Generally, it is issued in cases where either party requires strong business commitment and assurances that the other party will fulfil the contractual obligations envisaged in the contract. It is most commonly used collateral in any international business.
UAE being most commonplace for international investors, the usage of bank guarantees is manifestly large in number. The Commercial Lawyers in Dubai has outlined various aspects of bank guarantee and the law of UAE governing the same. Federal Law number 18 of 1992 on Commercial Transactions Law regulates the very aspect of bank guarantee and defines it under Article 411 as follows: “An undertaking issued by the bank to settle the customer’s debt to a third party in line with the conditions agreed upon and mentioned in the guarantee, which may be any given point of time or unlimited.”
Understanding the concept
Guarantee issued by the bank is considered as a commercial activity irrespective of the person for whom the guarantee is issued. Thus, it is governed by the provisions of Commercial Transactions Law. In addition, it also covers certain aspects of Civil Transactions Law (Federal Law Number 5 of 1985).
Each party involved in the bank guarantee has independent rights and obligations. The issuing bank or the guarantor has distinctive obligations as that of the principal debtor. Importantly, any guarantee issued by the bank is completely separate from the contract or agreement entered into by the parties.