SC: Surety Liability Limited to Original Guarantee Despite Contractual Variance

The Hon’ble Supreme Court of India, in Bhagyalaxmi Co-Operative Bank Ltd. v. Babaldas Amtharam Patel (D) through LRs & Ors. (2026 SCC OnLine SC 326), decided on February 27, 2026, held that where a creditor permits the withdrawal of amounts in excess of the sanctioned limit without the knowledge and/or consent of the surety, the surety stands discharged only with respect to such excess transactions and continues to remain liable to the extent of the original guaranteed amount under Section 133 of the Indian Contract Act, 1872 (ICA).

The aforementioned dispute arose from a cash-credit facility for the withdrawal of ₹4,00,000 extended by Bhagyalaxmi Co-Operative Bank Ltd. (Appellant Bank) to a borrower, for which the respondents stood as sureties. The borrower, however, withdrew amounts far exceeding the sanctioned limit. Upon default, the Appellant Bank initiated the recovery proceedings not only against the principal borrower but also against the respondents. While the Board of Nominees, the concerned adjudicatory authority, initially dismissed the claim against the respondents, the Gujarat State Co-operative Tribunal held them liable to the extent of the sanctioned amount. The High Court of Gujarat, however, set aside this finding, holding that the respondents could either be liable for the entire amount or not liable at all, relying on Section 139 of the ICA.

Before the Hon’ble Supreme Court, the central issue was whether the discharge of the liability of the respondent in such circumstances would be governed by Section 133 or Section 139 of the ICA. The Hon’ble Supreme Court undertook a detailed analysis of the statutory framework governing contracts of guarantee and the scope of discharge provisions under Sections 133 to 139 of the ICA.

The Hon’ble Supreme Court held that Section 133 of the ICA squarely applied to the facts, as the Appellant Bank had permitted a material variance in the terms of the contract namely, allowing withdrawals beyond the sanctioned limit without obtaining the consent of the respondents. It clarified that under Section 133 of the ICA, such variance results in the discharge of the surety only in respect of transactions subsequent to the variance and not in totality. Consequently, the liability of the respondents remains intact for the original amount guaranteed.

Rejecting the High Court of Gujarat’s interpretation, the Supreme Court held that the statute itself contemplates a bifurcation of liability and does not support an “all or nothing” approach. The Hon’ble Supreme Court further expounded that Section 139 of the ICA would not apply in the absence of an impairment of the respondent’s eventual remedy against the borrower, which was not established in casu.

Accordingly, the Hon’ble Supreme Court held that the respondents, were liable to the extent of ₹4,00,000, being the original sanctioned amount, along with the appropriate interest applicable, but stood discharged from liability in respect of the excess amounts withdrawn by the borrower without their consent. The appeal was allowed, and the judgment of the High Court of Gujarat was set aside.