JUDGMENT

Ahmadi, CJI.-The appellants are the State of Maharastra and its Executive Engineer who was posted at the Masonry Dam Division, Nathnagar, during the relevant period. In 1967, the appellant invited tenders for Performing work on the masonry portion of the Paithan Dam on Godavari River, as part of the Jayakwadi Project, Stage-I (hereinafter called "the work"). the first respondent, M/s. National Construction Company, Bombay (hereinafter called "the contractor") submitted its tender offer for the work which was conditionally accepted by the appellants on 30.3.1967.

2. On 6.1.1968, the second respondent, the Central Bank of India (hereinafter called "the Bank"), executed performance guarantee No. 57/22 whereby it guaranteed that the contractor would faithfully conform to the terms and conditions of the contract to be entered into between the appellants and the contractor. Under the terms of the guarantee, the Bank was jointly and severally liable with the contractor for the latter s default in performance; the liability of the Bank being limited to Rs. 14.12.836/-, i.e 5% of the contract price. The guarantee was to remain in force till 3.7.1972. Soon thereafter, on 8.1.1968, the