### Unilateral Variance in Terms of Underpinning Contract Discharges Surety Under Section 133 of Contract Act Brief Summary: The High Court of Delhi set aside arbitral awards and decrees against underwriters, holding that if an issuer unilaterally permits subscribers to withdraw following a successful public issue, it fundamentally alters the risk profile. Under Section 133 of the Indian Contract Act, 1872, such an unauthorized variance in the tripartite relationship between the issuer (creditor), subscribers (principal debtors), and underwriters (sureties) results in the automatic and irrevocable discharge of the surety’s liability.

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

While the issue initially met the 90% subscription threshold and closed on 18.02.1995.

SEBI subsequently directed the company on 06.03.1995 to offer subscribers an option to withdraw due to disclosure anomalies.

Following mass withdrawals, subscription fell below 90%, and Tommorrowland issued devolvement notices to Underwriters, who failed to pay.

Claims were referred to a Sole Arbitrator under the 1940 Arbitration Act.

The Arbitrator awarded damages at Rs. 80 per share plus 18% interest.

On challenge under Sections 14 and 17, the Single Judge affirmed liability but reduced damages to Rs. 20 per share and modified interest rates.

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

1. Whether the Underwriters’ appeals were maintainable under Section 39 of the 1940 Arb Act given the limitations of Section 17.

2. Whether the learned Arbitrator was competent to pass the Award beyond the four-month statutory period without prior court extension.

3. Whether the Underwriter’s liability was discharged under the Indian Contract Act, 1872, due to the unilateral post-closure withdrawal option provided by the issuer.

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

It relied on Section 28 of the 1940 Arb Act, which empowers courts to enlarge the time for making an award even after the award is rendered.

Crucially, the court applied the law of guarantee under Chapter VIII of the Indian Contract Act (ICA), 1872.

Section 126 defines the tripartite relationship of surety, principal debtor, and creditor.

Section 133 of the ICA establishes that any variance made without the surety’s consent in the terms of the contract between the principal debtor and creditor discharges the surety.

The court further relied on State of Maharashtra v. Dr. M.N. Kaul, affirming that a surety is a "favoured debtor" whose liability is strictissimi juris.

The Court first dismissed the maintainability objection, holding that Section 39(1)(vi) expressly allows appeals against orders refusing to set aside an award.

Regarding the delay in the award, the Court upheld the Single Judge’s post-facto extension under Section 28, citing the complexity of 260+ claims.

On the merits of liability, the Court found that the Underwriters occupied the legal status of "sureties".

It reasoned that once the public issue was successfully subscribed and closed on 18.02.1995, the contingency for the guarantee (under-subscription) was negated.

Tommorrowland’s unilateral act of allowing withdrawals on 06.03.1995—pursuant to SEBI directions but without the Underwriters' consent—fundamentally altered the contract between the creditor and the principal debtors.

Applying Section 133 of the ICA, the Court held that this "material variance" resulted in the automatic, statutory discharge of the Underwriters.

Consequently, the Arbitrator’s failure to apply the mandatory discharge provisions of the ICA constituted a patent error of law apparent on the face of the record.

It held that all Underwriters stood statutorily discharged from liability under the Underwriting Agreement.

Using powers under Order XLI Rule 33 of the CPC, the court extended this relief even to Underwriters who had not filed appeals to ensure judicial consistency.

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

No order as to costs.