### Unilateral variation of subscription terms without underwriters' consent discharges underwriting liability under the 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 entities.

The issue was closed on the "earliest closing date" (18.02.1995) after being fully subscribed.

SEBI subsequently directed the company to offer subscribers a withdrawal option due to disclosure anomalies.

Following mass withdrawals, subscription fell below the mandatory 90% threshold, triggering devolvement notices to the Underwriters.

The dispute was referred to a Sole Arbitrator under the 1940 Arbitration Act, who awarded damages at Rs. 80 per FCD plus 18% interest.

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

Both Tommorrowland and the Underwriters (HDFC Bank, etc.) filed cross-appeals.

Whether an appeal under Section 39 of the 1940 Arb Act is maintainable against a judgment passed under Sections 14 and 17 when the court modifies an award.

Whether the learned Arbitrator had jurisdiction to pass an award after the statutory four-month period without a prior extension from the court.

Whether the Underwriters stood discharged from their liability under the Indian Contract Act, 1872, due to the unilateral alteration of subscriber contracts (allowing withdrawals) by the issuer.

The court primarily applied Section 39 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 Arb Act, which empowers Courts to enlarge the time for making an award post-facto.

Crucially, the court applied Chapter VIII of the Indian Contract Act, 1872, specifically Section 126 (defining surety/guarantee), Section 128 (co-extensive liability), and Section 133, which mandates the discharge of a surety if a material variance is made to the contract between the principal debtor and creditor without the surety’s consent.

The Court first held that the appeals were maintainable under Section 39(1)(iii) and (vi) because the Single Judge had modified the award and refused to set it aside.

Regarding the delay in arbitration, the Court upheld the post-facto extension under Section 28, citing the complexity of 260+ claims.

On the merits, the Court found that an Underwriting Agreement is essentially a contract of guarantee.

Under Section 133 of the Indian Contract Act, any material variance without the surety's (Underwriter's) consent discharges them.

The Court reasoned that once the public issue was successfully subscribed and closed on 18.02.1995, the Underwriter's contingent risk ended.

Tommorrowland’s unilateral decision to allow withdrawals (pursuant to SEBI’s directive) after the successful closure constituted a material variance that fundamentally altered the risk profile without the Underwriters' consent.

Consequently, the Underwriters were discharged by operation of law, rendering the subsequent devolvement notices and the Arbitral Award legally void.

The Court held that by virtue of Section 133 of the Indian Contract Act, 1872, the Underwriters stood statutorily discharged the moment Tommorrowland unilaterally altered the subscription terms post-closure.

The Arbitral Award and the Single Judge’s judgments were set aside for manifest errors of law apparent on the face of the record.

Using its powers under Order XLI Rule 33 of the CPC, the Court extended this relief even to Underwriters who had not filed appeals, to ensure legal consistency.