The Hon’ble Supreme Court of India has clarified the extent of liability of a surety under Section 133 of the Indian Contract Act, 1872 in Bhagyalaxmi Co‑Operative Bank Ltd v. Babaldas Amtharam Patel (D) Through Legal Representatives & Others. The Hon’ble Court held that a surety cannot be held liable for withdrawals made by the borrower beyond the sanctioned loan limit where such variation occurred without the consent of the surety.
The dispute arose from a cash credit facility of ₹4,00,000 granted by Bhagyalaxmi Co-Operative Bank Ltd to a partnership firm, for which the respondents stood as guarantors. The bank alleged that the borrower had withdrawn amounts far exceeding the sanctioned limit and initiated recovery proceedings against both the borrower and the sureties.
The matter eventually reached the Hon’ble Supreme Court of India, where the question arose whether the sureties could be made liable for the excess withdrawals permitted by the bank beyond the sanctioned credit limit.
The Hon’ble Court examined Section 133 of the Indian Contract Act, 1872, which provides that any variance in the terms of the contract between the creditor and the principal debtor without the consent of the surety discharges the surety in respect of transactions subsequent to such variance.
The Hon’ble Court observed as follows:
- The liability of a surety is confined strictly to the terms of the contract of guarantee.
- Any material variance in the contract between the creditor and the principal debtor without the consent of the surety discharges the surety in respect of subsequent transactions.
- Permitting withdrawals beyond the sanctioned loan limit constitutes a variation in the contractual arrangement.
- Such variation cannot enlarge the liability of the surety beyond the amount originally guaranteed.
Thus, the Hon’ble Supreme Court set aside the Hon’ble Gujarat High Court’s judgement which ruled that variance in a loan agreement would discharge the surety of the entire liability.
Accordingly, the Hon’ble Supreme Court of India held that the sureties could be held liable only to the extent of the original sanctioned loan amount of ₹4,00,000 with applicable interest and not for the additional withdrawals made by the borrower beyond the sanctioned limit.
The judgment reiterates that a surety’s liability cannot be expanded beyond the terms of the guarantee and any material variance made without the consent of the surety discharges the surety with respect to subsequent transactions.
