1.The plaintiff entered into a contract with a consortium callied Saipem SPA / Snamprogetti of Italy for the construction of a system of undersea piplelines.The contractors were to provide a Bank Guarantee in respect of any claim of liquidated damages that may arise under the contract and accordingly the Defendant has furnished an irrevocable and unconditional Bank Guarantee in the amount of US $ 6,387,500/- and Indian Rs.8,060,000/-. The Bank Guarantee was extended from time to time for a value reduced in accordance with the actual work done and as of the date of invocation of the Guarantee, the guarantee was for a value of US $ 4,320,432/- and Indian Rs.5,515,959/-. The Guarantee being an irrevocable and unconditional Bank Guarantee, contained provisions as are usual in such guarantees.The relevant clause of the Guarantee is extracted in para 6 of the plaint and provided thus :
"Now therefore, in consideration of the premises aforesaid and at the request of the contractor, we State Bank of India, Overseas Branch, Bombay, Bank organized under the laws of India and having its registered / head office at Calcutta (hereinafter called "the Bank"), so as to bind ourselves and our successors and assignees do hereby irrevocably and unconditionally undertake to pay to you, the company, on demand in writing without demur or protest and irrespective of any contest or dispute between your goodselves and the contractor and without reference to the contractor, any sums of money at any time or from time to time demanded by the Company upto an aggregate limit of USD. 6,387,500/- (US Dollars six million three hundred eighty seven thousand and five hundred only) plus INR 8,060,000/- (Indian Rupees eight million sixty thousand only) on account of any liquidated damages due from the contractor to the company.
We further agree that as between us and the company for the purpose of this guarantee / undertaking, any notice of demand by the company towards liquidated damages and any amount claimed in such notice by the company on account thereof, shall be final and binding as to the factum of the L.D. and the amount payable by us to the company hereunder relative thereto".

2. According to the plaintiff, there was a delay on the part of the Contractor in completing the work within the scheduled date of completion. On 27th September, 1993, the plaintiff addressed a letter to the defendant invoking the Bank Guarantee, stating therein that the contractor had been advised to extend the validity of the Bank Guarantee and in the event of the Contractor not doing so on or before 1st October, 1993, the letter of the plaintiff be treated as a notice of invocation of the Bank Guarantee. Various reminders were addressed on 15th October, 1993, 19th October, 1993, 4th November, 1993 and 13th December, 1993 for crediting the amount under the guarantee to the account of the plaintiff. By a letter dated 4th November, 1993, the plaintiff claimed that it was entitled to interest with effect from 4th October, 1993, that is after the invocation of the Bank Guarantee. The Contractor had, in the meantime, moved the Tribunate Di Milan which is the Commercial Court in Italy of the first instance for an order restraining the Italian Bank Credito Intaliano from paying any part of the proceeds of the counter guarantee which the Italian Bank had issued in favour of the Defendant. On 30th September, 1993 an ex - parte order is stated to have been issued by the Court in Italy against the Italian Bank, from paying over the proceeds of the counter guarantee. The Italian Court has thereafter on 2nd Marc