Business Law Material

Pre. By Addis Tamiru Ass.
Lecture at Du, LLB, LLM candidate in Human Right &

criminal Justice
INTRODUCTION
“Business law” refers to the whole regulatory environment in which individuals or

„organizations‟ engage regularly for the purpose of securing commercial returns. It is a
legal regime with the object of shaping the behavior of “actors” in business transactions.
There is a vested interest for the law, like any other human relationships it claims to
regulate, to step into the work-for-profit areas in order to ensure that commercial
interactions are conducted in a proper manner. The legal regulation of business is even
more sensitive because engagement in business is an extension of a constitutional right to
property so that there must be a mechanism of the law that enables individuals to be
shielded against unwelcoming practices that prejudice their right without of course
affecting the rights of others. The law of commerce is indispensable not only from the
view point of individual right to property but also because it constitutes a fundamental
economic unit of a nation‟s economic performance and status as a whole. In this sense,
business law makes a huge contribution to the strong economic wellbeing of a state and
to the accompanying betterment of society‟s economic position.The legal framework that
governs business activities prescribes the conduct required of business-persons in their
commercial life, and solves business disputes in the ultimate aim of keeping the
tranquility of the business environment.
The Ethiopian “law of business” would also have as its object the advancement of the
above interests. This module centers upon the Ethiopian law with the fair treatment of the
relevant fundamental principles of law that are generally accepted in the business world.
It is particularly concerned with such visible areas as contracts, agency, sales,
commercial instruments and insurance among other things. These areas substantially
impinge upon economic sphere of interactions and, therefore, important for
businesspeople and other actors.
The course is designed to equip students with fundamental legal tools when deal with
business matters. You would be enabled to overcome various business challenges
involving legal questions in your future professional careers.It is hoped that you are
already well aware of general business ideals. Therefore, it suffices that you possess basic
knowledge in economic and business principles. You are going to be briefly introduced
about the law in this module.
The structure of the module is such that first considerations about law in general are
made. Then follows the exploration of the legal regime whereby legal transactions
emerge, the law of personality. The law of contracts, a relatively wider and indispensable
area for you as a businessperson, comes next. Special types of contracts, agency and sale,
are also separately treated because of their fundamental importance to the business world
and will appear in the module in that order. Principles of modern commercial law, as
Business Law for Management & Accounting Students 1

Pre. By Addis Tamiru Ass. Lecture at Du, LLB, LLM candidate in Human Right &
criminal Justice
contained in the 1960 Commercial Code of Ethiopia would mark the completion of this
peace of writing. Traders and business organizations, insurance and negotiable
instruments are addressed under this part. The module contains a number of self-check
and summary questions at the end of each chapter. You are strongly advised to attempt all
those questions and check your understanding of the matters covered in this module. Well
come to business law. I wish you good study.

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CHAPTER ONE
INTRODUCTION TO LAW AND THE LEGAL ENVIRONMENT OF BUSINESS
The successful completion and study of this chapter is expected to be accompanied by the
attainment of the following objectives:
 Distinguishing between/among the various schools of juridical thought that
evidence the absence of a generally agreeable definition of the word “law”;
 Noticing that law is more understood in terms of its features and functions rather
than interims of what it is;
 Specifically internalizing the functions law performs in a society and those of
business law in particular;
 Identifying the important legal matters in business interactions,
 Analyzing the pros and cons of resolving disputes in business by courts versus
alternative dispute resolution techniques.
1.1. MEANING OF LAW AND SCHOOLS OF JURISPRUDENTIAL THOUGHT
There have been and will continue to be different definitions of law. Various renowned
scholars and jurists have so far been making their own assertions of what law is, and
almost none of them concur on the definition of law. The Greek philosopher Aristotle for
instance thought of law as a “pledge that citizens of a state will do justice to one another”.
Aristotle‟s student, Plato, asserted that law was a form of social control. Cicero, a Roman
philosopher, believed law was the agreement of reason and nature, the distinction
between the just and the unjust. The British legal scholar Sir William Blackstone
described law as “a rule of civil conduct prescribed by the supreme power in a state,
commanding what is right and prohibiting what is wrong”. The famous US Supreme
Court Justice Oliver Wendell Holmes on his part contended that law was a set of rules
that allowed one to predict how a court would resolve a particular dispute – “the
prophesies of what the courts will do infact and nothing more pretentious …”.One can
easily notice that all these attempts of defining law are based on varied particularities,
even though a general observation may be inferred concerning the nature of law, which
will be discussed in brief very shortly. In jurisprudence, or the study of law, the broad
statement concerning the nature of law is the point of departure for all legal scholars and
philosophers. Now we come to the discussion of the most influential schools of thought
that have embodied the contentions in the discourse of defining law. Legal philosophers
and scholars frequently disagree on what the proper function of law should be and their
disagreements have produced different schools of jurisprudence, or philosophies of law.
a) The NaturalLawSchool

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This is the oldest and one of the most significant schools of jurisprudence. The
proponents of the natural law school of jurisprudential thought assert that “government
and the legal system should reflect universal moral and ethical principles that are inherent
in human nature”.
While according to natural law theorists there can exist a positive, or conventional, or
state-made, law which is operative only within the political jurisdiction of the concerned
state, such law would be valid only if it accords with natural law, which takes higher
order and which is neither spatial nor temporal. This means that natural law is universal;
it transcends any particular country‟s written laws (or positive laws) and that it is not time
and space specific. In short, the natural law tradition presupposes that the legitimacy of
conventional, or positive, law derives from national law; and whenever it conflicts with
natural law, conventional law loses its legitimacy and should be changed.
The world had experienced the practical application of natural law in the resolution of
real cases in the past World War II period. The Nuremberg trial of Nazi war criminals for
“Crimes Against Humanity” at the end of the WWII was conducted by making appeal to
this higher law. Although these criminals may not have disobeyed any positive law of
their country and may have been merely following their government‟s orders, they were
deemed to have violated a natural law that transcends any law imposed by state. The
natural law school of thought encourages individuals to disobey positive or written, laws
if those individuals believe that the written laws are in conflict with natural law.
Accordingly, persons who felt that America‟s involvement in Vietnam during 1960‟s and
early 70‟s was wrong used natural law as their reason to violate written laws when they
protested America‟s war effort.
b) The Positivist School
At the other end of the spectrum is the positivist school, and those who adhere to this
school believe that there can be no higher law than a nation‟s positive law. This means
that significance and final validity would be placed in law created by a particular society
at a particular point in time.
In the positivist perspective, the law is the law and must be obeyed irrespective of its
content. The merits and demerits of a particular law can be discussed and laws can be
changed in an orderly manner through a legitimate law making process. But as long as a
law exists, it must be obeyed; and whether a given law is good or bad is irrelevant in so
far as it has assumed its status following a duly constituted procedure.
c) Legal Realism
This school is propounded by thinkers who were rebelling against some of the common
assumptions regarding law of the contemporary legal theorists and jurists. The discourse

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of the legal realists principally contained three-fold aspects. Firstly, they were opposed to
the assumption that judges, at least ideally, apply the law impartially, logically and
uniformly. The legal realists rather firmly believed that each judge is influenced by the
beliefs and attitudes unique to his/her personality. Second, they claimed that each case is
attended by a unique set of circumstances and that no two cases, no matter how similar,
are ever exactly the same. Therefore, according to the realists, judges should tailor their
decisions to take account of the specific circumstances of each case rather than rely on
some abstract rule that may not relate to those particular circumstances. Thirdly, the
advocates of legal realism constructively influenced legal thought in that they called on
judges to consider extralegal factors, such as economic and sociological data, in making
decisions, to the extent that such non-legal sources illuminate the circumstances and
issues involved in specific cases. In general, the tenet of legal realism is the call for
flexible application of laws in a manner that conforms to the constant change in societal
values and the recognition of judicial activism.
d) The Marxist Legal Thinking
The Marxian view of law is considerably associated with its politico-economic paradigm.
This conception of law is substantially different from other schools of thought in that it
questions the very origin and purpose of law and argued for its elimination.
According to the Marxists, law came into existence as a result of the emergence of a class
society based on private property. The formation of a class society is such that those who
have appropriated private property constituted one class and those with no private
property constituted the other class (the lower class), and law is an instrument of
maintaining class differences and an oppressive tool by the economically dominant
against the have-nots.
The political and economic object of the Marxist thought is the transformation through
socialist state of the society to communist society where classes do not exist (and where
private ownership of means of production dies out). If the society is transformed to
communist mode, there would be no more need of laws and state. While the Marxists
regarded law, just like positivists and realists, as state-made, they contended that such law
would have effect only until communism is realized and would wither away thereafter
along with the state.
The lines of legal thought we have just explored above reflect the existence of diversified
notions regarding the definition of law. The variations in ascribing a meaning to law are
not matters of mere semantics; they are critical and rather grounded on deep
philosophical foundations. Nevertheless, the various schools of jurisprudential thought

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have had drawbacks that has subjected than to critics. The major problem with these
schools of thought generally is that no comprehensive approach to define law is made.
None of the perspectives would attempt to look into law in its entirety; they are rather
concerned with specific aspects of law. Naturalists, for instance, limit themselves to the
consideration of content of the law. Positivists, on the other hand, prefer to treat law from
formal point of view that law assumes validity if it comes about by a legitimate process.
Another problem coming up with an all convincing definition of law pertains to its very
nature. Law is a dynamic social norm. The society as a whole (whether ideologically,
philosophically, culturally, socially, economically, or politically) keeps changing and
law, as a norm of social regulation, accordingly would be subjected to a constant state of
flux. The law cannot refuse to change while the matters it governs change. If it does
refuse, it would no more be legitimate and would be thrown to disuse. Changing societal
circumstances demand the continued modification of law in terms of its content, form,
scope and nature. Therefore, providing a consensual definition of law in terms of these
latter factors is virtually impossible because these yardsticks would considerably differ
from time to time, and it is partly no surprise that the various jurists have not concurred
on what law is.
All the above failures do not mean, however, that law is without any generally accepted
characteristics. The problems reveal the apparent difficulty in telling what law directly is,
but law can be regarded as possessing certain universally recognized features. These
features or attributes are very important in that they provide indirect descriptions of law.
Below are the base characteristics of law along with their brief explanation.
1.2. The Features of Law
i) Generality
The most obvious feature of law is its generality. Law is a general statement regarding a
possible human conduct. Any valid legal norm is applicable to all the subjects in the
author‟s territory. Law is not meant to shape the behavior of a certain category of persons
and leave others; everyone is subject to the application of any duty existed law, saving
extremely exceptional circumstances (such as exemption from legal liability to a certain
degree because of immunity provisions). For instance, laws passed by the Ethiopian
legislator (the House of Peoples Representatives) demands all Ethiopians to comply with
it, irrespective of race, language, religion, social status, sex and political outlook. The
generality of laws also implies that a law is applicable to all similar cases, and it does not
leave others and govern some.

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ii) Normativity
One of the distinctive features of law is that it is a normative statement. This accords with
the philosophical discourse on the dichotomy between the “is” and the “ought”. The
characterization of law as a normative statement refers to the “ought” aspect of the
discourse, the statement of what should be rather than what is. Law is not a factual
statement (description is not in the nature of law); it is rather a prescriptive tool which
purports to shape human behavior in the future.
iii) Establishment in Permanence
The coming into force of law presupposes, at least presumably, its indefinite existence in
the future. It is unusual to fix a time-limit for the application of law. A frequently
changing law creates social instability and more prone to losing legitimacy. This does not
mean, however, that laws live forever. They have to be reasonably flexible to
accommodate changing social realities. Change in societal circumstances is normally a
gradual process and the corollary gradual remolding of laws cannot be regarded as
resulting in an unstable phenomenon. Laws violate the virtue of permanence and create
instability when they change quickly and unnecessarily without having regard to the
status of the situation it is meant to govern.
Law might exist exceptionally for temporary application. The possibility of the
declaration of state of emergency explains such a circumstance. The law declaring the
emergency situation remains in force until the matter that called for the declaration of
emergency secedes. But overall, law is to be established in permanence and a time frame
would be fixed only in exceptional circumstances.
iv) Intimacy with Human Behavior and State
Law is a social norm and its ultimate concern is regulation of the social behavior of
human beings. The claim of law would naturally be made by men with respect to or as
against each other. Law cannot be employed to govern relationships of other animate or
inanimate things as among themselves; it is not concerned with a claim between humans
and other things either.
The intimacy of the law and the state is far from question. In reality, one cannot conceive
of one without the other (they are two inseparable aspects of the same system).One
cannot have validity or legitimacy without the other. Indeed, the state is itself brought
into life by law and cannot continue in that status without using law. The law on the other
hand would have life and produce the desired effects only by the backing of centrally
organized state machinery.
v) Strongly Institutionalized

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We have said above that law is backed by an established system of a state. The state is
known for its strong institutionalization and this provides the law with institutionalized
system of enforcement. The state is constituted by centrally established institutions of
legislature, executive and judiciary entrusted with the tasks of law making, law
enforcement and interpretation of laws respectively. The combined operation of these
organs sanctions the law by a strong force.
1.3. Law as Distinguished from Other Social Norms
Law is a social norm, but not the only one. There are also other values of normative
significance in a society. The features we have seen in the forgoing sub-topic generally
characterize law as a social norm. Some of these features are exclusively concerned with
law while some are shared by other social norms. Now we came to the questions: what
are these other social norms? And what makes law different from them?
This “other social norms” category is filled perhaps by ethics, morality, culture, religion,
and the like. These ethical, moral, or religious values are normative in the sense that they,
just like law, prescribe what should be and what should not be and accordingly shape the
social behavior of man. To this extent, law possesses an identical attribute to that of
ethics, morality or religion. Nevertheless, there are conspicuous differences between law
and other social norms, as provided below.
One important issue that differentiates law from the other social norms is mechanism of
their enforcement. Law is backed by a strong sanction of the state and would be
institutionally enforced. Ethical/moral/religious norms on the other hand lack such
external and effective enforcement mechanism. Their observance is more often than not
demanded in point of conscience than through external organ. Individuals can breach
these norms with impunity and the most they would suffer is moral guilt.
Second, scope of application is a distinguishing mark between law and the “other social
norm” category. Law enjoys uniform and nationwide application. But the other social
norms are peculiar to particular groups and therefore suffer from extremely localized
(restricted) application. There could be a number of religions, cultures or customary
practices in a state; none of them would have norms that apply beyond their own
peculiarities.
Law can still be identified vis-à-vis other normative values of the society on the basis of
the mechanism by which it is created and changed. Law originates from a centrally
established and clearly defined institutional framework. The existence of clear
institutionalized system would make it easy to bring law into effect and to amend it. Non-
legal norms, on the other hand, do not normally have an easily traceable institutional
origin for they are not made in an organized way. They come into existence through a

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practice by a concerned group over a relatively longer time in a scattered and in
decentralized manner. The development of these non-legal norms out of unclear and
gradual process makes it equally difficult to amend them. They are not amenable to easy
and fast amendment for they are rigidly established.
A further important factor that can be regarded as a virtue of law over non-legal norms is
the exhaustiveness and clarity embedded in law. Law would be exhaustively proclaimed
(mostly written) and sufficiently clear. The conduct it purports to command or prohibit
and the consequences of behaving otherwise would be fixed in advance. Normative rules
of ethics, morality, or religion are, on the other hand, barely exhaustive and known for
their manifest lack of clarity. And mostly non-legal norms do not determine
consequences of breach in advance. Since they are mostly unwritten, they are surrounded
by a cloud of vagueness and obscurity.
1.4. Functions of Law

Dear students, have you ever doubted the importance of law in a society? Do you think
that the secure condition in which you accomplish your tasks would be there had law not
been there and prevailed? I hope you say not! Yes, laws perform various functions in a
society. They are the powerful weapons to attain diversified societal needs. Laws are not
ends in themselves, but rather they are the most effective and reliable means at the
disposal of the society.
The simple and common sense response you might make is perhaps that law is an
instrumentality for maintaining order and security. Imagine what would happened if there
were no law to curtail the conduct of gang of robbers breaking into your abode and taking
away the property you have gained over time through exerting your energy and investing
your money. Think also of a reckless conduct that sets fire to a building in which you run
your business affairs which results in a looting of essential documents. I hope you openly
unwelcome such a situation. In the absence of law, persons might excessively and
arbitrarily behave and you would also be discouraged to undertake proper business
activities for fear of the risk of losing it someday. So, laws, especially criminal laws,
would become indispensable tools to stop unwelcoming conducts and to create peace and
stability for proper life of the society.
It is important to note that haw delves into almost every social interaction. It regulates the
way a particular relationship is to be created, maintained and broken. Law is not limited
to mere maintenance of peace and order; it also steps in to govern detailed individual
interactions. Laws of family for instance are concerned with the regulation of the
institution of marriage and matrimonial affairs. Contract and property laws administer
contractual bonds and property relationships of individuals respectively. Business laws,

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on the other hand, intend to shape behavior in commercial transactions and ensure the
interaction is conducted in healthy and effective manner.
Law protects citizens from arbitrary and excessive governmental actions. That body of
law which sets out structure of the state and the relationship the government of that state
would have with citizens is referred to as constitutional law. The powers and functions of
the government are usually defined by a constitution, and this law restrains undue
governmental encroachment in the affairs of subjects. Human rights provisions are
typical examples in this regard – that they call upon the government to either act or
refrain from acting in the protection and enforcement of human rights. Law of
constitution can function in such a way that the various organs constituting the
government discharge their tasks in an atmosphere of harmony and transparency. The
principle of checks and balances incorporated into most republican constitutions reveals
the possibility of review of actions or decisions of the legislative, executive or judicial
bodies by one another.
Laws are also instrumental in fighting harmful traditional practices (HTPS). Early
marriage has been the widespread practice in many parts of Ethiopia. Marriage is a big
affair upon which family, the fundamental unit of the society, is found. Yet, such purpose
is served only if spouses are psychologically and biologically developed enough. Ignorant
of such fact, most Ethiopian parents force their teenage children (especially girls) to
marry while they are in fragile mental and physical conditions, exposing them to various
economic, social and biological problems. The same is true of Female Genital Mutilation
(FGM). The law is a typical tool in reducing, and ultimately eradicating, these harmful
traditional practices.
Law also pays a prominent role in improving the life of the society through the
encouragement of innovation and creativity. Law encourages individuals to engage in
innovative tasks by granting them rights to exclusive enjoyment of their inventions via
issuing patents, copyrights, trademarks and the like. These mechanisms bestow inventors
and authors of new ideas with economic and moral benefits, thereby helping society to
make use if better means of life.
1.5. Classifications of Laws and Nature of Business Law
The body of law is huge. To study it one must break it down by means of classification.
Classification of laws is the systematization of the law based on the subject matter for the
purpose of finding the relevant law more easily and determining whether different legal
rules were required depending on their area of application.

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No single classification system can cover the large of mass of legal information.
Consequently, those systems that have been devised tend to overlap. Moreover, they are,
of necessity, arbitrary in some respects. A discussion of the best known classifications of
law follows.
Public versus Private Law
Public law addresses the relationship between persons and their government, and between
various governments. They are public in the sense that the interest of the public at large is
at stake as represented by the government. Criminal law and constitutional law, for
example, are generally classified as public law, because they deal with persons and their
relationships to government. Criminal acts, though they may involve only one victim, are
seen as offenses against the society as a whole and prohibited by governments for the
purposes of protecting the public. Constitutional law is a public law because it involves
question of whether the government (federal, state or local in a federal setting, or the
central government in a unitary system) has the power to act in a particular fashion. Often
the issue is whether a law or a decision of a governmental authority, duly passed and
made, exceeds the limits set on the government.
Private law governs direct dealings between persons. When persons deal or affect other
persons, such as in a contractual relationship, the law governing these relationships is
classified as private law. Private law may ultimately advance societal interests as a
whole, but its immediate concern is with individual transactions that affect the legal
positions of the transacting persons. Agency, law of commercial paper, trade and
business organizations, sales, torts, insurance and any other area of business law is
essentially classified as private law
Substantive and Procedural Law
Substantive law includes all laws that define, describe, regulate and create legal rights
and obligations. This body of law establishes acts and situations producing effect at law.
For instance, a rule stating that promises are enforced only when each party has received
something of value from the other party is part of substantive law. So, too, is a rule
stating that a person who has injured another through negligence must pay damages.
Most of the bodies of law we have highlighted above, both public and private, are
substantive laws. Substantive law tells us what our rights are.
Procedural law sets out the methods of enforcing the rights established by substantive
law. Questions about how a lawsuit should begin, what documents need to be filed,
which court will hear the suit, which witnesses can be called, how the judicial
proceedings is conducted, and so on are all questions of procedural law. In brief

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procedural law tells us how to exercise substantive heights. Civil procedure, criminal
procedure and evidence are typical examples.
Dear students, you have to bear in mind that the importance of the distinction between
substantive and procedural law is more than academic. This is so because the result of a
case may well depend upon the determination that the rule is substantive rather than
procedural.
Civil versus Criminal Law
Civil law is concerned with the duties that exist between persons or between citizens and
their government (the latter as a ordinary legal person), excluding the duty not to commit
crimes. Contract law, for example, is part of civil law. The whole body of tort law, which
has to do with the infringement, in the absence of contract, by the person of the legally
recognized rights of another is an area of civil law. Criminal law, in contrast to civil law,
is concerned with wrongs committed against the public as a whole. Criminal law is
always public whereas civil law is sometimes public and sometimes private. In a criminal
case, the government seeks to impose a penalty on an allegedly guilty person.
I hope you have understood the nature and purpose of the above classification attempts. I
would like you to have thorough look to the classification once again and identify the
position of our subject matter, business law. You see that the various areas of law that
greatly touch with business (such as contracts, partnerships, commercial instruments,
traders and business organizations, agency, sales and insurance) constitute the private
legal regime rather than public, substantive rather than procedural, and civil rather than
criminal.
1. Discuss why a consensual definition of law has been difficult and why the various
schools of legal thought diverge on the conception of law.
__________________________________________________________________
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_________________________________________________________________.
2. Identify the basic features of law first, and then outline features that distinguish it
from non-legal norms.
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__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
_________________________________________________________________.

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3. What specific functions does business law perform in the society?

__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
________________________________________________________________.
4. What is the difference between the positivist and the Marxist legal ideology?
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__________________________________________________________________
__________________________________________________________________
_________________________________________________________________.
5. Where do you find business law in the broader classification of law? Exhaustively
discuss all the appropriate places it may occupy.
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
________________________________________________________________.
6. Discuss the virtues of out of court settlement of disputes over court adjudication.
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__________________________________________________________________
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CHAPTER TWO
LAW OF PRESONALITY
This section introduces the basic concept in law – the law of persons. Here is where all
legal claims start and produce the intended legal effects. A student who successfully
completes the study of this part should be able to:
- distinguish the legal meaning of person from its literal meaning;
- explain the purpose of granting an individual or a fictitious being with
personality;
- discuss the acquisition and termination of personality;
- identify the attributes of personality;
- analyze capacity and incapacity of physical persons.
2.1. The Concept of Personality and its Effect
The term person in law is different from its conventional meaning. Personality in law
refers to the authority accorded to a being (individual or organization) by law so that the
latter would be able to enter into various transactions having effect at law. In other words,
humans and fictitious entities cannot perform juridical acts without being recognized as
persons before the law. In order to acquire rights and bear duties that are enforceable by
the machinery of a legal system, one needs to possess personality first. It is only beings
that are persons in the eyes of the law who can conduct legally binding transactions. The
term person in its ordinary sense refers to human beings only and not for any legal
purposes other than mere linguistic purpose. But for the purposes of the law, not only
individual human beings assume personality upon fulfillment of certain prescribed
conditions, but also artificial creations of the law are granted personality.
Personality is a fundamental concept in law because no dealings of legal significance

would produce effects without it. It answers the basic question who the subjects of the
law are. Only subjects of the law can enjoy the rights that the law confers upon them and
only they can discharge the duties it imposes upon them. Thus, the normal effect of
personality is the ability to be a party to legal transactions and perform various juridical
acts (acts having effect at law) having effect of law.
Personality is granted to two categories of beings and accordingly is of types. One is
physical or natural personality that is possessed by human beings. In the past, not all
human beings were subjects of the law. For instance, slaves were regarded as mere
chattels of their masters and did not have any rights or duties of their own. They were
objects of legal transactions rather than subjects of the law. So, during those times,
personality was conferred upon non-slaves. But these days, with the abolition of slavery

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and its strict prohibition, virtually all human beings possess personality and perform
juridical acts. The other type of personality is that accorded to beings that do not have
material existence. Associations, companies, organizations, partnerships, corporations or
even the state are only perceived by the law to exist. These fictitious entities are exclusive
innovations of the law and accordingly given personality because of the necessities of
modern complex legal transactions.
2. 2. Beginning and Termination of Artificial Personality

There could be numerous mechanisms through which moral persons will begin to have
legal life. Of these mechanisms, the famous ones are issuance of a specific legislation,
effecting registration and requirements of publicity. For instance, public enterprises will
start to have personality upon the enactment of establishment regulations with no other
conditions attached to it. On the other hand, private business organizations need to be
registered with a competent public authority in order to acquire legal personality. They
should also comply with publicity requirements. So, acquisition of personality by
business organizations is realized by meeting the requirements of both registration and
publicity, and only as a consequence of such they can validly undertake acts of civil life.
The same way personality begins will it mostly end. That is to say, just like artificial
personality commences through issuance of statutes or effecting registration and
publicity, it ends through the enactment of dissolving law or the striking out of name of
the entity from the public registry. To terminate the legal personality of a public
enterprise, regulations would be issued and these would serve the purpose of ending the
legal life of the enterprise. Ordinary business organizations would cease to have legal life
when they are canceled from the registry and/or through the revocation of the license
issued to them as evidence of personality. Artificial personality may also end as a matter
of fact where the object for which the entity is established becomes impossible to achieve
or where that organization is dissolved because of bankruptcy. In all the above cases, the
fictitious beings would die out and they can no more be parties to transactions having
effect at law. Any act done by these beings after their personality has terminated is
deemed never to have happened for all legal purposes.
2.3. Attributes of Legal Personality
Being recognized as a person by the law makes the person possess certain attributes. The
most noticeable of these attributes are given below.
i) Having a name: - It may be very simple to coin a name and call a certain being by
that. But names do really affect the legal position of a person because they are

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mechanisms of identifying the civil identity of a specific person in the society and of
legally conferring/imposing upon it powers and disabilities. Furthermore, since use of a
name can modify the legal status of a person, the law provides for protective mechanisms
against abuse and usurpation of the name by others. Generally, it is through name as a
manifestation of civil identity that a person in the eyes of the law can become a party to a
legal transaction, and thus it is a fundamental attribute of personality.
ii) To sue and be sued (in one's name):- To sue is to bring a legal action against another,
and, conversely, to be sued is to face a legal action brought against oneself by another.
In both cases, one attends a law court where rights and duties are often modified through
judgments. Because they involve alteration of one's legal position and determination of
liability, suits should be brought by and against the concerned person in its own name.
For instance, if three people (A, B and C) form a company and the latter has satisfied the
requirements of law for the acquisition of personality, it brings legal actions against
others in the name of the company and not in the name of the owners. Similarly, others
institute a legal action against the company in the name of the company and not in the
name of A, B, or C (the owners). Thus, a distinction is drawn between the liability of the
company and the individual persons forming it.
iii) Entering into contractual relations: - Since a legal person is an entity that can be a
party to legal transactions. It can enter into various contracts in its own name. A company
can conclude a contract with another company or with a human being, and the rights
acquired as well as the liabilities incurred because of the contract belong to the company
itself, and not to the owners. It is this legal person itself that is either the creditor or the
debtor of a third party.
iv) Ownership and administration of property: - A legal person can exercise all property
rights to the exclusion of others and enjoys ownership and administration right over all
chattels belonging to it. Property belonging to a legal person is distinct from the property
of its owners, i.e. they belong to essentially different patrimonies.
v) Obligation to pay taxes: - A legal person is liable to pay taxes on taxable benefits and
gains. Since it is authorized to own and administer property and since it can carry on
business, a legal person pays taxes on its property and income in the same way human
beings do.
While it is generally true that fictitious beings possess all the above features on their own
behalf, there are also some other points we need to take note of here. We know that moral
or juridical persons do not have a physical existence, and so they are without the natural
faculties of thinking, deciding or moving. That means they necessarily undertake through
human agents when they carry out the above affairs. They use human mind and decision

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when they coin the name by which they are identified; they bring suits and defend same
being represented by human beings; it is again human agents that exercise property
ownership and administration, and sign a contract on the behalf of the legal person. But
all such acts performed by the human agent through representation are deemed to have
been directly undertaken by the legal person, and the rights and duties arising there from
would bind the legal person and not the human agent. Individuals only facilitate
transactions and they then step-out of the legal consequences.
The conferring of personality upon moral persons and accordingly authorizing them to
own property and conduct business in their own name give rise to the concept of limited
liability. The fact that the property and patrimony of the legal person is distinct from that
of its owners means that the legal person is liable to the extent of its property only. The
liability does not extend to the property/patrimony of the owners.
2.4. Commencement of Physical Personality
Dear students, the personality of natural persons begins through a couple of ways. There
is a rule which is generally regarded as the starting point of personality, and there is also
an exception to such rule where personality commences. Discussion follows below of the
rule first and then the exception.
2.4.1. The Rule
Most legal systems accept birth as a time when personality of a human being begins.
Similarly, Art.1 of the Ethiopian Civil Code provides “the human person is the subject of
rights from its birth…” Birth refers to the complete extrusion of the baby from its
mother's womb either in a natural way or by a medical operation. In this sense, the
beginnings of natural and legal existence are simultaneous. Birth alone is a sufficient
condition to confer personality under the Ethiopian law, and no other requirements are
attached to it.
2.4.2. The Exception
Because personality begins at birth as a matter of principle, an unborn body is not a

person in the eyes of the law and can have no rights. But this general rule is excepted in
that personality may be granted to a merely conceived baby without waiting for its birth
for some purposes. As an exception, personality of a fetus should be restrictively

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construed and it is applicable only in certain circumstances. The circumstance generally
revolves around the interest of the unborn child. The law has invented this fiction only for
the purpose of enabling the child (if it is born) to take a benefit in all matters affecting its
interest. This conception is based on the justification that a child who has already lost its
father while being in its mother's womb should not be subjected to further pain of losing
a benefit which it would have secured had it been born before its father's death. So, when
there is an interest of the baby at stake, the unborn baby in the womb should be regarded
as already born and should be allowed to take advantage of the interest.
The granting of personality to a fetus is subject to compliance with three cumulative

requirements. According to Art 2 of the Ethiopian Civil Code, “a child merely conceived
is considered as though born where its interest so requires provided it is born alive and
viable”. Thus, the three conditions are: the interest of the child must justify the grant of
personality, the child must be born alive, and it must be viable. These conditions are
cumulative in the sense that the missing of one suffices to deny the fetus personality.
In most cases, the interest of the unborn baby comes into the fore where a father dies
before the birth of the child leaving behind property. If a baby has to wait until birth to
acquire personality, i.e. if Art 1 of the Civil Code is strictly applied, it will definitely lose
the succession to its father's property because succession constitutes a juristic act and
being a beneficiary when it opens necessarily requires personality. Opening of succession
is legally made at the death of the father and the property would devolve upon those
having the capacity and the right to succeed at such time.
It is to be noted here that the merely conceived baby will be given personality (before
birth) only for the purpose of the particular interest that called for the personality. That
means an unborn child would be recognized as person only to benefit from the interest at
hand, and it has to wait until birth to acquire personality for all other juridical acts.
Acquisition of personality for a particular interest does not entitle one to exercise it across
the board, and in effect personality at conception is significantly reduced.
Besides the interest of the child, there remain two conditions: alive birth and viability. In
order to be considered as a person, the baby must be born alive so much so that, for
instance, personality will never be granted if the fetus is aborted. Viability refers to the
ability to live or the potential of surviving. This is to exclude from the ambit of
personality impotent newly born babies or those incapable of surviving because of some
congenital factors.
The law takes certain presumptions to settle questions of what baby is viable and what is
not. The law irrebutably presumes that a child that lives for 48 hours after its birth is

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viable, so that no contrary evidence can be admitted to disprove this presumption. The
law also provides for another presumption in the negative that a child that dies before 48
hours after its birth is deemed to be not viable. But this presumption is rebuttable in that
it can be shown to the contrary by proving the child was viable. But we cannot challenge
the non-viability of the child by using deficiency in constitution as evidence. That is to
say, if a child dies before 48 hours following its birth due to a disease he caught in its
mother's womb or due to other congenital biological deficiencies, it will be conclusively
deemed not viable. However, external factors that may have caused the death of the child
before 48 hours can be used to disprove the presumption of non-viability. If, for instance,
the baby dies on the 43rd hour after its birth because of mishandling by nurses or by
hunger or due to a car accident that occurred while it was being taken home from
hospital, all such can be employed to challenge the above presumption by proving that
the baby would not have died had it not been for the extraneous factors..
2.5. Capacity and Incapacity of Physical Persons
Capacity is a natural consequence of being recognized as a person before the law and it
refers to the authority to enjoy and exercise rights and duties by oneself. However, even
if personality is a necessary condition for capacity, it is not a sufficient one to enable one
to personally carry out juridical acts and certain conditions may incapacitate an individual
still possessing personality. Capacity or incapacity is usually thought of regarding two
aspects: holding rights and duties, and exercising rights and duties.
The principle governing the holding of rights and duties by physical person is that as
soon as personality begins all rights and duties are held by an individual. This means that
as far as the holding or enjoyment of rights is concerned, capacity is not only the rule but
an absolute rule. It can be inferred from Art. 1 of the Civil Code that entitlement to rights
and duties under the civil law belongs to all individuals by the fact of birth without any
other condition attached to such holding.
Capacity is the rule even in the case of exercising rights and duties a physical person
holds. Since holding rights and duties is meaningless without the authority to exercise
same, the full exercise of rights and duties in principle coincides with their holding. In the
same way that all physical persons enjoy rights and duties, they are capable of exercising
the same by themselves. But in certain circumstances it deems compelling, the law may
explicitly declare that person is considered incapable to exercise rights and duties. Since
capacity is presumed in the exercise of rights and duties (incapacity is very exceptional),
the burden of proving the existence of incapacity falls on the party who claims the
incapacity. Thus, in all acts of civil life physical persons may be assumed that they are

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dealing with equals who not only hold but also exercise the same rights and duties as
theirs.
Dear students, you learned above that a physical person may be exceptionally enjoined
from personally exercising rights and duties because of existence of certain conditions
expressly recognized by the law. But even in such case, the prohibition is not total, i.e.
the person is not prohibited from exercising rights and duties altogether but only his
personal exercise is disallowed. He or she can still exercise rights and duties through
another person by way of representation. So, the effect of incapacity in exercising rights
and duties is that the exercise would be entrusted to a third person. Let‟s now see in brief
the legally prescribed conditions of incapacity and their corresponding representation
institutions. Some of the conditions are protective of the interests of the incapable person
(e.g. minority, judicial interdiction) while others are either preventive or punitive of
certain conduct (e.g. foreign citizenship, legal interdiction).
a) Minority: - Minority in civil law is an incapacitating condition that occurs because of

age. A person below the age of 18 years is called a minor and is incapable of exercising
rights and duties by him/herself. The law intends that these persons have immature
intellectual faculty and lack the proper degree of appreciation when they transact acts of
civil life. The law interferes to protect minors from exploitation by others. Accordingly,
any civil act undertaken by the minor without authority is subject to invalidation. A
minor may, however, validly perform acts of daily life, i.e. simple and small matters that
are quite frequently done and that do not significantly affect the legal position of the
minor.
There are two institutions of representation recognized by the law to exercise rights and
duties on the behalf of the minor. One is guardianship, which is entrusted with the task of
running the personality affairs of the minor. Personality interests include food, clothing,
shelter, and schooling, and generally refer to the proper physical and psychological well
being and growth of the minor. The guardian is responsible for such interests of the child.
The other representative institution is the office of tutorship. Tutor is answerable for the
protection and management of the minor's economic (pecuniary) interests such as
securing income, investing same, running business, administering property and the like.
The incapacity arising as a result of minority may terminate through a couple of ways. A
minor obviously assumes capacity to exercise rights and duties him/herself when he/she
attains the age of majority (18 years). The incapacity of a minor may also come to an end
through emancipation even if the person is still below the age of eighteen. A minor may
conclude marriage in exceptional circumstances approved by the appropriate public body,

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and we call this situation emancipation. This phenomenon suffices to end the incapacity
of the minor and releases him/her from the authorities of the guardian and the tutor.
b) Judicial Interdiction: - This is a court judgment that declares a person as incapable

because of mental conditions. The law steps in to protect the interests of persons with
deteriorated mental functioning as a consequence of insanity, infirmity, senility and the
like. Insane persons are believed to be unable to understand the nature and consequences
of their actions because they have got a mental disease. Infirm persons are those with
serious physical deformities so that such deformities will have the ultimate substantial
reduction in mental functioning. For example, if a person is simultaneously deaf-mute
and blind, he/she is deemed to be infirm. Senility is deterioration in mental faculty
because of old age. The court can declare the interdiction of the above persons with
mental deficiencies.
Judicially interdicted persons will lose the authority to exercise rights and duties as of the
date of their interdiction. But they, just like minors, exercise rights and duties they hold
through guardians if the interest pertains to the personality of the incapable and through
tutors where the interest is a proprietary one.
Note that the offices of guardian and tutor have certain general features in cases of both
minority and judicial interdiction.
1. The offices are compulsory – it is a civil duty to become a tutor or a guardian and
no consent is needed.
2. The offices are in principle non-remunerative. A guardian or a tutor gives the
service for free.
3. The tutor/guardian must be a capable person. It is clear that an incapable person
cannot exercise representing others rights and duties that he/she cannot personally
exercise.
4. The essence of the distinction between the offices of guardianship and tutorship is
the type of activity undertaken and it does not mean that two different persons
should hold the offices. Both functions can be assumed by a single person.
5. The offices are strictly personal in the sense that they cannot be delegated to the
exercise of third party or they cannot be transferred to next of kin through
inheritance.
c) Legal interdiction: - This is an incapacity imposed by the law. A person will be legally
interdicted as a result of the pronouncement of a legally prescribed punishment for the
violation of criminal law. The prescribed sentence will deny the person the capacity to
carryout economic affairs. A legally interdicted person retains capacity over his

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personality interests and thus no guardian is necessary. A tutor may represent the legally
interdicted person to exercise the latter‟s pecuniary rights/duties. The assumption of the
office of tutorship is, unlike that of minority or judicial interdiction, voluntary. The
evident reason is that a person who lost his privilege because of commission of a crime
should not be favored by compelling others to assume the role of tutorship on his behalf.
d) Foreign Nationality: - This is a special incapacity because a person is prevented from

exercising specified categories of rights. For instance, the law states that a foreigner
cannot take part in governmental administrations. Likewise, a foreigner cannot (whether
personally or through an agent) own an immovable in Ethiopia, nor can he enter certain
investment fields reserved to Ethiopians.
2.6. Termination of Physical Personality
Article 1 of the Ethiopian Civil Code also provides for the way personality of individuals
ends. It states that human person is the subject of rights from birth to death, meaning
personality ends at death. In this case too, natural death and legal death of a person are
co-existent.
Declaration of absence can, through interpretation, also result in termination of physical

personality. The law says that if a person's whereabouts are not known for a certain
period defined by the law, a judicial declaration of absence having the effect of death for
all legal purposes may be made. Among the effects of death are found the opening of
succession of the person and the remarriage of her/his spouse. But most importantly,
absence with an effect of death will end personality of the absence.
Review and Self-check Questions
1.Why is the knowledge of law of personality so important to a businessman or a

manager?
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
_____________________________.

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2.What are the differentiating points between artificial persons and physical
persons?
__________________________________________________________________
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__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________.
3.What is the effect of a civil act performed by a judicially interdicted person?

__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
_______________________.
4.Does the establishment of a partnership by, for instance, identifying the

partners, paying the capital and concluding the memorandum of association
mark the beginning of personality for that partnership? Why or why not?
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__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
_______________________________________.
5.Work out the following case by making correct reasoning:

A and B are spouses. They have a merely conceived baby who is expected to be
born after four months. On the last day of the sixth month of pregnancy of his
wife, Ato A, the husband, died due to car accident leaving behind a good deal of
property. The mother gave birth to a female baby who died only after 50 hours.
(a) When does the baby begin to have personality and for what purpose?

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_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_________________________________.
(b) Would there be a difference regarding personality of the baby if the father
10 hours after the birth of his child and the baby dies 20 hours later because of
deficiency in development? Explain.
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_____________________________________________________________________
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_____________________________________________________________________
___________________________________.

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CHAPTER THREE
THE LAW OF CONTRACTS
This area is crucial for businesspeople and managers. Contracts are matters of daily life
especially in commerce. Thus, the knowledge of fundamental principles of contract law is
of much help in commercial success. Dear students, as a business professional you need
to check yourself at the end of this chapter if you have attained the following.
- Discovering the nature of a civil obligation;

- Comprehending the essential principles of contracts;
- Identifying and appreciating the essential requisites in the formation of contracts;
- Noticing the effects of contracts;
- Exploring issues of performance of contracts;
- Explaining non-performance and identifying the remedies.
3.1. Some Remarks on Obligations
There are all sorts of obligations imposed upon human beings: moral, religious or social
duties. In the area of social obligations, a special category is that of legal obligations
which will have a binding effect as opposed to the category known as natural obligations
that are not compulsory or binding on the parties. Legal obligations can be further split
into penal and civil obligations. The specific concern here is with civil obligations
existing between private citizens.
Civil obligation is a general reference to juridical acts having distinct legal effects that
exist between two or more persons in their private relationships concerning something
that one party must undertake towards the other party. This sort of obligation involves a
legal tie between the persons it exists and it is fully enforceable by means of a legal
action under the protection and sanction of the state.
A civil obligation consists of a juridical relation between two persons, of whom the one
entitled to demand performance on the obligation is called creditor and the one who is
obliged to perform is called debtor. Thus, the obligation and its correlative right take the
name of debt and credit respectively. One of the parties occupies the active position of
creditorship and the other assumes the passive status of debtorship. Every obligation has
a corresponding right, but the nature of the right that corresponds to a civil obligation and
enjoyed by the creditor is particularly a personal right, i.e., it is a right against a
designated person(s) or a defined class of persons, as opposed to real rights which are

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enforceable against any one at all. An obligation exists between persons, be they physical
or artificial, while a real right involves the association of a person with a thing and the
person can pursue this thing into whosever hands it falls.
It is also the essence of obligations that that there is a cause from which the obligation
proceeds, persons between whom it exists, and something which is the object of it. The
sources of obligations are generally law and contract. In contract, the will of the parties
forms the basis of the obligation; in the absence of a contract, an obligation cannot arise
except by virtue of the law and therefore all non-contractual obligations have the law as
their sole source. The obligations originating exclusively from the law may be further
founded on civil wrongs or unjust enrichment. Thus, obligations usually emerge
contractually by the natural agreement of the parties and by the law when the legislator
provides so in particular cases of torts and unjust enrichment. But it is beyond the scope
of this study to discus non-contractual obligations and our focus is on contracts only.
3.2. Essential Notions of Contracts
Dear students, in this section I'll introduce you with certain fundamental quasi-
philosophical concepts of contracts including the definition given by the Ethiopian law.
You are strongly advised to exert your utmost effort to grasp these concepts because the
whole discussion of contracts centers upon these notions in one way or another.
The Ethiopian Civil Code, a systematized legislative document covering substantial areas
of the civil law, is predominantly influenced by the Romano-Germanic civil law tradition,
and accordingly shares much of the jurisprudential aspects of this super legal tradition
particularly in the area of contacts. The Civil Code's draftsmanship with a Romano-
Germanic jurisprudential background has established in contractual matters the theory of
the autonomy of will. This theory derives from the philosophy of economic liberalism,
and embodies three major consequences:
(1) Contractual freedom: there is no obligation to contract; the contracting parties

are free to determine the scope of their contract; there is no special form for
contracts because consent is sufficient.
(2) Enforceability of contracts: a contract has the force of a law between parties.
The contract is compulsory even for the judge as he has to decide disputes by
referring solely to the provisions stipulated by the parties in their contract.
(3) The relative effect of contracts: a contract has no bearing on third parties, or
parties outside that contractual engagement are unaffected.

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The above notions can be explained further by considering definitional attempts. There
are also other ideas related to contracts.
Contract is a binding agreement; it is a promise or set of promises for the breach of which
the law gives a remedy, or the performance of which the law in some way recognizes as a
duty. A comprehensive definition incorporating important elements is given under Art.
1675 of the Ethiopian Civil Code. It states “a contract is an agreement whereby two or
more persons as between themselves create, vary or extinguish obligations of a
proprietary nature''. The contractual elements that emerge out from dissecting the
definition and other related issues are stated below.
A) Contracts are agreements – they are based on compulsory exchange of consent. There
must be an agreement as to every aspect of the contract, and this agreement must be
meant to be legally binding. And, conversely, there are agreements which do not give rise
to a legal bond and therefore not contracts. For instance, acts of courtesy, a „„gentlemen‟s
agreement‟‟, a free performance of service, or even a consensual relationship between
neighbors to help each other, are not contracts even if they are agreements. Therefore,
we can conclude that while all contracts are agreements, the vice versa is not true.
B) A contract needs at least two persons for its existence – there cannot be a one-man
contract. The contract is not a unilateral legal instrument which is an expression of a
single person's wishes. Such matters as a will drawing an order of succession, the
acknowledgement of a natural child, or the resignation made by an employee are all
unilateral expressions of a person's intention to generate juridical obligations. But none of
these are contracts because a contract cannot emerge by a single person's actions;
contracts are bi-party juridical acts that exist between two persons to the minimum.
C) Privity – a fundamental aspect of contractual liberty is the concept of privity of

contracts. This is the principle of relative effect of contracts so much so that third parties
are not concerned by the contracts made by other persons. The phrase “as between
themselves” in the definitional provisions of the Ethiopian Civil Code reveals the concept
in that it is only parties to a contract who are entitled to the benefits or burdened with the
liabilities that arise from the contract, and not third parties. In this regard, a contract is
distinguishable from other collective legal instruments which may be imposed on persons
who did not take part in them. A decision taken by a general assembly of shareholders,
for instance, does create a binding obligation on the partners of the company through the
operation of the majority rule even though they had opposed the obligation. The basis of
a contractual obligation is the equality of the parties, an important aspect of which is its
affirmation of individual liberties. Thus, the right to enter into a contract is also the right
not to enter into a contract.

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D) The object of contracts is the establishment and performance of an obligation – an

obligation is a legal tie (as defined previously), an action of being bound by a duty, and
here it is a freely imposed or accepted duty. Being the instrumentality of establishing a
legal bond, entering into a contract entitles the contracting parties to claim the assistance
of public force, in the guise of the courts and their officials, to obtain the performance of
this contract.
E) Contracts can be concluded for the creation, variation and extinguishment of

obligations: An obligation may be created anew, may be amended in the course of its
performance, and finishes one day. These three purposes can be achieved by entering into
a contract in each case. The parties can, through the instrumentality of contracts, not only
create legal bonds that had not existed before but also vary existing contracts between
them or, if they want to, can totally extinguish obligation that had previously been in
existence.
F) Contracts strictly speaking only concern proprietary, or better, patrimonial issues:

they are legal means of modifying economic positions of persons – that is why the law
regards contracts as concerned with ''obligations of a proprietary nature''. Thus,
agreements in respect of personal status, such as consent to marriage, divorce, or
filiations, are not contracts because they are not pecuniary matters in their strict sense.
Agreements regarding personality obey different, special legal regimes. It does not mean
that certain patrimonial obligations do not derive from such status-bound situations, such
as the payment of alimony. But it means that they are not governed by the general law of
contracts.
G) There are conspicuously abundant types of contracts in economic interactions of

persons: For instance, we can consider the following lists (which is by no means
limitative):-
- Onerous contracts in which both parties undertake towards one another an
obligation (e.g. sales contract), and gratuitous contracts in which only one
of the parties undertakes an obligation towards the other party (e.g.
contract of donation).
- Adhesive contracts where one party can only accept or reject what the
other party proposes to him, and freely negotiated contracts.
- Private contracts where only the parties have signed, and authenticated
contracts concluded and registered before a court or a notary.
- Contracts in consideration of the personal traits of a contracting party,
and anonymous contracts which are '' personality trait'' free and standard
for any contracting party.

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We can cite numerous other examples of contracts that can be validly concluded.
3.3. Formation of a Contract
Dear students, I hope you have understood from the previous introductory part that
contracts emerge out from the free will of the contracting parties. But it may be the case
that such free will would be exercised improperly so that the economic interest that is the
subject matter of a contract may be prejudiced. A party may enter into a contract because
the other party may have improperly induced him to do so. So, there are two interests at
stake here: one is that free will must be reasonably made and must be legitimate in the
circumstances; the other is that the formed contract should be enabled to produce the
economic effect it was intended for.
A striking balance between the interests is reaches by the law through the imposition of
certain non-derogable requirements in contractual undertakings. There is a vested interest
for the law, being cognizant of the possibility of abuse or prejudice of freedom to contract
and of the significance of contracts as instruments of economic performance, to intervene
in contractual affairs and set certain standards. The law regulates contracts in two ways.
On the one hand, there are provisions of the law that are deemed mandatory such as those
regarding formation of contracts from which contracting parties cannot deviate because
of the need to ensure the free exercise of contractual liberty and due to public policy
reasons. On the other, the law provides for permissive rules that serve the purpose of
filling the gap that may be left by the contracting parties – parties are free to determine
whatever they like on such regard but the law steps in so as to fulfill the contract should
the parties fail to do so. Accordingly, the law has regarded formative requirements as
essential and, therefore, compulsory upon the parties to comply with. You‟ll learn about
these essential requisites of concluding a contract in the sections that follow.
Article 1678 of the Ethiopian Civil Code states that no valid contract shall exist unless:-
a) the parties are capable of contracting and give their consent sustainable at
law;
b) the object of contract is sufficiently defined, and is possible and lawful;
c) the contract is made in the form prescribed by law, if any.
Four mandatory conditions are evident in the provision above: capacity, consent, object
and formality. Let's turn ourselves on to briefly exploring their nature and scope.

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3.3.1. Capacity
Much is said on legal capacity of a person to perform juridical acts. As contract is a

juridical act, remembering what is discussed in the foregoing chapter enables you easily
understand requirement of capacity in the formation of a contract. The law of contracts
itself does not address the issue of capacity, which means it suffices to look into the
general rules of capacity we addressed in the precious chapter.
It is fairly enough to reiterate here that either because the person has to be protected
(minors, judicially interdicted persons) or because he undergoes a prohibition (legally
interdicted persons, foreigners) the law decides that they cannot enter a contract. They are
incapable of binding themselves to somebody else. But if they do conclude a contract, the
sanction is the nullity of the contract as claimed by a person whose incapacity is proved.
3.3.2. Consent
Consent is a defect-free mutual agreement by the contracting parties. It is a manifestation

of freedom of contract, and therefore is the basis upon which rests the entire law of
contractual obligations. Consent carries a double aspect: first, the parties must agree on
the scope of their undertaking (there must be an agreement on each and every important
detail) and, second, there must be a willingness on the part of the contractants to make
their undertaking legally binding. It is only when this double condition is present that the
effectiveness of the binding nature of the obligation is guaranteed by the civil law.
The existence or otherwise of these aspects and their consequential bearing on the
validity or otherwise of a contract is to be scrutinized by judges taking into account the
circumstances of the case. Regarding the first element, for instance, the court is to
examine whether or not all details are essential in that lack of consent on one detail might
render the whole contract ineffective. Certain details may be insignificant so that the
presence or otherwise of consent will not have a bearing on the contract as a whole and
on the overall status of the contracting parties. Furthermore, the parties need not
necessarily express certain details in their contract so much so that one should not hastily
conclude these details are totally omitted from the contract and no corresponding consent
is given. The mere absence of some details does not mean that parties have not consented
to them, for consent is broad enough to be said existent having regard to custom, equity
and good faith.
The element of intention to be bound is an important psychological aspect that relates to

the contract as a whole. It refers to the state of mind of the contracting parties to cerate a

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legally binding instrument. The mutual assent of the parties is deemed to have final legal
force only if it is accompanied by a genuinely made intentioobligandi(intention to be
bound). Mere intention to be bound existing only in the subjective state of mind of the
parties does not suffice for the purposes of the law. An intention which is not expressed
in the contract makes the ascertainment of its existence by the courts very difficult as the
determination of a state of mind of a person is so complex a matter. The law requires the
intention to be bound to be declared so that the willingness of the parties is externally
manifested and this is deemed to simplify the work of the courts and to reduce the
possibility of disputes. Whether the declaration of intention is express or tacit is not a
question here, but only whether the declared intentioobligandi can be objectively
established. Further analysis of how consent is to be expressed is given below.
3.3.2.1. Offer and Acceptance
Ordinarily, mutual assent is evidenced by a contractual offer and acceptance. One party
offers a certain bargain to another party, who then accepts that bargain. The parties are
required to manifest to each other their mutual assent to the same bargain. A contract is
therefore the meeting of the offer with an acceptance.
The two stages of offer and acceptance are sometimes much more slow to develop into a
final contract. There may have been a number of exchanges between the parties where
conflicting offers and acceptances were exchanged over a period of time and where,
during the negotiation process, an agreement was achieved only on certain terms and not
on others. The meeting of the consent of the parties may be fragmented over time before
all these part agreements finally come together to form a global contract. Regard is to be
had to the final offer and acceptance that truly manifests the mutual consent of the parties
for it is only a finally made offer and acceptance that bind the parties.
Offer
An offer is a firm and definite (precise) proposal made by the offeror (the party who takes
the initiative to conclude a contract) to enter into a contractual engagement regarding a
particular subject matter. It expresses the willingness of the offeror to create a binding
obligation. Three elements are necessary for an offer to be effective at law: serious
intention(firm proposal), certainty or definiteness, and communication.
An offer is firm when the offeror has a serious intention to become bound by the offer.
But such serious intent is not determined by the subjective intentions, beliefs, and
assumptions of the offeror. It is determined by what a reasonable person in the position of

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the person to whom the offer is addressed would conclude the offeror's words and actions
meant. Offers made in obvious anger or undue excitements do not meet the intention test.
Because these offers are not effective in the eyes of the law, acceptance does not create a
contract. For instance, suppose A and B ride every morning to a school in A's 50,000 Birr
worth car. One cold morning, both persons get into the car, but A cannot start the car. A
yells in anger that he will sell the car to anyone for Birr 10,000. The next morning B
brought 10,000 Birr to take the car. Given these facts, a reasonable person, taking into
account A's frustration and the obvious difference in value between the market price of
the car and the proposed purchase price, would declare that his offer was not made firmly
and that B did not have a contract.
There are various proposals that are not legal offers. The concept of firm intention can be
further clarified by distinguishing between offers and numerous kinds of non-offers. As
such, social invitations, expressions of opinion, or statements of motive all do not
evidence an intention to enter into a binding agreement. If someone invites you to a
dinner and later on tells you that he has cancelled the invitation because he has got
another appointment, you can't invoke the law of contracts to enforce the promise
because such social relationships are not normally intended to be legally binding.
Suppose again that you wanted a doctor to operate on your broken legs, and the doctor,
after making the operation, tells you that your legs would probably heal a few days later.
If your legs do not heal after a month, you can't win a suit against the doctor for breach of
contract because the doctor did not make an offer to heal your legs in two or three days
but merely expressed an opinion as to when the legs would heal. Likewise, if A says he
plans to sell his stock in XYS.C. for Birr 5000 per share, a contract is not created if you
accept and tender the 5000 Birr per share for the stock. A has merely expressed his
motive to enter into a future contract for the sale of the stock, and no contract is formed,
because a reasonable person would conclude that A was only thinking about selling his
stock, not promising to sell.
Another obvious non-offer category is constituted by advertisements, catalogues, price

lists and circulars. In general, these cases are treated not as offers to contract but as
invitations to negotiate. For example, a seller's price list is not an offer to sell at that
price; it merely invites the buyer to offer to buy at that price.
In preliminary negotiations, a request or invitation to negotiate is not an offer. It only

expresses a willingness to discuss the possibility of entering into a contract. Similarly,
when construction work is to be done for the government and private firms, contractors
are invited to submit bids. The invitation to submit bids is not an offer, and a contractor
does not bind the government or private firm by submitting a bid. (But the bids that the
contractors submit are offers.) In some cases, what appears to be an offer is not sufficient

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to serve as a basis for the formation of a contract. Particularly problematic in this respect
are “offers” to sell goods at auctions. In an auction, a seller 'offers' goods for sale but this
is not a contractual offer. Instead, the seller is only expressing a willingness to sell. The
seller can withdraw the goods at any time before the sale is closed by announcement or
by knocking down of the auctioneer's hammer, unless the terms of the auction are
explicitly stated to be without reservation (in which case the seller is obliged to accept
the highest bid). In principle, there is no obligation to sell, and the seller may refuse the
highest bid. The bidder is actually the offeror and the contract is formed when that bid is
formally accepted.
The second requirement for an effective offer involves the definiteness of its terms. An
offer must have reasonably definite terms so that a court can determine if a breach had
occurred and can provide a remedy. Courts are authorized to supply a missing term in a
contract when the parties have clearly manifested intent to form a contract. If, in contrast,
the parties have attempted to deal with a particular term of the contract but their
expression of intent is too vague or uncertain to be given any precise meaning, the court
will not supply a reasonable term, because to do so might conflict with the intent of the
parties.
A third requirement for an effective offer is communication of the offer to the offeree,
resulting in the offeree's knowledge of the offer. Ordinarily, one cannot agree to bargain
without knowing that it exists. Uncommunicated offer is no offer at all. The offer must
also be addressed directly to the offeree (the person to whom the offer is directed for
his/her consideration) so much so that if the offeree learns of the offeror's intentions from
some other source, no legal offer results because no offer has been communicated. The
manner of communication need not necessarily be in writing or oral; the law recognizes
even signs and conduct as legitimate media for communication of an offer in so far as
there is no doubt as to the making of the offer.
Once an offer is properly made and made known to the offeree, it will be binding on the
offeror. The offeror cannot engage in activities that negate the offer, and his consent has
the force of law upon him.
Termination of Offer
An offer addressed to the offeree does not remain in force indefinitely. It will cease to
have a binding effect, and the offeror would be released from the legal bond. An offer
terminates generally by the action of the parties or through the operation of the law.
i) Termination by the Action of the Parties

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An offer can be terminated by the action of the parties in any of three ways: by
revocation, by rejection or by counter-offer.
(a) Revocation: - refers to the offeror's act of withdrawing an offer. Revocation
becomes effective where it is communicated to the offeree before the offeree
knows of the offer. Revocation practically operates as a mechanism of
terminating offers especially where there is a time between the making of the
offer and the knowledge of the offeree. Thus, revocation of an offer sent to the
offeree through post can be made by using a faster means of communication
(such as telephone) so that the offeree knows of the withdrawal notice before he
does of the offer. In so far as it carries with it the test of offeree's first knowledge,
revocation may be accomplished by express repudiation or by performance of
acts inconsistent with the existence of the offer, which are made known to the
offeree.
(b) Rejection: - this is the act of the offeree to terminate an offer. The offeree is free
to accept or reject the offer. If he elects to reject the offer and communicates same
to the offeror, the offer comes to an end even though the period for which the
offeror agreed to keep the offer open has not expired.
(c) Counter-offer:- A rejection of the original offer and the simultaneous making of
a new offer by the offeree is called a counter-offer. It is required that the offeree's
acceptance should match the offeror's offer exactly. Any material change in, or
addition to, the terms of the original offer automatically terminates that offer and
substitutes a counter-offer. The counter-offer, of course, need not be accepted; but
if the original offeror does accept the terms of the counter-offer, a valid contract
is created (Art 1694 of the Civil Code).
ii) Termination by Operation of Law
The power of the offeree to transform the offer into a binding legal obligation can be
terminated by operation of the law through the occurrence of the following events: lapse
of time; death or incompetence of the offeror or the offeree.
a) Lapse of time: - An offer terminates automatically by law when the period of time
specified in the offer has passed. Such is the case with offers in which a time-limit has
been stipulated. The time-limit specified in an offer normally begins to run when the
offer is actually received by the offeree, not when it is sent or drawn up. When the offer
is delayed (e.g. through misdelivery of mail), the period begins to run from the date the
offeree would have received the offer, but only if the offeree knows or should know that
the offer is delayed.

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If no time for acceptance is specified in the offer, the offer terminates at the end of a
reasonable period of time. What constitutes a reasonable period depends on the subject
matter of the contract, business and market conditions, and other relevant circumstances.
An offer to sell farm produce, for example, will terminate sooner than an offer to sell
farm equipment because farm produce is perishable and subject to greater fluctuations in
market value.
b)Death or Incompetence of Either party: - An offeree's power of acceptance is

terminated when the offeror or offeree dies or is deprived of legal capacity to enter into
the proposed contract. An offer is personal to both parties and cannot pass to the
descendant‟s heirs, guardian, or estate. Furthermore, this rule applies whether or not the
other party had notice of the death or incompetence.
Acceptance
Acceptance is a voluntary act by the offeree that shows assent to the terms of an offer. It
refers to the pure and simple agreement given by the offeree to the offeror. In other
words, acceptance must be absolute and unconditional in the sense that one must accept
just what is offered. This is the mirror image rule which requires acceptance to mirror
(reflect back) the full images of the offer. So, acceptance must unequivocally conform to
the terms of the offer; it must agree in the manner, at the place, and within the time set
forth in the offer. If the acceptance is subject to new conditions or if the terms of the
acceptance materially change the original, the acceptance may be deemed a counter-offer
that implicitly rejects the original offer.
Acceptance must be communicated, and, conversely, uncommunicated acceptance is no

acceptance. Just as for the offer, the communication of acceptance does not call for any
special formality. The only requirement, similar to the case of offer, is to have no doubt
as to the intention to undertake an obligation. Thus, acceptance can be communicated
expressly or tacitly. The express acceptance may be oral or in writing. The tacit
acceptance results from signs normally in use or conduct such that there is no doubt as to
consent. The above lenient approach to form of acceptance is, however, excepted where
the offeror stipulates a special form of acceptance in the offer. Such a specific term is
deemed to be part and parcel of the offer itself, and therefore acceptance, by definition,
must conform to the special form demanded by the offer. If, for example, the offer states
that acceptance is to be made in writing, the offeree is deemed not to have accepted the
offer purely and simply if he communicates his assent orally or through conduct.
Dear student, do you think acceptance can be effectively made when the offeree keeps
silent? Silence is a borderline and problematic concept with regard to acceptance and

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communication thereof. “Silence” in the legal sense of the word has to be defined. It
should not be confused with the simple absence of verbal or written expression, because
an outward behavior other than speech can be equivalent to a tacit acceptance. In other
words, silence is the total absence of any form of expression, be it verbal, written or
behavioral.
The grand rule is that silence does not constitute acceptance, and this is set out in Article
1682 of the Ethiopian Civil Code. This principle has a logical explanation deriving from
the basic ideal of contractual liberty. If silence is to amount to acceptance, a converse
situation that imposes upon offeree to resort to mechanisms of express rejection is
created. This would make life unbearable for all of us, who are constantly subjected to a
stream of unsolicited offers. It would place the burden of evidence of rejection on the
client and be unreasonable. It in effect means that freedom not to contract is significantly
restricted and creates insecurity. Thus, to protect contractual freedom, which also
includes a freedom not contract, it is traditionally established that silence cannot amount
to acceptance and that some form of outward expression is needed.
The above traditional rule is, however, not without exception. According to Art.1683 of
the Civil Code, certain persons are required by law or by concession to conclude certain
contracts on terms stipulated in advance with any one who makes an offer to them. The
explanation of this exception goes like this. Certain activities may constitute public utility
and are indispensable for the descent life of the community. Moreover, it is probably the
case that these activities provide limited or no alternatives, and perhaps monopolistically
held, with the consumer of such goods or services vulnerable to denial of consumption.
The modern conception of the duty of the state requires the latter to supply “public
utility” services to citizens. The state discharges such function through granting certain
economic operators the privilege to undertake the activities, and at the same time
imposing upon them the duty to accept any offer from the public, by either a special law
(e.g. establishment regulations for Ethiopian telecom) or a concession concluded between
the government and a private company.
The protection accorded to the public lies in the fact that the terms of the would-be
contract are fixed in advance by the relevant law or contract of concession. There is no
negotiation possible; it is a contract of adhesion for the client (consumer) and an imposed
contract for the supplier of the service if forced to accept clients. It is also noteworthy
that although the supplier of the service, the terms of the contract may not necessarily be
profitable for the client. Since the law or concession requires the offeree to accept the
offer, silence in such a case clearly amounts to an acceptance. The moment at which the
contract is concluded is upon the receipt of the offer. It must be stressed that the contract

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is thus concluded through an offer, and not through the acceptance. This means that not
only does silence not reject an offer but also acceptance is not necessary.
The second exception to the general rule that silence does not amount to acceptance is
provided by Art.1684 of the Civil Code in cases of pre-existing business relations. This is
a concern of contracting parties who have pre-existing or ongoing business relations and
have previously concluded a contract. If one of the parties proposes the renewal of an
expired contract, the modification of an existing contract or conclusion of another
contract supplementing the first, silence on the part of the other party results in
acceptance. To be a bit specific, for example, an offer to enter into a subsidiary contract
that supports the previous contract or to conclude a complementary contract that
addresses a lacuna or omitted element from the first contract, can be accepted through
silence. Nevertheless, in respect of offers relating to pre-existing business relations and
their silent acceptance, the law additionally imposes the observance of certain formalities:
the offer must be made in a special document stating expressly that the offer will be
considered accepted if no rejection is made within a specified time, or absent such time,
reasonable period of time. A „special document‟ is a document which is specific to the
contract and to the party concerned, and cannot be a general document sent to every body
every time. This shows that the law is taking a cautionary approach in derogating from
the principle of silence as not constituting an acceptance by adopting a restrictive
application of the exception.
In connection with this question of silent acceptance, the law also addresses issues of
invoices (Art.1685) and general business terms(Art.1686). An invoice is merely a
supportive document drawn up by the seller and addressed to the buyer evidencing the
delivery of goods in a sales contract. It may be the case that the invoice contains terms
not agreed upon by the parties. The law thus, having regard to the unilateral drawing up
of the invoice, declares that particulars entered into an invoice are acceptable only if they
conform to a prior agreement or if they have been expressly approved, and they cannot be
accepted through silence. Regarding general terms of business, very often a trader drafts
his terms of business for all futurecontracts by using a special pre-written form, stating
various specific clauses which he wants because they are in his interest. Conversely, such
clauses are not at the advantage of the other party, who is not necessarily a trader. Such
contracts of adhesion frequently give cause for suspicion, and the law has rightly
provided that such clauses would be inadmissible unless they are expressly known and
approved by the other party, or unless they are prescribed or approved by the public
authorities.

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A timely and definitive acceptance completes the contract. The issue as to when and
where the contract is fully created can be easily settled if the parties are present because
no difference would be there in place or time of offer and acceptance. A difficulty would,
however, arise if the contract is to be entered into between absent parties. The parties will
be at different places and they may enter into a contract using certain media of
communication. Determination of place of formation of a contract is important because it
solves the problem of, for instance, jurisdiction, applicable law and form of the contract.
Ascertainment of the time when the contract begins to have a legal force where a time-
gap exists between offer and acceptance settles issues relating to rate and amount of
contractual interest, limitation of actions, and transfer of ownership, amongst others.
For absent parties who conclude a contract by sending a letter using the mailbox, Art
1692 (1) of the Ethiopian Civil Code provides that the time and place of conclusion of the
contract is when and where the offeree sends his acceptance. The date of contract will be
the date of expedition of the acceptance, and it‟s popularly known as the theory of
emission or the dispatch theory. Certain legal systems prefer the time and place of
reception by the offeror of the acceptance; this is the theory of reception. The solution
afforded by the dispatch theory advantages the accepting party because in case of a
dispute it will be his local court that exercises jurisdiction and his local law that applies.
The situation is slightly different if the absent parties intend to conclude a contract over a
telephone conversation and fail to specify the place of the contract. Art 1692(2) states
that the contract shall be deemed to be made at the place where the person was called.
Here, the place chosen is not the place from where a party sends his acceptance, but the
place where he was called, i.e. the place chosen by the caller. It seems that the caller is
the offeror and the person who is called is the offeree. Finally, even if the law has not
expressly covered other modern means of communication such as faxes and internet
mailing, we can extend the provision on telephone call to these cases because of their
substantial similarity to phone call.
One point finally should be noted: termination of acceptance. Even if we have said above
(especially dispatch theory) that the making of acceptance completes a contract, Art.
1693(2) opens a right for the accepting party to withdraw his acceptance. The timely
withdrawal of an acceptance amounts to destroy a contract which was validly formed
unlike the case of withdrawing an offer. Timely withdrawal of acceptance that terminates
the binding effect of the contract is that made before the acceptance reaches the offeror,
in which case one could say that the theory of reception is reborn in respect of the
withdrawal of an acceptance.

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3.3.2.2. Vices of Consent
Vices of consent are defects that vitiate the validity of consent so that consent fails to be
given freely and in full knowledge of the obligations. The theory of the vices of consent
has to answer a double and, to a certain extent, contradictory requirement. Its objective is
on the one hand to ensure justice by avoiding that persons are trapped against their will
by given contractual obligations. On the other hand, it is necessary to ensure that
contracts concluded do remain secure – too liberal an approach of the possible defects of
contracts would bring about a great measure of legal uncertainty. Article 1696 provides
for a classical list of defects in consent – mistake, fraud and duress. The law also adds to
the above traditional “vice of consent” category the borderline problems of
unconscionable contracts. While the vices of consent proper address a psychological
issue, unconscionability is an economic vice consisting in the discrepancy between the
real value of the obligations subscribed and their contractual valuation. Art. 1710 of the
Civil Code provides for a different nature and scope in the case of unconscionable
contracts.
The sanction of a vice of consent is relative nullity. This means that where it is
established, this type of contractual defect may only be raised by the person it intends to
protect. If the contract is voidable, it remains that this must be decided by a court ruling,
and the mere fact that the vice exists does not automatically nullify the contract.
1. Mistake
A mistake is ordinarily understood as an erroneous belief in the truth of a situation or in

the existence or otherwise of something, when in fact the contrary is the case. In its legal
context, there are certain qualifications attached to mistake and only certain types of
mistake are admissible in order to avoid too much contractual insecurity. Mistake
constitutes a vice of consent, and therefore a ground for nullifying a contract, only when
it bears a double, cumulative nature. These natures are, first, the mistake must be
decisive, and, second, it must carry on a fundamental element of the contract.
Decisiveness is a subjective test that requires the mistaken party to establish that he
wouldn‟t have entered into the contract had he known the truth or reality. But this must
be a credible belief, and not an unbelievable mistake. Decisiveness is not sufficient on its
own, and an additional objective criterion is inserted to evaluate mistake as a contractual
vice, i.e., it must be fundamental. An element of contract is to be regarded as an
important component of the agreement if it relates, for instance, to the identity or
qualifications of the parties, the object of the contract, the cause of the obligation and the
like.

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I) Mistake as to the Nature or Object of the Contract
An admissible mistake may relate to the legal nature of the contract. A buyer thinks that
he concludes a sale of a house, while he ended up in concluding only a lease contract.
This is a fundamental mistake and can be regarded as vice of consent. Mistake as to the
object of a contract is taken to refer to a situation where the extent of the performance
promised by the party is substantially greater or the extent of the benefit expected by the
party is substantially smaller than what he truly wanted. The issue is generally about the
determination of the scope of the performance.
II) Mistake as to the Person
In this case the mistake carries either on the identity or on the qualifications expected of
the other party. The identity or qualification has to be a necessary element of the contract
either in general opinion or having regard to the circumstances. For example, if A wanted
to make a deal with a famous musician who entertains his guests at a party, and if he later
on discovered that the contracting party has the same name but nothing to do with the
famous artist, the mistake becomes fundamental. Likewise, if a person intends to
conclude a contract for the construction of a house with a highly educated civil engineer
but mistakably reaches an agreement with uneducated construction worker, there is a
mistake as to the qualification of the party and as such fundamental.
Some mistakes may be non-essential in that they can be either neglected or corrected, and
the contract remains valid. Mistake regarding motive of the contractant is non-
fundamental and does not give rise to the invalidation of a contract because motive is
something kept in the mind of party and not communicated to the other. Arithmetical
errors also produce the same effect (do not invalidate a contract); they are simply
corrected rather than invalidating the contract.
A claim of mistake to invalidate a contract is subject to the requirement of good faith. A

contracting party who made a mistake cannot base his defense on it in a manner contrary
to good faith. The contract remains unaffected should the other party wish to have the
contract implemented by making the mistake good. The bad faith of the mistaken party is
most appropriately sanctioned.
When a mistaken party invokes a mistake and succeeds in invalidating the contract, he
has to make good the damage that may be sustained by the other party. The mistake
normally evokes from the claimant, and the other innocent party should not suffer from

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his mistake – of course unless the other contracting party knew or should have known of
the mistake.
2. Fraud
Fraud is another vice recognized by the law vitiating the consent of a contracting party.
Although it is a tort, it also affects the genuineness of the innocent party‟s consent to a
contract. The transaction is not voluntary in the sense of involving mutual assent. When
an innocent party is fraudulently induced to enter into a contract, the contract normally
can be avoided because that party has not voluntarily consented to its terms. Normally,
the innocent party can either rescind the contract and be restored to his/her original
position or enforce the contract and seek damages for any injuries resulting from the
fraud.
Dear student, having said this as an introduction, let‟s turn ourselves to the substance of
fraud, i.e. the question of what really constitutes fraud in the eyes of the law that entitles a
party to avoid effects of a contract. But remember that we are not here to deal with every
detail concerning fraud but only the major ones. The important elements of fraud under
the Ethiopian law are deceitful practices, intent to deceive, and the innocent party‟s
justifiable reliance on the fraudulent practice. Thus, mere false statements intended to
deceive the other party to enter into a contract do not constitute fraud because they lack
“deceitful practice”. Likewise, deceptive silence (non-disclosure of facts) would not
amount to fraud. With regard to false statements and silence, every person is expected to
exercise care and judgment when entering in to contracts and the law will not come to the
aid to one who simply makes an unwise bargain. Exceptionally, however, the making of
false statements and failure to disclose important facts constitute fraud if the parties have
a relationship of trust and confidence, called a fiduciary relationship. In such a
relationship, if one party knows any facts that materially affect the other‟s interests, he
must disclose them, and, similarly, a party must refrain from providing a false statement
that materially affects the other party. An attorney, for example, has a duty not only to
disclose material facts but also to make truthful disclosures to a client. Such relationships
include those between partners in a partnership, guardians and wards, employers and
employees, and the like.
In the absence of the above relationships of trust and confidence, no false statement or
silence would constitute silence. There must additionally exist a “deceitful practice” that
requires certain acts or conduct of the faulty. For instance, if the used car salesman
manipulates the odometer, i.e. the car accessory showing the number of kilometers the
car has so far traveled, so that it shows 50,000 km instead of the real 150,000 km, he has
engaged in a deceitful practice to encourage the buyer in thinking this is a car with few

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kilometers, and so in a better condition – and more expensive. If, however, the salesman
says that the car has traveled 40,000 km but did not manipulate the odometer, it is a
simple lie (a mere false statement) and the client can check easily, and therefore no fraud
is committed.
The presence of knowledge on the part of the faulty party that facts have been falsely and
deceitfully represented it also an essential element of fraud. Guilty knowledge signifies
that there was intent to deceive and hence fraud, and it could be committed intentionally
or negligently. In the absence of a negligent or intentional state of mind, it is difficult to
conceive of a culpable conduct constituting fraud.
Finally, fraud is completed when an innocent party justifiably relies on the trick designed
by the other party. If a deceitful practice thoughtfully made can be easily detected, one
cannot be justified in relying upon that practice. Fraud is deemed to exist and constitutes
a defect in consent not merely by resorting to a practice with intent to deceive but when
accompanied by the corresponding reasonable absence of knowledge on the part of the
contractant affected.
Dear student, so far attempt is made to highlight upon the fraud committed by one
contracting party against the other. What if the fraud is committed by a third party, a
person who is not a party to the contract? One must first mention to eliminate the case
where a fraud is committed by the person legally representing the contracting party, i.e.
where an agent commits a fraudulent act in the course of concluding a contract as part of
his agency authorization. In such a case, at least in respect of the plaintiff (the person who
claims fraud has been committed against him), the perpetrator is the person represented.
Apart from such, the fraud committed by a third party and not by a contracting party has
no incidence on the validity of the contract. This is normally justified by the principle of
privity of contracts. The exception to this rule is where a party to the contract knew or
should have known of the contract. This helps the victim to avail him/herself of a covert
agreement between the party and the third party to set up the deceit.
The normal consequences of fraud are invalidation and the claim of damages. Fraud
vitiates consent and results in a relative nullity of the contract – the contract will be
invalidated when a fraud is claimed and established by the affected party and where the
court declares the invalidation. But because fraud necessarily entails fault, the duty of
making damages good is perhaps another logical sanction. The victim of the fraud can
also claim the payment of damages apart from or in addition to invalidation. If the party
who is the author of the fraud sustains damage because of invalidation by the innocent
party, he cannot claim damages because it was him who voluntarily created the fraud and
hence the risk of damages.

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3. Duress
Duress is an even more pressing problematic factor that can be legitimately said to have
vitiated consent of a contracting party. It involves conduct of a coercive character, that is,
assent to the terms of a contract is not genuine if one of the parties is forced into
agreement. Forcing a party to enter into a contract by threatening the party with a
wrongful act is legally defined as duress. For example, if A threatens to harm B or his
family unless he (B) signs a promissory note for the money that B owes, A is guilty of
duress.
Duress is authored by a person and directed against the other. It cannot be said, for
instance, that duress exists where a party was forced to contract because of general
circumstances, such as when he had to sell his house because of the continuous decrease
in price, or because of natures forces, as when he was forced to buy new sheet of metal to
replace the roof destroyed by a storm. In other words, the vice of duress may only be
established where the plaintiff (the person who claims his consent is vitiated by the
duress) proves the intention of another person to put him under pressure to enter the
contract.
The threat need not necessarily be physical; it could also be psychological in the sense
that it may be directed against the honor or reputation of a contracting party. Again,
duress is recognized where a threat of physical or moral harm is directed against a
contracting party‟s nearest relatives – ascendants, descendents and spouse. Duress does
not have to necessarily emanate from the other contracting party himself; it may be
evoked by a third party out of the contract. What is important here is that a force that
vitiates the consent of a contracting party is applied by another party, whether this other
party is the contracting party or not. Thus, the law regards as duress a threat of harm
against contracting party‟s (or his ascendants‟, descendants‟ or spouse‟s) life, person,
property or honor by whoever it might be inspired.
Duress should meet the requirements of „seriousness‟ and „imminence‟ in order to be

effectively invoked to invalidate the contract, according to the reading of Art.1706 of the
Ethiopian Civil Code. Seriousness refers to the gravity of the danger posed that would
suffice to compel a person to conclude a contract, and it would be determined by the
court having regard to the circumstances of the case. A danger is said to be imminent
when it is on the verge of materialization or where there is almost no time gap between
the communication of the threat and its projected materialization. Hence, there is no
duress if a party signs a contract under a pressure that is fixed to happen several months
later. Generally, duress must impress a reasonable person so that the existence of duress

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is determined by the consideration of what a reasonable man would have felt in the same
circumstances. This objective standard of reasonable person is, however, variable in
respect of the identity of the victim of duress. The duress is differently appreciated
having regard to the age, sex and condition of the person. Thus, under this subjective
evaluation stage, an old sick person will be considered more influenceable than a healthy
adult, a pregnant woman more than the single woman, minors in their early teens more
than a person in his late twenties.
There are certain borderline cases where one cannot surely say duress exists. One is a
special form of threat, that of exercising a right. In such case, a person uses a legitimate
right to force the other to conclude a contract. Generally, the threatened act must be
wrongful or illegal in order to be regarded as duress. Threatening to exercise a legal right
is not ordinarily illegal and normally does not constitute duress. Suppose that A injures B
in a car accident. The police are not called. A has no insurance for his car, but he has
substantial assets. B is willing to settle the potential claim out of court for 5,000 Birr,
which A refuses. After much arguing, B loses his patience and says, “If you don‟t pay me
5000 Birr right now, I‟m going to sue you for 15,000 Birr”. A is frightened and gives B a
promissory note for 5,000 Birr. Later, A refuses to make payment. B comes back to sue A
for the 5,000 Birr. Although A argues that he was the victim of dress, the threat of a civil
suit is normally not duress. However, this is not the case of the right is abused to gain
undue advantage from the circumstances, such as, in the example above, when B
demands A under the threat of reporting the incident, which is also a crime, to the police
to sign a promissory note for 50,000 Birr while he has sustained only a minor injury. If B
succeeds in forcing A, A can later on claim duress.
Another borderline case is reverential fear, where a person has a great respect for
another, for instance, vis-à-vis an ascendant or a superior. In fact there is no threat or
action from the ascendant or superior but simply the consequence of the normal relation
between two persons bound by this type of relationship. Entering into a contract as a
consequence of such relationship is in principle not a ground for invalidating a contract.
But if such a relationship gives rise to that of trust and confidence between the parties,
and the other party knowingly gains excessive advantage out of the contract, the party
with the „fear‟ can claim invalidation of the contract.
Economic need is generally not sufficient to constitute duress, even when one party
exacts a very high price for an item that the other party needs. If the party exacting the
price also creates the need, however, economic duress may be found.
At last, we come to a very peculiar scenario which is significantly related to duress and
the above borderline cases – unconscionability. Of course, the principle in a liberal

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economy embodies that each party to an onerous contract (a contract concluded for
consideration) will try to gain the best advantage. So, the simple fact that the contract is
unbalanced and burdensome to one party is not, as a rule, a vice of consent. But public
policy does exceptionally require that there be some limit on the power of individuals and
businesses to dictate the terms of contracts. The Ethiopian law also decides to limit the
liberal approach in favor of weaker parties who have in fact been exploited. The purpose
of legislative interference here is to avoid cases if unconscionability by entitling the
economically exploited party to invalidate the unconscionable contract.
Unconscionability exists, and invalidates a contract, subject to the satisfaction of three
conditions:
- the existence of “substantially more favorable” advantage to the stronger party;
- consent induced by the want, simplicity of mind, senility or manifest business
inexperience of a contracting party;
- justice requiring the invalidation of the contract.
Although judges have a wide discretionary power in the appreciation of issues of

unconscionability, the cumulative existence of the above three factors is deemed
sufficient for the invalidation of the unconscionable contract. Here, there are certain
terms used by Art.1710 (2) as elements of unconscionability that need to be defined.
‟Want‟ is a situation where a person lacks a commodity, in a somewhat less stringent a
manner than the state of necessity. “Simplicity of mind” may refer to a minor form of
mental illness or, even in the absence of such an illness, the state of mind of a young
and/or an uneducated person. One can describe „senility‟, in the context of
unconscionability, as the degradation of mental capacity, which has not yet reached the
stage of judicial interdiction. Finally, “manifest business inexperience” is about
understanding a person who has no trading experience whatsoever, i.e. the law authorizes
the judge to appreciate the economic exploitation that may be faced by a party manifestly
lacking experience how to deal with economic transactions.
3.3.3.Object of Contracts
Dear learner, you have studied the first essential elements to have a valid and binding
contract; you have also seen the void ability of a contract formed without complying with
those elements. These are capacity and consent of the contracting parties. This part
introduces you with a third essential requisite for the formation of a valid contract. To
remind you once again of the provisions of Article 1678 of the Civil Code, “no valid
contract shall exist unless the object of the contract is sufficiently defined, and is
possible, and lawful …”
By “object” one must not be confused with a thing, movable or immovable, concerned by

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the contract. The expression “object of the contract” as employed by the Ethiopian Civil
Code refers to the obligations undertaken by the parties in a given category of contract. In
a typical sales contract, for example, the payment of the price by the buyer and the
delivery of the good by the seller are the objects (obligations) of the contract. The object
of the contract is thus the legal result which the parties wish to achieve.
The freedom of contract is still upheld so that the parties are free to determine the
obligations in their contract. Parties have the right to define the nature and scope of the
obligation they subscribe. But, failure to define the object is a critical defect, and makes
the contract void and null. If the object is present, it should be determined or at least
determinable. The principal faculty of determination of the object of a contract resides
with the contracting parties themselves, but lacunae (gap) left by parties may be filled by
making a reference to custom, good faith and equity. Generally, object must be
sufficiently defined or determinable in order to create a valid contract.
The object (obligation) undertaken in the contract may take one of three broad forms: to
do, to give, and not to do. In obligation to do, a party undertakes to act in a way required
by the other. Such obligations are themselves divided into two sub-categories. One is
obligation of result in which a definite end is to be achieved under the contract, and the
other is obligation of means in which a party undertakes to do his/her best to achieve the
result without guaranteeing the achievement of an outcome. In obligation to give, a party
undertakes to transfer a right (such as full ownership) on a thing to another party. Finally,
obligations not to do are negative obligations that require a party to refrain from acting
some way. Any obligation in respect of all the above scenarios needs to be defined with
sufficient precision.
In addition to its sufficient definition, object of a contract must be possible of execution.

A contract which is impossible to perform cannot be enforced. Thus, if the parties
stipulate an obligation that is impossible at the time of the conclusion of the contract, the
contract is deemed as if never created. Nevertheless, the impossibility must be absolute
and insuperable. An absolute impossibility is one which is general and is the same for
any contract in the same circumstances. An insuperable impossibility is one which is
completely impossible for anybody, or one which is humanely impossible to achieve.
Again the impossibility need not necessarily be physical; it can also cover situations of
legal impossibility. For instance, it is legally impossible for a person to buy through a
contract a thing which is already his property.
An equally indispensable requirement with regard to object of a contract is that it should

be lawfulandmoral. An unlawful or immoral object nullifies a contract, for it is self-
contradictory for the law to recognize as legal instruments contracts with unlawful

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obligations. For example, an agreement for murdering a person cannot be legally
enforced for its object, i.e. homicide, is a crime under the criminal law. In addition to
legality, obligations should pass the test of morality. More often than not, law and
morality overlap so that what is immoral is also illegal, and there is a strong ground to
make the contract void. Sometimes, however, what is immoral may not be illegal. In this
case immorality suffices to nullify the contract. For example, prostitution is not illegal
but immoral in Ethiopia. So, an agreement of doing sexual intercourse for payment
cannot be legally enforced for the object is immoral. The case of unlawful or immoral
motive must be clarified here. Motives to enter into a contract are very private to the
contracting party, and therefore are difficult to ascertain, and thus they are not taken into
account to determine whether a contract contains unlawful or immoral object. But if the
motive is manifested directly or implicitly in the contract, it will be taken into account to
determine the unlawfulness or immorality of the object. For instance, if it is declared in
the contract of sale of a knife that the buyer wants to use the knife for stabbing someone
else, the contract is void because the motive shows an unlawful object, i.e. stabbing.
3.3.4. Form of Contracts
Form is the outward appearance of the contract, and so the way the will of the parties
becomes apparent. There are two extreme scenarios with regard to formality requirements
– formalism and consensualism. Consensualism bases the contractual form solely in the
partner‟s consent, which can be purely tacit in so far as it signifies the declaration of will.
Formalism on the other hand will only acknowledge a contract where an exterior, visible
sign is made so much so that actual will of the party will be regarded as secondary in so
far as the contract is expressed in a certain way.
Consensualism has the virtue of stressing the individual person‟s freedom to contract.
Not only is it, this context, a form of human rights in economic affairs but it is also
cheap, fast, simple and the manifestation of society of equals. Excessive formalism in
contracts is burdensome and costly because it calls for the intervention of legal
professionals or generates administrative fees and taxes at the expense of the contracting
parties. It can also be abused by parties in bad faith who try to manipulate formal defects
when they have no substantive defenses to support their claim. But formalism is not
without merits. It protects parties from acting too fast, without thinking about their
commitments. Forms tend in contemporary legislative acts to protect the weaker party in
a contract, because very often there is an economic imbalance and parties are in fact
unequal. A well employed form is a good preventive weapon against disputes, and its
precision can greatly help the judge easily settle any litigation which may arise.
The Ethiopian law takes a middle position compromising between the dangers of

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excessive formalism and advantages of relative consensualism. In pursuance of this,
Article 1719 of the Civil Code provides that no special form is required of parties when
they conclude a contract and consensualism is upheld in principle. But the law imposes a
certain formality requirement. In addition, parties can impose upon themselves the
compliance with a certain form. In both exceptional cases, formality must be observed
and parties are not free to set aside the prescribed formal requisite. Strict compliance with
a legally or contractually stipulated formality is a validity requirement (ad validitatem)
and sanction for the non-observance of such requirement is the absolute nullity of the
contract. The question of validity is a more fundamental a matter than the dictation of
form to provide proof of the contractual obligations, i.e. ad probationem, because it is
concerned with the very existence of the contract. Thus, failure to comply with the
exceptionally imposed formality requirements would render a contract null and void.
Dear student, we shall now see some specific cases where the law imposes a formality.
But first remark must be made of contracts made in writing. Written contracts must be
signed by all the parties for signature signifies the individualized consent of a party.
Again, they should be attested by at least two witnesses, or in some cases they may be
alternatively authenticated by a public authority.
One of the formality provisions (Art.1721) states that a preliminary contract has to be
concluded in the form of the main contract. Let‟s assume that A, residing abroad, wants
to conclude a contract of insurance with an insurer in Ethiopia and intends to authorize an
agent, B, to make a deal on his behalf with the insurer. The contract of agency concluded
between A and B is a preliminary contract because it paves the way for the conclusion of
the contract of insurance, the main contract. Now if the insurance contract is made in
writing, the contract of agency must also be made in writing. Art 1722 requires contracts
for the variation of a contract to be made in the form of the main contract, i.e. the varied
contract. The main contract‟s form thus extends to contracts made after its conclusion. In
the two cases above, the law intends to ensure consistency of form between essentially
related contracts concluded between the same parties.
Another contract in respect of conclusion of which the law demands a special formality is
that relating to immovable. Contracts concerning immovable include sale, mortgage,
usufruct, lease, and partition amongst other things. All such contracts relating to
buildings and land have to be concluded in writing and need to be registered with the
authorities. Immovable property involves huge capital and the law imposes a written and
registration formality to ensure security of transactions regarding such an important asset.
Again, contracts to which a public administration is party must be made in writing and be
registered with a court or notary. The state and its administrative departments are

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guardians of the public interest at large and therefore must conduct their operations
within an atmosphere of transparency. And transparency is best guaranteed if affairs are
documented. So, we can see the advantage of imposing a writing formality whenever the
state and its organs become parties to contracts.
The law also demands a formality requirement with regard to contracts that last for a
longer period of time. It is obligatory that a contract for a longer period of time be made
in writing. The reason for such a requirement is obvious: unwritten agreements may not
be easy to prove as witnesses may die, human memory may fade away as time passes. In
order to avoid possible future dispute, the law rightly requires contracts that work for
long period of time to be made in writing. For example, contract of insurance is given in
the illustrative list of contracts for a longer period given by the law, for it stays for a
relatively longer time. Employment contract made for an indefinite period of time also
constitutes such a category. So, both insurance and employment contracts need to be
made in writing.
3.4. Effect of Contracts
The general effect of a validly concluded contract is its legal enforceability. Once they
have created a contract between them following legitimate formation requisites, parties
are obliged to comply with the terms the breach of which would entail a legal liability.
Thus, as clearly stipulated under Article 1731 of the Civil Code of Ethiopia, the terms of
a contract shall be binding on the parties as though they were law. A party cannot
unilaterally change his mind with regard to a contract created by the mutual consent of
the contracting parties. Contracts are the law of the parties from which derogation is
disallowed and, as the famous English saying goes, a man’s word his bond. They are
binding not only on the parties but on the judge himself (the adjudicating organ) in the
sense that the judge will give effect only to the validly made terms of the contract
whenever a dispute appears before him.
A contract may contain ambiguous provisions; it may also have terms that apparently
conflict with each other. These problematic terms may not be sufficient to invalidate a
contract or otherwise render it ineffective. Here the court is authorized to remedy the
defective terms through interpretation having regard to the common intention of the
parties, custom, good faith and equity. But if the terms of the contract are clear even if
they may appear to be unfair, no interpretation is allowed. The judge cannot create a
contract for the parties under the guise of interpretation when the terms are clear, for this
amounts to binding parties with an obligation they have not intended. So, a validly
formed contract will be legally binding on the parties to the extent clearly spoken by its

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terms or to the extent substantiated through interpretation by courts if the terms happen to
be unclear.
3.4.1. Performance of Contractual Obligations
Performance is the execution of the obligation as per the terms of the contract. In the
normal course of things, a contractual obligation is to be discharged through
performance. Indeed performance is the purpose for the contract is formed in the first
place, and is deemed to be the natural consequence of a contractual engagement. It is to
the interest of the law to see contracts to hit their target, and it accordingly provides for
the mechanisms of ensuring such performance.
(a)Performance: by Whom?
Who makes the performance is an important question because it helps to identify person
obliged to perform a contract and to inform him of the consequences of his performance.
The obvious answer to the above question is that the debtor is the one who is demanded
to make performance. But performance can be validly made by anyone authorized by the
debtor, by court or by the law. The debtor may authorize an agent to carry out an
obligation. Likewise, a court appointed tutor can discharge an obligation on the behalf of
a judicially interdicted debtor, and legal heirs can execute the debts of their deceased
relative if they accept the succession. So, in principle anyone can perform the contract,
and normally there is no difference whether the contract is performed by the debtor
himself or by a third party.
Nevertheless, personal performance by the debtor may be an essential element of the

contract. In such case, no valid performance is made unless discharged by the debtor
himself. It is of a special interest to the creditor that performance be made by the debtor
himself. For example, employment contract by its nature needs performance by the
employee himself. The employee cannot delegate his job to someone else because
personal discharge is of special interest to the employer. But generally, where the
personality of the contracting party is not important a contractual obligation may be
performed by any third party.
(b) Performance of Whom?
This question is concerned with the party entitled to receive performance. Normally
performance can be made to the creditor or a third party authorized by the creditor, by the
court or by law. Performance made to unqualified person is invalid in the eyes of the law.

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For instance, a legally incapable creditor cannot receive payment personally, and such
payment shall not be valid unless the debtor shows that the payment has benefited the
creditor; the burden of proof is on the debtor. The debtor has to take utmost care when he
makes the performance; otherwise he is obliged to face the risk of double (second)
payment.
Even though as a rule payment made to a person unqualified (unauthorized) to receive on

behalf of the creditor is invalid, it becomes exceptionally valid if the debtor shows that
the payment has benefited the creditor, if the creditor confirms the payment or where it is
made in good faith to a person who appears without doubt to be the creditor. The
performance is deemed to be made the advantage of the creditor where there is a practical
enrichment or increase of his estate. With regard to the validity of a performance made to
persons who undoubtedly appear to be creditors, appearance does not mean physical
resemblance but rather it refers to a person who appears to be authorized to receive the
payment. The debtor is discharged with respect to the true creditor if the pays in good
faith to a person who has no right to receive but who unequivocally seems to be the
creditor. This can be particularly exemplified when the debtor makes the performance to
an apparent heir because of death of his real creditor.
When there is doubt as to who the true creditor is, the debtor may refuse to pay and
release himself by depositing the amount with the court. For instance, where there is a
litigation going on among the would-be creditors which the debtor knows and makes the
performance to one of the claimants, he does it at his own risk (he will bear the risk of
second payment).On the other hand, where the case is pending and the debts due, any of
the persons who hold themselves out to be creditors may require the debtor to deposit the
amount with the court.
(c) What Things (Goods or Services) are to be offered in Performance?
The provisions of Article 1745 underline the requirement of identity of the object offered
in performance with what was agreed in the contract. Contracts are laws for the parties,
and what must be offered is exactly what they have agreed. A contracting party cannot
discharge his obligation by offering his creditor something else than what he promised,
even if the other thing is of an evidently greater value than the thing agreed. This way,
the law gives priority to the compliance with the agreement between the parties rather
than the value of the thing.
Logically enough, the creditor is also entitled to refuse partial performance. This is
grounded on the idea that the creditor may not be forced to grant the debtor an extended
delay for performance. And conversely, the debtor is obliged to make partial performance

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if part of the debt is contested. The debtor must pay the non-contested part, pending
dispute on the contested part, and cannot delay its payment until the dispute is resolved.
The situation may be a bit complicated where the obligation is made regarding fungible
things. Fungible things are those things that can replace each other without causing
substantial difference, or things that are described normally in generic terms. Coffee and
crops are good examples. Questions of quality and quantity might arise at the moment of
performance of the contract. If the parties have specified the thing or expressly agreed on
the quality and quantity of the thing, that must be complied with. But in the absence of
such an express stipulation, the debtor is given a right to choose the thing to be offered in
performance. But the thing chosen by the debtor must be of at least average quality; he
can‟t offer in performance a thing of lesser value. But overall, slight variations in quality
(average or stipulated in the contract) or quantity must not be refused by the creditor. The
creditor can either proportionately reduce hisown performance or claim indemnity for the
slight variation. The purpose of such a provision is to ensure that a maximum number of
contracts are performed in the interest of a dynamic economy, and, conversely, that
parties avoid taking the pretext of smallest non-conformity to nullify contracts.
(d) Place and Time of Performance
If the parties determine the place of performance, their agreement is respected. But where
no place has been agreed, a permissive provision of the law stipulates that performance
shall take place at the place where the debtor had his normal residence at the moment of
concluding the contract. This general rule is excepted regarding specific things. If no
agreement is made to the contrary, performance in respect of a definite thing shall be
made at the place where such thing was situated at the time when the contract was
concluded.
Similarly, the time of performance can be agreed upon by the parties. Where there is no
such time-limit is stipulated in the contract, performance would be made forthwith
(immediately). There is no problem if the debtor performs the contract immediately after
its formation. But the creditor demands performance from the other party after lapse of
reasonable time. The creditor can oblige the debtor to perform the contract when he
benefits by a time-limit or after he performed or offered to perform his obligations
towards the debtor.
(e) Other Issues Related to Performance
A question may arise as to the currency of payment regarding the performance of money
debts. As a rule, money debts are discharged in local currency, in the currency that is the

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legal tender of the country where payment is to be made, even if the amount is stated in
the contract in a foreign currency. Still parties are at freedom to reach an agreement to the
contrary, or to exclude the making of payment in local currency. Sometimes parties may
leave price for determination by reference to an index made up of certain goods or
services without indicating a specific amount of currency. This is indeed a usable and
frequent technique which enables one to take into account monetary instability and
inflation.
The issue of interest and its rate is also an important matter in performance of contractual
obligations. The Ethiopian Civil Code under its Article 1751 provides that the legal rate
of interest that is to be paid on a debt is 9% unless the parties expressly stipulate a
different rate. Even if parties can stipulate interest and fix its rate in their contract, they
cannot fix the interest rate higher than 12%. Twelve percent interest rate is a maximum
rate over and above which a crime of usury is committed. In case parties fail to provide a
rate or fix it above 12 %, the legal interest rate ( 9%) is due on the debt and is payable.
To what obligation does a given payment apply? This question arises in case several
debts are due in a contract and the amount the debtor provides for payment is insufficient
to cover all the debts. A given contract may give rise to costs, interests and the principal
debt, and all such obligations may mature to be discharged. If the amount available for
payment is inadequate to pay-off all the debts, determination of the order of payment
becomes an important matter. The law lays down a rule that a partial payment is used to
cover first costs, then the interest due, and finally the principal debt. This solution is
intended to favor creditors in that they will get paid first the accessory elements of the
debt and they will be enabled to gain extra payment as potential interest on the remaining
main debt.
Performance of contractual obligations usually entails expenses. Any accompanying cost

while performance is made is to be covered by the debtor himself. As a rule, the duty to
perform a contract and the bearing of costs of the performance are essentially related
matters and are therefore naturally attributed to the debtor, the party who is obliged to
perform the contract. But the contracting parties can agree on who bears the expenses of
performance and such agreement will be effected without having regard to the
supplementary provisions of the law on the issue at hand.
3.4.2. Non-performance of Contracts
Non- performance of a contractual obligation refers to the breach or the non-compliance

with the promise made in the contract. The breach of a contractual obligation exists when
a party totally fails to carry out the obligation, if he makes fundamentally defective

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performance, or makes a delayed performance. The cases of defective performance (e.g.
partial performance) and delayed discharge are to be closely scrutinized to decide if they
really constitute non-performance.
Dear student, we have time and again said that contract is the law of the contractants and
will be indeed legally binging on them. That‟s to say, no party can unilaterally disregard
a contractual obligation and act as they wish. The binding nature of a contract is
manifested by the legal liabilities imposed on the defaulting party in the event of its
breach. There are remedies available to the victim of the breach and, at the same time, the
defaulter cannot go with impunity.
The remedies of non-performance at the disposal of the creditor are not usually to be
claimed immediately after the expiry of the time fixed in the contract. The remedies
usually overlook normal performance because they are based on the failure of the
performance. But contracts are created to be discharged through normal performance and
the law declares its utmost intention to ensure performance of the contract. Therefore, the
creditor is supposed to comply with a procedural requirement before he rushes into the
legal solutions. The procedural device is the giving of a default notice, so called because
it is made after the normal performance failed and is directed to the failing party. The
debtor may have simply forgotten the performance of the contract, or he may fail to
perform because of some personal problems. Rushing into legal remedies not only
defeats the purpose of the contract but frustrates innocent debtors and thereby jeopardizes
the smooth relationship between the parties. Thus, the law rightly requires awakening or
reminding the failing party to perform the contract by giving him a chance through a
default notice. The notice helps one to determine if a debtor is willing or able to perform
the obligation.
The rule is that default notice is given before resorting to the legal remedies in cases of
non-performance. But exceptionally the giving of default notice may become
unnecessary. Below follows the brief overview of cases where the creditor can resort to
remedies of non-performance without placing the debtor in default.
The obvious case is the contrary agreement of the parties. Like many other legal
provisions, the rules of contract law that require putting debtor in default are suppletory
(permissive) so much so that parties can expressly exclude the necessity of giving default
notice. This means that the non-performance of a contract entitles a creditor to directly
avail himself of the legal remedies.
A slightly different scenario is presented where the date of performance is compulsory or

essential. If the debtor fails to perform the contract on such date, no need of giving a

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default notice. In illustration of this, suppose A concluded a contract of hiring of Velo (a
bride‟s clothing) with B for her sister‟s marriage. The date of marriage is scheduled for
April 25, 2008 and B did not deliver the Velo on that date. The time of performance is
very compulsory and is indeed essential so that the delivery of the clothing after the
scheduled date is purposeless. Delivery on that very date has become an essential
requisite of the contract and no performance can be effective after such date. A is free to
claim the remedies of non-performance without the need to put B in default.
Where the obligation required of the contracting parity is not to do and the party breaches
this duty by doing (acting otherwise), the creditor of the assumed obligation cannot be
obliged to notify the defaulting party. The debtor has resorted to a conduct that he was
supposed to refrain from under the contract, and notifying him of his violation is
pointless as the risk that the contract intended to prevent has already materialized. If, for
example, X concluded a contract not to compete in business with Y and if X later on
enters competition with Y, no default notice is necessary and Y can directly invoke the
remedies of non-performance.
Default notice is also not necessary where a debtor has declared in writing that he would
not perform his contractual obligation. The purpose of notice in the first place is to
remind the debtor to perform the contract. So, requiring notice while the debtor is clearly
refusing performance does not serve any purpose.
So, what are these remedies that are to be claimed for non-performance either after giving
notice or immediately where notice is unnecessary? Under the Ethiopian law, the other
party can demand the following according to the circumstances:-
 Specific performance, or
 Cancellation of the contract by court or by himself, and
 Damages caused to him by non-performance be made good
(Article 1771 of the Civil Code).
The first two remedies, i.e. specific performance and cancellation, cannot be claimed
together for the invocation of one would naturally exclude the other. A party invoking
specific performance cannot at the same time invoke cancellation and vice versa, because
the two do not go together. But damages can be claimed in the absence of either of the
other two, or in addition to either of them. In other words, the claim for making damages
good can be lodged with either specific performance or cancellation.
3.4.2.1. Specific (Forced) Performance

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When a debtor fails to perform his obligations, the first legal remedy available to the
creditor is to request the court to force the debtor to perform. Specific performance as a
legal remedy is not something always awarded to the creditor whenever he demands it.
The law states that forced performance of a contract shall not be ordered unless it is of a
special interest to the party requiring it and the contract can be enforced without affecting
the personal liberty of the debtor. Thus, forced performance is the outcome of two
cumulative conditions: Special interest of the creditor and execution without encroaching
the personal liberty of the debtor. If either of these conditions is missing, forced
performance cannot be had.
It may be said that the forced performance of the contract is essential to the creditor if he
cannot enter into another similar contract or if he does not have alternative mechanism of
fulfilling his wish. For instance, if A agreed with B to sell an object that is not found
anywhere else and if B highly needs the thing, B can claim the forced performance of the
contract in the event A fails to carry out his contractual obligations. But, if B can get the
thing somewhere else even for substantially higher price, he can‟t seek specific
performance. He can however claim the difference in price to be compensated by the
debtor.
Personal liberty is a constitutional right (indeed a human right) that is internationally

recognized and protected. So, it cannot be restricted by contractual engagements under
the guise of forced performance. The non-performance of a contract is a breach of civil
obligation and has got a monetary correspondent. Personal liberty is a fundamental
human right that cannot be alienated from a person and cannot have a pecuniary value.
Thus, non-performance of a contract and personal freedom of an individual are two
separate and extremely disproportionate interests, and the occurrence of the former
cannot in any way affect the later. For instance, A concludes a contract with B, a singer,
to entertain customers at his grocery. B fails to show up for the performance. Now A
cannot claim the forced performance of the agreement by B because this affects B‟s
personal liberty. It has the effect of forcing B to personally appear on the stage and
perform without his will, and this undoubtedly denies B of his liberty.
3.4.2.2. Cancellation
Cancellation is another remedy of non-performance available to the creditor. One has to

distinguish cancellation from invalidation and termination of contracts. Both cancellation
and invalidation presuppose a problem with the contract – the former involves non-
performance and the latter arises in contracts with defective formation. But termination is
a defect-free mechanism of extinguishing contractual obligations by the mutual
agreement of the parties. The effect of invalidation and cancellation is the reinstatement

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of the parties to their former positions. The parties are as far as possible to be restored to
the economic status they would have assumed had they not entered into the contract. All
the three have one thing in common: they are instrumentalities of extinguishing (breaking
a legal bond) obligations between the parties.
Cancellation as a remedy for non-performance is in principle declared by the court. But

as a matter of exception, it can also be unilaterally declared by the parties, usually the
creditor. We will see the two one by one below.
i) Judicial Cancellation – This refers, as just highlighted above, to the situation that the
judiciary (the court) is vested with the power to render a final and definitive declaration
of cancellation producing full legal effects. The purpose of submitting cancellation to the
judiciary stems from the very sanctity of contractual obligations. It means that the
contract is the law of the parties and they must do their best to maintain the contract
rather than demean it by being able to escape its imperative provisions too easily. The
non-performance of the contract must therefore be of some importance before it is made
to result in the cancellation. There are certain borderline cases which may be easily
remedied to uphold the contract such as partial performance, defective performance and
delayed performance. All these considerations explain that cancellations call as a rule for
judicial decision, and that the court is never compelled to sanction contractual defaults by
ordering cancellation. Thus, the submission of a cancellation case to the court helps to
avoid the rush to create contractual instability by the parties and to make only warranted
cancellations.
However, there are guidelines which the court takes into account while examining a
cancellation case that the law has devised to minimize the subjectivity in judicial
discretion. The guidelines include interest of the parties and the requirements of good
faith, and the breach of fundamental provision of the contract. The court must see to it
that the cancellation is consistent with the interest of the parties and that it is demanded
by good faith considerations. The „fundamentality‟ of the breach needs to be proved in
the sense that the non-performance affects the very basis of the contract which would
have led a reasonable person not to enter a contract.
ii) Unilateral party cancellation – Even though the value legally attached to discharge
through performance and, if that fails, to cancellation by the judiciary is great, there are
certain obvious breaches of a contractual obligation that do not need ascertainment by a
court. In such cases, policy dictates that the party himself should be able to cancel the
contract. These exceptional scenarios are geared toward the prevention of prolonging the
inevitable – circumstances so obvious that there will be no reason for the court not to
grant cancellation and that unilateral cancellation saves the time, energy and resources

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consumed by waiting for court disposition. The law has expressly stipulated these cases,
as they are exceptions after all. They are stated below.
a) Essential date of performance: - This describes the circumstance whereby

the performance of the contract on a stipulated date is so essential that
failure of performance on such date renders the contract to that party
useless as there is no opportunity for making second performance.
Consider, for instance, that A and B concluded a contract for rental of car
for a wedding. If B fails to provide the car on the wedding day, then
performance will no more be important for A because the wedding day is
an essential date of performance for him, which has already passed.
b) Expiry of time limit: - This entitles a party to unilaterally cancel a contract

where a fixed, rigid time for performance has been specified and
performance has not taken place within this time. Three situations may be
identified here. One is expiry of a contractually fixed compulsory date of
performance. The second pertains to the failure to make performance
despite the sending of a default notice specifying a final time-limit for
performance. The third and the last is about the lapse of time limit fixed in
the grace period that is granted by the creditor or by the court. The expiry
of all these time stipulations entitles the creditor to cancel the contract
himself without the need to go to the court for same.
c) Anticipatory breach: - This happens where the defaulting party

unequivocally declares to the other party that he will not perform the
contract. A refusal communicated to the other party in writing entitles
such party to declare the unilateral cancellation of the contract even if the
communication is made before the arrival of the due date of the obligation.
This is an alternative available to the creditor; he can use other remedies
(forced performance) instead if he wants.
d) Impossibility of performance: - It refers to the situation where a specific

subject matter that was essential to the performance of the contract has
perished. The impossibility that is relevant here is subsequent
impossibility; original impossibility is excluded because a contract with an
impossible object is void in the first place.

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3.4.2.3. Damages
Dear student, we have said that an aggrieved party can claim the alterative remedies of
forced performance and cancellation in the event of non-performance of contractual
obligations. But it does not stop there. There are likely damages sustained by a party
because of the failure to discharge the contract by the other party. Damages may be due
whether or not the other remedies are claimed. Thus, damages may be awarded even
along with a claim for specific performance.
a) Nature of Contractual Damages
Contractual damages are characterized by the absence of a fault requirement. That means,
the plaintiff is not expected to prove the fault of the defendant in order to obtain damages
and the defendant cannot exculpate him/herself by establishing his faultlessness. This is
different from the nature of tortuous damages which are fault-based as a rule.
However, the defendant is entitled to assert the defense of force majeure if the non-
performance is the result of force majeure, the party will be released from the payment of
compensation for the resulting damage. Force majeure is a circumstance that is
unforeseen and makes performance absolutely impossible. Unforeseeability and absolute
impossibility are cumulative preconditions for the existence of force majeure, and the
absence of one denies the failing party to claim the defense. The law makes an illustrative
list of cases of force majeure. It includes the enactment of a law that prohibits the
implementation of the contract; a natural catastrophe such as earthquakes, thunder and
floods; on outbreak of international or civil war; or the debtor‟s death or unexpected
serious accident or illness. On the other hand, cases that can never constitute defense of
force majeure include strike or lockout occurring in the debtor‟s factory, an increase or
decrease in the price of raw materials necessary for the performance of the contract, or
the passing of new law which makes the debtor‟s obligation more onerous.
The fault of the debtor may be exceptionally taken into account. The law recognizes two
cases where damages are due only when fault is established. One is when the contract
relates to obligations of means, in which the debtor undertakes to do his best to achieve a
result without guaranteeing the result. If the debtor in good faith has done the best within
his competence and capacity, he is not the one to blame for the failure to achieve the end
because failure is in the nature of the contract itself. Such contracts as those concerned
with lawyer-client and physician-patient relationships create obligations of means. As
such, the lawyer tries his best to win a case and not guarantee to win it, and the doctor
does his best to cure the patient but not certain to cure him/her. Thus, the failure to
achieve the winning or the curing as the case may be does not result in the award of

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damages unless fault is proved. The second scenario is about gratuitous contracts –
contracts made for the exclusive advantage of one party, or contracts which create
unilateral obligation. Contracts of donation and deposit are good examples. In such
contracts, the debtor is free from the payment of damages of non-performance unless he
commits fault. The exclusion of damages in these cases reveals that the party who is not
benefiting from the contract in the first place should not be further penalized by the
payment of compensation for damages resulting from non-performance without his fault.
The degree of fault that needs to be established is not even ordinary; it should be a grave
fault. Of course, what constitutes grave fault is subject to the appreciation by the judiciary
of the circumstances of the case
b) Extent of Damages
The amount of damages that is payable for contractual non-performance is equal to the
normal damages that is expected to result from the non-performance. The court fixes, as
a rule, this amount having regard to all the circumstances surrounding the non-
performance without the need to ascertain the actual damage sustained by the creditor.
The amount of this presumed normal damage may be less than or could exceed the actual
damage. The court awards such an amount unless the contrary is proved by the parties.
The amount of the normal damages that is to be awarded by the court in the normal
course of things may be increased to the actual if it is less or reduced to the actual if it is
proved to be higher. The party, normally the creditor, can claim the increase of damages
by proving that the damage he actually sustained is greeter. Conversely, the other
contracting party, normally the debtor, can seek the reduction of the normal damages by
establishing that the actual damage is far less. Generally, the court awards damages in the
amount normally presumed to occur, but this amount may be decreased or increased if it
is proved by the parties that the actual damages caused by the non-performance is less or
greater than the normal damages as the case may be.
Self-Check Questions
1. Why is capacity required in the formation of contracts?

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2. Discuss the difference in the effect of fraud by a third party and duress by a third
party in the invalidation of a contract.
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3. Explain by taking two examples why some agreements are not contracts.
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4. What is the difference between implied acceptance and silence?

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5. Why do you think is the damages that result from the invalidation of a contract
because of mistake to be made good while those resulting from invalidation
because of fraud not?
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6. Spell out the circumstance in which reverential fear may operate as a legitimate
ground to invalidate a contract.
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7. Why is illegal motive not regarded as a ground that nullifies a contract?

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8. Cite an immoral business transaction, yet not illegal, and explain its effect on the
contract created.
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9. How are the problems of sticking to formality requirements and the danger of
absence of formalism reconciled? What is the position of the Ethiopian law on the
question of contractual formality?

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10. Identify the basic constituents of performance of contracts.

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11. How is partial performance dealt with under the law?

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12. What is the importance of special interest of the creditor in awarding specific
performance?
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13. Why is cancellation of a contract as a rule to be declared by the court?

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14. Discuss the essence of contractual damages.

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15. Jemal sent invitations to a number of potential buyers to submit bids for some
timber he wanted to sell. Two bids were received as a result; the higher bid was
submitted by Nuru. Jemal changed his mind about selling the timber, however,
and did not accept Nuru‟s bid.Nuru claimed that a contract for sale existed and
sued Jemal for breach. Did a contract exist? Discuss.
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16. Godanacontracts to lease a service station for ten years. His principal income is
from the sale of gasoline. Because of an oil embargo by foreign oil-producing

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nations, gasoline is rationed, cutting sharply into Godana‟s gasoline sales. He
cannot make his lease payments. Discuss if the lease contract can be
cancelledbecause of impossibility of performance.
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CHAPTER FOUR
LAW OF AGENCY
4.1. General
An agency relationship exists when one party, called the agent, agrees to represent or act
for another party, called the principal. The principal has the right to control the agent‟s
conduct in matters entrusted to the agent. An agency may be engaged to accomplish a
single task or to carry out several tasks.
Agency relationships permeate every aspect of modern economic life. By using agents,
the principal can conduct multiple business operations simultaneously in various
locations. As obviously human beings cannot be physically available at different places at
the same time, a person having the intent of doing business transactions at multiple places
(and that is very important in modern fast paced world of commerce) is helped by agency
undertakings to fill-in the gap created by the natural time and space constraints. Thus, for
example, contracts that bind the principal can be made at different places with different
persons at the same time. A familiar example of an agent is a corporate officer who

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serves in a representative capacity for the owners of the corporate entity. In this capacity,
the officer has the authority to bind the principal (the corporate/juridical entity) to a
contract. Indeed, agency law is essential to the existence and operation of a corporate life,
because only through its agents can a corporation function and enter into contracts.
Agency is the fiduciary relation that exists between two persons so that one shall act on
the behalf and subject to the control of the other. The term fiduciary is at the heart of
agency law. It can be used both as a noun and as an adjective. When used as a noun, it
refers to a person having a duty created by his undertaking to act primarily for another‟s
benefit in matters connected with the undertaking. When used as an adjective, as in
“fiduciary relationship”, it means that the relationship is one involving trust and
confidence.
In a principal-agent relationship, a legal bond will be created between the parties so that
the agent will act on behalf and instead of the principal in negotiating and transacting
business with third parties. An agent becomes empowered to perform legal acts that are
binding on the principal and can bind a principal in a contract with a third person. For
instance, if A is hired as a booking agent for a certain music band, A can negotiate and
sign a contract for the band to appear at concerts. The contract will be binding and thus
legally enforceable against the group. The authority given to an agent under Ethiopian
law is termed as the power of attorney (Art.2179, Civ. C).
While agency is the fiduciary civil relationship between the principal and the agent, its
primary purpose is to confer on the agent the authority to transact with third parties.
Thus, we would have two categories of relationships in agency undertakings: one is the
initial, or the internal, relationship between the agent and the principal, and the other is
the subsequent, or the external, relationship between the agent and third parties. These
two categories of relationships are separate and exist in their own right, even though the
second relationship somehow depends on the first so as to produce the normal effect of
agency.
4.2. Sources of Agency
The sources of agency under Ethiopian civil law are two: the law and contract. Even
though the origin may be different, it is ultimately sanctioned by the rules of law and
produces effect at law. In the majority of cases, agency undertakings originate from
contracts. So, our focus in this chapter is contractual agency. However, it is important to
make enumerations of agency relationships arising from the law.
4.2.1. Agency by Operation of the Law

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The law intervenes, in the absence of formal agreement between parties, in certain cases
for reasons of public policy and to fill-in the gap created by the difficulty, and sometimes
even the undesirability, of securing consent. There could also be various specific reasons
attributable to particular cases of agency created in this way. The Ethiopian law also
recognizes agency by the operation of the law in certain circumstances.
One instance where agency arising from the law operates is representation of persons
with legal incapacity. As you may remember from your discussion in chapter two,
incapable persons such as minors, judicially interdicted persons and legally interdicted
persons cannot perform juridical acts by themselves. They exercise their rights and duties
only through guardians and/or tutors. The law obliges the court to appoint a guardian
and/or a tutor for these kinds of persons. The guardian and/or the tutor act on the behalf
of incapable person not because of prior agreement but because the law has given them
the authority to do so.
An agency also arises by law in cohabitation, i.e. it may occur in family relationships, as
between husband and wife. For example, suppose one spouse purchases certain basic
necessities and charges them to the other spouse's charge account. The law often regards
the latter as liable for payment of the necessaries, either because of a social policy of
promoting the general welfare of the spouse or because of a legal duty to supply
necessaries to family members.
Agency by operation of law may also occur in emergency situations. The law encourages
the curbing of an emergency by recognizing persons who have no agency authority to
contract with others to act on the behalf of other persons anyway due to the emergency.
For example, a rail-road engineer may contract on behalf of his employer for medical
care for an injured motorist hit by the train. Such a situation is referred to in Ethiopian
law as unauthorized agency, which we will deal with later on.
In some situations, a court may also out of its discretion appoint an agent, called the
curator, to act on the behalf of another. The court grants an authority of agency where a
person cannot himself appoint an agent for reason of being away or ill, and it must make
the authorization in a manner that protects the interest of the principal.
4.2.2. Contracts
Like we cited above, the vast majority of agency relationships have their creation in
contracts, i.e. agreements between the agent and the principal. The preliminary
relationship is contractual in nature, and the parties to such contract can define the scope
of the authority of the agent and are free to determine the details of their engagement.

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Since the right to properly is one of the fundamental individual rights and since agency
has the effect of handing over this individual right to another person, it is normally
expected that the person himself authorizes another and he himself has to decide on his
economic fate to entrust the running of some (or all) of his proprietary rights to another
person.
4.3. Contractual Agency in Ethiopian Law
4.3.1. Definition and Formation
Agency is defined, under Article 2199 of the Ethiopian Civil Code, as a contract whereby
a person, the agent, agrees with another person, the principal, to represent him and to
perform on his behalf one or several legally binding acts. Agency in this sense is special
type of contract to which the fundamental rules of contract law should apply. The
essential requirements for the formation of any contract need to be observed in the
conclusion of a contract of agency too.
Such essential requisites as capacity, consent, object and formality must be fulfilled in
order to create a legally valid agency contract. The parties, both the agent and the
principal, must be capable of contracting. Thus minors, judicially and legally interdicted
persons cannot be parties to a contract of agency. As it is a juridical act, capacity is
required. But this is to be distinguished from the case where the law appoints agents for
these incapable persons. In this case, the incapable persons occupy the position of
principal, but that position has not arisen from a contract.
As a contractual engagement, agency cannot stand without the fulfillment of free and
legal consent. Consent is the pillar of contracts, and it needs to be manifested when
entering into the contract of agency. Object of the contract should be sufficiently defined,
should be possible, lawful and moral. The purpose for which the principal grants an
authorization to the agent should be stated with sufficient clarity; that same purpose must
be possible to execute. It must not be something that contravenes the law and morality.
A contract of agency should also comply with formality requirement if there is any such
requisite prescribed by the law. Form is not an absolute legal requisite; it is to be
complied with only when the law stipulates a specific formality. For example, the law
states that preliminary contracts are concluded in the same form as the main contract.
Most agency contracts are preliminary contracts, as they are dictated by the formality the
main contract adopts. For instance, suppose A authorizes B to conclude an insurance
contract, and the law demands contact of insurance to be made in writing. The

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preliminary contract (the agency authorization) should be made in the form (writing) of
the main contract (insurance).
The contract of agency, just like many other contracts, can be formed either expressly or
implicitly. The express manifestations of agency could be written or verbal
communications. The implied mechanisms of creating agency contracts are usually signs
and conduct. But, all these mechanisms must clearly show the pure and simple
conformity of acceptance with offer. Silence does not amount to acceptance, and cannot
be relied upon to result in a valid contract. In conclusion, a contract of agency may
emerge in whatever way in so far as there is no doubt as to the formation of the contract
by custom, equity or other prevailing value.
4.3.2. Scope and Types of Authority
The extent of the powers of the agent in explicit authorization is rarely difficult to tell,
because the express enumerations themselves are able to display the limits of the agency
authorization. But a problem of determining the scope of authority of the agent may arise
where the power is given implicitly. In any case, the law has tried to fill-in the gaps
created by the contract giving rise to the power of attorney of the agent by providing for
two mechanisms that contain matters given to the agent. The two ways of agency
authorization are general and special agency.
It may be the case that the power of attorney is fixed in general terms, without detailed
authorization. This is called a general agency. This may pose a problem as to what
powers should the agent exercise. The law states that agency expressed in general terms
only confers upon the agent authority to perform acts of management. Once again it looks
that the law has attached a great value to the proprietary interests of a person to as far as
possible be deemed run by the person himself. The law does not boldly allow general
agency authorizations to be interpreted in a manner that gives power to the agent to
perform acts that alter the patrimonial status of the would-be represented. Thus, the law,
demanding explicit assignment in cases that affect the economic position of the principal,
limits agency powers expressed in generic terms to the performance of acts of
management.
Acts of management are by nature, as legally understood, not directed at the alteration of
the proprietary position of the principal. They are merely administrative or else
maintenance functions that aim to continue the previous economic status quo of the
principal. A person with authorization in general agency terms discharges only
preservatory functions and is empowered only to sustain the rights of the principal; he is

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not authorized to exercise acts of disposing of the rights of the principal. Hence, such
agents have a limited power less disposing the represented person‟s rights.
The law enumerates, in article 2204 of the Civil Code, acts of management as comprising
the collection of debts, the discharge of debts, investment of income, leases for terms not
exceeding three years, and any other acts done for the preservation or maintenance of
property. These acts are taken as preservatory acts, and are more or less concerned with
the continuity of the rights of the principal and not alienating them. There is also a
category of functions exercised by the agent regarded by the law to fall in acts of
management. These are the sale of crops, the sale of goods intended to be sold, and the
sale of perishable commodities. These latter acts are acts of disposition; but a close look
at these activities reveals that the purpose of conferring power to conduct them on an
agent is to prevent the loss of the rights of the person represented. The economic rationale
behind these matters shows that they would be sold anyway even by the principal either
because they don't persist longer retaining their quality or are already destined for
disposition (such as trading stock). Thus, there is no purpose served by waiting for
express authorization, and general agency suffices as it effectively saves rights on such
commodities from being lost.
On the other hand, acts other than those of management which alter the legal position of
the principal need a special authorization. Acts of disposition thus need to be particularly
provided by principal. The agent is recognized as empowered to perform acts of
alienating the proprietary affairs of the principal only if the principal has specially
enumerated them in the document evidencing power of attorney. Otherwise, the power
cannot be presumed by the law.
Special agency confers on the agent authority only to conduct the affairs specified by the
contract of agency, and of course their natural consequences attached to the specifically
enumerated acts by usage or custom (Art.2206(1)). The fact that acts of disposition
presuppose express stipulation does not mean that the unstated but intrinsically associated
activities therewith are excluded. The law rightly includes the inevitable incidental
functions that are not even necessary to be specified in the scope of authority of a special
agent.
Article 2205(1) of the Civil Code makes an illustrative list of activities that require
special authorization for their discharge. These include alienation or mortgage of real
estate, investment of capital, signing of bills of exchange, effecting settlement and
consenting to arbitration, making donations, and bringing or defending lawsuits. Dear
distance learner, you may easily get that, for example, the sale or the setting for mortgage
(such as to borrow huge money) of an immovable property seriously affects the

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proprietary interests of the principal. Investment of capital is likewise, as opposed to
investment of income, entails a risk of losing the principal's wealth earmarked as venture
capital for expanding business affairs. Investment of income refers merely to maintaining
that income as it is (such as by depositing it with a bank). Settlement, arbitration,
bringing or defending lawsuits all implicate the disposing of the rights of the principal.
They all carry with them an aspect of surrendering the patrimonial interest of the
principal. Again, the authority to sign bills of exchange represents an important
proprietary right. Bills of exchange are simple contracts that easily transfer the money
belonging to the principal to another. All the above cases clearly tell the possibility for
the reduction, or even increase, of the patrimony of the principal. Patrimony stands for
the sum total of all assets and liabilities of the principal, and any such acts as the above
that alter the patrimony are to be specifically given to the agent. Otherwise, or failing
express enumeration, they are deemed not given to the agent and the contract of agency is
interpreted to exclude these transactions.
We may identify agency relationships having regard to the type of authority the agent
acts with. By type, we are not referring to the content of the authorization (which we have
just seen above), but to the external manifestation of the authority. In a sense, we can
categorize authority into: actual authority and apparent authority. Actual authority
produces the normal effects of agency relationship which we will see shortly. Apparent
authority may also give rise to such effects but only circumstantially. Actual authority is
an authority which the agent has factually been granted under the contract reached
between the principal and the agent or by virtue of subsequent ratification by the
principal. Both express and implied authorizations constitute actual authority. Apparent
authority, on the other hand, is not an authority arising from the consent of the principal
whether express or implicit. This authority does not exist in reality, but it arises as a
matter of law out of the presumed position of the parties in the eyes of third parties and
these third parties assume that the agent has authority to act on the behalf of the principal.
The scenario of apparent authority (where there is no authority at all in reality) must,
therefore, be distinguished from implied authority (where authority indeed exists).
Agency authorizations may also be divided from the view point of the knowledge by
third parties of the situation. In this sense, we can have disclosed and undisclosed agency
relationships. Disclosed agency is a relationship whereby both the identity of the
principal and the authorizations he has conferred on the agent are known to third parties.
Undisclosed agency on its part refers to the situation where the agent acts with third
parties without disclosing to third parties both the fact that he is an agent and the person
he has represented. An internal relationship (the actual authorization) between the
principal and the agent exists, but externally third parties believe that the agent is acting
on his own behalf. There is a difference in the effects of these sorts of agency

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relationships especially as regards relation with third parties, and we now look into the
effects of each of such agency engagements.
4.4. Effects of Agency
As a juristic act involving multiple relationships, agency undertakings produce various

distinct legal effects. The effect regarding liability relationships among the various parties
involved in agency vary depending on the sorts of authorization we have tried to
highlight just above. It is also equally breathtaking to consider the right-duty correlation
between the principal and the agent.
4.4.1. Liability Relationships
Complete agency that produces conventional effects between the principal and third party
is the one that comes about in actual authority and disclosed agency. In actual authority-
disclosed agency scenario, a direct legal bond is created between the principal and third
parties. The agent functioning under such a circumstance merely facilitates the
transactions and does not personally enjoy rights or bear duties arising from the
transaction he has undertaken with third parties. He simply steps out of the legal bond,
and it is the third party and the principal who are personally indebted to each other.
Neither the third party nor the principal can make a personal claim against the agent
regarding the transactions created. The agent is not answerable for the performance of the
contract he has concluded with third parties, and it is the principal and third party that are
legally obliged to one another for the performance of the obligation.
In an undisclosed agency scenario, the agent is deemed to have acted on his own behalf
and legal bond in this case is created between the third party and the agent. The agent is
authorized to represent the principal, but third parties do not know the fact that he is an
agent. So, the law recognizes a liability relationship between the agent and third party.
However, the internal liability relationship the agent has with the principal remains intact.
Thus, the agent recovers duties he has personally borne vis-à-vis third parties through his
rights from the principal, and he discharges the rights he has personally enjoyed vis-à-vis
third parties through his duties from the principal. The principal and the third party
cannot personally claim from each other, but they can claim from each other, through
subrogation, the rights and duties they each possess vis-à-vis the agent by replacing
themselves to the positions of the agent. They exercise against each other not the rights
they personally have with regard to each other but those of the agent.
In some instances, conflict of interest may arise between the principal and the agent, the
agent of interest may arise between the principal and the agent. The agent is deemed to

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undertake transactions in the exclusive interest of the principal. Thus, in case his
representative capacity comes into conflict with his personal interest and the latter
prevails, the agent is personally liable towards third parties irrespective of whether the
agency is a disclosed one. The principal would be legally obliged to assume only those
obligations created in his own interest. The agent may even contract with himself, he may
contract with the principal by using his representative capacity of the principal and his
own personal capacity. Here, it seems that the only party is the agent, but he stands for
two capacities (personal capacity and representative capacity) and thus a contract may be
legitimately said to have formed between the principal and the agent himself in his
personal capacity. So, if there is any conflict of interest evident in this kind of transaction,
the principal will not be bound. But, if the agent created such a relationship without
prejudicing the interest of the principal, he may bind the principal.
Let's finally see the liability relationship that underlies transacting in apparent authority.
Transactions undertaken in apparent authority may or may not create a direct legal bond
between the principal and the third party depending on circumstances. The agent who
acts in apparent authority is always personally liable to third parties with whom he
transacted. The question here is thus how to make the principal liable to third parties in
addition to the agent and when to exculpate principal.
The principle is that where an agent acts with apparent authority (such as where he
undertakes with lapsed or revoked authority, or else where he acts exceeding the
authority he is given), the principal will not be liable and only the agent is held liable to
third parties. But, exceptionally the principal is held liable together with the agent in the
following cases, as provided in Art. 2195 of the Ethiopian Civil Code.
- Where the principal has informed a third party of the existence of the power of
attorney but failed to inform him of the subsequent partial or total revocation of
such power;
(The principal has to notify third parties about the revocation of the authority of
the agent just as he notified them of existence of the authority. Otherwise, he is
deemed to be in bad faith and his default makes him liable.)
- where the principal failed to demand the return of a document evidencing power
of attorney, if any;
(If the authorization is supposed by a document evidencing same, which is mostly
the case, the principal has to take the document from the hands of the agent or he
has to legally claim the return in case the agent refuses. If the principal fails to do
so, he will be bound by the acts the agent makes.)
- Where the statements or behavior of the principal has made third parties believe
in the existence of authority.

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(If third parties justifiably rely upon the statements or conduct of the principal, the
principal will be liable towards third parties for the acts the agent performs in
apparent authority.)
These three cases are circumstances where the principal assumes joint and several
liability together with the agent towards third parties. When we say that the principal and
the agent are jointly and severally liable towards third parties, we mean that the third
party would have a full recourse either against one of these parties (principal or agent)
individually or against both of them jointly. Thus, while the agent is always liable to third
parties whenever he acts with apparent authority, the principal joins him in bearing such
liability only in the above exceptional cases.
However, the principal may exempt the agent from liability through the ratification of the
agent‟s actions in apparent authority. Where the principal ratifies (approves) acts that the
agent performs in apparent authority, whether such acts entail the joint and several
liability of the principal and the agent or the personal liability of the agent only, the agent
is relieved from liability whatsoever and the principal assumes complete liability. In other
words, ratification has the effect of assimilating the liability of the principal to the normal
liability that results from the combined consideration of actual authority/disclosed agency
scenarios. The whole transaction thus creates a direct legal relationship between the third
party and the principal. But in cases other than those making the principal jointly and
severally liable with the agent, the principal has the option of repudiation. Repudiation
refers to the power of the principal to reject (disapprove) acts that the agent performs in
apparent authority where the principal cannot be held liable, and this has the effect of
making the agent bear the whole liability towards the third party.
4.2.2. Duties of the Parties to the contract of Agency
This section is devoted to the internal (preliminary) relationship between the principal
and the agent. There are respective rights and duties as between these parties. Rights and
duties are correlates, and there cannot exist a right without a corresponding duty. Thus,
rights of the principal carry duties of the agent and rights of the agent carry duties of the
principal. This means that when we discuss duties of the agent, we are discussing the
corresponding rights of the principal, and that when we are discussing the duties of the
principal, we are discussing the rights of the agent. We thus deliberate briefly only on the
duties of the agent and duties of the principal in that order.
4.4.2.1. Duties of the Agent

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Duties of the agent arise from the contractual stipulation made by the parties and from the
fiduciary nature of agency undertakings that come into existence as a consequence of the
law‟s role to fill the gaps created by the contract.
a) Duty of notification: - It is a maxim in agency law that all that the agent knows, the
principal knows. Thus, it is only logical that the agent be required to notify the principal
of all matters that come to his attention concerning the subject matter of the agency.
What the agent actually tells the principal is not relevant; what the agent should have told
the principal is crucial. Under the law of agency, notice to the agent is notice to the
principal, and the agent should observe this duty.
b) Duty of Loyalty: - This is known in Ethiopian law as the duty to undertake

authorization with utmost good faith. The requirement of good faith is the pillar of civil
law and it refers to the agent‟s exercise of authority in the exclusive interest of the
principal. Loyalty is the manifestation of this requirement. Basically stated, the agent
has the duty to act solely for the benefit of his principal and not in his own interest or a
third party. For example, an agent cannot represent two principals in the same
transaction unless both know of the dual capacity and consent to. This duty also means
that any information or knowledge, even that resulting in revocation of authority,
acquired through the agency relationship be communicated to the principal and
considered confidential as regards third parties. In short, the agent‟s loyalty must be
undivided. The agent‟s actions must be strictly for the benefit of the principal and must
not result in any secret profit for the agent.
c) Duty of obedience and Diligence: - When an agent is acting on behalf of the principal,
a duty is imposed on that agent to follow all lawful and clearly stated instructions dictated
by the principal. Any deviation from such instructions is a violation of the duty of
obedience. In emergency situations, however, when the principal cannot be consulted, the
agent may deviate from instructions without strictly violating the duty of obedience if the
circumstances so warrant. Whenever instructions are not clearly stated, the agent can
fulfill the duty of obedience by acting in good faith and in a manner reasonable under the
circumstances.
Diligence refers to the care and skill expected of the agent. The agent must show a good
deal of care and skill in executing his agency functions. The standard of diligence
required here is that the agent must show no less care and skill towards the affairs of the
principal than he does to his own interests/affairs. He is required to carry out all acts that
a good father performs for his family.

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d) Duty of Accounting: - Unless an agent and a principal agree otherwise, the agent has
the duty to keep and make available to the principal an account of all property and money
received and paid out on behalf of the principal. The agent has a duty to maintain
separate accounts for the principal‟s funds and for the agent‟s personal funds, and no
intermingling of these accounts is allowed.
e) Duty of Non-delegation:- The fiduciary nature of agency relationship is all about

placing personal trust and confidence in somebody the principal appoints as an agent.
This very trust is derogated from when the agent delegates his authority to someone else
the principal did not consent to. The principal authorizes an agent so that the latter
discharges functions personally. This accords with the maxim “a delegate cannot
delegate”, meaning the agent himself is a delegate and cannot further delegate authority
over which he has no absolute power.
But, the principal may authorize the agent to appoint a sub-agent. in this case, the duty
the agent is expected to show to the principal is the reasonable selection of the sub-agent.
The agent may also be allowed to delegate by law another in place of him when it is of no
difference whether the act is done by the agent himself or by a third person and when this
is implied from usage or custom of the place of performance, or where the agent is unable
to perform the order himself because of unforeseeable circumstances and the agent is
unable to inform the principal of this case. This is generally directed at the protection of
the principal‟s interest where the agent can no more discharge his agency functions for
reasons beyond his control.
4.4.2.2. Duties of the Principal
a) Remuneration: - This duty is about the payment made to the agent for his services.
But remuneration is not a requisite; the law even says that agency services are
gratuitously made unless remuneration is expressly agreed upon by the parties. The duty
of remuneration thus comes into the scene under Ethiopian law where the parties
expressly stipulate in their contract. The duty to pay remuneration is exceptionally
demanded when the agency services are professional or where it is customary to pay
remuneration for the concerned agency services. But even in these latter cases, parties
can expressly exclude the payment of remuneration.
b) Duty to Advance Money: -The agent perhaps needs money to run the representation of
the principal. According to article 2221 of the Civil Code, the principal shall advance to
the agent the sums necessary for carrying out the agency. This would constitute all
expenses that the agent needs to make in the discharge of his functions including
transportation costs and the principal is expected to forward these outlays in advance.

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c) Duty of reimbursement:- Whenever an agent disburses sums of money at the request
of the principal, and whenever the agent disburses sums of money to pay for necessary
expenses in the course of a reasonable performance of his agency duties, the principal has
a duty to reimburse the agent for those payments. Agents cannot recover for expenses
incurred by their own misconduct or negligence, however.
d) Duty of Indemnification and Compensation: - Subject to the terms of the agency

agreement, the principal has the duty to indemnify an agent for liabilities incurred
because of authorized and lawful acts and transactions. For example, if the agent, on the
principal‟s behalf, forms a contract with a third party and the principal fails to perform
the contract, the third party may sue the agent for damages. In this situation, the principal
is obligated to compensate the agent for any costs incurred by the agent as a result of the
principal‟s failure to perform the contract. The principal shall also compensate for any
non-contractual damages sustained by the agent in the course of performing his agency
duties.
e)Agent’s Lien right:-As the principal is duty bound to discharge all the above functions
to the agent, the agent is entitled to hold as a security any property belonging to the
principal that comes into his possession in executing his functions until the principal
makes the necessary payments. Lien right is a security right that the agent has over the
movable property belonging to the principal in order to force the latter to discharge his
own obligations or to ultimately acquire that property in replacement for the expenses the
agent has incurred.
4.5. Special Agency Relationships
Dear student, in this section you will be introduced with certain particular types of
agency relationships within the ambit of the generality we have considered so far. Let‟s
see them as recognized by the law.
4.5.1. Commission Agency
Commission agency is a professional agency service that is undertaken for the payment
usually known as a commission. It is an agency widely accepted and practiced in the
world of commerce, and for particular affairs. The Ethiopian law of agency recognizes
three types of commission agents: commission to buy and to sell, Delcredere agency, and
forwarding agency.
i) Commission to buy or to sell
This is a special type of agency relationship where the agent, called the commission
agent, is empowered to discharge functions of selling or purchasing goods.Such agency

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confers upon the commission agent the power to buy or sell goods in his own name but
on the behalf of the principal (Art 2243(1), Civil Code). The agent enters into the sale and
purchase transactions in his own name, yet it is professionally known that he acts not on
his own behalf but representing the principal. Thus, the fact that the name of the principal
is not disclosed to third parties does not change the liability relationship, unlike in
undisclosed agency situations we have seen previously. The agent is a professional, and
for that matter, a trader under the Ethiopian Commercial Code; therefore, the “name test”
of the principal is unimportant here.
The commission agent enters only into sales and purchase transactions with third parties.
He only sells goods of the principal or buys goods for the principal. The “goods” he can
sell or buy are ordinary corporeal movables whose ownership can be transferred upon
delivery under a simple sales contract. This will be made clear in the next chapter on law
of sales. The sale and purchase power is not limited to „goods‟, it also includes securities
(such as shares) and other fungible things. The commission agent can be both an
individual agent and an incorporated body. That means even juridical persons can be
commission agents. Generally, subject to the specific provisions applying to such an
agency relationship, commission agency is governed by the general rules of agency
regarding, for example, rights and duties of parties and all other aspects.
ii) Delcredere Agency
This is a special type of commission agency where the agent with the power to buy or to
sell is obligated to provide guarantee for the performance of the transaction he has
entered with third parties. As a matter of principle, it is presumed that the agent does not
guarantee the performance of the juridical acts he has created, and he will simply step out
of the legal bond by leaving the performance of the transactions to the principal.
However, it is possible to bind oneself by holding oneself as a surety for the performance
of obligations. A commission agent who guarantees the performance of sale and purchase
obligations he has created with third parties in called a Del credere agent.
iii) Forwarding Agent
Forwarding agency is a contract of agency whereby the agent, called the commission
agent, shipper or carrier, undertakes to enter in his own name but on behalf of another
person, called the principal, into a contract for the forwarding of goods. These agents are
professional business runners that, subject to payment of commission, forward goods or
transport them. For example, shipping lines act as agents on the behalf of the parties to
deliver goods.
4.5.2. Unauthorized Agency

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Unauthorized agency occurs in necessity situations where unexpected situations affecting
the economic interest of a person happen. It is emergency cases that justify such kind of
agency. Article 2257 of the Ethiopian Civil Code states that unauthorized agency occurs
where a person who has no authority to do so undertakes with full knowledge of the facts
to manage another person‟s affairs without having been appointed an agent. The
representing person has no contractual authority to act on the behalf of the represented
person, but he is legally authorized to do so because the economic interest of the principal
(who is not in a position to take care of his business) is under a risk. Unauthorized agency
is fully recognized by the law only if there is no means of securing authorization from the
principal.
The agent indulging himself in such an activity is obliged to perform acts in good faith
and in strict compliance with the interests of the principal. If he discharges agency
functions in the interest of the principal and has acted with due care and diligence, the
effects of a normal agency relationship (as if the principal has made the authorization)
would be operative and the respective rules of agency would apply. Thus, the agent will
step out after making the necessary transactions and the principal is bound by the acts of
the agent to third parties. The principal has a duty to ratify (approve) the activities of the
agent in this case. Where the agent undertakes his agency functions in accordance with
the principal‟s interests though without authority, ratification is not even an option to the
principal and he is obliged to ratify. However, if the unauthorized agent fails to discharge
the powers he has assumed in necessity situations in the interest of the principal, the latter
is not obliged to ratify and he can indeed reject the agent‟s acts. In such case, the agent
will be extra-contractually liable both to the principal and third parties.
4.6. Termination of Agency Relationship
Agency is not a relationship of eternity. Just like all other juridical acts, its extinction is
far from argument. There are various factors that may operate as grounds for the
extinguishment of agency relationships. Agency may terminate either by operation of the
law or the actions of the parties.
4.6.1. Termination by Law
Where there is no agreement to the contrary, the death or declaration of absence or

incapacity or bankruptcy of either the agent or the principal will result in the
extinguishment of the legal bond. Upon death, personality ends for all legal purposes and
therefore the agency as a legal affair is outrightly terminated. Declaration of absence has
the effect of death, and therefore kills legal personality for all legal matters including
agency. Declaration of incapacity also puts an end to agency relationships because, as we
repeatedly said, the personal exercise of all juridical acts requires capacity. Absence of

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capacity entails absence of a juridical act such as agency. Bankruptcy on its part
impoverishes the economic status of a person. Agency relates to economic matters and a
person with no assets is not worthy of economic transactions.
4.6.2. Termination by the Parties
There is little doubt that the agent and the principal can, by mutually agreeing through
contractual faculty, terminate their agency relationships. They are free to bilaterally agree
to part company. This is an extension of their freedom of contract.
Unique to agency undertakings is, however, the fact that both the principal and the agent
can unilaterally terminate the relationship without suffering comparable risks of further
claims from each other as that evident in other contracts. The principal can any time
terminate the agency by his own discretion, without facing any claim from the agent. In
agency, it is only the principal‟s economic affair that is at stake, and so the principal has
an absolute power to put an end to the agency. He won‟t face, for example, the claim of
damages from the agent for the mere unilateral termination. The power of the principal to
unilaterally put an end to the authority he has given to the agent is called revocation.
In slightly similar a fashion, the agent can terminate the agency. He is perhaps not
deriving any benefit from the undertaking, and thus the law does not require the agent to
maintain the relationship until the expiry of the agency term. This is renunciation. The
agent can renounce his authority. But the exception here is that the agent bears the duty to
indemnify the principal where the renunciation is detrimental to the principal. Even in
this case, the agent, the agent will be relieved from the duty of indemnification where he
cannot continue the agency undertaking without himself suffering considerable loss.
Self-check Questions to Chapter Four
1. Why is it said that agency is a “fiduciary” relationship?

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2. What ends does agency serve in modern commerce?

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3. Explain what is meant by apparent authority by giving illustrations.

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4. What are the agent‟s rights and remedies against the principal? What are the
principal‟s rights and remedies against the agent?
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5. Identify the difference in effect between disclosed agency and undisclosed agency?
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6. “The agent does not incur personal liability even if he acts in apparent authority”.
Do you agree? Explain.

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7. What do you think is the effect of a person‟s transacting on the behalf of another
after his agency power is terminated?
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8. How do the principal and the third party claim from each other rights in undisclosed
agency relationship?
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9. First outlining the essence of agency functions under special authorization,

enumerate the activities.
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10. Ato Berihun, who resides abroad, appoints Tadele to undertake the construction of a
house on the land he has got in lease in Bahir Dar. Tadele created a transaction in
writing for the construction with independent contractor Ato Mergia. Tadele has also

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entered into contract with AtoYaregal for guarding the house under construction and
the construction materials pooled on the land. Yet, Tadele concludes all these
contracts in his own name and his contracting parties do not know he is an agent.
Answer the following questions based on the facts given in the case.
i) Should there be a compliance with a formality requirement in
authorizing the agent? What form, if any?
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ii) Can Tadele bind Berihun by a contract he created with Yaregal?

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iii) Is Mergia liable to Berihun for the construction of the house? How?
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CHAPTER FIVE
LAW OF SALES
Dear distance student, this chapter deals with another important area of law that you as a
potential businessperson need to acquaint yourself with. It focuses on a crucial type
transaction, sale, and its legal regulation. Thus, at the end of the chapter you must make
sure that you have:
- appreciated the basic elements in sale contracts;
- grasped the effect of sale contract;
- identified the identity of a „thing‟ that is subject-matter for sale;
- explored the concepts of transfer of possession, ownership, and risk;
- gathered rights and duties of parties to sale contract; and
- identified certain cases of like-sale transactions.
5.1. Introduction to Sales Contract and Its Formation
No body of law operates in a vacuum removed from other principles of jurisprudence. A

sales contract is governed by similar civil law principles applicable to all contracts –offer,
acceptance, capacity, performance, legality, etc – and these principles should be
reexamined when sales are studied. In regard to sales contracts, the special rules of sales
would have a prior application; when the special law of sales is silent on a given issue,
then the general principles of contract law will apply.
The objects of a sale contract we will deal with here are ordinary corporeal chattels –
tangible movable goods that can be easily transferred without any further need to register
them or the like. These types of goods are ordinary corporeal chattels in the sense that
their ownership is legally transferred upon mere transfer of possession through delivery.
As sale is a medium of transferring title; our focus here is with objects whose title passes
upon delivery. In so far of the sale of special movables, immovable, and incorporeal is
concerned, there is a separate regime of law regulating same which is, however, beyond
the scope of this module.
5.1.1. Meaning and Essential Elements
Sale is an exchange mechanism that has as its essence the passing of title from the seller
to the buyer for a price. Sale is a contract and the Ethiopian Civil Code (Art 2266) defines
a contract of sale as a contract whereby one of the parties, the seller, undertakes to deliver
a thing and transfer its ownership to another party, the buyer, in consideration of a price

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expressed in money which the buyer undertakes to pay him. We can gather certain
fundamental characteristics that a sales transaction embodies.
i) It transfers ownership: - Ownership in economic and legal terms represents

the fullest right a person would have over a property. So, it includes the right
not only to use the thing but also to demolish, abandon, alienate, or donate
that thing. Sale gives a buyer all such powers.
ii) It is an onerous act: - A contract of sale it not a liberality; it is always made
for consideration. Parties engage in a sale transaction to get some benefit each,
not merely to bind themselves to the other parties.
iii) It is a commutative act: - The contract of sale is bilateral – the obligation it
entails is divided between the parties thereto. The obligation of one party is
taken up in consideration of the obligation of the other.
iv) Trading parties and mercantible thing: - It is needed that parties to a contract
of sale are traders in the sense that they are free from insolvency or
bankruptcy risks. They must be worth transacting in commercial terms.
Similarly, the thing that is subject matter of sale must be that within
commerce. The thing should be a mercantible one upon which an exchange
through legal sale can be effected. Traditionally, certain things are outside
commerce. At the forefront is the human person; this manifests the prohibition
of slavery or the sale of one‟s own organs. You can‟t sell your child or your
limbs for that matter.
v) It involves the fixing of a price: - A characteristic of the contract of sale is the
price – the monetary counterpart of the giving over of the good for sale.
Incidental to this is that the price must be labeled in a legal currency, that it
must be certain or ascertainable, and that it must be just – not considerably
disproportionate with the value of the good.
As a final note, one needs to distinguish a sale contract from certain similar types of
exchange modes. Such contract as hiring sale, supplies, barter, donation, transfer of rights
other than ownership, and contract of service should not be confused with sale. There is a
difference between sale proper and the other types exchange transactions.
A contract of sale may be confused with a service contract especially as regards who
supplies the basic ingredients for the manufacture of a thing that is to be delivered. Where
the party who undertakes delivery of corporeal chattels to be manufactured or produced is
also to provide the main materials necessary for the manufacture or production, the
transaction is a sale one. But if the party to whom is delivery to be made provides the
essential ingredients for the making of the thing, the contract is best described as service
and not sale. For instance, A wants a full garment. A brought the pieces of textile by his

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own and hands them over to a tailor to produce the suit. This agreement is not one of sale,
but service.
Barter is also an onerous contract that is concluded with a view to transfer ownership.
But there is no monetary price in bartering, and the exchange is made between things.
Price expressed in money terms distinguishes sale from barter. Donation on the other
hand is a contract of gratuity; it is not made for consideration. One party undertakes the
obligation to transfer ownership of a thing to another. But sale is a bilateral engagement
when it comes to bearing obligations.
The transfer of rights other than ownership such as usufructs (a right to use and enjoy the
fruit, not to alienate) is in essence different from sale. Usufruct is short of the power to
alienate or dispose of a thing, which ownership contains. In sale, ownership is
transferred, not merely usufruct.
A contract may be concluded for hiring a thing. The intention is that the thing will be
returned back to the lessor. The contract may further provide that the tenant of the thing
will become the owner thereof upon payment of a given number of installments. Such a
contract will be assimilated to a sale contract where the said installments are paid. But the
tenant can terminate the contract by returning the thing to the original owner. A full sale
contract does not produce the effect of returning back the thing. Sale is also different
from a contract of supplies, where a party undertakes for a price to make in favor of the
other party periodical or continuous deliveries of things. This contract relates to the
delivery, not to the transfer of ownership of a thing. Price is paid for making the supply.
There are also certain “forms of sale” recognized by law. They are all forms of sale, but
assume different modes. These include sale on trial, sale by sample, sale with ownership
reserved, and sale with the right of redemption.
Sale by sample refers to the situation where a particular thing is agreed upon to be sold so
that it will also be used to conclude a sale contract in respect of the other category it
represents. The sample or pattern will operate to represent the sale of others. Thus, sale is
concluded in respect of the whole thing when the sample conforms to the description in
the contract.
Sale on trial on the other hand is a conditional sale which completes only after the thing
is taken by the prospective buyer and tried to be suitable. If the thing passes the trial, the
sale contract becomes intact. Until the trial is made, ownership resides in the prospective
seller and so risk remains with him.

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Sale with ownership reserved is a contract whereby the seller reserves to himself the
ownership until the buyer pays the price of the thing he has taken possession. A sale that
transfers ownership in full is created when the buyer fully pays the price. But until then,
the risk is assumed by the buyer, and the seller may take back the thing.
Finally, there is a type of sale called sale with right of redemption. Right of redemption
refers to the right the seller exercises to buy the thing back. Parties can reach agreement
so much so that the seller can re-buy the thing he has sold within a defined period of
time, usually two years, subject of course to the refund of the appropriate amount of price
to the buyer.
Dear distance student, I do hope that you would have a fair understanding of the essence
of the essence of a sale contract and its various manifestations. I also believe that the
comparisons made of contracts akin to sale help you make clear distinctions between sale
and these allied contracts. Anyway, it is hoped that you have by now grasped the
essential features of a contract of sale. Let‟s now turn to formation and then performance
of sale contracts.
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5.1.2. Formation of a Sale Contract
As the formative requirements we have considered in the third chapter are compulsory
upon the parties to be observed, they are needless to say applicable on any special
contract such as sale. Those essential requisites stated under Art.1678 of the Ethiopian
Civil Code are also upheld here.
Consent of both parties, capacity, object and legal formalities should always be observed
when concluding a sale contract. Consent as manifested through offer and acceptance and
which marks the mutual meeting of minds of the parties must be expressed concerning all
aspects of the sale transaction. As sale is a juridical act, the parties must be capable of
contracting. The object of the sale, the thing to be delivered and the delivery itself, should
not merely be lawful and moral but also be sufficiently defined and possible of
performance. As regards form that the contract is to assume, parties are free to adopt
whatever form they desire. They can conclude their contract in writing, orally, in signs, or
even in conduct, but the form they have agreed to adopt needs to be observed. If there is,
however, a formality requirement particularly imposed by specific sale contracts, that
should be complied with.
The “thing” upon which a sale contract is concluded needs to be the property of the
seller. As one cannot transfer what he does not have, a person cannot sell a thing that
does not belong to him. As sale is a mechanism of passing title, one cannot engage in sale

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without first having title over the thing to be sold. Exceptionally, however, it is possible
to sell a thing belonging to a third party, as when as agent is given a special authority to
transact sale of things belonging to the principal. A sale contract normally is concluded in
relation to a presently existing thing, that which is already in existence and ready to be
handed over to the buyer during the time of concluding the contract. All the same, sale
may be concluded regarding a future thing, a thing that is to be manufactured or produced
pursuant to the sale contract itself.
We have already said that sale is made for payment of a price expressed in money terms.
But parties may fail to fix the price by themselves, and this by itself does not lead to the
annulment of the contract. Parties may legitimately refer the determination of the price to
an external situation or a third party. An external situation could be the market and the
price can be only ascertained by having regard to that revealed by the market. Certain
goods may instantly fluctuate in price at different places. Parties can have the price
ascertained by referring to the price index revealed at a certain place and time. A third
party or arbitrator chosen by the parties can also determine the price for them. Thus, it is
after all these possibilities of determining the price are exhausted that the contract may be
annulled for lack of the essential element of certainly fixed price.
5.2. Performance and Obligations of Parties to Sale Contract
The normal effect of every contract is performance. Sale contract is no exception on this
regard. Performance is realized through the imposition of certain obligations on both the
seller and the buyer. The parties to the contract of sale have their own respective
obligations to discharge. Let‟s have a brief look at them.
5.2.1. Obligations of the Seller
The obligations of the seller bears are normally those imposed by the contract itself. The
law also imposes certain obligations of the seller either because of the silence of the
contract or due to the mandatory nature of the obligation. The most noticeable obligations
of the seller in a typical sale transaction are delivery, transferring ownership, providing
warranties, and other incidental duties.
a) Obligation to Deliver the Thing
Delivery consists in the factual handing over (the conveying) of the thing to the future
owner. Delivery effectively transfers possession in most cases. The delivery that transfers
possession over the thing can be made in three ways. One is the actual delivery of the

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thing itself – the thing is physically handed over to the buyer, i.e. both the corpus and the
animus will be transferred to the future owner. The second mode of delivery is what may
be termed as constructive possession, where the buyer after agreeing to take delivery lets
the seller to hold the thing to take it at some later time. The animus (the intention) is with
buyer but the corpus (the physicals of the thing) is still in the hands of the seller. It shows
that the buyer authorizes the seller to take custody of the thing on his behalf. In this case,
the possession of the thing is deemed already passed to the buyer and the risk will be
borne by him. Thus, constructive delivery also is a mechanism of valid delivery. The
third mode is the handing over of the documents representing the thing. This also shares
some similarity with constructive delivery as the corpus is still in the seller‟s hands. Such
is the case when the title deed of the thing is handed over to the buyer. Generally,
delivery doesn‟t have to be mere actual/physical delivery of the thing; it also includes the
other two cases where such is made in accordance with the law.
The determination of the quantity of the thing to be delivered is usually made by the
parties in their contract. That quantity is to be complied with, and no delivery is deemed
to be valid where it deviates from the quantity stipulated in the contract. But in certain
circumstances, it is impossible or at least difficult to determine a precise quantity of
goods. For instance, the weight or volume may vary according to time or temperature.
Therefore, the seller will only undertake to deliver only “about a certain quantity”, as
expressed in the words of Art 2275(1) of the Ethiopian Civil Code. The consequence is
that it is for the seller to determine the exact quantity to be delivered. But, the limitation
is laid on the seller to prevent him from abusing his position in that a contractual
provision regarding fixing of quantity may be made in the sole interest of the buyer and
that the possible variations between agreed and real quantity is limited to 10% in the case
of the whole cargo of a ship and to 5% only in all other cases.
The time of delivery is also an important aspect of delivery and of course performance.
As always, a clearly stipulated time of delivery in the contract is given effect. But the
date of delivery may not be inferred from the will of the parties. In this case, the law
requires the seller to deliver the thing as soon as the buyer requires him to do so. If there
is a contractual stipulation that delivery is made over a period of time, the privilege of
fixing the exact date of delivery within such range belongs to the seller unless it appears
from the circumstances that it is for the buyer to do so. However, overall, unless provided
contractually to the contrary, delivery of the thing is legally made in simultaneity with
payment of the price so much so that the seller is not obliged to deliver the thing until
payment it made. Regarding the place of delivery, the principle, as in other cases, is that
the place of delivery is fixed in the contract. Failing this, delivery is to be made at the
place where the seller had his place of business at the time of the contract or, in the
absence of such, his normal residence. But there are exceptions to this in the case of

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specific goods and certain kinds of generic goods. The place of delivery is the location of
a thing where the sale relates to a specific thing and the parties know the place the thing
is situated at the time of the contract. Similarly, delivery regarding sale of fungibles
selected from a stock or a specified supply or that of things to be made or produced in a
place known to the parties at the time when the contract is concluded is effected at such
place of the thing.
b) Obligation to Transfer Ownership
This obligation is evident as sale is a mechanism for the transfer of ownership and
ownership is not guaranteed by simple delivery. of course the sale we are taking about
right now is that of ordinary corporeal chattels the transfer of possession of which entails
the transfer of ownership. But that does not suffice, because title may be accompanied by
various encumbrances and the buyer must be helped to enjoy the thing he bought free
from any encumbrance.
It is a rule of legal significance that the seller shall take all the necessary steps for
transferring to the buyer unassailable rights over the thing (Art 2287, Civil Code). The
proprietary rights of the buyer may be affected because of third parties‟ rights over that
thing at the time the sale contract is concluded. Thus, the buyer may face the risk of
dispossession, whether partial or total. The seller is obliged to warrant the buyer any such
dispossession which he might suffer in consequence of third parties exercising a right
they enjoyed at the time of the contract. The warranty will take different forms, from the
total/partial refund of the price (plus eventual damages) to the undertaking of settling the
situation with the third party.
As sale is a contractual transaction, parties could have an express agreement even

regarding warranty for dispossession. This means that a contractual warranty is given
priority. But, there are legal limits on the giving of such warranty. Thus, where the buyer
knows the risk of dispossession, the seller is not obliged to warrant the thing. But, the law
recognizes that the seller can expressly undertake such warranty contractually. When we
come to the contractual exclusion of warranty, on the other hand, the law suspiciously
looks at the situation and imposes certain compulsory conditions. The law states that
contractual provisions excluding or restricting warranty shall be construed narrowly. The
law even totally disallows the contractual exclusion or restriction of warranty where the
seller has intentionally concealed that a third party had a right on the thing or where
dispossession is due to the act of the seller. Any exclusion or restriction in such cases is
of no legal effects.
c) Warranty Against Defects and Non-conformity

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A sale contract carries with it a warranty both against defects and non-conformity to the
contract. In pursuance of this, Art.2287 of the Ethiopian Civil Code reads that the seller
shall guarantee to the buyer that the thing sold conforms to the contract and is not
affected by defects. What are defects and non-conformities?
Defects relate to the quality of the thing, and involve the following cases:
- quality unsuitable for normal use or commercial exploitation;
- quality unsuitable for particular use expressly or impliedly provided in the
contract;
- deviance from the quality or specification provided expressly or impliedly in
the contract.
The first defect pertains to the unsuitability of the thing for the use normally expected or
for a commercial exploitation reasonably foreseen. This goes without any stipulation in
the contract. Thus, a television must serve audio-visual purposes, a pen must write, etc.
The second defect usually comes about because of a contractually fixed use. Quality for
particular purpose may not necessarily be identical to that of the normal quality. For
example, suppose X ordered Y, a baker, to prepare a cake that serves for wedding. Y
makes an ordinary cake. Here the particular purpose was wedding, but the cake is not
cooked in a way serving that purpose. Thus, there is a defect in the thing. Parties may
describe the quality the thing should possess irrespective of its use. This is the third
category of defect recognized by the law. For instance, you wanted Mr. Tekola, a
carpenter, to make a wooden bed for you. The purpose of the bed is quite obvious, i.e. for
sleeping. But you instructed him to do it with the decorations you wanted. Mr. Tekola
finalized a bed with no such decorations at all. There is a clear defect here, and you can
legitimately refuse to take delivery.
Defects could be of two types: patent and latent. Patent defects are obvious defects that
can be noticed too easily. Latent defects are those that are hidden so that they are
discovered through later examination by way of customary usage or expert inspection.
The rule of warranty is that for patent defects let the buyer beware (caveat emptor) and
for latent defects let the seller beware (caveat venditor). If the buyer takes delivery of
obviously defective thing, then the risk is his. The law expects persons to take reasonable
care of their affairs. The seller cannot be held liable on a warranty against defects which
are patent that the buyer could overlook them only as a result of gross negligence. The
seller is not liable, for a stronger reason, on a warranty against defects when it is proved
that the buyer knew of the defects. In this case, an express contractual warranty given by
the seller is of no legal effect. But even in such cases, any provision excluding or
restricting warranty is void where the seller has fraudulently concealed from the buyer

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the defect in the thing. The seller is exempted from the warranty if he refrains from
engaging in deceptive conducts. In latent defects, the principle is that warranty is due.
But, it is possible to contractually exclude or restrict the warranty on hidden defects too.
The exclusion or restriction, however, does not produce any legal effect if there is faulty
conduct of the seller that conceals the defect.
The buyer will avail himself of warranty for defects only upon compliance of procedural
requirements of examination and notification. He has to undertake customary
examination of the thing at the earliest possible opportunity. Or else he has to have the
thing technically examined by an expertise, such as in a laboratory, etc. The effects of the
examination, i.e. the defects and its nature, must be communicated to the seller. It is upon
making of these two cumulative conditions that the buyer may avail himself of the
warranties attached to a sale transaction.
Non-conformity shows a discrepancy between the things as described in the contract and
the delivered thing in terms of quantity, type, color or other similar characteristics. Non-
conformity resulting from the discrepancy involves partial delivery, or delivery of greater
or lesser quantity than undertaken in the contract to be delivered. Likewise, delivery of a
thing different to that provided in the contract or a thing of a different species is regarded
as non-conformity. The manners of assuming warranty and the scope of such warranty
are similar to the case of defects as we summarized above.
5.2.2. Obligations of the Buyer
The obligations of the buyer are paying the price (the main obligation), taking delivery of
the thing, and other obligation contractually imposed upon him.
a) Obligation to Pay the Price
The obligation is usually discharged quite easily by a cash payment. But as the economy
develops and the importance of commercial transaction rise, more sophisticated means of
payment also appear. For instance, cheques, bank accounts, special banking facilities,
credit card payments or even payment in foreign currencies are modes of paying the
price. Art 2304(1) of the Civil Code reads “the obligation to pay the price shall include
the obligation to take any step provided by the contract or by custom to arrange for or
guarantee the payment of price”. In a sense, the buyer must arrange the actual payment of
price and so undertake all the relevant formalities to transfer the money through orders to
the bank. For instance, he is responsible for ensuring that the money is there on the day of
the sale. He must also guarantee payment. The buyer is responsible for an effective

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transfer of money to the seller. For instance, he is liable if there is insufficient cash on his
bank account when he drawn a cheque.
The place of payment is in principle that fixed in the contract. Where the contract is silent
payment is made at the address of the seller which implicitly means his business address.
In cases of simultaneity, price is paid at a place where the thing is delivered. Quite in a
similar fashion, time of payment is that stipulated in the contract which could range
between payment at the contract and postponement to a future date such as sale on credit
that is realized later than the delivery of thing. In the absence of a contractual provision,
the principle is sale for cash on delivery. Payment is simultaneous with delivery, but the
buyer should be granted the opportunity to examine the thing for defects or non-
conformities so as to avoid a dispute where payment has taken place and the seller
refuses to repair defects.
b) Duty to Take Delivery
Where the delivery consists in that of a thing conforming to terms of the contract, the
buyer should take it. The buyer has a duty to cooperate in the delivery process and he
may not obstruct the sale by blocking the delivery. The obligation to take delivery
includes active performance of procedures necessary or even customary for carrying out
the delivery. He has to cooperate with the seller, for example, in indicating the color, size
or other important attributes of the thing.
5.2.3. Common Obligations of the Parties
The priority is given, like always, to a contractual term that is fixed by the parties. If there
is no agreement, the law imposes certain obligations on both parties based on
circumstances. By common obligations of the parties, we don‟t mean that the duty is
borne at the same time by both the seller and the buyer; we rather mean that it is possible
for both parties to assume the said categories of duties having regard to the circumstances
of the case. Thus, transfer of risk, expenses, and preservation of the thing may be borne
by either of the parties depending on differences in time, nature and other attending
circumstances.
a) Transfer of Risks
Transfer of risks is not an obligation in and by itself. It is rather a circumstance that

determines on whom certain consequential obligations should fall. Let‟s first look in brief
how risk passes from one party to another, usually from the seller to the buyer.

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The accepted principle as far as transfer of risk is concerned is the doctrine of res perit
domino, i.e. risk follows title. Stated differently, the transfer of ownership (title) is
accompanied by the transfer of risk. The sale of ordinary corporeal chattels transfers
ownership thereof merely through factual delivery because these goods are those
susceptible to the application of the property law presumption “one who is in possession
is deemed to be the owner”. But that is not all about it, and transfer of risk may occur
even where technically transfer of ownership has not yet taken place or where there is a
dispute as to the validity of the sale of the thing.
Risk involves the destroying, perishing, wearing and deterioration of a thing that is
subject matter of the sale transaction. Where the risks are transferred to the buyer,
through delivery made in accordance with the provisions of the contract and of the law,
he is obliged to pay the price notwithstanding that the thing is lost or altered in value
(Art.2323 cum 2324, Civ. C.). The buyer bears the risk of the thing‟s being lost or
deteriorated from the date of taking delivery, and his obligation to the seller remains
unaffected by these circumstances. Stated acontrario, the risk remains with the seller in so
far delivery is not made appropriately and risk is not transferred. Even though delivery
might not yet have carried transfer of ownership, the rationale here is that the law wants
the risk of loss of the thing to be borne by the material possessor of the thing, irrespective
of the actual status of ownership rights.
The buyer bears risk not merely where he took delivery of the thing, but also from the
day he is late in taking delivery of the thing. Specific things are do not pose a problem
here. If the sale relates to fungible things, the delay of the buyer does not transfer risks
because it requires specifications and it is generally difficult to take delivery.
Things under voyage (on course of transport) may pose a problem in the determining the
transfer of risk. The idea here is that the risk of the voyage is for the buyer because the
transfer of risks happens on the day the thing leaves the hands of the seller, and it is
immaterial that the thing is handed over to the buyer. But the law prohibits the seller from
abusing his position by giving a damaged thing and pretending the damage happened
during the voyage. Fraud of the seller reserves the risk to him, and if he knew or should
have known that the thing had perished or was damaged the risk will not be transferred to
the buyer.
b) Expenses
A sale transaction could entail various expenses. Who is to bear these expenses is an
important question. The noticeable expenses here are those of forming the contract,

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delivery, transport, payment, custom duties and expenses because of change in business
address of a party.
The law provides that the expenses of delivery (that includes counting, measuring and
weighing costs), transport (where delivery is carriage-free), customs duties linked to a
delay caused by the seller, and those incurred due to the change in business address by
the seller, are all borne by the seller. The buyer on his part bears the expenses of the
contract of sale itself, expenses for payment, expenses after delivery and expenses of
transport where thing is sent to other place than that of delivery. The nature of these
expenses and their appropriation shows that they are incidental to the primary obligations
and so borne by the respective parties.
c) Preservation of the Thing
The duty of preservation of the thing arises where the buyer fails to take delivery of the
thing on the one hand, and the seller makes a defective delivery refused by the buyer on
the other. Where the buyer is late in taking delivery or in paying the price, the seller bears
the duty to preserve the thing at the buyer‟s expense. He is for that matter entitled to
retain the thing until the buyer indemnifies him of the expenses he incurred in preserving
the thing. But if the thing deteriorates or is damaged because of his failure to preserve, he
will be liable. Where the thing sold has been received by the buyer but he intends,
legitimately, to refuse it, he is obliged to ensure its preservation at the seller‟s expense.
He is again empowered to retain the thing until the seller indemnifies him of his expenses
of preservation. His failure to preserve the thing makes him liable for the resulting
damage or loss of the thing. Finally, the seller and the buyer can relieve themselves of the
duty of preservation by consigning or selling the thing in accordance with general
contract principles.
5.3. Non-performance of a Sale Contract
As sale is a special type of contract, and therefore the general rules of contracts will
apply, mutates mutandis. Thus, with some adjustments, the remedies of non-performance
we have tackled in the third chapter are applicable to non-performance of sale contracts.
These are forced performance, cancellation and damages, if any.
5.3.1. Forced Performance
Dear distance student, you have to recall your reading on forced/special performance of
general contracts. Specific performance is awarded only if it is of a special interest to the

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creditor and if it can be carried out without affecting the personal liberty of the debtor.
For example, if the buyer finds the thing in the market, he cannot claim that the specific
delivery of the thing by the defaulting seller is of a special interest to him. In this case,
the buyer is preferred to make a purchase in replacement if the new thing conforms to
commercial practice or such purchase can be effected without inconvenience or
considerable expense. By the same token, a seller cannot claim the forced payment of a
price from the defaulting buyer if he can sell his thing at equivalent price to someone
else. That is, where compensatory sale is possible or customary, the court will not award
a forced performance against the buyer.
5.3.2. Cancellation
This is also not a novel nation as we have dealt with in relative depth on our discussion of
contracts in general. You are expected to recall all those points we put forth there and you
can make a simple adjustment to understand cancellation in a sale contract. As a rule,
parties have to seek cancellation of the contract from a judicial body. All the same, they
can unilaterally declare cancellation in exceptional circumstances. There are a couple of
reasons attributable to the buyer‟s claim of cancellation and there are other sets of reasons
for cancellation raised on the part the seller. There are also reasons available to both
parties.
i) Reasons for Cancellation by the Buyer
Cancellation is either judicial (by the court) or unilateral (by the buyer in this case). In
both cases, our focus is the buyer‟s right to either ask the court or do it himself.
One reason is the expiry of the compulsory date fixed for delivery. The date is
compulsory if the thing has a market price on markets to which the seller can apply to
obtain it. Where this time lapses, the buyer can cancel the contract. Where the date fixed
for delivery is not compulsory, the court or the buyer may grant the seller an additional
time called grace period within which he shall perform his obligation. The contract is
cancelled as of right where the seller fails to deliver the thing within such additional time.
Another scenario that brings cancellation to the buyer is where whole ownership is not
transferred to him. That means the seller delivers thing in sale whose title is defective or
encumbered because of other persons‟ rights over the thing. If the seller fails to deliver a
thing free from all encumbrances, the court can order the cancellation of the contract.
However, no cancellation is possible where the buyer knew of the encumbrance on
purchasing the thing. The law disallows cancellation in such case because parties

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knowingly entering into defective transaction should not attempt to invoke that defect at
the expense of creating insecurity in transactions. Again, there will not be any
cancellation where the right with which the thing is encumbered is of a small importance
and it appears that the buyer would have bought the thing despite the encumbrance. The
intention of the law is to prohibit immaterial defects featuring during contractual
formation from manipulations intended to avoid contractual obligations; these matters are
to be objectively appreciated by the court.
The encumbrance may be of the nature that the buyer is totally dispossessed from the
thing he bought. If the seller was bound to warrant the buyer against the dispossession,
the contract is cancelled as of right without any court involvement. The law,
acknowledging that the buyer bought the thing for enjoying it, regards total dispossession
as defeating the whole object of the sale transaction and therefore treats the contract as
cancelled in its own right. In cases of partial dispossession, it is the court that may decide
on the cancellation. Cancellation is, however, not possible where the dispossession only
affects a part of the thing of minor importance and where it is reasonably expected the
buyer would have bought the thing had he even known of the potential dispossession.
A contract may also be cancelled (as invoked by the buyer) by the order or decision of
the court if the thing is affected by a defect against which the seller warranted the buyer.
Note once again that the thing is deemed to be defective where it does not possess the
quality required for its normal use or commercial exploitation or where it does not
possess a quality required for its particular use. Where the defect relates to part of the
thing only, the contract is cancelled for that defective part only. The contract may
however be cancelled as a whole where the defective part cannot be separated from the
whole.
ii) Reasons for Cancellation by the Seller
The failure to pay the purchase price by the buyer constitutes one reason for the seller to
invoke cancellation of the contract. The seller may himself declare cancellation in case of
non-payment of price where such right has been given to him in the contract. If there is
no express stipulation in the contract that empowers the seller to cancel the contract upon
non-payment as agreed, the seller can declare cancellation only upon expiry of a
reasonable time fixed by him in the default notice made to the buyer. The seller can also
cancel the contract where the buyer fails to pay the price within the grace period given by
the court.
The failure of the buyer to take delivery of the thing may somehow operate as a ground
for the seller to require judicial cancellation of the contract. If the buyer‟s failure to take

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delivery justifies the fear that he will not pay the price, seller can seek cancellation. This
takes into account the situation that some buyers manifest their refusal to pay the price by
failing to take delivery of the thing they purchased. Seller can also demand cancellation
where taking delivery of the thing is an essential stipulation of the contract and the buyer
fails.
iii) Reasons for Cancellation by Both Parties
Both the seller and the buyer may get the contract cancelled due to certain conditions
relevant to their respective positions, the necessary changes being made. They are
considered below.
One case involving defective performance (or non-performance) may pertain to

successive deliveries. In successive deliveries, performance does not stop at once; it
continues for some time in the future. In such case, the detective performance of the past
may operate to stop future performance. The law states that where, in contracts for
successive deliveries by reason of the non-performance or the defect of one of the
performances due by a party, the other party is justified in fearing that the future
performance will not be made or will be affected by defects, such party may require the
cancellation of the contract for the future (Art 2351(1), Civ.C). Normally the cancellation
is for the future and the past performance, though not made or defective, remains as it is.
But where the plaintiff proves that the faulty delivery affects the whole delivery by
making such deliveries, past or future, useless to him, he may ask for cancellation of the
whole.
Impossibility in performance of an obligation entitles the respective party to cancel the

contract. Impossibility is a factual state of affairs, and occurrence of facts that make the
performance of the contract impossible evidently results in the cancellation of the
contract. It is pointless for a contract whose object has totally failed to remain in effect.
Anticipatory breach is also a ground for the cancellation of a sale contract. Anticipatory
beach refers to the situation whereby one party unequivocally (without any doubt)
informs the other party that he will not perform the obligation on his part. The other party
can cancel the contract even if the breach is made before the due date stated in the
contract.
iv) Effects of Cancellation
Where contract is cancelled for any of the above grounds, the parties are released from
their obligations under the contract. This release does not affect the right to demand
damages where they are sustained. Where a party has performed his obligation in whole

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or in part, he may claim the restitution of what he had supplied including the expenses
incurred. In the case where both parties have performed their obligations, each of them
may refuse restitution due by him until the other party has effected his part. Restitution is
the return by a party of things he has taken under the contract from the other party. If the
seller is to refund the price, it must include interest from the day of reception. If the buyer
is to restore the thing to the seller, it includes profits derived from the thing.
Sometimes restitution of the thing to its previous position may be impossible as a result
of the destruction of the thing in whole or in part or as a result of damage to the thing. If
the loss or damage is due to his act or due to the act of the person for whom he is
responsible, the buyer loses his right to claim to claim restitution; otherwise the buyer
retains his right to cancel the contract along with an award of damages. The buyer cannot,
however, cancel the contact where he is unable to restore the thing because he has
assigned or transferred it or the thing has perished or has been damaged by his act.
The person required to make the restitution of the thing shall be entitled to reimbursement
of the expenses he has incurred in preventing deterioration of the property or loss unless
the expenses were rendered necessary by his own fault or by the fault of a person for
whom he is responsible. Where the expenses incurred on the thing have increased its
value, the person making the restitution is entitled to the reimbursement of the expenses
by the amount only of the increase in value at the time of the restitution.
A person making the restitution of the thing may remove anything he joined to the thing
which can be separated from the thing without appreciable damage to the thing.
Conversely, a person required to make the restitution is bound to indemnify the true
owner where the former has caused deterioration of the property.
5.3.3.Damages as a Remedy for Non-performance
The non-performance by a contracting party of his obligation may be economically

detrimental to the other party, and the seller or the buyer, whoever the victim of the
default might it be, may claim that the damages thus caused be made good by way of
compensation. Compensation is claimed whether the contract is cancelled or maintained.
It is also due where the contract has not been regularly and exactly performed.
If the contract is sustained through specific performance, damages are due merely
because of a delay in performance so that the contracting party is awarded compensation
for a time he is deprived of the enjoyment of the thing that he had counted on. He may
also have lost a good chance to resell the thing if that was his intention. On the other
hand, if the contract is cancelled, the person is deprived of the advantage that he could

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legitimately expect from it. In both cases, it is proper to reestablish the equilibrium
established by the contract by remedying the upset by the failure to perform the contract.
This is done by requiring the person who has not performed his obligation or has
performed it improperly, incompletely or late, to pay damages to the other party.
The principles of claiming damages we have raised on contracts in general are also
applicable here. Leaving that part for your reading, I briefly focus on the issues of
damages specific to sale contracts.
Where the contractual breach is only that of being late in paying the price, the amount of
damages to be awarded is that the buyer should pay interest at the legal rate. This means
that if the contract is performed anyway even though not in time, the damage is
calculated to equal a simple interest at the legal rate, i.e. 9% on the principal. A higher
interest rate fixed for the contract as a whole will not apply to the award of damages.
The amount of damages awarded where a contract is cancelled will be fixed having
regard to whether a thing has a current price. Current price refers to the price practiced on
the market which would be the normal place of business for the buyer or the seller. The
amount of damages is equal to the difference between the contractual price and the
current price. The current price is the one that prevails on the day when a party could
exercise his right to declare unilateral cancellation or on the day following the date of
judicial declaration of cancellation. The defaulting party is also to pay normal expenses
linked to a purchase in replacement or compensatory sale as the case may be.
The situation is treated differently in the eyes of the law where the thing does not have a
current price. Here there is no term of reference to objectively calculate the amount of the
damages. One therefore looks at the compensation a reasonable man (in this the court)
deems appropriate. Such amount may be increased to the actual prejudice where one
party sustains damages because of intent to harm, gross negligence or grave fault
committed by the other party.
The amount of damages resulting from anticipatory breach is fixed by referring a current
price of the thing to that prevailing on the last day of the period stipulated in the contract
for the performance of the obligation. Where no time-limit for performance is fixed by
the contract, the day of reference is will be that when right to declare cancellation of the
contract could be exercised. Since anticipatory breach is usually made prior to the arrival
of the contractually fixed date of performance, the law implicitly upholds that it is fair to
calculate the damage waiting for the normal date of performance and the price in force on
that day. Nevertheless, damages cannot exceed the price actually paid for a previous

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purchase in replacement. Nor can it exceed the difference between the price fixed in the
contract and the price actually received for a previous compensatory sale.
Finally, a scenario that could result in the award of damages is dispossession. In such
case, the seller should reimburse the buyer, in addition to any other damages, the judicial
and extra-judicial expenses of proceedings he had to institute. The exception here, i.e.
where no damages may be sought, is the expenses the buyer could have avoided had he
informed the seller of proceedings with third parties.
5.4. Some Issues About International Sale Transactions
Dear distance student, what we have so far been considering is almost entirely a domestic
law of sale. Law is very personal in the sense that it effectively applies in a jurisdiction of
a state and not somewhere outside. The Ethiopian sales law is given effect only in
Ethiopia. Nevertheless, sale is also an international affair transcending beyond the
particular boundaries of a state because of increased commercial and trade relations
between states on the globe. So, in addition to particular treaties signed between countries
regarding a transnational sale transaction, there are some general issues we can arise.
Generally, the international sales contract is drafted to accommodate buyers and sellers
with each other. The bargaining systems cover items such as market forces affecting
prices, risk factors and terms that relate to security of payments. The final agreement is
an essentially private transaction and calls for a private legal regime.
Performance of an international contract involves greater distance and longer periods of

time before the goods are delivered and payment is required than in the usual domestic
transaction. There are also purely international risks such as differences in legal
currencies, different governmental regulations, difference in language, differences in
legal system and society, etc.
The international sale of goods will commonly involve more than one legal relationship.
That is in addition to the basic sales agreement, there is a shipping contract and insurance
contract. Further, there is a variety of documents such as bill of lading, invoice, and
marine insurance policies. Trade problems associated with international sales contracts
arise with regard to restrictive trade devices that impede or distort trade. Classic examples
include tariffs, import quotas, import licensing procedures and complex customs
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Even though many different issues are involved in international sale contract, here we are
mainly concerned with the arrangement related to security of payment in overseas trade.
We thus focus on the documentary credit, or letter of credit as it is usually called.
Because buyers and sellers engaging in international business transactions are sometimes
separated by thousands of miles, special precautions are often taken to ensure
performance under the contract. Sellers want to avoid delivering goods for which they
might not be paid. Buyers desire the assurance that sellers will not be paid until there is
evidence that the goods have been shipped. The exporting/importing Ethiopian enterprise
does not trust its respective partner abroad. Thus, letters of credit are frequently used to
facilitate international business transactions. The letter of credit is usually opened by a
bank, and the bank serves as an intermediary and guarantees the payment.
In a simple letter-of-credit transaction, the issuing bank agrees to issue a letter of credit
and to ascertain whether the beneficiary (seller) performs certain acts. In return, the
account party (buyer) promises to reimburse the issuer for the amount paid to the
beneficiary. There may also be an advising bank that transmits information, and a paying
bank may be involved to expedite payment under the letter of credit.
Under a letter of credit, the issuer is bound to pay the beneficiary (seller or exporter)
when the beneficiary has complied with the terms and conditions of the letter of credit.
The beneficiary looks to the issuer, not to the account party (buyer or importer), when it
presents the documents required by the letter of credit. Typically, the letter of credit will
require that the beneficiary deliver a bill of lading to prove that shipment has been made.
Letters of credit assure beneficiaries (sellers or exporters) of payment while at the same
time assuring account parties (buyers or importers) that payment will not be made until
the beneficiary has complied with the terms and conditions of the letter of credit. Study
the following exhibit for a better understanding.

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ISSUER
BANK
SELLER LETTER OF
BUYER
CREDIT
CARRIER
CHRONOLOGY OR EVENTS
1. Buyer contracts with issuer bank to issue a letter of credit; this sets forth the
bank‟s obligation to pay on the letter of credit and the buyer‟s obligation to pay
the bank.
2. Letter of credit is sent to seller informing seller that upon compliance with the
terms of the letter of credit (such as presentment of bill of lading), the bank will
issue a payment for the goods.
3. Seller delivers goods to carrier and receives a bill of lading.
4. Seller delivers the bill of lading to issuer bank and, if the document is proper,
receives payment.
5. Issues bank delivers the bill of lading to the buyer
6. Buyer delivers the bill of lading to carrier.
7. Carrier delivers goods to buyer
8. Buyer settles with issuer bank.
The letter of credit is known for its virtue. The basic principle behind letters of credit is
that payment is made against the documents presented by the beneficiary and not against

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the facts that the documents purport to reflect. Thus, in a letter credit transaction, the
issuer does not scrutinize the underlying contract; a letter of credit is independent of the
underlying contract between the buyer and the seller. Eliminating the need for banks
(issuers) to inquire into whether or not actual conditions have been satisfied greatly
reduces the costs of letter of credit. Moreover, the use of a letter of credit protects both
buyers and sellers.
The compliance with a letter of credit is usually simple to assure. In a letter of credit
transaction, generally at least three separate and distinct contracts are involved: the
contract between the account party (buyer) and the beneficiary (seller), the contract
between the issuer (bank) and the account party (buyer), and finally the letter of credit
itself, which involves the issue (bank) and the beneficiary (seller). As noted, given that
these contracts are separate and distinct, the issuer‟s obligations under the letter of credit
do not concern the underlying contract between the buyer and the seller. Rather, it is the
issuer‟s duty to ascertain whether the documents presented by the beneficiary (seller)
complywith the terms of the letter of credit. If the documents presented by the beneficiary
(seller) comply with the terms of the letter of credit, the issuer (bank) must honor the
letter of credit.
Sometimes, however, it is difficult to determine exactly what a letter of credit requires.

The degree of compliance required of parties by a letter of credit may vary slightly from
place to place. The Commercial Code of Ethiopia contains provisions on letter of credit
(Art.959-967). It recognizes two types of letters of credit: revocable and irrevocable.
Revocable credits are not legally binding undertakings between banks and beneficiaries.
Such credits may be modified or cancelled at any time without any notice to the
beneficiary. When the revocable letter of credit had been transmitted to a branch or
another bank, the fact of modification or cancellation of such credit must be
communicated to the branch or other bank prior to payment, negotiation or acceptance of
the credit. Otherwise, the cancellation or modification cannot have effect on the conduct
of the branches or the other bank. Revocable credit is to the disadvantage of the seller
(exporter) as he may not have recourse against issuer. Therefore, he does not seem to
consent to such a credit.
Irrevocable credit is, on the other hand, a definite undertaking by an issuing bank and is
binding. Irrevocable letter of credit, as the name indicates, cannot be modified or
cancelled, and it would constitute the full engagement of the issuer (bank) to the
beneficiary or other bona fide holders of drafts drawn under the letter that the provisions
for payment, acceptance or negotiation contained in the letter of credit will be duly
fulfilled. Thus, irrevocable letter of credit embodies a firm commitment by the issuing

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bank and its issuance imposes on the issuer (bank) an obligation from which it cannot
withdraw.
Irrevocable letters of credit require confirmation to bind other bank. When the issuer
instructs another bank to confirm its irrevocable letter of credit and when the latter does
so, the confirmation implies a definite undertaking of the confirming (advising) bank as
from the date on which it gives confirmation. In an unconfirmed letter of credit, the
beneficiary will not have recourse against the advising bank. In the case of a confirmed
irrevocable credit, the beneficiary has double promise for payment by two banks and he
can quite legitimately enforce his claims of payment not only against the issuing bank but
also the confirming bank.
The advising bank is, juristically speaking, jointly and severally liable after its
confirmation is secured. After the shipment of goods, the documents are presented by the
seller to the advising (confirming) bank. If the documents comply with the specification
in the letter of credit, the advising bank can even immediately pay the seller and demand
payment of the goods from the issuing bank. On the other hand, the buyer is the customer
of the issuer (bank); he has no contractual relationship with the confirming (advising)
bank. Consequently, the buyer would have no rights against the advising bank and vice
versa.
Self- check Exercises
1. If the sale contract is silent as to the place and time of delivery, where and when
should delivery take place?
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2. If you go to a bank and exchange 100 USD for Ethiopian Birr, does that constitute
sale? Why or why not?
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3. State special matters, if any, that pertain to cancellation of a sale contract as

opposed to cancellation of contracts in general.
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4. Explain patent and latent defects and their respective effects.
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5. What does the duty to transfer “unassailable rights” refer to?
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6. There are cases where warranty for defects cannot be contractually excluded.
Identify.
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7. There are cases where contractual silence regarding warranty for defects legally
excludes the warranty. Identify.
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8. How do you distinguish contract of supplies from a sale contract?
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9. What is the remedy available to the buyer is case he faces dispossession from the
thing?
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10. What is non-conformity?
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11. A purchased a mobile cell from B, a dealer. There were many defects in the cell
which rendered it unfit for use. A sued B for breach of warranty. B raised the
defense that the defects were latent and unknown to him and could not have
reasonably been discovered. Could B avoid liability on the said ground?
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12. X contracted to sell 70 head of beef cattle of Birr 150 per hundredweight to Y.Y
made a Birr 5000 down payment. Before delivery, X heard a rumor that Y was in
poor financial condition, and X demanded that he receive full payment before
delivering the animals. Y told X that the balance would be paid on delivery, based
on the weight of the cattle delivered. X refused to deliver the cattle and sold them
to a third party. Y filed a suit. X claimed that Y‟s refusal to pay was an
anticipatory breach of the contract. Discuss whether X was correct and what
action he could have taken on the basis of the rumor?
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13. A bank issued a letter of credit in favor of A to cover the sale of 100,000
computers. The letter of credit specified that the computers would be transported
by ship. A shipped the computers by air. Payment on the letter of credit was
dishonored because the shipment by air did not fulfill the precise terms of the
letter of credit. Should a court compel payment? Explain.
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CHAPTER SIX
INTRODUCTION TO COMMERCIAL LAW
Commercial law is a broad area of law. Our concern here is only with the fundamental
principles as particularly enshrined in the Commercial Code of Ethiopia. You will have a
brief look at the law of traders and business organizations, insurance and negotiable
instruments. At the end of this chapter, you must be able to:
- distinguish traders from non-traders.
- differentiate the business organizations that can be formed in Ethiopia,
- define insurance and insurable interest
- state the significance of insurance transactions
- describe negotiable instrument and negotiability
- identify the different types of negotiable instruments and their resenting features.
6.1. Law of Traders and Business Organizations
6.1.1. Traders
Who are traders? This is the foremost question that may come to one‟s mind. Traders are
persons who carry on trading activities professionally and for gain. Their professional
career is indicative of the fact that these persons engage in trade as a means of earning
livelihood. Obviously, traders pursue profit-making ends. The law has expressly stated in
a seemingly limitative list, the activities that are regarded as trading. Article 5 of the
Ethiopian Commercial Code contains twenty-one activities in which traders can engage
in.
Thus, not all persons who operate a given task for profit may be necessarily regarded as
traders. For example, persons who engage in agricultural production, cattle breading,
fishery and persons who operate activities at the level of handcrafts are not treated as
traders even if they derive profits out of their activities, and they don‟t have the rights and
duties of traders. This shows that the type of activity, not necessarily a profit generating
one, is considered for categorizing a professional pursuer as a trader or not.

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There are some persons who from the outset cannot engage in trading activities or at least
engage subject to fulfillment of certain conditions, not because the activities they engage
in are non-trading. Incapable persons, foreigners, associations, among others, are group
of persons who cannot engage in commercial activities. Incapable human beings such as
minors and persons with interdiction are denied the capacity to carry out acts of civil life,
and trade is at the top of juridical acts. Therefore, persons with incapacity cannot operate
trade personally by the application of the law of physical personality. Foreigners on their
part cannot directly go into trade matters as nationals. First, there are activities reserved
to nationals, and foreigners are totally enjoined from participating in those sectors.
Secondly, they need to secure work permit before embarking upon trading ventures.
However, for a poor nation like ours, foreign investment is necessary and the
government‟s successive grant of investment permit to foreigner‟s evidence to this fact.
Associations, on the other hand, are organizations formed to operate non-profit making
activities. Religious, social or many other non-governmental organizations acquire legal
personality upon registration but are not traders, for the mere reason that they pursue end
other than the realization of commercial surpluses.
A trader can be both a physical person and a juridical person. Both human beings and
corporate entities are regarded as traders when they take part in the activities earmarked
by the law as trading ones. Thus, a trader is not to merely mean individual merchants, and
the corporate form of trading is also legitimately recognized.
Traders have certain obligations not borne by non-trading persons. They are generally
required to be registered, to obtain business license and to keep books and accounts. No
trader can engage in commercial activities unless first registered in the commercial
register. The government tries to avoid the huge potential abuse in this sensitive area by
overseeing the potential and actual conduct of the traders by, among other things,
requiring registration. A similar end may be served by requiring the trader to secure a
business license form the authorities. A crucial obligation, especially from the view point
of government revenue, is the maintenance of proper and accurate books of account.
Business sector is the principal area from which the government generates revenue
through taxation to operate its multiple functions. Computations of tax liability are by and
large dependent accurate financial records by the concerned trader.
6.1.2. Law of Business Organizations
Among the two basic forms of doing business, i.e. individually or through an
incorporated body, the latter form can be split into various sub-forms. The corporate form
of doing business we deal with right now is the private one, meaning business forms
taken up by non-state entrepreneurs and that are governed by the commercial law. A

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corporate form of business undertaking is also available to the public in a slightly
different form from the private counterpart. Public enterprises and cooperatives are the
public forms of engaging in commerce by way of a corporate body. Anyway, one scheme
of operating business may be chosen over another for a variety of reasons.
Business organization is defined under the Commercial Code as an association arising

out of a partnership agreement. The word “association” is not used here to equate
business organizations to non-profit making entities; it is used here to mean grouping of
people. A business organization is, therefore, a grouping of business persons that comes
out of the partnership agreement. A partnership agreement exhibits certain features and
contains certain elements. According to article 211 of the Commercial Code, it is defined
as a contract whereby two or more persons who intend to join together and to cooperate
undertake to bring together contributions for the purpose of carrying out activities of an
economic nature and of participating in the profits and losses arising out thereof, if any.
Let‟s try to dissect the statement in order to understand a partnership agreement.
The partnership agreement is a contract in the strict sense of the term. As a contract,
multilateral instrument, it should satisfy all the legal requisites we raised on general
principles of contract law and it produces all the effects of a contract. It binds together the
cooperators and contributors and it is backed by the sanction of law for enforcement. As a
contract again, two or more persons are needed and this means that a single person cannot
establish a business organization in Ethiopia. Parties to the partnership agreement should
be willing to work together for common goal. The extent of collaboration depends on the
nature of the business organization. In companies, personality of the contracting pary is
less important than that in partnerships. The persons also undertake to make contributions
that later constitute the business organization. The kind of contribution may depend upon
the interest of the parties and the need for investment in the business organization. Cash
contributions are the obvious modes. But in kind contributions, or even skill
(knowledge), are possible in so far as they are susceptible to monetary valuation.
Business organizations are established for the purpose of carrying out activities of
economic nature and the partnership agreement should also reveal this. That is to say,
persons organize themselves in the form we are talking about to strengthen their
economic power, to collect more profit. In other words, a business organization cannot be
established for purpose other than profit making. The contracting parties further
undertake to participate in both the profit and the loss that arise out of their operation, as
the case may be. The contract cannot exclude members from either the profit or loss or
both. Mind you here that the case of limited liability is conceptually different and it is
generally recognized in companies.

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The Ethiopian law recognizes six types of business organizations: three types of
partnerships, two types of companies and a joint venture. Partnerships are associations of
persons and the personality of members does greatly matter. Companies are associations
of capital and the personality traits of shareholders are not important to the existence of
the company. Joint ventures are unique forms of business organization. Let‟s have a
cursory look at them.
a) Partnerships
Partnerships would have their own legal personality upon registration and publicity. But
such personality is greatly dependent on the mutual understanding between the partners
so much so that the withdrawal of one partner may cause the dissolution of the
partnership as a whole. There are three types of partnerships: ordinary, general and
limited partnerships.
Ordinary partnerships are corporate forms of doing business in non-commercial

activities. A commercial business organization is the one that picks up one of the
activities listed under Article 5 of the Commercial Code. A business engaging in those
activities cannot be run in the form of ordinary partnerships. An ordinary partnership may
be set up to operate other activities that do not make their doer a trader. Most of the
provisions of ordinary partnerships are informal and flexible, compared to the provisions
governing general and limited partnerships. Partners in an ordinary partnership are,
however, all jointly and severally liable for the debts of the partnership. But partners may
avoid the joint and several liability by contractually stipulating to the contrary.
General partnership is a commercial business organization in which all partners occupy

the same position vis-à-vis third parties. All partners are jointly and severally liable to
third parties, and they cannot even avoid this obligation by a contractual term. All of the
partners can be managers of the partnership. Creditors will have recourse against the
partners only after they exhaust the possibilities of recovery from the partnership.
A limited partnership comprises two categories of partners: general partners and limited
partners. The general partners of a limited partnership assume similar obligation as that of
partners of a general partnership. General partners are jointly and severally liable for the
debts and commitments of the partnership where the assets of the partnership cannot
cover the debts and commitments. This group of partners act as managers of the limited
partnership. Limited partners, on the other hand, are partners that cannot be held
responsible for the debts of the partnership beyond their original contribution. They
cannot also take part in the management for that is inconsistent with their exemption from
liability.

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b) Companies
The company is the best way of doing business in a corporate form. it is characterized by
an acquisition of capital from a relatively wider segment of the society. What is needed is
capital and not persons, and thus members are not expected to take part in the operations
of the company. Ownership belongs to dispersed shareholders while management and
control is in the hands of professional managers. The basic virtue of the company form is
the full recognition of limited liability. No contributor (shareholder) is held liable for the
debts of the company beyond his contribution, and he does not risk losing his personal
property because of liability incurred by the company. The life of a company is not
dependent on the life of the shareholders, unlike partnerships. The company exists and
operates independently of, and in fact remotely from, shareholders and the company
continues despite withdrawal or death of shareholders.
We have two types of companies: share companies and private limited companies. Both
have their partnership agreement expressed in what are termed as memorandum of
association and articles of association. They also have their capital divided into shares,
and they issue shares, even though shares of a very different nature. They are always
commercial business organizations in the sense that they engage only in one of the
activities legally recognized trading ones. They also have differences.
The minimum capital requirement is significantly different. A private limited company

has capital ceiling but Share Company can raise capital to an unlimited amount. The
number of shareholders for a share company is minimum five while private limited
companies can be formed by fewer people up to two. But the latter have a ceiling on the
number of shareholders, 20, while there is no limitation on the maximum number of
shareholders in share companies. Share companies are authorized to raise capital through
a subscription of shares to the public and pool together large sums of money for the
capital of the company. Private limited companies cannot offer shares for public
subscription.
Share companies can issue transferable shares and other transferable securities. They can
issue various classes of shares that can be negotiated easily. They can enter into loans by
issuing debentures. Private limited companies cannot issue such documents. In share
companies, important decisions are made by the general meeting of share holders. But in
private limited companies, the possibility or importance of such meeting is doubtful as
the line between ownership and management is often blurred.

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c) Joint Ventures
Joint ventures in investment law parlance refer to the collaboration between two persons
(usually where the government is a party) already in another business. Under the
Ethiopian Commercial Code, a joint venture is a secret business organization. The
existence of a joint venture cannot be disclosed to third parties. The organization is
known only to the venturers. The agreement forming a joint venture need not be made in
writing. A joint venture need not be registered and publicized by any way. Accordingly, a
joint venture cannot be a person; it cannot sue and cannot be sued. Third parties only
know the manager of the joint venture. The manager is responsible for all faults and
liabilities that may emerge because of the business. The powers of the manger and
liability of other partners will be determined in their internal mutual agreement.
6.2. Law of Insurance

6.2.1. General
Insurance is a social security scheme that developed because of the existence of risks.
Risks are evident especially in the business world where persons may be exposed to huge
losses as a result of the materialization of the risk. Such a phenomenon may discourage
people from venturing on sectors that may entail risk or the business sector might have
been generally endangered. Insurance policy had succeeded in responding to the
abovementioned problem.
A person or an organization may merely assume a risk of some kind that may or may not
happen. Whether the risk happens or not is, however, not certain. Nobody knows when,
how and to what extent the risk may materialize. If this fact was known beforehand,
everyone would have avoided it. It the uncertainty and fear of unfortunate moment may
hamper commerce or industry. The uncertainty surrounding potential losses is referred to
as risk. An insurance coverage for the risk will encourage people to conduct business
with out the fear of the occurrence of the risk. There are many virtues of insurance.
Insurance makes a person work without fear and thus increase production and
productivity. Individuals perform more in a risk free or risk controlled environment.
Insurance helps to budget money for unknown loss. If a person is insured, he pays money
to the insurance company at a continuous interval. The periodic payment, called
premium, can be taken as a budgeting in advance for an uncertain risk.
Most importantly, insurance distributes risk among different people. People under a
certain risk make payments in advance so as to address the risk in case it materializes.
The public will make a cumulatively huge contribution to the insurer, and the insured
who suffered the actualized risk would be redressed and put to his position he was before
the materialization of the risk. Because the insured has got paid from the fund pooled

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together by the public and we can say that the risk is dispersed on the people generally.
The distributed burden would be too easy for members of the community to bear, but
would have been very devastating on the individual persons in the absence of insurance.
Insurance has become a significant force in the industrial sector where there is an active
movement of labor and where equally risk exists. Insurance protects workers against
work related hazards. While the workers enjoy work without fear, that will be very
beneficial to the employer for more work is to be performed and production increased.
insurance companies create employment opportunity. Their financial and social status
makes them great contributors to the employment sector of a nation.
6.2.2. Insurable Interest
Any party purchasing insurance must have a “sufficient interest” in the insured item to
obtain a valid policy. Insurance laws determine sufficiency of items for insurance
coverage. A person is said to have insurable interest where he has a vested interest in the
subject matter of insurance to whom the advantage may arise or prejudice may happen.
There must be an economic link to the claim of insurance.
A person should have some kind of relation to or concern in the subject matter of the
insurance. Insurance protects the relation or economic concern on a thing. We say that
there is an insurable interest if the occurrence of a given peril assumed to affect the
concern on the subject matter of insurance proved to affect the economic interest of an
insured. The insured should be benefited from the existence of a thing or an interest
insured or should be prejudiced by its destruction upon materialization of the risk.
6.2.3. Insurance Policy and Rights and Duties of Parties
Insurance policy is basically a contract, but a special contract. It is defined under Article
654(1) the of the Commercial Code as a contract whereby a person called the insurer,
undertakes against payment of one or more premiums to pay to a person, called the
beneficiary, a sum of money where a specified risk materializes. As a contract, an
insurance policy should satisfy all essential requirements of a valid contract. In addition,
it must exhibit the special features attached to it by the provisions of the Ethiopian
Commercial Code.
Accordingly a contract of insurance must be made in writing. This is so because the law
says that the contract should be supported by a written document called an insurance
policy, which, as is mentioned in the definition is the contract itself (Art 657 (21). We can
say that the law has specifically imposed a writing requirement in the creation of an

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insurance contract, and that must be observed. The insurance policy also is to contain the
facts stated in Article 658. These are:
- the place and date of the contract;
- the names and addresses of the parties;
- the items, liability or person insured;
- the nature of the risks insured;
- the amount of the guarantee;
- the amount of the premium; and
- the term for which the contract is made.
In insurance contracts, the person guaranteeing against a given risk is called the insurer.
In Ethiopia, only share companies can be insurers because financial activities, viz
banking and insurance, are run only in the form of share companies. The person seeking
an assurance against a definite risk is the insured, or the beneficiary to use the Code‟s
terminology. The insured may subscribe insurance policy for his own benefit or for the
benefit of other person(s), i.e. the beneficiary of the policy may be the insured or a third
party.
The insurance policy must specify the subject matter of the insurance that contains an
insurable interest. Insurable subject matter could be a property exposed to peril (such as
car, building, machinery), liability to third parties, persons themselves including their life
and illness or accidents.
The insurance of property refers to both corporeal and intangibles. Physical assets are
obviously proper subject matters for insurance policy. Equally, intangible claims such as
rights and credits (receivables) to be collected may be insured. Even though these do not
have a material existence, there is a risk that they may not be recovered or received and
thus they constitute insurable interest. A person may face a liability to third parties. He
may extra-contractually fall into a liability scenario and this is a risk. A person can cover
such risk with an insurance policy so that he normally undertakes his activities without
much fear of liability.
Another subject matters of insurance are persons. Persons insure themselves for a variety
of reasons. For example, a person‟s death may seriously affect his descendant‟s or others

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whom he supports. Life insurance policy provides such person to give financial security
in advance to persons he supports. The life of the insured is an insurable interest for
ultimate beneficiaries whose livelihood is dependent on the earnings of the insured.
Likewise, a person may insure himself against defined accidents or illnesses for his own
benefit or for the benefit of others. An accident may cause a serious and permanent
bodily injury and may thus reduce the working and earning potentials. Illness may cause
same. Insurance is a good security for such risks. The insurance of illnesses or/and
accidents usually includes their consequences including death.
The insurance policy contains certain basic rights and obligations from which parties can
not even contractually derogate. Both the insurer and the insured do bear some duties to
one another. The insurer guarantees the insured against the risks specified in the policy,
and he must pay the agreed amount within the time specified in the policy or when the
risk insured against occurs at the time specified in the policy. This duty of the insurer is
not affected even if the losses or damages insured occurred due to the fault of a person
for whom the insured is responsible, and the obligation remains valid regardless of
establishing such link. But the insurer is automatically exempted from the duty if the
losses or damages covered by the policy are caused by the negligent or intentional fault
of the insured himself.
The main duties of the insured under an insurance policy are the payment of a fixed
premium and the disclosure of material facts. Insurance is not a gratuitous contract; it is a
contract made for consideration and each of the parties performs obligations. Thus, the
insured pays a fixed sum, called premium, which is usually paid on a time interval. The
insured is equally obliged to disclose exactly all the material facts within his knowledge.
This is an essence of an insurance policy and no contract continues without making exact
statements of all the facts. By material facts, we mean that the insurer appreciates the
risks based on them and consents to enter into the policy based on that. Thus, any
concealment or false statement made by the insured that make the insurer wrongly
appreciate risks, and that lead the latter to enter into the policy which otherwise he would
not have done, would nullify the policy.
6.3. Some Remarks about Law of Negotiable Instruments
A negotiable instrument is any document incorporating a right to an entitlement in such a

manner that it be not possible to enforce or to transfer a right separately from the
instrument (Art.715 (1), Comm. C). A negotiable instrument is a special but simple
document that gives the possessor a right to the entitlement as expressed in the instrument
by the presentment of the instrument to the debtor. The right cannot be claimed without

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the delivery of the instrument. The instrument is said to be negotiable because it can be
transferred (with the full rights) from one person to the other by mere delivery or,
sometimes, by endorsement.
The Ethiopian law recognizes three categories of negotiable instruments: commercial

instruments, transferable securities, and documents of title to goods. Transferable
securities are mechanisms of holding and negotiating certain types of rights and such
include shares and debentures. Documents of title to goods represent right over goods
that are on shipment. A bill of lading, a truck way bill and an airway bill are the
examples.
Commercial instruments are the most noticeable types of negotiable instruments. They
are documents that embody an entitlement to a specific sum of money. We will have
some issues regarding these categories of negotiable instruments below.
The vast number of commercial transactions that take place daily in the modern business
world would be inconceivable without commercial paper (instruments). Commercial
paper is any written promise or order to pay a sum of money. Bills of exchange (drafts),
promissory notes and cheques are typical examples. Commercial paper is transferred
more readily than ordinary contract rights, and persons who acquire it are normally
subject to less risk than the ordinary assignee of a contract right. Commercial paper at the
beginning grew out of commercial necessity, and was used in accordance with practices
set by individual merchants. But later on, it gained attention from the legal system and its
importance has resulted in the emergence and development of separate legal regime.
Instruments function in two ways – as a substitute for money and as a credit device.
Debtors sometimes use currency, but for convenience and safety they often use
instruments instead. For example, an instrument is being used when a debt is paid by
cheque. The substitute-for-money function of instruments developed in the middle ages.
Merchants deposited their precious metals with goldsmiths to avoid the dangers of loss or
theft. When they needed funds to pay for the goods they were buying, they gave the seller
a written order addressed to the goldsmith. This authorized the goldsmith to deliver part
(or all) of the precious metals to the seller. These orders, called bills of exchange, were
sometimes used as a substitute for money. Today, people use cheques and other types of
instruments in the same way.
Instruments may represent an extension of credit. When a buyer gives a seller a

promissory note, the terms of which provide that it is payable within sixty days, the seller
has essentially extended sixty days of credit to the buyer. The credit aspect of instruments
was developed in the Middle Ages soon after bills of exchange began to be used as

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substitutes for money. Merchant buyers were able to give to sellers bills of exchange that
were not payable until future date. Because the seller would wait until maturity date to
collect, this was a form of extending credit to the buyer.
For an instrument to operate practically as either a substitute for money, credit device, or
both, it is essential that the paper be easily transferable without danger of being
uncollectible. This is the function that characterizes negotiable instruments.
The Ethiopian Commercial Code specifies four types commercial instruments: bills of
exchange (drafts), cheques, promissory notes and traveler‟s cheques. The instruments are
frequently divided into two: orders to pay (drafts and cheques) and promises to pay
(promissory notes). The instruments may also have different natures based on the form of
transfer. They may be specified, to bearer or to order documents.
Instrument which is payable to bearer may be transferred by delivery alone; the bearer
simply hands to another party. The holder of an instrument in a specified name
establishes his right, upon delivery, to the entitlement as expressed in the instrument by
his designation as beneficiary therein and in the register held by the person issuing the
said instrument. Instruments to order may be transferred by endorsement and delivery of
the instrument to the beneficiary under the transfer.
A draft (bill of exchange) is an unconditional written order that involves three parties.
The party creating it, the drawer, orders another party, the drawee, to pay money usually
to a third party, the payee. The drawee must be obligated to the drawer either by
agreement or through a debtor-creditor relationship for the drawee to be obligated to the
drawer to honor the order. A cheque is simply a bill of exchange drawn on a banker. In
the case of cheque, the drawee is a banker. It is also an instrument to order.
The promissory note is a written promise between two parties. One party is the maker of
the promise to pay and the other is the payee, or the one to whom the promise is made. A
promissory note, which is often referred to as a note, can be made payable at a definite
time or on demand. It can name a specific payee or merely be payable to bearer.
The requirements for negotiability of these instruments are: be in writing, signed by the
maker or the drawer, be an unconditional promise or order to pay, state a fixed sum of
money, be payable at sight (on demand) or at a fixed date. They are payable to order or to
bearer, unless it is cheque which is always to order.
Unconditionality of promise or order: -A negotiable instrument‟s utility as a substitute

for money or a credit device would be dramatically reduced if it had conditional promises
attached to it. It would be expensive and time-consuming to investigate conditional

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promises or orders, and therefore the transferability of the instrument would be greatly
restricted. Substantial administrative costs also would be required to process conditional
promises. Furthermore, the payer or any holder of the instrument would risk the
possibility that the condition would not occur.
A fixed amount of money: - Negotiable instruments must state with certainty a fixed
amount of money to be paid at any time the instrument is payable, a requirement that
promises clarity and certainty in determining the value of the instrument. Any promise to
pay an amount to be determined in the future in risky, because the value of money
(purchasing power) fluctuates. Also, if the instrument‟s value were stated in terms of
goods or services, it would be too difficult to ascertain the market value of those goods
and services at the time the instrument was to be paid.
Promise or order: - For an instrument to be negotiable, it must contain an express order

or promise to pay. A mere acknowledgement of the debt, which might logically imply a
promise, is not sufficient because the promise must be affirmative, written undertaking.
But, if such words as “to be paid on demand” or “due on demand” are added, the need for
affirmative promise is satisfied.
The transfer of entitlements a negotiable instrument embodies are transferred by

negotiation. Negotiation is the transfer of an instrument in such form that the transferee
(the person to whom the document is transferred) becomes a holder. A transfer by
negotiation creates a holder who, at the very least, receives the rights of the previous
possessor. A transfer by negotiation, unlike an assignment, can make it possible for a
holder to receive more rights in the instrument than the prior possessor had. A holder who
receives greater rights is known as a holder in due course. Such holder acquires that
privileged status on the instrument because of his good faith possession. There are two
methods of negotiating an instrument so that the receiver becomes a holder: itdepends on
whether the instrument is to order or to bearer.
If an instrument is payable to bearer, it is negotiated by delivery – by transfer into

another person‟s possession. The use of bearer paper involves more risk through loss or
theft than the use of order paper because any one in possession, irrespective of the
manner of acquisition of the instrument, is entitled to the sum the instrument represents.
Order paper contains the name of a payee capable of endorsing. If an instrument is

payable to order, it is negotiated by delivery with any necessary endorsements. An
endorsement is a signature with or without additional words or statements. It is most
often written on the back of the instrument itself. If there is no space on the instrument,

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endorsements can be written on a separate piece of paper called allogne. The allogne
must be fixed to the instrument to become a part of the instrument.
Self-check Questions
1. How would you distinguish traders from ordinary persons?

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2. The Ethiopian Commercial Code, which is still in force, contains an exhaustive

list of trading activities. But many ways of doing business have emerged since its
promulgation. Do you think these „new‟ ways of doing business cannot do not
have a law in force for their regulation?Explain.
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3. Financial business in Ethiopia is not only reserved to nationals but also can only
be undertaken in the form of share company. Why such a restriction?
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4. “Private limited companies in Ethiopia have the combined virtues of privacy of
partnerships and permanence of share companies”. Explain.
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5. Joint ventures are secret profit-making institutions so much so that they do not
have legal personality. What purpose does the law contemplate when it recognizes
such form of business organizations?
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6. Insurance is an indispensable social service sector. Discuss the rationale behind

the emergence of an insurance scheme.
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7. What requirements must be met for an instrument to be negotiable?

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8. A note has two original parties. Who are they? A cheque has three original
parties. Who are they?
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9. What are the differences between instruments to bearer and to order?

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10. The following note is written by Admassu Kibebew on the back of an envelope:
“I, Admassu Kibebew, promise to pay Maeregu Tesfaye or bearer Birr 1000 on
demand.‟ Is this a negotiable instrument? Discuss fully.
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Pre. By Addis Tamiru Ass.

Lecture at Du, LLB, LLM candidate in Human Right &

“Business law” refers to the whole regulatory environment in which individuals or

Business Law for Management & Accounting Students 1

Business Law for Management & Accounting Students 2

INTRODUCTION TO LAW AND THE LEGAL ENVIRONMENT OF BUSINESS

1.1. MEANING OF LAW AND SCHOOLS OF JURISPRUDENTIAL THOUGHT

Business Law for Management & Accounting Students 3

Business Law for Management & Accounting Students 4

d) The Marxist Legal Thinking

Business Law for Management & Accounting Students 5

1.2. The Features of Law

Business Law for Management & Accounting Students 6

iii) Establishment in Permanence

iv) Intimacy with Human Behavior and State

Business Law for Management & Accounting Students 7

1.3. Law as Distinguished from Other Social Norms

Business Law for Management & Accounting Students 8

1.4. Functions of Law

Business Law for Management & Accounting Students 9

1.5. Classifications of Laws and Nature of Business Law

Business Law for Management & Accounting Students 10

Public versus Private Law

Business Law for Management & Accounting Students 11

Business Law for Management & Accounting Students 12

3. What specific functions does business law perform in the society?

Business Law for Management & Accounting Students 13

2.1. The Concept of Personality and its Effect

Personality is a fundamental concept in law because no dealings of legal significance

Business Law for Management & Accounting Students 14

2. 2. Beginning and Termination of Artificial Personality

2.3. Attributes of Legal Personality

Business Law for Management & Accounting Students 15

Business Law for Management & Accounting Students 16

2.4. Commencement of Physical Personality

2.4.1. The Rule

2.4.2. The Exception

Because personality begins at birth as a matter of principle, an unborn body is not a

Business Law for Management & Accounting Students 17

The granting of personality to a fetus is subject to compliance with three cumulative

Business Law for Management & Accounting Students 18

2.5. Capacity and Incapacity of Physical Persons

Business Law for Management & Accounting Students 19

a) Minority: - Minority in civil law is an incapacitating condition that occurs because of

Business Law for Management & Accounting Students 20

b) Judicial Interdiction: - This is a court judgment that declares a person as incapable

Business Law for Management & Accounting Students 21

d) Foreign Nationality: - This is a special incapacity because a person is prevented from

2.6. Termination of Physical Personality

Declaration of absence can, through interpretation, also result in termination of physical

Review and Self-check Questions

1.Why is the knowledge of law of personality so important to a businessman or a

Business Law for Management & Accounting Students 22

3.What is the effect of a civil act performed by a judicially interdicted person?

4.Does the establishment of a partnership by, for instance, identifying the

5.Work out the following case by making correct reasoning:

Business Law for Management & Accounting Students 23

Business Law for Management & Accounting Students 24