consequence of Issuing Guarantee Cheques in UAE

By Sakshi Srivastava - 14 Mar 2022 Last Updated: 20 May 2022
Legal Consequence of Issuing Guarantee Cheques in UAE

Due to its commercial nature, the bank guarantee in the UAE is governed by Civil Transaction Law No 5 of 1985, regardless 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 discusses the meaning of a guarantee cheque, but also the legal implications of such cheques when issued in the UAE. Bank Guarantee:

The issuance of a bank guarantee creates a separate and independent obligation for the bank issuing such instrument, as well as the guarantor and principal debtor. It is considered an independent liability issued by the guarantor to the creditor, also known as the beneficiary, by the principal debtor.

The issuance of any type of transaction or underlying contract between the beneficiary or the principal debtor will have no effect on the bank guarantee. Regardless of any understanding or contract between any of the three parties, namely the guarantor, the principal debtor, or the beneficiary, or regardless of the position of the principal debtor, the guarantor will be bound by the bank guarantee.

The Legality of a Bank Guarantee

Amount of Bank Guarantee

 Under UAE law, a bank guarantee with no amount is not legal. It is expressly stated that a bank guarantee must be of a certain amount.

Time Limit for Bank Guarantee

 According to UAE law, the time limit for a bank guarantee is not required. If, on the other hand, the time duration is present in the instrument, it will automatically expire when the time period expires. Also, under CTL article 418, the guarantor's obligation may be waived if the instrument is not renewed before the guarantee expires or the beneficiary does not make a payment request within the prescribed time frame. Furthermore, it is implied that in the absence of the time factor, the general law of limitation will apply to the bank.However, because such a limitation period is also missing, it is assumed to be 10 years from the date of issuance of such instrument.

Assignment of the Instrument

 According to Article 416, the instrument will not be valid in the hands of a third party if the beneficiary assigns it to the third party without the guarantor's prior consent. In addition to the requirement of consent, it is specified that such consent be in writing. Furthermore, such a right can be granted to the beneficiary by the guarantor at the time of signing the bank guarantee by making it a part of the guarantee. Furthermore, the principle of assigning the bank guarantee to a third party states that once the beneficiary has assigned the instrument to the third party, the third party will become a new beneficiary and will replace the beneficiaryand will take the place of the old ones. This means that the beneficiary will have to give up all rights and claims relating to the instrument to the third party, and the guarantor will be liable only to the third party and will have to fulfil their obligations to the third party upon their request.

Invocation of Bank Guarantee

The beneficiary is the only party who can invoke the bank guarantee, and based on this invocation, the bank is obligated to pay the beneficiary regardless of the principal debtor's default, act, or omission in this regard. This instrument is intended to be free of conditions, but if a condition exists that requires a beneficiary to act on the condition in a specific way or submit any documents to the bank, the bank will not fulfil the payment request until and unless such an act is performed or a submission is made to the bank.Such conditions are said to be stated in the bank guarantee itself, and it is the guarantor's responsibility to demonstrate that such a condition is not met. The Court order is the only exception that allows the bank to refuse to pay the beneficiary on the successful invocation of the instrument; otherwise, the bank must make all payments related to the invocation.

Payment

 Upon invocation of the bank guarantee, the guarantor must make all payments due in relation to the guarantee within the time period specified in the guarantee. Thus, it is the responsibility of all three parties, namely the guarantor, the beneficiary, and the principal debtor, to establish a time limit for the guarantor to pay upon the beneficiary's request.

Injunction

 In some exceptional cases, the court may levy an annexation on the bank guarantee amount with the guarantor. Article 416 states that only serious and exceptional grounds can elicit such an interim injunction against the guarantor on the principal debtor's appeal and are subject to the court's decision. The Court of Cessation upheld this provision in an appeal no. 247/2007, ruling that the court will not prevent the bank from paying the beneficiary at the request of the principal debtor unless there is a compelling and exceptional reason to do so on the part of the principal debtor.

Failure to make Payment

 If the guarantor fails to make the payment against the bank guarantee, the beneficiary may file an application in court against the guarantor. 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.

Conclusion

Even if you don't have any established ties, use guarantees to conduct business with confidence. Dhanguard may be able to tackle your issues relating to the bank guarantees in UAE. Dhanguard offers customized solutions such as performance, advance payment, tender, warranty, financial guarantees, and among other things, upon request. 

Dhanguard has a knowledgeable team that can assist you and provide you with a hassle-free bank guarantee services in Dubai and UAE.

By Sakshi Srivastava

14-Mar, 2022

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