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