### Unilateral Post-Subscription Modification of Terms Discharges Underwriters from Contractual Guarantee Obligations under Indian Contract Act.

Tommorrowland Ltd. launched a public issue of Fully Convertible Debentures (FCDs) in 1995, which was fully underwritten by 267 underwriters, including HDFC Bank.

While the issue initially closed on February 18, 1995, having achieved the 90% subscription threshold.

SEBI subsequently directed the company to offer subscribers a withdrawal option due to disclosure anomalies.

Following these withdrawals, subscription fell below 90%, and Tommorrowland issued devolvement notices to underwriters.

After the Delhi Stock Exchange declined arbitration in 1997, the High Court appointed a Sole Arbitrator in 2007.

The Arbitrator awarded damages against the underwriters at Rs. 80 per FCD plus 18% interest.

On challenges under Sections 14, 17, 30, and 33 of the 1940 Arb Act, the Single Judge affirmed the underwriters' liability but reduced damages to Rs. 20 per FCD and slashed interest rates.

Both the company and underwriters appealed.

The Court primarily applied Section 39(1)(iii) and (vi) of the Arbitration Act, 1940, regarding the maintainability of appeals against orders modifying or refusing to set aside awards.

It relied on Section 28 of the 1940 Act and the precedent *State of Punjab v. Hardyal*, which affirms judicial discretion to enlarge time for making an award even after its expiry.

Crucially, the Court applied Chapter VIII of the Indian Contract Act (ICA), 1872, specifically Sections 126 and 128 defining guarantee and surety.

The Court applied Sections 133 and 134, which mandate the discharge of a surety upon any material variance or alteration of the contract between the creditor and principal debtor without the surety's consent.

The Court determined that an underwriting agreement is a contract of guarantee governed by Chapter VIII of the ICA, where the underwriter is the "surety".

It found that once the public issue was successfully subscribed and closed on Feb 18, 1995, the original risk the underwriters agreed to cover had ceased.

Tommorrowland’s unilateral decision to allow withdrawals (even though SEBI-mandated) fundamentally altered the contractual framework without the underwriters' consent, which constituted a "material variance" under Section 133 of the ICA.

The Court reasoned that statutory protection for a "favored debtor" (surety) is mandatory and cannot be overridden by contractual machinery or silence.

Consequently, the liability of the underwriters stood extinguished by operation of law prior to the issuance of devolvement notices.

The Arbitrator’s failure to apply these mandatory statutory provisions constituted a patent error of law apparent on the face of the record.

Consequently, it allowed the appeals filed by the underwriters (e.g., FAO(OS) 85/2022) and set aside the Arbitral Awards and the Single Judge's Impugned Judgments.

The appeals by Tommorrowland seeking higher damages (e.g., FAO(OS) 38/2022) were dismissed as infructuous since the underlying liability was non-existent.

In instances where underwriters did not file cross-appeals, the Court invoked its powers under Order XLI Rule 33 of the CPC to set aside those decrees to ensure legal uniformity and prevent the enforcement of a non-existent liability.

All 28 appeals were disposed of accordingly, holding the underwriters bear no liability.