Performance Bonds &

Guarantees in Qatar

Julie Tuck
Senior Associate
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Today’s Performance …
• Performance security generally
• What are bonds & guarantees?
• Contractual structure
• Applicable Qatar Law
• Expiry & renewal
• Calls on bonds/guarantees

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Performance Security –
background & principles

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Who should provide performance
security?
• In theory - not only for employers as
beneficiaries – can work both ways!

• Contractors? Consultants? Suppliers?

• What is the purpose of the guarantee & under

what circumstances would it be called?

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Types of Performance Security
• Can take several forms:
• performance bonds & guarantees
• parent company guarantee
• tender bonds
• advance payment guarantees
• retention or retention bonds,
• vesting deeds
• project accounts

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Quote from Mr Issa Mohannadi
(CEO Dohaland):
“In a recession we need to know that people are capable of
supporting themselves, so we need to check whether they are
getting paid for work they have done in other countries.”

“We are seeing people asking for advance payments and we are
willing to help with that. We always ask for a payment guarantee
from a bank in return, but if the firm is unable to provide it we will
still consider working with them in some circumstances – for
instance, if they can provide an asset as a guarantee.”

(Interview in UK’s ‘Building’ Magazine January 2010)

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What are bonds &
guarantees?

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Types of bonds &
guarantees? (1)
• Unconditional
• stands alone, ‘on-demand’
• no reliance on underlying contract
• considered onerous in construction industry
• “… discount on contract price…”
• variation of underlying contract has no effect
on guarantee
• vast majority of bonds in Qatar are this kind

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Types of bonds &
guarantees? (2)
• Conditional
• ‘co-extensive’
• intrinsically tied to the underlying contract
• requires evidence of breach of underlying contract &
possibly of loss suffered:
• decision from independent expert or adjudicator; or
• full court judgement or arbitration award
• variation to underlying contract may effect guarantee
• rare in Qatar
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Unconditional or
Conditional obligation?
“… on your written demand in the event that [the
contractor] fails to execute the contract in
perfect performance.”

Esal v Oriental Credit [1985] English courts held:

• trigger for payment was the demand, not the breach
• bank could not be expected to assess performance
• unconditional guarantee
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Example wording in
Qatar

“… we, [**] Bank, hereby irrevocably undertake

to pay you any sum not exceeding [QAR **] upon
receipt by us of your first demand in writing
stating:
(i) that the Principal is in breach of his obligation(s)
under the underlying contract and
(ii) the respect in which the Principal is in breach”

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Issues for ‘debtors’

• Parties to the underlying contract do not

control terms of guarantee – must agree with
guarantor

• See & agree terms of required guarantee

• Who must give the guarantee?

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Who gives the
guarantee?

• Law for guarantees generally:

Civil Law (Law No. 22 of 2004) Articles (808)-
(836)

• Law for guarantees given by banks:

Commercial Law (Law No. 27 of 2006) Articles
(406)-(413)
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Performance bonds &
guarantees – contractual
structure

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 Contractual Triangle
Debtor
(Contractor/Consultant)

Underlying contract
(Building contract/ Counter Indemnity
Consultancy Agreement) Agreement
(with security)

Creditor Guarantor
(Employer/Client) Bond/Guarantee (Bank)
(typically 10%)

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Guarantor’s Security
for counter-indemnity

• Not a Guarantor risk; debtor carries risk

• Guarantor takes security – funds or assets
• In Qatar between 0% - 100% of bond amount
• Debtor’s ability to source guarantee:
• indicates financial strength
• evidence of ability to deliver contract obligations

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Qatar Law – General
Principles

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The Commercial Law (1)
Article (406):
“A letter of guarantee is a written, non-cancelable
undertaking issued by a bank at the request of one of
his customers …, to pay a sum of money, fixed or to
be fixed to … “the beneficiary”, if the beneficiary
requests him to do so, within the period specified in
the letter, without taking any objection into
consideration. The letter of guarantee shall specify
the purpose for which it was issued.”
(underlining added)

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The Commercial Law (2)

Article (413):
“The rules of international transactions
concerning the letter of guarantee shall
apply in respect of any matter not
specifically provided for in this section.”

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ICC Uniform Rules on Demand
Guarantees (URDG)

• International Chamber of Commerce

Commission on Banking Technique & Practice
• International rules – to apply if incorporated
• Current: URDG No. 458 – since 1992
• From 1 July 2010 new URDG No. 758
• Does not apply to conditional guarantees

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Guarantees under Civil Law (1)

Article (808):
“The guarantee is a contract by virtue of
which a person guarantees the execution
of an obligation, by undertaking to the
creditor to fulfill this obligation if the debtor
has not personally fulfilled it.”

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Guarantees under Civil Law (2)
• Commercial Law applies to: “… undertaking
issued by a bank … to pay a sum of money …
without taking any objection into consideration.”

• What if these words are not included in the

guarantee?

• Will Civil Law apply instead of Commercial Law?

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Guarantees under Civil Law (3)
Article (818)
1. The guarantor shall be entitled to depend on
all the grounds which the debtor is entitled to.

Creates:
• link between guarantee & underlying contract
• possibly a condition to the claim succeeding

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Guarantees under Civil Law (4)

Suggested wording for beneficiaries in

guarantees:

“…upon receipt by us of your first demand in

writing notwithstanding any contestation or
objection by [the bank] or [the contractor].”

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Expiry & renewal of
bonds/guarantees

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Expiry dates
• Conditional guarantees
• normally end on event
• Civil Law Article (817) “The guarantor shall be
exonerated with the exoneration of the debtor”
• Unconditional guarantees
• normally fix expiry date
• ‘Extend or call’ clause
• Check time periods sufficient for administrative
renewal
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‘Extend or call’ clauses
Consider additional provisions if call is made for
failure to extend:
• funds received to be held by beneficiary on
debtor’s behalf
and
• funds returned to debtor if no call required for
other default

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Calls on bonds/guarantees

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On-demand – unfair call?
• Depends on the call terms: are documents
required to justify the call?

• URDG 458:
• guarantors to examine the required documents: “…
with reasonable care to ascertain whether or not they
appear on their face to conform with the terms of the
Guarantee”
• if they don’t conform or appear to be inconsistent with
one another, they shall be refused
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Contractual terms for bond call

FIDIC Silver/Yellow/Red Book Clause 4.2:

Employer will not call on bond except for sums
due under the contract if:
• Contractor fails to: extend bond, pay a sum due, or
remedy a default; or
• Employer is entitled to terminate the contract due to
contractor default or insolvency

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Challenging or ensuring bank pay-out (1)
• Whichever side you are on – look at terms of
bond and underlying contract
• Process:
• ‘default’ or ‘dispute’ likely to be evident
• Beneficiary calls on bond/guarantee
• Debtor may have notice from Guarantor or
Beneficiary
• Guarantor may be reluctant to pay but also may be
wary of breaching terms of guarantee
• Nature & terms of the counter-security may be
relevant here
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Challenging or ensuring bank pay-out (2)

• Employer’s options if Bank delays or refuses payment

• Contractor’s options to prevent Bank from paying

• Injunctions: what will the court consider?

• Contractor’s options if guarantor already paid out

• ‘War stories’
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Thank you

Julie Tuck
Denton Wilde Sapte
+974 459 8980
julie.tuck@dentonwildesapte.com

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