A bank guarantee is an autonomous and independent contract and must have effect according to its own terms.

( 1 ) WHAT sanctity and effectiveness is to be attached to the Bank guarantees which are also called performance guarantees is the question that calls for decision in this appeal?

( 2 ) THIS is an appeal against the order of the learned single judge by which he refused the application for the appellant for interim injunction (arising out of a suit filed by appellant) restraining the respondent from realising any amout in pursuance of the bank guarantee dated 6. 3. 1979 furnished to it by the appellant from the Bank of India.

( 3 ) THE plaintiff is a manufacturer of tyres. One of the raw materials which is used in the manufacture of tyres is natural rubber. The import of natural rubber is canalised through respondent. For their requirements the appellant entered into an agreement with the respondent for the supply by the respondent of 360 MT of SMR-20 quality of natural rubber Alongwith the registration application a bank guarantee from the Bank of India for Rs. 3. 6 lakhas was furnished which was calculated Rs. 1,000/ per MT for the quantity indented. By clause 10 (viii) of the Conditions of allotment the appellant had agreed to make payment for goods allotted and for taking the delivery of goods within the time prescribed by the ; STC, it had further agreed that in case of default in either case the STC shall be free to forfeit the earnest money or invoke the bank guarantee or can take any other action as the STC may deem fit without any reference to the appellant.

( 4 ) THE defendant allocated 360 MT of material to the plaintiffs vide their letter of 9. 5. 1979. One of the conditions was that the appellant was to make payment of the full amount allotted by 25. 5. 1979. It is common case that the period for making the said payment was later on extended to 24. 6. 1979.

( 5 ) THE appellant made payments for 200 MT by 20. 6. 1979. It appears that 170 tonnes was lifted by the appellant without any difficulty. However differences seem to have arisen regarding the balance of 30 MT as would appear from the letter of 27,6. 1979 written by the appellant to the defendant indicating that it was unable to lift the balance 30 tonnes, as there seems to be some damage to the stock. On 6. 7. 1979 the appellant was informed by the Deputy Marketing Manager, (STC), Delhi that as it (appellant) had failed to make payment for 160 MT within the extended period the earnest money of one lakh sixty thousand proportionately to the default of 150 MT stand forfeited as per terms of the allotment order. The parties of course were at variance as to who was at fault The appellant maintained thai out of the last intalment ot 50tonns, could not be delivered to it by the achedule lime because there was no stock and though it may be technically in default by not having made full payment by 24. 61979 the time for delivery should be extended by another month i. e. upto 27. 71979. The respondent however, took a different view of the default of wrote to the Bank of India on 16. 10. 1979 stating that the appellant had failed to observe the terms and conditions of the allocation order issued for the supply of 360 MT and has defaulted in making the payment of 160 MTs and that it therefore invoked the bank guarantee to the extent of Rs. 1,60,000. 00 of she defoult committed by the appellant and requested the Bank to remit the said amount within a week of the said letter. The bank naturally informed the appellant that a demmand has been made by the respondent to encash the bank guarantee. The appellant Protested at this action, as wil[ appear from its letter of 21. l0. 1979 in which it took the stand that it was the fault of the respondent who was not in a position to supply the full quantity. It was also suggested that the representative of the appellant met the representative of the respondent and that some kind of an agreement was also made between them that the STC will not enforce the forfeiture of earnest money and encash the bank guarantee. It is in those c