Unilateral variance of contract terms without surety's consent discharges underwriting liability under the Indian Contract Act.

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

While the issue initially closed on the earliest closing date (18.02.1995) after being fully subscribed, SEBI subsequently directed the company on 06.03.1995 to grant investors an option to withdraw due to disclosure anomalies.

Following mass withdrawals, the subscription fell below the mandatory 90% threshold, leading the issuer to claim devolvement of liability upon the underwriters.

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

The Arbitrator awarded damages (Rs. 80 per share) and 18% interest in 2012.

On challenge under the 1940 Arb Act, the Single Judge affirmed liability but reduced damages to Rs. 20 per share and lowered the interest rates.

Both the issuer and various underwriters filed cross-appeals.

The Court primarily applied Sections 126, 128, 133, and 134 of the Indian Contract Act, 1872, regarding contracts of guarantee and the discharge of sureties.

It invoked the principle that a surety's liability is *strictissimi juris* and any variance in terms without the surety's consent discharges their liability.

The Court also relied on Section 39 of the Arbitration Act, 1940, defining appealable orders, and Section 28 of the same Act regarding the Court’s power to enlarge time for awards.

Precedential reliance was placed on *State of Maharashtra v. Dr. M.N. Kaul* (AIR 1967 SC 1634) regarding the "favoured debtor" status of a surety.

Precedential reliance was placed on *Hari Shankar Lal v. Shambhunath Prasad* (AIR 1962 SC 78) regarding time extensions.

The Court found that the underwriting agreement was essentially a contract of guarantee governed by Chapter VIII of the IC Act.

Applying Section 133, the Court reasoned that the public issue had been successfully completed and closed on 18.02.1995.

The subsequent act of Tommorrowland—unilaterally allowing subscribers to withdraw after closure following SEBI's directive—constituted a "material variance" in the underlying contract between the creditor and principal debtors without the Underwriters' (sureties') consent.

The Court held that once the 90% subscription threshold was initially met, the risk the underwriters guaranteed had ceased to exist; recreating that risk via unilateral withdrawal options automatically discharged the underwriters by operation of law.

Furthermore, regarding procedural issues, the Court upheld the post-facto extension of time for the award due to the complexity of 260+ claims and found the appeals maintainable under Section 39(1)(iii) and (vi) as the Single Judge had modified/refused to set aside the award.

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

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

The Court exercised its powers under Order XLI Rule 33 of the CPC to apply this relief even to Underwriters who had not filed cross-appeals to ensure legal consistency.

No costs were awarded.