Question:hard

X takes a loan of ₹ 10,00,000 from Bank A. Y signs a contract as surety, promising to pay the bank if X defaults. After 3 months, Bank A agrees to reduce the interest rate and extends the repayment period by 6 months without informing Y. Subsequently, X defaults on the loan. Which of the following statements correctly describes Y's liability under the Indian Contract Act, 1872?

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Section 133 is crucial: Any "variance" in the contract terms without the surety's consent acts as a "get out of jail free" card for the surety regarding subsequent defaults!
Updated On: Jun 8, 2026
  • Y is liable only if the bank sues the principal debtor first, regardless of the modification.
  • Y is partially discharged from liability because Bank A's modification increased the risk to Y without his consent.
  • Y is not liable at all because the principal debtor defaulted after the contract modification.
  • Y is fully liable for the entire loan because a surety is always liable once the principal debtor defaults.
Show Solution

The Correct Option is C

Solution and Explanation

Step 1: Lay out the story simply.
X borrows 10,00,000 from Bank A. Y is the surety, meaning Y promises to pay if X defaults. Later the bank quietly changes the deal with X (lower interest, longer repayment time) without telling Y. Then X defaults. We must find Y's liability under the Indian Contract Act, 1872.

Step 2: Who is a surety and what protects him?
A surety stands as a backup payer. Because he takes a risk for someone else, the law gives him strong protection. He agreed to back the original deal, not a changed one.

Step 3: Apply Section 133.
Section 133 says that if the creditor and the principal debtor change the terms of the contract without the surety's consent, the surety is discharged for all transactions after that change.

Step 4: Apply it to the facts.
Bank A changed the interest rate and extended the repayment period without asking Y. This is exactly the kind of variance Section 133 talks about. Y never agreed to it.

Step 5: When did the default happen?
X defaulted after the bank made these changes. Since the change came first and was made without Y's consent, Y is released from his obligation.

Step 6: Eliminate the wrong options.
Option A wrongly limits Y's defence to suing the debtor first. Option B says only partial discharge, but Section 133 gives full discharge when terms are varied without consent. Option D says a surety is always liable, which ignores the protection of Section 133. So A, B, and D are wrong.

Step 7: Final answer.
Because the contract was changed without Y's consent, Y is fully discharged and not liable.
\[ \boxed{\text{Y is not liable at all because the principal debtor defaulted after the contract modification.}} \]
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