### Unilateral Variance in Terms of Underwriting Contract Discharges Surety by Operation of Law Key Takeaways: * Statutory Discharge: Underwriting agreements function as contracts of guarantee; any material variance via unilateral post-closure withdrawal options discharges the underwriter/surety under Section 133 of the Indian Contract Act. * Post-facto Extension: Courts retain discretionary power under Section 28 of the 1940 Arbitration Act to extend the time for making an award even after its pronouncement. * Appellate Scope: An order refusing to set aside an award is appealable under Section 39(1)(vi) of the 1940 Act, even if the decree is subsequently modified. * Merit of Claims: Liability cannot be resurrected once a surety is statutorily discharged, rendering subsequent devolvement notices legally inconsequential.

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

Though the issue initially closed on 18.02.1995 after being oversubscribed, SEBI subsequently directed the company to offer subscribers an option to withdraw due to disclosure anomalies.

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

The company issued devolvement notices to underwriters, who refused to pay.

Disputes were referred to a sole arbitrator under the Arbitration Act, 1940, who awarded damages at Rs. 80 per FCD plus 18% interest.

A Single Judge of the Delhi High Court affirmed the underwriters' liability but reduced damages to Rs. 20 per FCD and lowered the interest rates.

Both the company and several underwriters (HDFC Bank, HSIIDC, etc.) preferred appeals under Section 39 of the 1940 Act.

The court primarily applied Section 39 of the Arbitration Act, 1940, which lists appealable orders, including those refusing to set aside an award.

It relied on Section 28 of the 1940 Act regarding the Court’s power to enlarge time for making an award even after its expiry.

Crucially, the court applied Chapter VIII of the Indian Contract Act, 1872, specifically Section 126 (definition of guarantee), Section 133 (discharge of surety by variance in terms), and Section 134 (discharge of surety by release of principal debtor).

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

The Court determined that an underwriting agreement is essentially a contract of guarantee.

Under the tripartite relationship defined in Section 126 of the IC Act, the underwriters were sureties, Tommorrowland was the creditor, and subscribers were principal debtors.

The Court reasoned that once the public issue was successfully subscribed and closed on 18.02.1995, the risk the underwriters guaranteed (undersubscription) had been negated.

Tommorrowland’s subsequent unilateral act of allowing subscribers to withdraw—pursuant to SEBI’s directive but without the underwriters' consent—constituted a "material variance" in the contract terms under Section 133 of the IC Act.

This variance automatically and irrevocably discharged the underwriters as sureties by operation of law.

Consequently, the Arbitrator and the Single Judge committed a patent error of law by ignoring these mandatory statutory discharge provisions of the IC Act.

The appeals filed by the Underwriters (e.g., FAO(OS) 85/2022) were allowed, and both the Arbitral Awards and the Impugned Judgments were set aside insofar as they fastened liability on the underwriters.

Consequently, all appeals filed by Tommorrowland seeking higher damages (e.g., FAO(OS) 38/2022) were dismissed as infructuous, as the underlying liability itself was extinguished.

No order as to costs was made.