### Unilateral Variance in Terms Discharges Underwriting Obligations Under Section 133, Indian Contract Act.

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

Although the issue was initially closed on February 18, 1995, as "fully subscribed," SEBI later directed the company via a letter dated March 6, 1995, to offer subscribers an option to withdraw due to disclosure anomalies.

Massive withdrawals followed, dropping subscription below the mandatory 90% threshold, leading the company to issue devolvement notices to underwriters.

After years of litigation, a Sole Arbitrator awarded damages of Rs. 80 per FCD plus 18% interest against the underwriters in 2012.

A Single Judge of the Delhi High Court modified this Award by reducing damages to Rs. 20 per FCD and slashing interest rates.

Both Tommorrowland and the Underwriters filed cross-appeals under Section 39 of the 1940 Arb Act.

The court primarily applied Sections 126, 133, and 134 of the Indian Contract Act, 1872 regarding contracts of guarantee and the discharge of sureties.

It applied the principle of strictissimi juris, establishing that a surety is a "favoured debtor" whose liability cannot be extended beyond the literal terms of the engagement.

Section 39 of the Arbitration Act, 1940 was applied to determine the scope of appealable orders.

Additionally, the court invoked Order XLI Rule 33 of the CPC to grant relief to non-appealing parties to ensure uniformity in justice.

The court reasoned that an underwriting agreement is essentially a contract of guarantee where the underwriter (surety) guarantees the default of public subscribers (principal debtors) to the issuer (creditor).

The court found that once the public issue was successfully closed at 90% subscription, the risk guaranteed by the underwriters was extinguished.

Tommorrowland’s subsequent unilateral act of allowing withdrawals—pursuant to SEBI directions but without the underwriters' consent—fundamentally altered the terms of the contract.

Under Section 133 of the IC Act, such a "material variance" results in the automatic and irrevocable discharge of the surety.

The court held that the Arbitrator and Single Judge committed a patent error of law by failing to apply these mandatory statutory protections, which override any contractual "devolvement notice" machinery.

It held that the Underwriters bore no liability as they were statutorily discharged the moment the issuer varied the contract terms without their consent.

Applying Order XLI Rule 33 of the CPC, the court extended this relief even to those 20 underwriters who had not filed appeals, setting aside the Arbitral Awards and Impugned Judgments against them to prevent a miscarriage of justice.

Both the awards and the decrees were set aside in their entirety.