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The
bank guarantee is a very important tool in the business process it ensures that
the liabilities of the debtor will be met in the event that the debtor fails to
fulfill the contractual obligations; Pursuant to Article 411(1) of Federal Law
No 18 of 1993 – Commercial Transactions Law (“CTL”), a bank guarantee is an
undertaking issued by a bank (the “Guarantor”) to settle the debt of a client
(the “Principal Debtor”) owed to a third party (the “Beneficiary”), in
accordance with the conditions agreed and included in the guarantee deed, which
may be for a definite or indefinite period of time”.
The
relationship between the Guarantor and the Beneficiary is governed by the
letter of guarantee and its terms and such relationship is independent of the
relationship between the Principal Debtor and the Beneficiary. Upon the
issuance of a bank guarantee, a direct relationship is established between the
Guarantor and the Beneficiary and the Guarantor may have a direct obligation
towards the Beneficiary in this respect, depending on the terms of the bank
guarantee.
In
practice a performance bond/advance payment bond backed by a bank guarantee is
an essential element in most of the construction contracts in UAE, However, the
beneficiary may misuse such a tool if a dispute arises between the business
parties, that is why it is very important to be aware of the rules regulating
the bank guarantee and to understand the Provisional Measures related to the
bank guarantee.
1. The Imposition of a Precautionary
Attachment on the Bank Guarantee (The Provisional Measures)
Article 417(2) of the CTL states (in
translation):
“In
exceptional cases, the court may at the request of the ordering person levy
seizure on the guarantee amount with the bank, provided that the ordering person
relies for his claim on serious and solid grounds.”
Article
417(2) of the CTL means that in the event of a dispute between the Principal
Debtor and the Beneficiary, which may lead to the Beneficiary invoking the bank
guarantee, the Principal Debtor may request the Court to impose a precautionary
attachment on the amount of the bank guarantee.
A
request for a precautionary attachment made by a Principal Debtor pursuant to
Article 417(2) of the CTL must be based on “serious and solid grounds”. The CTL
provides little guidance as to what is meant by “serious and solid grounds” and
therefore the assessment of same falls solely to the discretion of the Court,
and is determined on a case by case basis.
Once
the court grants the precautionary attachment order, the applicant needs to file the substantive
case within eight (8) days from the date of imposition of the precautionary
attachment before the competent court, pursuant to Article 114(2) of UAE
Cabinet Resolution No 57 of 2018 (the “Resolution”), which came into force on
16 February 2019, which states (in translation):
“The
judgment creditor shall, within eight days at most from the date of issuance of
the [attachment] order, file before the competent court the action for the
establishment of the right, in cases where the [attachment] is ordered by the
magistrate of summary justice, otherwise, the seizure shall be deemed void ab
initio.”
2. The Capacity of the Dubai Federal
Court to Order Provisional Measures in the Event there is an Arbitration
Agreement between the Principal Debtor and the Beneficiary
Recently,
a court judgment has been issued by Dubai courts on 22 May 2019, case number
110 /2019 commercial grievance appeal, stated that based on Article 18/2 of
Federal Law No 6 of 2018 – Arbitration Law issued on 3 May 2018 (“Arbitration
Law”) and, Article 21/1 of the Arbitration Law, in the disputes where the
parties agreed on arbitration, the precautionary attachment application shall
be filed before the chief judge of the appeal court or the arbitration
tribunal, as long as the parties did not agree on the jurisdiction of Dubai
courts relating to the interim relief.
This
judgment is interesting and contrary to the previous interpretation of the
legal rules in this regard.
Such
as Article 22 of the CPC, this clearly states that the UAE Courts shall have
exclusive jurisdiction to decide on the interim measures.
Also,
decisions of the Dubai Court of Cassation have established that if there is an
arbitration agreement between the parties but there is no agreement on
jurisdiction relating to interim relief, then any request for interim relief
shall be subject to the jurisdiction of the Dubai Courts. Please see the
decision by the Dubai Court of Cassation on 2 July 2005 in Cassation No. 204/
2005, Commercial.
The
above two different interpretations make it very important to the parties of
the arbitration agreement to specify clearly in the arbitration clause the
jurisdiction relating to the interim relief to avoid any unnecessary confusion
and to secure their legal position.
Summary:
A
bank guarantee is an important tool for business activities, and in order to
avoid any misuse of the bank guarantee in the event of dispute or disagreement
between the contracting parties, UAE legislature has tried to (a) create a
balance between the parties to prevent the beneficiary from misusing the letter
of guarantee and (b) provide the principal debtor the right to seek a
precautionary attachment and at the same time oblige the principal debtor to
file the substantive case within eight (8) days from the date of the imposition
of the attachment, Also it is very important to the parties of the arbitration
agreement to specify clearly in the arbitration clause the jurisdiction
relating to the interim relief.
Written by: Mohamed Abourassm Gaber
Executive Associate
Mahmood
Hussain Advocates and Legal Consultancy