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Suretyship in the UAE: legal hints

Blogs / 16-07-2018

It is common in commercial transactions that a personal guarantee/suretyship be issued in favor of the creditor as part of the security offered.

Article 1056 of the UAE’s Civil Transactions Law (the “CTL”) defines the suretyship as follows:

“Suretyship is the joining of the liability of a person called the surety with the liability of the obligor in the performance of his obligations”.

Article 73 of the UAE’s Commercial Transactions Law (the “CL”) provides that, “a guarantee shall be commercial if the guarantor has guaranteed a debt which is deemed in regard to the debtor to be commercial unless otherwise provided for by law or agreement, or if the guarantor is a trader and has an interest in guaranteeing the debt”.

In principle entering into a suretyship is considered to be a civil rather than a commercial act and it is generally regulated by the CTL rather than the CL on the basis that it is personal in nature and because, usually, the surety does not receive a fee for issuing the suretyship and is thus considered to be acting as some sort of donor.

However if the suretyship is issued in favor of a commercial debt or if the surety is a trader and has an interest in guaranteeing the underlying debt then it should be considered a commercial guarantee in nature and the provisions of the CL may also apply to regulate the guarantee.

Although the granting of a suretyship has been common practice in the UAE, the legal concept of suretyship is more complicated than one would expect. We have come across many occasions where parties involved in these transactions are not fully aware of the implications. This article highlights some of the more common pitfalls in suretyship in the UAE.

1)  Claiming the suretyship   

Article 1092 of the CTL provides:

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”.

This therefore provides that if the creditor does not bring their claim against the surety within 6 months of the debt becoming due he would be time barred from doing so. One can imagine this time frame being missed if the creditor grants the debtor an opportunity to pay.  It is important to note however, that several Dubai Court decisions have indicated that this provision is not related to public order and can therefore be contracted out of by the parties. In other words, the parties can amend the time limitation such that a longer timeframe is provided for. Any agreement to extend the time limit to claim under the suretyship must be in writing in the suretyship document itself.  

2)  Suretyship over future debts

A suretyship cannot apply on future debts that are not determined. This means that a surety cannot guarantee a debt that has not yet been determined.  Indeed, several cases illustrate that the suretyship over future debts is legally invalid. By way of example, suretyship over the liabilities arising from a current account is suretyship for a future debt that is not determined. This is because the final amount in a future debt will only be due once the account is closed. Accordingly, the suretyship in relation to a future debt will not be valid.

In order to mitigate (although not eliminate) the risk of challenging the validity of the suretyship in relation to future debts, we would recommend that the suretyship, to the extent possible, actually provides how such debt may be calculated/determined.

3)  Suretyship for self

An individual cannot issue a suretyship for himself. The Dubai Cassation Court has reiterated this rule in a corporate context, by stating that suretyship issued by the owner of a sole establishment for the purpose of securing payment for such establishment, was invalid because a sole establishment does not acquire its own independent legal personality. 

4)  Validity of suretyship after the demise of the principle debtor

Article 1099 of the CTL states: “Suretyship shall terminate as follows:-

(e) upon the death of the principal obligor

…”

The Dubai courts have provided an interpretation of this Article, which stated that the termination upon the death of the principal obligor is not inevitable and that the parties can ontract out of this position, so that the the surety will remain obligated to pay the suretyship, even upon the death of the principal obligor.

5)  Issuing a suretyship by a company

It is unwise to assume that simply because a person is the Manager of a company, that person has the authority to sign a suretyship that binds the company. The manager signing on behalf of the company should be expressly and duly empowered to sign the suretyship whether by virtue of the by-laws of the company or in a shareholders’ resolution.

We advise creditors to ensure that the corporate documents of a company and/or its board/shareholders resolution provide that the individual signing on behalf of the surety/company has sufficient powers to sign the suretyship. 

Concluding remarks

It is essential that the relevant parties be aware of the different pitfalls relating to suretyships and that any suretyship be adequately drafted and properly issued in order to avoid or at least mitigate against any potential dispute or challenges.