Unilateral Variation of Underlying Contract Without Surety’s Consent Discharges Underwriting Obligations Under Section 133 Contract Act.

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

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

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

Following large-scale withdrawals, subscription fell below the mandatory 90% threshold.

Tommorrowland issued devolvement notices to underwriters, who failed to pay, leading to a refund of all application money.

Disputes were referred to a Sole Arbitrator under the Arbitration Act, 1940, who awarded damages and interest against the underwriters.

On suits filed under Sections 14 and 17 of the 1940 Act, the Single Judge affirmed the liability but reduced the damages from Rs. 80 to Rs. 20 per FCD and modified interest rates.

The parties filed cross-appeals under Section 39 of the 1940 Act.

The Court applied Section 39 of the Arbitration Act, 1940, which permits appeals against orders modifying/correcting an award or refusing to set one aside.

It applied Section 28 of the 1940 Act, granting the Court discretionary power to enlarge time for making an award even after the award is made.

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

It further relied on the *strictissimi juris* principle from *State of Maharashtra v. Dr. M.N. Kaul*, holding that a guarantor cannot be liable beyond the letter of his engagement.

The Court reasoned that an underwriting agreement is essentially a contract of guarantee where the underwriter is the "surety," the issuer is the "creditor," and the public subscribers are "principal debtors."

The undisputed facts showed the issue was successfully subscribed and closed on 18.02.1995, satisfying the original risk.

The subsequent "withdrawal option" mandated by SEBI but implemented unilaterally by Tommorrowland fundamentally altered the contract between the creditor (issuer) and the principal debtors (subscribers) without the Underwriters' consent.

Applying Section 133 of the IC Act, the Court held this "material variance" resulted in the automatic and irrevocable statutory discharge of the Underwriters.

The Court found that the Arbitrator and Single Judge committed a patent error of law by ignoring these mandatory provisions of the IC Act, which override any contrary contractual machinery regarding devolvement notices.

It allowed the appeals of the Underwriters (e.g., FAO(OS) 85/2022) and set aside both the Arbitral Awards and the Impugned Judgments insofar as they fastened liability.

Consequently, all appeals filed by Tommorrowland Limited (seeking higher damages/interest) were dismissed as infructuous, as the underlying liability itself was non-existent.

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

All 28 appeals were disposed of with no order as to costs.