### Unilateral Post-Subscription Variance in Underwriting Terms Discharges Surety by Operation of Law under Section 133 of Contract Act.

Tommorrowland Ltd. launched a public issue of Fully Convertible Debentures (FCDs) in 1995, which was fully underwritten by various entities.

The issue was initially closed on 18.02.1995 upon being fully subscribed.

Subsequently, SEBI directed the issuer to grant an option to investors to withdraw their applications due to anomalies in the offer price.

Following withdrawals, subscription fell below the mandatory 90% threshold, prompting Tommorrowland to issue devolvement notices to underwriters.

After a decades-long delay and refusal of the Delhi Stock Exchange to arbitrate, the High Court appointed an Arbitrator in 2007, who eventually passed awards in favor of Tommorrowland in 2012.

A Single Judge of the High Court affirmed the awards but modified them by reducing damages from Rs. 80 to Rs. 20 per FCD and slashing interest rates.

Both the issuer and the underwriters filed cross-appeals under Section 39 of the 1940 Arb Act.

The court applied Section 39 of the Arbitration Act, 1940, which permits appeals against orders modifying an award or refusing to set one aside.

It relied on Section 28 of the 1940 Act, which grants Courts the discretion to enlarge the time for making an award even after it has been pronounced.

Primarily, the Court applied Chapter VIII of the Indian Contract Act, 1872 (IC Act), specifically Sections 126 and 128 regarding the nature of guarantees, and Sections 133 and 134, which stipulate the discharge of a surety upon material variance in the terms of the contract without the surety’s consent.

The Court first dismissed maintainability objections, holding that an order refusing to set aside an award is appealable under Section 39(1)(vi) even if a decree follows.

It upheld the post-facto extension of time given the "unusual complexity" of 260 claims.

On the core merit, the Court characterized the underwriting agreement as a "contract of guarantee" under Section 126 of the IC Act, where the underwriter is the "surety".

The Court reasoned that once the public issue was successfully closed on 18.02.1995, the risk the underwriters guaranteed had ceased to exist.

Tommorrowland’s unilateral decision to allow withdrawals (pursuant to SEBI directions) without the underwriters' consent constituted a "material variance" of the contract under Section 133 of the IC Act.

The Court held that a surety is a "favored debtor" and cannot have their risk enlarged or liability revived through unilateral acts of the creditor.

Consequently, the statutory discharge of the underwriters was automatic and irrevocable, rendering subsequent devolvement notices legally void.

It held that the Arbitral Awards and the Single Judge’s judgments were vitiated by a manifest error of law for failing to apply the mandatory discharge provisions of the Indian Contract Act.

The Courte declared that the Underwriters bore no liability toward Tommorrowland.

All awards in favor of Tommorrowland were set aside, and its claims for higher damages/interest were dismissed as infructuous.

Under Order XLI Rule 33 of the CPC, the Court extended this benefit even to those underwriters who had not preferred appeals, to ensure legal consistency and prevent the enforcement of non-existent liabilities.