### Unilateral variation of subscription terms without consent discharges underwriting liability under the Indian Contract Act.

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

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

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

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

Disputes were referred to a Sole Arbitrator under the Arbitration Act, 1940, who awarded damages (at Rs. 80 per FCD) and interest against the underwriters.

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

Both Tommorrowland and several underwriters filed cross-appeals under Section 39 of the 1940 Arb Act.

The court primarily applied Sections 126, 128, 133, and 134 of the Indian Contract Act, 1872, governing contracts of guarantee.

It identified the underwriter as a "surety," Tommorrowland as the "creditor," and subscribers as "principal debtors."

Under Section 133, any variance made without the surety’s consent in the terms of the contract between the principal debtor and creditor discharges the surety.

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

Procedurally, Section 39 of the Arbitration Act, 1940, was applied regarding appealable orders.

Order XLI Rule 33 of the CPC was used to grant relief to non-appealing parties to ensure thematic consistency.

The court found that the Underwriting Agreement was a contract of guarantee meant to cover the risk of under-subscription during the public offer period.

Once the issue successfully achieved 90% subscription and closed on February 18, 1995, the contingency for which the guarantee was given was negated.

The court reasoned that Tommorrowland’s unilateral decision to allow withdrawals—mandated by SEBI but done without the underwriters' consent—fundamentally altered the contractual framework.

This constituted a "material variance" under Section 133 of the Contract Act, resulting in the automatic and irrevocable statutory discharge of the underwriters.

The court held that the Arbitrator and Single Judge erred by failing to apply Chapter VIII of the Contract Act, which overrides contractual machinery clauses once the surety is discharged by law.

Consequently, the Arbitral Awards and the Single Judge’s judgments fastening liability were set aside for patent illegality.

The appeals filed by the Underwriters (HDFC, HSIIDC, DCM, and Dolf Leasing) were allowed.

The twenty-four appeals filed by Tommorrowland seeking higher damages/interest were dismissed as infructuous, as the underlying liability itself was extinguished.

Using its powers under Order XLI Rule 33 CPC, the court extended this relief even to those underwriters who had not preferred separate appeals, ensuring judicial uniformity.