Specimen Deed of Guarantee — Bank Guarantee and Performance Guarantee Format 2026

What Is a Guarantee?

A guarantee (or guaranty) is a contract to perform the promise or discharge the liability of a third person in case of their default. Under Section 126 of the Indian Contract Act, 1872, a "contract of guarantee" is defined as a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety", the person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor". A guarantee may be oral or written — but in commercial practice, guarantees are always in writing and often executed as deeds.

Types of Guarantees in Commercial Practice

1. Bank Guarantee (BG): A guarantee issued by a bank on behalf of its customer (the applicant/principal debtor) in favor of a third party (the beneficiary). If the customer defaults on their obligation, the bank pays the guaranteed amount to the beneficiary. Banks issue BGs for: contract performance, advance payment security, bid/tender security (EMD), customs duty, court orders, and rental guarantees. Bank guarantees can be: (a) unconditional/on-demand — the bank pays on mere demand without verifying whether the customer actually defaulted, (b) conditional — the bank pays only after the beneficiary proves the customer's default.

2. Performance Guarantee: A specific type of guarantee ensuring that a contractor/supplier will perform their contractual obligations. Typically: 5-10% of the contract value. If the contractor fails to perform, the beneficiary invokes the guarantee and receives compensation without needing to prove actual damages.

3. Counter Guarantee: A guarantee given by a customer to their bank, indemnifying the bank against any liability arising from the bank guarantee issued on the customer's behalf. When a bank issues a BG, the customer provides: (a) counter guarantee (personal/corporate guarantee), (b) margin money (10-25% of BG value), and (c) collateral security. The counter guarantee is the bank's security — if the BG is invoked and the bank pays, the bank recovers from the customer under the counter guarantee.

4. Fidelity Guarantee: A guarantee for the honesty and faithful performance of an employee. If the employee commits fraud or dishonesty, the guarantor compensates the employer. Common in financial institutions and cash-handling positions.

Specimen Bank Guarantee — Performance of Contract

[Illustrative format — based on ICSI Drafting material]

DEED OF GUARANTEE

This Deed of Guarantee is made on [Date]

BETWEEN:

[Bank Name], a banking company within the meaning of the Banking Regulation Act, 1949, having its branch at [Address] (hereinafter called the "Bank/Guarantor") of the First Part,

AND

The [State Government / Central Government / Company Name], represented by [Authority/Designation] (hereinafter called the "Beneficiary") of the Second Part.

RECITALS

WHEREAS [Company Name] Ltd. (hereinafter called the "Contractor"), a company incorporated under the Companies Act, having its registered office at [Address], has entered into a contract (Contract No. [Number] dated [Date]) with the Beneficiary for the supply/construction of [Description of goods/works] at a total contract price of Rs. [Amount].

WHEREAS under the terms of the said contract, the Contractor is required to furnish a Bank Guarantee for [X]% of the contract value (Rs. [Amount]) to secure the due performance of the contract.

WHEREAS the Bank has, at the request of the Contractor, agreed to issue this guarantee in favor of the Beneficiary.

NOW THIS DEED WITNESSETH:

1. The Bank hereby irrevocably and unconditionally guarantees to the Beneficiary that in the event the Contractor fails to perform its obligations under the said contract, the Bank shall pay to the Beneficiary, on first demand and without demur, any amount up to a maximum of Rs. [Amount] (Rupees [Words] only), without the Beneficiary needing to prove the Contractor's default.

2. The Bank's liability under this guarantee is limited to Rs. [Amount] and shall not be affected by: (a) any change in the constitution of the Bank or the Contractor, (b) any variation, amendment, or modification to the contract between the Contractor and the Beneficiary, (c) any indulgence, forbearance, or extension of time granted by the Beneficiary to the Contractor, (d) any winding up, insolvency, or liquidation proceedings against the Contractor.

3. This guarantee shall remain valid and in force from [Start Date] until [End Date], unless extended by mutual consent. Any claim under this guarantee must be received by the Bank on or before [End Date].

4. The Bank's obligation shall be discharged: (a) on payment of the guaranteed amount to the Beneficiary, (b) on expiry of the guarantee period without any claim, (c) on the Beneficiary's written release of the guarantee, (d) on the Contractor completing all obligations under the contract to the Beneficiary's satisfaction.

5. Notwithstanding anything contained herein, the Bank's maximum liability shall not exceed Rs. [Amount], and this guarantee shall stand automatically discharged after [End Date] unless a written claim is received by the Bank before that date.

Specimen Personal Guarantee — Performance of Contract

[For guarantee by an individual/director — not a bank]

DEED OF GUARANTEE

This Deed is made on [Date] by Mr./Ms. [Guarantor Name], residing at [Address] (the "Guarantor") in favor of [Beneficiary Name/Company] (the "Beneficiary").

WHEREAS [Principal Debtor Name] has entered into [Contract/Agreement] with the Beneficiary for [Description], and the Beneficiary has required a personal guarantee for the due performance of the said obligations.

NOW THE GUARANTOR HEREBY GUARANTEES to the Beneficiary that: (a) in the event of default by [Principal Debtor] in performing the obligations under the said contract, the Guarantor shall pay the Beneficiary such amounts as may be due, up to a maximum of Rs. [Amount], (b) this guarantee shall be a continuing guarantee under Section 129 of the Indian Contract Act, 1872, and shall remain in force until the complete performance of all obligations, (c) the Guarantor's liability shall not be affected by any variation in the contract, extension of time, or forbearance by the Beneficiary.

Legal Framework — Sections 126-147 Indian Contract Act

Section 126 — Definition: Contract of guarantee defined with three parties: surety, principal debtor, creditor. Section 127 — Consideration: Anything done for the benefit of the principal debtor is sufficient consideration for the surety's guarantee. Section 128 — Surety's liability: Co-extensive with that of the principal debtor (surety is liable for the same amount as the debtor). Section 129 — Continuing guarantee: A guarantee extending to a series of transactions. Section 133 — Discharge of surety: Surety is discharged by variance in terms of contract without surety's consent. Section 134-139 — Other grounds of discharge: Release of principal debtor, compounding with debtor, creditor's act impairing surety's remedy, loss of security.

Invocation of Bank Guarantee

When the beneficiary invokes (calls upon) the bank guarantee: (a) the beneficiary sends a written demand to the bank citing the contractor's default, (b) for unconditional/on-demand BGs: the bank must pay without verifying default — the bank cannot refuse or delay (Supreme Court in U.P. State Sugar Corporation v. Sumac International), (c) for conditional BGs: the bank verifies whether the conditions for invocation are met, (d) payment must be made within the BG terms, (e) the bank then recovers from the contractor under the counter guarantee. Courts have consistently held that banks cannot refuse to honor BGs except in cases of fraud or irretrievable injustice.

Stamp Duty on Guarantee Deeds

Guarantee deeds attract stamp duty under the Indian Stamp Act / State Stamp Acts — typically charged as a "bond" or "indemnity bond." Rates vary by state: some states charge a flat fee (Rs. 100-500), others charge ad valorem (0.1-1% of the guaranteed amount). Bank guarantees issued by banks are often exempt from stamp duty in some states. Always check the applicable state stamp duty schedule before execution.