Letter of Guarantee Template (India) — Free Format
A letter of guarantee is a written promise by one person (the surety) to a creditor to pay or perform if another person (the principal debtor) fails to do so. In India it is governed by Sections 126 to 147 of the Indian Contract Act, 1872, which define a contract of guarantee and set out the surety's rights and when they are discharged.
Stamp, registration and e-sign at a glance
The three things to settle before anyone signs this agreement in India.
Payable under the stamp law of the state where it is signed; rates vary by state. Unstamped, it cannot be used as evidence until duty and penalty are paid. A guarantee is charged under its own entry in most state stamp schedules, either as a fixed amount or ad valorem on the guaranteed amount.
Check your state's rateRegistration is not required.
This agreement can be signed electronically with Aadhaar eSign or a DSC under the Information Technology Act, 2000. Electronic signatures listed in the Act's Second Schedule carry a presumption of reliability. Banks and lenders sometimes insist on physically signed, stamped guarantees.
What cannot be e-signedWhat is a Letter of Guarantee?
Section 126 defines a contract of guarantee as a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person giving the guarantee is the surety, the person for whom it is given is the principal debtor, and the person to whom it is given is the creditor. A guarantee can be written or oral, but a written guarantee is the norm. It differs from an indemnity (Section 124), where the promisor protects the promisee from loss, and from a bank guarantee, which is issued by a bank on demand terms.
When to use it
- A director or promoter backs a company's bank loan or credit facility
- A parent company guarantees a subsidiary's payment obligations to a supplier or landlord
- A vendor asks for a guarantee for goods supplied on credit
- A personal guarantee for a loan, lease or performance obligation
Key clauses checklist
Make sure your draft covers each of these. Linked clauses open a sample wording with drafting tips.
- Parties and underlying obligation guaranteed
- Nature of the guarantee (continuing, limited amount, specific transaction)
- Extent of the surety's liability (co-extensive with the debtor)
- Demand and payment Sample clause
- Waiver of surety defences and variation
- Revocation of a continuing guarantee Sample clause
- Subrogation and rights of the surety
- Stamp duty Sample clause
- Governing law and jurisdiction Sample clause
Indian law notes
Extent of liability
Under Section 128 of the Contract Act, the surety's liability is co-extensive with that of the principal debtor unless the contract says otherwise. The creditor may ask the surety to pay without first suing the debtor, unless the guarantee requires it. Cap the amount and period if you are the surety.
Continuing guarantees and revocation
A guarantee that extends to a series of transactions is a continuing guarantee (Section 129). The surety can revoke it for future transactions by notice to the creditor (Section 130), and it is revoked by the surety's death for future transactions (Section 131) unless the contract says otherwise.
Discharge of the surety
The surety is discharged where the creditor varies the terms of the contract with the debtor without the surety's consent (Section 133), releases or compromises with the debtor in a way that discharges him (Section 134), or gives the debtor time or agrees not to sue him without the surety's consent (Section 135; see Bank of Bihar v Damodar Prasad, AIR 1969 SC 297), or acts against the surety's interests or impairs his remedy against the debtor (Section 139). Guarantee documents therefore usually include a waiver of some of these protections, which courts read carefully.
Misrepresentation and concealment
A guarantee obtained by misrepresentation of material facts by the creditor, or by concealment of material circumstances, is invalid (Sections 142 and 143). Disclose the debtor's true position to the surety.
Rights of the surety
After paying, the surety is entitled to recover from the principal debtor (Section 140), to the creditor's securities (Section 141) and to an implied indemnity (Section 145). Co-sureties share the liability equally unless agreed otherwise (Section 146).
LETTER OF GUARANTEE Date: [Date] To, [Creditor Name] [Address] (the "Creditor") Dear Sirs, Re: Guarantee for the obligations of [Principal Debtor Name] (the "Principal Debtor") 1. BACKGROUND At the request of the Principal Debtor, the Creditor has agreed to [lend Rs. [Amount] / supply goods or services / lease premises] to the Principal Debtor under an agreement dated [Date] (the "Principal Agreement"), on condition that I/we, [Surety Name], residing at / having our registered office at [Address] (the "Surety"), give this guarantee. 2. GUARANTEE In consideration of the Creditor entering into the Principal Agreement with the Principal Debtor, the Surety unconditionally and irrevocably guarantees to the Creditor the due and punctual payment of all sums due from the Principal Debtor under the Principal Agreement, up to a maximum of Rs. [Amount] together with interest, costs and charges (the "Guaranteed Amount"). 3. NATURE OF GUARANTEE This is a [continuing guarantee for all amounts due from time to time up to the Guaranteed Amount / guarantee for the specific transaction described above]. The liability of the Surety is co-extensive with that of the Principal Debtor under Section 128 of the Indian Contract Act, 1872. 4. DEMAND On the Principal Debtor's default, the Creditor shall give written notice to the Surety. The Surety shall pay the amount demanded within [seven] days of the notice, without requiring the Creditor to first proceed against the Principal Debtor or any security. 5. VARIATIONS The Surety agrees that the Creditor may, with notice to the Surety, grant time to the Principal Debtor, agree to minor changes in the Principal Agreement that do not increase the Surety's liability, and the Surety's liability shall continue. [Any variation that increases the Surety's liability requires the Surety's written consent.] 6. SURETY'S RIGHTS After paying, the Surety shall be subrogated to the Creditor's rights against the Principal Debtor and shall be entitled to the benefit of the Creditor's securities, as provided in Sections 140 and 141 of the Contract Act. The Surety shall not claim against the Principal Debtor until the Creditor's claim has been paid in full. 7. REPRESENTATIONS The Creditor confirms that it has disclosed to the Surety all material facts known to it about the Principal Debtor and the Principal Agreement. The Surety confirms that it has independently reviewed the Principal Agreement. 8. DURATION AND REVOCATION This guarantee remains in force until [Date / all amounts due under the Principal Agreement have been paid]. The Surety may revoke this guarantee as to future transactions by [30] days' written notice, but remains liable for amounts due up to the date of revocation. 9. GOVERNING LAW AND JURISDICTION This guarantee is governed by the laws of India. The courts at [City] have exclusive jurisdiction. Yours faithfully, Surety: ____________ Name: [Name] Designation (for a company): [Designation] Date: [Date] Accepted by the Creditor: ____________ Name: [Name] Date: [Date] Witnesses: 1. ____________ 2. ____________
Replace every [placeholder] and delete options that do not apply. Check the stamp duty in your state
How to execute it
From blank template to a signed, stamped and stored contract.
Identify the principal debtor, the exact liability guaranteed and the maximum amount the surety will cover.
Decide whether the guarantee is for a single transaction or a continuing one, and how long it lasts.
Read the underlying agreement; a guarantee is only as clear as the obligation it supports.
Print on stamp paper at the state's guarantee rate, sign before witnesses and give a copy to the creditor.
Keep records of any variations, and re-sign or confirm consent if the underlying terms change in a way that increases the surety's risk.
Frequently asked questions
What is a letter of guarantee?
It is a written undertaking by a surety to pay or perform if the principal debtor defaults. The Indian Contract Act, 1872 governs it in Sections 126 to 147.
What is the difference between a guarantee and an indemnity?
A guarantee involves three parties and secures a debtor's obligation to a creditor. An indemnity, under Section 124, is a promise to compensate a person for a loss and generally involves two parties. Their legal rules differ.
Can a surety withdraw a guarantee?
The surety can revoke a continuing guarantee for future transactions by notice to the creditor (Section 130), unless the guarantee says otherwise. Amounts already due remain payable.
Is a bank guarantee the same as a letter of guarantee?
No. A bank guarantee is issued by a bank on its own terms, usually payable on demand, and is typically backed by a counter-indemnity or margin from the customer. A personal or corporate letter of guarantee is a private contract of suretyship.
Does a guarantee need stamp paper?
Yes, a guarantee is an instrument chargeable with stamp duty under state law. An unstamped guarantee is not void but cannot be admitted in evidence until duty and penalty are paid.
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