In a recent judgement, the Dubai Court of Cassation gave a narrow interpretation to the obligations resulting from a personal guarantee of a revolving credit facility.
The plaintiff bank opened a current account for a trading company, guaranteed by each of three managers of the account holder. The bank also extended a banking facility for about Dh6.6 million (US$1.8 million), likewise secured by three personal guarantees, and further secured by an assignment of equipment. Over the two and a half years of operation of the facility, the borrower made use of more than Dh10 million under the facility. The bank brought suit against the borrower and the three guarantors for about Dh600,000 in outstandings.
The lower courts held that the borrower was obliged to pay the claim of the bank, including interest. However, the courts below dismissed the suit against the guarantors on the basis that the guarantees had been released when funds were used in excess of the facility. The lower courts held that the guarantees covered draw-downs by the borrower only up to the nominal amount of the facility, and that guarantees of additional draw-downs would have to be separately obtained.
The Dubai Court of Cassation affirmed the judgment of the courts below. In its judgment, the Court of Cassation observed that the determination of the guarantor's obligations is an issue of fact for the courts below, not an issue of law subject to review by the Court of Cassation. The Court of Cassation added that a guarantee is to be interpreted narrowly, meaning that the interpretation should not expand the limited obligations entered into by the guarantor. The Court added that a guarantee for a facility in a specified amount does not extend beyond the specified limit. The Court went on to state that multiple draw-downs under a facility would each be deemed a separate borrowing not subject to the securities applying to the original borrowing unless specifically agreed.
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