### Unilateral Variance in Terms Discharges Underwriting Liability as Surety Under Section 133, Contract Act

Tommorrowland Limited (formerly M.S. Shoes East Limited) launched a public issue of Fully Convertible Debentures (FCDs) in 1995, which was fully underwritten by 267 underwriters.

The issue closed on February 18, 1995, having achieved the 90% minimum subscription.

Subsequently, following SEBI directions regarding anomalies in the prospectus, the company offered subscribers a withdrawal option.

Massive withdrawals caused subscription to fall below 90%, prompting the company to issue devolvement notices to underwriters.

After a decades-long delay and reference to arbitration under the 1940 Arbitration Act, the Sole Arbitrator awarded damages (Rs. 80 per FCD) and 18% p.a. interest against the underwriters.

The Single Judge affirmed the underwriters' liability but reduced damages to Rs. 20 per FCD and lowered the interest rates.

Both the company and several underwriters filed cross-appeals.

1. Whether the appeals filed by the Underwriters against a decree passed under Section 17 are maintainable under Section 39 of the 1940 Arbitration Act.

2. Whether the Arbitrator had the jurisdiction to pass an award beyond the statutory four-month period without a prior extension from the Court.

3. Whether the Underwriters’ liability stood discharged under the Indian Contract Act, 1872, due to the unilateral alteration of the subscription terms by the Issuer.

The Court applied Section 39(1) of the Arbitration Act, 1940, which allows appeals against orders modifying/correcting an award or refusing to set one aside.

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

Crucially, the Court applied the law of suretyship under Chapter VIII of the Indian Contract Act, 1872: Section 126 (defining guarantee), Section 128 (co-extensive liability), and Section 133, which mandates the discharge of a surety if the creditor makes any variance in the terms of the contract without the surety’s consent.

It followed the precedent in *State of Maharashtra v. Dr. M.N. Kaul*, holding that a guarantor’s liability is *strictissimi juris* and cannot be extended beyond the letter of the engagement.

The Court first held the appeals maintainable as Section 39(1)(vi) expressly permits appeals against a refusal to set aside an award.

Regarding the procedural delay, the Court affirmed the Single Judge's *post-facto* extension of time under Section 28, citing the complexity of managing 260+ claims.

On the merits, the Court identified the Underwriter as a "surety" and the Issuer as a "creditor".

It reasoned that since the public issue had been successfully subscribed and closed, the original risk the underwriters guaranteed had been negated.

The Issuer’s unilateral decision to allow withdrawals—even if SEBI-mandated—fundamentally altered the contract between the Issuer and the subscribers (principal debtors) without the Underwriters' consent.

Under Section 133 of the Contract Act, this variance resulted in an automatic and irrevocable statutory discharge of the Underwriters.

The Court found that the Arbitrator and Single Judge committed a manifest error of law by ignoring these mandatory provisions of the Contract Act.

It held that the Underwriters stood statutorily discharged from all liability the moment the Issuer unilaterally altered the subscription terms.

Consequently, the Arbitral Awards and the Impugned Judgments were set aside to the extent they fastened liability on the Underwriters.

Using its power under Order XLI Rule 33 of the CPC, the Court extended this relief even to those Underwriters who had not filed appeals, ensuring legal consistency.

The company’s appeals regarding the quantum of damages and interest were dismissed as infructuous.