Core Legal Answer & Context: This statement is a fundamental principle governing the contract of guarantee, as enshrined in the Indian Contract Act, 1872. A contract of guarantee involves three parties: the principal debtor (who incurs the debt), the creditor (to whom the debt is owed), and the surety (who guarantees the debt). The phrase "coextensive with principal debtor" means that the surety's liability is exactly the same in scope and extent as that of the principal debtor. The caveat "unless it is otherwise provided in the contract" allows parties to modify this co-extensiveness through specific contractual terms.

Relevant Statutes and Sections:

1. Section 126, Indian Contract Act, 1872: Defines a 'contract of guarantee', 'surety', 'principal debtor', and 'creditor'.
2. Section 128, Indian Contract Act, 1872: States, "The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract."
3. Sections 133-139, 141, 142-144, Indian Contract Act, 1872: Detail the various circumstances under which a surety may be discharged from liability.

Elucidation of Co-extensive Liability (Section 128): 'Co-extensive' implies that the surety is liable for all that the principal debtor is liable for. This means:

• Immediate Liability: Upon the principal debtor's default, the surety's liability arises immediately. The creditor is not obligated to first exhaust remedies against the principal debtor (e.g., sue the principal debtor or realize security from them) before proceeding against the surety, unless the contract specifically stipulates such a condition.
• Same Extent: The surety's liability cannot be greater than that of the principal debtor. If the principal debtor's liability is reduced (e.g., by part payment or a court order), the surety's liability is also reduced proportionally.
• Joint and Several: The creditor can sue the principal debtor, the surety, or both simultaneously. The liability is often considered joint and several.
• Contractual Limitation: The phrase "unless it is otherwise provided by the contract" is crucial. Parties can, by agreement, limit the surety's liability (e.g., to a specific amount less than the principal debt, or make it contingent upon the creditor first proceeding against the principal debtor or their assets).

Important Landmark Cases:

1. State Bank of India v. M/s. Indexport Registered & Ors. (1992): The Supreme Court unequivocally reaffirmed that the liability of the surety is co-extensive with that of the principal debtor and that the creditor is not bound to exhaust his remedies against the principal debtor first before proceeding against the surety.

Circumstances Under Which a Surety is Discharged from Liability (Sections 133-139, 141, 142-144): The Indian Contract Act provides several safeguards for the surety, allowing for their discharge under specific circumstances, primarily when the creditor's actions alter the original contract or impair the surety's ability to recover from the principal debtor:

1. By Revocation (Sections 130 & 131):

   • Specific Guarantee: Generally, a specific guarantee (for a single transaction) cannot be revoked once the consideration has passed and the liability has accrued.
   • Continuing Guarantee: A continuing guarantee (for a series of transactions) can be revoked by the surety as to future transactions by giving notice to the creditor. The death of the surety also operates as a revocation for future transactions.

2. By Variance in Terms of Contract (Section 133):

   • If the creditor and the principal debtor, without the surety's consent, make any material alteration in the terms of the contract, the surety is discharged as to transactions subsequent to such variance. The rationale is that the surety guaranteed a specific contract, and any material change without their consent alters the risk they undertook.

3. By Release or Discharge of Principal Debtor (Section 134):

   • If the creditor releases the principal debtor, or does any act or omission which has the legal effect of discharging the principal debtor, the surety is discharged. This is because the surety's liability is secondary to that of the principal debtor.

4. By Compounding with Principal Debtor (Section 135):

   • If the creditor, without the surety's consent, makes a contract with the principal debtor to give him time, or to not sue him, the surety is discharged. (Exceptions: if the contract is with a third party, or if the surety assents to such arrangement).

5. By Creditor's Act or Omission Impairing Surety's Remedy (Section 139):

   • If the creditor does any act inconsistent with the rights of the surety, or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged. For example, if the creditor loses a security provided by the principal debtor.

6. Loss of Security (Section 141):

   • If the creditor loses or parts with any security given by the principal debtor at the time the contract of guarantee was entered into, without the consent of the surety, the surety is discharged to the extent of the value of the security. This protects the surety's right to be subrogated to the creditor's rights over such security upon payment.

7. Invalidation of Contract of Guarantee (Sections 142-144):

   • Guarantee obtained by Misrepresentation (Section 142): Any guarantee obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid.
   • Guarantee obtained by Concealment (Section 143): Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.
   • Failure of Co-surety to Join (Section 144): Where a contract of guarantee is entered into on the condition that another person shall also join as co-surety, the guarantee is not valid if that other person does not join.

Clear Conclusion: Section 128 of the Indian Contract Act establishes the fundamental principle that a surety's liability is co-extensive with that of the principal debtor, meaning they are equally and primarily responsible for the debt upon the principal debtor's default, unless contractually limited. However, the Act also provides comprehensive provisions (Sections 133-139, 141-144) that safeguard the surety's interests, allowing for their discharge from liability under various circumstances, particularly when the creditor's actions unilaterally alter the original contract, impair the surety's recourse against the principal debtor, or if the guarantee itself was improperly obtained.