In commercial transactions, parties often require security against a potential breach of contract. One practice sometimes used in the UAE is for a party to issue a cheque representing an agreed penalty or security amount, with the cheque being held by a neutral third party “in Amana” and released only if certain contractual conditions are satisfied.
While commercially straightforward, this arrangement raises an important legal question: what does “Amana” actually mean under UAE law, and what prevents the holder from releasing or using the cheque prematurely?
The answer depends heavily on how the arrangement is structured.
“Amana” Is Not a Legal Mechanism by Itself
The Arabic concept of Amana broadly refers to something being entrusted to another person for safekeeping. However, simply stating that a cheque will be held “in Amana” does not, by itself, create a complete legal framework governing when the cheque may be released, deposited or returned.
The parties should therefore document the arrangement through a clear escrow, custody or stakeholder agreement.
Under such an arrangement, a neutral third party receives the cheque but is contractually prohibited from delivering or presenting it unless specified conditions have occurred.
For example, if Party A and Party B each provide a penalty cheque, the agreement may require an independent stakeholder to retain both original cheques and release one only following a clearly defined contractual breach.
The stakeholder is therefore not deciding who is legally right or wrong. Its role should be limited to following the release mechanism agreed in advance.
Is This a “Trust” Under UAE Law?
The UAE has a formal trust regime under Federal Decree-Law No. 31 of 2023 Concerning Trust, which replaced the earlier federal trust legislation.
A trust is a specific legal arrangement under which assets are placed under the control of a trustee for beneficiaries or for a defined purpose, with the trust property being legally separated from the trustee’s personal property.
However, a commercial arrangement under which a lawyer, company, bank or other stakeholder simply holds original cheques pending satisfaction of contractual conditions does not necessarily need to be established as a formal trust.
In many transactions, a properly drafted contractual escrow or custody arrangement will be more appropriate and considerably simpler.
The distinction matters because calling an arrangement a “trust” does not automatically make it one. Its legal nature will depend on its terms, purpose, assets and structure.
What About UAE Escrow Laws?
The UAE also recognises statutory escrow arrangements in particular sectors. A well-known example is Dubai’s real estate development escrow regime under Dubai Law No. 8 of 2007 Concerning Escrow Accounts for Real Estate Development.
Under that regime, amounts received from purchasers of off-plan properties are deposited into designated project accounts managed by approved account trustees. Dubai Land Department confirms that such accounts are specialised accounts intended to protect funds collected for off-plan developments.
However, these statutory real estate escrow rules should not be confused with a private arrangement for holding penalty cheques.
There is no general rule that simply placing a cheque with a third party automatically converts it into a statutory escrow instrument. Instead, the rights and obligations of the parties must principally be established through the underlying contract and the specific custody or escrow agreement.
The Cheque Itself Requires Particular Care
This is perhaps the most important practical consideration.
Under Federal Decree-Law No. 50 of 2022 concerning the Commercial Transactions Law, a cheque remains a commercial paper and payment instrument governed by specific statutory rules. UAE law therefore does not allow parties to assume that describing a cheque as a “security cheque” or “penalty cheque” eliminates its legal characteristics.
For this reason, the documentation surrounding the cheque becomes particularly important.
The agreement should expressly identify:
- the cheque number, bank, drawer and amount;
- the contractual obligation secured by the cheque;
- confirmation that the stakeholder holds the cheque solely for safekeeping pending the agreed release conditions;
- the circumstances constituting a triggering event;
- the documents required before the cheque can be released;
- whether notice and a cure period must first be given;
- whether release requires joint written instructions, an expert determination, arbitral award or final court judgment;
- circumstances requiring the cheque to be returned to its issuer; and
- the stakeholder’s duties and limitations of liability.
Without these safeguards, disputes can arise not only over the underlying breach but also over whether the cheque should ever have been released.
A Penalty Cheque Does Not Automatically Determine the Compensation Payable
There is another important distinction between holding a cheque as security and determining the amount ultimately recoverable for breach.
The UAE’s Federal Decree-Law No. 25 of 2025 promulgating the Civil Transactions Law recognises the ability of contracting parties to agree in advance on compensation for contractual breach. However, agreed compensation remains subject to judicial control in circumstances prescribed by law, including where the agreed amount is excessive or the underlying obligation has been partly performed.
Accordingly, a cheque for AED 1 million held as security does not necessarily mean that AED 1 million will automatically constitute the final compensation recoverable following every alleged breach.
This is one reason why the stakeholder should generally not be given broad discretion to decide whether a breach has occurred or how much compensation is payable.
A Safer Structure for Commercial Transactions
Where two contracting parties want reciprocal penalty cheques to be held “in Amana”, a practical structure is usually to appoint an independent stakeholder and execute a separate Cheque Custody and Escrow Agreement alongside the principal commercial agreement.
The principal agreement determines the parties’ obligations, breaches and agreed remedies.
The custody agreement determines what happens to the cheques.
Most importantly, the release mechanism should be objective. Instead of allowing one party simply to demand the other party’s cheque, release could depend upon clearly identifiable evidence — for example, written agreement between both parties, expiry of a contractual cure procedure without dispute, an expert determination where appropriate, or a final court judgment or arbitral award.
For high-value transactions, requiring an independent determination before release can significantly reduce the risk of the security mechanism itself becoming a source of commercial pressure.
Conclusion
The concept of holding penalty cheques “in Amana” can provide useful security in UAE commercial transactions, but the expression Amana should not be relied upon as a legal safeguard by itself.
UAE law provides sophisticated frameworks for trusts, escrow arrangements, contractual obligations and cheques, but each serves a different legal function. A privately held penalty cheque will therefore usually require a carefully drafted contractual mechanism defining who holds it, why it is being held, when it may be released, when it must be returned and what happens if the parties dispute the alleged breach.
The objective should be simple: the cheque should provide security without giving either party an uncontrolled enforcement tool.
Properly structured, an independent custody or escrow arrangement can achieve that balance while reducing the risk of premature presentation, wrongful release and additional litigation.
For more information and legal consultation reach out to us at +971 52 758 3267 - reception@alsafarpartners.com or visit https://www.alsafarpartners.com .
Written By: Mrs. Kavitha Panicker - Managing Partner at Al Safar and Partners Law Firm.