Contract of Guarantee — Sections 133 and 139 — Indian Contract Act, 1872 — Overdrawing beyond sanctioned limit without surety’s consent — Extent of discharge. (Paras 3–4.4, 7–7.4)
The principal debtor was sanctioned a cash-credit facility of ₹4,00,000/-. The sureties executed guarantees limited to this amount. Subsequently, the bank permitted withdrawals far exceeding the sanctioned limit without the sureties’ consent.
The High Court held that the sureties must either be liable for the entire outstanding amount or not liable at all. The Supreme Court reversed this view.
Under Section 133, any variance in the terms of the contract between the creditor and the principal debtor, made without the surety’s consent, discharges the surety only in respect of transactions subsequent to the variance. The discharge is not absolute.
Ratio Decidendi: Where a creditor permits overdrawing beyond the sanctioned limit without the surety’s consent, the surety stands discharged only qua the excess amount constituting variance; liability continues to the extent originally guaranteed.
Section 139 — Discharge by impairment of surety’s eventual remedy — Inapplicability in absence of prejudice to subrogation rights. (Paras 4.8–4.10, 6.1, 7.1)
Section 139 requires (i) an act inconsistent with the surety’s rights or omission of duty by the creditor, and (ii) impairment of the surety’s eventual remedy against the principal debtor.
Although permitting excess withdrawals may affect the surety’s contractual exposure, there was no impairment of the surety’s eventual remedy against the principal debtor. The surety retained full rights of recovery upon payment.
Ratio Decidendi: Mere variance in contractual exposure does not attract Section 139 unless the creditor’s act or omission impairs the surety’s eventual remedy against the principal debtor; absence of such impairment excludes discharge under Section 139.
Liability of Surety — Co-extensive nature — Subject to contractual limit. (Paras 4.1, 5.2, 5.3)
The liability of a surety is co-extensive with that of the principal debtor unless otherwise provided in the contract (Section 128). However, co-extensiveness operates within the limits of the guarantee.
The surety cannot be made liable beyond the scope of the guarantee. The creditor is not required to first exhaust remedies against the principal debtor before proceeding against the surety.
Ratio Decidendi: Co-extensive liability does not enlarge the quantum of guarantee; it operates only within the contractual limits to which the surety consented.
Material Variation — Consent of Surety — Necessity. (Paras 4.4–4.6)
A surety cannot be bound to altered obligations without consent. Material variation of the principal contract without consent discharges the surety to the extent of the variation. Consent must be proved by the creditor seeking enforcement.
Ratio Decidendi: Any material variation in the underlying contract, without the surety’s consent, releases the surety from liability for transactions subsequent to such variation.
Error of High Court — “All or Nothing” Approach Rejected. (Paras 7, 7.3)
The High Court erred in holding that the surety must be liable either for the entire outstanding sum or not at all. Section 133 expressly contemplates partial discharge limited to subsequent transactions after variance.
Ratio Decidendi: The statute mandates bifurcation of liability where variance occurs; an “all or nothing” approach is contrary to Section 133.
Operative Conclusion
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Appeal allowed.
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Judgment of the High Court of Gujarat dated 25.06.2008 set aside.
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Sureties (Respondent Nos. 1 and 2) held liable only to the extent of ₹4,00,000/- with applicable interest — being the originally sanctioned amount guaranteed.
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Sureties not liable for excess amounts withdrawn beyond the sanctioned limit.
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Parties to bear their respective costs.
