### Unilateral Post-Subscription Variance in Public Issue Terms Discharges Underwriting Obligations Under Section 133, Contract Act.

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

The issue closed on 18.02.1995 after being reportedly fully subscribed.

Subsequently, SEBI directed the company to grant investors a withdrawal option due to disclosure anomalies.

Following mass withdrawals, subscription fell below the mandatory 90%.

Tommorrowland issued devolvement notices to underwriters, who failed to pay.

After a protracted delay, the dispute was referred to a Sole Arbitrator under the 1940 Arb Act.

The Arbitrator awarded damages (Rs. 80 per FCD) and interest.

A Single Judge of the High Court affirmed the liability but modified the award by reducing damages to Rs. 20 per FCD and slashing interest rates.

Both the issuer and several underwriters (HDFC, DCM, etc.) filed cross-appeals.

The Court primarily applied Section 39 of the Arbitration Act, 1940, which governs the maintainability of appeals against orders modifying or refusing to set aside awards.

It relied on Section 28 of the 1940 Arb Act regarding the Court's power to grant ex-post-facto extensions for making awards.

Central to the decision was Chapter VIII of the Indian Contract Act, 1872, specifically Section 133 (discharge of surety by variance in terms), Section 126 (definition of guarantee), and Section 128 (co-extensive liability).

It followed the principle from State of Maharashtra v. Dr. M.N. Kaul that a surety’s liability is strictissimi juris and cannot be extended beyond the letter of the engagement.

The Court found that while the procedural challenges regarding service and time extensions were meritless.

The Arbitrator and Single Judge failed to apply the mandatory provisions of the Indian Contract Act.

The Court characterized the Underwriting Agreement as a contract of guarantee where the underwriter is the "surety".

It reasoned that since the public issue was successfully subscribed and closed on 18.02.1995, the contingency (under-subscription) the underwriters guaranteed against never occurred.

The issuer's subsequent unilateral decision to allow withdrawals—following a SEBI directive—constituted a "material variance" in the contract between the creditor (issuer) and principal debtors (subscribers) without the surety's consent.

Under Section 133 of the IC Act, such variance resulted in the automatic and irrevocable discharge of the underwriters from their obligations.

Consequently, the contractual machinery for devolvement became unenforceable once the statutory discharge took effect.

It allowed the underwriters' appeals (e.g., FAO(OS) 85/2022) and set aside both the Arbitral Awards and the Single Judge's Impugned Judgments to the extent they fastened liability.

Consequently, all appeals by Tommorrowland seeking higher damages or interest (e.g., FAO(OS) 38/2022) were dismissed as infructuous.

In cases where underwriters did not appeal, the Court invoked its powers under Order XLI Rule 33 of the CPC to set aside the liability to ensure legal consistency across the common transaction.

No order as to costs.