Abu Dhabi Court of Cassation, Commercial Appeal No. 1033 of 2022, judgment of 24 January 2023
Under Article 8 of the Arbitration Law a court must declare a claim inadmissible if the defendant invokes an arbitration agreement before pleading on the merits, unless the agreement is void or incapable of performance. But a contract binds only its parties (Article 250 of the Civil Transactions Law), and a letter of guarantee creates a relationship between the bank and the account party that is independent of the underlying contract. An arbitration clause in a subcontract therefore does not prevent a court from deciding a claim, joined against the issuing bank, to cancel guarantees after the subcontract has ended. Members of a contracting consortium are jointly liable, and one member's bankruptcy does not suspend the claim against the others.
A subcontractor sued in the Abu Dhabi Commercial Court for cancellation of a performance bond and related bank guarantees that it had provided, through its bank, in favour of a consortium of companies acting as main contractor. The subcontract, which contained an arbitration clause, had been terminated by the consortium in August 2021 after the project owner terminated the main contract, and an arbitral award had already been made in the subcontractor's favour for its dues; the guarantees had been attached in the arbitration. The courts below ordered the guarantees cancelled. Two consortium members appealed in cassation, arguing that the claim was inadmissible because of the arbitration clause, that the guarantees should have been retained, and that the case should have been stayed because bankruptcy proceedings had been opened against the third consortium member.
The Court of Cassation dismissed the appeal. Arbitration is an exceptional route; under Article 8 of Federal Law No. 6 of 2018 a court seized of a dispute covered by an arbitration agreement must declare the claim inadmissible if the defendant raises it before any plea on the merits, unless the agreement is void or impossible to perform. A contract's effect is limited to its parties under Article 250 of the Civil Transactions Law, and the relationship between the account party and the issuing bank under a letter of guarantee is independent of the relationship between the account party and the beneficiary. The bank had been joined but was not party to the subcontract containing the clause, the subcontract had ended, and the award had confirmed the subcontractor's performance, so the objection had no basis. Under the subcontract the guarantees had to be returned on termination, and the works had been completed. The word 'consortium' does not create a separate legal person; its members share the benefits of the contract and are jointly liable unless otherwise agreed, so under Articles 452 and 463 the creditor may pursue any of them, who cannot rely on defences personal to another member, such as its bankruptcy, to obtain a stay.
Construction disputes often combine an arbitration clause in the subcontract with bank guarantees governed by separate instruments. This judgment shows that the arbitration clause will not necessarily keep guarantee-related claims out of court where the bank is a party and the underlying contract has ended. It also confirms that consortium partners in the UAE are jointly liable to subcontractors and cannot hide behind a partner's insolvency.
| Article 8 of Federal Law No. 6 of 2018 on Arbitration — text of article 8 |
| Articles 250, 452 and 463 of Federal Law No. 5 of 1985 (Civil Transactions Law) — text of articles 250, 452, 463 Decided under this law; it has been replaced by Civil Transactions Law 2025. |
“العلاقة بين الآمر بإصدار خطاب الضمان وبين البنك مصدر الخطاب مستقلة عن العلاقة بين الآمر والمستفيد من خطاب الضمان”Short quotation from the judgment as published by the court. The full judgment is on the court’s official service.
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