Re Mahmoud and Ispahani

Re Mahmoud and Ispahani [1921] 2 KB 716

The effect of statutory illegality on contracts.

Facts:

Under the Defence of the Realm Act 1914 an Order was made, titled the Seeds, Oils and Fats Order 1919 that said “a person shall not… buy or sell or otherwise deal in” linseed oil without a licence. The claimant had a licence to deal in linseed oil and sold 150 tons of oil to the defendant. The defendant had incorrectly told the claimant that they had a licence to deal in oil. In fact they did not. Later, the defendant refused to accept delivery of the oil, and the claimant sued for damages.  

Issues:

The defendant argued that as he had no licence to deal in oil the contract was illegal under the 1919 Order. Consequently, the contract should be illegal and void. Therefore, the claimant could not sue for damages upon it. 

Held:

The Court of Appeal held that the claimant could not sue upon the contract as it was illegal. Banks LJ said:

“it is open to a party however shabby it may appear to be to say that the Legislature has prohibited the contract, and therefore it is a case in which the court will not lend its aid to the enforcement of the contract “.

Here, the Order expressly prohibited the type of contract the parties had entered into.  Therefore, to enforce this would undermine the purpose of the statute. Atkin LJ said that a court could also infer a prohibition if the statute in question imposed a penalty upon someone entering into that particular contract.  However, the terms of the statute would have to be examined very carefully.