Performance Guarantee Agreement Template for the United Arab Emirates

A Performance Guarantee Agreement is a vital financial security instrument that protects project owners and employers against the risk of contractor default or non-performance in the United Arab Emirates. This legally binding document creates a three-party relationship between the guarantor (typically a bank), the principal (contractor or service provider), and the beneficiary (project owner), ensuring project completion and compliance with contractual obligations.

When do you need this document?

You need a Performance Guarantee Agreement when entering into significant construction, infrastructure, or commercial contracts in the UAE. Government entities routinely require performance guarantees for public works projects, procurement contracts, and infrastructure development exceeding AED 50,000. Private sector projects, particularly in real estate development, oil and gas, and major supply agreements, also commonly require these guarantees. The document becomes essential when you're a project owner seeking financial protection against contractor default, or when you're a contractor required to provide performance security to secure a contract award.

Key legal considerations

Your Performance Guarantee Agreement must clearly define the guaranteed obligations, specifying the exact performance standards and deliverables covered under the guarantee. The guarantee amount typically ranges from 5% to 10% of the contract value, though this can vary based on project risk and contractual negotiations. You must establish clear trigger events that allow the beneficiary to call the guarantee, including specific breach scenarios and notice requirements. The agreement should include automatic renewal clauses if the underlying project extends beyond the original timeline, ensuring continuous coverage throughout the performance period. Payment procedures must comply with UAE banking regulations, typically requiring written demands and supporting documentation before guarantee activation.

Legal requirements in United Arab Emirates

Under UAE Federal Law No. 5 of 1985 (Civil Code), your Performance Guarantee Agreement must satisfy specific legal requirements for enforceability. Articles 1057-1091 govern guarantee and surety arrangements, requiring clear identification of all parties and explicit guarantee terms. UAE Federal Law No. 18 of 1993 (Commercial Code) mandates that commercial guarantees include specific banking compliance provisions, particularly when issued by licensed financial institutions. The UAE Central Bank Law (Federal Law No. 14 of 2018) imposes additional regulatory requirements on banks issuing guarantees, including capital adequacy and reporting obligations. Your agreement must include governing law clauses specifying UAE jurisdiction and comply with Cabinet Resolution No. 57 of 2018 regarding bank guarantee requirements in government contracts. Dispute resolution clauses should reference UAE Federal Law No. 6 of 2018 (Arbitration Law) for efficient enforcement procedures.