JUDGMENT

The appellant had entered into a contract with Abu Dhabi Municipality, Abu Dhabi for supply of 7,500 M.T. of B Grade basmati rice. It in turn had entered into an agreement with the respondent on April 20, 1985 for supply of 3000 M.T. and in case of necessity another 1500 M.T. at the option of the STC, for shipment, of the B-Grade, basmati rice to foreign buyer M/s. Abu Dhabi Municipality, Abu Dhabi. In clause 17 of this contract envisages execution of a bank guarantee by the respondent for due performance of the contract, which reads thus:

17. Bank Guarantee - "The supplier shall within three days of the signing of this contract furnish to the STC a Bank Guarantee from a scheduled bank for an amount of Rs. 11,70,000/- (Rupees Eleven lacs seventy thousand only) which is equivalent to 5% value of the contract as per the pro forma attached hereto as Annexure III for the performance of its obligations under this contract and the export contract. The Bank Guarantee should be made valid up to 22nd July 1985. In the event of suppliers failure to perform any of its obligations under the Back-to-Back contract and/or the export contract, STC shall without prejudice have the right to c