Unconditional bank guarantees remain enforceable despite arbitration disputes; injunctions lie only for fraud or irretrievable injustice.

An unconditional bank guarantee is an independent contract, and the bank must honour it on demand without demur. Pending disputes under the underlying contract, including arbitration, a counter-claim, or unresolved questions of breach and loss, do not by themselves justify an injunction against invocation. Court interference is available only in exceptional cases such as established fraud or irretrievable injustice. On the facts discussed, the pleaded disputes and pending arbitration did not amount to special equities, and no sufficient material showed fraud or irretrievable injustice. The restraint on encashment was therefore not sustainable, and invocation of the guarantees could not be blocked on the basis of the underlying contractual controversy.

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Issues: (i) Whether an injunction could be granted restraining encashment of unconditional bank guarantees merely because disputes between the contracting parties were pending in arbitration; (ii) Whether the facts pleaded by the contractor constituted special equities or irretrievable injustice so as to justify interference with the bank guarantees.

Issue (i): Whether an injunction could be granted restraining encashment of unconditional bank guarantees merely because disputes between the contracting parties were pending in arbitration.

Analysis: A bank guarantee is an independent and distinct contract between the bank and the beneficiary. Where the guarantee is unconditional and the bank has undertaken to pay on demand without demur, the bank's obligation is absolute and is not affected by disputes arising under the underlying contract. The mere pendency of arbitration, a counter-claim, or the question whether breach and quantum of loss have been adjudicated does not justify restraining encashment. The beneficiary's right to invoke the guarantee cannot be controlled by issues belonging to the primary contract.

Conclusion: The injunction could not be sustained on the ground that the underlying disputes were pending before the arbitrators.

Issue (ii): Whether the facts pleaded by the contractor constituted special equities or irretrievable injustice so as to justify interference with the bank guarantees.

Analysis: Interference with encashment of a bank guarantee is permitted only in exceptional cases, such as established fraud or irretrievable injustice. The circumstances relied upon, namely the existence of disputes, a counter-claim, and the pendency of arbitration, did not amount to such exceptional circumstances. The case did not disclose fraud, and the materials relied upon were insufficient to show that refusal of injunction would cause irretrievable injustice. Special equities were therefore not made out.

Conclusion: The contractor failed to establish any exceptional ground warranting restraint against invocation of the guarantees.

Final Conclusion: The judgment of the High Court was unsustainable and the appeals succeeded, with the restraint on invocation of the bank guarantees being lifted in law, save for the temporary direction protecting the parties until the specified date.

Ratio Decidendi: An unconditional bank guarantee must be honoured according to its terms, and a court will interfere only in exceptional cases of established fraud or irretrievable injustice; disputes under the underlying contract, by themselves, do not justify an injunction against invocation.

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