Unconditional bank guarantees must be honoured on demand; courts will restrain encashment only for fraud or irretrievable injury.

An unconditional bank guarantee must be honoured on demand where its terms require payment without demur and make the beneficiary the sole judge of default. Reference to the underlying contract does not convert such a guarantee into a conditional one, and disputes under that contract do not suspend the bank's independent obligation. Injunction against encashment is available only in exceptional cases of established fraud or irretrievable injury; absent such pleaded and proved grounds, restraint is unsustainable. The guarantee was therefore treated as invocable, and judicial interference with its encashment was rejected.

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Issues: Whether the bank guarantee was unconditional and invocable on demand, and whether injunction could be granted restraining its encashment.

Analysis: The guarantee was required to secure timely delivery, erection, commissioning and performance, but its operative clauses provided that the guarantor would pay the stipulated amount on demand without demur, that the purchaser would be the sole judge of default, and that disputes pending between the parties would not suspend the purchaser's right to recover under the guarantee. The reference in the preamble to the underlying contract did not convert the guarantee into a conditional one. An injunction against invocation of a bank guarantee can be granted only in exceptional cases of established fraud or irretrievable injury, and no such foundation was laid in the pleadings or evidence. The dispute between the parties regarding alleged breach of contractual obligations could not control the independent obligation undertaken by the bank under the guarantee.

Conclusion: The bank guarantee was held to be unconditional, and the injunction restraining its encashment was held unsustainable. The order of the High Court was set aside and the purchaser was permitted to invoke the guarantee.

Ratio Decidendi: An unconditional bank guarantee must be honoured according to its terms, and courts will not restrain its invocation merely because disputes exist under the underlying contract unless fraud or irretrievable injury is clearly established.

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