### Unilateral Variance of Subscription Terms Without Consent Discharges Underwriter's Liability Under Contract of Guarantee

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

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

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

Following mass withdrawals, the subscription fell below the mandatory 90% threshold, and the company issued devolvement notices to the underwriters.

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

The Arbitrator awarded damages of Rs. 80 per FCD plus interest.

A Single Judge of the High Court later modified these awards, reducing damages to Rs. 20 per FCD and altering interest rates.

Both Tommorrowland and the Underwriters filed cross-appeals.

Whether an appeal under Section 39 of the 1940 Arb Act is maintainable against a judgment that modifies an award while refusing to set it aside.

Whether the court has the power to grant a post-facto extension of time for making an award under Section 28 of the 1940 Arb Act.

Whether the underwriting obligation of a surety is discharged under the Indian Contract Act if the creditor (issuer) unilaterally alters the contract with the principal debtors (subscribers) without the surety's consent.

The Court applied Sections 15, 17, 28, and 39 of the Arbitration Act, 1940, regarding the court's power to modify awards, extend time, and hear appeals.

Central to the merits, the Court applied Chapter VIII of the Indian Contract Act, 1872, specifically Section 126 (defining guarantee), Section 128 (co-extensive liability), Section 133 (discharge of surety by variance), and Section 134 (discharge by release of principal debtor).

It relied on *State of Maharashtra v. Dr. M.N. Kaul*, establishing that a surety is a "favoured debtor" whose liability is *strictissimi juris* and cannot be extended beyond the letter of the engagement.

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

The Court reasoned that once the public issue was successfully subscribed and closed on Feb 18, 1995, the contingency for the guarantee (under-subscription) was negated.

SEBI’s subsequent mandate to allow withdrawals, and Tommorrowland’s compliance therewith, constituted a "variance" in the terms of the contract between the creditor and the principal debtors (investors) without the surety's consent.

Under Section 133, this unilateral alteration resulted in an automatic and irrevocable statutory discharge of the Underwriter’s liability.

The Court held that the Arbitrator and Single Judge committed a patent error of law by failing to apply these mandatory statutory provisions, which override any contractual machinery for devolvement notices.

The appeals filed by the Underwriters (e.g., FAO(OS) 85/2022) were allowed, and the Arbitral Awards and Impugned Judgments fastening liability upon them were set aside.

Consequently, all appeals filed by Tommorrowland seeking higher damages (e.g., FAO(OS) 38/2022) were dismissed as infructuous because 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 filed appeals to maintain legal consistency.