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PETITIONER: STATE OF KERALA

       Vs.

RESPONDENT: COCHIN CHEMICAL REFINERIES LTD.

DATE OF JUDGMENT: 26/03/1968

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V. MITTER, G.K.

CITATION:  1968 AIR 1361            1968 SCR  (3) 556

ACT: Contract-Mortgage deed providing for loan to company and for supply  of  goods by company to mortgagee-Sale price  to  be adjusted against loan’ and interest-Mortgagee not  advancing loan-If  relieved  of obligation to  purchase  goods-Whether liable for damages for not advancing loan and for breach  of contract to buy goods.

HEADNOTE: A  mortgage deed was executed by the respondent company  and one of its directors in favour ’of the State of Kerala.   It was-provided  inter  alia by the terms of the deed  that  in consideration  of the State granting a loan of a sum of  Rs. 2.5  lakhs  to the company, the latter would supply  to  the State  3,000  tons of ground-,nut cake  within  a  specified period  and make deliveries in accordance with  instructions to  be given by the State, and the account for  this  supply will  be adjusted against the loan amount and  the  interest thereon.  It was common ground however that the loan amount, though acknowledged in the mortgage deed as received by  the company,  was  never  in fact advanced by  the  State.   The respondent  company  arranged  for the supply  of  goods  as agreed  and sought the necessary instructions for  delivery, but, these we’re never given. The  company  instituted a suit in March  1953  against  the appellant State for damages for failure to, advance the loan amount and for breach of contract to purchase the  groundnut cake.   The  trial court decreased the suit for  Rs.  36,000 being  damages for failure to advance the loan and  for  Rs. 1,23,000  as damages for breach of contract.  An  appeal  to the  High  Court challenging the liability of the  State  to compensate  the company for failure to take delivery of  the goods was dismissed. It was contended on behalf of the State that the  obligation to  take  delivery of the goods agreed to be  purchased  was contingent upon the Government’s advancing the loan  amount, so  long  as the amount was not advanced by the  State,  the mortgage was not in law effective and the Company could  not enforce the contract relating to ground-nut cake a.-reed  to be purchased by the State., HELD : Dismissing the appeal)

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A transaction of mortgage formally executed does not  become void   or ineffective merely because the mortgagee fails  to advance  the amount  of money undertaken to be  advanced  by him.  Under the terms of the mortgage deed liability of  the State  to purchase the groundnut cake. from the Company  was not made conditional upon the State advancing the loan.   By failing to advance the loan amount the State could not avoid liability to carry out the obligation to purchase the  goods contracted to be purchased.  Even if it be assumed that  the indenture  incorporated reciprocal promises, in the  absence of  any express provision to that effect the contract  could not  be terminated by the default of the State.   Breach  of contract  by one party does not automatically terminate  the obligation  under the contract : the injured party  has  the option  either to treat the contract as still in  existence, or  to  regard  himself as discharged.  If  he  accepts  the discharge  of the contract by the other party, the  contract is 557 at  an  end.  If he does not accept the  discharge,  he  may insist on performance. [560 C-D; 561 D]. Tatia v Babaji, I.L.R. 22 Bom. 176, Rashik Lal v. Ram Narain and Others, I.L.R. 34 All. 273, Dip Narain Singh V. Nageshar Prasad  and  Others, I.L.R. 52 All. 338,  White  and  Carter (Councils) Ltd., v. Mc Gregor, [1962] A.C. 413. referred to. There  was no substance in the, contention, that  the  State was  by its default liable to, compensate the  Company  only for  loss arising out of its failure to advance  the  money, and  not  out of its ’failure -to purchase the  goods.   The State’s  undertakings  to  advance  the  loan  and  to  take delivery  of  ground-nut cake were two  independent,  though inter-related  transactions; and by committing a  breach  of its  own obligation to advance the loan, the State  did  not absolve  itself from liability for the breach  arising  from its refusal to take delivery of the goods offered [561 F-H].

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No’. 741 of 1965. Appeal  by special leave from the judgment and decree  dated April  1, 1963 of the Kerala High, CourT in Appeal Suit  No. 480 of 1958. Sarjoo Prasad and M. R. K. Pillai, for the appellant. S. V. Gupte and A. G. Pudissery, for the respondent. The Judgment of the Court was delivered by Shah,  J. - On October 9, 1950, a deed styled an  "indenture of  mortgage"  was  executed by  the  Cochin  Chemicals  and Refineries Ltd.,-hereinafter called ’the Company’ and N.  C. John a Director of the Company, in favour of I the State  of Travancore Cochin.  The relevant terms of the indenture were               "In  consideration  of the sum of  Rupees  2.5               lakhs (2,50,000) borrowed by the mortgagor No.               I from the mortgagee (the receipt of which sum               mortgagor   No.  1  doth  hereby   admit   and               acknowledge) mortgagor No. I hereby  covenants               with the mortgagee as follows :-               (a)  That the mortgagor No. I shall supply  to               the mortgagee 3,000 tons of -groundnut cake at               the rate of 600 tons per month within a period               of  five months commencing with the first  day               of November 1950 and ending with the last  day               of March 1951.               (b)That  the account for the  groundnut  cakes               supplied  by mortgagor No. I to the  mortgagee

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             will be -settled and adjusted against the loan               amount of Rs. 2.5 lakhs: and interest  thereon               at  41 % per annum at the end of  March  1951,               the  groundnut cakes supplied being valued  at               the  average,  price fixed by  the  Government               during  the  period for purchases  from  other               sources.  If ’on such adjustment any amount is               found  due  to the mortgagor No.  I  the  same               will be paid by the mortgagee.  If how- 558               ever  it  is  found  that  the  price  of  the               groundnut cakes supplied is not sufficient  to               make  up  the loan amount  with  the  interest               thereon, mortgagor No. I shall pay the deficit               amount to the,mortgagee immediately after  the               settlement of account.               (c)That  mortgagor No. 1 shall deliver  the               groundnut   cakes.  at  any,  depot   in   the               Travancore-Cochin  State as may from  time  to               time   be   required  by   the   Director   of               Agriculture   from  the  mortgagee   free   of               transport charges."               II."For   the  consideration   aforesaid   the               mortgagor  No.  1 hereby transfers by  way  of               simple  mortgage  to the  mortgagee"  all  the               assets described in Sch. 1, "and mortgagor No.               2  hereby transfers by way of simple  mortgage               to the mortgagee" the assets described in Sch.               11,  "to  the intent that -the  said  premises               shall  remain and be charged as  security  for               the  payment  to  the mortgagee  of  the  said               principal   money,  interest  and   costs   in               accordance  with the Covenants  herein  before               contained."               III."The  mortgagors hereby covenant with  the               mortgagee as follows:- The  indenture was executed by the Company and N.  C.  John. and  also by the Secretary to the Government of  Travancore- Cochin  on  behalf  of  His  Highness  the  Rajpramukh.    A supplementary deed was executed on November 7, 1950, whereby it was agreed that Without prejudice to the right to recover the  amount secured or any portion thereof as I stipulate  , it shall also be recoverable under the Revenue Recovery  Act for  the  time  being in force or in  other  manner  as  the mortgagee may deem fit. It  is  common ground that the amount  acknowledged  in  the indenture was not advanced at the date of the indenture  and was never advanced thereafter.  The Company arranged for the supply  of  goods  agreed  to be sold  under  the  terms  of paragraph  I(a) and wrote from time to time letters  to  the appropriate  officers  of  the State  asking  them  to  give instructions about the depots where the supplies were to  be made.   In  reply  to  the letter  Ext.   H,  the  Assistant Director  of Agriculture by Ext.  M, dated January 3,  1951, replied that               "I write to invite your attention to my letter               of even No. dated 12-12-1950 and to inform you               that I shalt be placing orders for the  supply               of groundnut cake as soon as I get orders from               Government  providing the necessary funds  for               paying  you  the  advance of  Rs.  2  and  1\2               lakhs." 559 No instructions for supply were however given to the Company to  supply  the goods agreed to be purchased by  the  State.

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The  Company instituted on March 9, 1953, an action  against the State of Travancore-Cochin for a decree for Rs.  3,600/- being  damages  for  failure  to advance  the  loan  of  Rs. 2,50,000/-,  and  Rs. 1,68,600/- as damages  for  breach  of contract to purchase 3,000 tons of groundnut cake under  the indenture.  The Trial Court decreed the suit for Rs. 3,600/- being damages for failure. to advance the loan, and for  Rs. 1,23,000/- being damages for breach of contract to  purchase groundnut cake.  In appeal to the High Court, the  liability of  the State to compensate the Company for failure to  take delivery  of  the goods offered to be  delivered  alone  was challenged.   The High Court confirmed the decree passed  by the  Trial Court negativing the contention raised on  behalf of  the  State that the obligation to take delivery  of  the goods   agreed  to  be  purchased  was  contingent  on   the Government’s  advancing  Rs.  2,50,000/-.   The  State   has appealed to this Court with special leave.               Two questions arise for determination -in this               appeal               (1)  Whether under the terms of the  indenture               the  State by refusing to advance the loan  of               Rs. 2,50,000/was absolved from the  obligation               to   purchase  the  goods  referred-   to   in               paragraph I(a) of the indenture; and               (2) Whether in the circumstances of the  case,               the Company was not entitled to claim  damages               for breach by the State to purchase the  goods               agreed to be purchased. The  indenture incorporated two transactions: (1) a mortgage in  favour  of  the  State by the Company  and  N.  C.  John charging  properties  belonging to the  two  mortgagors  for repayment  of Rs. 2,50,0001/-; and (2) the Company  agreeing to  -sell and the State agreeing to purchase 3,000  tons  of groundnut  cake at the rate of 600 tons per month  for  five Months  to  be  supplied  at  any  of  the  depots  in   the Travancore-Cochin  State  as  may  from  time  to  time   be designated, by. the Director of Agriculture.  The  indenture expressly recited that the amount of Rs. 2,50,000/- was  ad- vanced to the Company but the supplementary deed dated  Nov- ember  7,  1950, and the correspondence make it  clear  that though the money was recited to have been actually advanced, it  was  :pot in fact advanced but it was  intended  by  the State Government to advance it.  For some reason where it is difficult   to  ’ascertain  from  the  record,   the   State Government  did not carry out its obligation to advance  the money,  after obtaining the indenture and the  supplementary deed from the Company and its Director.  But even as late as January  3,  1951, as is clear from  Ext.   M-the  Assistant Director  of  Agriculture reiterated the  promise  that  the money 560 will  be  advanced  and delivery of  goods  offered  by  the Company will be accepted. Counsel for the State contended that so long as the loan was not  advanced  by  the State, the mortgage was  not  in  law effective,  and the Company could not enforce  the  contract relating  to  groundnut cake agreed to be purchased  by  the State, for the obligation undertaken was in consideration of the loan of Rs., 2,50,000/- and arose only when the loan was advanced.   But  the assumption, that if the State  did  not advance  the  loan which it had undertaken to  advance,  the indenture was ineffective, cannot be accepted.  There is  no such express term in the deed, and none can be implied  from the   covenants  and  the  surrounding   circumstances.    A transaction  of mortgage formally, executed does not  become

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void  or ineffective merely because the mortgagee  fails  to advance  the  amount of money undertaken to be  advanced  by him.  If without advancing the *mount agreed to be advanced, he sues on the title created under the deed of mortgage, the Court  will  not award him a decree for anything  more  than what  he  has But that is not to say that  the  mortgage  is invalid In Tatia v. Babaji(1),Farran, C.J., observed :               "I  am  not,  however,...........prepared   to               assent  to  the train of  thought  which  puts               conveyances of lands in the mofussil perfected               by   possession  or  registration  where   the               consideration  expressed in the conveyance  to               have been aid has not in act been paid in  the               same  category as contracts void for  want  of               consideration." Similar  observations were made in Rashik Lal v. Ram  Narain and others(’), where Karamat Hussain, J., observed at p. 276               "........  Mortgage  under  the  Transfer   of               Property  Act is a transfer of an interest  in               the  land mortgaged, and not a mere  contract.               It  therefore follows that no sooner  a  valid               mortgage  deed is registered, an  interest  in               the property mortgaged, in the absence of  any               contract   to  the  contrary,  vests  in   the               mortgagee  notwithstanding the fact that  -the               mortgage  money  has  not  been  paid  by  the               mortgagee  to  the’ mortgagor.  The  mere  non               payment of the mortgage money cannot have  the               effect of rendering the mortgage invalid." Sulaiman,  J.,  in Dip Narain Singh v. Nageshar  Prasad  and others(2)  observed  that  once  a.  document   transferring immovable  property  has been  registered,  the  transaction passes out of the domain of a mere contract and into one  of a  conveyance.  Such a completed transaction is governed  by the provisions of the (1) I.L.R. 22 Bom. 176. (3) I.L.R. 52 All. 338. (2) I.L.R. 34 All. 273, 561 Transfer of Property Act and so much of the Contract Act  as is applicable thereto. The argument that because the amount was not advanced by the State  to the Company, the mortgage was void or  ineffective therefore  cannot  be  accepted.  Nor do the  terms  of  the indenture  justify the plea that the liability of the  State to  purchase 3,000 tons of groundnut cake from  the  Company was  conditional  upon the State advancing Rs.  2  50,000/-. The  two  transactions incorporated in  the  indenture  were undoubtedly  inter-related.   The  price  payable  for   the supplies of groundnut was to be adjusted towards the  amount advanced or to be advanced by the State.  But by failing  to advance  the amount the State could not avoid  liability  to carry  out the obligation to purchase the, goods  contracted to  be purchased.  Even if it be assumed that the  indenture incorporated  reciprocal promises-the State to  advance  Rs. 2,50,000/-  and  the  Company  to  deliver  3,000  tons   of groundnut  cake-in the absence of any express  provision  to -that  effect  the contract could not be terminated  by  the default of the State.  Breach of contract by one party  does not   automatically  terminate  the  obligation  under   the contract : the injured party has the option either to  treat the contract as still in existence, or to regard himself  as discharged.  If he accepts the discharge of the contract  by the other party, the contract is at an end.  If he does  not accept  the discharge, he may insist on performance see  the

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judgment  of the House of Lords White and Carter  (Councils) Ltd.  v.  McGregor(1).  The  case before  the  House  was  a Scottish  case, but the law of Scotland is not different  on the matter under consideration from the English law, and the Indian  Contract Act closely follows the English Common  Law in  that  matter.   It cannot, therefore, be  said  that  by refusing to advance the loan which the State had  undertaken to  advance, the obligation to purchase groundnut cake  from the Company came to an end. Nor  is there any substance in the, second  contention  that the  State  was  by its default  liable  to  compensate  the Company only for loss arising out of its failure to  advance the money, and not out of its failure to purchase the goods. The  State had undertaken to advance Rs. 2,50,000/-  to  the Company.   It had also undertaken to take delivery of  3,000 tons  of  groundnut cake offered by the  Company  under  the terms  of  contract of sale.  These  were  two  independent, though  inter-related  transactions,  and  by  committing  a breach  of  its own, obligation to advance the  sum  of  Rs. 2,50,000/the State did not absolve itself from liability for the breach arising from the refusal to take delivery of  the goods  offered.   The cause, of action arising  out  of  the refusal   to  take  delivery  of  the  goods   offered   was independent of the cause of action arising out of the (1) [1962] A.C.413=[1961] 3 AII. E.R.1178. 562 breach  committed  by the State in not advancing  the  loan. The   two   causes  of  action  were  cumulative   and   not alternative.   There  is therefore no warrant for  the  plea that by claiming damages for loss suffered by it as a result of  the failure to advance the loan, the Company elected  to give up its claim for damages for breach of the contract  to take delivery of 3,000 tons’ of groundnut cake by the State. The appeal fails and is dismissed with costs. R.K.P.S.                         Appeal dismissed. 563