Bank Guarantee

Business partners’ uses bank guarantee in order to make sure the safety of the negotiated transactions in the business. In agreement with these document bank accepts a responsibility to pay a listed amount of money to the client in case the contractor fails to accomplish the terms of the contract.

A bank guarantee is a loan product but is much cheaper than a cash loan. Though, in this case, banks charges a specific commission fee that is generally a percentage of the amount of the transaction.

The service of a bank guarantee in UAE is attractive because it decreases possible risks of transactions and make sure the full discharge of responsibilities specified in the contract.

The parties to the bank guarantee are stated as follows-

Beneficiary 

The natural or legal person (can also be referred as client) who requests for making a payment and who accepts the amount of payment from the bank.

Principal

The originator of issuing a bank guarantee (can also be referred as the borrower)

Guarantor 

Any financial institution (bank or insurance company), which accepts a responsibility to make a payment to the person stated in the agreement instantaneously upon receiving request for payment.

Bank guarantees are beneficial and helpful not only for business owners but for banks also. Different from a loan, they does not require instant monetary coverage. Besides, such payments on guarantees can be delayed for some time. A commission fee for the provision of such guarantees can be charged compulsorily and in full amount.

Bank guarantees in UAE are distinguished depending on the features of a transaction, they are as follows-

types of bank guarantees in UAE

Payment Guarantee 

This type of bank guarantee ensures timely payment for the delivered goods or for the services rendered.

Tender Guarantee (Tender Bond) 

This type ensures fulfilment of payment requirements in case the succeeding tenderer refuses cooperation like cancels application, does not sign a contract, etc.

Tax and Customs Guarantees 

This type of guarantee ensure execution of obligations to the tax and customs authorities in UAE.

Advance Payment Guarantee 

This type of guarantee ensures refund of the advance payment in case the terms of the transaction are not fulfilled in relation to time & volume.

Performance Guarantee 

This type of guarantee serves a guarantee for all the type of services, tasks or delivery of goods that is performed in full and also in time.

Conditional & Unconditional Guarantee

Subject to the terms of monetary payment, a bank guarantee can be either classifies into conditional & unconditional guarantee. Conditional guarantee can be stated as a payment made on the availability of a written request of the beneficiary and the documents that confirms the fulfilment of responsibilities by the principal. In case of unconditional guarantee, the accessibility of a written request from the beneficiary is enough to make the payment.

Secured & Unsecured Guarantee

Moreover, bank guarantees can also be unsecured and secured. If there is a written commitment then the guarantee is unsecured. If there is any other way of ensuring such as pledging of a property then the bank guarantee is considered as secured.

Bank Guarantee under UAE cannot be for an undefined amount and it should also consists of a fixed amount for which the Guarantee is being provided.

There is no such requirement to provide a time limit in the Bank Guarantee under UAE Law. On the other hand, if time limit is included a Guarantee will expire routinely upon the expiration of such set limit. However, in case there is no time limit stated in the Bank Guarantee then the general limitation periods or time bars provided will be applicable. UAE Law does not offer a limitation period precisely for Bank Guarantees, so the general limitation period of ten years will be applicable for Bank Guarantees.

However the issuance of a Bank Guarantee effects in combined and several obligations of the Guarantor with the Principal Debtor. The Guarantor is only liable to pay to the Beneficiary on an invocation of the Bank Guarantee by the Beneficiary and not on an act of default by the Principal Debtor. Primarily, a Guarantee has to be unconditional, on the other hand if it is a subject to conditions or suggestion of any documents by the Beneficiary. Such conditions are to be provided within the writing of the Bank Guarantor. The Beneficiary will not be able to summon the Bank Guarantee unless the prescribed conditions are met. It is the obligation of the Guarantor to demonstrate that the Bank Guarantee is subject to such circumstances.

Upon the effective invocation of the Guarantee, the Guarantor is needed to make all payment of the due amount and cannot decline to make such payment if it is pursuant to a court order.

Consequently it is among the Guarantor, Beneficiary and the Principal Debtor to choose the time limit at the time of signing of the Bank Guarantee, for making payment after invocation

Bank Guarantee Related FAQ

Frequently Asked Questions