Introduction – Bank Guarantees in UAE

Bank guarantees are an essential element of commercial life in the United Arab Emirates (UAE), providing financial assurance and supporting confidence in contractual relationships. Whether between contractors and employers, suppliers and buyers, or companies and government authorities, bank guarantees help mitigate risk and ensure parties fulfill their obligations.

A bank guarantee is a written undertaking from a bank to pay a certain amount to a third party (the beneficiary) in the event the bank’s client (the applicant) fails to perform under a contract. It functions as a financial backstop that protects the beneficiary against default without requiring upfront payment. In the UAE’s fast-growing, project-based economy, bank guarantees are common in construction, real estate, trading, and procurement.

Common Types of Bank Guarantees

The most widely used bank guarantees in the UAE include performance guarantees, advance payment guarantees, bid bonds, payment guarantees, and customs guarantees.

Performance guarantees assure the beneficiary that the contractor will complete the project or supply as agreed. If the contractor fails, the beneficiary may call on the guarantee to cover losses or complete the work.

Advance payment guarantees are issued when a party receives upfront funds. They ensure the beneficiary can recover the advance if the applicant fails to fulfill the contract.

Bid bonds (or tender guarantees) are used in public and private tenders to ensure the seriousness of the bid. If the bidder withdraws after being selected, the bond can be called upon.

Payment guarantees assure sellers or service providers that they will be paid once delivery is complete. These are frequently used in supply chain and international trade transactions.

Customs guarantees, meanwhile, provide assurance to UAE authorities that import duties and fees will be paid or obligations fulfilled, particularly in cases involving temporary imports or bonded warehousing.

Legal Framework and Key Features

Bank guarantees in the UAE are governed primarily by the UAE Civil Code (Federal Law No. 5 of 1985), specifically Articles 414 to 416, and further supplemented by the UAE Commercial Transactions Law (Federal Decree-Law No. 50 of 2022). Additionally, Central Bank regulations guide how licensed banks may issue and manage guarantees.

One of the fundamental principles under UAE law is that a bank guarantee typically constitutes an independent obligation. This means that the guarantee is separate from the underlying contract, and the issuing bank must honor a claim that complies with the terms of the guarantee, even if a dispute exists between the applicant and the beneficiary.

Bank guarantees are usually irrevocable and time-bound. They include a specified expiry date, and beneficiaries must submit any claim before this deadline, often along with a formal declaration of default or supporting documentation as stipulated.

Drafting and Language Considerations

The wording of a bank guarantee must be precise and aligned with the underlying contract. Any ambiguity in the terms—such as the amount, claim procedure, or duration—can lead to disputes or render the guarantee unenforceable.

In the UAE, guarantees may be issued in English, Arabic, or a bilingual format. Given that Arabic is the official language of the courts, it is common practice for important legal documents to be issued in both languages, especially where future enforcement may be required.

While most guarantees are “on-demand” (meaning they can be called upon without proving actual loss), some are conditional and require submission of specific documents or evidence. In either case, clarity in drafting is crucial.

Practical Considerations and Costs

From a business standpoint, securing a bank guarantee involves engaging a bank that assesses the applicant’s creditworthiness. Banks typically require collateral—such as cash deposits, fixed assets, or credit limits—before issuing the guarantee. The applicant pays fees that generally range from 1% to 3% of the guarantee amount per annum, depending on risk and duration.

Beneficiaries must ensure that the guarantee aligns with the terms of the contract, particularly regarding the value, duration, and events that may trigger a claim. Any claim must strictly follow the procedure and documentation requirements stated in the guarantee. Failure to do so can invalidate the demand.

Guarantees Issued by Foreign Companies and Banks

Where the applicant is a foreign entity—such as a parent company or supplier operating outside the UAE—the guarantee may be issued by an overseas bank. However, in practice, many UAE-based beneficiaries, especially government bodies and large corporations, require the guarantee to be either issued or confirmed by a bank licensed in the UAE.

This local confirmation is vital because UAE courts typically require a UAE party for enforcement purposes. If a guarantee is issued by a foreign bank without a local correspondent, enforcement may become challenging and time-consuming.

To avoid complications, international companies should coordinate with their banks to issue the guarantee through a UAE-based correspondent bank, or alternatively open a UAE bank account to facilitate the process. In high-stakes transactions, this approach helps ensure that the guarantee is both recognized and enforceable under UAE law.

Risks, Protections, and Abuse

While bank guarantees offer strong protection, they are not entirely free of risk. In rare cases, applicants seek to block payment by alleging fraud. UAE courts, however, only consider intervening in cases of clear fraud or abuse—typically defined as a dishonest or bad-faith claim by the beneficiary. This is a high threshold, and courts generally uphold the independence of the bank’s obligation unless compelling evidence is provided.

To mitigate risk, applicants should ensure that the terms of the guarantee and the underlying contract are aligned and provide appropriate checks against misuse. Beneficiaries, in turn, must be careful not to make unjustified claims, as doing so could lead to legal liability or reputational harm.

Conclusion to Bank Guarantees in UAE

Bank guarantees are a powerful commercial tool that instill confidence and reduce risk in the UAE’s business environment. Their use spans across industries and contract types, offering financial protection when one party fails to perform.

Understanding how guarantees operate, the legal framework that governs them, and the practical considerations of issuance and enforcement—especially when dealing with foreign entities—is essential for any business operating in or engaging with the UAE market.

Given the potential legal and financial implications, both local and international businesses are advised to seek legal counsel when negotiating, drafting, or invoking a bank guarantee. Properly structured, a bank guarantee is not just a security instrument—it is a foundation for trust in business.

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*The information on this page is not intended to be legal advice. This article is intended to provide an initial introduction to bank guarantees in the UAE.