### Unilateral Variance of Contract Terms Without Consent Discharges Underwriting Obligations Under Section 133, Contract Act

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

The issue was initially closed on February 18, 1995, after being reported as fully subscribed.

Subsequently, SEBI directed the Appellant to offer a withdrawal option to subscribers due to disclosure anomalies.

Following large-scale withdrawals, subscription fell below the mandatory 90% threshold, leading the Appellant to issue devolvement notices to Underwriters.

After the Delhi Stock Exchange refused to arbitrate, the High Court appointed a Sole Arbitrator in 2007.

The Arbitrator awarded damages (Rs. 80 per share) and interest to the Appellant.

The learned Single Judge, in Section 14 and 17 suits under the 1940 Arb Act, upheld the liability but reduced damages to Rs. 20 per share and modified interest rates.

Both parties filed cross-appeals under Section 39 of the 1940 Arb Act.

The court primarily applied Section 39 of the Arbitration Act, 1940, which specifies appealable orders, including those modifying or refusing to set aside awards.

It applied Section 28 of the 1940 Arb Act regarding the court's discretionary power to enlarge time for making an award even after the award is made.

The core of the judgment rested on Chapter VIII of the Indian Contract Act, 1872 (IC Act, specifically Section 126 (definition of guarantee), Section 128 (co-extensive liability), and Section 133 (discharge of surety by variance in terms without consent).

The court relied on the doctrine strictissimi juris, stating a guarantor cannot be made liable beyond the letter of their engagement as established in State of Maharashtra v. Dr. M.N. Kaul.

The Court held that the Underwriting Agreement constituted a contract of guarantee under Section 126 of the IC Act, where the Underwriter was the surety, Tommorrowland was the creditor, and subscribers were principal debtors.

The court found that once the public issue was successfully closed on February 18, 1995, with over 90% subscription, the specific risk the Underwriter guaranteed had ceased to exist.

The subsequent unilateral act of the Appellant in allowing withdrawals (pursuant to SEBI directions) without the Underwriters' consent constituted a "material variance" under Section 133 of the IC Act.

Applying the "favored debtor" principle, the Court reasoned that the statutory discharge of a surety is automatic and irrevocable; thus, the liability could not be revived by a later devolvement notice.

The court found the Arbitrator and Single Judge committed a patent error of law by failing to apply these mandatory statutory provisions of the IC Act.

It held that an appeal under Section 39(1)(iii) and (vi) is maintainable.

Regarding the merits, the Court concluded that the Underwriters stood statutorily discharged from all obligations due to the material variance of the contract without their consent.

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

For cases where Underwriters did not appeal, the Court invoked its powers under Order XLI Rule 33 of the CPC to ensure legal consistency and dismissed Tommorrowland's appeals as infructuous.

No order as to costs was made.