The UAE Federal Supreme Court (“FSC“) in a recent judgment categorically clarified key principles relating to a guarantee contract in bank financing transactions. Note, in the present context, we are referring to a guarantee given by a third party in connection with a borrower’s obligations to a bank—not a unilateral guarantee given by a bank relating to an applicant’s obligations to another party.
In its judgment, the two key findings of the FSC in the case were:
- Article 1092 of the UAE Civil Code is not applicable to guarantee contracts in a bank financing context;
- There is no prescribed form of a guarantee.
Article 1092 of the UAE Civil Code does not apply to a guarantee of a bank loan or facility
Article 1092 states that “If a debt is due, the creditor must claim for it within six months from the date on which it fell due, otherwise the surety shall be deemed to have been discharged”. In practice, UAE contracts of guarantee or a guarantee to which a UAE entity is party, will typically include a 1092 waiver. This practice arose from UAE Courts commonly applying Article 1092 in order to determine whether or not the claim should be heard. However, the FSC clearly stated “bank loans and facilities are not subject to Article 1092 of the Civil Transactions Law … Article 1092 is inapplicable in the case of a suretyship for commercial obligations”. This will give significant comfort to all banks’ lending to UAE entities that the lack of a 1092 waiver may not be fatal where a claim is made after the 6 month period and it is a commercial obligation.
Required formalities of guarantees contract
The FSC held in the judgment that guarantees do not require certain forms. Instead, they are subject to the general principles in the Civil Code regarding the formation of the agreement and the interpretation of the contracting parties’ intention. Hence, an offer of the guarantee and acceptance by the bank is sufficient. Furthermore, it held that the guaranteed amounts need not be specified in the guarantee as long as it is clear in the contract what is being guarantee. In the case, the FSC was happy that a general guarantee of “the satisfaction of all indebtedness of the client to the bank” is valid. Even though the actual the secured obligation was unspecified at the time the contract of suretyship was entered into, is determinable, because the thing guaranteed is the debt, not its amount. Accordingly, the usual practice of referring to the facilities secured (but with no amount mentioned) accords with this approach. Moreover, guarantees of all debts due to a bank can be considered as determinable.
What banks should do now?
The approach taken by the FSC now aligns with precedent from Supreme Court in Abu Dhabi. By contrast, in Dubai, the Court of Cassation has ruled that Article 1092 applies to all guarantees meaning the 6 month period would be enforced. Consequently, while the FSC judgment is important and welcome, we would need to see it followed by Dubai Courts before any change in practice is made in bank documents across the UAE. This judgment will be an essential reference point in any case where Article 1092 is in question.
How can we help?
Our Banking and Finance team have extensive experience working on finance transactions across the Middle East and North Africa (MENA) region, reflected in our position as a category leader across multiple jurisdictions. To discuss how this case could impact existing bank documentation or ongoing cases, please contact our Banking & Finance Team.
