The independence of a bank guarantee from the underlying contract the feature that makes it commercially powerful also creates a significant risk for principals: the beneficiary may make a call in circumstances where no genuine breach has occurred, or may manufacture a pretext for demand. In Iraq, as in all jurisdictions, principals facing unfair guarantee calls have legal remedies but those remedies must be exercised with extreme speed. This article examines the legal framework for challenging unfair guarantee calls in Iraq, the remedies available before Iraqi courts, and the practical steps that principals must take immediately upon learning of an improper demand.

What Constitutes an Unfair Call in the Iraqi Context

An unfair or abusive guarantee call in the Iraqi context occurs where: the beneficiary makes a demand knowing that no breach of the underlying contract has occurred; the demand is made for a purpose unrelated to the security function of the guarantee; for example, as a commercial pressure tactic during a contract dispute; the demand is made for an amount exceeding the actual loss or the guaranteed amount; the underlying obligation has already been fulfilled and the guarantee should have been released; or the demand contains false information in the supporting statement required under URDG 758. In Iraq’s construction sector where disputes between government entities and contractors are common improper guarantee calls are a recognised risk that contractors must be prepared to address.

The Fraud Exception Under Iraqi Law

Iraqi civil law recognises the principle that courts may intervene in contractual arrangements where there is fraud (ghash) or abuse of rights. Applied to bank guarantees, this means that a court may restrain payment under an on-demand guarantee where the beneficiary is acting fraudulently. The fraud exception in the Iraqi context requires: evidence that the beneficiary knows there is no legitimate basis for the demand not merely a disputed commercial claim; the fraud must be clear and established, not merely alleged; and the application must be made before the bank pays urgency is absolute. Iraqi courts applying civil law principles may have a somewhat broader conception of what constitutes sufficient grounds for intervention than common law courts, but the threshold remains high.

Seeking an Injunction Before Iraqi Courts — The Process

The process for seeking an injunction to restrain guarantee payment before Iraqi courts involves: immediate legal consultation as soon as the principal learns of the guarantee call, it must consult Iraqi legal counsel with experience in urgent court applications; preparation of the application, the legal team prepares an urgent injunction application (talab isti’jali) supported by evidence of the alleged fraud or abuse; filing with the competent court, the application is filed with the commercial court having jurisdiction over the matter typically the court in the governorate where the issuing bank is located; the court reviews the application ideally on an urgent basis and initially without notice to the beneficiary (ex parte); if granted, the court order is served on the issuing bank restraining payment pending a full hearing; and the full hearing, the court hears arguments from both parties and decides whether to maintain or lift the injunction.

Evidence Required for an Injunction Application

The strength of an injunction application depends entirely on the evidence available. The principal should gather and present: documentation proving that the contractual obligation was performed, completion certificates, handover records, engineer’s certifications, and any other evidence of performance; evidence that the demand is false; for example, where the beneficiary’s supporting statement contains factually incorrect claims that can be disproved by documentation; any communications between the parties acknowledging performance or agreeing to extend the contract rather than terminate; and expert evidence where technical performance is disputed, an expert report confirming that works conform to specification can be powerful supporting evidence. The standard of evidence required is high: suspicion and commercial dispute alone are insufficient.

Remedies After Payment

Where the bank has already paid under the guarantee before an injunction can be obtained, the principal’s remedies shift from preventing payment to recovering amounts paid. Available remedies include: claims for damages against the beneficiary for wrongful calling of the guarantee pursued through Iraqi courts or arbitration under the underlying contract; claims for unjust enrichment where the beneficiary has received payment to which it was not entitled; and set-off of amounts paid against other obligations owed by the beneficiary to the principal under the contract. Recovery through these mechanisms is possible but typically slower and less certain than preventing payment through an injunction.

Preventive Measures — Reducing the Risk at the Drafting Stage

The best protection against unfair guarantee calls is careful drafting at the outset. Contractors in Iraqi projects should: insist on URDG 758 governance, the supporting statement requirement provides a layer of protection against groundless demands; negotiate pre-call notification requirements in the underlying contract, the employer must notify the contractor of the alleged breach and allow a cure period before calling the guarantee; include dispute resolution provisions requiring arbitration of the underlying dispute before or concurrent with any guarantee call; ensure the guarantee clearly defines the specific obligations it secures vague guarantee descriptions create broader calling rights; and negotiate the guarantee amount to be proportionate to the actual risk being secured.

How Etihad Law Firm Assists

Etihad has experience acting for contractors facing unfair guarantee calls in Iraq. We move swiftly to assess the viability of injunctive relief, prepare urgent court applications, coordinate with the principal’s bank, and pursue post-payment recovery against beneficiaries who have called guarantees wrongfully. We also advise proactively on guarantee terms to minimise unfair call risk.