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 claim eventual damages, be entitled to invoke the Bank Guarantees and forfeit the amount realised thereunder. Suppliers liability and on account of their failure to fulfil their obligations will not be restricted up to the value of the Bank Guarantee to be furnished by supplier."

In furtherance thereof, the respondent had executed the contract of guarantee of even date, namely, April 20, 1985 in the following manner:

"That the Bank hereby irrevocably and unconditionally guarantee to the Corporation that in the event of any failure/ default for whatever reason on the part of M/s. Jainsons Clothing Corporation in performing all or any of its obligations under the said contract and or the export contract and the L/ C established thereunder and as may be amended from time to time, the Bank shall pay to the Corporation forthwith on corporations first demand an amount of Rs. 11,70,000/- (Rupees eleven lacs Seventy thousand only) being approx. 5% of the contract value of the export. The payment shall be made by the Bank to the Corporation without any demur, protest or contestation and without any reference to supplier notwithstanding any dispute(s) whatsoever pending between the Corporation and the buyer. A certificate of the Corporation that supplier has defaulted in the fulfilment of its obligations shall be sufficient for the purpose of filing claim on the Bank under the Guarantee and the same shall be final, conclusive and binding on the Bank. The Bank shall forthwith pay to the Corporation the amount claimed by the Corporation up to the amount guaranteed herein. In case Bank fails to pay the amount claimed by the Corporation within 15 days of the date of demand of the Corporation, then the Bank shall also be liable to pay to the Corporation interest @ 22.75% per annum from the date of Corporation demand up to date of actual payment and the guarantee amount shall stand enhanced to the extent of the interest thus due and payable by the Bank."

On June 15, 1986 the Officer of the S.T.C. in terms of the guarantee had issued a certificate that the respondent had committed default in the performance of the contract and called upon the Bank to pay the sum of Rs. 11,70,000/- contracted under the bank guarantee. The respondent filed Suit No. 1086/85 in the High Court, Delhi for perpetual injunction restraining the appellant from enforcing the bank guarantee. I.A. No. 3455/85 was filed for temporary injuction, pending suit. By Order dated March 11, 1986, the learned single Judge of the High Court refused to grant injunction under O. 39, Rr. 1 and 2, C.P.C. On appeal, the Division Bench in FAO (OS) No. 97 of 1986 by Order dated August 4,1986 issued the injunction as prayed for. Thus, this appeal by special leave.

2. Shri Arun Jaitley, the learned senior counsel for the