### Unilateral variation of subscription terms without Underwriter's consent attracts statutory discharge under Section 133, Contract Act.

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

Although initially oversubscribed and closed on February 18, 1995.

SEBI later directed the Plaintiff to offer investors a withdrawal option due to disclosure anomalies.

Following mass withdrawals, subscription fell below the mandatory 90% threshold.

Tommorrowland issued devolvement notices to the Underwriters, who refused to pay.

After a protracted delay, the Delhi High Court appointed an Arbitrator in 2007 under the 1940 Arb Act.

The Arbitrator awarded damages (Rs. 80 per FCD) plus 18% interest.

The Single Judge affirmed the Underwriters' liability but reduced damages to Rs. 20 per FCD and slashed the interest rates.

Both parties appealed under Section 39 of the 1940 Arb Act.

1. 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.

2. Whether the Court can grant a post-facto extension of time for making an award under Section 28 of the 1940 Arb Act.

3. Whether the Underwriters stood discharged of their liability under the Indian Contract Act, 1872, due to the unilateral alteration of the subscription terms following SEBI’s intervention.

The Court primarily applied Section 39(1) of the Arbitration Act, 1940, regarding the maintainability of appeals against orders modifying or refusing to set aside awards.

It relied on Section 28 of the 1940 Act, which grants the Court discretionary power to enlarge the time for making an award even after it has been pronounced.

Most critically, the Court applied Chapter VIII of the Indian Contract Act, 1872, specifically Section 126 (definition of guarantee), Section 133 (discharge of surety by variance in terms), and Section 134 (discharge by release of principal debtor).

It followed the precedent in State of Maharashtra v. Dr. M.N. Kaul, establishing that a surety is a "favoured debtor" and their liability is strictissimi juris.

The Court determined that an underwriting agreement is essentially a contract of guarantee under Section 126 of the IC Act, where the Underwriter is the surety, the Company is the creditor, and the public is the principal debtor.

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.

The subsequent unilateral grant of withdrawal options to subscribers (principal debtors) by Tommorrowland, without the Underwriters' (sureties') consent, constituted a "material variance" in the contract terms under Section 133.

The Court held that this act fundamentally altered the risk profile, thereby triggering an automatic and irrevocable statutory discharge of the Underwriters' liability.

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

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

The appeals filed by Tommorrowland (seeking higher damages/interest) 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 ensure uniform relief even for those Underwriters who had not filed cross-appeals.