A Contract of Guarantee refers to a Contract wherein one party promises to save the other from suffering any losses due to the non-performance of the promise of another. There are essentially three parties involved in such a Contract namely the Creditor, Principal Debtor, and the Surety. Disputes might arise in respect to the powers and the relationship among each of them in a Contract. This case was a landmark judgement in deciding the course of Guarantee Contracts in India.

Facts
In this case, the respondents, who were partners in a firm, entered into a Contract with the State Bank of Travancore to open a cash credit account up to the limit of Rs 1 Lakh. It was further agreed that in case they failed to repay the amount, the Bank has full right to claim the amount from their estate.

However, a month later, the appellant executed a letter of guarantee with the bank in respect of any liability of the respondents up to the limit of Rs 1,00,000 for the cash credit account and also for the discounted bills up to the limit of Rs 45,000. The respondents, in this case, failed to pay the amount along with the appellant. As a result, the bank decided to sell the stock that had been pledged. However, the stock which was worth Rs 99,991 was found to be overvalued by around Rs 30,000.

The bank further gave additional time to respondents to make up for the stock that had been misplaced or lost but they failed to do so. As a result, the Bank filed a suit against the respondents as well as the appellant based on the allegation that they had taken away the stock. The respondents didn't contest the suit and it was only contested by the appellant on certain grounds claiming variance in terms of Contract by the bank thereby absolving his liability.

The case was first referred to the Trial Court and later to the High Court both of which confirmed the decree in favour of the respondents. The decision was later challenged by the Appellant and brought before the Supreme Court.

Issues:
The primary issues before the Supreme Court were as follows:

• Whether there was a variance in the terms of the Contract without surety (Appellant's) consent thereby absolving his liability?
• Whether giving additional time to respondents for the repayment of debt absolves the Appellant's liability?
• Whether the loss of security on part of the Creditor absolved the Surety's liability to that extent?

Laws Applicable
The legal provisions applicable in this case are as follows:

• Section 133 of the Indian Contracts Act, 1872
• Section 135 of the Indian Contracts Act, 1872
• Section 141 of the Indian Contracts Act, 1872

Analysis
Since this case involves a Contract of Guarantee involving three parties namely the Bank (Creditor), respondents (Principal Debtors), and the appellant (surety), the various provisions under the Indian Contracts Act, 1872 concerned with a guarantee were applied by the Court. A guarantee contract is a tripartite agreement i.e., its entered into between three parties namely the debtor, creditor, and the surety who guarantees to pay the amount for the goods availed by the principal debtor in case he/she defaults.

As per Section 133 of the Indian Contracts Act, 1872, in case there is a variance in terms of a Contract originally entered into between the Creditor and the Principal Debtor without the Surety's consent, the surety is discharged from liability. The Contract between the Creditor and the Principal debtor is the primary contract from which the secondary contract of Guarantee emerges. As soon as the creditor and debtor enter into an agreement with the due consent of the surety, the terms can't be changed without the surety knowing about the same.

Now in the present case, the maximum cash credit limit had been first decreased to Rs 50,000 and was again increased to Rs 1 Lakh without the consent of the surety.

However, this limit was merely meant for the internal accounting of the bank and was not binding on the respondents because of the already existing agreement as can be seen from the facts. As a result, it is fair for the Court to hold that without a formal written agreement having the consent of all parties, there can be absolutely no variance in the contractual terms as the reduction in limit was only for internal purposes which wasn't enforceable.

Another major issue, in this case, was that the creditor had extended the time period for the bringing back of the lost stock by the respondents in this case.

As per Section 135 of the Indian Contracts Act, 1872 if the creditor gives time to the principal debtor for repayment of the amount then it discharges the surety unless the surety assents to this Contract. This section shall apply only in the case where the creditor had to take any new security from the principal debtor or had to take some money from the debtor under a new Contract for the first time.

However, in this particular case, it was not the repayment of money that had been asked for. Since this additional time was to bring back the lost goods, it doesn't discharge the surety from his liability because these goods had already been the subject matter of the Contract and were not to be found under a new Contract.

Another legal point in this case clearly doesn't call for the liability of the Surety. Since in this case it was the creditor only who was at fault and the surety had only guaranteed against the negligent act of debtors, they should not be liable to compensate to the extent of goods lost.

As per Section 141 of the Indian Contracts Act, 1872, if the creditor loses out on the security the surety is not liable to pay to the extent of the securities lost and their liability is discharged. This section is concerned with the rights of a surety against the creditor. The creditor is essentially entitled to all the securities held by the creditor against the principal debtor. This right exists regardless of the fact whether the creditor was actually aware of the same or not.

Since in this given case, the goods were lost because of the negligence of the bank itself, the surety is not to be held liable and his liability would be discharged to the extent of the lost goods. Hence the lost stock worth Rs 30,000 is of no concern to the surety and he isn't required to compensate for it.

As a result, it can be clearly inferred that the surety's liability can't be discharged completely but only in part to the extent of the lost goods because of the negligence of the bank.

Conclusion
The Court decided in this particular case with respect to Surety's liability that they are not discharged from their liability just because the banks extended the time for returning the goods for the respondents. Further, there is also no variance in contractual terms and this reduction in limit was not enforceable and was even changed to the original value later on.

However, the Court decided that the surety's liability is discharged to the extent of lost goods which was clearly justified in this case, and can only claim Rs 5,000 from the appellant. This judgement, even in the present times proves to lay down vital guidelines to be followed for Guarantee Contracts. In any Contract of Guarantee, the surety is only liable to compensate for any losses caused by the acts of the Principal Debtor and not for the fault or negligence of the Creditors.