A bank guarantee can be invoked for refund of price of goods found to be of improper quality.

( 1 ) THIS appeal under section 10 of the Delhi High Court Act is directed against a judgment dated 24th February, i983, whereby an application claiming an interim injunction to restrain the encashment of a bank guarantee dated 11th December, 1980 was rejected. The entire dispute arossment of a contract for the supply of 96 M. Ts. of Kishmish. In connection with that contract, a bank guarantee No. 138 of 1980 dated 11-12-1980 issued by the Canara Bank, Chandni Chowk, Delhi was furnished by the contractor (Appellant) to the Union of India. This bank guarantee was for Rs. 3. 66. 260. 00 but it appears that out of this Rs. 24. 400. 00 covered a different contract and for the purpose of the Kishmish contract, the bank guarantee was for a sum of Rs. 3,41,840. 00.

( 2 ) THE Kishmish was delivered but according to the Union of India, part of the quantity was found to be unfit for human consumption within the warranty period. According to the plaintiff in the suit, there was no warranty executed. The total supply made against the contract of 96 M. Ts. was 85 M. Ts. out of which the Union of India had declared 48 77 M. Ts. approximately to be unfit for human consumption within the warranty period. Later, this amount was reduced to a lesser amount which is 43. 663 MTs. approximately.

( 3 ) THE main question urged on behalf of the appellant was that the bank guarantee had been invoked in circumstances in which it cov!d not be invoked. To understand this submission, an extract from the bank guarantee is necessary. It states in para 2 as follows : "we, Canara Bank, Chandni Chowk. Delhi- 110006 do hereby undertake and promise to pay the amounts due and payable under this Guarantee without any demur, merely on a demand from the Government staling that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by the Government by reason of any breach by the said contracior (s) of any of the terms or conditions contained in the said agreement or by reason of the contractor s failure to perform the said agreement. Any such demand made on the bank shall be conclusive as regards the amount due and payable by the bank under this guarantee. However, our liability under this guarantee shall be restricted to an amount not exceeding Rs. 3,66. 260. 00 ,"

( 4 ) ON 17th April, 1982, the Government of India invoked the bank guarantee by addressing a letter to Manager, Canara Bank, Chandni Chowk, Delhi. In para 2 of this letter it was stated that 33. 618 948 Tonnes Kishmish was declared gone bad and the firm had, therefore, been called upon to replace the condemned stores or to refund the cost thereof but the firm bad not done so So, the amount of Rs. 12,70,340. 30 was recoverable by the Government. In para 3, it was stated that the terms and conditions of the bank guarantee entitled the government to demand against any loss cr damage caused to or suffered and hence the bank guarantee to the extent of Rs. 3,41,840. 00 was sought to be encashed.

( 5 ) THE interim injunction was sought against the encashment and was granted initially but later withdrawn. It is submitted that the bank guarantee is not encashable as no loss was claimed. We have examined this contention but do not see how the bank guarantee is not applicable to the loss in question. The substance of the matter is that according to the government, they bad paid for the Kishmish which was later rejected and hence were entitled to a refund of the price on the ground that it was unfit for human consumption. In short, the government s case is that either the Kishmish has to be replaced or its price has to be refunded. On the other hand, the case of the contractor is that there was no warranty covering the subsequent deterioration of the Kishmish and in any case, the breach of warranty would give rise to a claim for damages and not for refund of the price.

( 6 ) WE refuse to decide the real effect of the contract at this stage. Thesuit is pending and the