Facts: In 1993, M/s Darshak Trading Company (Respondent No. 6) obtained a cash-credit facility of Rs. 4,00,000 from Bhagyalakshmi Co-Operative Bank Ltd. (Appellant). Respondent Nos. 1 and 2 stood as sureties for this specific amount. Subsequently, the principal borrower, in connivance with bank officials, withdrew amounts totaling over Rs. 26 Lakhs, far exceeding the sanctioned limit. Upon default, the Bank filed a Lavad Suit for the entire amount. The Board of Nominees decreed the suit only against the borrower, dismissing it against the sureties. On appeal, the Co-operative Tribunal held the sureties liable for the original sanctioned amount of Rs. 4,00,000. However, the High Court of Gujarat set aside this order, holding that any variance in the contract without the surety's consent discharges the surety entirely from all liability.
Procedural Posture: The matter reached the Supreme Court via a Civil Appeal challenging the judgment of the High Court of Gujarat, which had allowed a writ petition filed by the sureties against the Co-operative Tribunal's order.
Issue: Whether a variance in the terms of a loan contract (overdrawing beyond the sanctioned limit) without the surety's consent results in an absolute discharge of the surety's liability, or if the surety remains liable for the original amount for which the guarantee was initially given.
Holding: The Supreme Court held that the sureties are liable to the extent of the original sanctioned amount (Rs. 4,00,000) plus interest, but are discharged regarding the excess amounts withdrawn subsequent to the variance.
Reasoning: The Court reasoned that Section 133 of the Indian Contract Act, 1872, specifies that a variance without consent "discharges the surety as to transactions subsequent to the variance". This implies the discharge is not absolute but applies only to the altered portion of the contract. The High Court erred in holding that liability cannot be bifurcated. The Court further clarified that Section 139 did not apply because, although the bank's act was inconsistent with the sureties' rights, it did not "impair the eventual remedy" of the sureties against the principal debtor. The cardinal rule is that a guarantor is not liable beyond the terms of his engagement, but he remains bound by the transactions he specifically guaranteed prior to any material alteration.