Due to the significant level of risk inherent in the construction industry, many project owners ensure that they only work with contractors and subcontractors who are both licenced and bonded. This is an effective way to transfer risk and protect project owners from suffering a financial loss caused by projects taking longer than anticipated or a range of unforeseen factors.
Surety Bonds and UAE Commercial Law
Experts in the surety field – such as Rob Tolley, who was instrumental in launching surety bonds in the Middle East in the early 2000s – know that under UAE commercial law, performance bonds may be unconditional or conditional. However, in most cases performance bonds issued by contractors are ultimately payable without conditions, which is also known as ‘on demand.’ This means that the bank can’t refuse to liquidate the performance bond in the event that, for example, there is a dispute between the project owner and the contractor.
A performance bond protects the project owner from financial loss in the event that the contractor fails to fulfil the contract as per its terms and conditions. This type of bond is distinct from a payment bond, which guarantees that the contractor will pay the labourers, subcontractors and material suppliers associated with the project.
Performance Bond: Remedy for Contractors
If a contractor believes that the project manager wishes to liquidate the performance bond on fraudulent or unjustifiable grounds, the former has recourse to the summary court, to seek an order to stop this intended liquidation. Within the Dubai Court of Cassation, it’s an established principle that despite the fact an issuing bank is obliged to liquidate the letter of guarantee on the beneficiary’s initial demand without being required to obtain the client’s permission, the law allows the client to have recourse to the court. This can be undertaken in a bid to have an attachment order placed on the guarantee amount if the client has specific or serious reasons for doing so.
These grounds could include if significant pending payments were still due to the contractor when the project was completed and handed over or if there was evidence that the project owner had no right to begin the liquidation process.
If a performance bond is liquidated, the remedy available to the contractor involves filing a case to seek repayment of the amount of money attached to the performance bond, along with an amount for damages or interest, as applicable.