Personal Agreement in UAE

The UAE is the financial capital of the Middle East. The investor-friendly economic environment in emirates like Dubai, Abu Dhabi, and Sharjah has provided growth and development opportunities for all kinds of businesses.  However, in this volatile financial market, both creditors and borrowers struggle to meet their financial obligations. The volatility and increase in transactions created the need for a secured and fast debt recovery mechanism.

It is a common scenario in the UAE, individuals providing post-dated or undated cheques as a guarantee. Apart from post-dated cheques, Personal Guarantees also play a significant role in debt financing transactions. In UAE, laws related to personal guarantees are slightly different from other countries. The Sharia Law is an inherent part of its application.

What is Personal Guarantee?

“A personal guarantee is a person’s legal assurance to reimburse a credit provided to a business for which they serve as manager, executive or partner.”

A personal guarantee provides an extra layer of protection to creditors. However, a personal guarantee just mitigates the risk. They do not eliminate the risk entirely. It is often observed even the guarantor default on their liability. Regardless of this, personal guarantees are among the most common tools used in the UAE to provide additional surety to creditors and ensure a reliable debt recovery mechanism.

Personal guarantees are first mentioned in the Federal Law Number 5 of 1985 (the civil code) in article 1057, which defines guarantee as a suretyship provided by the guarantor with the liability of ensuring the primary debtor performs his or her obligations.

Personal Guarantee vs. Personal Financial Guarantee

UAE law creates a distinction between a personal guarantee and a personal financial guarantee. One of the striking and most remarkable differences between both guarantees is that in a personal guarantee, the court asks the guarantor to produce the principal debtor in the court in the event of a dispute. However, in a personal financial guarantee, the guarantor needs to pay the debt; it is irrelevant whether he or she brings the principal debtor to the court or not.

Therefore, whenever an individual decides to provide a personal guarantee, he or she must ensure whether the document clearly states the term “personal guarantee” and the obligations in detail. In its absence, the judges have the right to make their interpretations and may regard it as a “personal financial guarantee.”

Terms and Conditions

The Civil Code clearly defines the terms and conditions that govern the issuance and performance of guarantee, such as:

1. For a valid guarantee, a principal debtor must be indebted to the creditor in the form of debt or property. Moreover, it should be in the capacity of the guarantor to discharge his or her obligations.
2. The obligations of the guarantor are secondary to the principal debtor’s obligations. If the principal debtor is discharged from his or her obligation, the guarantor is also considered discharged.
3. If there is no third-party claim, then both the principal debtor and guarantor are discharged from the obligations. Moreover, if the creditor agrees on an alternative mode of debt recovery, the obligations extinguish.
4. In case the principal debtor declares bankruptcy, the creditor must prove its debt in bankruptcy. In the absence of proof, the creditor may lose its right to claim recourse against the guarantor.
5. Upon the satisfactory discharge of debts, the creditors are obligated to return all the papers to the guarantors to exercise their right to seek action against the primary debtor.
6. The creditor has the entitlement to seek legal recourse against the principal debtor and guarantor or both.

Laws related to Personal Guarantee

The Obligation of Guarantor

 Article 1068 of the Federal law 5 of 1985 on Civil Transaction states

• Suretyship (guarantee) binds the guarantor to ensure the due appearance of the debtor at the time and place fixed by the creditor. In case the guarantor fails to perform his or her obligation, the judge may condemn him to a daily fine for delay in the performance of an obligation. The guarantor can release him or her from this fine if he or she establishes his or her inability to have the debtor appear in court.

• The guarantor must pay the specified penalty amount, but the judge can fully or partially exempt the penalty if the guarantor justifies the failure of the performance of the obligation.

Discharge from Personal Guarantee

Article 1068 of the Federal law 5 of 1985 on Civil Transaction states

• The guarantor shall be discharged from the agreement if he or she fulfills the guarantee or perform the object of the guarantee.
• He or she shall also be discharged in case of the death of the guarantor but not by the death of the guaranteed person. The successor of the guaranteed person shall have the right to demand the guarantor to fulfill his or her obligation.

Expiration of Personal Guarantee

The suretyship comes to an end under the following events, and it is covered under Article 1099 of the Federal law 5 of 1985 on Civil Transaction:

• Upon the payment of debt.
• Upon the perishing or deterioration of the property in possession of the debtor, by force majeure or prior to the claim is made.
• Upon cancellation of the contract, forcing the debtor to honor the right.
• Upon the death of the debtor.
• Upon performing the obligation of bringing the debtor at the place of delivery after the expiration of the term to the creditor; unless the creditor willing refuses to take the delivery.
• Upon bringing the debtor before the expiration of the term, and there is no harm to the creditor from taking the delivery.
• When the debtor voluntarily delivers of himself or herself.

Time Limitation for the enforcement of Guarantees

Article 1092 of Federal law 5 of 1985 on Civil Transaction states the concerning period of limitation for the enforcement of guarantees. The article states that when the debt matures, the debtor must claim it within six months from the date of maturity. Otherwise, the guarantor shall be deemed as discharged. Different UAE courts interpret the article in various manners. Dubai Court of Cassation establishes that guarantee is a civil obligation, and the claim against the guarantor must be initiated in 6 months. However, the Supreme Court of Abu Dhabi has limited its interpretation in such a manner that the 6-month time limit is not applicable in the case of commercial transactions. The free zone courts, such as DIFC Courts, provide a broader time margin.

Personal Guarantee provided by Married women

Article 1074 of Federal law 5 of 1985 on Civil Transaction states that the husband has the right to revoke the guarantee provided by his wife without his authorization. The amount of guaranteed debt is not considered in this case.

Criminal Proceedings and Personal Guarantee

The UAE legislation views personal guarantee as suretyship only. However, it is a common practice among banks to take an undated cheque from the guarantor. The practice ensures the risk of the bank is fully covered. Our business lawyers advise that the cheque must not mention that the word “Guarantee” must be undated, unconditional, and signed by an authorized signatory.

Bottom Line

The UAE law clearly explains how the Personal Guarantee must be executed. Even though the interpretation is not devoid of grey areas, it ensures the rights of all parties are well preserved. The guarantor must adhere to the rules and clearly understand his or her obligation before guaranteeing for the creditor. It is strongly advised to seek professional legal help and understand the repercussions if the guarantor fails to perform his or her obligations.