Jurisdictional Clarity for Banks and Contractors in ADGM Guarantee Disputes

The General Assembly of the Abu Dhabi Court of Cassation has issued a pivotal decision clarifying the judicial authority competent to hear disputes arising from bank guarantees issued in connection with construction contracts performed within the Abu Dhabi Global Market (ADGM). This ruling resolves years of conflicting jurisprudence and provides long‑awaited certainty for employers, contractors, and financial institutions operating across the UAE’s dual onshore free zone judicial landscape.

Bank guarantees particularly performance guarantees and advance payment guarantees remain indispensable in the UAE construction sector. Under a typical construction contract, the contractor procures a guarantee from a UAE‑licensed bank in favour of the employer. The bank undertakes to pay a specified amount (often a percentage of the contract value) upon the employer’s demand if the contractor fails to perform its contractual obligations.

Given their financial significance, disputes frequently arise regarding the encashment of these guarantees. Such disputes may occur:

• Between the employer (beneficiary) and the issuing bank, or
• Between the employer and the contractor, where the contractor challenges the employer’s right to call the guarantee.

The emergence of ADGM as a major venue for construction and infrastructure projects has added a new layer of complexity in terms of deciding which court has jurisdiction over disputes involving guarantees issued for ADGM‑based projects.

Before the Court of Cassation’s intervention, two contradictory judicial approaches existed:

1. The “dependent” approach: Some judgments treated the guarantee as an extension of the underlying construction contract. If the project was performed within ADGM, disputes over the guarantee were deemed to fall within ADGM Courts’ jurisdiction even if the issuing bank and/or the beneficiary was an onshore entity.
2. The “independent contract” approach: Other judgments emphasized the autonomy of bank guarantees from the construction contract, treating them as standalone legal instrument. Under this view, disputes between employer and bank belonged before the ordinary Abu Dhabi courts, regardless of the project’s location.

This inconsistency created uncertainty for stakeholders and increased litigation costs, as parties often faced preliminary jurisdictional challenges before reaching the merits.

The Abu Dhabi Court of Cassation has now unified the legal principles and set out a clear, structured rule for determining jurisdiction over guarantee‑related disputes-

1. Disputes Between Employer and Contractor (Underlying Contract Disputes)

If the dispute over the guarantee arises between the employer and the main contractor, and the underlying construction contract was performed wholly or partially within ADGM, then:

→ ADGM Courts have jurisdiction.

This is because the dispute itself is considered to have arisen from the underlying contract, which is itself connected to ADGM.

2. Disputes Between Employer and Issuing Bank (Independent Guarantee Disputes)

If the dispute arises between the employer (beneficiary) and the issuing bank, based on the terms of the guarantee itself, then:

→ Ordinary Abu Dhabi courts have jurisdiction,

unless one of the following exceptions applies:

• The parties expressly agree to ADGM jurisdiction; or
• Either the employer or the bank is an ADGM‑licensed entity, in which case ADGM Courts have jurisdiction by operation of law.

This distinction reinforces the long‑standing principle of the independence of bank guarantees, while still respecting the jurisdictional reach of ADGM where a sufficient nexus exists.

Why This Decision Matters

The decision is set to reshape the landscape for banks and contractors alike by bringing long‑needed clarity to disputes involving construction‑related guarantees. With jurisdictional boundaries now firmly defined, banks can assess and price risk with far greater confidence, reducing exposure to unexpected litigation in unfamiliar forums. Contractors, in turn, benefit from a more predictable dispute‑resolution pathway that limits tactical challenges and accelerates the resolution of guarantee calls that often strain cash flow and project continuity. This enhanced certainty not only lowers legal costs and procedural delays but also strengthens commercial stability across the construction and financial sectors, reinforcing trust in the UAE’s judicial and regulatory environment.

For entities operating in or around ADGM whether employers, contractors, or banks this decision underscores the importance of:

• Carefully drafting jurisdiction clauses,
• Understanding the legal nature of bank guarantees, and
• Assessing whether any party is ADGM‑licensed.

Conclusion

The General Assembly’s ruling marks a major step toward harmonizing the interaction between ADGM Courts and the Abu Dhabi onshore judiciary. By drawing a clear line between contract‑based disputes and independent guarantee disputes, the Court has provided a practical, business‑friendly framework that will guide stakeholders for years to come.

Our firm continues to monitor the evolving jurisprudence in this area and stands ready to advise clients on structuring their contracts, guarantees, and dispute‑resolution strategies in light of this important development.