Corporate Guarantees In The UAE: Practical Tips From The Frontline On Enforcement

Overview

Corporate guarantees are a cornerstone of commercial and financial transactions in the UAE. Whether used to secure the obligations of a group company, support a financing arrangement, or backstop a supply or services agreement, they provide essential credit comfort to counterparties. However, the legal treatment of corporate guarantees and their enforceability depends significantly on the governing law and forum chosen by the parties. This is particularly true when navigating the dual legal systems of UAE mainland law and the DIFC common law regime.

What UAE Law Requires

Under UAE federal law, and specifically the Commercial Transactions Law (Federal Decree Law No. 50 of 2022), corporate guarantees are interpreted through the lens of suretyship principles. While UAE law permits a guarantee to secure performance obligations under a contract, it imposes key limitations. Most notably, the law requires that the obligations guaranteed must be specific and the amount either clearly stated or objectively determinable. Open-ended liabilities, such as future penalties, liquidated damages, or indemnities that are not subject to a pre-agreed cap or formula, are unlikely to be enforceable under this regime. The UAE courts tend to interpret guarantees restrictively, in line with civil law traditions that favour certainty and precision over broad contractual flexibility.

The DIFC Advantage

By contrast, DIFC law, derived from English common law, offers a more commercially flexible framework. Corporate guarantees governed by DIFC law can validly secure a wide range of obligations, including indeterminate liabilities and broad indemnities. Parties are free to draft first-demand guarantees, waive defences, and impose joint and several liability without being constrained by the formalism that characterises UAE mainland law. This has made the DIFC an increasingly attractive jurisdiction for international lenders, investors, and contracting parties seeking certainty in cross-border commercial arrangements.

Challenges in Enforcement

However, while DIFC law may offer flexibility on paper, enforcement in practice can be more complex particularly when the guarantor's assets or operations are located outside the DIFC, such as in Dubai mainland or elsewhere in the UAE. Despite the mutual recognition framework between the DIFC Courts and Dubai Courts, enforcement of a DIFC court judgment or order in the onshore UAE courts is not automatic. In some cases, local courts may scrutinise the substance of the guarantee, especially if it contains obligations that would be considered vague or excessive under UAE law. This risk becomes particularly acute when the DIFC law-governed guarantee covers uncapped liabilities, future damages, or open-ended indemnities.

In such scenarios, the Dubai Courts may refuse to enforce the DIFC judgment on public policy or legal grounds, especially where they consider the guarantee to violate mandatory provisions of UAE law. This creates a legal tension between the parties' contractual expectations under DIFC law and the potential barriers to enforcement in onshore courts.

Arbitration as a mitigation tool

A practical solution to mitigate this risk is to incorporate an arbitration clause, either within the guarantee itself or within the underlying contract, referring disputes to a reputable international arbitral institution seated in a neutral or enforcement-friendly jurisdiction such as the DIFC-LCIA Arbitration Centre or the Dubai International Arbitration Centre (DIAC). Arbitral awards are generally enforceable across the UAE under the New York Convention and UAE Arbitration Law, and the scope for public policy challenges tends to be narrower compared to court judgments.

Enhancing enforceability

Another approach is to carefully structure the guarantee to comply with UAE enforceability standards, even when governed by DIFC law. This may involve introducing a monetary cap, clearly identifying the secured obligations, and avoiding language that implies open-ended or discretionary liabilities. Doing so enhances the enforceability of the guarantee in both DIFC and onshore courts and reduces the risk of legal challenge.

Key takeaways

In summary, while DIFC law provides parties with the flexibility to craft sophisticated and commercially useful corporate guarantees, enforcement outside the DIFC remains a key consideration. Parties must balance the benefits of contractual freedom against the realities of execution risk, particularly in onshore UAE. At BSA, we work closely with clients to tailor guarantees that are not only robust in drafting but also strategically structured to ensure cross-jurisdictional enforceability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.