Unconditional bank guarantees remain enforceable on demand, and injunctions against encashment will not issue absent fraud or special equities.

A performance bond styled as a performance guarantee was treated as a contract of guarantee, not indemnity, because the instrument and the surrounding contractual scheme showed distinct obligations and required the bank to pay on demand without reference to the contractor. The use of words such as "indemnify" in one clause did not alter the overall character of the document. The guarantee was also held to be unconditional and irrevocable, making the bank's liability autonomous and enforceable on demand. In the absence of fraud or special equities, the court declined to restrain encashment.

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Issues: (i) Whether the performance bond styled as a performance guarantee was in substance a contract of indemnity or a contract of guarantee. (ii) Whether the instrument was an unconditional and irrevocable bank guarantee liable to be honoured on demand, so as to justify refusal of injunction against encashment.

Issue (i): Whether the performance bond styled as a performance guarantee was in substance a contract of indemnity or a contract of guarantee.

Analysis: The instrument and the underlying contract were read as a whole. The contractual scheme separately provided for a performance guarantee and a performance indemnity bond, showing that the parties treated them as distinct obligations. The guarantee was addressed as a bank guarantee, and its operative clauses required the bank to pay on demand without reference to the contractor. Mere use of the words "indemnify" or "indemnified" in one sub-clause did not convert the document into a contract of indemnity under the Contract Act. The surrounding clauses, including the bank's obligation to treat the employer's decision as binding and to pay notwithstanding disputes, reinforced that the instrument was a guarantee under the law.

Conclusion: It was a contract of guarantee, not a contract of indemnity.

Issue (ii): Whether the instrument was an unconditional and irrevocable bank guarantee liable to be honoured on demand, so as to justify refusal of injunction against encashment.

Analysis: The guarantee text stated that the bank's liability was absolute and unequivocal, payable on demand, without demur and notwithstanding disputes pending between the parties. Such wording made the bank's obligation autonomous and independent of the parent contract. In the absence of established fraud or circumstances amounting to special equities, the court would not restrain encashment of an unconditional bank guarantee. The petitioner's attempt to link the bank's liability to adjudication of underlying contractual disputes was inconsistent with the terms of the instrument.

Conclusion: The guarantee was unconditional and irrevocable, and the injunction against encashment was rightly refused.

Final Conclusion: The appeal failed because the instrument was a bank guarantee of an independent and unconditional character, and the beneficiary was entitled to invoke it.

Ratio Decidendi: A bank guarantee that is, on its terms, unconditional, irrevocable and payable on demand is an autonomous obligation enforceable independently of the underlying contract, and courts will not restrain its invocation absent established fraud or comparable exceptional grounds.

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