# [1968] 3 S.C.R. 556

- **Citation:** [1968] 3 S.C.R. 556
- **Court:** Supreme Court of India
- **Decided:** 1968-03-26
- **Bench:** J. C. Shah, V. Ramaswami, G. K. Mitter
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1968-3-s-c-r-556-4451
- **Pages:** 7

## Headnote

8
Contract-Mor{f:age deed providing for loan to company and for supply of goods by company to mortgagee-Sale price to be adiusted against
loan and interest-Mortgagee not cdvancing loon-I/ relieved of obligation to purchase goods-Whether liable for da1nages for .'lot advancing
loan and for bre(1ch of contract to buJ goods,
A mdrtgagc deed was executed by the respondent company and one
of its directors in favour of the State of Keral::i. It was provided inter alia
by the terms of the deed that in consideration of the State granting a loan
of a sum of lls. 2.5 lakhs to the company, the laUer wou1U supply lo the
State 3.000 tons of ground-nut cake Yyjthin a specified pe'riod and make
deliveries in accordance 'Nith instructions ·to be given by the State, and
the account fo·r this supplv will be adjusted again·st the loan amount and
the interest thereon.
It Was comn1on 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 d·~livery, but these we're never given.
The company instit\Ited a suit in 1Iarch 1953 against the appellant
State for dumages for failure to advance the loan an1ount and for breach
of contract to purchase the ground-nut cake. The trial court decTecd the
suit for R.;;. 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 chaUenging the liability of the State to compensate the company
for failure to take delivc'ry of the goods v.·as dismissed.
It was contended on behalf of the State that the obligation to take
delivery of the good_s agreed to be purchased was contingent upon the
Government's advancing the loan amount, so long as the amount was not
atlvanced by the State~ the mortgage \vas not in Jaw effective
and the
Company could
not
enforce the contract relating to ground-nut cake
~1i;:recd to be purchased by the State.
HELD :
Dismissin.q the appeal.
A transaction of mortgage formally executed docs 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 ~roundnut cake from
the Company was not n1adc conllitional upon the State advancing the
1oan.
By failing to advance the loan an1ount the State could. not avoid
liability to carry out the obligation to purchase the goods contracted to
be purchased. Even if it be assumed thJ.t the indenture incorporated reciprocal promises, in the absence of anv express provision to that effect the
contract could not be t~rn1inatcd by the default of the State. Breach of
contract by one party does not auton1atica1ly terminate the obligation
under the contract: the injured party has the option either to treat the
cnntract as still in existence. or to regard himself as discharged. If he
~ccepts the discharge of the contract by the other party, the contract i"
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KllRALA V. COCHIN REFINERIES (Shah, J.)
557
A
at an end. If he does not accept the discharge, he may insist on performance. (560 C-D; 561 DJ.
B
c
D
E
F
G
H
Tatia v. Babaji, I.L.R. 22 Bom. 176, Rashik Lal v. Ram Narain end
Others, I.LR. 34 All. 273, Dip Narain Singh v. Nageshcr Prasad and
Others. I.L.R. 52 All. 338, White and Cart., (Councils) Ltd, v.
McGregor, [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 lo 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

## Text

STATE OF KERALA
v,
COCHIN CHEMICAL REFINERIES LTD.
March 26, 1968
[J. C. SHAH, V. RAMASWAMI AND G. K. MITTER, JJ.]
8
Contract-Mor{f:age deed providing for loan to company and for supply of goods by company to mortgagee-Sale price to be adiusted against
loan and interest-Mortgagee not cdvancing loon-I/ relieved of obligation to purchase goods-Whether liable for da1nages for .'lot advancing
loan and for bre(1ch of contract to buJ goods,
A mdrtgagc deed was executed by the respondent company and one
of its directors in favour of the State of Keral::i. It was provided inter alia
by the terms of the deed that in consideration of the State granting a loan
of a sum of lls. 2.5 lakhs to the company, the laUer wou1U supply lo the
State 3.000 tons of ground-nut cake Yyjthin a specified pe'riod and make
deliveries in accordance 'Nith instructions ·to be given by the State, and
the account fo·r this supplv will be adjusted again·st the loan amount and
the interest thereon.
It Was comn1on 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 d·~livery, but these we're never given.
The company instit\Ited a suit in 1Iarch 1953 against the appellant
State for dumages for failure to advance the loan an1ount and for breach
of contract to purchase the ground-nut cake. The trial court decTecd the
suit for R.;;. 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 chaUenging the liability of the State to compensate the company
for failure to take delivc'ry of the goods v.·as dismissed.
It was contended on behalf of the State that the obligation to take
delivery of the good_s agreed to be purchased was contingent upon the
Government's advancing the loan amount, so long as the amount was not
atlvanced by the State~ the mortgage \vas not in Jaw effective
and the
Company could
not
enforce the contract relating to ground-nut cake
~1i;:recd to be purchased by the State.
HELD :
Dismissin.q the appeal.
A transaction of mortgage formally executed docs 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 ~roundnut cake from
the Company was not n1adc conllitional upon the State advancing the
1oan.
By failing to advance the loan an1ount the State could. not avoid
liability to carry out the obligation to purchase the goods contracted to
be purchased. Even if it be assumed thJ.t the indenture incorporated reciprocal promises, in the absence of anv express provision to that effect the
contract could not be t~rn1inatcd by the default of the State. Breach of
contract by one party does not auton1atica1ly terminate the obligation
under the contract: the injured party has the option either to treat the
cnntract as still in existence. or to regard himself as discharged. If he
~ccepts the discharge of the contract by the other party, the contract i"
c
D
E
F
G
H
KllRALA V. COCHIN REFINERIES (Shah, J.)
557
A
at an end. If he does not accept the discharge, he may insist on performance. (560 C-D; 561 DJ.
B
c
D
E
F
G
H
Tatia v. Babaji, I.L.R. 22 Bom. 176, Rashik Lal v. Ram Narain end
Others, I.LR. 34 All. 273, Dip Narain Singh v. Nageshcr Prasad and
Others. I.L.R. 52 All. 338, White and Cart., (Councils) Ltd, v.
McGregor, [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 lo 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].
Civn. 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 the State of TravancoreCochin. 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. 1 from the
mortgagee (the receipt of which sum mortgagor No. 1
doth hereby admit and acknowledge) mortgagor No. 1
hereby covenants with the mortgagee as follows :-
. (a) That the mortgagor No. 1 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 supphed by mortgagor No. 1 to the mortgagee will be settled
and adjusted against the Joan amount of Rs. 2.5 lakhs
and interest .thereon at 4!% per annum at the end of
March 1951, the groundnut cakes supplied being valued
at t?e average price fixed by the Government during the
penod for purchases from other sources.
If on sucli
adjustment any amount is found due to the mortgagor
No. 1 the same will be paid by the mortgagee. If how-
\
558
SUP.REM!! COUllT .REPORTS
[1968) 3 S.C.R.
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. 1 shall pay the
deficit amount to the mortgagee immediately after the
settlement of account
(c) That mortgagor No. I 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. l hereby transfers by way of simple mortgage to the
mortgagee" all the assets described in Sch. I, "and mortgagor No. 2 hereby transfers by way of simple mortgage
to the mortgagee·· the assets described in Sch. II, "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 accorda11ce
with the Covenants hereinbefore contained."
Ill. "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 Rajpramulch. 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 stipulated, it shall also be recoverable under
the Revenue Recovery Act for the time being in force or in other
marmer 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 Jetter of even
No. dated 12-12-1950 and to inform you that I shal~ 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! lakhs."
A
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KERALA V, COCHIN REFINERIES (Shah, J.)
559
No instructions for supply were however given to the Company
to supply the goods agreed to be purchased by the State. The
Company instituted on March 9, 1953, an action against !he
·State of Travancore-Cochin for a decree for Rs. 3,600/- bemg
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 lcian, 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 wa5 challenged. The High Court confirmed the decree -passed by tho 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 :
(I) 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 l(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. 2,50,000/-; and (2) the Company agreeing to sell and the
State agreeing to purchao;e 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 Travanc<ire-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 advanced to the Company but the supplementary deed dated November 7, 1950, and the correspondence make it clear that though
the money wns recited to have been actually advanced, it was not
in .fact advanced, but it was intended by the State Government to
advance it.
For some reason, which 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 Companv 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
SUPRBMB COURT RBPOllTS
(1968) 3 S.C.R.
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 void or ineffective merely because the mortgagee fails
to advance the amount of money undertaken to be advanced by
him. If without advancing the amount 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
advanced.
But that is not to say that the mortgage is invalid.
In Talia v. Babaji(1), Farran, C.J., observed :
"I am not, h9wever,
.
.
.
prepared to assent
to the train of thought which puts conveyances of lands
in the mofussil W{ected by possession or registration
where the consideration expressed in the conveyance to
have been paid has not in fact been paid in the same
category as contracts void for want of consideration."
Similar observations were made in Rashik Lal v. Ram Narain arid
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 110t been
paid by the mortgagee to the mortgagor:' The mere nonpayment of the mortgage money cannot have the effect
of rendering the mortgage invalid."
Sulaiman, J., in Dip Narain Singh v. Nageshar Prasad and
olhos(1) 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
(I) l.L.R. 22 Born. 176.
(2) I.L.R. 34 All. 273.
(l) I.LR. 52 All. 338.
A
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B
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KERALA >". COCHiX REFINERIES (Shalt, J.)
561
TJ'llnsfer of Property Act and so much of the Contract Act a; is
applicable thereto.
The argument that because the amount was not advanced by
the State to the Company, the mortgage was void or ineffective
thenfore cannot be accepted. Nor do the terms of the indenture
justifv the plea that the liability of the State to purchase 3,000
tous of groundnut cake from the Company was conditional upon
the State advancing Rs. 2,50,000/-. The two transactions incor·
porated 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 tenninated 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 judgment of the
House of Lords White and Caner (Co1mcils) Ltd. v. McGregor(').
The case before the House was a Scottish case, but the law of
Scotland is not different on the matter under consideration from
the F.nglish Jaw, 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 i1ad
undertaken to t!dvance, the ooligation to purchase groundnut cake
from the Company came to an elid.
Nor is there any substance in the secoud 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
G
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
]ndependent, 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
H
(I) (1962) A.C. 413=(196113 All. E.R. 1178.
562
SUPREME COUllT REPOllTS
[1968] 3 s.c.R.
breach committed by the State in not advancing the loan. The
A
two causes of action were cumulative and not alternative. There
is therefore no warrant for the plea that by claiming damages for
loss su1Iercd 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 ions of groundnut cake
by thf' S<ate.
B
The appeal fails and is dismissed with costs.
R.K.P.S.
Appeal dismissed.