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