Full Judgment Text
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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