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

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

The issue was initially oversubscribed and closed on February 18, 1995.

Subsequently, SEBI directed the company to give investors an option to withdraw due to anomalies in the prospectus.

Following withdrawals, subscription fell below the mandatory 90%.

The company issued devolvement notices to underwriters under the Underwriting Agreement, but they did not pay.

After a decades-long delay, an Arbitrator appointed under the 1940 Act awarded damages at Rs. 80 per FCD plus 18% interest.

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

Both Tommorrowland and the underwriters filed appeals under Section 39 of the 1940 Act.

The Court primarily applied Section 39 of the Arbitration Act, 1940, regarding the maintainability of appeals from orders modifying or refusing to set aside awards.

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

Crucially, the Court relied on Chapter VIII (Sections 126, 133, and 134) of the Indian Contract Act, 1872, governing contracts of guarantee.

It applied the principle of *strictissimi juris*, which dictates that a surety/guarantor is a "favoured debtor" and is discharged if the creditor (issuer) makes any variance to the contract with the principal debtor (subscribers) without the surety's consent, as held in *State of Maharashtra v. Dr. M.N. Kaul*.

The Court reasoned that the Underwriting Agreement was essentially a contract of guarantee where the underwriter (surety) guaranteed the default of public subscribers (principal debtors).

While the Arbitrator and Single Judge focused on the breach of the Underwriting Agreement, they failed to apply the mandatory statutory discharge provisions of the Contract Act.

The Court found that once the issue successfully hit the 90% threshold and closed, the risk the underwriters had agreed to cover was negated.

Tommorrowland’s unilateral decision to allow withdrawals (even if SEBI-mandated) constituted a material variance in the terms of the contract between the creditor and the principal debtor without the surety's consent.

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

Consequently, any subsequent devolvement notice was legally non-est as the guarantee had already stood extinguished by operation of law.

The appeals filed by the underwriters (including FAO(OS) 85/2022) were allowed, and the Arbitral Awards and the Single Judge’s judgments fastening liability were set aside.

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

Using powers under Order XLI Rule 33 of the CPC, the Court extended this relief even to those underwriters who had not preferred cross-appeals, to ensure legal consistency.