Bank guarantees must be honored by the bank unless established fraud or irreparable harm exists; courts must avoid granting injunctions against their encashment.

1. Special leave granted.
Having been thwarted by orders of the court below in its attempt to get encashment of the bank guarantees, issued by the State Bank of India, Meerut Cantt. Branch (respondent No. 2) respondent No. 1 has led to the filing of this appeal by the aggrieved beneficiaries.

2. The appellant and respondent No. 1 had entered into an agreement on 27th July, 1994 whereby respondent No. 1 was to supply boiling house equipment the cost of which was Rs. 5.23 crores. The supply of equipment and material was to start from 15th September, 1994 and the same was to be completed by 10th August, 1995, as per the schedule of the supply agreed to by the parties.

3. According to one of the clauses of the aforesaid agreement respondent No. 1 had agreed to furnish bank guarantees in favour of the appellant. Out of the above six, only four bank guarantees were furnished including bank guarantee No. 40/51 dated 1st December, 1994 for a sum of Rs. 26,15,000/- and bank guarantee No. 40/47 dated 24th November, 1994 for a sum of Rs. 35 lacs. These are the bank guarantees with which we are concerned in the present case.

4. Bank guarantee No. 40/51 was issued to ensure timely delivery of equipment and supply by respondent No. 1. The relevant clauses of the said bank guarantee No. 40/51 are as follows :
"In consideration of the premises the Guarantor hereby unconditionally and irrevocably undertakes to pay to the Purchaser on their first written demand and without demur such a sum not exceeding Rs. 26,15,000/- (Twenty six lacs fifteen thousand only) as the purchasers may demand representing 5% (five per cent) of the contract price, and if the guarantor fails to pay the sum on demand the guarantor shall also pay on the sum demanded interest at the bank lending rates then prevailing reckoned from the date of demand till the date of payment.
2. The guarantor shall pay to the purchaser on demand the sum under clause 1 above without demur and requiring the purchasers to invoke any legal remedy that may be available to them, it being understood and agreed firstly that the purchasers shall be the sole judge of and as to whether the sellers have committed breach(es) of any of the terms and conditions of the said agreement and secondly that the right of the purchasers to recover from the guarantor any amount due to the purchasers shall not be affected or suspended by reasons of the fact that any dispute or disputes have been raised by the sellers with regard to their liability or that proceedings are pending before any Tribunal, arbitrator(s) or Court with regard to or in connection therewith, and thirdly that the guarantor shall immediately pay the aforesaid guaranteed amount on demand and it shall not be open to the guarantor to know the reasons of or to investigate or to go into the merits of the demand or to question or to challenge the demand or to know any facts affecting the demand, and lastly that it shall not be open to the guarantor to require the proof of the liability of the seller to pay the amount before paying the aforesaid guaranteed amount to the purchasers.

5. The other bank guarantee No. 40/47 was originally issued for a sum of Rs. 51,70,000/- for securing advance payment. The agreement contemplated the liability being gradually reduced and on 28th August, 1995 this bank guarantee was reduced for a diminished amount of Rs. 33 lacs. The relevant clause of this bank guarantee is as follows :
"In consideration of the premises the guarantor hereby unconditionally and irrevocably undertakes to pay to the purchaser on their first written demand and without demur such a sum not exceeding Rs. 51,70,000/- (Rupees fifty one lacs seventy thousand onl