Be Aware of the Legal Consequences of Issuing

Guarantee Cheques in UAE

Author: Dr. Hassan Elhais

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.

Related Links
Covid-19 Measures Issued by Central Bank of UAE
An Introduction to Corporate Guarantee
What is the Procedure for Applying for Bail after Being Detained?
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