A contract of guarantee is a contract to perform the promise, or to discharge the liability of a third person, in the case of default. The person who gives the guarantee is called the surety or the guarantor; the person in respect of whose default, the guarantee is given, is called the principal-debtor; and the person to whom the guarantee is given, is called the creditor. A guarantee may be either oral or in writing.
Any variance, made without the surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance. 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/she cannot be bound for the final obligation of the principal-debtor which would be different from the obligations which the surety initially guaranteed. This is owing to variation in terms of the original contract. In such a situation, a surety is discharged forthwith on the contract made being altered without his consent. This is because the liability of the surety extends only to what contract he guaranteed and not something for which he had not contracted for. Therefore, in order to bind the surety to a contract of guarantee, he must be consulted. Section 133 of the Indian Contract Act, 1872, defines – Discharge of surety by variance in terms of the contract.
Any alteration made in an instrument, after its execution, in some particular which is not material, does not discharge the surety from liability. But where the alteration is material, the surety can claim to be discharged. In other words, if a change in the contract between the guarantor and the principal-debtor materially affects the position of the surety, then it would absolve the surety from liability. However, the guarantor is not discharged by any variation of the principal contract made with his consent. The consent has to be proved by the person who seeks to enforce the guarantee. The surety continues to be liable for transactions effected before such variation. The surety is discharged as to the transactions subsequent to the variance.
Any modification of the contract between the creditor and the principal debtor, that has been made without the consent of the sureties, cannot subsequently bind them. Critically, however, a plain reading of the said provision reveals that such discharge of the surety is not absolute in nature. The surety is discharged only in respect of transactions that occurred subsequent to the variance of the terms of the contract.
It is also a well-established principle that 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. However, where the creditor withdrew the suit against the principal-debtor, but continued the suit against the surety, the latter was not discharged because his remedy against the principal-debtor was not impaired.
In Bonar vs. Macdonald, (1850) 3 HLC 226, it was observed that any variance in the agreement to which the surety has subscribed, which is made without the surety’s knowledge or consent, which may prejudice him, or which may amount to a substitution of a new agreement for a former agreement, even though notwithstanding such variance, the original agreement may be substantially performed, will discharge the surety.