Bank Guarantees in the UAE: Types, How a Call Works, and Challenging an Unfair Call

Direct answer. In the UAE, where federal law governs, bank guarantees are regulated by Articles 411 to 419 of the Commercial Transactions Law, Federal Decree-Law No. 50 of 2022. Under Article 414, the bank pays a letter of guarantee without conditions, unless the letter itself is conditional, when payment is requested within the period stated in the letter. Guarantees governed by DIFC or ADGM law, or by a foreign law chosen in the guarantee, can follow different rules. The bank must pay a compliant demand made within the validity period, even if the customer disputes the contract, and then recovers the money from the customer. The main way to stop payment is a court order seizing the guarantee amount at the bank, which the law allows only on "serious and confirmed grounds". The bar is high, so no one can promise a call will be stopped. MOHRE worker protection, immigration deposits and travel-ban cases use the same words but work differently.

How a bank guarantee works under UAE law

The Commercial Transactions Law, Federal Decree-Law No. 50 of 2022, covers bank guarantees in Articles 411 to 419. It came into force on 2 January 2023 and replaced the 1993 Commercial Transactions Law.

Article 411 defines a bank guarantee as a bank's undertaking to pay its customer's debt to a third party, on the conditions written into the guarantee. It can run for a fixed or an open term, and the bank is jointly liable.

Three parties are involved:

• The applicant. The customer who asks the bank to issue the guarantee, usually a contractor or supplier. The law calls this person "the person making the order".
• The bank. The guarantor that signs the undertaking.
• The beneficiary. The party that can demand payment, usually the employer, buyer or government entity on the other side of the contract.

Article 412 gives examples of the forms a bank guarantee can take, including a reserve guarantee on a commercial paper, an independent guarantee contract and a letter of guarantee. The most common, and what most people mean, is a letter of guarantee addressed to the customer's creditor. Under Article 413, every bank guarantee is a commercial activity, whoever the customer is.

Bid, performance and advance-payment guarantees

Dubai government tenders show how these work. Dubai Law No. 12 of 2020 (as amended), on contracts and warehouse management in the Government of Dubai, sets these rules:

• A bid bond may be an unconditional and irrevocable bank guarantee. The government entity sets the amount, up to 2% of the estimated tender value, and it must stay valid for at least 30 days after the bid validity ends (Article 31).
• It can be confiscated without notice or a court judgment if the bidder withdraws before the award, refuses without an acceptable reason to extend it, or, as the winner, refuses to sign or fails to provide the performance bond on time (Article 31).
• A performance bond is normally 10% of the bid value, unless Dubai's Department of Finance sets another guarantee or percentage. It stays valid for 90 days after the contract term for supply and services contracts, or until final receipt for works contracts, unless the committee sets another period. An exemption may be granted where the contract value does not exceed AED 500,000 (Article 40).
• Advance payments must be made against a bank guarantee in the same amount and currency (Article 59).

These rules cover Dubai government contracts only. Private contracts set their own terms. For building-project disputes, see our guide to construction dispute resolution in the UAE.

On-demand or conditional: the wording decides

Article 414 defines a letter of guarantee as the bank's undertaking, at its customer's request, to pay a set or determinable sum to the beneficiary. The bank pays if payment is requested within the period stated in the letter. It pays without conditions ("unconditionally and without restrictions") unless the letter itself is conditional. Every letter must state its purpose.

In practice, you will see two shapes:

• On-demand guarantee. The beneficiary sends a written demand within the validity period and the bank pays. The bank does not investigate whether the contractor actually failed.
• Conditional guarantee. Payment depends on conditions in the letter, such as a supporting document. If they are not met, the demand does not comply.

Some guarantees state that they are subject to international rules issued by the International Chamber of Commerce, which can set the form of a demand. Check your guarantee's wording.

This is the key difference from an ordinary guarantee. Under the Civil Transactions Law, Federal Decree-Law No. 25 of 2025, a surety undertakes to the creditor to perform an obligation if the debtor fails (Article 986), and a suretyship is not valid unless the secured obligation is valid (Article 990). An ordinary surety can often rely on defects in the main debt. A bank under an on-demand letter of guarantee generally cannot, because it promised to pay without conditions.

Getting a bank guarantee issued

You apply to your own bank, which decides whether to issue the guarantee and on what terms. Settle these points first:

• Security. Under Article 415, the bank may ask for security before issuing: cash (a cash margin), commercial papers, securities, goods, or an assignment of your rights against the beneficiary. So the bank often already holds the money it would pay out.
• Wording. If the beneficiary or the tender documents set the text, read it before the bank issues it, and check whether payment is on demand or conditional.
• Amount and expiry. Match them to the contract, and note any renewal term. The expiry date decides when the bank is released and when your security comes back.
• Costs. Issuance charges and the size of any cash margin are set by your bank, not by law. Get them in writing before you sign.

What happens when the beneficiary calls it

A call (demand or encashment) usually runs like this:

1. The beneficiary sends a written demand to the bank within the validity period, in the form the guarantee requires.
2. The bank checks the demand against the guarantee: the amount, the dates, and any document the letter requires.
3. If the demand complies, the bank pays, then recovers the amount from the applicant.

Three articles set the applicant's exposure.

Article 417(1). The bank may not refuse to pay for a reason arising from its relationship with the applicant, or from the applicant's relationship with the beneficiary. A dispute over performance does not, on its own, stop payment. It is argued separately, often under the contract's dispute clause. See resolving commercial disputes in the UAE.

Article 419. Once the bank pays, it steps into the beneficiary's position and can recover the amount from the applicant.

Article 418. The bank is released if no payment request reaches it within the validity period, unless the parties expressly agreed to renew before expiry. If the guarantee expires unpaid, the bank must return the applicant's security, unless otherwise agreed.

This is why beneficiaries send "extend or pay" letters close to expiry. Treat one as urgent. Under Article 416, the beneficiary can assign its rights only with the bank's approval.

Challenging an unfair call: the seizure route

The law gives one clear exception to the pay-first rule. Under Article 417(2), the bank may refrain from paying where an enforceable order or court judgment imposes a seizure on the guarantee amount held at the bank. To obtain it, the applicant must base its claim on "serious and confirmed grounds".

The law does not list what counts as serious and confirmed grounds. Courts decide case by case, and the bar is high, because a guarantee is designed to be paid first and argued about later. A simple disagreement about delay or quality should be expected to end in payment. Any "fraud" or "manifest abuse" test comes from court practice, not the text of the law.

The procedure sits in the Civil Procedure Code, Federal Decree-Law No. 42 of 2022:

• Article 27. A designated urgent matters judge at the Court of First Instance can make temporary orders in urgent cases without deciding the merits.
• Article 247. A creditor can ask the court hearing the case, or the judge for expedited matters, for a precautionary attachment, for example where it fears losing the security for its right. The article is written for a creditor, so an applicant needs to show a right of its own against the beneficiary.
• Article 250(2). After an attachment ordered by the judge for expedited matters, a claim confirming the right must be filed within eight days of the decision, or the attachment is void. The rule is written for prejudgment attachment. Whether a court applies it the same way to an Article 417(2) seizure is a question for your lawyer, so plan on eight days.
• Article 250(3). The debtor and other concerned parties can challenge the attachment order.

The order has to come before payment. Once the bank pays, nothing is left to seize, and the fight becomes a money claim against the beneficiary. Court fees and processing times vary by court and emirate, so confirm them with the court or a licensed UAE lawyer.

Guarantees and deposits outside business contracts

Three everyday uses of the phrase work differently.

The MOHRE worker guarantee

Under Article 8 of Cabinet Resolution No. 18 of 2022, private-sector employers covered by the Labour Law must provide either a bank guarantee of AED 3,000 per worker or insurance for each worker, under MOHRE's mechanisms. Establishments MOHRE classifies as high-risk must insure each worker. Other employers can choose either option.

MOHRE's announcement of Ministerial Resolution No. 318 of 2022 says the guarantee is issued through a UAE-based bank, is valid for one year, can be renewed automatically and is payable on MOHRE's demand without other restrictions. The insurance option is a 30-month policy. The 2022 announcement listed premiums from AED 137.50 to AED 250 per worker, depending on the category, with cover up to AED 20,000 for items such as wages, gratuity and repatriation. Premiums can change, so confirm current figures with MOHRE. An employer can reclaim the guarantee in cases such as permit cancellation with proof of departure, or transfer to a new employer.

Deposits to sponsor parents

When a resident sponsors parents or other relatives, the immigration authority may ask for a refundable financial guarantee. Despite the name, this is a cash deposit paid to the authority, not a letter of guarantee from your bank. For a resident bringing in a father or mother, ICP's 2024 services guide lists AED 5,000 per person, up to AED 15,000, under its residence service for relatives (listed among humanitarian cases). It is refunded on request after the relative's residence is cancelled or they leave the UAE, provided they have not committed a residency violation. For several other services the guide sets a five-year limit on refund requests, so apply promptly.

For ICP-issued residence, ICP's online service "Refund of fees for approved applications" handles the refund. At the time of writing it requires UAE Pass, lists a fee of AED 25 and a completion time of two days, and requires any linked circular to be lifted first. In Dubai, confirm the amount and refund route with GDRFA. Amounts can change, so confirm current figures with ICP or GDRFA or a licensed UAE lawyer before you apply. See our guide to sponsoring parents in the UAE.

Security to lift a travel ban

Under Article 325(3) of the Civil Procedure Code, a judge may order a travel ban to lapse if the debtor provides a sufficient bank guarantee, or a solvent guarantor the judge accepts. Under Article 325(4), the debtor can instead deposit the debt and expenses with the court treasury. See how to lift a travel ban in the UAE.

Security cheques are a different instrument with their own rules. See post-dated and security cheques in the UAE.

Mistakes to avoid, and when to get a lawyer

• Signing without reading the guarantee wording. On-demand and conditional guarantees carry very different risks.
• Missing the expiry date. Diary the validity period and any renewal term.
• Ignoring an extend-or-pay letter. Treat it as urgent.
• Treating a contract dispute as a defence to payment. Under Article 417(1), it is not one.
• Waiting until the bank has paid. A seizure order only catches money the bank still holds.
• Forgetting your security. Ask for your cash margin back once the guarantee expires unpaid.

Get advice early if a call looks unjustified or an extend-or-pay letter arrives. A lawyer can assess whether your grounds could meet the "serious and confirmed" test. You can find banking and finance lawyers on LEXAI, or construction lawyers for project disputes. For the wider picture, see our UAE banking and finance law guide.

This is general legal information, not legal advice. Confirm current procedure with the relevant authority or a licensed UAE lawyer.