Bank Guarantees in UAE Commercial Contracts: A Practical Guide to Calls, Conditions and Disputes

A bank guarantee can give the beneficiary access to funds quickly, often based on a compliant written demand rather than a full merits fight. That makes it one of the most powerful security instruments in UAE commercial practice. It also makes it one of the most disputed.

This guide is for businesses operating in the UAE: contractors issuing performance bonds, suppliers dealing with advance payment guarantees, landlords holding security under commercial leases, and trading companies requiring payment guarantees. Whether you are preparing to call a guarantee or trying to stop a call, the stakes are real. Performance bonds commonly sit around 10% of contract value, so a dispute on an AED 50 million contract can put AED 5 million at risk within days.

UAE courts generally treat on-demand guarantees as autonomous instruments and intervene only in limited, exceptional scenarios. That reality means bank guarantee disputes are usually won on wording and timing: what the guarantee requires, what the demand says, and how quickly you act when a call is imminent.

This guide explains how bank guarantees work under UAE law, when they can be called, what grounds exist to block a call, and what both parties should address when negotiating guarantee terms.

What Is a Bank Guarantee?

A bank guarantee is an undertaking by a bank to pay a specified sum to a beneficiary on demand. The bank's obligation is independent from the underlying contract between the parties. If the beneficiary makes a compliant demand, the bank must pay, regardless of whether the party who provided the guarantee disputes the claim.

Under Article 411 of the UAE Commercial Transactions Law, a bank guarantee creates joint and several liability between the bank and the party requesting the guarantee (the "principal debtor"). The bank is not acting as agent or surety. It is a principal debtor in its own right.

Key Terminology

Different documents use different terms for similar instruments:

On-Demand vs Conditional Guarantees

The single most important distinction is whether the guarantee is "on-demand" (unconditional) or "conditional."

On-Demand Guarantees

Most bank guarantees in the UAE are drafted as on-demand instruments. Article 414 of the Commercial Transactions Law defines a bank guarantee as an undertaking to pay "unconditionally and without restrictions," unless the guarantee itself imposes conditions.

Standard on-demand wording:

"The bank undertakes to pay the beneficiary on receipt of its first written demand stating that the principal is in breach of its obligations under the contract, the sum not exceeding [amount]."

With this wording:

• The bank must pay when the beneficiary makes a compliant written demand
• The bank cannot investigate whether a breach actually occurred
• The bank cannot refuse payment because the principal disputes the claim
• Payment typically follows within a short period, often one to two weeks

An on-demand guarantee functions, in practical terms, as near-cash security.

Conditional Guarantees

A conditional guarantee requires the beneficiary to satisfy specific requirements before the bank will pay. These might include:

• Submission of documents proving the breach (inspection reports, certificates, court judgments)
• Confirmation from an independent third party
• Evidence that a specific contractual trigger has occurred

With a conditional guarantee, the bank can refuse payment if the conditions are not met. The beneficiary may need to pursue arbitration or litigation to establish entitlement before the guarantee becomes payable.

Which Type Should You Require?

In UAE market practice, particularly in construction and government contracts, beneficiaries typically insist on unconditional instruments. Principals should focus negotiation efforts on other protections: reduction mechanisms, expiry dates, and clear trigger language.

When You Can Call a Guarantee

Assuming you hold an on-demand guarantee, you can call it by submitting a written demand to the issuing bank that complies with the guarantee's terms.

Requirements for a Valid Demand

1. Written demand addressed to the issuing bank
2. Statement that the principal is in breach of the underlying contract (in the form specified in the guarantee)
3. Amount claimed (up to the guarantee limit)
4. Submission within the validity period

The bank does not verify whether the breach actually occurred. A compliant demand that meets the guarantee's requirements is sufficient to trigger payment.

What the Bank Cannot Do

Under Article 417(1) of the Commercial Transactions Law, the bank is not entitled to refuse payment "for reasons relating to the bank's relation with the client or the client's relation with the beneficiary." This means the bank cannot:

• Refuse payment because the principal disputes the breach
• Delay payment to investigate the underlying facts
• Require proof of breach before paying
• Accept instructions from the principal to withhold payment (absent a court order)

If the bank refuses a compliant demand without a court order, it breaches the guarantee. The beneficiary can then claim the guarantee amount plus damages from the bank through banking and finance litigation.

When a Call Can Be Blocked

The principal has one avenue: applying to the court under Article 417(2) of the Commercial Transactions Law for a precautionary attachment order preventing the bank from paying.

The Legal Standard: "Serious and Solid Grounds"

Article 417(2) 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."

The law provides little guidance on what constitutes "serious and solid grounds," leaving the assessment to judicial discretion on a case-by-case basis.

How Courts Have Applied This Standard

The Dubai Court of Cassation has addressed this standard in several decisions. In Commercial Appeal No. 247/2007, the court held that it "will not stop the bank from paying the money under the Bank Guarantee to the Beneficiary unless there are exceptional and compelling reasons to do so, the claim is fully ascertained, and provided that there are no previous judgments in favour of the Principal Debtor against the Beneficiary based on the same documentation."

This establishes a high threshold. The court's focus on "exceptional and compelling reasons" reflects a policy of protecting commercial certainty in guarantee transactions.

Commentary on UAE court practice identifies several factual scenarios that courts have recognised as potentially meeting this threshold:

Procedural Requirements for Attachments

If the court grants a precautionary attachment, the applicant must file a substantive case within eight days under Cabinet Resolution No. 57 of 2018, Article 114(2). Missing this deadline renders the attachment void, and the bank can proceed with payment.

This tight deadline means principals must be prepared to commence formal proceedings immediately upon obtaining an attachment. In practice, this requires having the substantive claim ready to file before the attachment application is made.

Arbitration Clauses and Interim Relief

Where the underlying contract contains an arbitration clause, questions arise about which forum has jurisdiction over attachment applications. In a Dubai Court of Appeal decision dated 22 May 2019 (Commercial Grievance Appeal No. 110/2019), the court addressed the interaction between arbitration agreements and interim measures, including guarantee attachments.

The court held that under Articles 18 and 21 of Federal Law No. 6 of 2018 (the Arbitration Law), where parties have agreed to arbitration, applications for precautionary attachment should be filed before the chief judge of the Court of Appeal or the arbitration tribunal, provided the parties have not specifically agreed that Dubai courts retain jurisdiction over interim relief.

This position differs from earlier Dubai Court of Cassation jurisprudence (including Cassation No. 204/2005) which held that UAE courts have jurisdiction over interim measures where the arbitration agreement is silent on the point.

Practical implication: Parties should specify clearly in their arbitration clause whether UAE courts retain jurisdiction for interim relief relating to bank guarantees. Ambiguity on this point can cause delay or jurisdictional disputes at a critical moment.

The Reality of Attachment Applications

In practice, obtaining an attachment remains difficult. Courts are generally reluctant to interfere with guarantee autonomy because doing so undermines the commercial purpose of these instruments. Unless the principal has strong documentary evidence of completed performance, fraud, or manifest bad faith, an attachment application faces long odds.

Where attachments have succeeded, they typically involve clear factual circumstances: works demonstrably completed and handed over, or written acknowledgments from the beneficiary negating any basis for a claim. Assertions of good performance, without documentary proof, are generally insufficient.

Time Limits and Expiry

Guarantee Validity Period

Bank guarantees should specify an expiry date. If no expiry is stated, the general limitation period of ten years applies under Article 95 of the Commercial Transactions Law.

Critical point: If you do not call the guarantee before it expires, you lose the right to do so. We have seen beneficiaries lose significant sums because they were still in negotiations when the guarantee lapsed.

Article 1092 Time Bar

Article 1092 of the UAE Civil Code imposes a six-month time bar on claims against guarantors from when the obligation becomes due. However, UAE courts have interpreted this provision inconsistently:

DIFC and ADGM Guarantees

For guarantees governed by DIFC or ADGM law, different limitation periods apply. Under DIFC law, claims generally cannot be commenced more than six years from when the cause of action arose (excluding fraud). Where free zone legislation is silent on a particular issue, UAE Civil Code provisions may apply.

Parties should confirm the governing law of the guarantee itself, which may differ from the governing law of the underlying contract.

Common Mistakes

Practical Recommendations

For Beneficiaries

1. Require clear, unconditional on-demand wording from a UAE Central Bank licensed bank
2. Specify the exact trigger language in the underlying contract and cross-check against the guarantee
3. Include an automatic extension clause or ensure the validity period extends well beyond the contract period
4. Diarise expiry dates and review guarantee status regularly
5. Prepare compliant demand documentation in advance of any anticipated call

For Principals

1. Negotiate for conditional terms where commercially feasible, requiring documented proof of breach
2. Include staged reduction provisions tied to project milestones or delivery schedules
3. Cap the guarantee at a reasonable percentage of contract value (5% to 10% is typical for performance bonds)
4. Require return or release within a specified period after contract completion or expiry of the defects liability period
5. Document performance throughout the contract to support any future challenge to a call

For Both Parties

1. Clarify governing law and jurisdiction for disputes about the guarantee itself
2. Address interim relief jurisdiction expressly in any arbitration clause
3. Include provisions for guarantee renewal if the underlying contract is extended
4. Coordinate with banks early on wording, fees, and collateral requirements

What Happens After a Call

Recovery After a Wrongful Call

If a guarantee is called and the principal believes the call was wrongful, the remedy is to commence proceedings (litigation or arbitration, depending on the dispute resolution clause) seeking repayment of the guarantee amount, together with interest and potentially damages. This is a separate claim from any underlying contract dispute.

The principal must prove that the beneficiary had no entitlement to call the guarantee at the time it did so. In practice, these claims are difficult. The beneficiary will typically argue that even if the underlying dispute is eventually resolved in the principal's favour, the call was legitimate at the time because there was a genuine dispute about performance. Courts and tribunals examine the position as at the date of the call, not with hindsight.

Key Takeaways

How Kayrouz & Associates Can Help

Kayrouz & Associates' Corporate & Commercial and Litigation teams advise on bank guarantee matters across all sectors. Our services include:

• Reviewing and drafting guarantee provisions in commercial contracts
• Advising beneficiaries on calling guarantees and preparing compliant demands
• Advising principals on opposing calls and preparing attachment applications
• Representing parties in commercial disputes over guarantee calls in UAE courts and arbitration
• Advising on guarantee requirements for construction contracts and government tenders

For businesses that deal with bank guarantees regularly, whether as beneficiary or principal, we offer commercial contracts support on a retainer basis. This ensures guarantee provisions are reviewed consistently across your agreements and that you have access to advice quickly when a call is threatened or needs to be made.

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