Dubai Court of Cassation Judgment (491 of 2019)
Dubai Court of Cassation judgment (491 of 2019)
Mohamed El DessoukySenior Associate,Litigation
In banking transactions, borrowers often are required to provide certain guarantees. The role of a guarantor is to guarantee the fulfilment of the borrower’s obligations to the bank under the facilities provided to the borrower. There are two types of guarantors: personal and commercial guarantees. A personal guarantee is a guarantee provided by an individual. A commercial guarantee is a guarantee issued by a company to guarantee a commercial or personal debt.
This article considers a noteworthy Dubai Court of Cassation judgment (491 of 2019) that addressed the validity of banking guarantees, notably corporate guarantees and the consequences of the guarantee’s invalidity.
Pursuant to the Federal Commercial Companies Law (Commercial Companies law), it is settled that a limited liability company is represented by its manager. The manager has authority to represent the company in its contracts and dealings with others. A manager’s acts therefore bind the company as long as the manager does not commit fraud. It follows that a guarantee must be signed by the company’s manager to help ensure the validity of the guarantee. However, validity of the guarantee signed by the company’s manager will also hinge on his/her capacity to provide a guarantee.
A person authorised to manage a company does not have explicit powers to provide guarantees under the Commercial Companies Law. Providing guarantees is considered an “act of disposal” because of the liability it creates. As a result, it requires the company’s board of partners to give special authorisation to the manager to allow him/her to provide guarantees.
An English translation of Article 1058 of the Civil Code (Federal Law 5 of 1985 as amended) provides:
“It is a prerequisite of a suretyship arising that the surety should be competent to make voluntary dispositions.”
A person who has the capacity to provide a guarantee also has the capacity to make voluntary dispositions.
Furthermore, Article 83 of the Federal Commercial Companies Law provides:
“1. The management of a limited liability Company shall be entrusted to one or more managers as determined by the partners in the MOA. Such managers shall be selected from among the partners or from third parties. If managers are not appointed in the MOA of the Company or under a separate contract, the General Assembly of Partners shall appoint the managers. If there is more than one manager, the partners may appoint a board of directors and vest in it such powers and functions as set out in the MOA.
2. Unless the appointment contract of the manager of the Company or its MOA or AOA restricts the powers conferred upon the manager, the latter shall have full powers to manage the Company, and his actions shall be binding upon the company, provided that the capacity in which he acts is explicitly stated.”
The foregoing clearly indicates that the manager may provide the guarantee in his capacity as the company’s manager provided he/she has the requisite capacity to make voluntary dispositions. By contrast, a guarantee provided by a partner or shareholder shall be considered void as a partner/shareholder cannot legally represent the company (i.e. due to absence of legal capacity to make voluntary dispositions) unless the partner/shareholder is also the manager mentioned on the company’s licence.
In this case, the bank had obtained a provisional attachment order against the Claimant’s accounts and funds based on the Claimant’s guarantee of facilities which the local partner in the company had obtained.
In this case, the bank had obtained a provisional attachment order against the Claimant’s accounts and funds based on the Claimant’s guarantee of facilities which the local partner in the company had obtained. The partner, who signed the guarantee on the company’s behalf, was not the manager and did not represent the company. The name of the manager was mentioned in the company licence and memorandum of association.
The bank had purported to approve the guarantee even though it was invalid. The company claimed that the bank was aware of these facts because the company was a client with accounts at the bank and therefore, the bank should not have approved an invalid guarantee that was not provided by the manager of the company.
Notwithstanding the company’s objections to the attachment on the grounds of an invalid guarantee, the bank filed a substantive action before the Court of First Instance confirming the attachment. The Court held that the bank’s approval of an invalid guarantee from the company has the effect of reducing the effectiveness of the security.
The Claimant (the limited liability company guarantor) filed a case against the bank to claim compensation for the harm incurred as a result of the bank’s precautionary attachment proceedings on the basis of the invalid guarantee. It claimed an amount of AED 8 Million Dirhams for the loss and damage it suffered as a result of the bank’s actions, including freezing its bank accounts and, trade license, and thereby suspending its ability to resume its business activity and operations.
In its defence, the bank argued that the invalid guarantee caused harm only to the bank. The bank’s filing of legal proceedings is a legitimate right as provided under Article 104 of the Civil Code, which provides:
“The doing of what is permitted by law negates liability, and no person who lawfully exercises his rights shall be liable for any harm arising thereout.”
The Court of Cassation upheld the bank’s argument and rejected the Claimant’s claim for compensation. The court rejected the Claimant’s case against the bank because the bank had no intention to cause harm to the Claimant. The elements of civil liability were not established against the bank in the absence of the element of fault and the lack of causal connection between the bank’s act of approving an invalid guarantee and the loss and damage alleged by the Claimant.
The judgment highlights the importance for banks and lending institution of checking the legal capacities of the signatories of a guarantee before providing banking facilities to a customer and attempting to enforce the guarantee. In this regard, the lender must take account of the different requirements under UAE law depending on the type of transaction and the person (natural or legal) providing the guarantee. That said, while an invalid guarantee will reduce the scope of the bank’s security for the underlying loan, the guarantor will have to prove intention on the part of the bank to harm him/her/it in order to claim compensation for loss and damage caused by any effort by the bank to enforce the invalid guarantee.
For further information please contact Mohamed El Dessouky.
Published in October 2022
