CHAPTER THE CONCEPT OF LEGAL PERSONALITY

1.1. Definitions

A person, in the first instance, is a human being who is individual member of the society and it
also refers to an entity (such as a corporation) that is recognized by law as having the rights and
duties of a human being.

A person is any being whom the law regards as capable of rights and duties. Any being that is
so capable is a person, whether a human being or not, and no being that is not so capable is a
person, even though he be a man. Persons are the substances of which rights and duties are the
attributes. It is only in this respect that persons possess juridical significance, and this is the
exclusive point of view from which personality receives legal recognition. Or

Hence, a person is a being or an entity that possesses rights and duties or is a subject of rights

and duties before the eyes of the law.

Legal personality is the legal status of one regarded by the law as a person: the legal
conception (device) by which the law regards a human being or an artificial entity as a person. It
is a particular device by which the law creates or recognizes units to which it ascribes certain
powers and capacities.

Legal personality is the attribute feature of being the subject of rights and duties before the eyes
of the law. If one is the subject of rights and duties it is a person and the process is called
personality.

1.2. Types of Persons

There are two types of persons recognized by the law. These are:

a. Natural or Physical Persons: is a human being, as distinguished from an artificial person

created by law, who is an individual member of the society.

- At the present time, every human being is considered as a person before the eyes of the law
without the fulfillment of any additional requirement. Or legal personality is presumed.
- When a person is born physically, s/he is also born legally. Legal personality would be
conferred up on every physical person automatically up on birth. Hence, every physical person is
the possessor of rights and duties from the moment of its birth up until its death.[1]

b. Artificial or Juristic Persons: are entities such as corporations or associations and so on

created by law and given certain legal rights and duties of a human being: a being, real or
imaginary that for the purpose of legal reasoning is treated more or less as a human being. Such
persons are also termed as fictitious persons, legal persons, and Moral persons.

- These are not human beings. They can’t, by themselves, do what human beings can do
physically. They are represented (even lead by) by physical persons to do their activities.
- Legal personality is not conferred up on them naturally. Hence, personality is not presumed to
them.
- Their existence, unlike human beings, is fictitious. Legal personality is given to them by law,
artificially, for the sake of convenience in control up on the fulfillment of certain requirements,
such as application to the required office, registration, publications, legality of object of
incorporation and so on.
- Be aware that, for their personality is given to them by law it may also be withdrawn by law for
failure to keep up with the requirements of the law.
- In conclusion, artificial persons are the subject of rights and duties from
their formation (registration and publication) to their liquidation (winding up).
- The following are typical examples of artificial persons: Companies, Hotels, Religious
Organizations, and Government Ministries.[2]

1.3. The Beginning of Legal Personality

Article 1 of the Civil Code of Ethiopia dictates that : the Human person is the subject of rights
and duties from its birth to its death. In order to understand this provision we need to define
each element of the article turn by turn.

- BIRTH: is the culmination of pregnancy or the cutting (severing) of the umbilical-cord or the
complete extrusion of the baby (child) from its mother’s womb (uterus) naturally or via a C-
section. Or when the child begins an independent existence, by itself, in the real world.
- RIGHT: is the legal ability or capacity or privilege to do something (rights-in-rem - or rights
to be exercised in relation to a thing e.g. a chair) or to prohibit others from doing something
(rights-in- person am - rights to be exercised against a person). E.g. the right to Succession.
- DUTY: it is certain legal or contractual obligation that has to be discharged accordingly or
otherwise constitutes a fault and entails legal liability. E.g. the duty to pay tax or maintain the
elderly.
- DEATH: is the complete metabolic breakdown or collapse or when the heart stops beating or
the lung stops functioning.

In conclusion, for physical persons, the status of being a person before the eyes of the law is
given naturally (via the instrumentality of birth) and it would only be taken away naturally by
death.

Article 2 of the civil code stipulates the exception rule to the principle stated under article 1 of
the same code. Article 2 envisages that, a child merely conceived shall be deemed as though
born whenever its interest so demands provided that it is born alive and viable.

According to this article the law does not only confer the status of being a person after birth but
also exceptionally before birth up on the fulfillment of three complementary requirements. These
are:

1. Conception: per article 3 of the same code, a child is deemed to have been conceived on the
300th day which precedes its birth.

2. There needs to be an interest (mostly economic) of the fetus to be protected in its favor

nevertheless it is yet to be born. For instance, the right to succession or Donation. The
presumption of the law is, if the child is to be born after nine months why should we preclude
him from enjoying his rights merely because it is yet to be born. and
3. The child should be born (when it is born) Alive and Viable. I.e., when the child is born after
the completion of pregnancy it should be born:

- Alive: with a functioning lung or with a breath or as different from a stillbirth. And
- Viable: literally defined a child shall be viable means it should be born, as a person, with the
potential (physical requirements) to survive in the future. [3] However, the technical definition of
viability is stipulated under Article 4 of the Civil Code, the article stipulates that:
- 4(1): a child shall be deemed to be viable where it lives for 48 hrs. (at least) after its birth,
notwithstanding any proof to the contrary. Hence, it is considered as a person and its interest, if
any, are protected
- 4(2): a child shall be deemed to be not viable where it dies in less than 48 hours after its birth
and the cause of death being an Internal or Natural factor or due to a deficiency of bodily
constitution. Such as, Cancer or HIV and so on. Hence, it is not considered as a person and its
interest would not be protected. Remember: if a child becomes not viable, it will be considered,
for all legal purposes, never to have been born.
- 4(3): a child shall be exceptionally deemed to be viable where it dies in less than 48 hours
after its birth and the cause of death being an external factor or a factor other than deficiency of
its internal bodily constitution, such as an accident. This is because the presumption of the law
becomes had it not been for the external factors the child would have survived and become
viable. Hence, in this case, though it died in less than 48 hours, the child would be exceptionally
considered viable and considered as a person and its interest, if any, would be protected.

1.4. The Attribute Features of Legal Personality

By the attribute features of legal personality we are referring to those characteristics or attributes
that distinguish beings endowed with legal personality from beings with no legal personality.
Accordingly, the following are the typical attribute features of legal personality:

a. The right to have a name (to be named) to be identified by it. If one is not a person s/he does
not meaningfully cause use of their name. In Ethiopia we follow a three degree naming scheme,
which is consecutively, First Name, Father’s Name and Grand Father’s name.
b. The ability to sue or be sued by its own name.
c. The ability to own and administer property, whether the property is movable or immovable;
tangible or intangible.
d. The ability to engage in a Juridical Act (an act to be effected by the law), such as concluding
a contract, issuing of a WILL and so on.
e. The obligation (duty) to be pay taxes as per the conditions prescribed by law.

- Can you enumerate additional attribute features of legal personality of both types, i.e., both the
rights and the duties??

1.5. The Fundamental Nature of Legal Personality

Legal personality is so fundamental to a person’s meaningful existence that creates a legal

bondage or connection or attachment as between the individual and
the laws and opportunities that are available to him or her in a certain country where s/he is
living. Consequently, if one does not have legal personality, s/he is not considered as a person or
there is no legal recognition as to his or her existence and his /her existence becomes remedy-
less before the eyes of the law of that particular state.
CHAPTER TWO
LAW OF CONTRACTS (preliminary reading)

illustration not visible in this excerpt

I. UNDERSTANDING CONTRACT LAW

When was the last time you made a contract? If you bought your first car last year or sold your
old skis at a flea market, you probably know that these activities involve contracts. Many
common daily activities may also involve contracts, from buying a fast food meal to filling your
car with gas. Most people think a “contract” is a long, preprinted, formal document that they sign
when buying a vehicle, selling their house, or purchasing insurance. Such formal documents
represent only a small fraction of the contracts that you will make in your lifetime. The truth is
that you create a contract any time you agree to exchange things of value. Because contracts
pervade your life, you need to know about their nature, purpose, and effect. Further, contract law
forms the foundation for all other areas of the law that we will explore in this text.

Understanding contract law is necessary to grasp the law of sales, consumer law, agency law,
property law, employment law, partnership law, corporate law, and computer law. We will begin
with the most basic concepts: what contracts are and how they come into existence.

II. THE NATURE OF A CONTRACT

A contract is any agreement enforceable by law. You should never enter into a contract without
understanding the legal responsibilities involved. Not all agreements are contracts, however. A
Son’s promise to take the garbage to the curb before his father returned home is probably not a
contract. In contrast, Mr. Kebede’s agreement to run an ad in the newspaper is undoubtedly a
contract. Similarly, if someone answers Mr. Kebede’s advertisement and returns his lost laptop,
he will owe that person what he promised as a reward in the ad.

III. THE THREE THEORIES OF CONTRACT LAW

The legal responsibilities associated with contracts are based on what the involved parties do and
say to one another. In the past, courts asked whether the parties to a contract exchanged things
of equal value. This approach was called the equity theory of contract law. However, the
advent of industrial capitalism and the need to support a profit-making system forced the courts
to shift their focus. When asked to settle a contract dispute, the courts would ask whether the
parties had agreed to the terms set forth in the agreement. This new theory was called the will
theory of contract law because it focused on the exercise of each party’s free will. The courts no
longer asked if the contract was fair; instead they pondered, “Did the parties really agree to these
terms?”

One problem with the will theory is that it was difficult to know what the parties were actually
thinking when they entered into an agreement. Consequently, the courts studied actions and
words to determine if the parties reached a “meeting of the minds.” Gradually, this approach led
to a search for certain fixed elements to contracts. If these elements existed, the courts would
hold that a contract existed. This approach became known as the formalist theory because it
relied on the form of the agreement.
IV. THE ELEMENTS OF A CONTRACT

The six elements of a contract are offer, acceptance, genuine agreement, consideration, capacity,
and legality.

To be legally complete, a contract must include all six elements. Notice that the list does not
include anything written. Not all contracts have to be in writing to be enforceable.

- Offer: is a proposal by one party to another intended to create a legally binding agreement.
- Acceptance: is the second party’s unqualified willingness to go along with the first party’s
proposal. If a valid offer is met by a valid acceptance, a contract exists.
- Genuine Consent: Some circumstances, such as fraud, misrepresentation, mistake, undue
influence, and economic duress, can destroy the genuineness of an agreement.
- Capacity: The fourth element is the legal ability to enter a contract. The law generally
assumes that anyone entering a contract has the capacity, but this assumption can be disputed.
- Consideration: the fifth element is the exchange of things of value. The parties to the contract
should exchange things of value to one another. If not, there is no consideration in that
agreement.
- Legality of Object: People cannot enter into contracts to commit illegal acts.
Consequently, legality is the final element of a contract.

V. CHARACTERISTICS OF A CONTRACT

Contracts can be created in different ways and can assume diverse forms. A contract can be
described by any of the following characteristics: Valid, void, voidable, or unenforceable
Express or implied Bilateral or unilateral Oral or written.

Any contract can have characteristics from one or more of these four groups. That is, a contract
can be valid, express, bilateral, and written. Let’s take a closer look at what these
characteristics indicate about a contract.

a. Valid, Void, Voidable, or Unenforceable

The word valid means legally good, meaning that a valid contract is one that is legally binding.
On the other hand, a contract that is Void has no legal effect. An agreement that is missing one
of the previously discussed elements would be void, such as any agreement to do something
illegal.

When a party to a contract is able to void or cancel a contract for some legal reason, it is a
Voidable contract. It is not void in itself but may be voided by one or more of the parties. A
contract between two minors, for example, could be voidable by either of them.
An unenforceable contract is one the court will not uphold, generally because of some rule of
law, such as the statute of limitations. If you wait too long to bring a lawsuit for breach of
contract, the statute of limitations may have run its course, making the contract unenforceable.

b. Express or Implied

An express contract is stated in words and may be either oral or written. An implied
contract comes about from the actions of the parties. People often enter into implied contracts
without exchanging a single word.
Example 1: Alemayehu went to a self-service AGIP gas station that requires payment before the
attendant will turn on the pumps. He handed the attendant 10 birr, returned to his car, pumped 10
birr worth of gas into his tank, and drove off. Neither party spoke a single word, yet an implied
contract arose from their actions.

c. Bilateral or Unilateral

The word bilateral means two sided. Thus, a bilateral contract contains two promises. One party
promises to do something in exchange for the other’s promise to do something else. If a friend
says, “I’ll sell you my DVD player for 150 birr,” and you say, “I’ll buy it,” a bilateral contract
comes into existence. Each of you has made a promise- you have promised to buy, and your
friend has agreed to sell. Most contracts are created in this way.

In contrast, the word unilateral means one-sided. A contains a promise by only one person to do

something, if and when the other party performs some act. If your friend says, “I’ll sell you my
DVD player for 150 birr if you give me the cash before noon tomorrow,” he or she will not be
required to keep the promise unless you hand over the cash before noon on the following day.

A reward offer (public promise of a reward) is one of the most common instances of a unilateral
contract. The acceptance of the reward offer must precisely comply with the offer.

Example 2: Say Mr. Belete placed an advertisement in the Addis Zemen newspaper offering a

reward for the return of his lost laptop. However, Mr. Beletes’s offer of a reward alone did not
create a contract. The contract would come into existence only when someone returns the laptop.
Mr. Belete would then owe the finder the reward.

d. Oral or Written

An oral contract is created by word of mouth and comes into existence when two or more people
form a contract by speaking to each other. One person usually offers to do something, and the
other party agrees to do something else in return. Most contracts are oral contracts of this nature.

Sometimes, however, it is desirable to put contracts in writing. A written contract assures that
both parties know the exact terms of the contract and also provides proof that the agreement was
made. A law, the Civil Code of Ethiopia, requires that certain contracts, such as, contracts related
to immovable, Administrative contracts and contracts for a longer period of time must be made
in writing to be enforceable.

§ What do you think are the advantages of concluding a contract in writing than orally?

Reviewing What You Learned

1. Explain the elements of legal contracts.

2. What are the differences among valid, void, voidable, and unenforceable contracts?
3. What are the differences between express and implied contracts?
4. What are the differences between unilateral and bilateral contracts?
5. What are the differences between oral and written contracts?

Definition of Terms

- Offer: A proposal made by one party (the offeror ) to another party (the offeree ) indicating a
willingness to enter a contract.
- Acceptance: The agreement of the offeree to be bound by the terms of the offer.
- Genuine agreement: Offer and acceptance go together to create genuine agreement, or a
meeting of the minds. Agreement can be destroyed by fraud, misrepresentation, mistake, duress,
or undue influence
- Consideration: Consideration is the thing of value promised to one party in a contract in
exchange for something else of value promised by the other party. The mutual exchange binds
the parties together.
- Capacity: The law presumes that anyone entering a contract has the legal capacity to do
so. Minors are generally excused from contractual responsibility, as are mentally incompetent
and drugged or drunk individuals.
- Legality: Parties are not allowed to enforce contracts that involve illegal acts. Some illegal
contracts involve agreements to commit a crime or a tort. Others involve activities made illegal
by statutory law.

2.1. Sources of Obligation

An obligation can be defined as certain duty (either contractual or legal) that has to be discharged
or otherwise constitutes a fault and entails legal liability. Hence, regardless of the source or the
nature of the obligation, the essence of an obligation lays in the fact that it requires to be
discharged or it is obligatory to be performed and if one of the parties failed to discharge their
obligation there is an obvious legal consequence- Liability. Accordingly, there are two basic
sources of an obligation. These are:

1. Law: this is a legal obligation that mandatorily emanates from the direct operation of the law.
The law directly imposes various imperative obligations on citizens to preserve various interests.
The typical interest that such obligation stands to defend is public interest. The protection of the
interest of the public at large is non-negotiable. Hence, every law stands to protect public
interest. Legal obligations are mandatory in nature and require due obedience. Otherwise
stipulated, such obligations may not be freely disregarded by the parties.
2. Contracts: as different from legal obligation sometimes the parties to certain contractual
engagement may up on their own free will (volition or consent) create and impose an obligation
towards one another. This is not an obligation imposed on the parties by the direct order of the
law. Rather, this is an obligation created by agreement of the parties- according to the principle
of Freedom of Contracts . As a result, most of the obligations involved in contracts are
permissive in nature, which are imposed by the parties themselves. A certain obligation is said to
be permissive if it can be disregarded by agreement of the parties. However, once a contract has
been duly constituted before the eyes of the law, after fulfilling the requirements of formation,
each provisions of the contract bind the parties as a law. Hence, failure of either party to honor
the terms of their agreements results in legal liability.

- Can you enumerate other possible sources of an obligation in addition to the law and
contracts?
2.2. Technical Definition of Contracts

Literally defined a contract is an agreement between 2 or more parties creating obligations that
are enforceable or otherwise recognizable at law- Binding Contracts. Not all agreements are
enforceable at law. Hence, only agreements that are enforceable at law result a contract. The law
does not negotiate on the enforcement of contracts.

However, the technical definition of a contract is stipulated under Article 1675 of the Civil Code
of Ethiopia, according to this provision,

“A contract is an agreement whereby two or more persons, as between themselves, create,

vary or extinguish obligations of patrimonial nature.”

In order to have meaningful understanding of the above provision, we need to dissect each
element of the provision as follows:

a. A contract is an agreement

An agreement is a mutual understanding between 2 or more persons about their relative rights
and duties. Or it is manifestation of mutual assent by 2 or more parties, legally competent
persons, to one another. An agreement is in some respects a broader term than a contract or even
than bargain or promise. Accordingly, the parties to the contract:

- Should negotiate, deal or bargain on all terms of the contract whether fundamental or incidental
terms of the contract.
- Should understand each other and express their understanding.
- Should have mutual understanding or consensus on the terms of the contract- Consensus ad
idem or there should be meeting of minds. And,
- Should, as much as possible, bargain in a win-win-situation.

§ Do you think that all agreements result in a contract? The answer is obvious that not all
agreements result a contract. However, be aware that, all contracts are necessarily the results of
an agreement. Or the signing of an agreement is a necessary condition for the constitution of a
contract. We engage in the conclusion of millions of agreements (of many types) every day and
it is very difficult to consider them as contracts. The purposes of contracts are very limited
compared to the purposes of an agreement. Agreements do not only serve (have) business
objects. They, unlike contracts and in addition serve numerous social purposes or relationships.
Agreements have broader purposes and wider concepts.

Hence, the next question we need to respond to is, if all agreements do not result in a contract,
what type of agreements result in a contract?

Only agreements in which the parties have agreed to be bound (obliged) by the terms of their
agreement result a contract. Or the agreements which result a contract are those in which the
parties have assumed the intention to be bound (intentio obligandi) by the terms of the contract.
As mentioned above, the parties should not only agree but also consent to be bound by the terms
of their agreement either expressly or impliedly.

In conclusion, only agreements enforced (sanctioned) by law result in contracts. Or failure of

either or both parties to perform (honor) according to the contract entails sanction by law against
the failing party. This principle is called the principle of sanctitiy of contracts. The law does not
negotiate on the keeping of promises. This goes in line with the Amharic maxim- failure to keep
a promise is worse than losing a descendant . Or the latin maxim - Pacta sunt survanda.

The following agreements, for instance, may not result in a contract:

- Social or domestic Agreements: promise of dinner invitations between friends, a father’s

promise to a son or good neighborly promises made to help each other during harvest and so on.
- Simulated Agreements: where the parties secretly agree not to be bound by their agreement.
- Gentlemen’s Agreement: where the parties made an open stipulation or an exculpatory clause
that their agreement does not result in liability.

b. … Where by two or more parties…

In order to conclude a legally binding contract there should be at least two or more persons that
are the parties to a contract. A person may be able to talk with his own self but a person cannot
legally or validly or safely conclude a contract with himself. If a person is allowed to make a
contract with himself it makes the very essence of engaging in a contract (i.e., exchange of
consideration) futile or meaningless. The main objective behind the conclusion of a contract is to
exchange an economic value dictated by self-insufficiency. If a person is allowed to sale his own
car to his-self he has, practically, exchanged no value hence there will be no contract.

However, some scholars mention article 2188 of the civil code of Ethiopia and argue that a
special agent empowered to sell car of the principal may conclude a contract with his own self
and sell the car to his self. Are they justified? Consider the following scenario:

Mr. Alemu is a rich business person. He is so busy that he does not have time to sell his own car.
Hence, he appointed Mr. Tibebu, as a special agent only for the purpose of selling the car, on
behalf of Mr. Alemu. Now, Mr. Tibebu, the selfish, taking advantage of his power of
representation, sold the car not to another person but to himself. Now, the seller is Tibebu and
the buyer is also Tibebu.

Can we say Mr. Tibebu has concluded a contract with himself? Is the contract viable before the
eyes of the law? Why or why not? What are the practical problems if Mr. Tibebu sells the car of
another person to his own?

c. … ‘As between Themselves’…

The legal effect of a contract, whether positive or negative, shall be restricted to the parties to the
contract or the contractants or the signatories of the contract- Privity of Contracts. The rule
is, nobody shall be bound by any undertaking to which s/he has unconsented. Hence, the parties
or their agreement can only bind themselves not outsider parties or non-signatories or non-
contractants or third parties to the contract. However and exceptionally, there are some
situations where by a third party or its interest may be affected (mostly benefited) by a contract
concluded by other parties. In this regard, you are invited to read provisions of the Civil Code
stipulated from Article 1952 and the following entitled Promises, Stipulations, Assignments,
delegation of rights Concerning Third Parties. However, the most prominent example is a
contract of life insurance, where by the subscriber enters in to a contract with the insurer having
named a 3rd party beneficiary who will be paid the insurance money up on the death of the
subscriber. In this case nothing prohibits the named beneficiary to benefit from a contract to
which s/he is not, technically, a party.

d. …Create, Vary, Or Extinguish Obligations…

Up on the conclusion of a valid contract the parties to the contract may:

- Create a totally new contractual obligation. Example, ‘A’ lend 600 birr to ‘B’ and signed a
new contract of Loan to that effect. or
- Vary or supplement or complement or alter the terms of an existing contractual obligation
by a subsequent contract. Example, concluding a new contract to increase the amount of rent
based on an existing contract- it was 300 Birr now they increased it to 500 Birr or it was a loan
or debt without guarantee now they signed a contract to add the guarantee. Or they had a prior
insurance contract and they conclude a new contract to increase the amount of the premium to be
paid by the insured.
- To extinguish or terminate the effects of an already existing contract by a subsequent
contract. Examples are: Novation (1826) - where the parties terminate the effect of an old
obligation by changing and replacing its nature or content and constitute a new obligation which
is different from the old obligation. And Set-off or Off-set (1831): where the parties terminate
their existing counter obligation to one another by agreeing to off-set such obligations as they
exist.

e. Obligations of Patrimonial Nature

Not all types of obligations are the subject matters of a contract. The main objective of a contract
is to exchange an economic value. The obligation to be exchanged should be patrimonial i.e.,
pecuniary (monetary) or proprietary. Persons should not enter in to contracts to kill time. Rather,
they should engage in contracts to exchange Consideration. In legal jurisprudence,
consideration is certain benefit or advantage or entitlement or accrual to be enjoyed in exchange
for certain disadvantage or forbearance to be suffered. At the end of the day, the consideration to
be exchanged, as between the parties, should be appreciated in terms of money or property.

The exchange of consideration identifies contracts from the so-called “obligations of status” such
as ‘marriage’, ‘Adoption’ and ‘Betrothal’.

§ Do you think, under Ethiopian laws Marriage is a contract or not??

2.3. FORMATION OF CONTRACTS

Formation of a valid contract requires the fulfillment of four essential elements. These are:
capacity, consent, object and form. According to article 1678 of the civil code:

No valid contract shall exist unless:

The parties are capable of contracting and give their consent sustainable at law;

The object of the contract is sufficiently defined and is possible and lawful;

The contract is made in the form prescribed by law, if any.

Now let us discuss the four essential elements for the existence of a valid contract turn by turn.

1. Capacity: can be defined as a legal ability to exercise (practically) the attribute features of

legal personality or to perform juridical acts. As we have discussed earlier, the human person is
the subject (possessor) of rights and duties from its birth to its death. This, however, by no means
implies that s/he begins to exercise their capacity from the moment of birth onwards. There is a
big difference as between the mere possession of rights and duties on the one hand and the
ability to exercise them on the other.

According to article 192 of the civil code, the rule regarding capacity is, the human person is
presumed capable of performing all acts of civil life unless s/he is expressly declared incapable
by the law.

Consequently, the following groups of persons are expressly declared incapable by law for
various reasons:

a. Minors

- A minor is a person of either sex who has not attained the full age of 18 years. (Read Art. 198
of the civil code).
- Minors are precluded from exercising their rights and duties by themselves.
- Minors are presumed to be mentally and physically immature or incompetent.
- They are presumed to have no discretionary capacity.
- They are declared incapable for their own protection or in order to prohibit third parties from
taking advantage of the simplicity of the mind of a minor.
- However, this does not mean that their rights and duties will remain unexercised. To that effect,
the law has appointed the office of a Guardian (to act on behalf of the minor and take care of its
person) and a Tutor to take care of the economic interests of a minor, if any. (Refer to article 199
of the civil code).
- Minors may not perform juridical acts except in the case provided by law- the so-called ACTS
OF EVERYDAY LIFE.
- On the other hand, as per the dictation of article 328, the disability of a minor shall cease on his
attaining majority or being emancipated (as of right by marriage or attains the age of 15 years).
Be aware that, the effect of emancipation is majority or an emancipated minor shall be deemed
under the law to have attained majority in all that concerns the care of his person and the
management of his pecuniary interests.

b. Insane Persons

- An insane person is one who, as a consequence of his being insufficiently developed or as a

consequence of a mental disease or of his senility, is not capable to understand the importance of
his action or to appreciate his respective rights and duties.(Art. 339)
- These are persons with an unsound mind or lunatics or deficiency of mental constitutions or
inmates of mental hospitals.
- They, like the case of minors, are declared incapable for their own protection in their relation
with third parties and similarly, the law appoints a guardian and a tutor on their behalf for the
exercise of their rights and duties.
- There are three forms of insanity recognized under the Ethiopian civil code. These are:
(a) Merely Insane Persons: are insane persons whose insanity is neither notorious nor judicially
interdicted. These are presumed to be sane persons for all practical purposes unless they can
show that, at the time the acts are performed, s/he was not in a condition to give consent free
from defects due to their insanity.

(b) Notoriously Insane Persons: these groups come in two forms:

- In urban areas, are persons where by reason of their mental condition, they are an inmate of a
hospital or of an institution for insane persons or of a nursing home, for the time which they
remain to be an inmate.
-In rural areas however, they are persons where their families or those with whom they live,
keep over them a watch required by their mental condition, and where their liberty of moving
about is, for that reason, restricted by those who are around them.

(c) Judicially Interdicted Persons: are persons whose insanity is pronounced by the court
where their health and interest so requires.

c. Disabled Person

These groups are those deaf-mute, blind persons and other persons who as a consequence of a
permanent infirmity are not capable to take care of themselves or to administer their property.
Hence, they are at liberty to take care of their interests by themselves as long as they have the
potential to do so or otherwise, or if incapable to do so, they can invoke in their favor the
provisions of the law which afford protection to those who are insane.

d. Legally Interdicted Persons

-These are persons from whom the law withdraws the administration of their property, as a
consequence of a criminal sentence passed on them.
- Hence, unlike the above three groups of persons, these are declared incapable not for their own
protection from third parties but as a punishment against crimes committed by them.
- Remember, these groups of persons are not affected by mental problems or they are of a sound
mind. The only incapacity inflicted on such persons is regarding the administration of their
property. To that effect, the law appoints a tutor to act on their behalf and administer their
economic interests.
- Finally, the interdiction imposed on such persons by law shall come to an end when the person
interdicted has undergone the punishment for the duration of which the disability was to last.

f. Foreigners

The disability imposed by law on foreigners living in Ethiopia is special in that it pertains to the
fact that they are not citizens of the country. Although foreigners are as a matter of principle
fully assimilated to Ethiopian subjects as regards the enjoyment and exercise of civil rights, they
are specifically incapable to participate in the government or the administration of the country.
Generally however, the various incapacities imposed on foreigners (for instance inability to own
an immovable property in Ethiopia) can be lifted via the instrumentality of a work permit
(license) or an order issued by the government to that effect.

Pay attention to the following facts:

- The incapacity referring to minors, insane and infirm persons and legally interdicted persons is
imposed up on them generally due to problems related to age or mental condition of persons or
sentences passed up on them. Hence, it is named General Disability.
- The incapacity imposed on foreigners and other professional persons are called Special
Disabilities for they are imposed for special reasons such as nationality and the nature of the
functions exercised by them.
- The effect of lack of capacity and consent in a certain contractual relationship
is Invalidation of the contract up on the application or request of the person affected by the
incapacity. In turn, the immediate effect of invalidation of a contract
is Restoration (reinstatement) of the parties to their position before the making of the contract.
(Refer to Articles 1808 to 1818 of the civil code of Ethiopia).

2. Object: is the obligation to be created or varied or extinguished by the parties via the
instrumentality of the conclusion of the contract. Object of a contract can also be defined as the
main content or consideration or undertaking assumed by the parties to be exchanged in due
course of the contract.

The object of a contract may be constituted in two forms. These are:

- Positive (commission) Object: such obligations are discharged by an action or the commission

of an act such as obligations related to payment, delivery or rendering of a service and so on. E.g.
to pay, to do, to deliver
- Negative (omission) object: in such type of objects the duty of the doer of the obligation is to
undo or abstain or forbear from doing something. E.g. Obligation not to do, not to build and so
on.

As a rule, according to the principle of freedom of contract, the parties to the contract shall freely
determine the object or contents of their contract. For instance, if the object of the contract refers
to loan of money, the parties to the contract may freely determine the following: the amount of
the loan; the time of payment; the place of payment; the way of payment: whether an interest is
to be paid or not; the need for a guarantor if the borrower cannot pay and so on.

However, under the disguise of freedom of contract, the parties shall not derogate mandatory
provisions of the law (restrictions and prohibitions set by law) in relation to the object of a
contract. Accordingly, the object of a contract shall be:

1. Sufficiently defined or ascertained with sufficient precision or certain or definite in meaning,

quality or quantity. If the object of a contract is not sufficiently defined it will be very difficult to
be performed and becomes of no effect.

For instance, if the obligation of the contract is sale of a house, among other things, the parties
should sufficiently define, issues related to: the house number, the design of the house, the
surface area of the house, the city, sub-city, wereda and kebele where the house is situated, and
so on.
2. Possible: the performance of the object of the contract shall be humanely possible at the time
of the contract. An impossible obligation is not an obligation at all. The obligation assumed by
the parties should not relate to an insurmountable task. We say an obligation is impossible when
its impossibility is absolute and insuperable which cannot be cured by either purchase-in-
replacement or a compensatory-sale. Impossibility may relate to a thing or a fact. E.g. Sale of a
thing which does not exist or sale of a thing which in a non-merchantable-state or sale of things
that are not subject matters of sale. E.g. celestial bodies.
3. Lawful, moral and in line with Public Policy:

- The object of a contract shall not be contrary to public laws or mandatory provisions of private
laws. Or it should not be against any applicable law of the land or it should not be declared
illegal by an express legal manifest or a statute or proclamation. E.g. sale of extra-
commercium things and things under public domain is prohibited. Signing a contract to operate
smuggling is illegal.
- The object of a contract shall not violate the morality of the place of the contract. As different
from law, morality is a relative concept that has to be strictly interpreted relative to the time and
place of the contract. E.g. Sale of dog’s meat or donkey’s milk or celebration of marriage
between two male individuals to establish a civil partnership may be moral or immoral
depending on the moral requirements of the place where such contracts are made.
- The object of a contract should not also violate the requirements of public policy set by the
government or its enterprises in due course of administration public resources. E.g. the
government does not provide governmental house rental services to those persons that already
have a house in their name. Hence, if any of such persons engage themselves in contractual
relationship with the pertinent organ of the government in charge of housing the contract would
be automatically of no effect.

3. Form

As different from the other three elements for the validity of contracts (which are mandatory)
form is not a mandatory requirement. Accordingly, the requirements attached with the form of a
contract can be illustrated as follows:

- As a rule, the parties to the contract are at freedom to agree to follow form of their choice. As a
result, they may conclude the contract orally or in writing.
- However, once the parties have agreed to follow a particular (special) form the contract shall
not be deemed to be completed until it is made in the agreed form. And
- If a particular type of contract is required by law to be in writing that shall be observed. For
instance, for one reason or the other, the law requires the following types of contracts to be in
writing: Contracts relating to immovable; contracts made with a public administration and
contracts made for a longer period of time such as contracts of guarantee, insurance and so on.
- Contracts required to be in writing shall be: supported by a special document signed by all the
parties bound by the contract; attested by two witnesses and duly signed or thumb-marked.

NB. Contracts that have problems of object and form are Void or of no effect. It will be

considered as if it has never been made from the beginning.

4. Consent

- Consent is the willingness (volition/assent) of a person to enter in to a contract.

- Consent shall be sustainable at law or unvitiated.
- The consent to enter in to a contract should be given freely, voluntarily and genuinely.
- Consent should not result from the vices of consent, such as Fraud (deceit), Duress (coercion),
Mistake (error), False Information, Threat to exercise a right, Reverential fear (undue influence)
and unconscionableness (lesion). Or the parties should not give their consent as a result of the
infliction of either of the above circumstances.
-However, if consent is given by a party to certain contract due to either of the above factors it
would not be considered as a sustainable consent before the eyes of the law. This makes the
consent given vitiated for the law presumes the fact that the person who gave the consent would
not have consented had it not been for the existence of the vices of consent.
-Under a microscope the components of a valid consent are, on the one hand agreement of the
parties on the terms of the contract freely and genuinely and on the other, their agreement to be
bound by the terms of their contract.
-A valid consent is only a consent which is expressed or declared by the parties to the contract
and consent is expressed or declared via the instrumentality of offer and acceptance.

2.4 Offer and Acceptance

As mentioned earlier, a valid consent is the one which is expressed and declared by the parties.
Hence, it is natural to expect the parties to the contract to declare their consent via the
instrumentality of offer and acceptance.

Offer: is a proposal or an invitation expressing the willingness of a party (the offeror) to create

contractual relationship with another party (the offeree). In order to be binding an offer should
fulfill the following characteristics:

- An offer may be declared orally, in writing, by gesture (symbol) or by conduct. Though the
oral and written forms of declaration are the most common and evident ones, what truly matters,
at the end of the day, is whether the parties have clearly expressed their will and understand each
other after the declaration of the offer. Hence, whenever an offer is made by sign (symbol) the
parties should use a sign normally in use (conventionally known sign) justified by continuous
general or local usage of the sign, such as a hand shake, nod of head or the knocking down of a
hammer and so on. Similarly, when the parties declare their offer via conduct, such conduct
should express that in the circumstance of the case there is no doubt as to the parties’ agreement.
Typical example of offer and acceptance by conduct may be calling a doctor home, using what is
delivered, bringing a lost object in case of promise of a reward and so on.

- An offer shall always accompany an intention of the offeror to be bound by the terms of
the offer s/he made for the lapse of either a specified period mentioned on the offer (duration of
the offer) or if no such time is fixed on the offer, for the lapse of a reasonable period of time to
be determined having seriously considered the circumstances of the case. A
subtle offeror however stipulates a time limit on the offer and bind itself only to the lapse of such
period mentioned on the offer. In case an offer is made with no duration of acceptance, various
factors should be considered to determine the binding life of the offer such as: the Present
(conversing parties) or absent (corresponding) nature of the parties to the contract; complication
in post office; seasonality and marketability; whether the parties have pre-existing business
relationship; the nature of the transaction itself and so on.

- Be aware that, once an offer is made by the offeror for either a fixed duration of acceptance or
with no duration of acceptance, it is the right of the offeree to bind the offeror (by the terms s/he
made on the offer) for the lapse of the fixed period or a reasonable period of time.

- In order it can be an offer it has to be written down in definite enough terms and should
encompass detailed (full-fledged) bargain or substance.

- An offer is different from a ‘ mere declaration of intention’ made by the offeror to enter in to

a contract with the offeree. A typical, binding, unilateral offer is an offer which is directly
communicated to the intended (the particular) offeree or its agent. If it is not communicated to
the particular offeree or its agent or if it is communicated (declared or made) to another person
(in the absence of the offeree), it only amounts to a mere declaration of intention and not a
binding offer.

- An offer is different from ‘an invitation to offer’ or ‘an invitation to threat’. As a result, the
posting up of tariffs, price-lists or catalogues or the display of goods or symbols for sale or
menus or the release of advertisements (ads.) by mass media such as product advertisement or
advertisement of an auction, are not by themselves binding offers rather they amount to an
invitation made by the offeror to the interested offerees to look for such symbols or tariff or price
tags and make an offer to the party who originally announced the advertisements. Hence, the
contract begins when a customer look for a displayed good, get attracted by it and then requests
the vendor to buy the good. The offeror is the customer and the vendor becomes the offeree.

- An offer may be made to a particular person (specific offer) or generally to the public at large
or a particular group out of the public at large (general offers). In this regard, you should
understand that real offers are those that are made to a particular offeree. This is the case because
when offers are made to large number of people it creates various practical legal complications
due to the fact that it can be accepted by more than one person. Typical example of a binding
general offer in Ethiopia is ‘ Public Promise of a Reward.’ This is an advertisement made to
(addressing) large number of persons via a mass media of wider circulation stating that a reward
will be given to that particular person who has performed (knowingly or unknowingly) a
particular activity advertised by the offeror. Public promise of a reward is an exception to the
principle that advertisements are not valid offers.

Acceptance: is the agreement of the offeree to the terms of the offer made by the offeror. The
following are the essential characteristics of an acceptance:

- An acceptance may be made in writing or orally or by symbol or implied from conduct and it
has to be communicated to the offeror. However, if a particular type or mode of acceptance is
required (dictated) by the offeror the accepter should comply with the same.

- An acceptance always implies an agreement and an intention to be bound by the terms of the
offer. Or a serious intention to accept should be there.

- Acceptance shall be made while the offer is still in force or not withdrawn by the offeror.

- Where the offer is made in alternative terms, the acceptance must make it clear to which set of
terms it relates.

- A person cannot accept an offer of which he has no knowledge. Can he?

- ‘ Cross-offers’ do not constitute an agreement or acceptance. Cross offers are identical offers
made by two parties to one another and their offers are crossed say in a post office but neither
offer is accepted by either party.

- An acceptance shall be made in the form and in conformity with the terms specified on the

offer or the offeror controls the offer or the method of the acceptance should be reasonable to the
method of the offer. We say there is an acceptance and there by a contract, if and only if the
terms of the offer and the acceptance mirror each other this is called the mirror image rule. If
the acceptance is not the mirror image of the terms of the offer there will be no meeting of
minds we have discussed earlier.

- An acceptance shall be made absolutely (totally or as

is), unconditionally and unequivocally (vividly) or otherwise stated, if the terms of an offer are
amended or altered or complemented or supplemented by the offeree, it does not amount to an
acceptance rather it amounts to a counter-offer or as if the offeree has made an entirely new
offer to be accepted by the original offeror and there will be a contract if and only if the new
offer is accepted by the first offeror. To stipulate it otherwise, if there is a tiny discrepancy as
among the terms of the offer and the acceptance, the contract or the agreement or the offer and
the acceptance knock-out each other, this is called the ‘ Knock-out rule’.

According to article 1682 of the civil code of Ethiopia, Silence when an offer is made shall not
amount to acceptance. When we say silence, we are referring to the ‘lack of response’ in all
means possible such as words, signs or conduct. So when the offeror provides the offer to
the offeree the offeree remained silent. Now the question is, does the silence of
the offeree amount to acceptance? In normal times, the silence of the offeree does not, by itself,
amounts to an acceptance. What practical legal problems would be created if silence when an
offer is made amounts to acceptance? Or what are the anomalies the law intends to avoid by not
considering the silence of the acceptor as an acceptance?

However, there are three exceptional situations whereby silence when an offer is made amounts
to acceptance. These are:

1. When it is duty of the offeree to accept the offer, made to it, by law or by concession. In
such case the reception of the offer, on its own, amounts to acceptance. This principle works to
those organizations duty bound to deliver basic necessity services (such as water, electricity) to
the public at large under a concession with the government. Hence, once a customer has fulfilled
the requirements expected of him to acquire an energy service from the Ethiopian Electric Power
Corporation and submitted his offer to that effect to the agency the agency may not refuse the
provision of the service by remaining silent for the silence of the agency amounts to acceptance.
2. In case of general terms of business prescribed by public authorities. These are general
guiding terms of working of an institution which are prepared, pre-stipulated and approved by it.
Hence, they are not as a rule subjected to negotiation with a fellow customer rather the customer
is expected to know and adhere to them accordingly as long as they are prescribed by such
authorities. Hence, such rules become automatically applicable on a customer who is trying to
access the service of such public authority whether the customer remained silent or not. As an
example refer to the rules at the back of a lottery you have purchased or the rules at the back of
the bank-pass-book you have opened in the commercial bank of Ethiopia or the transport tariffs
prescribed by the government. It is the duty of the transport user to accept such tariffs prescribed
by the government. So it does not make a difference whether the customer remains silent or not.
3. In case of pre-existing business relationship between two parties and an offer is made to
continue or vary an existing contract or to enter in to a subsidiary or complementary contract
may be accepted by silence. However, such shall be the case where the new offer is made in
a special document informing the other party that the offer shall be regarded as accepted
(warning clause) if no reply is given within a reasonable period of time.

2.4. Time for the Completion of a contract

The time for the completion of the contract (time of acceptance) becomes significant not in case
a contract is made between present or conversing parties that are making the contract face to
face. The relationship of such parties is mostly instant in that they can complete the contract by
simultaneously exchanging their obligations face to face. However, if the parties are not making
the contract face to face or if they are absent or corresponding parties they cannot complete the
contract (exchange offer and acceptance) simultaneously. So, there should be another important
question we need to answer regarding when is the time to say the contractual relationship
between the parties is completed or the process of the exchange of the offer and acceptance is
deemed to be completed as between the offeror and the offeree ? Per the dictation of general
jurisprudence of contracts there are two theories that are used as a frame of reference to
determine the exact time of completion of a contract in case a contract is made via an
intermediary such as a post office or along the telephone. These are:

a. Theory of Dispatch: this is also called the mail-box-theory. According to this theory, a

contract is deemed to be completed (made) at the place where and at the time when the
acceptance was sent to the offeror. If the contract is made by telephone, it shall be deemed to be
completed at the place where and the time when the party was called. Hence, without
considering the likelihood of various complications or delay in the post office or without making
sure whether the acceptance send by the offeree is actually received by the offeror or not, this
theory concludes that the contract is automatically completed up on the moment it is dispatched
to the offeror in the post office by the offeree. To which party do you think is this theory
advantageous or disadvantageous? Why?

b. Theory of Reception: according to this theory, a contract is deemed to be completed at the

place where and the time when the acceptance was received by the offeror. So per this theory, a
mere sending of the acceptance by the offeree does not suffice or complete the contract unless
the acceptance has finished its journey in the post office and is practically received by
the offeror. To which party do you think is this theory advantageous or disadvantageous? Why?

Finally, which theory do you think is applicable in Ethiopia? Why or why not? What are the
practical legal problems if we apply either of the theories?

2.5. Grounds for the Termination of an Offer

In line with the general saying that everything that has a beginning has an end, offers are not
forever viable. The following are the major grounds for the termination of an offer:

- Lapse of the Duration of the Offer: the law dictates that whosoever offers another to enter in
to a contract and fixes a time limit for acceptance shall be bound by his offer until the time limit
fixed expires. If it is not made with a time limit, then the offer will be terminated after the lapse
of a reasonable time with in which the offeror expects the offeree to decide on the offer.

- Rejection by the Offeree: nevertheless an offer is made with a time limit or not, the offer will
be terminated, if it is expressly rejected by the offeree either before the lapse of such fixed time
or the lapse of the reasonable period of time. The only reason to fix the duration is to give more
time to the acceptor to consider the offer. If the acceptor rejects it forthwith, fixing a period of
time on the offer serves no purpose.

- A counter-offer by the Offeree.

- Withdrawal of the Offer by the Offeror: an offer shall be deemed not to have been made
where the offeree knows (learns) that the offer made to him is withdrawn before he knew or at
the time when he knows of the making of offer.

- Death, incapacity or bankruptcy of the Offeror or the Offeree

Exercise: identify the following issues as offer, what kind of offer, acceptance, what kind,
invitation to offer, mere declaration of intention and so on:

- Calling a Doctor home?

- Reading a menu indicating the price of various meals served in the hotel?

- A Handshake between a seller and a buyer?

- Going to a gas station and without any conversation paying the price to the vender and
pumping the gas in to your car and drive away?

- Bringing a lost object to the owner of the object who has promised to reward the finder?

- An ATM machine placed in front of Dahen Bank Share Company?

- Bus number 48 standing on its usual fermata waiting to customers in need of transport?

- A beer distributing vehicle of St. George Beer Company standing in front of the door of your
hotel with stock full of beer?

- Finding a Waliya beer-corcky that contains a car picture or image in its inside?

- An auction advertisement made on ETV to interested participants?

- An announcement made by Mr. Alemayehu in the Debre Tabor Tewodros Stadium during half
time that he wants to sale his car to Mr. Alemu?

- An advertisement on Addis Zemen Gazette saying “a Trouser and a shirt for 10 birr ”

- A ‘flick knife’ displayed in a shop window with a price attached to it.

- A preliminary negotiation made between Abebe and Kebede for the sale of Abebe’s car to
kebede.

2.6. OFFER and ACCEPTANCE (preliminary reading)

illustration not visible in this excerpt

I. REQUIREMENTS OF AN OFFER

Because the six elements of a contract form the heart of contract law, we will build our study of
contracts around them. Understanding the elements of offer and acceptance is necessary before
moving on to other matters, such as which contracts must be in writing, how contract rights are
transferred, how contracts end, and what happens when one party breaches a contract.

As noted earlier, an offer is a proposal by one party to another party to enter a contract. The
person making the offer is the offeror, and the person who receives the offer is the offeree. An
offer has three basic requirements. It must be:

- Made seriously
- Definite and certain
- Communicated to the offeree.

Serious Intent: An offer must be made with the intention of entering into a legal obligation. An
offer made in the heat of anger or as a joke would not meet this requirement. For example, a
friend complaining about her unreliable car might say, “Give me five bucks and it’s yours.” This
statement may sound like an offer, but your friend cannot be forced to sell her car for five
dollars. Often an invitation to negotiate is confused with an offer. Sellers usually have limited
merchandise to sell and cannot possibly sell an advertised product to everyone who sees an ad.
For this reason, most advertisements in newspapers, magazines, and catalogs are treated as rather
than as offers. They are also called invitations to deal, invitations to trade, and invitations to
make an offer.

Example: An advertisement in the newspaper read, “Lava Lamps, 49.98 birr.” Helenwork, went
to the store the next day and said, “I would like to buy a Lava Lamp.” A clerk, named Berihun,
apologized, saying the lamps had sold out within an hour after the store opened.

The advertisement in the above Example was merely an invitation to the public to come in, see
the lamps, and make an offer. When Helen said, “I would like to buy a Lava Lamp,” she was
actually making an offer to buy at the advertised price of 49.98 birr. The storeowner is free to
accept or reject the offer. There are exceptions to this rule.

The courts consider some advertisements as offers when they contain specific promises, use
phrases such as “first come, first served,” or limit the number of items that will be sold. In such
cases, under the terms of the advertisement, the number of people who can buy the product
becomes limited, making the advertisement an offer rather than an invitation to negotiate. Price
tags, signs in store windows and on counters, and prices marked on merchandise are treated as
invitations to negotiate rather than as offers. This rule of law probably stems from days when
people negotiated for products more than they do today.

Definiteness and Certainty: An offer must be definite and certain to be enforceable. A landlord
(lessor) of an apartment with faulty plumbing might agree to pay “a share” of the cost if the
tenant (lessee) fixes the plumbing, but the court would not enforce the contract because it was
not possible to determine what the parties meant by “a share.”

Example: Mr. Wendu was offered a position as an account executive in Grand Resort Hotel in
Bahir Dar at a salary of 20,400 birr a month plus a “reasonable” commission on total sales. Is
this a definite and certain offer? No, because it would be difficult to determine exactly what a
“reasonable” commission is. The court, however, could fix a commission based upon general
practices of the trade.
Communication to the Offeree: Offers may be made by telephone, letter, telegram, fax
machine, e-mail, or by any other method that communicates the offer to the offeree. However,
the offer should be communicated to the particular offeree with whom the offero r intended to
make a contract with.

Example: Mr. Gobeze found a wallet. A driver’s license identified the owner, and Gobeze
returned the wallet. The owner thanked him but did nothing more. Later in the evening, while
reading the newspaper, Gobeze discovered that the owner had offered a reward for return of the
wallet. However, he cannot claim the reward because the offer was not communicated to him. He
did not know about the reward when he returned the wallet.

II. REQUIREMENTS OF AN ACCEPTANCE

The second element of a legally binding contract is acceptance of the offer by the offeree. As in
the case of an offer, certain basic requirements must be met: the acceptance must be
unconditional and must follow the rules regarding the method of acceptance.

Unconditional Acceptance: The acceptance must not change the terms of the original offer (as
is) in any way. This principle is called the Mirror Image Rule. Any change in the terms of the
offer means the offeree has not really accepted the offer but has made a Counteroffer. In that
case, the original offeror is not obligated to go along, and no contract results. Instead,
the offeror becomes an offeree and may accept or reject the counteroffer.

Example: Mr. Shiwangizaw sent a letter to Mr. Alebachew, offering to buy the latter’s home for
800,000 birr. Mr. Alebachew, who had advertised his house at 800,000 birr, wrote a reply
stating, “I accept your offer. However, i would like the price set at 830,000 birr .”

Ato Alebachew didn’t really accept Shiwangizaw’s offer, as his letter claimed. Instead, he made
a counteroffer, which Shiwangizaw is free to accept or reject. He may choose to make a
counteroffer of his own, agreeing to buy the home for an amount somewhere between 800,000
and 830,000 birr.

Then the initiative to accept or reject would shift back to the seller. This process could continue
until the terms of the offer and the acceptance “mirror” each other. The parties could also decide
they will never agree on a mutually satisfactory price.

III. METHODS OF ACCEPTANCE

The time at which an acceptance takes place is important because that is when the contract
comes into existence. When the parties are dealing face-to-face or on the telephone, no special
problem exists.

One party speaks, and the other listens and communicates the offer or the acceptance. Special
rules, however, govern acceptances that take place when the parties are separated by a distance
and must communicate by letters, telegrams, or fax. According to common law, an acceptance
that must be sent over long distances is effective when it is sent. Any method of communication
that has been expressly or impliedly endorsed by the offeror would qualify. Common law also
says that an acceptance is implied when the offeree accepts by the same or a faster means than
that used by the offeror.
Consequently, the acceptance of a mailed offer for goods would be effective when it is sent
electronically, via fax, or through an overnight carrier. If the offeror states in the offer what
method the offeree must use to accept, that method must be followed. Sometimes an offer
specifies that it must be accepted by an action. In these cases, the action must take place before
there is an acceptance.

For example: Mr. Melaku, a sponsor, promised to pay Mr. Chalachew, a musician, 10,000 birr
to Abebech Gobena Orphans suit and march with the band at a football game’s halftime. Mr.
Chalachew would have to perform the action to accept the offer. The offeror cannot impose
silence on the offeree as the means of acceptance unless he or she has previously agreed to this
condition or has allowed silence to signal acceptance in the past. In contrast, if the offeror has
established silence as the means of acceptance, then he or she will have to live by that condition
if the offeree accepts by remaining silent.

Example: Shegitu wrote a letter to Belaynesh offering to sell her motorcycle. “If I do not hear
from you, I shall assume that you have accepted my offer,” she said. However, Belaynesh’s
silence after receiving the offer would not bind her to pay. A person cannot be forced to respond
to avoid a binding agreement. On the other hand, if Belaynesh intended to accept the offer and
complied with Shegitu’s directions to remain silent, then Shegitu must honor that silence as her
acceptance.

IV. TERMINATION OF AN OFFER

Even though an offer has been properly communicated to the offeree, it may be terminated. This
termination may occur in any of the following five ways:

a. Revocation: is the taking back of an offer by the offeror. The offeror has a change of mind or

circumstances and decides to withdraw the offer before it has been accepted. Two important
rules govern revocation: an offer can be revoked any time before it is accepted, and a revocation
becomes effective when it is received by or communicated to the offeree.

Example: Andargachew offered to sell his CD burner to Muluken for 250 birr. Muluken
examined the CD burner and found that it was in good condition. However, Muluken couldn’t
decide if he wanted to spend so much money for a used piece of equipment. He told
Andargachew that he would consider his offer. In the meantime, Andargachew decided that he
didn’t want to sell his CD burner after all. He telephoned Muluken and informed him of his
decision. Andargachew could revoke his offer because Muluken had not yet accepted it.

b. Rejection: or refusal, of an offer by the offeree brings the offer to an end. For example, if

someone says to you, “I’ll sell you my camera for 1500 birr,” and you say, “I don’t want it,” then
the offer has come to an end.

Example: Elfinesh decided that she wanted to make some extra money by selling some dried
floral arrangements that she had made using flowers from her own garden. Elfinesh spoke to her
neighbor, Aregash Hotel, about the flower arrangements and offered to sell them for 40 birr each.
Aregash liked the descriptions and decided to take a look at Elfinesh’s work. When Elfinesh
showed the arrangements to her, however, Aregash realized that they were not what she had
expected. Aregash decided to reject Elfinesh’s offer.
c. Counteroffer: A counteroffer ends the first offer. If someone says to you, “I’ll sell you my
camera for 2500 birr,” and you say, “I’ll give you 2400 for it,” no contract comes into existence
unless the original offeror accepts your new offer. If you later say, “Okay, I’ll give you 2500 birr
for the camera,” you will be making a new offer, which the original offeror may accept or reject.

d. Expiration of Time: If the offeror sets a time limit for the acceptance of the offer, it must be
honored. Assume that Abel has offered to sell Dawit his motorcycle for 18,745 birr. Abel tells
Dawit the offer will remain open until noon of the following day. To create the contract, dawit
must accept within that time. If no time for acceptance is stated in the offer, it must be accepted
within a reasonable time. Otherwise, no contract exists. What is a reasonable time depends on the
circumstances. For example, a reasonable time to accept an offer for purchasing a truckload of
ripe tomatoes would be different from a reasonable time to accept an offer for purchase of a
house.

e. Death or Insanity: If the offeror dies or becomes insane before the offer is accepted, the offer
comes to an end. Although death ends an offer, it does not end a contract, except for contracts
related to personal services.

illustration not visible in this excerpt

2.7. EFFECT OF CONTRACTS

According to Article 1731 of the Civil Code of Ethiopia in order to be effective a contract shall
be lawfully formed. This is the case where the requirements of formation (Capacity, Consent,
Object and Form) are fulfilled. The following three sentences briefly summarize effects of
contracts:

1. The provisions of a lawfully formed contract bind the parties as though a law or each
provisions of a contract serve as law of the parties. Refer to Sanctity of Contracts.
2. The rule is the parties are at freedom to determine the contents of their contract.
3. However, they may not derogate mandatory provisions of the law (restrictions and
prohibitions) under the guise of such freedom. For example, the parties to the contract may not
shorten period of limitations fixed by law (Art. 1855). The parties however may derogate
permissive provisions of the law by providing their own solutions for all possible aspects of the
contract. Permissive provisions that are not excluded by the agreement of the parties become
binding. For instance the parties can fix “time of payment”, “place of payment”, “legal interest”
or “quality of fungible things”. If the parties do not particularly agree on permissive provisions
the law fills the gap in their agreement by providing the required solutions.

2.8. PERFORMANCE OF CONTRACTS

Performance is the carrying out of the obligations assumed by the parties under the contract
according to the law and their agreement. In this section, we will deal with the various aspects of
performance in the form of a question and Answer as follows:

Who shall perform?

Both parties to the contract shall perform their respective obligations and this is the
recommended way of extinguishing contractual relationships. However, it is normal to expect the
debtor to start performance first. For example, in case of sale contract we should normally expect
the seller should take the initiative to deliver the things to be sold to the buyer.

Who is the Debtor?

The debtor is the party who is at duty to discharge his/her obligations under the contract but who
has not discharged yet or who has failed to do so. For example, if the buyer has already collected
the thing but has not yet discharged his duty of payment, s/he becomes the debtor.

Who is the creditor?

The creditor is the party who has already discharged his obligation and is expecting the same
from the debtor. In the above example the seller has already discharged his obligation of
delivering the thing sold and he is expecting the buyer to discharge the obligation of payment.

How shall it be performed?

The debtor may perform in either of the following types or ways of performance:

a. In person or personal performance: this is a type of performance where a party is at duty to

cause the performance of the obligation by himself and only by himself or personally. Personal
performance is the rule. This excludes the opportunity of performing an obligation through the
instrumentality of another person. Personal performance occurs in the following cases:

- If the performance requires the particular skills, experience, or training (expertise) of the
debtor. Or if the creditor has a particular interest in receiving such personal performance in that
the creditor cannot require the performance from another person in the circumstance of the case.
- If personal performance is expressly agreed up on by the parties in the contract. Or if the parties
have excluded other types of performance by agreement. And
- If personal performance is dictated by the very nature of the obligation to be discharged by the
debtor.

b. Performance via the instrumentality of a third party: this is a performance made by a third

party to the contract that is so authorized to perform on behalf of the debtor either by the debtor
himself (agent of the debtor) or the law (heirs-at-law of the debtor or co-debtors with the debtor
or guarantors of the debtor) or by the order of the court (the court may order a third party to
perform on behalf of the debtor such as liquidators of succession). In this case, regardless of the
doer of the performance, what actually matters is the fact that the creditor has received the
performance. Typical examples of performance via a third party are those types of performance
related with payment of a price, delivery of a thing and son where it does not make a sensible
difference whether the performance is made by the debtor or a third party on his behalf. This
type of performance is the exception to the rule of performance (personal performance) and it
refers to all types of performance other than in person performance.

To whom shall it be performed?

The debtor shall perform (either personally or through a third party so authorized) to the creditor
or a third party so authorized either by the creditor himself (agent of the creditor) or by law
(heirs-at-law) or by order of the court (such as joint creditors or liquidators). In this case
however, you should bear in mind that an authority is a necessary condition for receiving the
performance on behalf of the creditor or a third party cannot stand from the middle of nowhere
and accept the performance without an express authority to that effect.

What is the fate of a payment made to an incapable creditor?

This is a payment or a performance made to a creditor who is declared incapable by the law. As
you are aware, if there is no capacity, there is no valid contract. Or the contract becomes invalid
(valid until invalidated). As a result, payment made to a creditor incapable of receiving it is
invalid. The legal consequence is, the first payment made by the debtor is invalid means second
payment can be claimed by the representatives of the incapable creditor as if no payment was
made in the first place. However, such payment may become exceptionally valid if:

- The payment is ultimately confirmed by the capable creditor or

- The payment has benefited the creditor or it is to the advantage of the estate of the creditor.

What is the fate of a payment made to unqualified or unauthorized creditor?

This is a scenario where by payment is made to a person who is not authorized to receive the
payment on behalf of the creditor. Payment made to unqualified person is invalid. The thing is, if
the first payment is invalid, a second payment can be claimed by the real or qualified creditor as
if no payment was made in the first place. However, such payment may be exceptionally valid
where:

- The payment is confirmed by the real creditor, or

- The payment is to the advantage of the estate of the creditor, or
- The payment is made in good faith to a person who appears without doubt to be the creditor.
For example, a payment made to an heir-apparent of the creditor who turned out to be not an heir
of the creditor later on.

What if two or more persons appear to be the creditor and claim performance from the
debtor?

Where there is a doubt as to who is qualified to be paid, in case more than one person claim to be
the creditor, the debtor may refuse to pay and release himself by depositing the amount due with
court. However, the debtor shall pay at his own risk where he is aware of a pending litigation
(contest) and pays to any of the persons (contestants) who hold themselves out to be creditors.
Moreover, where a case is pending in court and the debt is due, any of the persons who hold
themselves out be creditors may require the debtor to deposit the amount due.

What should be the Identity of the thing to be delivered?

The creditor shall not be bound to accept a thing other than that due to him. So what the debtor is
expected to deliver is only a quality (the same species) of the thing that has been particularly
agreed up on the contract. Otherwise stated, the debtor may not force the creditor to accept a
thing other than what is mentioned in the contract. Be aware that the principle still works if what
was actually delivered is a thing of similar or a greater value than the one agreed originally. This
should be seen in line with the principle that agreements of the parties bind them as a law. So, if
the creditor wanted a particular thing or quality of a thing s/he may have a particular reason in
receiving such particular thing or quality of a thing. The debtor cannot force the creditor to
accept a thing only because it is of a greater value than the one agreed up on the contract.
What if the debtor caused a partial payment?

Partial payment can be defined as any payment which is lesser than the full amount of the
payment agreed on the contract. So, the question is should the creditor accept a partial payment
made by the debtor? The creditor shall not refuse partial payment unless the debt is liquidated
(an ascertained and admitted debt) and fully due (matured or excigible debt). In the rest of the
circumstances the creditor should not refuse to accept partial payment. However, where only part
of the debt is contested, the creditor may accept the admitted part of the debt and claims for the
remaining.

- Why do you think is partial payment prohibited? Can you mention scenarios where it is
justified to pay partially?

What if fungible things are due for delivery?

Fungible things are things of an interchangeable quality, test, and value. These are things that are
regarded as commercially interchangeable with other property of the same kind. They are
generally referred to as complementary goods in economics literature. For instance, ‘teff’,
‘Corn’, ‘wheat’ and ‘oil’ are fungible in nature there are various qualities of ‘teff’ and ‘oil’ that
can be used interchangeably. For instance, oil can be made from different types of grains.

The rule is, if the delivery is related to ‘fungible things’ and the parties have not specified the
specific quality of the thing, the seller may choose the specific quality to be delivered. However,
the seller may not take advantage of his right to choose the specific quality and offer a thing
below average (medium) quality.

What if an insufficient quantity (non-conformity) or quality (defect) of fungible things is

delivered?

The creditor may not refuse fungible things on the ground that the quality or quantity offered to
him does not exactly conform to the contract, unless this is essential to him or has
been expressly agreed up on. Hence, the creditor should be able to prove the fact that the
delivery of the exact quality or quantity of the contract is fundamental to him or he cannot use
the delivery for the intended purpose unless it of that particular quality of quantity or he has
a special interest in receiving that particular quality of the thing and if there is a slight non-
conformity of quality the thing becomes of no use to him.

Where the thing does not exactly conform to the contract, in terms of quantity, the creditor may
proportionately reduce his own performance or where he has already performed claim damages.
This goes in line with the doctrine of ‘substantial performance’. i.e., the creditor shall not refuse
a non-conforming delivery as far as the debtor has performed substantially or the major part of
the delivery.

What amount of interest shall be due?

The rate of interest shall be of nine percent per annum where interest is due and the rate has not
been fixed. Bear in mind that interest would be calculated if and only if the parties have reached
on an agreement that an interest is due but they did not agree as to how much should be
calculated. In such case the law presumes that they have agreed on 9 percent per annum. Legal
interest rate shall not apply where another rate has been fixed either by parties (contract) or law
or customary rules. The maximum amount of interest imposed is for loan (2479) which is 12
percent per annum. However, a rate of interest above the maximum amount will be reduced to 9
percent per annum and the same holds true if the parties only mention that an interest is due but
did not specific at all.

Where should be the place of payment or performance?

Determination of place of payment or performance of a contract is very significant in that it

determines various aspects of the contract. Such as, the legal tender to be used by the parties as a
means of payment, the jurisdiction of the court that adjudicates the parties if a dispute arise,
which party covers the cost of transport, the transfer of risk from the seller to the buyer.
Accordingly the following three rules are applicable:

- Agreed place of payment or delivery on the contract, if any, shall be respected.

- Where there is no agreed place fixed on the contract, payment shall be made at the place where
the debtor had his principal residence at the time when the contract was made.
- However, if the thing is a definite or specific thing, payment in respect of it shall be made at the
place where the thing was at the time when the contract was made. E.g., a car in a garage.

When should be the time of payment?

Determination of the time of payment is also essential in that it determines various aspects of the
contract, such as: the calculation of interest, the transfer of risk, the calculation of damages and
so on. The following are the rules in relation to time of payment:

- Agreed time of payment or delivery, if any, shall be respected

- Where no time is agreed up on or fixed on the contract, payment may be made forthwith or
immediately, and
- Payment shall be made whenever a party requires or demands the other party to perform his
obligation.

Transfer of Risk

Risk refers to the payment of the value of the thing if the thing is lost (stolen), deteriorated
(degraded in quality) or destroyed (damaged). The rule is risk perishes with the owner or risk
follows possession. The party who is at duty to preserve the thing is the party who is in
possession of the thing. Hence, risk always begins from the possessor and transfers to the other
party (the next possessor) due to various factors: (Arts. 2323 – 2327 of the Civil Code)

- After actual delivery

- After the date of delivery
- After the date of payment
- When the things are delivered to a carrier or a third party custodian (consignment).

You should bear in mind that, risk applies only to corporeal chattels or things and the none
performance of a fundamental obligation transfers risk.

2.9. Non-Performance of a Contract and Its Remedies

Meaning and General Remedies of Non-Performance

As per Article 1731 (1), a contract formed lawfully binds the parties as if it were law, which
means that the parties shall perform (discharge) their obligations according to their contract and
the law. If performance is made according to the contract and the law, it is deemed to be valid
and releases a party (the debtor) from his obligation.

Thus, non-performance of a contract refers to the failure of either one or both of the parties to
perform contractual obligations in conformity with the terms of the contract and the law. It is
also called breach of a contract.

The following are the major instances of non-performance:

- This failure or breach may be total - where a party totally fails to honor the terms of a contract.
- It may also be partial- where a party has performed his/her obligations only partly.
- It may also relate to delay in performance.
- Offering performance at a place other than the place agreed up on by the parties or at a place
fixed by law also constitutes non-performance.
- Delivering a thing that non-conform to the contract or
- Delivering a defective thing also amount to the breach of contract.
- Moreover, an interruption of a successive delivery also amounts to non-performance.

Generally any deviation by a party from the terms of the contract amounts to non-performance.

Legal Remedies of Non-Performance

It is clear that breach by one party affects the interest of the other party, which usually is referred
to as the Victim party. Thus, it is logical to provide a solution or remedy for the party affected
by non-performance. We have discussed that one function of contract law is to enforce contracts.
One way of doing that is to provide remedies for non-performance particularly by sanctioning
failures. Otherwise parties would be reluctant to enter in to a contract. It is commented that the
rules on non-performance are intended to avoid the deterrence effect of non-performance on
contractants for fear that their contract may not be performed or in other words, it is intended to
secure security of contractual transactions.

It is important at this junction to note that the parties may stipulate contractual remedies for
breach of their obligation. For example, they may incorporate their own penalty clauses. These
kinds of remedies may be enforced by the law (see articles 1886-1895). However, the law of
contract provides remedies even if there is no contractual provision to that effect. These are
called legal remedies against non-performance.

Default Notice

It should be noted however that the creditor before proceeding to exercise (invoke) the remedies
of non-performance should fulfill one more legal formality in that s/he should put the debtor at
default or give the debtor a default notice. Notice can be a written demand or by any other act
denoting the intention of the creditor to obtain performance. The creditor should fix a reasonable
period of time in the notice after the expiry of which he will not accept performance of the
contract.

The purpose of giving default notice is to remind (warn) the debtor that his obligations are due
and it is time to perform his obligation or otherwise the creditor will resort to exercising the legal
remedies. Giving of notice also begins the calculation of interest against the debtor. It also begins
the calculation of damages for delay in favor of the creditor.

You should also bear in mind that giving of a notice is not always mandatory or there are
scenarios whereby the creditor may directly proceed to exercise his legal remedies against the
failed debtor. We call such cases where notice is unnecessary. In the following scenarios Notice
is unnecessary:

- In case of an omission type of obligation where the obligation of the debtor was to refrain from
certain acts or doing something
- the debtor assumed to perform an obligation which the contract allows to be performed only
within a fixed period of time (a compulsory-date) and such period has expired; e.g., A Birth Date
- In case the parties have expressly agreed on the contract that notice is unnecessary
- In case of Anticipatory Repudiation (breach). AR is a situation where by the debtor expressly
informs the debtor that he would (can) not perform his obligations or it is a written intent not to
perform.

The legal remedies for non-performance protect the interest of the party that is affected by non-
performance. The interest that is affected by non-performance of the contract is the benefit that
could have been gained had the contract been performed. Accordingly, the remedies are
supposed to put the victim party in the position he would have been had the contract been
performed.

As such, the Ethiopian law of contract generally recognizes the following three remedies against
non-performance:

Forced (Specific) Enforcement of the contract

This is a remedy in which the creditor requests the court to force the hands of the debtor to
perform his obligation according to the contract or the law. This is designed to satisfy the victim
party by enforcing the terms of the contract. It may be done either by compelling the debtor
(failing party) to perform his or her obligations or by authorizing the creditor (victim) party to
perform the debtor’s obligation at the cost and expense of the debtor. The former is usually
referred to as forced performance, while the latter is called substituted performance.

The court shall not award specific performance of a contract up on compliant and in favor of the
creditor unless:

- It is of a special interest to the party requiring it- that the creditor cannot acquire similar
performance from other sources or the performance of the obligation was the very reason of the
creditor to enter in to the contract. And
- The contract can be enforced without affecting the personal liberty of the debtor. Only
proprietary interest shall be affected not personal liberty of the debtor.

Consider the following two examples:

Assume that a monopolistic entity, which supplies vital goods (e.g., water or electricity) or
services (e.g., postal or telecommunication) to a customer cuts of its supplies. In this case the
goods or services are so essential that the customer cannot get them from other sources. Thus, it
may be said forced performance is of special interest to the creditor, i.e., the customer. At the
same time, ordering the entity to provide these goods or services cannot deprive the entities
liberty (as only physical persons enjoy liberty). So, in this case the court may order forced
performance.

In another scenario, if an artist who has agreed to present his songs on a certain occasion in
consideration of payment fails to discharge his obligation at the agreed time, It may arguably
said that the contract is entered into in consideration of his talents and that his performance of the
obligation is of special interest to the creditor. However, to order the artist to sing without his
will amounts to deprivation of his liberty. Thus, in such cases, forced performance cannot be
ordered even if it is of special interest to the creditor

Accordingly, substituted performance can be ascertained in two ways:

- If the obligation that the debtor has failed to perform was an obligation to do, the court may the
creditor to do or to cause to be done at the expense of the debtor the acts which the debtor
assumed to do.
- If the obligation that the debtor has failed to perform was an obligation not to do, the court may
authorize the creditor to destroy or cause to be destroyed at the debtor’s expense the things done
in violation of the debtor’s obligation to refrain from doing such things.

Otherwise stated the creditor will be authorized to cause a Purchase-in-replacement or a

C ompensatory Sale

Consider the following examples:

- Ato Belay fails to dig a well; the debtor can have dug the well by any one at Ato Belay's
expense up on court authorization.
- If Ato Belay's obligation was to refrain from erecting a building and fail to do so by erecting a
building, the creditor can destroy the building or have it destroyed. Such act shall be made upon
court authorization and at the expense of the debtor.

Cancellation of the Contract

The second remedy available to the creditor is cancellation of the contract. This may take place
either by court judgment (judicial cancellation) or the unilateral act of the creditor. Unilateral
cancellation is a condition where by a party cancel the contract where a provision to this effect
has been made in the contract and the conditions for enforcing such information are present
(materialized). In all other cases, the creditor may apply to court for declaration of cancellation
and it is the court that is vested with the ultimate power to declare cancellation or not. The effect
of cancellation is to put the parties to the position that would have existed had the contract not
been made. Thus, the creditor can claim restitution of what he has paid or delivered during
performance.

In making its decision regarding to cancel a contract or not, the court should have regard to the
interest of the parties, the requirements of good faith or whether the breach of the debtor is
related to the fundamental provision of the contract in that the creditor would not have entered in
to the contract without the term which the debtor has failed to execute being included. Do not
also forget that contracts to be canceled are those that have problem of performance rather than
problem of formation the later are to be invalidated than canceled. A party may apply to
cancellation in case of all the instances of non-performance mentioned above such as in case of
delay, impossibility of performance, anticipatory repudiation and so on.

Compensation or Damages

The third remedy is damages (compensation). The creditor can claim compensation for the
damage or loss he has incurred as a result of non-performance. This remedy may be claimed in
addition to (additional) either of the above remedies or independently. In applying any of or a
combination of these remedies, one should take in to account not only the interest of the creditor
(victim party) but also that of the debtor (failing party) i.e., for example, the debtor cannot be
required to pay excessive compensation or his personal liberty be deprived under the guise of the
legal remedies. The purpose of awarding compensation to the creditor is to maintain the
disturbed equilibrium of interest as between the interest of both parties as a result of the non-
performance. The court shall not award damages to the creditor to retaliate the debtor for his
failure to perform the obligation. As a principle, in law of contracts, damages refer only to
economic loss (as different from moral loss) and the party who is claiming the compensation is at
duty to prove the economic loss he has sustained due to the non-performance of the obligation
assumed by the debtor. As a rule, the compensation to be awarded by the court to the victim
party should be equal to the economic loss sustained by such party.

Abbildung in dieser Leseprobe nicht enthalten Remission of Debt: a contract of debt would
be extinguished in favor of the debtor where the creditor informs the debtor that he (creditor)
regards him (debtor) as released and the debtor is in agreement to the proposal submitted to him
for the remission of the debt.

1. Novation: an obligation shall be extinguished where the parties agree to substitute therefore a
new obligation which differs from the original one on account of its object or nature. For
instance, an obligation to pay may be changed to an obligation to render a service. However, the
parties to a novated obligation shall show unequivocal intention to extinguish the original
obligation.
2. Off-Set or Set-Off: where to persons owe debts to one another set-off shall occur and the
obligation of both persons shall be extinguished. However, off-set shall not occur unless both
debts are ‘money debts’ or the debt relates to certain quantity of fungible things and both debts
are liquidated (certain in amount and uncontested) and fully due (matured or exigible). Set of
shall occur to the extent of the lesser amount and it does not occur in case of the negative
conditions of set-off mentioned on article 1833 of the civil code.
3. Merger or Confusion: merger shall occur and the obligation shall be extinguished where the
positions of the creditor and debtor are merged or confused in one of the contracting parties. For
example, imagine that an only son was the debtor of his own father (creditor) and before the time
of payment of the debt the father died unfortunately leaving the succession to his only son. In
such case we say the status is merged with in the son and he is no more a debtor. However,
remember that the obligation shall revive where the merger comes to an end. Another typical
example is an amalgamation made between two companies (company ‘A’ and ‘B’), that have a
debtor and a creditor relationship, to form company ‘AB’. When company ‘AB’ is formed there
will be no more debtor-creditor relationship in between.
4. Period of Limitation: per article 1845 of the civil code of Ethiopia, actions for the
performance of a contract, actions based on the non-performance of a contract and actions for the
invalidation of a contract shall be barred if not brought within ten years. There are two basic
types of Legal Prescription. These are:
- Acquisitive Prescription: the lapse (expiry) of the limitation period creates a right to the party
in whose favor the period is running.
- Liberative Prescription: the lapse (expiry) of the limitation period relieves (liberates) the
debtor in the contract from discharging his obligation under the contract.

CHAPTER THREE
CONTRACT OF SALE

3.1. Definition

According to article 2266 of the civil code sale is a contract whereby one of the parties, called
the seller, undertakes to deliver a thing and to transfer its ownership to another party, the buyer,
in consideration of a price expressed in money which the buyer undertakes to pay him.

Try to discuss and respond to the following introductory questions regarding law of sales:

- Whether sale is a mechanism of assignment of rights? Yes it is for consideration (price)

- Who is the seller (vendor)?

- Who is the buyer?

- What are the obligations of the seller? Obligation to deliver the thing; obligation to transfer
ownership of the thing; obligation to provide warranty (against dispossession, defect and non-
conformity); other related obligations

- What are the obligations of the buyer? Obligation to pay the price (consideration); obligation to
take delivery of the thing (is this really an obligation?) and other related obligations

- Which obligations of the seller and the buyer are fundamental or determinative or consequential
obligations? The duty of Delivery; transfer of ownership; payment of the price and taking
delivery of the thing.

- What are the attributes of being a fundamental obligation? It affects the very existence of the
contract; the parties should at least agree up such obligations; non-performance of a fundamental
obligation is a good cause for cancellation of sales contract; non-performance of a fundamental
obligation results in transfer of risk.

- Which obligations of the seller and the buyer are non-determinative or incidental obligations?
Their non-fulfillment does not affect the existence of the contract; if the parties do not agree on
them the law fills the gap to the parties; their non-performance does not entail cancellation or
transfer of risk?

- Whether sale is a special contract or not? Yes sale is a special type of contract which
exclusively deals with the sale of corporeal chattels (movables) up on the payment of a ‘price.
General provisions of contract law become applicable if and only if: the special provisions of
sales contract refer to such general provisions or do not expressly exclude general provisions or
the provisions of sales law remain silent to alleviate their own problems.
- As far as the provisions of law of sales are considered one can identify three different degrees
of specialty or applicable laws: 1. General provisions of contract law 2. Law of contract of sales
and 3. Contracts for the sale of cattle and other living animals.

3.2. Peculiar Features or characteristics of contract of sales

1. Sale is a contract. So, all the essential elements for the existence of a valid contract shall be
fulfilled (Capacity, Consent, Object and Form).
2. There should at least be two or more parties in certain sales contract. No one can validly or
safely sale or buy his own property to his self. Why not? E.g. 2188 of the Civil Code
3. Mere delivery of the thing without the transfer of its ownership does not amount to sale.
Hence, the seller should transfer unassailable right of ownership to the buyer. An ownership right
with no risk of dispossession by third party or defect or non-conformity shall be transferred. To
that effect the law imposes the duty of implied warranty on the seller against risk of non-
dispossession. This requirement distinguishes sale from Bailment or Custody.
4. Consideration of contract of sales is always a price expressed in terms of ‘money’. The duty of
the buyer is always to pay the price expressed in terms of money. This identifies ‘sale contracts’
from Barter in which things are offered for other things. Barter was an earlier stage in the
evolution of contract of sale or it is a contract allied to sale.
5. Subject Matter of Sale is always a thing or goods. A thing may include the following:

- Movables (corporeal chattels): are things which have a material existence and can move
themselves or be moved by man without losing their individual character. (Art. 1127)
- Accessories of a thing: an accessory is a thing which is permanently destined for the use of
another thing. (Art. 1135 of C.C)
- Intrinsic Elements of an Immovable Property (Immovable by Destination): these are parts of
an immovable property that can be severed or separated and sold without damaging the main
element. An intrinsic element of a thing is anything which is materially united to a thing and
which cannot be detached therefrom without destroying or damaging such thing. (1132)

Examples: Trees, Crops and Quarries are intrinsic elements of the land until separated from it.

- Natural Forces of an Economic Value such as electricity, wind and geothermal energy, shall
be deemed to be corporeal chattels where they have been mastered by man and put to use.
- Securities to Bearers, claims and other incorporeal rights embodied in securities to bearer
shall be deemed to be corporeal chattels. (Lottery, shares, Bonds and stocks)
- Intellectual Property Rights such as copy right, patent, good will, trade mark, Trade Secrets
- Business

6. The following are non-subject matters of sale contracts:

- Immovable Property such as land and building

- Actionable Claims or a right of Legal Action against another are to be assigned to a 3rd person
- Money: Money is a price unit by which things get sold. It is a medium of exchange by which
things get sold. The possessor of money is presumed to be its owner. Currency may in no case be
claimed from a person who acquired it in good faith.
- All things that are not mastered by man and Put to use such as Celestial bodies are not subject
matters of sale contracts.

3.3 PERFORMANCE OF SALE CONTRACTS

As we have discussed in chapter three, performance is the carrying out of the obligations
assumed by the parties according to the law and the contract. It is the duty of both the seller and
the buyer to perform or discharge their respective obligations. The obligations incorporated
under law of sales are divided in to three. These are: Obligations of the Seller, Obligations of the
Buyer and Common Obligations of the Seller and the Buyer. Let us deal with them one by one as
follows:

1. OBLIGATION OF THE SELLER:

the seller has the following three basic obligations:

a. Obligation to Deliver the Thing: Delivery is the handing over or conveyance of the thing and
its accessories in accordance with the law and contract. An accessory is a thing permanently
destined for the use of another thing.

Modes of Delivery: the following can be considered as the major modes of delivery:

- Actual Delivery: the physical handing over of the thing and its accessories directly to the buyer
or its representative. The most frequent and recommended mode of delivery.

- Constructive Delivery: this does not result in physical delivery of the thing to the buyer but
the seller will keep possession of the thing on behalf of the buyer. (Art. 1145 C. Code)

- Traditio Longa Manu: the seller does not physically hand over the thing to the buyer but make
ready and point out the placement of the thing to the buyer

- Traditio Brevi Manu : the buyer is already in possession of the thing even before the making of
the contract. The conclusion of the contract is the way of delivery. E.g. Hire Purchase.

- Symbolic Delivery: the delivery of a symbol representing the thing amounts to the delivery of
a thing. E.g. Delivery of a key of a car or a Bill of Lading for things under voyage.

- Delivery via a Carrier: this is a delivery via the instrumentality of a carrier such as an airline
or a shipping line or railway line.

The obligation to deliver the thing includes the obligation to deliver the agreed thing, quantity
and quality of a thing and at the time and place of delivery agreed on the contract or fixed by
law.

The principle of Time and Place of Delivery under general provisions of contract law is Mutatis
Mutandis applicable to law of sales. (Refer to articles 2276 and 2277 of the civil code).

b. Obligation to Transfer Ownership of the Thing

- Per the dictation of Article 1204 of the civil code, Ownership is the widest right that may be
had on a corporeal thing.

- It is only an owner of a thing that can exercise all the rights associated with the thing. These
include the right to use the thing or use the fruit of the thing or dispose or sell the thing.
- Ownership can be transferred either by law (succession) or by contract (sale). Ownership
transfers up on transfer of possession and possession transfers up on delivery. However, mere
delivery does not transfer ownership.

- In order to transfer a good title of ownership, the seller must be the real owner of the thing sold.
There is a maxim which narrates “no one can transfer a greater right in property (title) than he
himself has” or “nemo dat quod non habet” the seller can only transfer a title on the thing, to the
buyer, as good as his own over the thing sold.

- The seller is at duty to take all the necessary steps for transferring to the buyer unassailable
rights of ownership over the thing to the buyer. Accordingly, the seller shall transfer an
encumbrance (disturbance/dispossession) free (total or partial) right of ownership to the buyer.

c. Obligation to Provide Warranty against Dispossession (title), Defect and Non-conformity

Warranty is a mechanism devised by law and imposed on the seller to transfer unassailable right
of ownership to the buyer. Warranty is a legal (implied) or contractual promise made by the
seller regarding the quality, character, title or suitability of the goods he has sold. There are two
types of Warranty. These are:

- Express Warranty: is created where the seller makes a statement of facts or a promise to the
buyer concerning the goods that become part of the bargain. However, mere opinion or
recommendation made by the seller may not amount to warranty.

- Implied Warranty: are responsibilities imposed by law on the seller for the good quality of
goods he sold. It does not matter whether or not the seller has made express promises as to the
quality of the goods.

Implied warranties are imposed on the seller in the interest of promoting higher standards in the
market place and due to the following points:

- The buyer commonly has little or no opportunity to examine the goods carefully before making
a decision to buy them. (information asymmetry)

- The complexity and technicality of some goods made it difficult to buyers to inspect or test the
things before purchasing them.

- The seller has every opportunity and position to inspect and know the thing.

- The principle of “Caveat Venditor” or ‘ Beware the Seller’ of the duties of implied warranty on
the thing.

Warranty against dispossession is an implied warranty that will be effective if and only if the
buyer is not aware of the threat of dispossession or defect in the thing.

If the buyer is aware of such defect or risk of dispossession by a third party and purchased the
thing s/he may not invoke the duty of the seller to provide warranty.
It is also the counter duty of the buyer to examine the thing when s/he gets the opportunity and
notify any defect to the seller in due time if the buyer wants to cause use of the implied warranty
against the seller.

Otherwise if the buyer knowingly buys a defective thing from the seller, the seller shall not be
forced to make good the warranty. This principle is called “Caveat Empitor” or “Beware the
Buyer of the duty to examine the thing and notify the seller”

2. OBLIGATIONS OF THE BUYER

The two fundamental obligations of the buyer are the obligation to pay the price and take
delivery of the thing. Now let us deal with them one by one:

a. Obligation to Pay the Price

Price is the amount of money that the buyer undertakes to pay to the seller in consideration of a
thing. You need also to bear in mind that, the obligation to pay the price of the thing includes the
obligation to take every step necessary provided by law, custom, to arrange for or guaranty the
payment of the price. For example, it may be opening an account or deposit money in a bank or
issue a check, or surrender collateral if necessary. Also beware that each type of sale may pursue
its own customary requirement.

The other issue we need to ascertain is as to how do the parties determine price of the thing.
Accordingly, price of the thing can be determined by:

- Agreement of the parties: this is the appropriate way to determine price

- Weight: in this case the parties should consider using the ‘net weight of the thing’ or the weight
of the thing minus the weight of the container.

- Things at current price: the parties may also use the market price of the thing if the thing is
quoted in the market.

- Price at which the seller normally sells in the normal circumstance of a market

- Price determined by third party.

The provisions we have discussed in relation to the time and place of payment of the price are
also mutatis mutandis applicable to contract of sales.

b. Obligation to take delivery of the thing

The buyer is at duty, after delivery, to take such steps as may be necessary for completing the
delivery of the thing. This may include the obligation to go to the place of business of the seller
or opening of his store or be present at the time and place of delivery or to tell the seller to keep
it on himself. The other question we need to answer is whether the obligation to take delivery of
the thing is really an obligation or not? Considering the selfish nature of the human person it is
presumed that once the buyer has paid the price s/he will for sure take the delivery of the thing. It
should however, be noted that what makes it an obligation is the fact that failure to take delivery
of the thing has a legal consequence to be borne by the buyer. For example, if the buyer has
failed to take delivery of the thing at the agreed time and place of delivery risk to the thing, if
any, transfers to him, the seller can consider the failure of the buyer as a ground to claim the
cancellation of the contract and also the buyer is at duty to cover cost of preservation of the
thing, if any, incurred by the seller for the care and preservation of the thing under his custody.

3. COMMON OBLIGATION OF THE SELLER AND THE BUYER

These are common obligations in the sense that they are obligations imposed on both the seller
and the buyer but each party discharges his or her obligations independently. Accordingly, the
following are the common obligations of the seller and the buyer:

a. Obligation to Pay or Cover Expenses

First of all, understand that the parties incur no expenses at all if the sale is an instant type of
sale. However, one should also presume the fact that the expense of the parties would increase
with the increase of the amount of money involved in their contract. Not let us deal with the
expenses of the buyer and the seller turn by turn:

i. Expenses of the Buyer: the buyer should cover the following expenses:

- The expenses of payment

- The expense of the contract
- Forwarding transport cost if the thing is to be taken to other place after the place of delivery
- Any expense arising after the place of delivery

ii. Expenses of the Seller: the seller, on his part, should cover the following expenses:

- The expenses of delivery of the thing. Such as expenses related to counting, measuring,
weighing of the thing to be delivered.
- Various expenses until place of delivery
- Expense of transport until place of delivery unless the transport arrangement of the parties is
‘Carriage Free’. If their agreement is carriage free then it will be the exclusive duty of the seller
to cover the cost of transport all the way to its final place of destination.
- The seller also covers additional expenses incurred by the buyer as a result of changing of
residence by the seller.

The other important issue we need to ascertain is who covers the price increase or decrease
related to the thing caused due to an increase or a decrease in customs duties after the time of the
making of the contract but before the time of payment of the price. It is an obvious fact that, the
amount of customs duty imposed on a thing at the time of import has an obvious implication on
the fixing of the price of the thing.

The rule is, where import customs duties or other duties charging the imported thing are to be
paid by the seller and such duties increase after the contract is made, such an increase or decrease
shall be added to the price.

b. Obligation to Preserve the Thing

Beware that preservation of the thing made by one party (seller/buyer) is always made on behalf
and at the expense of the other party to the contract. The other requirement to preserve a thing is
possession of the thing that it is only the possessor of a thing that has the opportunity (duty) to
preserve the thing. In addition preservation of the thing is to be made if and only if the cost of
preservation is not greater than the actual value of the thing to be preserved. If cost of
preservation is greater than the actual value of the thing to be preserved, the party who is at duty
to preserve the thing can sale the thing.

The SELLER shall preserve the thing (on behalf and at the expense of the buyer) in case the
buyer is late to take delivery of the thing and in case of constitutum Possesserium or the thing
has continued under the possession of the seller up on the agreement of the parties.

In due course of preservation of the thing, the seller may incur various expenses related to hiring
a guard, renting a ware house or maintenance of the thing and such expenses shall be refunded
by the buyer or otherwise the seller may refuse to deliver the thing to the buyer or exercises his
‘lien-right’

You should also be aware that the seller is liable to any damage to the thing due to lack of
preservation.

The BUYER should also preserve the thing (on behalf and at the expense of the seller), if s/he
intends to refuse the thing either owing to defect in the thing delivered or non-conformity. In line
with this, you should know that if the buyer claims to cancel the contract or requires the
replacement of the thing risk shall not transfer to him nevertheless the thing is under his
possession. In the meantime, the buyer should preserve the thing or if the risk is due to lack of
preservation by the buyer, the buyer will be liable to cover the price of the thing.

Finally, it should be understood that the seller and the buyer or the party who has the duty to
preserve the thing has the right to relieve itself from the duty of preserving the thing by
consigning the thing to a third party according to the provisions of the Civil Code (Arts. 1779 -
1783).

c. The obligation to shoulder unpreventable Risk related to the thing

- First of all, risk is the liability of a party that arise due to loss (stolen), deterioration (degrading
of quality) or damage (destroyed) of the thing.

- Risk follows Ownership or Possession- ‘ res peri demino ’. It is the person who is in the
possession of the thing that has the duty to preserve the thing.

- Risk shall be borne by the party who is in a better position to avoid or avert the risk.

- Risk shall also be shared by both parties if none of the parties are in a better position to
avert/avoid the risk.

- The main motive behind the rules on ‘transfer of risk’ is to cause the efficient allocation of risk
among the parties.

- The effect of shouldering a risk by a party is that the person who bears the risk is to cover the
value of the thing which has been damaged or lost.
- Risk refers only to corporeal chattel or movable property where the duty to transfer ownership
is imposed on the seller. Or for instance, risk does not concern (relate to) money.

- Risk always begins from the possessor (seller) and up on the factors/grounds it transfers to the
buyer:

- After actual delivery (physical handing over) of the thing to the buyer.

- After the date of delivery (lapse of the date) and even if delivery is yet to be made due to the
default of the buyer. In such case the buyer not only loses the thing but also pays the price of the
thing.

- If the buyer fails to pay the price and payment has been a condition for delivery of the thing

- If fungible things has been identified/isolated and allocated by the seller and their placement is
notified to the buyer.

- If the things are under voyage, risk transfers when the thing is handed over to the carrier by the
seller.

However, remember that, risk is not transferred in a situation where at the time of the making of
the contract, the seller knew or should have known that the thing has perished or was damaged.

CHAPTER FOUR
4. The Law of Agency

4.1. The Need for Agency

- Issue for Discussion: consider the following set of facts

It is plainly discernable from the very first article of the Ethiopian civil code that the human
person is the subject of rights and duties from its birth to its death. [4] In a similar fashion,
artificial persons are also the subjects of rights and duties from their formation (registration) to
their liquidation (cancellation of register).[5] Furthermore, per the dictations of the civil code,
every person is presumed capable unless expressly declared incapable by law. i.e., s/he is
presumed to have the necessary legal capacity to exercise the attribute features of his or her
legal personality or to personally take care of his or her interest.[6]

From this logic a question should emanate that, so far as every person is capable of personally
exercising his or her own affairs in everyday life (which is the most preferable), why should
there be a need for representation or agency by another person (who is even presumed to have
his own personal engagements)?

The practical experience (legal or otherwise) in Ethiopia or elsewhere reveals that the following
are the major rationales that triggered the need for representation by another person:

a. It helps to overcome limitation (constraints) of time and place: imagine that you are a
prosperous business person running your business throughout the country and it is also in the
nature of the businesses you are running that they require your immediate attention or else the
consequence will be unbearable. On the other hand, nevertheless the modern commercial world
is too complex, you are just a human person that can only be at a place at a given time or do a
thing at a time. In such situations, the basic way out to escape bankruptcy would be hiring an
agent who act on your behalf and help you to overcome such inherent limitation.

b. It helps to overcome lack of business knowledge or experience: it is an open secret that

knowledge and experience are not the only inputs to start a business. However, with them added
to the menu of a trader, the business venture can get more attractive. In this regard, hiring an
agent (a professional) enables one to perform certain tasks which s/he has neither the required
knowledge nor experience to perform by themselves.[7]

c. It is a tool to overcome the pitfalls of incapacity: as mentioned above, for various reasons
the law has precluded some groups of persons from personally exercising their rights and duties.
[8]
 However, it is not fair that they should remain remedy-less for they are at least possessors of
rights and duties as a person. Here emerges the necessity of agency that these groups of persons
can be capable of safely exercising their rights and duties (take care of their interests) via means
of representation by other capable individuals.[9]

d. The very nature of artificial persons: it is a clear fact that such persons are endowed with
legal personality artificially (as opposed to naturally) for the sake of convenience in control and
other rationalities. Otherwise, they are non-living things (associations of capital) that lack the
necessary mental capability to analyze the cost and benefit of their transaction. Hence, it is
inherent in their very nature that they need to be represented by physical persons who will act on
their behalf and deal with third parties. For instance, the founders, managers, directors, and
secretaries, of all business organizations are natural persons who are authorized to act on their
behalf.[10]

4.2. Sources of Agency

The representative capacity (power of attorney) to act on behalf of another person (artificial or
natural) may emanate from the following basic sources:

4.2.1 The Law

It is obvious from the reading of Art. 2179 of the civil code of Ethiopia that, the authority to act
on behalf of another person may derive from the law. This is the case where the law appoints an
agent to act on behalf of another person for reasons like the protection of the principal that may
otherwise be at stake if s/he acts by himself or herself. This become crucial in case the principal
is declared incapable by law.[11] The other situation where the law appoints an agent is the case of
agency of necessity or unauthorized agency.[12] In this regard the very nature of artificial persons
that necessarily dictate their representation by natural persons to perform their day to day
activities is typical.[13]

4.2.2 Contract

The basic source of agency is a contract. As different from the first, this is a relationship created
between the agent and the principal based on their genuine contractual engagement. The contract
should, among other things, define the scope of the representative capacity of the agent and its
duration.[14]
4.2.3 Decision of the Court

This is a situation where the authority to do an act or acts of a certain kind on behalf of another
emanates from the decision of a court. Such types of agents are known as curators.[15]

4.3. Definition of Contract of Agency

Per Article 2199 of the civil code,

As we can understand from the above definition, Agency is 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 is a contract.[16] It is actually a special type of contract which expressly deals with the
relationship between the agent and the principal. For contracts are the cornerstones of the
economy the law has stipulated stringent requirements of validity. Hence, agency as a contract is
expected to fulfill the essential validity requirements for the existence of a valid contract
mentioned under article 1678 of the civil code in relation to capacity, consent, object and form.
[17]

The other point to discern here is, this contract refers only to the internal contract concluded as
between the agent and the principal and it basically governs their bilateral relationship. However,
this contract is the main input for the conclusion of another contract, called external contract, as
between the agent and another third party. It is understandable that the purpose of appointing an
agent is to deal with third parties via means of an intermediary.

The other point of emphasis should be how many parties are there in a certain agency
relationship? Before one dares to answer this question, as mentioned above, s/he should be aware
of the fact that there are two types of contracts under a certain agency relationship. Having this in
mind the following are the parties to a certain agency relationship:

- The person represented- the principal.

- The representative- the agent.
- The person with whom the agent concludes the external contract- the third party.

Technically however, one should raise a question as to whether the agent is really a party to the
external contract concluded between the agent and the third party? And the answer is obvious,
i.e., the agent is not presumed to be a party to a certain agency relationship for s/he is a mere
facilitator or mediator as between the principal and the third party with whom the contract is
concluded. Otherwise stipulated, the agent does not assume any personal liability or benefit from
the transaction as far as s/he is representing the best interest of the principal or act on behalf, in
the name of and the exclusive interest of the principal.[18]

Finally, we should understand that the acts which the agent undertakes to perform on behalf of
the principal are juridical acts- acts that are legally binding or otherwise constitute a fault and
entail legal liability. However, in the normal course of events (without personal fault on his part),
the agent is not liable to the performance of the contract contracted with the third party.[19]

4.4. Scope of Representation

By scope of representation we are indirectly referring to the ‘object’ of the internal contract. The
main object of the internal contract is not different from defining the depth and nature of the
power of attorney vested on the agent. That means, the agent can act and bind the principal if and
only if he performed those powers vested in him by the contract of agency. Though the scope of
agency shall be expressly stipulated in the contract, which may not be always the case. In such
cases, the scope shall be determined or fixed according to the nature of the transaction to which it
relates.[20] The non-fulfillment of this obligation would be against the interest of the principal for
it will encourage unauthorized agency.

4.4.1 Complete Representation

The agent is deemed to completely represent the interest of the principal in the following cases:

- If the agent acts in the name and on behalf of the principal and the third parties with whom the
agent is contracting are aware of the fact that he is an agent of another person. This is the case of
disclosed principal.[21]
- If the agent is acting with the scope of representation vested in him by the internal contract.
And
- If the agent is representing the best interest of the principal or acts with the exclusive interest of
the principal.

You should be aware of the legal implication of complete representation that, if the agent
completely represents the principal, s/he would not assume any personal liability and all the acts
of the agent bind the principal towards the third party as if they are performed by the principal
himself.[22] In all other case however, the agent is presumed to have acted in his own name and
behalf which will make him personally liable to the third party with whom he is contracting. The
latter case amounts to the cases of undisclosed principal.

4.4.2 Types of Agency

According to Article 2202 of the civil code, there are two types of agency. These are General and
Special types of agency. Now let’s discuss them as follows:

a. General Agency

is a situation where the agent is vested with the power to deal with all the affairs of the principal
of a particular type or in a particular place. Such agents are agents who are in general authorized
to represent the principal. One could say they are trustworthy persons to the principal in that the
principal authorizes them to entirely represent his interest. As a result, such agents are only
authorized to perform acts called ACTS OF MANAGEMENT on behalf of the principal.[23]

What kind of acts do you think are acts of management? The following are some examples of
acts of management:

- Acts done for the maintenance or preservation of property;

- Lease for terms not exceeding three years;
- The collection of debts that are matured or exigible;
- The discharge of debts;
- The investment of income; and
- The sale of crops or goods intended to be sold or perishable commodities
b. Special Agency

It is an agency whereby the agent is authorized to transact or deal with specific business affairs
of the principal.[24] Such agents are mostly professional agents who expertise in cutting a deal for
a specific transaction. As a result most of the acts done by such agents are ACTS OF
LIQUIDATION or DISPOSAL. Such agents are prohibited from performing acts called acts of
management. Besides, their service as an agent is deemed to be of a short term (until disposal).
The other thing one should be aware is special agency shall confer on the agent authority only to
conduct the affairs specified in the contract and their natural consequence according to the nature
and usage therein.[25]

What kinds of acts, do you think are acts of disposal? An agent may not deal with the following
acts without a special power of agency[26]:

- Alienation or mortgage of immovable property;

- The investment of capital
- Sign bill of exchange
- Make donation
- Effect a settlement; and
- Defend an action on behalf of the principal.[27]

4.4.3 Special Types of Agents

a. Commission Agents: is an agent (natural or juristic person), who independently,

professionally and for gain, undertakes to buy or to sell in his name, but on behalf of the
principal, goods, movables or any other thing of a similar nature (securities or other fungible
things).[28]

b. Forwarding Agents: are agents, which may be a carrier or a shipper who undertakes to act on
his own name but on behalf of another person, called the principal, into a contract for the
forwarding of goods.[29]

c. Curator Agents: this are agents appointed by a court to represent and perform legally binding
acts on behalf of another person up on application to that effect by the relatives or the spouse of
the principal.

d. Commercial Agents (brokers): is an agent (a natural or artificial person) who independently,

professionally and for a gain, brings parties together for the purpose of their entering into an
agreement such as contract of sale, lease, insurance or carriage.

4.5. Duties and Liabilities of the Parties to the Contract of Agency

It is obvious that agency is a contract in which at least two parties bilaterally counter oblige
themselves to perform certain obligation towards each other. Hence, both the agent and the
principal in a certain agency relationship have their own respective duties in need to be
discharged according to their agreement in particular and the law in general. i.e., failure to
discharge by either party, if any, entails liability.

4.5.1 Duties and Liabilities of the Agent

The following are the main duties of the agent in a certain agency relationship:

a. The duty of strict good faith: the agent shall act with strict good faith towards his principal.
This duty, among other things, requires the agent to disclose to his principal any circumstance
which would justify the revocation of the agency or the variation of its terms.[30]

b. The duty to act in the exclusive interest of the principal: as mentioned earlier the agent is a
mere facilitator. s/he shall not claim to have any personal benefit in their engagement with a third
party on behalf of the principal. As a result the agent is required to act in the exclusive interest of
the principal and s/he may not, without the latter’s knowledge, derive any benefit from any
transaction in to which s/he enters in pursuance of his or her authority. Moreover, the agent may
not make use to the detriment of the principal of any information obtained by him in the
performance of his duties as an agent.[31] The thing is, though it is normal that in due course of
his activities the agent may face a conflict of interest, however, s/he should refer it to the
ultimate decision of the principal.[32]

c. The duty of accounting: this is the other vital duty of the agent for mostly the activity of
agents is related to the finance of the principal. Hence, it is the duty of the agent to account to the
principal for all sums received by him and all profits accruing to him in due course of his
employment, notwithstanding that the sums he received were not owed to the principal or there
being existed an adverse claim to the monies collected. Besides, where the agent converted to his
own use monies he owed to the principal, he shall be liable for the payment of interest as from
the day of such use, without it being necessary that notice be given to him. Finally, this duty is
deemed to be discharged when the accounts of the agent are duly approved by the principal.[33]

d. The duty of diligence: the office of the agent, though voluntary in nature, creates a fiduciary
relationship with the principal. Hence, the agent is expected to show the qualities of care, interest
and fitness in his activities. Two folds of diligence may be expected from the agent. Firstly, the
agent shall exercise the same diligence as a bonus pater familias in carrying out the agency as
long as he is entrusted therewith.[34] This is called the objective standard of duty expected from a
paid or professional agent. Secondly, the agent is required to show the same degree of diligence
or care as to his own or that he show in due course of taking care of his own personal affairs.
This is called the subjective standard of care mostly expected from a gratuitous agent. Finally,
the agent shall be liable for fraud and for defaults in the performance of his duties.[35]

e. The duty of ‘no delegation’ of authority: it is inherent in the nature of the obligation of the
agent that s/he should perform his activities personally. As a result, the rule is the agent shall
carry out the agency in person unless he is authorized by the principal to appoint a substitute or a
delegate. However, such delegation may be impliedly accepted where from usage it appears a
matter of indifference whether the agent acts personally or by the deputy or where the interest of
the principal so requires or when unforeseen circumstances prevent the agent from carrying out
the agency and he is unable to inform the principal of these circumstances.[36]

4.5.2 Liabilities of the Agent

On the other hand, in the following circumstances the agent shall be personally liable towards the
third party he is dealing with and/or the principal:

a. In case of undisclosed or partially disclosed principal: this is a situation where the agent

acts on his own behalf with third parties, notwithstanding the fact that such thirds parties know
that he is an agent of somebody else or not. Such an agent shall personally enjoy the rights or
incurs the liabilities deriving from the contracts he makes with third parties and his acts
whatsoever may not bind the principal.[37]

b. In case the agent abuses his authority: this is against the essence of fixing the representative
capacity of the agent by the internal contract of agency concluded between the agent and the
principal. Accordingly, the agent shall be liable to contracts made by him in the name of the
principal outside the scope of his authority. However, it is up to the discretion of the principal to
either opt to ratify or repudiate such ultra vires acts of the agent.[38]

c. In case the agent acts on a lapsed authority: sometimes the parties to the relationship may
determine the duration of the viability of their relationship by fixing a period of time to that
effect. That means the agent can legally represent the interest of the principal only and until the
lapse or expiry of such period. Otherwise, if the agent acts on behalf of the principal after the
expiry of the duration of his power of representation, s/he shall be personally liable.[39]

d. In case of unauthorized agency: an agent who undertakes, with full knowledge of the acts, to
do or manage the affairs of another person without having been appointed as an agent shall be
personally liable towards the third party to the performance of the obligation he undertake to
discharge.[40] In a nutshell, the acts of such an agent shall not bid the person whose affairs have
been taken care of. However, the principal may exercise either of the following options towards
such acts of the agent and thereby bind himself or not for the deeds of the agent towards the third
party:

Ratification: this is the situation where the principal approves or ratifies the acts of the agent,
nevertheless they are unauthorized. This happens, mostly, in cases where the interest of the
principal required that the management be undertaken as a necessity. Ratification has a legal
effect of making the unauthorized acts of the agent binding against the principal.[41]

Repudiation: this is a situation where the principal rejects or disapproves the unauthorized acts
of the agent. This automatically entails the personal liability of the agent towards the third party.
The more the acts of the agent put the interest of the principal at stake, the more the principal
tends to repudiate them.[42]

e. The agent shall be generally liable towards the principal for his failure to discharge his
obligation according to the contract of agency. i.e., failure to discharge all the duties of an agent
mentioned above makes the agent personally liable to the principal. For instance, bad faith in due
course of discharging the activities; in case of conflict of interest with the principal (in case the
agents acts on behalf of multiple principals other than the one or the agent contracts with himself
on behalf of the principal); failure to disclose important information; failure to account his
activities or to submit report of the management of his affairs up on demand or periodically;
fraud and defaults in his work; the agent shall be liable for the acts of the person whom he
appointed or delegated without authorization as his substitute as if they were his own; the agent
is also liable for the care with which he selected his substitute and gave him instructions, even
with authorization of the principal to appoint a delegate.[43]

4.5.3 The Duties and Liabilities of the Principal

Most of the duties of the principal towards the agent are related to the fulfillment of various
types of payments and security of resources of the agent who is acting on his behalf. On the other
hand, the basic duty of the principal towards the third party is performance of the obligation
undertaken by the agent towards the principal.

The following are the main duties of the principal towards the agent:

a. The duty of remuneration: remuneration is a commission paid to the agent for the activities
exercised by him. The problem is, due to either the voluntary nature of the office or the fiduciary
nature of the relationship per se, the agent cannot claim remuneration as of right unless, such
payment is contractually agreed upon or the acts are performed on a professional level (all cases
of special agency) or it is customary to do so in the nature of the activities done by the agent.
Moreover, though such payment may be contractually agreed upon, it is subjected to the full
discretion of courts to either reduce or increase it, if it appears to be excessive or out of
proportion to the services rendered by the agent.[44]

b. The duty of Reimbursement: it is the main duty of the principal to advance to the agent the
sums necessary or entirely the resources needed for the proper performance of his activities.
Otherwise, if the acts of the agent are left behind due to the non-resourcefulness of the principal
the latter shall be liable to the third party. This being the case however, if the agent happens to
have covered such outlays or expenses by himself, then it is the duty of the principal to
reimburse to the agent such costs incurred in the proper carrying out of the agency. The duty of
reimbursement also includes the payment of interests by the principal, which are due from the
day when they were incurred.[45]

c. The duty of Indemnification: this is also another type of payment, but for a different reason.
This duty obliges the principal to make good (compensate) any damage of the agent sustained in
the course of carrying out of the agency and which was not due to his own default. So the only
Burdon of proof required from the agent would be to prove that the damage was sustained while
practicing his agency.

It is similar for all the above types of payments required from the principal that, first; they are
not subjected to off-set by the principal under the pretext that the transaction was unsuccessful
and second, until the payment of the sums due to him by reason of the agency, the agent shall
have a lien on the objects entrusted to him by the principal for the carrying out of the agency.[46]

- Do you think the agent can exercise his right of lien on the documents evidencing the agency?
Refer to Art. 2184-86 of the civil code.

On the other hand, the following are the main liabilities of the principal[47]:

- During ratification;
- In case he informed a third party of the existence of the power of attorney but failed to inform
him of the partial or total revocation of such power;
- He failed to ask the agent to return the document evidencing the power of attorney and failed to
seek a judicial decision to the effect that such document was revoked;
- He caused in any other manner, in particular by his statements, behavior or failure to act, a third
party to believe that the person with whom he was dealing was authorized to act on behalf of the
principal.
- He is liable for the performance of the obligation towards third party.
- In case of plurality of principals, the principals shall be jointly liable to the agent for all the
consequences of the contract.
4.6. Grounds for the Termination of Agency Relationship

It is a universally known fact that everything that has a beginning has an end and agency
relationship is not an exception to it. The following are the main grounds of termination of a
certain agency relationship:

a. Revocation of agency by the principal: it is within the full discretion of the principal to
restrict or revoke the representative capacity (the authority he gave to the agent to make contract
in his name) of the agent at any time and to force the agent to restore to him the written
instruments evidencing his authority. However, unless otherwise where the date was agreed upon
in the principal’s interest, the he is at duty to indemnify the agent for any damage caused to him
by the revocation where such revocation occurs prior to the agreed date or under conditions
detrimental to the agent. If the principals are plural, the revocation of the agent may be effected
only by the agreement of all the principals.[48]

b. Renunciation by the agent: this is the action of the agent where he renounces or resigns his
office voluntarily. In this case however, the agent is at duty to give notice of his resignation to
the principal. This is due to a legal presumption that the agent is deemed to properly resign from
his duties if and only if he is replaced by another. In a similar fashion, if such renunciation is
detrimental to the interest of the principal, it is the duty of the agent to indemnify the principal
unless the latter cannot continue the performance of his obligation without himself suffering a
considerable loss.[49]

c. Death or incapacity of the agent: in the absence of an otherwise agreement a contract of

agency shall terminate by the death, declaration of absence, bankruptcy or incapacity of the
agent. In such case the principal has a right to information about the happening by the heirs or
representatives of such agent and the latter are at duty to take all the necessary steps to protect
the interest of the principal.[50]

d. Death or incapacity of the principal: in a similar fashion the death, absence, bankruptcy or
incapacity of the agent terminates the agency relationship. In this case however, for the agent is
still alive he has a duty of serving as a care-taker until the legal representatives of the principal
take over the activity.[51]

e. Expiry of the duration of agency: if the contract was made for a defined period of time, the
relationship terminates with the lapse of the period of time mentioned in the contract.[52]

f. Achievement of Object: if both parties perform properly and achieved the very purpose of
their relationship there will be no reason for the continuation of their relationship.[53]

CHAPTER FIVE
5. Law of Business, Traders and Business Organizations

5.1. Business

5.1.1 Definition of Business

In its rough or popular sense, business may be defined as the property of a trader or a business
person on which it may exercise the widest rights of ownership. It is precise from the dictation of
article 1204 of the civil code that, ownership is the widest right that may be had on a corporeal
thing. This implies that, if a trader owns a business s/he may exercise the various rights of
ownership that may be had on such business. For instance, mortgage the business [54], hire the
business[55], sale or transfer the business[56], contribute the business to a business organization,
[57]
 constitute a usufruct on it[58] and so on.

However, the technical definition of business is broader. Per Article 124 of the com. Code,

Business is an incorporeal movable consisting of all movable properties brought together and
organized for the purpose of carrying out activities of an economic nature [emphasis added].

This definition consists of two basic concepts- the constituent elements of a business and the
elements should be used to operate an activity of economic nature.

Accordingly, there are two basic constituent elements of a business. These are corporeal movable
properties[59] and incorporeal movable property.[60] The corporeal elements of the business mainly
constitute the equipment, goods, raw materials, things in stock and so on. [61] On the other hand,
the incorporeal elements[62] (in which the main essence of a business lays) mainly include the
business’s, Goodwill, Trade-name, the special designation under which the business is carried
on, the right to lease the premises in which the trade is carried on, patents and copyrights or other
intellectual property rights.[63] The other of such elements is prohibition of the seller of a business
from unfair competition with the buyer in the last five years of the sale.[64]

- Issue for Discussion

Now, bearing in mind that property can be generally divided into two as movable and immovable
property.[65] Do you think that the immovable properties nevertheless they are owned by the
trader himself (i.e., the land on which the premises of the business lays and the building in which
the business is carried on) are the constituent elements of the business? Why or why not?

This being the case however, one should still ask a question as to what is the legal effect of being
the constituent element of a business. As it is inferable from the provisions of the commercial
code, unless there is an otherwise agreement to that effect, the sale of a business implies the sale
of all the constituent elements of such business. For instance, if somebody sold his business, it is
also his obligation to enable the buyer to take over the goodwill of the business by handing over
to him all the necessary documents and information.[66]

Finally, it is also a requirement that these elements of the business shall be organized for the sake
of operation of an activity of an economic nature (economic enrichment in this case).

5.2 Traders

5.2.1 Definition of Traders

It should be a preliminary fact that business (in general) can be operated by both physical
(traders) and Artificial (business organizations) persons. However, sole-business or
proprietorship can only be operated by natural persons. From this we can derive the literal
definition of a trader as, a natural person who operates a sole-business (an individual business).
That means, artificial persons may not operate a sole-business in Ethiopia. The prohibition goes
with their very nature that, formation of a business organization necessarily requires the signing
of a partnership agreement, which on its part requires the existence of at least two persons as a
signatory.[67]

In the technical sense however, the definition of the notion trader requires the fulfillment of two
basic conditions- the General and Special conditions.

According to the general condition, three sub conditions shall be complementarily fulfilled.
These are:

(1) The existence of a ‘business’: every trader should operate a business. Or otherwise

stipulated, there is no trader that does not operate a business. The manner of operating it does not
actually matter- it can be operated as an owner, or a lessee, or a usufructuary of the business, but
the trader is the one who is practically operating it.[68]
(2) The professional nature of the operation: this requires the trader to operate the business as
a principal means of calling or vocation or livelihood in addition to the professional engagement
of the trader.[69] And,
(3) The existence of profit-motive: the main object of the trader should be maximizing profit or
it should be operated for an economic gain (enrichment) i.e., as different from gratuity or charity.
[70]

The special condition on the other hand, in addition to the fulfillment of the general condition
requires that the ‘business object’ of the undertaking should relate to one or the activities
enumerated under Article 5 of the com. Code as acts of commerce or trading activities. [71] Bear in
mind that, any activity other than those enumerated under Article 5 of the com. Code is excluded
from being an object of a trading or economic activity and it is not in the nature of government to
negotiate on them.[72]

- Issues for Discussion

(1) Do you think that the list under Article 5 should be exhaustive or enumerative? And
(2) Should all professions or activities or professionals in a country be considered as a trading
activity? Why or why not?

5.2.2 Rights and Duties of Traders

Traders, as mentioned above, are natural persons who are the subject of rights and duties from
their birth to their death. In addition, as a person, they are presumed to be capable unless
expressly declared incapable by law. However, as different from the natural sense as an ordinary
person, traders have special rights and duties as a professional person operating trade. The
following are the major ones:

i. Rights of Traders

Traders have the right to engage in a trading activity of their choice as a means of subsistence or
livelihood so far as they do not defy those prohibitions and incompatibilities set by the law.[73] In
addition, traders have also the capacity to engage in a trading activity either as an individual or as
a couple or as if they are unmarried at all. however, if a person acts as a trader individually
where he was married, it is possible but the law reserves to the other spouse the right to an
opposition if it is found to be in the interest of the household. [74] Finally, traders have the right to
become beneficiaries of any government flexibilities to traders or traders of a certain type and so
on. A good example can be tax-exemption.

On the other hand, the following are the main duties of traders:

a. Commercial Registration: traders should be registered in the commercial register.[75] Unless

they are registered their will be no legal personality.[76]

- What do you think are the effects of failure to register and cancellation of register?[77]

- What if a trader sold his business or is unable to operate his business or died, but s/he failed to
cancel or re-register it?[78]

b. Maintaining Books and Accounts: every trader should maintain various books and accounts
of the business s/he is operating.[79] The notion books and accounts includes, among other things,
the journals, inventories and balance sheet, and correspondences of a trader.[80]

- What is the effect or essence of keeping books and accounts? Do you think it has something to
do with evidence? Against whom they testify?[81]

c. Prohibitions and incompatibilities: every trader has the duty to respect such prohibitions or
lawful restrictions or incompatibilities attached by the law.[82] The prohibitions basically refer to
the duties related to preserving free competition. For instance, anti-competitive agreements
(vertical or horizontal), anti-competitive mergers, and abuse of dominant position are prohibited.
[83]
 The incompatibilities are mostly related to the requirements of sex, age, nationality, license
and qualifications attached by law in respect of particular trades. For instance, minors may not
operate trade[84] ; partnerships and private limited companies may not operate high-profile
businesses;[85] foreign nationals may not operate banking or insurance business in Ethiopia [86] and
associations may not carry on trade in Ethiopia.[87]

d. the obligation to pay tax and others obligations

5.3. Business Organization

5.3.1 The need for business organizations

Before going to the main issue of this section, it is good to ask a question that why we are in
need of business organizations where we can individually engage ourselves in a trading activity?
The following can be the main justifications behind the need for business organizations:

- The need to raise huge capital and chains of business enterprises: briefly, four individuals
with 10,000 ETB each can join together and raise 40,000 ETB which enables them to better
engage themselves in a medium-profile business. Moreover, it will be a wonderful combination
of money, knowledge and experience.

- The need to share or shoulder losses together: economic losses are unavoidable. But their
consequence would be more unbearable to a single individual than plural business partners. A
single blow can bring a trader into a break-even point but the impact is lesser in a business
organization.
- The veil of limited liability: when a business organization is established, it will acquire its
own distinct legal personality, i.e., as different from its members or shareholders. Among the
features of such personality is the ability to pay its own debts by itself. Hence, as different from
the ‘joint and several liability’ in case of traders, shareholders of a company are liable to the
debts of the company only to the extent of their contribution or shareholding. This implies that
the debts of the company shall be satisfied from the assets of the company itself not from the
personal property of the shareholders.[88]

5.3.2 Definition of Business Organizations

According to Article 210 of the com. code, a business organization is an association arising out
of a partnership agreement. Here, the term ‘association’ should be taken in the literal sense as
groupment. Such aggregate may be broadly divided into an aggregate of persons- partnerships
(where the personality of each partner is more important) and an aggregate of capital or shares-
companies (where the subscription of the capital is more important than the personality of
shareholders). Besides, such association (of person/capital) should be for the purpose of carrying
out economic activities.

Article 211of the same code defines a partnership agreement as,

an agreement 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 profit and losses arising thereof, if any.[89]

In order to establish a business organization there should be more than one person (except the
case of share companies where the floor requirement is 5 persons). However, the ceiling
requirement of membership is yet undetermined except the case of private limited companies
which is 50. These persons should at least have the intention to work together diligently and
should owe special confidence and commanding trust among themselves. For instance, if there is
a serious disagreement among them it will be against Article 211 of the code.[90] Cooperation
would be meaningless without contribution; hence, everyone should bring something to the table
or subscribe contributions. In the absence of an otherwise agreement, contributions are presumed
to be equal. Contribution may be: in cash, in kind (property), the use of a property, skills
(services), intangible property, debts owed from others, and business.[91] However, in case of
share companies the only accepted forms of contribution are cash and in kind contribution.

The other determinant aspect of the agreement is the share of both profits and losses by all the
partners. Unless it is otherwise stipulated, the share (of profits/losses) is presumed to be equal.
Moreover, what is strictly prohibited is the ‘giving of all the profits to a partner’ or the ‘relieving
of a partner from only the losses’. Otherwise, respective proportions of each partner (in profit or
loss) can be determined by an internal agreement of the partners.[92]

Finally, the purpose of this agreement should be for the carrying out of activities of an economic
nature. Any other object other than this shall be out rightly unacceptable for it will escape to the
realm of other civil organizations whose motive is obviously non-profit oriented.[93]

- Do you think that the signing of a partnership agreement suffices for establishing a business
organization?

5.3.3 Types of Business Organizations

Business organizations in Ethiopia can be basically categorized based on the following two
parameters- form wise and object wise.

Form wise, there are two broad categories of business organizations (partnerships and
companies) and/or six sub-categories of them- ordinary partnerships, general partnerships,
limited partnerships, joint ventures, share companies and private limited companies. Object wise,
there are two types of such organizations- commercial and non-commercial business
organizations. Now let’s shade a light on them one by one.

The following are the six types of business organizations in Ethiopia:

a. Ordinary Partnerships

This can be said the simplest form of partnership in Ethiopia. It seems because of this that the
com. code does not have a conclusive definition of it. Per Article 228 of the code, it is a
partnership created where property is held by several persons for reasons outside their control.
By this we mean, in case several persons become the joint owners of a property, let’s assume due
to a succession, and the joint owners agree to create a partnership for the management of the
property jointly owned.[94] Otherwise, a certain business organization is deemed to be an ordinary
partnership if it does not have characteristics, which make it a business organization covered by
the com. code of Ethiopia.[95] Finally, such partnerships are always non-commercial in nature.[96]

b. Joint Ventures

It is a secret or clandestine type of partnership in that the joint venture agreement as among the
venturers lacks the characteristics of divulgation or publicity or registration or transparency to
third parties. It is only one of the partners (the manager) who is only known to the public as if he
is doing his own individual business. Otherwise, the agreement between the manager and the rest
of the venturers or the venture per se does not have legal personality. It can be considered as a
partnership because it is subjected to the general principles of partnerships per Article 271 of the
code.[97]

- Why do you think the law allowed such clandestine type of business organization?

c. General Partnerships

As far as partnerships as concerned, this are the typical types of partnerships in that it is
commercial in nature and is established by partners who are jointly and severally liable as
between themselves and to the partnership firm’s undertakings. External liability of the partners
(towards) third parties is unlimited but the partners can settle their internal liabilities by
agreement. It fulfills all the requirements expected from a commercial business organization in
that it should be registered, publicized and it is subjected to bankruptcy and it is equipped with
better management. Moreover, it exercises the attribute features of legal personality, such as
names and the legal obligation of taxation.[98]

d. Limited Partnerships

This is a partnership that consists of two types of partners: general partners (active partners,

who can be managers and whose liability is unlimited) and Limited partners (passive partners,
who cannot be a manager and whose liability is limited to the extent of their contribution). Other
than this all the provisions of general partnerships is applicable on them.[99]

e. Share Company

Compared to the rest of business organizations in Ethiopia, this is the most modern and well
organized corporate form. Per Article 304 of the com. code, a share company is a company
whose capital is fixed in advance and divided into shares and whose liabilities are met only by
the assets of the company. The concept of limited liability of shareholders is well practiced here
than the rest of the business organizations in that shareholder are liable only to the extent of their
contribution or shareholding. They are always (by their very form) commercial in nature. [100] It is
only such companies in Ethiopia that can participate in a high profile business such as banking
and insurance. They have professional management, such as Board of directors, General
Managers, Secretaries, and Auditors, which is different from ownership (shareholders). Unlike
partnerships, their existence is perpetual than contingent. They are guided by their own statutes
(the memorandum of association and articles of association) in addition to the law and the
general meeting of the shareholders. It is only share companies in Ethiopia that can issue
negotiable securities, such as equity instruments (shares) or debt instruments (debentures).[101]

f. Private Limited Company

This is the other variety of company in Ethiopia. But viewed under a microscope it is a hybrid of
a general partnership and a share company. For instance, on the one hand, like partnerships it
cannot operate in a high-profile business; it cannot even issue negotiable securities, and there is
no ease of transfer of shares to a third party.[102] On the other hand, like share companies there is
the concept of limited liability of partners. In terms of the ceiling requirement of membership
(which is 50) and the initial capital in need to be subscribed (which is 15,000 ETB), it differs
from share companies (where there is no ceiling requirement of membership and initial capital is
50,000 ETB).[103]

5.3.4 Commercial and Non-commercial Business Organizations

On the other hand, from the perspective of their ‘object of incorporation’, business organizations
in Ethiopia can be sorted as commercial and non-commercial.

a. Commercial Business Organizations

According to Article 10 of the com. code, a certain organization is deemed to be commercial in

nature in either of the following cases:

(1) Where the object of the organization stipulated under the memorandum of association is to
carry out activities of commercial nature;
(2) Where the organization is found practically (de facto) engaged in commercial activities,
nevertheless the object stipulated in the memorandum of association is non-commercial in
nature; and
(3) The very form of the organization: Share companies and private limited companies in
Ethiopia are commercial in nature (de jurie) whatever their objects and ordinary partnerships are
always non-commercial in nature.

b. Non-commercial Business Organizations

Defined by exclusion, those organizations, which does not fell under the ambit of this provision
are deemed to be non-commercial and are not subjected to the commercial code. In this regard,
associations and cooperative societies are worth mentioning, in that; they are governed by
different laws and authorities of their own.[104]

Finally, it is only commercial business organizations in Ethiopia that are subjected to the duty of
commercial registration, maintaining books and accounts, and the bankruptcy provisions of
Book-V of the com. code.[105]

5.3.5 A company or a partnership

When a group of businessmen get together and decide to start a business, one decision that they
will need to make early on is whether to operate as a company or as a partnership. There are
certain advantages, and indeed certain disadvantages, that can be attached to incorporation.

The following are, therefore, matters which businessmen will need to consider. The essence of
the company is that it is a separate person in law. [106] From this very basic difference between the
company and the partnership flow many of the advantages and disadvantages of incorporation.
The most obvious advantage in incorporation is the access to limited liability . Not all companies
are limited companies. Unlimited companies do not need to file accounts so sometimes this is an
attraction for businessmen.

However, the possibility of limiting the liability of the participators to the amount of the issued
shares is an attractive one. Sometimes this advantage is, of course, more apparent than real. If a
small private company goes to a bank and asks to borrow a large sum of money, the bank is
unlikely to be satisfied with the possibility of recourse against the company’s assets. In practice,
the bank manager will require some collateral security from the company’s directors. In a
partnership, however, all the partners will have unlimited liability for the business’s debts and
liabilities.[107] In a limited partnership, however, only sleeping partners may have limited liability
and it is not possible to form a partnership made up entirely of limited partners. There must
always be somebody who is ‘picking up the tab’ with no limitation of liability.[108]

A further advantage of the company is the possibility of separating ownership from control. In a
partnership, all of the partners are agents for the firm. In a company, (this is particularly the case
in share companies) the ownership and the control are separated. Those people owning the share
capital will not generally be the people who are running the business. However, in private
limited companies, the owners and the managers may well be the same. [109] An attraction of
incorporation is what is sometimes termed as perpetual succession . This means that the
company need never die. Companies do go into liquidation but they need not do so. There is no
theoretical reason why a company cannot go on forever.[110] In the case of partnerships, however,
wherever there is a change of partners, there has to be a drawing up of partnership accounts and a
re-formation of the partnership.[111]

Incorporation is an attractive business medium where the participators wish to be able to transfer
their shares at some later stage. In a company, shares are freely transferable, subject to the terms
of the articles of association and the memorandum of association.[112] In a partnership, by
contrast, a partner’s share is not so transferable unless the agreement so provides.
[113]
 Transferability has its own advantage for it encourages competition and development of
business.[114]
It is said to be easier to raise finance where a company is formed as opposed to a partnership.
Clearly, if a company is quoted, it has access to the Stock Exchange to raise finance by issuing
its shares and debentures (collectively called securities) to the public. In the case of debentures,
these may be secured by a floating charge over all of the company’s assets and undertaking. The
device of the floating charge is unique to the company and thus a partnership cannot take
advantage of this means of raising finance.[115]

It is probably the case that there is more prestige attached to the company than to the partnership.
There is no reason that this should be the case but probably the trading and investing public sees
a company in a more favorable light than a partnership. A further consideration, although it
might not be an advantage for companies, is taxation. Companies will pay corporation tax on
their profits. These profits may then be distributed as dividends to members who may be liable to
pay tax on the dividend that has already been paid by the company. In the case of partnerships,
the profits of the partnership business are attributable to the partners of the firm who will pay
income tax on those profits. It is not possible to say in isolation from factors concerning the
circumstances of the participators and their other sources of income whether this is an advantage
or not. It will depend on the circumstances.

The disadvantages that are attached to incorporation are not numerous. There are clearly
formalities to be complied with. A partnership agreement need not even be written. Clearly, it is
desirable to have a written agreement for evidential purposes but there is no legal reason why the
agreement should be in writing. Companies are subject to a comprehensive code of rules
contained in the Companies Act 1985 and elsewhere; the partnership is not subject to a detailed
statutory regime although the Partnership Act 1890 does set out some rules.

In the case of a company, there are various formalities to be complied with. A constitution has to
be drafted, made up of a memorandum of association and articles of association. [116] There are
various ongoing formalities for a company including the filing of an annual return, the filing of
annual accounts and the filing of various forms connected with changes of directors, issue of
shares, issue of debentures, change of company secretary etc. Companies also have to comply
with formalities regarding the holding of meetings which is not the case in a partnership.

Together with these formalities, one can say that there is the disadvantage of publicity in the case
of the company. This is generally seen as a disadvantage as a company has no option but to make
certain of its affairs public. These would include the company’s directors, company secretary, the
accounts of the company (unless unlimited), the annual return of the company, the company’s
constitution and various registers that have to be kept at the company’s registered office.

Together with formalities and publicity, one may add expense as a disadvantage. However, the
expense of setting up a company is not great.

Two other disadvantages of incorporation may be mentioned here. These are the rules on the
maintenance of capital that apply to companies and which are much stricter than in relation to
partnerships and the remaining rules on ultra vires that limit a company’s freedom of maneuver.
Partnerships by contrast are free to do what is legal within the law of the land.

5.3.6 Peculiar Features of Business Organizations

- Business organizations, from a legal viewpoint, are undertakings with more than one member,
having assets distinct from the private assets of the members and a formal system of
management, which may or may not include members of the organization.

- The first feature, initial plurality of membership, distinguishes the business organization from

the business owned by one man; in the latter case the trader can do as he pleases with its assets,
since he is personally liable for debts and obligations incurred in connection with the business,
no special rules are needed to protect its creditors beyond the ordinary provisions of bankruptcy
law.

- The second feature, the possession of distinct assets , is essential for two purposes: to identify
the assets to which creditors of the organization can resort to satisfy their claims (though in the
case of some organizations, such as the partnerships they can also compel the member to make
good any deficiency), and to make clear what assets the managers of the organization may use to
carry on business for the member’s benefit.

- The third essential feature, a system of management, varies greatly. In a simple form of
business organization the members are entitled to participate in the management, and each
member has an equal voice in management decisions.

- Business organizations are affected by the legal environment in which they operate.
Accordingly, two aspects of the Law of Business Organizations should be noted. First, the law
facilitates various combinations of labor, capital and management. Certain business or economic
goals may be better served by one organizational form than another. The second noteworthy
feature of the Law of Business Organizations is that each form of organization imposes varying
degrees of legal formalities on its participants. Further, one’s business relationship may have
different legal consequences, depending on which organizational form is selected.

5.3.7 Commercial Code Definition of Business Organization?

- Article 210 of the Commercial Code defines a business organization as “any association
arising out of a partnership agreement.”

- A partnership agreement, pursuant to Article 211 of the Code, is “a contract where by two or
more persons who intend to join together and to cooperate undertake to bring
together contribution for the purpose of carrying out activities of an economic nature and of
participating in the profits and losses arising out there or ,if any.”

- Articles 210 and 223 reveals two important aspects of business organizations, namely
the contractual and institutional (or, organizational) aspects.

- Article 223 suggests that even if a business organization emanates from a partnership
agreement, the mere fact of concluding a valid partnership agreement is not enough to create a
business organization at law.

- I.e. there is more to the formation of a business organization de jure than the conclusion of

a partnership agreement. As Mr. Everett F. Goldberg, “[a] business organization has an
institutional aspect with an existence dependent upon, but separate from, the partnership
agreement.”
- A business organization is a contractual association of two or more persons who undertake to
bring in contribution with a view to carrying out an economic activity. It is an essential character
of a business organization that it should have a profit motive, this being the feature which
distinguishes it from an association.

5.3.8 Partnerships and Companies

- Business organizations may be classified into two basic types according to the general
characteristics they share in common: partnerships on the one hand and companies on the other.

i. Partnerships

- A partnership is an aggregate or collection of individual members.

- Thus, in a partnership firm, of paramount importance is personality of the individual partner.

- This is so, because incapacity, death, or serious disagreement between partners may result in

dissolution of the partnership firm.

- Intimate personal collaboration is expected of each partner. Only persons who know each other
very closely may enter into a partnership agreement giving rise to a partnership firm.

- Partnerships are suitable for small business involving a relationship of mutual trust and special
confidence.

- The partners are agents for each other.

- Therefore, they are normally jointly and severally liable for the acts of each other and the
liability of each partner to third parties is unlimited , although they are liable to contribute to
each other’s liability and entitled to claim to an indemnity from the partner at fault.

- In the absence of a contract to the contrary, comes to an end when a partner dies or becomes
insolvent. Hence, the length of existence of the partnership firm is generally considered as
contingent.

- A partner cannot transfer or assign his interest in the firm to an outsider or third party and make
the transferee or assignee a partner without the consent of all the other partners.

ii. Companies

- A company is an aggregate or collection of shares or capital . As a result of capital, importance

is legal personality of the company. Thus, the company may carry on juridical acts by its own
name. Hence, it is entirely distinct from its members.

- The company has perpetual succession . As a result, death or insolvency of a shareholder does

not affect its existence.
- With respect to transfer of shares, shares in a company are freely transferable unless the
company’s articles of association otherwise provides. Thus, a shareholder can transfer his share
and ordinarily the transferee becomes a member.

- Members of a company are not entitled to take part directly in the management of the
company unless they become directors . That is to say, a shareholder of a company acting in his
individual capacity cannot bind the firm by his acts.

- A company is managed by a board of directors , general manager , shareholders’

meetings, and auditors.

5.3.9 Forms and Formation of Business Organizations

- The main classification is between partnerships ( ordinary partnership, joint venture, general

partnership, and limited partnership ) and companies (Share Company and private limited
company) .

- However, per art. 212, there are 6 types of business organizations in Ethiopia. These are:
Ordinary partnership, Joint venture, General partnership, Limited partnership, Share Company,
and Private limited company.

i. Formation

- Article 211 of the Commercial Code defines the partnership agreement as Article 211 of the
Commercial Code defines the partnership agreement “ a contract whereby two or more persons
who intend to join together and to cooperate and 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.”

- As a contract it is governed by the provisions of the general contract and other pertinent
provisions of the com. code.

- Hence, all the essential requirements for the existence of a valid contract shall be met.

E.g., Persons incapable under the civil code.

ii. Publicity

- A further formality requirement imposed on the parties to a valid partnership agreement is

publicity. According to Article 219(1) of the Commercial Code “any business organization other
than a joint venture shall be made known to third parties.” The policy consideration behind the
publicity requirement is to protect third parties. Members are required to bring to the attention of
the public that they have formed a business organization. This requirement is unique to
partnership agreements, as distinct from other contracts, because the very existence of the
business organization depends on its fulfillment.

iii. Legal personality

- bodies corporate under public law, associations, cooperative societies, and business
organizations, which are dealt with legally as if they were people; this is called having legal
personality .

- Article 210(2) of the Commercial Code stipulates that “any business organization other than a
joint venture shall be deemed to be a legal person.”

- Legal personality, therefore, is a device whereby groups of people such as business

organizations become the subject of rights and duties.

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iv. Share Companies

- Comparatively speaking, companies are more suitable for large scale business operation than
partnerships, with business opportunities growing at a faster pace as a result of discovery and
exploitation of natural resources.

- The company form had its humble beginning in the late 16th or early 17th century and since
then on, it grew in size and power in different measures in different counties. In the USA it came
to be known as corporations or a multi-national which grew to the dizziest and most formidable
heights that man has ever known.

- Share Company is defined as (a) one which does not have restriction on maximum number of
members (b) inviting public to subscribe for shares or debentures of the company (c)
transferability of shares are free.

- A minimum of five persons are required to form a share company. On the other hand, private
limited company is one which, by its status: (a) restricts the right of its members to transfer their
share is (b) The number of members limited to 50; (c) No invitation to the public to subscribe for
any shares or debentures of the company. A minimum of two members are required to form a
private limited company.

5.3.10 Distinction between Private Limited and Share Company

i. Membership: only two persons are required to form a private limited company while a share
company requires a minimum of five members to start with. There is no limit on the maximum
number of members in Share Company. Whereas a private limited company can have only 50
members at most.

ii. Directors: A private limited company is managed by one or more managers while Share
Company is managed by directors whose minimum number shall be three.

iii. Public subscription: while a share company can invite public to subscribe to its shares and
debentures, a private limited company cannot go to public to raise its capital.

iv. Prospectus: A share company which goes to public to raise its capital is required to file a
prospectus while a private limited company is exempt from this requirement because it cannot
invite public to subscribe to its capital.
V. Minimum subscription: in Share Companies all capital must be subscribed and 25% of the
capital must be paid-up before registration. Private Limited Company is registered by fully paid-
up capital.

5.3.11 Some Merits of Company

- Financial Resource: If a business venture is to be promoted on a large scale, none of the

partnership or sole proprietorship form of business organization can prove equal to the task of
raising funds to the required level. It is only the company forms both private limited company
and share company, which can mobilize huge funds, required by big business.

- Limited liability: company became more popular with investors these days it is largely
because of its limited liability clause only. Other factors like profitability of the business venture
and confidence in the management etc.

- Scope of growth: unlike the partnership and sole proprietorship forms of business

organization, where the growth is stunted for lack of adequate funds, the company form of
organization need not suffer for lack of financial resources with a huge capital at its disposal,
collected from investors spread all over the country and even abroad also, the company can grow
and expand at a rapid pace and reach the break-even point faster than expected.

- Professional management: in order to achieve the targeted rates of growth and expansion of a
company, competent and professional management of the company is no less important than the
availability of adequate finance. One great advantage of company form of organization is that it
allows for insulation of management from ownership.

- Stability of the company: for the success of any business venture, continuity and stability of
business are equally important and neither can be self-supporting without the other.

- Positive social benefits: a company is beneficial not only to its members, creditors and
employees but also to the public at large. It supplies goods and services at a competitive rates by
introducing new and sophisticated technologies and by exploiting the natural resources in a most
efficient and economic manner. That part, it provides employment opportunities both direct and
indirect to the needy and competent persons in the society.

5.3.12 Nature of Companies

- Limited liability: limited liability of members is one of the most common characteristics of
Share Company. Share Company is a separate legal entity. It is the owner of its assets and liable
to pay its liability (Art 304(1)). In other words liability of the members is limited. No member is
liable to contribute anything more than the nominal value of the shares held by him.

- Perpetual succession: unlike partnership Share Company will not be dissolved by the death or
incapacity of its members. It is an entity with a perpetual succession. Its life is not measured by
the life of any member. It is independent of the lives of its members. Members may come and
members may go, but the company continues its operation unless it is wound-up.

- Transferability of shares: Even though it is possible to restrict free transfer of shares in the

articles of association (Art. 333(1). As a general principle shares of Share Company are freely
transferable and can be sold or purchased in the share market. This is one of the reasons why
people prefer to form companies than partnerships.

- Transferability of company shares is an added advantage both to the institution of the share
company as well as to the investor.

CHAPTER SIX
NEGOTIABLE INSTRUMENTS

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6.1. PURPOSE AND TYPES OF NEGOTIABLE INSTRUMENTS

Purpose of Negotiable Instruments

Throughout history, people have found it necessary to transact business without carrying around
large sums of money. People have also devised arrangements to purchase items that they will pay
for at a later date. The law of negotiable instruments was developed to meet these needs.

The use of checks, notes, drafts, electronic banking, and credit cards has increased dramatically
in recent years. More people are opening checking accounts and signing drafts and promissory
notes than ever before. These instruments are used conveniently and safely as a substitute for
money and to obtain credit.

A negotiable instrument is a written document giving special legal rights to the transferee that

may be transferred by endorsement or delivery. There are two basic kinds of negotiable
instruments: notes (including certificates of deposits) and drafts (including checks).

I. NOTES

A note (often called a promissory note) is a written promise by one person, called the maker, to
pay money to another person, called the Payee. When two persons sign a note, they are known
as co-makers.

Creditors who loan money or extend credit ask debtors to sign notes as evidence of debt. An
advantage of using a note is that it can be negotiated (transferred) to other people without much
difficulty.

There are various types of notes. A demand note is a note that is payable when the payee
demands payment. In contrast, a time note is a note that is payable at a future date, which is
written on the face of the note. An installment note is a note that is paid in a series of payments.
People often sign this type of note when they borrow money to buy a car or a house.

Example: Alemu bought a car from Meseret’s Used-Car Exchange for 14,900 birr. He paid
10,000 birr down and signed a note promising to pay the balance, along with interest at the rate
of 18 percent per year, to the dealer in monthly installments over a two-year period. To get the
money immediately, Meseret’s Used-Car Exchange negotiated the note to the Abkute Finance
Company, which accepted it for a small service charge. Now Alemu will have to make monthly
payments to the holder of the note- the Abkute Finance Company.

II. CERTIFICATES OF DEPOSIT

A certificate of deposit (CD) is a note provided by a bank. A CD is a bank’s written receipt of
money and its promise to pay the money back, usually with interest, on the due date. CDs are
written for a specific time period, such as six months, one year, two years, or five years. Banks
pay higher interest for longer-term CDs. The interest paid on a CD is higher than the amount
paid on a regular savings or checking account because the depositor cannot withdraw the money
before the due date without penalty. In certain circumstances, people who have certificates of
deposit can obtain money by negotiating the certificates to other people or by pledging them as
security for a loan.

III. DRAFTS

In contrast to a note, which is a promise to pay money, a draft is an order to pay money. Drafts
are more complicated than notes because they involve three parties instead of two. Also called
a bill of exchange, a draft is an instrument in which one party (the drawer) orders another party
(the drawee ) to pay money to a third party (the payee). Drawees, although ordered to pay
money, are not required to do so unless they have agreed to the arrangement. They agree to a
draft by writing the word accepted on the document (usually on the front) and signing their
name. A drawee that has done this is called an acceptor and can be required to pay the draft.

Businesses and private parties frequently use drafts to transfer debts from one party to another.
For example, if Chaltu owes Alelign 1,000 birr that Alelign also owes to the furniture store of
Abdi. This situation can be easily resolved by using a draft. Alelign can draw a draft ordering
Chaltu to pay the 1,000 birr to the store. If Chaltu agrees by writing accepted and signing the
face of the draft, she will then be obligated to pay 1,000 birr to the furniture dealer, thus paying
Alelign and Abdi’s debt.

A sight draft is a draft that is payable as soon as it is presented to the drawee for payment.
A time draft is a draft that is not payable until the lapse of the particular time period stated on
the draft.

IV. CHECKS

A check is a draft drawn on a bank and payable on demand. It is the most common kind of

draft in use today. When issuing a check, you put money in the bank and then order the bank to
pay your money to others by writing out checks.

You can write out a check to be paid at a later date by postdating it; that is, you put a date on the
check that is later than the date on which the check is written. Failing to put a date on a check
does not affect its negotiability.

6.2. Requirements of Negotiability

I. DRAFTING INSTRUMENTS

To be negotiable, an instrument must satisfy specific criteria. It must:

- Explain the elements of negotiable instruments.
- Bear the signature of the maker or drawer.
- Be an unconditional promise or order to pay.
- Be made out for a fixed amount of money.
- Be payable on demand or at a definite time.
- Be payable to order or to bearer.

II. WRITTEN INSTRUMENT

The promise, or order, to pay must be in writing. It can be printed, typed, handwritten in pen or
pencil, or expressed by using any other tangible form of writing. A negotiable instrument written
in pencil is, however, an invitation for forgery. The person who drew the instrument would be
responsible for any loss caused by the negligent drawing of the instrument.

III. SIGNATURE OF MAKER OR DRAWER

The maker must sign a note, and the drawer must sign a draft. A signature may be any mark,
such as one’s initials, that is placed on the instrument with the intention of serving as a signature.
Of course, the signature on a check should match the signature card on file with the bank. The
signature may appear in the body of the instrument as well as at the end.

IV. UNCONDITIONAL PROMISE OR ORDER

The promise in the note, or the order in the draft, must be unconditional. If either is qualified in
any way, the instrument is not negotiable.

Example: Bezawit’s uncle gave her a promissory note for 3,000 birr. The note was complete and
regular in every way, except that it bore the statement, “Payable only on Bezawit’s graduation
from high school.”

This note is a valid promise to pay. When Bezawit graduates from high school her uncle will
owe her 3,000 birr. The note, however, is not negotiable because it is conditional on its face.
Statements requiring that certain things be done or that specific events take place make the
instrument a simple contract rather than a negotiable instrument.

V. FIXED SUM OF MONEY

A negotiable instrument must be payable in a fixed sum of money. Usually it can be payable in
any money that has a known or established value. An instrument payable in a foreign currency or
any medium of exchange accepted by a foreign government is negotiable.

VI. PAYABLE ON DEMAND OR AT A DEFINITE TIME

Negotiable instruments must be payable on demand or at a definite time. This requirement

makes it possible to determine when the debtor or promisor can be compelled to pay.

Demand Paper An instrument is payable on demand when it so states, or when it is payable “on
sight” or “on presentation.” These instruments are called demand paper. The key feature of
demand instruments is that the holder can require payment at any time by making the demand
upon the person obligated to pay.
Definite-time-paper Instruments meet the definite-time requirement when they are payable on
or before a stated date. Instruments payable “one year after date” and “thirty days after sight”
also meet the requirement. These instruments are called Definite-time-paper.

In contrast, an instrument payable only upon an act or event, the time of whose occurrence is
uncertain, is not payable at a definite time. For instance, an instrument payable when a person
marries or reaches a certain age would not be negotiable.

Example: If Bezawit’s uncle had given her a note that said “payable 30 days after my death,” the
note would not be negotiable because it is not payable at a definite time. No one can be certain
when Bezawit’s uncle will die.

VII. PAYABLE TO ORDER OR BEARER

Negotiable instruments, except for checks, must be payable to order or to bearer. The words to
the order of and to bearer are called the words of negotiability. The maker or drawer may
stipulate “Pay to the order of Kidus Molla,” “Pay to Kidus Molla or order,” or “Pay to Kidus
Molla or her assigns.” If such words are omitted in instruments other than checks, the
instruments are not negotiable.

Example: Suppose that the note given to Bezawit in the above Example read, “I promise to pay
Bezawit three hundred birr.” The implication is that the uncle would pay Bezawit but no one
else. Thus the instrument would not be negotiable. In the case of a draft, the drawee must be
indicated with reasonable certainty. If an instrument named the drawee as “Dahen Bank,
Debretabor,” and there were several Dahen Banks in Debretabor, the draft would be
nonnegotiable.

VIII. DATES AND CONTROLLING WORDS

The omission of the date does not affect the negotiability of an instrument. When the date is
omitted, the date on which the instrument is received is considered to be the date of issue.
Handwritten terms control typed and printed terms, and typed terms control printed terms. Words
control figures, except when the words are unclear.

Example: Tagegn received a check from Yerom. The check was made out for “Seventy-seven
birr” in words and 87 birr in figures. The bank would most likely honor the check for the amount
that was written in words.

6.3. Summary

- Popular negotiable instruments include checks, notes, and drafts. Negotiable instruments were

developed because people wanted to transact business without carrying around large sums of
money and to purchase items that they could pay for at a later date. The use
of checks, notes, drafts, electronic banking, and credit cards has increased dramatically in
recent years. More people are opening checking accounts and signing drafts and promissory
notes than ever before. These instruments are used conveniently and safely as a substitute for
money and to obtain credit.

- A negotiable instrument is a written document giving special legal rights to the transferee that

may be transferred by endorsement or delivery. There are two basic kinds of negotiable
instruments: notes and drafts. When two persons sign a note, they are known as co-makers.
Creditors who loan money or extend credit ask debtors to sign notes as evidence of debt. An
advantage of using a note is that it can be negotiated (transferred) to other people without
much difficulty. There are various types of notes. A demand note is a note that is payable when
the payee demands payment. In contrast, a time note is a note that is payable at a future date,
which is written on the face of the note. An installment note is a note that is paid in a series of
payments. People often sign installment notes whey they borrow money to purchase a car or
house. A certificate of deposit is a note provided by a bank. A CD is a bank’s written receipt of
money and its promise to pay the money back, usually with interest, on the due date. Most CDs
are written for a specific period of time, such as six months, one year, two years, or five years.
Banks pay higher interest for longer-term CDs. Sometime people who hold certificates of deposit
can obtain money by negotiating them to other people or by pledging them as security for a loan.
A check is a draft drawn on a bank and payable on demand. Checks are the most common type
of draft in use today. When you write a check, you order the bank to pay the money in your
checking account to others.

- A note is a written promise by one person, called the maker, to pay money to another person,
called the payee. A draft is an order to pay money. A draft is an instrument in which one party
(the drawer) orders another party (the drawee) to pay money to a third party (the payee). A sight
draft is a draft that is payable as soon as it is presented to the drawee for payment. A time draft is
a draft that is not payable until the lapse of the particular time period stated on the draft.
Businesses and private parties frequently use drafts to transfer debts from one party to another.

- To be negotiable, an instrument must be in writing, must be signed by the maker or drawer,

and must contain an unconditional promise or order to pay. In addition, the instrument must
be made out for a fixed amount of money, payable on demand or at a definite time, and
be payable to order or to bearer.

- The omission of the date does not affect the negotiability of an instrument, but the omission
allows the presumption that the date on which the instrument is received is the date of issue.

- Handwritten terms control typed or printed terms, and words control figures. Handwritten terms
control typed and printed terms because the court assumes that they represent the final intent of
the parties to the contract. Words control figures because it is much harder to make a mistake
when writing in words the amount of the negotiable instrument.

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CHAPTER SEVEN
LAW OF INSURANCE

7.1. Definition

- From the viewpoint of the individual (Policyholder or insured or assured or subscriber),

insurance is defined as a mechanism of risk transfer or an economic device where by a person
called the insured (subscriber of policy) transfers a risk of financial loss resulting
from unforeseeable events [117] affecting Property, Life or body to a person called the Insurer
for consideration (payment of premiums). A typical example can be, Abebe was bothered about
the loss or destruction of his motor vehicle due to an accident or collusion and to preserve his
property he purchased a Motor Vehicle Insurance Policy from the Ethiopian Insurance
Corporation.

- From the perspective of the Insurer (assurer), insurance is a mechanism via which a risk is
distributed among the group of persons (insured) who are exposed to the same type of risk, i.e.,
persons who bear the risk of suffering a Financial Loss as a result of events affecting property,
life or body.[118]

For Example, Nyala Insurance Company sold 200,000 Fire Insurance Policies in 2015 covering
losses related to Buildings in case of Fire Accident. It has collected premiums from 200,000
individuals. Now imagine that out of the 200000 insured individuals only 10,000 of them
actually sustained a covered financial loss[119] in the financial year 2015. Now, it is the duty of the
insurer to pay compensation only to the 10000 individuals (subscribers), who suffered the loss,
which is covered according to the contract, out of the pool of premiums collected from 200000
individuals. If one policy is worth (sold for) 10000 birr, the entire collected amount would be
200000 * 10,000 birr which equals to 2,000,000,000 birr. However, the insurer paid only 10,000
* 10,000 birr which equals to 100,000,000 birr. So imagine the difference in money when
2,000,000,000-100,000,000 which equals to 1,900,000,000 birr. As a result the insurer has
distributed the loss sustained by only the 10000 persons among the remaining 190000
individuals whose property were not damaged.

- Hence, insurance is a cooperative device to spread (distribute) the loss caused by a particular

(specified on the contract) risk over a number of persons (many persons) who are exposed to it
and who agree to insure themselves against the risk.

- Insurance is advantageous to the insured person for it enables him or her to protect himself
from heavy (unbearable) losses likely to be caused by an uncertain event by paying a
comparatively much smaller premium.

- However, be aware that, insurance does not and cannot prevent loss of property or the incurring
of civil liability or the death of a person or bodily injury or illness of the insured person. It does
not prevent the happening of the risk by itself. It is rather a curative (not preventive) remedy
which provides financial compensation for the effect of misfortune.

7.2. Nature of Insurance Contract

- Insurance is a type of contingent or conditional contract. It is a contract in which the

performance of the obligation by the parties or one of them is dependent up on
the condition or contingency agreed by the parties on the contract. If the contingency or
condition does not materialize there will be no payment of insurance compensation.[120]

- Insurance is a contract. As a result, the essential validity requirements of a contract are

applicable. You need also identify the rights and duties of the parties to the contract of insurance.

- An insurance contract is an Aleatory Contract rather than Cumulative Contract. Aleatory

contracts have a chance element (not all subscribers would be paid) and uneven exchange (not
always win-win). Under such contracts the performance of at least one party is dependent up on
chance.
- Insurance is a unilateral contract in that it is only the insurer that makes a legally enforceable
promise to pay a claim or provides other services to the insured.

- Insurance is a contract of Adhesion. All the terms and conditions of the contract are not the
result of negotiations between the parties. Or the contract is articulated by the insurer and all the
insured has to do is accept (adhere to) it.

- Insurance works by the Law of Large Numbers or pool of premiums.

7.3. Significance of Insurance

Stipulated in a nutshell, insurance as a mechanism of transfer of risk has great economic and
social benefits to the individual insured, his family, the insurer and the economy of a country in
general.

The following are the major advantages of the contract of insurance:

- Indemnification of Losses: payment of compensation by the insurer for losses permits

individuals and their families to be restored to their original financial position after a loss has
occurred. Businesses will remain in business or employees continue to keep their jobs or families
remain intact and so on

- Reduction of Worry and Fear: it reduces or eradicates worry and fear either before or after
the happening of the loss. A person who is insured for a ‘long term disability’ do not have to
worry about the loss of earning if a serious illness or accident occurs.

- Source of Investment Funds: the insurance industry is an important source of funds for capital
investment and accumulation. The premiums collected by the insurer and other funds which are
not needed to pay for immediate losses and expenses can be loaned to businesses or invested in
manufacturing or Real Estate.

- Means of Loss Control: if no effort is made to prevent or minimize occurrence of insured risks
or losses, the premiums would have a tendency to rise. Hence, insurers should participate in
various programs and sponsorship schemes to minimize or reduce the chance of risk such as road
building, fire safety standards and so on. Insurance should be taken as a mechanism of risk
management.

- Enhancing Credit: when a person is insured, the fact that s/he is insured enhances a person’s
credit .i.e., it makes him or her as a borrower a better credit risk to the lender because it
guarantees to the lender that the value of the borrowers collateral and gives the lender (creditor) a
greater assurance that the loan will be paid.

7.4. The Major Principles of Law of Insurance

1. The Principle of Utmost Good Faith: Insurance is said to be a contract of utmost good faith.
In effect, this principle imposes a higher standard of honesty on parties to an insurance
agreement than is imposed in ordinary commercial contracts.

2. The Principle of Indemnity: all contracts of insurance are contracts of indemnity, except

those of life and personal accident insurances where no money payment can indemnify for loss
of life or bodily injury.[121] In case of marine and fire insurances, the insurer undertakes to
indemnify the insured for loss or damage resulting from specified perils. In case of loss, the
insured can recover from the insurer the actual amount of loss, not exceeding the amount of
policy.

3. The Principle of Proximate Cause: per this principle, the insurer is liable only for those
losses which have been proximately caused by the peril insured against. In other words, in order
to make the insurer liable for a loss, the nearest, immediate, or the last cause has to be looked
into, and if it is the peril insured against, the insured can recover. Insurers are not liable for
remote causes and remote consequences even if they belong to the category of insured perils.

4. The Principle of Insurable Interest: insurance should not provide an insured with the means
of showing a net profit from the event insured against. Insurance is not a means of making profit.
It is a mechanism of indemnifying losses via the payment of compensation.

5. Doctrine of Subrogation: The doctrine of subrogation is a result of the principle of indemnity

and as such, it applies only to property insurances. According to the principle of indemnity, the
insured can recover only the actual amount of loss caused by the peril insured against and is not
allowed to benefit more than the loss he suffered. In case the loss to the property insured has
arisen without any fault on anybody’s part, the insured can make the claim against the insurer
only. In case the loss has arisen out of tort or fault of a third party, the insured becomes entitled
to proceed against both the insurer as well as the wrongdoer. However, since a contract of
insurance is a contract of indemnity, the insured cannot be allowed to recover from both and
thereby make a profit from his insurance claim. He can make a claim against either the insurer or
the wrong doer. If the insured chooses to be indemnified by the insurer, the doctrine of
subrogation comes into play and as a result, the insurer shall be subrogated to all the rights and
remedies of the insured against third parties in respect of the property destroyed or damaged.

6. Risk must attach or the Existence of Risk: It is a general principle of law of insurance that
‘if the insurers have never been on the risk, they cannot be said to have earned the premium’. If
the subject-matter of insurance ceases to exist (e.g. the goods are burnt) or the insured ship has
already arrived safely, at the time the policy is effected, the risk does not attach, and as a
consequence, the premium paid can be recovered from the insurers because the consideration for
the premium has totally failed. Thus, where the risk is never run, the consideration fails and
therefore the premium is returnable.

References

1. The civil code of Ethiopia 1960, Articles 1 to 549, on the Laws of persons.

2. The civil code of Ethiopia 1960, Articles 1675 to 1808, on the laws of contracts.

3. The civil code of Ethiopia 1960, Articles 2266 to 2426, on the laws of contract of sales.

4. The civil code of Ethiopia 1960, Articles 2179 to 2265, on the laws of agency.

5. The commercial code of Ethiopia 1960, Articles 1 to 123 on the laws of traders, PP. 1-25.
6. The commercial code of Ethiopia 1960, Articles 124 to 209 on the laws of business, PP.
25-41.

7. The commercial code of Ethiopia 1961, Articles 210 to 569 on the laws of business
organizations, PP. 41-122.

8. The commercial code of Ethiopia 1961, Articles 654 to 714 on the laws of insurance, PP.
140- 152.

9. The commercial code of Ethiopia 1961, Articles 715 to 895 on the laws of negotiable
instruments, PP. 152 to 196.

10. The Constitution of the Federal Democratic Republic of Ethiopia 1995.

11. The Federal Revised Family Code Proclamation of 2000

 In the ancient times, not everybody who is born physically is considered as a person and there
[1]

by possess or exercise rights and duties before the eyes of the law. For instance, SLAVES were
considered merely as a Living Merchandise or chattels of their Masters. Who do not have
rights and duties as a person; who were not the subjects of rights and duties rather slaves were
the objects of the law- be aware that slaves were sold by their masters as merchandise or
animals. At that time, a slave is considered as a person if and only if it is freed by the master.
They did not even have legit names of their own. They only have had the so-called Slave-
Names. The same was the reality regarding most of the rights related to women and children up
until the turn of the 20th century. In this regard, the recognition of the right of women to
election, succession, possession and administration of property are only recent events.

 Can artificial persons properly undertake their activities by themselves without the
[2]

instrumentality of natural persons or the physical help of physical persons? For example, can
they manage themselves or conclude a contract or sue by their own names?

 What if a child is born with three eyes, four hands and three legs? Can we say s/he is born with
[3]

the potential to survive in the future or viable? Should the law consider such child as a person?

 Read Article 1 of the civil code of Ethiopia

[4]

 Read Arts. 117 to 121 of the com. code. The immediate implication of registration of a
[5]

business organization is legal personality and cancellation of registration is winding up of it.

 Consult Art. 192 of the civil code of Ethiopia

[6]

 Read Arts. 2234, 2251 for special agents called commission and forwarding agents,
[7]

respectively and Art. 44 of the com. Code for commercial agents.

 According to Articles 192-194 of the civil code there are two types of such disabilities:
[8]

General disabilities (which depend on the age or mental condition of persons or on sentences
passed upon them) and Special Disabilities (which depends on reasons of their nationality or
functions exercised by them).

 Refer to Arts. 204-209, 263, and 359 of the civil code

[9]
  Read Art. 216 of the com. Code. It states that a business organization shall acquire rights and
[10]

incur liabilities by its agents in accordance with the provisions relating to agency. Read also Arts
35-36 of the same.

 Art. 192 of the civil code states that, every physical person is capable of performing all acts of
[11]

civil life unless he is declared incapable by the law. Read also Arts. 193 and 194 of the civil code

 Read Arts. 2257 to 2265 of the civil code. It is an agency established by law where an
[12]

individual standing from the middle of nowhere and without any express appointment by the
principal takes care of the affairs of another person being dictated by necessity or otherwise.

 Read Art. 216 (2) of the com. Code, which dictate that a business organization shall act in
[13]

legal proceedings by its agents.

 Art. 2199 of the civil code states that, agency is a contract where by a person, the agent,
[14]

agrees with another person, the principal, to represent him and to perform on his behalf one or
several legally binding acts.

 Refer to Arts. 2253 to 2256 of the civil code. Such appointment is however up on complaint.
[15]

Read also Art. 950 of the civil code for the appointment of a ‘judicial-liquidator of succession’
by the court.

 Read Art. 1675 of the civil code which defines a contract as, a contract is an agreement
[16]

whereby two or more persons as between themselves create, vary or extinguish obligations of
proprietary nature.

 Read also Arts. 2200-2201 of the civil code

[17]

 Read Art. 2189 of the civil code

[18]

 You may read Art. 2212 of the civil code. However, s/he shall be liable for non-performance,
[19]

if they are aware of the insolvency of the third party or ought to have known it at the time of
making the contract.

 Read Arts 2187, 2202 and 1713 of the civil code

[20]

 Read Arts. 2197 and 2198 of the civil code

[21]

 Read Art 2189 of the civil code

[22]

 Read Art. 2204 of the civil code

[23]

 Read Art. 2202 (2) of the civil code

[24]

 Consult Art. 2206 of the civil code

[25]

 Refer to Art. 2205 of the civil code

[26]

 Read Art. 216 (2) of the com. Code of Ethiopia

[27]
  Read Arts. 60 of the com. Code and 2234 of the civil code
[28]

 Read Arts. 2251-52 of the civil code

[29]

 Read Art. 2208 of the civil code

[30]

 For a better understanding cross refer Arts 2209, 2187-88 of the civil code
[31]

 In this regard, you can further deepen your knowledge by referring to Arts. 30, 40, 47, and 55
[32]

of the com. code.

 Cross refer to Arts.2210 and 2213-14 of the civil code.

[33]

 This is a Latin verse to mean, as a good father or leader of the family

[34]

 Refer to Art. 2211 of the civil code

[35]

 Cross refer Arts. 2215 and 1740 of the civil code. This goes with a maxim that, ‘ the Delegate
[36]

may not Appoint a Delegate ’

 Read Arts. 2197-98 of the civil code

[37]

 Refer to Arts. 2190-2194 and 2202 of the civil code

[38]

 Refer to sub article 2 of Art.2190 of the civil code

[39]

 Read Art. 2257- 58 of the civil code.

[40]

 Refer to Art. 2264 of the civil code

[41]

 Read Art. 2265, 2193 of the civil code

[42]

 Refer to Arts. 2187, 2188, 2197, 2208, 2210-2216 of the civil code
[43]

 In this regard you may refer to Arts. 2219- 20 of the civil code.
[44]

 Refer to Art. 2221 of the civil code

[45]

 Read Arts. 2223- 24 of the civil code of Ethiopia.

[46]

 Read Arts. 2192-2195, 2212, 2222, 2225, 2265 of the civil code
[47]

 Cross refer Arts. 2226-27, 2183-84 of the civil code

[48]

 Read Art. 2229 of the civil code

[49]

 Read Art. 2230 of the civil code

[50]

 Refer to Arts. 2232 and 2182 of the civil code

[51]
  One can infer this from an otherwise reading of Art. 1821 of the civil code
[52]

 Read Art. 1806 of the civil code

[53]

 Read Arts. 171-193 of the com. code

[54]

 Read Arts. 194-205 of the com. code

[55]

 Refer to Arts. 150- 170 of the com. Code of Ethiopia

[56]

 Refer to provisions of the com. Code from Art. 206 to 209

[57]

 Read Art. 125 (3) of the com. code

[58]

 Art. 1127 of the civil code defines corporeal chattels as, things which have a material
[59]

existence and can move themselves or be moved by man without losing their individual
character.

 Incorporeal are those properties that lack physical existence (unperceivable) but can still be
[60]

appreciated in terms of money or property.

 Refer to Art. 128 of the com. code

[61]

 Read Art. 127 of the com. code

[62]

 For a detailed knowledge refer to Arts. 130-134; 135-139; 140-147; 145-147, and 148-149 of
[63]

the com. Code respectively.

 Refer to Arts. 158-59 of the com. code

[64]

 Refer to Art. 1130 of the civil code

[65]

 Read Art. 155 of the com. Code; even an assignment of a business may entail the assignment
[66]

of its trade name with it- read Art. 139 of the same code

 Cross read Arts. 210 (1) and 211 of the com. code
[67]

 Read Art. 125 of the com. code

[68]

 Read Art. 5 of the com. code

[69]

 Ibid
[70]

 Refer to Art.5 and its all sub-articles

[71]

 This is one of the ‘prohibitions’ imposed on traders by the com. Code per Arts. 22-26 of the
[72]

same

 Refer to Arts. 41 of the FDRE constitution and Art. 22 of the com. code
[73]
  Cross refer Arts. 16 of the com. Code and Arts. 645 of the civil code
[74]

 Refer to Arts. 86-124 of the com. code

[75]

 Read Art. 117 of the com. code

[76]

 Read Arts. 118 and 112-114 of the same code

[77]

 Refer to Art. 119 of the com. code

[78]

 Consult Arts. 71-85 of the com. code

[79]

 Read Arts. 66- 70 of the same code

[80]

 Read Arts. 71-72; 92 and 155-57 of the commercial code

[81]

 Arts. 22-26 of the code

[82]

 Read Arts. 5-10 of the trade practice proclamation no. 329/2003

[83]

 Read Art. 11 of the com. code

[84]

 Read Arts. 26 and 513 of the com. code

[85]

 Read the banking business proclamation no. 592/2008

[86]

 Read Arts. 25-27 of the com. code

[87]

 Read Art. 304 of the com. code

[88]

 Refer to the ff. provisions and try to understand the bolded- elements of the definition: Arts.
[89]

1675 of the civil code, 229, 5, 229(3), 212 (2), 270, 251-52 and 270 of the com. code

 Read Art.218 of the com. code

[90]

 Read Art. 229 of the same code

[91]

 Read Art. 215 of the com. code

[92]

 Consider associations and cooperative societies

[93]

 Read also Art. 112-13 of the same code

[94]

 Read the provisions of the com. code from Art. 227 to 270
[95]

 Read Art. 10 and 213 of the same code

[96]

 Refer to Arts. 271-280 of the com. code

[97]
  Refer to Arts. 280-295of the com. code
[98]

 Read Arts. 296- 303 of the com. code

[99]

[100]
 Read Art. 10 of the com. code
[101]
 Read Arts. 304-509 of the com. code
[102]
 Read Arts. 510 (3), 513, 523 of the co. code
[103]
 Read Arts. 510-543 of the com. code

 Read Arts. 25-26 of the com. code, cooperative societies proclamation. No. 147/1998 and
[104]

Arts 408-482 of the civil code.

[105]
 Read Arts. 86-123 and 71-85 of the com. code
[106]
 Read article 324 of the com. code

 That is to the exception of the liabilities of ‘limited partners’ in a limited partnership. Read
[107]

art. 296 and the ff.

[108]
 Those groups of partners are known as general partners of the limited partnership.
[109]
 Read also article 526 of the com. code

 For instance, in England the Hudson’s Bay Company has been running for well over 300
[110]

years.
[111]
 Again read arts. 218 (2), 260, 278 (1-h) of the Com. Code.
[112]
 Read article 333 of the com. code
[113]
 In this context, readers are advised to read art. 274, 282 of the com. code

 The advantage of transferability is seen at its clearest where a company is quoted on the
[114]

Stock Exchange or the Alternative Investment Market (AIM). At this stage, there will be a
market mechanism for disposing of and purchasing shares.

 In this regard, read arts. 312, 317-321, and 325 and the following of the same code and cross
[115]

refer it with art. 274.

[116]
 Read arts. 313-314 of the Com. Code

 There is no insurance for foreseeable (certain) events or loses. It is in the very nature of
[117]

insurance that it only covers losses that are not foreseen by the parties to the contract.

 The term ‘The same type of risk’ refers to the presence of ‘pool of premiums’ or the
[118]

availability of many individuals who are at risk and paying premiums. It is out of the pool of the
premium that the insurer pays to those persons (out of the many) who has actually suffered the
loss. Insurance works

 Remember the insurance policy does not cover all or unspecified (uncovered) risks on the
[119]

contract.

 The insurer’s obligation to pay a claim depends on whether or not the beneficiary has
[120]

complied with all policy conditions or not.

 The Principle of ‘Indemnity’ or ‘compensation’ does not work in life insurance because there
[121]

can be no payment of compensation that can ‘commensurate’ the life of a person.