Surety discharged only for transactions subsequent to unauthorized contract variance under Section 133.

In October 1993, M/s Darshak Trading Company (Respondent 6) obtained a cash-credit facility of ₹4,00,000 from the Appellant-Bank.

Respondents 1 and 2 stood as guarantors for this specific amount.

Subsequently, Respondent 6, allegedly in connivance with bank officers, withdrew amounts far exceeding the sanctioned limit, totaling over ₹26 lakhs.

Upon default, the Bank filed a Lavad Suit.

The Board of Nominees decreed the suit only against the principal borrower and dismissed it against the sureties.

On appeal, the Gujarat State Co-operative Tribunal held the sureties liable for the original sanctioned amount of ₹4,00,000 plus interest.

However, the High Court of Gujarat set aside this order, ruling that under Section 139 of the Indian Contract Act, the sureties were discharged entirely because the Bank permitted overdrawings without their consent, and liability could not be bifurcated.

Whether the respondents are entitled to a total discharge of liability under Section 139 of the Indian Contract Act, 1872, or remain liable as sureties for the original contracted amount under Section 133 of the Act due to the variance in the contract?

The Court primarily applied Section 133 of the Indian Contract Act, 1872, which stipulates that any variance made without the surety’s consent in the terms of the contract discharges the surety only as to transactions subsequent to the variance.

It distinguished this from Section 139, which provides for the discharge of a surety if the creditor's act or omission impairs the surety’s eventual remedy against the principal debtor.

The Court relied on Basavaraj v. Canara Bank (2010), noting that a surety continues to be liable for transactions effected before a variation.

The Court relied on MS Indexport Registered (1992), confirming that a surety's liability is co-extensive with the principal debtor.

The Court observed that the High Court erred in holding that a surety's liability is "all or nothing".

Applying Section 133, the Court reasoned that while the overdrawings beyond ₹4,00,000 constituted a "variance" without the sureties' consent, such a variance does not result in an absolute discharge from the initial obligation.

The statue specifically mandates that the discharge applies only to transactions subsequent to the variance.

Regarding Section 139, the Court found it inapplicable because, although the Bank's actions increased the debt, they did not legally impair the sureties' "eventual remedy" to sue the principal debtor for the amount they might pay to the Bank.

Therefore, the liability could and must be bifurcated: the sureties remain bound by the original contract (₹4,00,000) but are discharged from the unauthorized excess.

It held that the respondents/sureties are liable to the extent of the originally sanctioned ₹4,00,000 with applicable interest, as Section 133 only discharges them from liabilities arising after the unauthorized variance.

The Court concluded that there is no legal bar to bifurcating liability between the sanctioned amount and the overdrawn amounts.