Surety Not Liable For Contract Changes Without Consent: Supreme Court

The Supreme Court has clarified that under Section 133 of the Indian Contract Act, if the terms of a contract between a creditor and the principal borrower are changed without the consent of the surety (guarantor), the surety cannot be held liable for those changed terms.

However, Court made it clear that this does not mean the surety is completely discharged from liability. The discharge applies only to transactions that take place after such changes are made in the contract.

A Bench of Justices B V Nagarathna and Ujjal Bhuyan explained that a surety cannot be made responsible for obligations they never agreed to. If new terms are introduced without their consent, they cannot be bound by those altered obligations.

"Discharge of surety by variance in terms of the contract means that the surety cannot be bound to something for which he has not contracted. This would imply that if the surety had not assented to certain new terms, he cannot be bound for the final obligation of the principal-debtor which would be different from the obligations which the surety initially guaranteed,'' the Bench said.

Court also discussed Section 139 of the Act, which deals with situations where the creditor acts in a way that harms the rights of the surety. It said that for this provision to apply, two conditions must be met: first, the creditor must either act against the rights of the surety or fail to perform a duty owed to them; and second, such action or inaction must weaken the surety’s ability to recover money from the principal borrower.

In such cases, even if the borrower is not discharged, the surety can still be relieved of liability if their ability to recover dues is affected.

"No bar can be placed on the creditor so as to restrict their ability to recover the amounts owed from the sureties before proceeding as against the principal debtor,'' the Bench further clarified.

These observations were made while allowing a civil appeal filed by Bhagyalaxmi Cooperative Bank Limited against a Gujarat High Court judgment dated June 25, 2008.

The case dates back to 1993, when M/s Darshak Trading Company took a cash-credit loan of Rs 4,00,000 from the bank. Two individuals stood as guarantors for this loan. The bank later alleged that the borrower, in collusion with some bank officials, withdrew amounts far exceeding the sanctioned limit.

After default in repayment, the bank filed a suit to recover over Rs 26 lakh with interest. In 2001, the Board of Nominees allowed recovery only from the principal borrower and dismissed the case against the guarantors.

In 2007, the Gujarat State Co-operative Tribunal reversed this and held the guarantors liable for Rs 4,00,000 with interest. However, the high court later set aside this decision, holding that the guarantors could either be liable for the entire amount or not at all.

The Supreme Court disagreed with this view. It held that the high court’s reasoning was incorrect, as the law clearly allows for partial liability. The guarantors cannot be held responsible for amounts exceeding Rs 4,00,000, since those excess withdrawals amounted to a change in the contract without their consent.

Court said that dividing the liability in this manner is not only permissible but required under the law to determine the exact extent of a surety’s responsibility.

Accordingly, court held that the guarantors are liable only to the extent of Rs 4,00,000 along with applicable interest, which was the original sanctioned loan amount. Since they were not informed about the excess withdrawals, they cannot be held liable for those additional amounts

Case Title: Bhagyalaxmi Cooperative Bank Limited Vs Babaldas Amtharam Patel Through Legal Representatives & Others

Bench: Justices B V Nagarathna and Ujjal Bhuyan 

Date of Judgment: February 27, 2026