JUDGMENT

K. JAGANNATHA SHETTY, J.:—We grant special leave and proceed to dispose of the appeal.

2. The General Electric Technical Services Company (GETSCO) had entered into a contract with Indian Airlines which included, inter alia, the construction and fabrication of air craft testing centre/ engine repair centre in Delhi. The GETSCO in turn entered into a contract with M/ s Punj Sons (P) Ltd. - respondent 1 for getting that work done for Indian Airlines. As per the contract respondent 1 was required to provide performance bond equal to 30 per cent. of the total value of contract price which was to be split up into two performance bonds partly to be released on completion of the project, and the balance upon the expiration of the warranty. The respondent 1 was also required to furnish a bank guarantee to secure the mobilisation advance of 25 per cent. of the contract value. On 28 October, 1946 respondent 1 furnished the bank guarantee to secure the mobilisation advance of Rs. 1,86,00,000/-. The guarantee was furnished by Honkong & Shanghai Bank (the Bank) respondent 2.

3. Respondent 1 instead of furnishing the two performance bonds, as agreed upon, wrote a letter dated 3 September, 1987, as follows:

".........

Sub: Jet Engine Test & Repair Centre at Palam

Finance September 3, 1987

Dear Sir,

In terms of above contract we have to submit two separate Bonds for Mobilisation advance and performance guarantee & 25% and 30% of the Contract value. Bank Guarantee for mobilisation advance has already been submitted and we have not to submit the Performance Bonds for 30% of the Contract value. Since the amount of Performance Bond shall be progressively utilised over the contract period, in order to reduce Bank charges and marginal money, we would like to suggest alternative proposals to meet with your requirements:

AA. We propose to submit performance guarantees for 30% of the contract value duly signed by two directors in their personal capacity and countersigned by Punj Sons (Pvt.) Ltd . This Performance Bond shall include identical terms & conditions, as desired in your format. Similar Bond has already been accepted by M/s. Hindustan Petroleum Corporation Ltd. Bombay for their Bombay-Pune Pipeline Project valued at Rs. 7.05 crores.

BB. Alternatively, we would suggest submission of a Composite Bank Guarantee where amount vacated by Mobilisation advance shall be utilised by Performance Bank Guarantee amount. This Guarantee. shall at any time be valid for equivalent to 30% of the contract value, to cover unrecovered mobilisation advance and Performance Guarantee amount of the work certified.

We have submitted similar Bonds to a number of our customers to their entire satisfaction. May we request you to look into the above arrangement and allow us to submit the above Bond or Composite Bank Guarantee under this Contract.

Thanking you and assuring you of our best services at all times......"

4. GETSCO has accepted the revised proposal contained in the aforesaid letter. Consequently, on 25 January, 1988, the Bank furnished a composite bank guarantee for Rs. 2,12,25,000/ -. Out of this composite bank guarantee 15 percent being Rs. 1,06,12,500/ would remain in force until 30 June, 1988 and the balance 15 per cent. would remain valid till final acceptance certificate i.e. till 30 June 1989.

5. It seems respondent I failed to complete the project within the stipulated time as per contractual specifications despite repeated opportunities to rectify defects and deflciencies prior to August 1988 and thereafter GETSCO terminated respondents right to continue the project and wrote a letter dated 17 April 1989 to the Bank seeking encashment of the bank guarantee dated 25 January 1988 for Rupees 1,06,12,500/-.,On the same day .the bank issued a cashiers order No. 2605 for Rs. 1,06,12,500/- in favour of GETSCO. On 18 April 1989 the respondent 1 filed a suit for injunction against GETSCO and the Bank in the High Court and obtained an ex parte injunction at the resi