A decision puts an end to years of inconsistent judicial interpretations and bringing much-needed legal certainty. The General Assembly of the Abu Dhabi Court of Cassation has delivered a landmark ruling clarifying which courts have jurisdiction over disputes involving bank guarantees issued in relation to construction projects carried out within the Abu Dhabi Global Market Courts (ADGM).

Bank guarantees are usually used in construction projects. The most common bank guarantees in construction are performance guarantees, which are securities that ensure the proper performance of the agreement by the contractor. Whereas advance payment guarantees are guarantees protecting advance payments made by the employer. In both situations, the bank undertakes an obligation to pay the employer upon demand, subject to the terms of the guarantee.

There are usually two categories in which disputes on bank guarantees occur, and they are:

  1. Disputes Between Employer and Contractor – These disputes arise in situations where the employer wrongfully calls the guarantee, there was no contractual breach, or the encashment was abusive or made in bad faith.
  2. Disputes Between Employer and Issuing Bank – These disputes arise when the employer demands payment from the issuing bank, and the bank refuses payment or disputes compliance with the guaranteed terms.

The Conflicting Approach

ADGM has its own independent legal system and an independent court system. Hence, when the project was in ADGM, but the employer or bank was on the mainland, the main question was which court would hear the case.

There were two different conflicting judicial approaches in such cases adopted by the courts:

  1. Dependent Approach – Some courts held that the bank guarantee is dependent on the construction contract; hence, jurisdiction should be given to ADGM Courts.
  2. Independent Contract Approach – Whereas other courts stated that bank guarantees are autonomous and independent contracts.

What the Court Finally Decided

  1. The Court held that the distinction is based on who the dispute is between.
  2. If the dispute is between the employer and contractor, and the construction agreement was performed wholly or partly in ADGM, the ADGM Courts will have jurisdiction. This is because the dispute arises from the underlying contract, which is connected to ADGM.
  3. If the dispute is between the employer and the issuing bank, and it concerns the guarantee itself, then the ordinary Abu Dhabi Courts have jurisdiction. This is because the guarantee is an independent banking instrument, and the dispute does not arise directly from the construction contract.

Exceptions Recognized by the Court

The exceptions recognized by the Court are:

  1. If the parties expressly agree that disputes relating to the guarantee will be heard before ADGM Courts, then the ADGM Courts may exercise jurisdiction.
  2. If the employer or the bank is an ADGM-licensed entity.

The General Assembly of the Abu Dhabi Court of Cassation has given a landmark judgment in an area that had conflicting judicial approaches for a very long time. This judgment has helped bring clarity regarding jurisdiction, ensuring that the autonomy of ADGM as a separate legal entity is not taken away, while at the same time ensuring that it does not deal with cases beyond its jurisdiction.

We at Ayesha Aldhaheri Advocates and Legal Consultants assist clients in handling disputes relating to ADGM projects, construction-related bank guarantees, and guarantee claims. We are committed to helping employers, contractors, and financial institutions navigate complex jurisdictional and commercial issues while safeguarding their legal and financial interests.