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Chapter I:
Introduction to Obligation
Chapter Objectives
 At the end of this chapter, you will be able to:
 Define what obligation is
 Explain nature of obligation
 Identify sources of obligation
 Define what contract is
 Explain nature of contract
 Know types and importance of contract and contract law
 Describe historical development of contract law
Definition and Nature of Obligation
 In the modern legal systems and currently existing legal materials, there is no exact or single whole
definition of obligation.
 Black’s law dictionary defines obligation as ‘a legal or moral duty to do or not to do something’.
 Common-law scholars such as Fredrick Pollock defines obligation in its popular sense as merely
synonym for ‘duty’.
 French judges define the term obligation as a legally binding relations to another party [where he/she]
is obliged to give [or not to give] or to do or not to do something.
 Likewise, the Ethiopian civil code, in the book IV of the code, uses the term obligations without
defining what it means.
 Obligations should be created by the competent parties with their express or implied consent; courts
cannot create a contract for the parties.
 Sources of Obligation
 In general, the fundamental sources of obligations can be classified into two:
1. Contractual sources of obligations and
2. Non-contractual sources of obligations
 While contractual sources of obligations arise from the terms of the contract, non-contractual
sources, as the name itself implies, are obligations whose sources are other than contractual
relationships.
 In the Ethiopian legal system, even if there are no clearly stated classifications of sources of
obligations, the close readings of the provisions of the civil code show that there are both
contractual and non-contractual sources of obligations.

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 In this regard, while Contractual obligations arise from Article 1675 of the civil code, non-
contractual obligations arise from Arts.2027-2178 of the same code
 Non-contractual sources of obligations may, in turn, classified into three major categories
which include:
 Obligations arising from tort (Arts. 2027- 2161 CC)
 Obligations arising from unjust enrichment (Arts. 2162-2178 CC) &
 Obligations arising from other laws
 Obligation arising from the law is a unilateral obligation imposed on citizens or contracting
parties without their consent. It includes among other things:
 Obligation to pay income taxes;
 Obligation to render military services;
 Obligations of creditors;
 Obligation of debtors;
 Obligations of families to their children, etc.
 Definition and Nature of Contract
 Dear students, do you think we have a universal definition of contract? Why
 Because various legal systems and countries fail to define it uniformly, there is no single
and universal definition of the term ‘contract’.
 However, owing to its nature, contract can be defined as legally enforceable promise or
agreement.
 Contract is defined as legally enforceable promise or agreement because the breach of the
promise or agreement gives rise to legal claim before a court of law.
 However, all promises or agreements are not enforceable.
 Would you institute a legal action before a court of law if your friend fails to keep his
promise of inviting you a tea?
 Contract law is, in turn, defined as a law which governs such questions as which
agreements the law will enforce?, what
 obligations are imposed by the agreement in question ? and what remedies are available if
the obligations are not performed?
 More complete definition of contract is provided under Article 1675 of the 1960 Ethiopian
Civil Code which defines contract as:
‘An agreement whereby two or more persons as between themselves create, vary
or extinguish obligation of proprietary nature’’.

 This definition contains so many points which worth separate analysis:

1. “ A contract is an agreement….” similar with the general definition we analyzed
above.
2. “…whereby two or more persons…” i.e. except in agency relationships(Art.2188),
one cannot contract with oneself; there must be 2 or more persons to form a contract.
3. “… as between themselves…” i.e. except under Art. 1957 CC, the section on
“promises and stipulations concerning third parties”, the contracting persons can bind
and entitle only themselves, not outsiders.

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4. “… create, vary or extinguish obligations…” powers of contracting parties … which

makes the definition of contract more fitting and complete in Ethiopia.
5. “… obligations…” i.e. to mean contracts are legally enforceable obligations
6. “… of a proprietary (patrimonial) nature.) This definition excludes contracts of
“status”, such as betrothal, marriage and adoption which creates obligations of status
pre-defined by law of non-patrimonial nature.
 Types of Contracts
 Based on the factors of classification (parties to the contract, the legal systems they operate in
etc.), there are various types of contracts.
Though they have certain overlapping features, some types of contracts
include:
A. Private vs Administrative Contracts
B. Express versus Implied Contracts
C. Solemn (Formal) versus Consensual (Informal) contracts
D. Contract of Adhesion Versus Contract of Consultation (Freely
Negotiated Contracts) and
E. Bilateral vs Unilateral Contracts
 Just to address some of them:
 While private contracts is a contract between two or more private persons(whether natural or
artificial), Administrative contract is a contract entered between Administrative agencies and
private persons whose main aim is to maintain public interest (the common good).
 While express contract is the one whose terms of the agreement are fully and explicitly stated
in words, either orally or in written form, implied contract is a contract created and defined
by the conduct of the parties, rather than their words.
 While Solemn (formal) contracts are contracts that require a special form or method of
creation (formation) to be enforceable or valid, consensual /informal/ contracts are contracts
in which no special form is required to be enforceable or valid.
 While contract of adhesion is a type of contract written only by one party without negotiating
with the other one (because the former has better bargaining power), Contract of
Consultation (Freely Negotiated Contracts) as its name speaks is the contract negotiated b/n
two equal parties with equal bargaining power.
 Conceptually, there is no difference b/n 4 & 5
Importance of Contract and Contract Law
 In general, both helps to facilitate smooth business transaction(relationships) because
contracts, inter alia:
1. are legally enforceable agreements or promises
2. specify the rights and obligations of contracting parties
3. are written documents that outline the full understanding of the business relationship
and scope of the work. and
4. minimize risks
Historical Development of Contract Law

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 The historical development of contract law can be traced back to ancient and classical Roman
law.
 However, the foundation of the present-day law of contract was laid in the 19th century, the
historic period which saw rapid expansion of trade and industry which, in turn, made
commercial disputes inevitable. Because of those Commercial disputes people turned to the
court of law for solutions.
 Gradually, there developed a body of settled rules which was affected by the dominant
economic philosophy, the so called the laissez-faire philosophy (individualism) or Market
liberalism which propagates that states should not intervene in the functioning of markets and
individuals should be free to determine their own destiny.
 The philosophy of laissez faire was mirrored in the law of contract by two assumptions:-
freedom of contract and equality of bargaining power.
 But both freedom of contract and equality of bargaining power are proved to have their own
limitations. Nowadays, the law limits freedom of contracts on the grounds of capacity,
consent, object and the like.
 Similarly, it was noticed that the theory of equality of bargaining power had brought certain
unnecessary results because parties to a contract do not necessarily have equality.
For example,
 employers and employees in the time of work and
 amount of wages etc., producers and consumers, lenders and borrowers do not have
equal power in the negotiations.
 This all finally led to various dissatisfactions, riots & unrests which called for the
intervention of the government to set minimum standards of enforceable contracts & this
gave rise to modern contract laws in various corners of the world.
Jurisdictions on Contract Law in Ethiopia
 subject to material jurisdiction of the courts, all courts in Ethiopia, both at federal and
regional levels, have jurisdiction over contract matters
 Since Jurisdictional matters are the concern of procedural laws, students will have more
detailed and clearer picture of the matter when they take the courses.

Chapter II:
Formation of Contract
Chapter objective
 The major objective of this chapter is to enable you describe and discuss elements of valid
contract in general and under the Ethiopian legal system
Validity Requirements of Contract
 The state uses some yardsticks to check whether or not persons have made a contract. They
are called validity requirements or elements of a valid contract and contract is unthinkable
without their fulfilment.
 Dear students… can you mention the so called validity requirements or elements of a valid
contract?

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 The so-called validity requirements or elements of a valid contract are:

 Capacity;
 Consent;
 Object and
 Form, if any. Article 1678 CC
 While all contracts are expected to fulfill the requirements of capacity, consent and object,
form is required only for few contracts. That is why it is phrased as ‘form, if any’.
1. Capacity
 hope you are familiar with the concept of capacity from your law of person’s
course. so, what is capacity? Is there distinction between capacity of natural
persons and of artificial persons?
 In general, we can say capacity, in both cases, is the power to enter into legal
transactions.
 Regarding the capacity of natural persons, which is the concern of this course;
 Minors,
 judicially interdicted persons (Insane & infirm) and
 legally interdicted persons cannot enter into a contract.
 when a legally interdicted person enters into a contract which he was prohibited
from, it is not limited to incapacity but also extends to illegality as per Art 1716.
 There are also some special incapacities such as nationality and functions of
persons that prohibit the person from entering into a contract as provided under
Art. 194 of the CC.
2. Consent
 Consent is a declaration of intention to be bound by an obligation. A person has to
express his willingness (agreement) to create an obligation on himself, or give up
some or all of his proprietary rights.
 Consent is one of the defining features of individual autonomy and
freedom of contract.
 We cannot imagine a contract without the valid consent of the parties to the contract.
 as addressed in the opening of the 1st chapter too, mere domestic or social
agreements are not usually intended to be binding and, therefore, are not
contracts. This is because these agreements or promises are only moral agreements
or promises which lack state backing for their enforcement .
 A binding contract, however, is usually in the nature of a commercial bargain,
involving some exchange of goods or services for a price.
 Consent in a contract is not about moral obligation; it is about legal obligation.
Here, for a contract to exist, parties must agree that any violation of the obligation
would be punished by using state machinery.
 The phrases “… consent sustainable at law under Art.1678 (1) & agrees to be
bound thereby …” under Art. 1679 imply the parties’ intention to take any

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controversies, in relation to obligation, to court thereby allowing the court to

interfere in their relation.
 Communication of Consent
 Consent is expressed either in the form of
1. offer or
2. acceptance which are ways of communicating one’s own intention to be bound
by an obligation.

 Offer or acceptance is declared to another person by ordinary ways of

communication which are:
 Oral,
 Written,
 Signal and
 Conduct

 Offer and Declaration of Intention

 Offer contains three important elements:
1. The content of the contract,
2. The agreement of an offeror to be bound and
3. Request of the offeror to the offeree to be bound by the offer.
 The offer can make his offer in
 writing or
 orally, or
 by signs normally in use or by conduct (Art.1681 (1).
 The offeror has the autonomy not only to choose ways of the communications listed above
but also to choose the ways that the offeree shall use to give a response (Art. 1681(2).
 Written declaration of offer is when all the elements of offer are reduced in writing on a
paper or electronics and delivered to the offeree.
For example, if the offeror sends his offer through
 letter,
 email or
 fax such is written communication of an offer.
 Oral communication of an offer is when the offeror uses his voice to tell to the offeree the
contents of the offer and the offeree uses hearing (ears) to know what the offeror is
communicating to him.
 Besides the face-to-face communication,
 using telephone,
 telegram etc. to communicate an offer is oral communication of an offer.

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 Signal communication is of two types: gesture and object placed to give information
(indicate intention to be bound). Mute and/or deaf people use such way of communication
either to make or accept offer.
 Moreover, raising hand at auction to accept the offer, nodding head, shaking hands and
hammering down in an auction sale are also examples of communication by gesture.
 Communication of offer by conduct is when the offeror performs partly or wholly the
obligation that he will perform if the contract is entered into.
 Offer by conduct is an implied offer because the offeree is forced to infer the offer from the
conduct of the offeror.
 If a father calls a doctor to see his minor child for some infection, the doctor infers that the
father is the one who pays him .
 Offer is different from declaration of intention. In principle, an offer is binding on the
offeror only if it is addressed to a specified person. In short, while offer addresses an
identified person or beneficiary, declaration of intention does not.
 The ultimate goal of the declaration of intention is advertisement of a product or service
without any intention to be bound by the content of the advertisement.
 The person declaring his intention can change his declaration at any time for whatsoever
reason without any legal liability for unreasonable and arbitrary change of his intention.
 Articles 1687 & 1688 of the CC provide examples of declaration of intention. These are:
 Sending price lists or tariffs;
 Posting up price list/tariff and catalogue in a public place ;
 Display of goods for sale to the public and
 Sale by Auction (until the winner signs a valid contract)
 All of the above instances are declarations of intention, not offer because:
1. They do not address a particular person(beneficiary)
2. They are not binding
3. They do not indicate all terms of the contract such as due date, place of performance,
quantity, etc. & thus incomplete.
4. There would be multiple acceptances if the declaration of intention is to be
considered as an offer.
 But, exceptionally, as per Art. 1689 CC, public promise of reward is a special and binding
offer.
 Public promise of reward is notifying the public that whosoever performs a certain act
indicated in the notice will be given benefit of proprietary nature by the promisor.
 Public promise of reward can be accepted by conduct.
 Public promise of reward can be published by posters or by any other means such as
 newspapers
 radio or
 Television etc.
 Some scholars argued that Public promise of reward does not include simple oral
announcements even if made at public meetings. But some others argued against this very
argument/view.

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 Public promise of reward is a true offer. It cannot be withdrawn; and binds the offeror within
the stipulated delay of Article 1690(1) or the reasonable delay of article 1691(1).
 What happen if the promise is performed by more than one person? In such case the promiser
may reward in one of the following options:
 to the first in time, or
 to all in equal shares, or
 fully to each.
 Acceptance of Public promise of reward is a complete contract.
Effects of Offer (Art.1690, 1691, 1693(1), 2055)
 Unlike the declaration of intention where the person declaring his intention can change his
declaration at any time for whatsoever reason without any legal liability for unreasonable and
arbitrary change of his intention, the offeror cannot change his offer for unjustified reasons
once he sent his offer to the offeree. In short, offer legally binds the offeror.
 Once the offer is made, it means that one side of the parties to the contract (the offeror) has
agreed to be bound by his/her offer. Therefore, an offeror who changes his offer partially or
totally is liable for any material damage sustained by the offeree.
 Dear students…When does offer begin to be binding? Is it exactly at the time when the
offeror sends his offer to the offeree or at the time the offeree knows and accepts the contents
of the offer?
 An offer begins to be binding at the time the offeree accepts and takes decision that affects
his material interest.
 However, if the offeror withdraws his offer after he has sent to the offeree, he should
immediately inform the withdrawal of the offer to the offeree before he receives the offer or
at least before the offeree takes decision that affects his material interest on the assumption of
the offer. In such case, the law presumes the offer is not made (Art 1693).
 This means an offer may be withdrawn or modified as far as the offeree has not incurred
expenses with a view to concluding a contract with the offeror. So, what is crucial is not the
time when the offeree received the offer but the decision he has taken due to his knowledge
of the offer.
 The burden of proving that the offer is changed or withdrawn after he takes decision that
affects his material interest is on the offeree.
 As per Article 2055 of the civil code, changing/withdrawing an offer is a fault. However,
change or withdrawal of an offer is not a fault when it is withdrawn or changed:
 before the offeree knows the offer or
 at the time the offeree know the offer or
 at any time before acceptance for justified reason
 What about after acceptance but before the offeree takes a decision that affects his material
interest?
 How Long should the Offeror bound by his offer or how long should he wait for acceptance?

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 The offeror May himself determines how long the offer remains binding. However, after
expiry of such time limit, the offer or can change, modify or withdraw his offer for
whatsoever reason and without any liability to the offered (Art 1690).
 What if the offeror fails to fix time limit for acceptance? In case the offeror fails to fix time
limit for acceptance, the offer remains binding for reasonable period (Art 1691).
 Reasonable period indicates the time that the offered needs to understand the offer and
decide to accept or reject it. So, if the offered remains or unable to decide within such
reasonable time, the offeror will no longer be bound by his offer.
 But another important question is that how long is a reasonable period? The length of
reasonable period is the average time that the average person may need to determine on
the offer.
 The length of reasonable period does not tolerate subjective weaknesses of the offeree b/c
contract is not a charity and the offer or is running for gain and has no legal or moral
obligation to scarify for such weaknesses.
 However, objective criteria such as
 Price fluctuation,
 market in/stability, and
 Complication of content of the contract should be taken into account to determine the
length of reasonable period.
 Market and price have direct relation because market instability results in price fluctuation
thereby affecting the decision of both the offer or & offered. So, when there is market
instability reasonable period should depend on the frequency of price change.
 If the acceptance reaches the offeror after expiry of reasonable period, the offeror has a duty
to inform the offeree the lateness of the acceptance by using the speediest medium of
communication available. Such medium should at least be as speedy as the medium used by
offeree to send his acceptance.
 If the offeror fails to reject the acceptance immediately, the offeree has the right to claim that
the acceptance was given within reasonable period and hence contract was concluded (Art
1691(2).
 The other ground that terminates the effect of an offer is the offeree’s rejection of the offer
(Art 1690(2). Rejection of an offer is, either making modification to the content of the offer
or sending a “no” answer to the offeror.
 Offer is deemed to be rejected “where acceptance is made with reservation or does not
exactly conform to the term of acceptance” (Art 1694).
 There is no reason for the offeror to wait for an expiry of reasonable period once the
offeree rejects the offer.
 Rejection releases the offeror because there is no justification for the offeree to get time to
revoke his rejection and claim to accept the offer simply because the objective reasonable
time has not yet expired. Moreover, there is a less possibility that an offeree who once
rejected an offer could come to accept the same and forcing the offeror to wait such change
of mind is fooling him and inequitable.

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Acceptance (Art 1681-1685, 1689(1), 1694) (1893(3)

 Acceptance is a positive response to an offer. In other words, it is a declaration of intention
to be bound by each and every contents of an offer.
 Acceptance is declaring agreement which presupposes knowledge of the obligation for
which the agreement is given.
 However; if the offer is public promise of reward the offeree is not known to the offeror;
hence who’s ever performs the promise is considered as if he accept by conduct.
 Any slightest modification made to the content of the offer is considered as rejecting the offer
and making, an alternative offer (Art.1694).

 On receiving an offer, the offeree has three alternative answers to an offer;

 The “Yes” answer which means accepting the offer as it was made; without any
modification or reservation,
 The “No” answer which means totally rejecting the offer or
 “Acceptance with reservation” which means having reservation or alternative
proposals for some of the contents of the offer.
 Where acceptance is made with reservation or does not exactly conform to the terms
of the offer” the offeree takes the position of the offeror and the offeror then becomes
an offeree (Art. 1694).
 In such case, the [former] offeree (the current offeror) is bound by the new offer he
makes until the time limit he fixes or the reasonable time for acceptance expires as
per Art. 1690(1) & Art.1691 (1) CC respectively.
How acceptance is made
 Since acceptance is communication of intention, like an offer, it can be made in all possible
ways of communication (I.e. it can be made in
A. writing
B. orally or
C. By signs normally in use or by conduct).
 However, if a special form is prescribed by the offeror, the offeree should accept the offer
only in the special form prescribed by the offeror (Art. 1681(2)).
E.g. if the offer prescribes acceptance should be in writing/letter, even immediate telephone
acceptance is of no effect.
Silence where an offer is made
 If he/she is not willing to accept the offer, the offeree does not have a duty to give response to
the proposal of the offeror. In such case his/her silence should not be considered as
acceptance pursuant to Art. 1682 of the CC which provides this principle.
 Silence, in this context, means not answering to the offer in one of ways of
communications addressed.
 Silence is not acceptance because there is no consent in silence.
Exception (Art. 1682 -1685)

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 The principle that silence is not acceptance has some exceptions. In general, the exceptions
emanate from the
 law or
 contract. In such cases, the offeror shall not wait for the acceptance of the offer by
the offeree. See Art. 1683(1) CC.
 The law or contract may impose on the offeree the obligation to accept offers made to it. This
is mainly when the offeree is a Public Enterprise which provides:
1. Vital services to the community, such as postal and telegraphic transmissions,
telephone services, public transport etc… or
2. Vital supplies to the community, such as supplies of light, water etc…
 Moreover, no acceptance shall be required where a party is bound by a concession granted
by the authorities to enter into a contract on terms stipulated in advance.
 Terms stipulated in advance are terms which usually fix the scale of prices to be charged and
the limitations on the undertaking’s liability for non-performance.
 Pursuant to Art. 1683(2) of the CC, since no acceptance is required from the offeree (such
undertakings), the receipt of offer makes the contract, which exists from that time onwards.
In other words, the offer alone creates the contract and makes it enforceable by the offeror
against the offeree.
 For example, Ethiopian Electric Power Corporation, Ethiopian Telecommunications
Corporation, Water & Sewerage Authorities are expected to accept offer for electric use,
telephone line and pipe line. They cannot reject the offer from the public except on rare
and justified grounds. In such cases, to avoid the presumption of silence, they have to
respond per Arts. 1690(1) or 1691(1).
 The writer of the teaching material argues against the literal meaning of Art. 1683 which can
be interpreted as once offer is made, acceptance is automatic and the offeror can claim
performance of the contract by the offeree
 . He argues this interpretation is illogical because:
1. The offeree’s consent is absent;
2. The offeree may lack resource to accept the contract;
3. The offeree may have legal or contractual or legal authority to stream line offerors i.e.
duty to prioritise some groups,
E.g. investors;
4. The offeree can refuse to perform his contractual or legal obligation? [Without
justified reasons????
 Based on these justifications, the writer, even recommends for the amendment of the
provision as:
Where an offeree has legal or contractual duty to accept an offer, the offer shall be deemed to
have been accepted unless the offeree rejects the offer with in time specified in the offer or
where no time is specified within reasonable period.
Preexisting business relations
 In addition to the cases of public undertakings and concession contracts, silence amounts to
acceptance in preexisting business relations. However, in preexisting business relations, offer
is said to be accepted by silence when it:
1. Is to vary, supplement or complement preexisting contractual relation;

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2. is made in writing;
3. is written on special document and
4. Contains warning that silence amounts to acceptance.
i. To vary, supplement or complement preexisting contractual
Relation
 Variation of a contract means changing, modifying or avoiding some of the provisions of the
contract
For example, in a sale contract, the buyer may offer to change the delivery date.
 Supplementary or subsidiary contract is a contract that may exist independently but that help
to facilitate the implementation of preexisting contract.
Examples include:
1. You bought goods and the seller offers you to provide transport service;
2. Photocopier proposes to bind the paper s/he has photocopied;
3. a contractor who builds the house proposes to construct a fence for the same
building.
ii. The offer should be made in writing
 In principle, offer can be made orally, in writing, by signs normally in use or conduct
depending on the preference of the offeror.
But silence [by the offeree] can be interpreted as acceptance only if the offeror uses written
form of communication that is addressed directly to the offeree (Art.1684 (2)
iii. The offer should be written on special document (Art 1684 (2)
 The document that contains the offer should contain nothing else than the offer.
E.g. offer written on the back of an invoice should not be deemed to have been accepted
by silence (Art.1685). Moreover, offer should be written on a paper; E-mail is not a
document.
iv. Warning indicating that silence amounts to acceptance
 The offeror should also expressly indicate in his offer that he considers the silence
of the offeree as acceptance after expiry of time limit indicated in the offer (Art.
1690(1)) or reasonable period (Art.1691 (1) (Art 1684 (2).
Effect of Acceptance
 In general, it can be inferred from Art 1679 and 1693(2) that once an offer is accepted; the
offeree is bound by his word.
 Acceptance begins to produce effect from the moment the offeree sends it to the offeror
provided that it reaches the offeror within time specified under Art. 1690(1) or 1691(2).
 The offeree may abort the contract by withdrawing his acceptance (Art.1693 (2). He can
freely withdraw his acceptance before the offeror knows such acceptance or regardless of
his/her knowledge.

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General Terms of Business

 No party is bound by general terms of business which he did not agree to be bound with (Art
1685); any annexes to main contract never bind a party who has not known its content and
not agreed to be bound.
Negotiation vs. Consent (Art.1695)
 Negotiation is a discussion made between parties intending to shape the content of a would
be contract.
 Any proposal made during negotiation is not binding on the party making the proposal i.e. a
party may withdraw from the negotiation at any time (Art 1695 (1).
 However; if the negotiation is completed (content of the contract is determined) and both
parties agree to be bound by the negotiation, then it ends up becoming a contract (Art 1695
(1)
 In negotiation, it is very difficult to know the party who made an offer. However; we may
take as an offeror the party who proposes the content of the contract last.
 In negotiation, parties need not reach agreement on all contents of the contract. They may
expressly agree to be bound by contents of the negotiation thereby leaving detail to be
completed by the law (Art 1695 (2).
Defect in Consent and Available Remedies (Art 1696 – 1710)
 If the consent expressed in the form of offer and acceptance does not indicate what the
offeree or the offeror really intended, then, there exists defect in consent.
 The common causes of defect in consent are:
1. Wrong information w/c comprises mistake, false statement and fraud;
2. Threat w/c comprises duress, reverential fear, threat to exercise a right &
3. Lesion
 The existence of defect in consent may be a cause for invalidation of contract per Art.
1696. However, it should be noted that there are cases where defect in consent does not
necessarily lead to the invalidation of contract.
These cases are:
 When a party who agreed to be bound because of defective consent fails to demand
the invalidation per Art. 1808. And
 In those cases provided under Arts.1708, 1709, and 1710.
1. Defect of Consent due to Wrong Information
 Mistake,
 fraud, and
 False statements may lead an offeror or offeree to have a wrong knowledge
about the content of the contract i.e. assing a decision to be bound on the
basis of wrong information.
1. Mistake (Art 1696- 1703)
A. Is a false belief, a belief in something which is untrue?

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B. Is when a party makes misunderstanding on the content of the contract or on the

identity of the other contracting party.
C. The person might have committed such misunderstanding either because of his own
poor inference from given facts or false statement or deceitful practice of others
person. E.g.
 A buyer purchased a bracelet believing that it is pure gold and later on
found out that it is silver mixed.
 A seller says nothing to the buyer about the quality of bracelet.
 As per Arts. 1697& 1698, one can invalidate or avoid his obligation on the basis of
mistake if the following two conditions are cumulatively fulfilled. These are:
1. Mistake must be fundamental (Art 1698) and
2. Mistake must be decisive. (Art 1697)

1. Mistake must be fundamental (Art 1698)

 A mistake is said to be fundamental when a person misunderstands the object or nature
of the contract or identity of the contracting party (the person with
 The ‘element of the contract which the parties deem to be fundamental’ is the object (rights
& duties of parties to the contract);
 It does not mean the elements of a contract provided under Art. 1678
 Consent,
 Capacity,
 Object and
 Form).
Art. 1678 elements of a contract
 No valid contract shall exist unless:
A. the parties are capable of contracting and give their consent sustainable at law;
B. the object of the contract is sufficiently defined and is possible and lawful;
C. the contract is made in the form prescribed by law, if any.
ቊ 1678፡፡ የውል አቋሞች፡፡
 የሚጸና ውል ነው ለማለት ሦስት ሁኔታዎች ያስፈልጉታል፡፡
1. ውል ለመዋዋል ችሎታ ባላቸው ሰዎች መካከል ጒድለት የሌለው ስምምነት መኖር፤
2. በቂ የሆነ እርግጠኛነት ያለው የሚቻልና ሕጋዊ የሆነ ጒዳይ፤
3. ይኸውም የውሉ አጻጻፍ ፎርም (ዐይነት) በሕግ የታዘዘ ሆኖ፤ እንደ ትእዛዙ ባይፈጸም ፈራሽነትን
የሚያስከትል ሲሆን አንድ ልዩ ፎርም፡፡

 Mistake in the object of the contract is not limited only to the obligations of the
parties to the contract but also includes characteristics such as
 size,
 quality and
 Type of the subject of the contract.
 Example of
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 Mistake in the nature of the contract is if a person who intended sale contract enters into
donation contract enters of contract refers to types of contract.
 Example of mistake in the object of the contract is when some one buys a
television produced by china believing that it is Japan’s product.
 Example of mistake in the identity of the other contracting party is when the person
concludes a contract with “B” believing that he is “A”. B and A could be twins, supply
similar product. Etc.
The law also attempts to indicate what “fundamental mistake” means by telling us non
fundamental mistake (Art.1701). Mistake of the motive of a party or arithmetic mistake
are non-fundamental.
 Art.1701 non-fundamental
1. A contract may not be invalidated on the ground of mistake where such mistake
only relates to the motives which led to the making of the contract.
2. Arithmetical mistakes in a contract shall not affect its validity and shall be corrected.
ቊ 1701፡፡ በቂ ምክንያት የማይሆን ስሕተት፡፡
1. ለመዋዋል ባደረሱት ምክንያቶች ላይ የተደረገ ስሕተት ውሉን አያስቀረውም፡፡
2. በውሉ ላይ የተደረገ የሒሳብ ስሕተት ብቻ የተሳሳተው ሒሳብ እንዲተካከል ያደርገዋል እንጂ፤
ውሉን በሙሉ አያፈርሰውም፡
 Arithmetical mistake is taken as non- fundamental mistake because it can be easily corrected
(Art 1701(2). This happens when both parties accept the arithmetic mistake. But if the
arithmetic mistake is claimed by one party only, it may be fundamental mistake.
 Arithmetic error is all about clerical error or a slip of the pen; that is why it is said non-
true mistake
 Example of arithmetic mistake is when “A” signs a check believing that s/he
orders a payment of 50,000 birr although the check indicated birr 500,000 which the
payee read and accepted. In this case, the payee accepted the check believing that it
carried an order of 500,000 birr but “A” believed it to be 50,000 birrs.

A mistake is arithmetic when amounts, numbers or even provisions are missed or

improperly typed due to clerical error regardless of the common intention of the parties
expressed in the form of offer and acceptance.

 Generally, arithmetic mistake is editorial error and may also be applied to any other
editorial error such as missing of provisions that indicate rights and obligation of the parties.

e.g. in a contract of sale, the phrase dealing with place of delivery is missed although the
parties consented that it is in Addis Ababa.

 Mistake must be decisive. (Art 1697

 The mistake is decisive when the mistaken party proves that a rational person in his position
would not have entered into such contract had it not been for the mistake (Art 1697)
Art 1697: - Mistake must be decisive

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The party who invokes his mistake shall establish that he would not have entered into the
contract, had he known the truth.
ቊ 1697፡፡ ውልን ከመቀበል ስለሚያደርስ ስሕተት፡፡
 መሳሳቱ ይታወቅልኝ ሲል የሚከራከረው ወገን ስሕተቱ ለመዋዋል ያደረሰው መሆኑን ማስረዳት አለበት፤
እንዲህ መባሉ፤ እውነቱን ዐውቆ ቢሆን ኖሮ ፈቅዶ የማይሠራው መሆኑ ሲታወቅ ነው፡፡
 The decisiveness of the mistake should be determined by court taking into account the
surrounding circumstances and subjective conditions of the mistaken party.
 The criteria that are going to use by courts for the decisiveness of a mistake are subjective
(Arts. 1697 & 1699).
Art 1699: - mistake as to the nature or object of the contract
A contract may be invalidated on the ground of mistake where:
a. the mistake relates to the nature of the contract; or
b. the mistaken party has undertaken to make a performance substantially greater or to
receive a consideration substantially smaller than he intended.
ቊ 1699፡፡ በውሉ ዐይነት ወይም ጒዳይ ላይ ስለሚሆን ስሕተት፡፡
 ለመዋዋል ያደረሰው ስሕተት በተለይ ውሉን የሚያፈርሰው፤
(ሀ) በውሉ ዐይነት ላይ ስሕተቱ የደረሰ ሲሆን፤
(ለ) አንደኛው ተዋዋይ በሰጠው ቃል ስለ መሳሳቱ የሚያቀርበው መከራከሪያ ከፍ ያለ አስረጅነት
የሚያገኝ ሲሆን፤ ወይም ውል ተቀባይ የሰጠው መልስ በእውነት ከፈቀደው እጅግ ያነሰ ሆኖ ሲገኝ
ነው፡፡

 The purpose of considering the subjective criteria is searching the intention of the mistaken
party since contract is binding only when the person knows his rights and obligation and
agrees to be bound. However, knowing intention of such mistaken party is possible only by
putting oneself in his position i.e. what would I do as a rational person, had I been in his
condition’.
Good Faith of Mistaken Party (Art.1702)
The mistaken party must be in a good faith to be out of the contract concluded in such
mistake.
Art.1702: - Good Faith of Mistaken Party
1. The mistaken party may not invoke his mistake in a manner contrary to good faith.
2. He shall be bound by the contract he intended to make where the other party agrees to
perform such contract.
ቊ 1702፡፡ ለቅን ልቡና ደንብ ተቃራኒ የሆነ አሠራር፡፡
1. በስሕተቱ ተጎጂ የሆነው ወገን የቅን ልቡና አሠራርን ተቃዋሚ በሆነ አኳኋን ይታይልኝ ሊል አይችልም፡፡
2. ሌላው ወገን ተዋዋይ እንደ ውሉ እንዲፈጸምለት የሚፈቅድ መሆኑን ካረጋገጠ ተዋውሎበት በነበረው ውል መገደድ
አለበት፡፡
1. Reparation (Art.1703)
 Invalidation of
contract on ground of mistake entails payment of damages
(compensation) by mistaken party to the other party. However, a mistaken party can

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escape such liability only if he proves that the other party knew or should have known such
mistake (Art. 1703)

Article 1703: - Reparation of damage

 Whosoever invokes his mistake to avoid the effect of a contract shall make good the
damage arising out of the invalidation of the contract unless the other party knew or
should have known of the mistake.
ቊ 1703፡፡ ኪሣራ የመክፈል ግዴታ፡፡
 ውሉ ከሚያደርስበት ግዴታ ለመዳን ሲል በስሕተቱ የሚያመካኘው አንደኛው ወገን ተዋዋይ፤ ሁለተኛው
ወገን ይህን ስሕተቱን ካላወቀለት ወይም ማወቅ እንደነበረበት ካልገለጸ በቀር በውሉ መፍረስ ምክንያት
ለደረሰው ጉዳት ኪሣራ ይከፍላል፡፡
2. Fraud (Art 1704)
 Is another category of wrong information which causes defect in consent.
 Fraud is an intentional act of preparing false or wrong information or changing or
modifying the content of the subject matter of the contract in a manner that cannot
be noticed by ordinary observation.
 Fraud is a mistake provoked by deceit or cheating.
 It is making things or documents to give wrong information.
ቊ 1704፡፡ ተንኰል፡፡
1. በተንኰል የተደረገ ውል ፈራሽ የሚሆነው ከተዋዋዮቹ አንደኛው ወገን ውሉ እንዲደረግ ያደረገው
በሁለተኛው ተዋዋይ ላይ ተንኰል ባይደርስበት ኖሮ ውል የማያደርግ እንደነበረ ሲገለጽ ነው፡፡
2. ከተዋዋዮቹ ውጭ በሆነ በሌላ ወገን ተንኰል ያለ ውዴታ ባደረገው ውል ጉዳት የደረሰበት ወገን፤
ሁለተኛው ተዋዋይ ይህ ተንኰል የደረሰበት መሆኑን ካላወቀለት ወይም ማወቅ እንደነበረበት ካልተገለጸ
ወይም ከውሉም ጥቅም ካገኘ በውሉ ተገዳጅ ይሆናል፡፡
Article 1704: - Fraud
1. A contract may be invalidated on the ground of fraud where a party resorts to deceitful
practices so that the other party would not have entered into the contract, had he not been
deceived.
2. A contracting party who has been deceived by a third party shall be bound by the
contract unless the other contracting party knew or should have known of the fraud on
the making of the contract and took advantage thereof.

 Fraud is a deceitful practice which may be accompanied by false statement, though

false statement by itself, is not a fraud
 Examples of fraud common in our country include; The practice of mixing up banana
with butter, red ash with pepper, milk with water, sugar with honey and so on

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 Fraud can have three-fold aspect/effects:

1. A contract aspect, leading to invalidation;
2. A tort aspect, leading to damages and
3. Criminal aspect, leading to punishment.
 Sub-article 2 of Art. 1704 provides that “a contracting party who has been deceived by a
third party shall be bound by the contract unless the other contracting a party knew or
should have known of the fraud on the making of the contract and took advantage there
of”. E.g. A, the employer wants to employ a qualified employee for some position in his
company. B is a recent college graduate who is not well qualified for the position A is
seeking to employ. If C who is a broker deceived A that B is qualified for the position and A
employs B believing B is qualified, A cannot terminate contract of B but can institute court
action against C provided that B has no knowledge about the fraud.
 N.B A party who is unable to prove Art.1704 [fraud] may resort to proving existence of
mistake although practically proving mistake is more stringent than fraud.

3. False statement (Art 1705

 False statement is untrue statement made either intentionally or negligently.
 Misleading conducts (manners) or silence may also amount to false statement. Art 1705(2)
 In principle, pursuant to Art 1705(1), even if it is made in bad faith and negligently, telling a
false statement cannot lead to invalidation of contract. It is what we may expect in free
market economic system.
For example, the seller told the buyer that the product will serve for 5 years but it
actually served only for 2 years.
 Exceptionally, however, false statement can be a ground for invalidation of contract
where:
A. There is a special relationship between the liar contracting party and the mistaken
party and
B. Such special relationship led the mistaken party to believe the statements of the other
party
Art 1705: - False statement
1. A contract may be invalidated where a party in bad faith or by negligence made
false statements and a relationship giving rise to a special confidence and
commanding particular loyalty existed between the contracting parties.
2. The provisions of sub-art. (1) shall apply where a party, by his silence,
3. caused the other party to believe a fact which was untrue.
ቊ 1705፡፡ እርግጠኛ ባልሆነ ጒዳይ ስለ መዋዋል፡፡

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1. በክፉ ልቡና ወይም በቸልተኛነት የተደረገ ሲሆን ይልቁንም በተዋዋዮቹ መካከል የተለየ የታወቀ መተማመን ያለ
በመሆኑ በግንኙነታቸውም አንዱ ላንዱ የተለየ ታማኝነት እንዲኖረው ሲገደድ፤ እርግጠኛ ባልሆነ ጒዳይ የሰጠው
ውል ለማፍረስ የሚፈቅድ ምክንያት ይሆናል፡፡
2. እንዲሁም ዝም በማለት፤ የተዋዋለው ሌላውን ወገን ያልተካከለውን ነገር አሳምኖት እንደሆነ፤ ይኸው ሥርዐት
ተፈጻሚ ነው፡፡
A. Special relationship between the liar contracting party and the mistaken
party
 Here, the special relation should be a legally recognized relation which creates duty to trust
one another. The duty to trust one another may be either legal or moral.
 The verb “existed” in the past tense under sub-Article one of the provisions at hand shows
that the relationship must exist prior to the challenged contract and not created by it.
 Examples of legally recognized special relationships are
 husband-wife,
 doctor-patient,
 lawyer-client citizen-government,
 confessor-penitent,
 employer-employee relationships and the like.
B. Such special relationship led the mistaken party to believe the statements
of the other party
 False statement or silence can be a ground for the invalidation of the contract in such
relation only if it is made by the party to the contract, not by third party to the contract.
 Moreover, supplying false information have tort aspect which may lead to damages. (Art.
2059(1))
2.Defect in Consent due to Threat (Art.1706-1709
 A person may be threatened either physically or psychologically to make an offer or to
accept an offer made to him.
 In such case, the person is declaring his intention to be bound as an alternative means of
avoiding the effect of the threat.
 In principle, parties enter into a contract for purpose of deriving economic
benefit but in case of threat, both or at least one of the party is entering into a contract to
avoid a possible risk that has been directed against him, his relative or his property interest
 So, had it not been for the threat, the person would not have declared to be bound i.e.
intention to be
bound is lacking.
 As highlighted in the opening, defect in consent due to threat includes:
A. Duress;
B. A threat to Exercise a Right and
C. Reverential fear

I. Duress (Art.1706 & 1707)

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 “Duress” is the compelling of a party to consent to a contract by threats of grave and

imminent harm to such party or his ascendants, descendants or spouse.
 One can raise duress as a cause of invalidation of contract if the following conditions
are cumulatively fulfilled:
Art.1706: - Duress
1. A contract may be invalidated on the ground of duress where the acts of duress
led a party to believe that he, one of his ascendants or de- ascendants, or his
spouse, were threatened with a serious and imminent danger to the life, person,
honour or property.
2. Duress must be such as to impress a reasonable person.
3. The nature of duress shall be determined having regard to the age, sex and
position of the parties concerned.
ቊ 1706፡፡ በመገደድ የተደረገ ውለታ፡፡

1. የኀይል ሥራ ለውሉ ማፍረሻ ምክንያት የሚሆነው አንደኛውን ወገን እሱን ራሱን ወይም ወላጆቹን
ወይም ተወላጆቹን ወይም ባልን ወይም ሚስትን ከባድና የማይቀር አደጋ በሕይወቱ በአካሉ፤ በክብሩ
ወይም በንብረቱ እንደሚመጣበት ያሳመነው ሲሆን ነው፡፡
2. ይኸውም የኀይል ሥራ አእምሮው የተደላደለውን ሰው ለማሥጋት የሚችል መሆን አለበት፡፡
3. እንዲህም ሲሆን የማስገደድ ሥራ የደረሰበትን ሰው ዕድሜውን ጾታውን አኳኋኑን ማመዛዘን
ያስፈልጋል፡፡

A. There is a threat or warning to cause harm.

 The person must be told expressly that he has to choose either suffering from the
harm or entering into a contract. In other words, he should not infer the threat of
harm from the behavior or identity of the parties.
 For example, if some gangsters come to a home of certain rich man
and remained in seat for an hour without giving any instruction to him,
he cannot claim duress if he writes them a check of 500,000 birr and
made them to leave his house.
B. The harm is on the person himself or his/her spouse or
his/her ascendants or descendants
NB: - The law limited the threat only to the above-mentioned family members. So, this
means one cannot invoke for the invalidation of contract made on ground of duress directed
against his/her collaterals such as brothers, sisters, aunts, uncles and the like.
How do you See this provision??? Don’t you think the latter family members should be
included in the provision?
C. The harm is on person, life, property, and honor
 Harm on person is when the threat is to cause bodily damage to any of the above
stated persons.
 Harm to a life is when the threat is to kill any of the above stated persons.

NIC 20
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 Harm to honor is when the threat is to commit a certain act that negatively affects
the reputation or public image of any of the above listed persons i.e. threatening to
release information which the threatened person wants to keep secret.
 Harm to property is when threat is to destroy certain property. In other words, the
person is threatened either to enter into a contract or he is going lose certain property.
D. The party believes that the harm will happen if he does not consent
to the contract
 The existence or non existence of duress depends on the subjective mentality of a party.
Therefore; it is enough if the threat is apparent to a party, although there was no real
threat.
For example, the fact that the pistol used to threaten a party was artificial does not matter;
it is enough if he believed that the pistol was the true one.
E. The threat should be serious:
 The threat is said to be serious when the harm to be caused is greater than the obligation
that a party enters into.

E.g. a simple warning that s/he would face a kiss on the lip or a slap on the face and the like if
s/he is not consenting is not a serious threat

F. The harm must be imminent: -

 Here, the harm is going to happen soon; A party does not have time to think of another
option to avoid the happening of the harm except by consenting to the contract.
 The person or property threatened should be under the control of the threatening party
and the threatening party will cause the damage at the moment a party refuses to
consent.
 Example of imminent harm is If Shibbiru and Ashebir kidnapped Abel’s
daughter, and made a telephone call to him that he either bring half million birrs
to the place where his daughter is detained within few minutes without
reporting the fact to the police or they will rape his daughter.
 Example of non-imminent harm is if a bank manager receives a letter
warning him to sign a check of 1,000, 000 birr for a burglar within a weak or he
would suffer the consequence.
G. The threat must impress a reasonable person: -
 The law does not expect a citizen to be a hero who can have courage to resist any
threat. It, however, does not want us to be cowardice. A citizen should have some
courage to resist some threats.
 The law punishes cowardice by denying the opportunity to invalidate contracts if the
threat was such that any ordinary person would have resisted it.
For example, the law does not accept a healthy man of 35 to claim that he was
threatened by a young girl of 12. Of course, here one may raise the weapon with
which he/she is threatened

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 22

 In determining the cowardliness, the court should take into account the
 health,
 sex,
 age and
 position of the person threatened and threatening. Normally, males may be
expected to defend themselves better than women. Adults are also expected
to defend themselves better than minors.
 Moreover; health, education and other psychological factors are also important to
determine whether or not the person was cowardice or had reason for failure to resist
the threat.
Duress by third Party (Art.1707
 The threatened party can claim the invalidation of contract whether he is
threatened by the other party to the contract or by a third party to the contract. (Art
1707 (1). Thus, duress by anybody is a ground for the invalidation of a contract. This
is justified on the ground that duress is dangerous to the social order.
 Moreover; the other party cannot raise his unawareness of the duress as a justification
to avoid invalidation. Such justification may, however; be a ground to claim damage
from a party who got the contract invalidated (Art 1707 (2)
Art.1707: - Duress by third Party
1. A contract may be invalidated on the ground of duress notwithstanding that duress was
exercised by a person other than the party who benefited by the contract.
2. The party who invokes duress to avoid the effect of a contract shall make good the damage
arising out of the invalidation of the contract, where duress was exercised by a third party and
the other contracting party did not and should not have known thereof.

ቊ 1707፡፡ ሦስተኛ ወገን ስለሚያደርገው የኀይል ሥራ፡፡

1. በተዋዋለው ሰው ላይ የኀይል ሥራ ሲፈጸም የኀይል ሥራ ሠሪው በስምምነቱ ተጠቃሚ ያልሆነ ሌላ ሰው ቢሆንም

እንኳ የውል ማፍረሻ ምክንያት ይሆናል፡፡
2. የኀይል ሥራውን የፈጸመው ሦስተኛ ወገን ሆኖ አንደኛው ወገን ያላወቀውና ሊያውቀውም
የማይገባው ያልሆነ እንደሆነ፤ ከተዋዋዮቹ አንዱ በመገደዱ ምክንያት ከውሉ አፈጻጸም እድናለሁ ባዩ፤
ውሉ ባለመፈጸሙ ሌላውን ወገን ላገኘው ጉዳት ኪሣራ መክፈል አለበት፡፡
II. A Threat to Exercise a Right (Art 1708)
 Unlike duress where physical violence is used as a means to compel a person to enter into
contract, a threat to exercise a right is when right is used as a means to compel a person
to enter into a contract i.e. a person is made to choose either to perform/undergo certain
legal obligation or to enter into a contract.

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 23

 E.g. “A” the owner and “B” the Architect entered into construction
contract for residential house. The terms of the contract provides that “B”
should complete the house within a year for otherwise he will pay 200,000
Birr as a penalty and the contract may be cancelled. “B” failed to
accomplish the house within the agreed time and “A” warns him to build a
fence (which is not part of the original contract) for otherwise he is using
his right of claiming 200,000 Birr and cancellation of the contract. “B”
builds a fence being threatened “A” is going to exercise his right as
provided in the original contract.
 As per Art. 1708, a threat to exercise a right shall be no ground for invalidating a
contract unless such threat was used with a view to obtaining an excessive advantage.
 However, if threat was used with a view to obtaining an excessive advantage i.e. an
advantage which exceeds the weight of the right threatened with, it could be a ground
for invalidating a contract.
 Obtaining an advantage which exceeds the weight of the right threatened with is an abuse
of right and amounts to duress which is, thus, open to invalidation.
 However; the threat to exercise a right may be directed against the person
from whom the threatening person does not have any right. E.g. a threat to
exercise a right may be directed against the father for the wrong done by his son or against
the mother for the wrong done by her minor daughter etc. The father or
mother enters into the contract to protect his/her son and daughter respectively
III. Reverential fear (Art. 1709)
 Reverential fear, as provided under the provision, is fear of an ascendant or a
superior.
 Reverential fear is a psychological threat. The threatening person is playing against the
psychological (mental) feeling of the threatened person. It is a psychological intimidation
that if the person does not give his consent to be bound by the contract, he will be belittled
by some one or the public in general. It is, in short, the fear of opinions.
 Reverential fear is also called undue influence (see Art. 868 of the civil code)
ቊ 868፡፡ የመንፈስ መጫን(1) መሠረቱ
በአንድ ኑዛዜ ውስጥ ያለ ቃል በዚህ የኑዛዜ ቃል ተጠቃሚ የሆነው ወይም
ማናቸውም ሌላ ሰው በተናዛዡ ላይ በአለው ከመጠን በላይ የሆነ የመንፈስ መጫንን
ምክንያት በማድረግ ፈራሽ ሊሆን አይችልም፡፡
Art. 868. - Undue influence. - 1. Principle.
A provision contained in a will may not be invalidated by alleging an
excessive influence which the beneficiary of such provision or any other
person had on the testator.

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 However; the mere existence of reverential fear of ascendant or superior is not enough to
invalidate the contract. The reverential fear must make the person to lose certain
advantages i.e. his bargaining power was reduced; he was not free to bargain properly so
that the other contracting party get excessive advantage from the contract.
 Even if a person enters into a contract which he did not want, he must prove financial loss
to invalidate contract on the basis of reverential fear.
 What should be proved is not only the financial loss but also the fact that the financial loss
has gone to the benefit of the person who is the source of reverential fear.
 In short, only contracts entered into with superior/ascendant can be invalidated on basis of
reverential fear provided such ascendants/superior derived excessive advantage.
Whether the advantage is excessive or not should be determined case by case by taking
into account the economic position of both parties.
 Reverential fear is presumed. The fact that superior/ascendant made an offer is
enough to prove the existence of undue influence. The offeree should be presumed that he
entered into such substantially disadvantageous contract because of reverential fear.
However; the superior/ascendant can disprove such presumption by any means.
3. Defect in Consent due to Lesion/Unconscionable Contract (Art 1710)
 Lesion or unconscionable contract is a type of contract which substantially
favors only one party to a contract. Art 1710(1)
 In the free market economy, contracting parties are presumed equal. Moreover,
Security of trade would be endangered if it is allowed to invalidate a contract
merely because it is much more profitable for one party than for the other.
 Gratuitous contracts do not fall under the operation of sub-article 1 of Article
1710. This is because, there is no point in assessing the mutual advantage in
gratuitous contracts w/c are precisely intended to be in favor of only one party.
The law on donations addresses this point. Art. 2439
 Nevertheless, equality of contracting parties may be affected by individual
want, simplicity of mind and business inexperience thereby giving the other
NIC 24
 25

party the opportunity to exploit such weakness. It is, thus, in such cases that the
party who has given defective consent can claim the invalidation of the
contract. Art 1710 (2)
 “Where justice requires” under sub-article 2 of Article 1710, means that the
court is free to refuse this remedy (i.e. invalidation of the contract on grounds of
equity). E.g. when the victim is rich and the transaction is insignificant.
 The term “want” can be understood to cover cases of destitution or states of
distress or necessity.
E,g. if a woman agrees to pay whatever amount of money to certain rescuing
group so that the group rescue her daughter from some other mafia group who
detained her daughter and the rescuing group claimed 2,000,000$ after rescuing
her daughter, there is no duress against the woman by the rescuing group but
she is in distress/they are using her want.
 Simplicity of mind is a kind of mental limitation which impairs the victim’s
judgment. It may result from illiteracy.
 Senility is general incapacity which may result from old age.
 But we should bear in mind that all old people are not senile and then
generally incapable for there are even some old people who are wiser than the
young people. The point is that there could be some old people with reduced
consciousness and it is a contract entered with such old people which may be
invalidated on the ground of senility.
 Business inexperience implies lack of familiarity with business transactions.
Professional merchants cannot invoke this ground of contract invalidation but it
can be invoked by non-merchants. Illiteracy and general lack of instruction may
often amount to business inexperience.
 Simplicity of mind and business inexperience may overlap some times.
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E.g. A country side girl who over paid for a necklace, can claim the
invalidation of the contract. i.e. she can invoke both the simplicity of her mind
and business inexperience.

ቊ 1710፡፡ ስለ መጉዳት፡፡
1. ላንደኛው ተዋዋይ ወገን የበለጠ ጥቅም የሚሰጥ ነው በማለት ብቻ ውሉን ለማፍረስ አይቻልም፡፡
2. ቢሆንም የተጎጂው ፈቃድ የተገኘው፤ ችግሩን የመንፈሰ ቀላልነቱን መጃጀቱን በዕድሜ መግፋቱን ወይም
በንግድ ግልጽ የሆነ የልማድ ዕውቀት የሌለው መሆኑን በመደገፍ እንደሆነና በሕሊናም ግፍ መስሎ ሲታይ
ውሉን ለማፍረስ ይቻላል፡፡

Art 1710: - Unconscionable Contract

1. A contract may not be invalidated on the sole ground that its terms are substantially more
favorable to one party than to the other party.
2. Where justice requires, any such contract may be invalidated as unconscionable where the
consent of the injured party was obtained by taking advantage of his want, simplicity of
mind, senility or manifest business inexperience.
3. Objects of Contracts (Art 1711-1718)
 Like capacity and consent, object is another crucial validity requirement of a
contract.
1. Definition
 What does the term “object” mean?
 The objects of a contract are obligations to perform something.
E.g. If “A” is a car seller and “B” is buyer, it is the obligation of “A” to show the car
to “B” and it is, in turn, the obligation of “B” to pay. Strictly speaking, in the
above sale contract, the object of the contract is the car.
 Broadly speaking, object of the contract is an obligation or agreement of
parties to do something (obligation to act) or to refrain from doing something
(obligation not to act) or obligation to give something to someone.
 As we shall see ahead, lack of object makes a contract non-existent or null
and void from the very beginning
 As provided under Article 1678c, an object of a contact should be sufficiently
defined, and is possible and is
lawful and moral

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 When it is said that object should be defined, it is to mean that

obligations of the parties or of one of them should be ascertained with
sufficient precision. Art. 1714(1).
Art. 1714: - object must be defined,
1. A contract shall be of no effect where the obligations of the parties or of one of them
cannot be ascertained with sufficient precision.
2. The court may not make a contract for the parties under the guise of interpretation.

ቊ 1714፡፡ በማይበቃ አወሳሰን የተመለከተ የውል ጒዳይ፡፡

1. ተዋዋዮቹ ወይም ከተዋዋዮቹ አንደኛው ወገን የገቡት ግዴታዎች በትክክልና በሚበቃ ሁኔታ
ካልተገለጹ በቀር ውሉ ፈራሽ ነው፡፡
2. ውል መተርጒምን ሰበብ በማድረግ ለተዋዋዮቹ ወገኖች አንድ ውል ዳኞች ሊፈጥሩ አይችሉም፡፡
 For example, the object of employment contract is the employers’ agreement to
pay wage and employees’ agreement to do certain thing.
 In the same fashion, in contract of sale of house; the obligation of the seller is to
transfer ownership and possession to the buyer and the obligation of the buyer
is to pay price.
Freedom of Contract
 As per Art 1679, parties are the ones who define the content of their contract.
They are free to determine:
 what to perform,
 where to perform (place of performance)
 when to perform (time of performance)
 How to perform (manner of performance) and
 penalty for nonperformance.
 They are free to enter into any type of obligation, obligation to do “not to do” or “to give”
(Art 1712(1)
 However; parties may fail to specify all the possible contents of the contract. In such cases
and when dispute arises, courts could refer to good faith, equity, custom and law for matters
that are not clearly settled in the contract.
 In order to settle disputes, courts should first refer to contractual provisions and if
they are found to be insufficient, then to legal provisions and if still the matter is not
resolved, to customs and at the end good faith and equity be applied.
 However; law, custom, equity and good faith merely supplements the contract. If there is
no contract (main obligation), they cannot by themselves create contract (Art 1704 (1). In
other words, the object of the contract should be understood by referring to the contract itself
without referring to law custom, equity or good faith.

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 That is why (Art 1714(2) provides that “the court may not make a contract for the parties
under the guise of interpretation.”
 So, a contract is interpreted only if it is sufficiently clear, at least on the main object, so
that such sufficiency be completed. For example, in a sale contract, the court should at least
know obligation of a seller and then it can refer to the law to determine its price (See Art
2305-2307).
Art. 2305. - Price determined by weight.
Where the price is determined by the weight of the thing, the net weight shall be taken into
account in cases of doubt.
ቊ 2305፡፡ በክብደት የተወሰነ ዋጋ፡፡
ዋጋው የተወሰነው በዕቃው ክብደት መሠረት የሆነ እንደሆነ፤ ጥርጣሬ ባለ ጊዜ መገመት ያለበት የዕቃው የራሱ ብቻ
ጥሩ ክብደቱ ነው፡፡

Art. 2306. - Thing at current price.

Where the thing sold is quoted on the market or has a current price. the parties shall be
deemed to have concluded the sale at this price, having regard to the time when and place
where delivery is to take place

ቊ 2306፡፡ የታወቀ ዋጋ ያለው ዕቃ፡፡

የተሸጠው ዕቃ በገበያ የተወሰነ ወይም የታወቀ ዋጋ ያለው ሲሆን፤ ሁለቱ ወገን ተዋዋዮች ስለተሸጠው ነገር ሻጩ
የሸጠውን በሚያስረክብበት ቀንና ቦታ በሚገበይበት ዋጋ እንደተዋዋዩ ይቈጠራል፡፡

Art. 2307. - Thing usually sold by seller.

1. Where the sale relates to a thing which the seller normally sells, the parties shall be
deemed to have concluded the sale at the price normally charged by the seller, having
regard to the time when and place where delivery is to take place.
2. The amount shown in the invoice presented by the seller shall be deemed to conform to
such price.

ቊ 2307፡፡ ሻጭ ዘወትር የሚሸጣቸው ነገሮች፡፡

1. ሽያጩ ዘወትር ሻጩ በሚሸጠው ነገር ሲሆን ሁለት ወገን ተዋዋዮች ሽያጩ ሻጩ የሸጠውን በሚያስረክብበት
ቀንና ቦታ ዘወትር በሚሸጥበት ዋጋ እንደተዋዋዩ ይቈጠራል፡፡
2. ሻጩ ባቀረበው ፋክቱር ላይ የተጻፈው ዋጋ ከዚህ በላይ ከተጻፈው ዋጋ ጋሪ ትክክለኛ ዋጋ ነው ተብሎ
ይገመታል፡፡

Limitations to Freedom of Contract

 Parties’ freedom of contract is not absolute (Art 1711). It is limited for the following major
reasons. Absolute freedom of one may violate the rights of others. Moreover, to attain social
justice, peace and tranquility and public morality; it is necessary to limit freedom of contract.

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Art 1711: - determination of object

The object of a contract shall be freely determined by the parties subject to such restrictions and
prohibitions as are provided by law.
ቊ 1711፡፡ የውል ጒዳይ አወሳሰን፡፡
ሕግ ከወሰናቸውና ከከለከላቸው ነገሮች በቀር ተዋዋዮች ሁሉ የሚዋዋሉበትን ጒዳይ እንደመሰላቸው የመወሰን መብት
አላቸው፡፡

Under Ethiopian law; freedom of contract is limited depending on:

1. Clarity of the object (Art 1714),
2. Possibility of the object (Art 1715),
3. Legality of the object (Art 1716(1) and
4. Morality of the Object (Art.1716 (1)

1. Clarity of the object (Art 1714):

 The object of a contract should be sufficiently clear; otherwise, the court
concludes as though parties did not exercise freedom of contract.
 Where a Party’s obligations cannot be sufficiently ascertained, the object is not defined and
there is no contract at all.
Art. 1714. - Object must be defined.
1. A contract shall be of no effect where the obligations of the parties or of one of
them cannot be ascertained with sufficient precision.
2. The court may not make a contract for the parties under the guise of
interpretation.
ቊ 1714፡፡ በማይበቃ አወሳሰን የተመለከተ የውል ጒዳይ፡፡

1. ተዋዋዮቹ ወይም ከተዋዋዮቹ አንደኛው ወገን የገቡት ግዴታዎች በትክክልና በሚበቃ ሁኔታ ካልተገለጹ
በቀር ውሉ ፈራሽ ነው፡፡
2. ውል መተርጒምን ሰበብ በማድረግ ለተዋዋዮቹ ወገኖች አንድ ውል ዳኞች ሊፈጥሩ አይችሉም፡፡
2. Possibility of the object (Art 1715):
 The object of a contract or contractual obligations must be humanly possible to perform.
Parties’ freedom does not allow them to bind themselves to perform humanly impossible
things.
 Impossible obligation is the obligation whose performance is beyond the nature of
human being. Impossible obligation is not an obligation.
E.g. If “x” agrees to sell a dead sheep to “Y” the sale is void as the object of the
contract is an impossible object.
 Moreover, the law wants to protect the public from some superstitious believes.

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For example, if a person agrees to raise a dead body; to duplicate money by mystery, to
bring audio visual image of dead body; to make a person very rich etc. the object of the
contract is impossible.
Art. 1715. – object must be possible
1. The object of a contract must be possible.
2. A contract shall be of no effect where the obligations of the parties or of one of them
relate to a thing or fact which is impossible and such impossibility is absolute and
insuperable.

ቊ 1715፡፡ የሚዋዋሉበት ጒዳይ ለመፈጸም የሚቻል ስለ መሆኑ፡፡

1. የውል ጒዳይ ለመፈጸም የሚቻል መሆን ይገባዋል፡፡
2. ተዋዋዮቹ ወይም አንዱ ወገን ተዋዋይ ሊፈጸም በማይቻል ነገር ላይ የተዋዋለ እንደሆነና የተዋዋሉበትም ነገር
በፍጹም የማይቻልና የማይሞከር ጠባይ ያለው ሆኖ የተገኘ እንደሆነ ውሉ ፈራሽ ነው፡፡
3. Legality of the object (Art 1716(1):
 The object of a contract should not violate any law of the country (The Constitution,
International Treaties and Subordinate laws) for otherwise it is of no effect.
E.g. Article 9(1) of the EDRE Constitution stipulates that:
Article 9 Supremacy of the Constitution
1. The Constitution is the supreme law of the land. Any law, customary practice or a
decision of an organ of state or a public official which contravenes this
Constitution shall be of no effect.
Thus, contracting parties cannot enter into an obligation which contravenes
the constitution
2. All citizens, organs of state, political organizations, other associations as well as their
officials have the duty to ensure observance of the Constitution and to obey it.
3. It is prohibited to assume state power in any manner other than that provided under
the Constitution.
4. All international agreements ratified by Ethiopia are an integral part of the law of the
land
አንቀጽ 9 - የሕገ መንግሥት የበላይነት
1. ሕገ መንግሥቱ የሀገሪቱ የበላይ ሕግ ነው። ማንኛውም ሕግ ልማዳዊ አሠራር፣ እንዲሁም የመንግሥት
አካል ወይም ባለሥልጣን ውሳኔ ከዚህ ሕገ መንግሥት ጋር የሚቃረን ከሆነ ተፈጻሚነት አይኖረውም፡፡
2. ማንኛውም ዜጋ፣ የመንግሥት አካላት፣ የፖለቲካ ድርጅቶች፣ ሌሎች ማኀበራት እንዲሁም
ባለሥልጣኖቻቸው ሕገ መንግሥቱን የማስከበርና ለሕገ መንግሥቱ ተገዢ የመሆን ኃላፊነት
አለባቸው፡፡
3. በዚህ ሕገ መንግሥት ከተደነገገው ውጭ በማናቸውም አኳኋን የመንግሥት ሥልጣን መያዝ የተከለከለ
ነው፡፡
4. ኢትዮጵያ ያጸደቃቻቸው ዓለም አቀፍ ስምምነቶች የሀገሪቱ ሕግ አካል ናቸው፡፡

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 Moreover, parties cannot enter into an obligation which contravenes other subordinate
laws of the country.
E.g. a contract concluded by parties to abduct or assist abduction of a woman violates
criminal law of the land. The object of this contract is illegal.
 N.B restriction and prohibitions indicated under Art 1711 differ from legality of object.
Restrictions and prohibition indicate the concept of social and customer protection whereas
legality indicates concept of public order
 . Restrictions and prohibitions are mainly found in labor law and trade practice law. They
are also found in commercial code and civil code.
 Restrictions and prohibitions are intended to protect the individual contracting party
whereas legality is intended to protect the public.
 So, legality of the object is determined by referring to criminal law whereas restrictions and
prohibitions are to be found in the private law area.
4. Morality of Object (Art.1716 (1)
 Literally, morality is a standard set by a society concerning the distinction
b/n right and wrong or good and bad behavior.
 One problem with morality is that it is subjective; i.e. what is moral in certain
society could be immoral in some other society and vice versa.
 As a means of self-defense, the society punishes those who violate morality.
Law is part of morality that is entrusted by the society for its enforcement. The
remaining part of morality is to be enforced by the society itself by means of
public opinion.
 Even though the state does not have a duty to enforce morality, it should
refrain from indirectly assisting the violation of morality. Therefore, any
immoral obligation cannot be enforced by court or executive (Art.1716 (1).
 The obligation may not be crime but it may be contrary to morality.
E.g. A contract for sexual intercourse/prostitution
Art. 1716. - Unlawful or immoral object
1. A contract shall be of no effect where the obligations of the parties or of one of them are
unlawful or immoral.
2. A contract shall be of no effect where it appears to be unlawful or immoral that the
obligations assumed by one party be related to the obligations of the other party.
ቊ 1716፡፡ ሕገ ወጥ ወይም ለሕሊና ተቃራኒ የሆነ ጒዳይ፡፡

1. (ተዋዋዮቹ ወይም አንዱ ወገን ተዋዋይ የገቡበት ግዴታ ሕግን ወይም መልካም ጠባይን ተቃራኒ የሆነ
እንደሆነ ውሉ ፈራሽ ነው፡፡

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2. እንዲሁም ሌላው ወገን ለገባለት ግዴታ ሲል፤ አንዱ ወገን የገባበት ግዴታ ለሕግ ወይም ለመልካም ጠባይ
ተቃራኒ መስሎ በታየ ጊዜ ውሉ ፈራሽ ነው፡፡
4. Form of Contracts (Art 1719 – 1730)
Definition
 Form is the way in which the content of the contract exists or appears to
others.
 It answers the question as to how third parties such as court could know the
agreement of parties. Thus, it has a probative value.
 A contract may exist either in written form or oral form. When contract is in
written form, a court or third parties know the agreement by reading a paper on
which it was written (Art.2003). And when contract is in oral form, the court
can know the agreement of parties from oral testimony of the parties themselves
or witnesses (Art 2002).
Art. 2002. - Means of evidence.
Proof may be adduced by writings, witnesses, presumptions, a party's admission or oath, in
accordance with the rules set out in this Chapter and the forms prescribed in the Code of Civil
Procedure.

ቊ 2002፡፡ የማስረጃ ዐይነቶች፡፡

በዚህ ምዕራፍ ላይ በተመለከቱት ደንቦች መሠረትና በፍትሐ ብሔር ሕግ ሥነ ሥርዐት ደንብ ላይ በተገለጸው
ድንጋጌ ዐይነት፤ በጽሑፍ በምስክር፤ በሕሊና ግምት በተከራካሪው ወገን እምነት፤ ወይም በመሓላ ማስረጃ
ማቅረብ ይችላል፡፡

Art. 2003. - Contracts to be in writing.

Where the law required written form for the completion of a contract, such contract may not be
proved by witnesses or presumptions unless it is established that the document evidencing the
contract has been destroyed, stolen or lost.

ቊ 2003፡፡ ጽሑፍ በሆነ ሥርዐት (ፎርም) ይደረጉ የተባሉ ውሎች፡፡

ውሉ በጽሑፍ እንዲሆን ሕግ ባዘዘ ጊዜ ይህ ጽሑፍ የተቀደደ የተሰረቀ የጠፋ መሆኑ ካልተረጋገጠ በቀር ውሉን
በምስክሮች ወይም በሕሊና ግምት ለማስረዳት አይቻልም፡፡

 Moreover, oral form of contract includes conduct, signs normally in use and partially
written and partially unwritten agreement. when part of the agreement is written while the
remaining is unwritten, the written part could only be used as corroborative evidence to oral
testimony.
Freedom of Form (Art 1719)
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 Most non lawyers think that for a contract to be binding it should be always in writing
and signed by the parties to the contract. However, the law gives freedom to the parties to
choose either written or oral form.
 So, in ppl, a contract can be valid if consent, object and capacity requirements are
fulfilled.

Art. 1719. - Form of contracts.

1. Unless otherwise provided, no special form shall be required and a contract shall be valid
where the parties agree.
2. Where a special form is expressly prescribed by law such form shall be observed.
3. The parties may stipulate that the contract shall be made in a special form.
ቊ 1719፡፡ ስለ ውል አጻጻፍ ነጻነት፡፡
1. በጠቅላላው ሥርዐት በሁለቱ ወገን ተዋዋዮች በማናቸውም ሁኔታ የተደረገ ስምምነት ውል ለማድረግ በቂ ነው፡፡
2. ሕጉ በግልጽ የሚያስገድድ በሆነ ጊዜ ግን አንድ ልዩ የሆነ የሚጠበቅ አጻጻፍ (ፎርም) እንዲኖር ያስፈልጋል፡፡
3. እንዲሁም ተዋዋዮቹ የውላቸውን አፈጻጸም ልዩ በሆነ አጻጻፍ ሥርዐት ሊወስኑት ይችላሉ፡፡

Limitations (Exceptions) to Freedom of Form Art.1719 (2, 3)

 Freedom of form is not absolute. It may be limited by law or contracting
parties. An offerer has a freedom to determine the form of acceptance (Art 1681
(2). If the written form proposed by the offeror is rejected, then the offer itself is
rejected (Art 1694).
Art. 1681. - Form offer and acceptance.
1. Offer or acceptance may be made orally or in writing or by signs normally in
use or by a conduct such that, in the circumstances of the case, there is no
doubt as to the party ‘s agreement.
2. The party who makes an offer may stipulate a special form of acceptance.
ቊ 1681፡፡ የውል አቀራረብና አቀባበል፡፡
1. ፈቃድን በቃል ወይም በጽሑፍ ወይም በተለመዱ ጠቅላላ ምልክቶች ወይም ለውሉ
መነሻ ከሆነው ምክንያት የተነሣ ግዴታ ለመግባት መፍቀዱን በማያጠራጥር አሠራር
ለማስታወቅ ይችላል፡፡
2. ቢሆንም ለውሉ አቀባበል አቅራቢው የተለየ አሠራር ለመወሰን ይችላል፡፡
Art. 1694. - Defective acceptance.
The offer shall be deemed to be rejected and a new offer shall be deemed to
be made where the acceptance is made with a reservation or does not exactly
conform to the terms of the offer.
ቊ 1694፡፡ ፍጹም ያልሆነ የውል አቀባበል፡፡

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የተጠበቀ ሁኔታ ያለበት ወይም ከቀረበው የውል ድርድር ቃል ጋራ በትክክል የማይስማማ

የውል አቀባበል ድርድሩን እንደ አለመቀበልና አዲስ ድርድር እንደማቅረብ ይቈጠራል፡፡
Reasons for Limitation on Freedom of Form
A. Evidentiary value
 Sometimes, we may feel insecure when we make contracts orally especially when the
contract involves considerable property interest.
 Those factors which may exacerbate the insecurity are:
 If we made oral contract in the absence of witnesses, there is a probability that a
person with whom we entered into the contract denies the contract.
 High mobility of people which creates shortage of information to properly know the
personality of the individual we are contracting with
 The disintegration of social life (Social bond) which also contributes to our
insecurity since there is less possibility to use public opinion to punish the people
who dishonor his words.
 So, to reduce such insecurity people may prefer to make their contract in written
form.
B. Recalling content of a contract:
 There is an Amharic adage that says “በቃል ያለ ይረሳል በፅሑፍ ያላ ይወረሳል” may
be translated as “things in mind can be forgotten; things in writing can be
recalled.”
 If a contract is formed orally, there is high possibility that its content be
forgotten both by parties and witnesses specially when the content of a
contract is a complex one and remains effective for a relatively longer period.
 In general, to protect parties against failure of memory as time passes, parties may agree to
make their contract in a written form.
C. Indication of intention to create legal relation:
 Making a contract in a written form is a clear indication of an intention to be bound.
 If a contract is to be made in writing, a party thinks twice before he gives his final
consent to be bound. The person thinks both before consenting to the contract and
signing on the written contractual document. He has a time to think whether to insist in
his consent or change his mind before the signing on the document.
 Moreover, when one party proposes written form, the other party may understand that
the contract is being taken seriously by proposer of the form.
 Generally, written form makes parties to be conscious of the effect of the contract. So,
written form may be taken as an indication of intention to create legal relation
D. To Prevent or Minimize Corruption

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 Under some special types of contracts such as Administrative Contract, written form of
contract is mandatory. This is because it is believed that oral contract opens a room for
corruption since keeping information is difficult.
 Thus, to prevent or at least minimize corruption, administrative contracts shall be made only
in written form.
Contracts made in Written Form (Art 1721 – 1726)
 as we have addressed herein above, in principle, form is not an essential element of a
contract; there is freedom of form.
However, exceptionally, freedom of form can be limited either by the law or parties to
the contract.
 As per Arts. 1719 (2) & 1720 (1), where a special form is expressly prescribed by law, such
form shall be observed for otherwise it is not a contract but a mere draft.
 Accordingly, the following contracts shall be made in writing:
A. Contracts the law requires to be made in writing,
B. Contracts parties want to make in writing,
C. Preliminary contract (Art 1721),
D. Variation of contract made in writing (Art 1722

A. Contracts the law requires to be made in writing

 Some of the contracts that the law expressly requires to be made in writing are:
1. Contracts relating to immovable: - All contracts that affect a right on
an immovable, except lease or rent of house, must be made in writing.
Therefore, sale, usufruct, servitude, mortgage etc. should be made in writing.
Art. 1723
A contract made in a special form shall be varied in the same form.
Art. 1723. - Contracts relating to immovables.
1. A contract creating or assigning rights in ownership or bare ownership on an
immovable or a usufruct, servitude or mortgage of an immovable shall be in
writing and registered with a court or notary.
2. Any contract by which an immovable is divided and any compromise relating to
an immovable shall be in writing and registered with a court or notary.
ቊ 1723፡፡ የማይንቀሳቀሱ ንብረቶችን ስለሚመለከቱ ውሎች፡፡
1. የማይንቀሳቀሱ ንብረቶችን ባለቤትነት ወይም ባንድ በማይንቀሳቀስ ንብረት ላይ የአላባ
ጥቅም መብት ወይም የመያዣ ወይም የሌላ አገልግሎት መብት ለማቋቋም፤ ወይም
ለማስተላለፍ የሚደረጉት ውሎች ሁሉ በጽሑፍና በሚገባ አኳኋን በፍርድ ቤት መዝገብ
ወይም ውል ለማዋዋል ሥልጣን በተሰጠው ፊት መሆን አለባቸው፡፡
2. እንዲሁም የማይንቀሳቀስ ንብረትን የሚመለከቱ የክፍያ ወይም የማዛወር ስምምነቶች ሁሉ
በጽሑፍና በሚገባ አኳኋን በፍርድ ቤት መዝገብ ወይም ውል ለማዋዋል ሥልጣን በተሰጠው
ፊት መሆን አለባቸው፡፡

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 However, as per FSCCD in the case between Rented Houses Administration Agency vs.
Sosina Asfaw in a file No15992, lease or rent relating to immovable (House) need not be
made in writing.
2. Contracts with public administration (Art 1724): any contract to which
a government agency is a party, including any type of employment contract, should be
made in writing.
Art. 1724. - Contracts made with a public administration.
Any contract binding the Government or a public administration shall be in writing and
registered with a court, public administration or notary.
ቊ 1724፡፡ ካስተዳደር መሥሪያ ቤት ጋራ የሚደረጉ ውሎች፡፡
መንግሥት ወይም ለሕዝብ አገልግሎት የቆሙ መሥሪያ ቤቶች ግዴታ የሚዋዋሉባቸው ውሎች ሁሉ
በጽሑፍና በሚገባ አኳኋን በፍርድ ቤት መዝገብ ወይም ባንድ ባስተዳደር ክፍል መሥሪያ ቤት መዝገብ
ወይም ውል ለማዋዋል ሥልጣን በተሰጠው ሰው ፊት መሠራት አለባቸው፡፡
 Can you mention the reasons behind making administrative contracts in written form? The
common reasons are:
 In public administration, because officials may leave their office by election, removal or
resignation, it would be difficult to ascertain the content of the contract entered into during
their stay in office unless it is made in a written form.
 As we know, because contracts concluded by public officials representing the agency
continues to be effective even after they leave their office, they should be made carefully in a
written form.
 Moreover, oral contract opens a room for corruption since keeping information is
difficult in orally made contracts.
 Some other types of contracts which the law requires to be made in
writing include:
1. Contract of guarantee (Art 1725 (a);
2. Contract of insurance (Art 1725 (b);
3. Partnership contract;
4. Pledge for a loan exceeding 500 birr (Art 2828 (2);
5. Sale and mortgage of business (Art 152, 177 (2) comm. code);
6. Promise of sale and preemptions (Art 1412) and
7. Agreement prohibiting assignment or attachment of a certain thing (Art
1430)
B. Contracts parties want to make in writing
 Under the section on freedom of the form, we have seen that freedom of form can be limited
either by law or parties to the contract. Therefore, using their freedom of form, parties are at
liberty to choose their contract be made in a written form.
 Moreover, we have already addressed the possible reasons why parties may prefer written
contract over its oral counterpart
 Once the parties agree to make their contract in writing, then contract will not be completed
until such form is fulfilled. (Art 1726). No party can require the performance of the contract
until it is made in writing.

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Art. 1726. - Agreed form.

A contract which the parties agree to make in a special form not required by law shall not be
deemed to be completed until it is made in the agreed form.
ቊ 1726፡፡ በስምምነት ስለሚሆን ያጻጻፍ ዐይነት (ፎርም)፡፡
ተዋዋዮዡ ለሚዋዋሉት ውል ሕግ የማያስገድደውን ልዩ አኳኋን (ፎርም) ለመፈጸም የተስማሙ እንደሆነ
ለምሳሌ፤ ሕግ ሳያስገድድ በጽሑፍ ለመዋዋል የተስማሙ ሲሆኑ ውሉ ፍጹም የሚሆነው የተስማሙበትን
የውላቸውን አፈጻጸም ሞልተው በተዋዋሉ ጊዜ ብቻ ነው፡፡
 Even if the parties have begun to perform the contract, the court does not help them to have
the performance completed unless they comply with their prior agreement to make the
contract in writing. This means parties cannot change their prior agreement impliedly by
performing the contract.
 Express agreements cannot be changed by implied agreement. However, parties can change
any express agreement by another express agreement.
 As per Art. 1722, a contract made in a special form shall be varied in the same form.
Therefore, If the agreement was made in writing its change should also be made in writing
and vice versa
Art. 1722. - Variations.
A contract made in a special form shall be varied in the same form.
C. Preliminary contract (Art 1721)
 Another type of contract which should be made in writing is preliminary contract.
Preliminary contract is a contract which has to be concluded before another contract. It
intends to lead to another contract.
Art. 1721. - Preliminary contracts.
Preliminary contracts shall be made in the form prescribed in respect of final contracts.
ቊ 1721፡፡ ተቀዳሚ ውሎች፡፡
ተቀዳሚ ውሎች ለመጨረሻ ውል በተወሰነው አጻጻፍ (ፎርም) ዐይነት መሠራት አለባቸው፡፡
 Preliminary contract shall be made in writing if the contract to which it leads is
required to be made in writing either by the law or the parties. The best example is
agency contract. If the agent’s power is to enter into a contract in writing, he should be
conferred with such power in writing (Art 2200(1)
Art. 2200(1). - Form of agency.
1. Authority may be conferred upon an agent either expressly or impliedly.
2. Where the act to be performed by the agent is under the law to be made in a
prescribed form, such form shall be complied with in conferring authority upon the
agent.
ቊ 2200(1)፡፡ የውክልና ፎርም፡፡
1. ውክልና በግልጽ ወይም በዝምታ ሊሰጥ ይችላል፡፡

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2. ቢሆንም ተወካዩ ሊፈጽመው የሚገባው የሥራ ተግባር፤ ስለ አፈጻጸሙ በአንዳንድ ሕጋዊ ፎርም
ውስጥ እንዲገባ የሚያስፈልገው ሲሆን ውክልናው ለተወካዩ ሊሰጠው የሚገባው ይኸው ሕግ
በሚያዝዘው ፎርም መሠረት ነው፡፡
D. Variation of contract made in writing (Art 1722
Art. 1722. - Variations.
A contract made in a special form shall be varied in the same form.
ቊ 1722፡፡ ውልን ስለ መለዋወጥ፡፡
ዋናውን ውል የመለወጥ ጒዳይ ለዚሁ ውል በተደነገገው አጻጻፍ (ፎርም) መሠራት አለበት፡፡
 As we have seen under Art. 1675, variation of contract is a contract itself. So, if such
contract relates to contracts indicated under Art. 1723 (contracts relating to immovables), Art.
1724 (Contracts made with a public administration) and Art. 1725 (Contracts for a Iong
period of time), it should necessarily be made in writing
Art. 1675. - Contract defined.
A contract is an agreement whereby two or more persons as between themselves create, vary
or extinguish obligations of a proprietary nature.
ቊ 1675፡፡ የውል ትርጓሜ፡፡
ውል ማለት ንብረታቸውን የሚመለከቱ ግዴታዎችን ለማቋቋም ወይም ለመለወጥ ወይም ለማስቀረት፤
ባላቸው ተወዳዳሪ ግንኙነት በሁለት ወይም በብዙ ሰዎች መካከል የሚደረግ ስምምነት ነው፡፡
Art. 1725. - Contracts for a long period of time.
The following contracts shall be in writing:
a. contracts of guarantee; and
b. insurance contracts; and
c. any other contract in respect of which such form is required by law.
ቊ 1725፡፡ ለብዙ ዘመን የሚቈዩ ውሎች፡፡
እንዲሁም፡-
(ሀ) የዋስትና ውሎች
(ለ) የኢንሹራንስ ውሎች፡-
(ሐ) ይህ አጻጻፍ (ፎርም) በሕግ ያስፈልጋቸዋል የተባሉት ሌሎች ውሎች ሁሉ፤ በጽሑፍ
መሠራት አለባቸው፡፡
 N.B The law provides form for creation and variation of a contract but it is silent about form
for extinguishing a contract. The drafter also expressly states that provisions dealing with
form of contract do not include extinction of contract (David.p.28).
 The writers of the teaching material are of the opinion that when parties intend to extinguish
contractual obligation that exists between them, they shall extinguish it in the same special
form they made the contract.
 Moreover, they are of the opinion that extinction of the contract should be made in the same
form of its formation for the following reasons:

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1. Extinction of contract is a contract itself- As we have addressed in the

definitional part too, a contract is not only an agreement to create and vary but also
an agreement to extinguish obligations of proprietary nature. So, when the law
provides that a contract be made in writing, it includes extinction since extinction by
itself is a contract.
2. Intention to create legal relation can be clear: a person should be presumed
to have changed his previous stand only when he uses the same way of declaration of
intention as he used earlier. Art. 1726
ቊ 1726፡፡ በስምምነት ስለሚሆን ያጻጻፍ ዐይነት (ፎርም)፡፡
ተዋዋዮዡ ለሚዋዋሉት ውል ሕግ የማያስገድደውን ልዩ አኳኋን (ፎርም) ለመፈጸም የተስማሙ
እንደሆነ ለምሳሌ፤ ሕግ ሳያስገድድ በጽሑፍ ለመዋዋል የተስማሙ ሲሆኑ ውሉ ፍጹም የሚሆነው
የተስማሙበትን የውላቸውን አፈጻጸም ሞልተው በተዋዋሉ ጊዜ ብቻ ነው፡፡
Art. 1726. - Agreed form.
A contract which the parties agree to make in a special form not required by law shall
not be deemed to be completed until it is made in the agreed form.
3. Probatory value of written instrument (Art. 2005): A contract formed in
written form has to be extinguished only in a written form; otherwise, it is very
difficult to prove that a written contract has been extinguished by a later oral contract.
Art. 2005. - Probatory value of written instrument.
1. A written instrument shall be conclusive evidence, as between those who
signed it, of the agreement therein contained and of the date it bears.
2. It shall have the same probatory value for persons represented in the act and
the heirs of the parties.
ቊ 2005፡፡ የጽሑፍ ማስረጃ በቂነት፡፡
1. የጽሑፍ ሰነድ፤ በላዩ ስለሚገኘው የስምምነት ቃል እንዲሁም በላዩ ላይ ስለተጻፈው
ቀን በተፈራራሚዎቹ መካከል ሙሉ እምነት የሚጣልበት በቂ ማስረጃ ነው፡፡
2. እንዲሁም በእንደራሴ በተፈጸመላቸው ሰዎች በኩልና የተዋዋዮቹ ወገኖች ወራሾች
በሆኑት ዘንድም ሙሉ እምነት የሚጣልበት በቂ ማስረጃነት አለው፡፡
Effects of form
 When the law or parties requires the contract to be made in writing, failure to comply with
such requirement makes the contract a mere draft (Art. 1720). The contract never exists until
the formality requirement is fulfilled.
Art. 1720. - Effect of provisions as to form.
1. Where a special form is prescribed by law and not observed there shall be no contract
but a mere draft of a contract
2. A contract shall be valid notwithstanding those fiscal provisions, such as provisions
relating to stamp duty or registration fee, have not been complied with.
3. Unless otherwise provided, a contract shall be valid notwithstanding that prescribed
measures of publication have not been complied with.

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ቊ 1720፡፡ ስለ ውል አጻጻፍ (ፎርም) የተሰጠ ደንብ አለመፈጸም የሚያስከትለው፡፡

1. ሕግ የተለየ ጽሑፍ (ፎርም) እንዲኖር ባዘዘ ጊዜ ይህ አኳኋን እስኪፈጸም ድረስ ውሉ እንደ ረቂቅ
ብቻ ሆኖ ይታያል፡፡
2. እንደ ቴምብር መክፈል ወይም እንደ መመዝገብ ግዴታ ያሉት ስለ ውል ጒዳይ የተወሰኑት
የቀረጥና የግብር ድንጋጌዎች አለመፈጸም ውሉን ፈራሽ አያደርገውም፡፡
3. እንዲሁም ተቃራኒ ድንጋጌ ከሌለ በቀር ስለ ውል ጒዳይ የተወሰኑ የማስታወቂያ ድንጋጌዎች
አለመፈጸም ውሉን ፈራሽ አያደርገውም፡፡
 As per Article 1720 (1), Some contracts need to be registered. Such registration is normally
intended to make third parties to be aware of the existence of such contract. such registration
does not have any relationship with form of the contract. That means, even if the legal
requirement of registration has not been fulfilled, the contract can still be enforced between
parties.
 Registration can affect the validity of contract only when the law expressly states that failure
to register the contract shall make the contract non-existent (Art.1720 (3).
E.g. although Art 1723 provides that contract relating to immovable be registered, it does
not state that failure to register shall make the contract non-existence. Therefore, according to
Art.1720 (3), contract relating to immovable remains valid even if the registration
requirement is not fulfilled.
But FSCCD, Vol.4, File No.21448 makes registration mandatory
Art. 1723. - Contracts relating to immovables.
1. A contract creating or assigning rights in ownership or bare ownership on an
immovable or a usufruct, servitude or mortgage of an immovable shall be in writing
and registered with a court or notary.
2. Any contract by which an immovable is divided and any compromise relating to an
immovable shall be in writing and registered with a court or notary.
ቊ 1723፡፡ የማይንቀሳቀሱ ንብረቶችን ስለሚመለከቱ ውሎች፡፡
1. የማይንቀሳቀሱ ንብረቶችን ባለቤትነት ወይም ባንድ በማይንቀሳቀስ ንብረት ላይ የአላባ ጥቅም መብት
ወይም የመያዣ ወይም የሌላ አገልግሎት መብት ለማቋቋም፤ ወይም ለማስተላለፍ የሚደረጉት ውሎች
ሁሉ በጽሑፍና በሚገባ አኳኋን በፍርድ ቤት መዝገብ ወይም ውል ለማዋዋል ሥልጣን በተሰጠው ፊት
መሆን አለባቸው፡፡
(2) እንዲሁም የማይንቀሳቀስ ንብረትን የሚመለከቱ የክፍያ ወይም የማዛወር ስምምነቶች ሁሉ
በጽሑፍና በሚገባ አኳኋን በፍርድ ቤት መዝገብ ወይም ውል ለማዋዋል ሥልጣን በተሰጠው ፊት
መሆን አለባቸው፡፡
Written form (Art 1727-1729
 A contract is said to be in writing where:
 The content of a contract is written i.e. the content is readable.
 The writing is made on a special form. Special form means any pure paper that is
intended for a specific contract only. Therefore; if a paper contains another contract or
other things such paper is not a special document.

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 Moreover; writing on electronics does not fulfill the requirement of special document.
 Parties to the contract sign the special document. Parties sign by putting hand
written mark on the special document (Art 1728). Here, two things are interesting
firstly the law does not allow the use of mechanical process such as stamp; secondly,
thumb mark never binds unless it is made in the presence of notary, registrar or a
judge acting in discharge of his duty (Art-1728 (2)
 At least two capable witnesses sign the special document. Art-1729.
Art. 1727. - Written form.
1. Any contract required to be in writing shall be supported by a special document
signed by all the parties bound by the contract.
2. It shall be of no effect unless it is attested by two witnesses.
ቊ 1727፡፡ የውል ጽሑፍ አኳኋን (ፎርም)፡፡
1. ውል በጽሑፍ እንዲደረግ ግዴታ ሲኖር ልዩ በሆነ አሠራር ተገልጾ በውሉ ግዴታ ያለባቸው ሰዎች
ሁሉ መፈረም አለባቸው፡፡
2. በሁለት ምስክሮች ፊት ካልተረጋገጠ አይጸናም፡፡
Art. 1728. - Signature.
1. Any party bound by a contract shall affix his handwritten signature thereto.
2. Where a party cannot write, he may affix his thumb-mark.
3. The signature or thumb-mark of a blind or illiterate person shall not bind him unless
it is authenticated by a notary, registrar or judge acting in the discharge of his dutie
ቊ 1728፡፡ ፊርማ፡፡
1. ፊርማ በውሉ ተገዳጅ በሆነው ሰው እጅ መጻፍ ይገባዋል፡፡
2. ለመፈረም የማይችል ሰው በጽሕፈት ፊርማው ፋንታ የጣት ምልክት መተካት ይችላል፡፡
3. የዕውራን ወይም የመሐይምናን ፊርማ የጣትምልክት ፊርማ የነሱ ፊርማ መሆኑን ውል አዋዋይ
ሹም ወይም አንድ ፈርድ ጸሓፊ ወይም አንድ ዳኛ በሥራቸው ላይ ሆነው ያረጋገጧቸው ካልሆነ
አያስገድዳቸውም፡
Art. 1729. - Witnesses. - 1. Capacity.
1. Where witnesses are required by law or agreement, they shall be of age and not
judicially interdicted, unless otherwise expressly provided.
2. Sex or nationality shall not be considered in determining the capacity to act as a
witness.
ቊ 1729፡፡ ምስክሮች (1) ችሎታ፡፡
1. በዚህ ሕግ ወይም ተዋዋዮች በተዋዋሉት ውል ምስክሮች እንዲኖሩ የተባለ ሲሆን ግልጽ የሆነ
ተቃራኒ ድንጋጌ ከሌለ በቀር ምስክሮቹ አካለ መጠን ያደረሱና ያልተከለከሉ እንዲሆኑ አስፈላጊ
ነው፡፡
2. የሰዎቹ ጾታ ወይም ዜግነት ምስክር የመሆንን ችሎታ አያስቀርም፡፡
Other Special Forms

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 There are also other special forms of contracts. These other special forms should contain
contents of the contract in a readable manner but the thing on which the readable content
is found may be a special document, scrape of paper, electronics or any other thing.
 moreover; such form may be signed either by both parties or only one of them or it may not
be signed at all. Also, there is no need of witness to sign. The best example of such special
forms is commercial instruments. Signing or issuing a commercial instrument is concluding
a contract. Such contract should be made in a special form.
 Parties can also agree to make their contract in the special form. E.g. they can agree the
contract is binding without the need of witnesses etc. Therefore; when the parties agree to
make their contract in special form; they should clearly define what that special form
means.
Consequences of Validity Requirements
 Validity requirements also known as elements of contract, as addressed above, are
 consent,
 object,
 capacity and
 form. Generally, a contract that misses any of these elements is either void or
voidable. Void and voidable contracts have differences and similarities.
i. Differences between void and voidable contracts (Art, 1808-1814)
A. Differences in terms of Definition:-
 Void contract is a contract which parties intend to produce binding effect but
does not actually have any legal effect. The obligation intended by the parties
does not exist from the very beginning. So, it is called void abinitio.
 voidable contract is a contract that has begun to produce effect intended by
the parties however it contains certain formation defects that may destroy
the effect it has produced.
 Void contract cannot be cured but voidable contract may be cured by
agreement of both parties to the contract (Art.1811).
B. Differences in terms of Cause
 A contract is said to be void when the object or form elements are missed.
 If the object is unclear (undefined), unlawful, impossible or immoral, the contract is said to
be void contract.
 Likewise, if the especial form prescribed by law or agreed by parties is not complied with,
the contract is said to be void contract.
 On the other hand, a contract is said to be voidable if it contains defect in consent or
capacity (Art.1808 (1).
C. Differences in terms of plaintiff

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 Void contract can be brought before the attention of a court by any body, including the
public prosecutor. Art.1808(2). But in case of voidable contract, only a person whose
consent was defective or the person who was lacking capacity at the time of conclusion of the
contract can bring the case to the attention of the court (see Art.33 of Ethiopian Civil
Procedure Code).
D. Differences in terms of Relief Sought
 In case of void contract, the person bringing the contract to the attention of the court is not
intending to have the contract invalidated since there is nothing to be invalidated. Rather,
he wants either to make sure that the contract is void or wants the court to stop parties from
violating the law/moral standard of the society under the guise of performance of contract.
 Moreover, a person may apply to court to get back anything he has given believing that the
contract was valid.
 However, a party who is sure that the contract was void and has made no payment, need not
go to court and shall refuse to perform the contract (Art 1809).
 On the other hand, voidable contract is a contract that has begun to produce effect. In case of
voidable contract, the person bringing the contract to the attention of the court is intending to
have the contract invalidated. In short, the relief sought is to have such contract declared
void.
 Voidable contract produces legal effect unless the party whose consent was vitiated or
incapable at the time of conclusion of contract challenges its validity (Art. 1808 (1).
 But unlike void contract which does not exist from the very beginning, voidable contract
can be cured where:-
a. Invalidation is not claimed within two years
 A party whose consent was vitiated loses his right to invalidate the contract unless he brings
court action within two years from the moment, he knew the fraud or mistake or from the
moment the duress disappears (Art. 1810(1).
 In case of lesion, the period of two years begins to count from date of conclusion of
contract; not from the date a person knows the existence of lesion (Art 1810 (2).
 Notice that a contract affected by incapacity need to be invalidated within two years from the
date the person became capable (Art 1810 (1).
b. Contract is confirmed
 Voidable contract can be cured where a person whose consent is vitiated waives his right
to demand invalidation (Art 1811(1)
c. The injury is made good
 A contract vitiated by lesion remains valid if the party taking undue benefit agrees to
return such benefit (Art. 1812)
d. The vitiated provisions of the contract are avoided
 Contract may be invalidated partially provided the valid one is independent of the invalid
one (Art 1813). This is if a contract contains both lawful/moral and immoral/unlawful

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obligation, the immoral/unlawful obligation shall be considered as if not written and the
remaining should be given effect, provided that it is clear and meaningful.
E.g; - C and D agreed that D shall serve as a maid servant and she shall also make herself
ready for sexual intercourse twice a week with C and C shall pay birr 400 per month. Here,
the part dealing with sexual intercourse should be considered as if not written or (does not
exist).
ii. Similarities between Void and Voidable Contracts (Art 1815-
1818)
 The following are similarities of void and voidable contract: -
A. Unable to Produce Legal Effect on the Parties: - Like void contract, voidable
contract is also considered as void abinitio once it is invalidated.
 Invalidation of voidable contract has a retroactive effect thereby denying the
contract to produce any obligation from the moment of its inception.
Invalidation of voidable contract is similar with aborting the embryo.
B. Reinstatement (Art 1815-1818): when a person inters into void or voidable
contract and made undue payment, it does not mean that he will be without
remedy. A party who received undue payment shall give it back and such giving
back is called reinstatement (Art 1815 (2). Thus, void and voidable contract
which is invalidated are similar in reinstatement.
 Reinstatement is made either by returning back the payment (thing received)
or by paying appropriate compensation for the thing that cannot be returned.
 In the following cases, reinstatement may be made by paying
compensation:-
i. When Ownership of the thing is transferred to third party Possessor in Good faith Art.
1161
ii. When the thing is Lost or damaged by the fault of receiver Art.2028
iii. Obligation “to do” or “not to do”: - In these two types of obligation, there is no
transfer of ownership or holding. The contract requires the parties to perform certain
intellectual or physical (labor)activities that benefit the other or to refrain from exercising
certain property rights. So, the concept of reinstating the parties by returning the thing does
not work since there was nothing delivered.
iv. When the thing is transformed: where the thing is transformed (substantially
changed or altered), the receiver shall pay the price of the thing (Art 1817 (2). E.g.
Almaz bought flour from Shemsu’s shop but she has already made a bread. In such cases
since reinstatement of the thing is impossible the receiver should pay money.
v. When returning the thing is uneconomical: The thing may not have been
transferred, damaged, lost or transformed, but repayment expense may be high. In such case,

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the court should not order the repayment of the thing. Rather, it should order payment of
compensation.
 In short, if the contract is invalid, any performance made on the basis of such contract
becomes
invalid. This means the receiver shall return the thing he received (Art 1815). However, if
returning is not possible for whatsoever reason, an appropriate compensation shall be paid
(Art 1817).
Chapter III:
Effects of Contract
Chapter Objectives
At the end of this chapter, students will be able to:
 distinguish the different techniques of interpretation of contracts
 identify who may perform a contract, for whom the contract shall be performed
 analyze how the contract shall be performed
 identify the time and place of performance of contracts
 identify the ways of transfer of risk
 know the contracting party who bear the costs of payment
 Know what variation of contract is and who may vary a contract

What does effects of contract mean? (Art.1731)

 The two major principles of contract are freedom of contract and its sanctity (binding
nature).
 To make a serious promise certainly involves a moral duty to keep it. There is Latin saying
“pacta sunt Servando” which means that a person is bound by his words. There is also
an equivalent Ethiopian proverb, ‘የተናገሩት ከሚጠፋ የወለዱት ይጥፋ’ may be translated
as” failure to keep a word is worse than losing a descendant.”
 Contract is binding not only morally but also legally i.e. Once a contract fulfills
the requirement of Art 1678 (consent, capacity, object and form, if any), it becomes a law.
It is, thus, a law between contracting parties (See Art. 1731/1).
 As we know, law is enforced by executive and interpreted by the judiciary.
 As law makers, parties to the contract, can repeal or amend the contract.
 Moreover, the law must be implemented i.e. contract should be performed for violating a
law entails punishment i.e. non- performance of contract leads to payment of damages.

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 Effects of contract, in this section, mainly address:

1. Interpretation of contract,
2. Performance of contract and
3. Variation of contract.

i. Interpretation of contract (Art 1732 -1739)

 As a law, a contract may be interpreted. Interpretation is giving meaning to the
provisions of the law/contract.
 However, a law/contract is interpreted when it is vague, silent, illogical, ambiguous,
and contradictory. In other words, if the provision of the contract is clear, there is no
need to interpret (Art 1733).
 Law is an express intention of the legislators. Interpretation is, therefore, searching the
intention of the parties (Art. 1734(1).
 In line with art. 1733, in a case b/n Ethiopian Development Bank vs. Abdurahman Telisa, file
No. 15662 presented to it on Megabit 13, 1999 FSCCD properly ruled that whenever the
provision of the contract is clear, court should not depart from clear meaning even if such
clear meaning is unfair.
Presumption of Good Faith
 While interpreting a contract i.e., searching for the intention of parties, we have to presume
that parties entered into a contract in good faith (Art. 1732).
 Good faith should mean that no party to the contract intends to deceive the other party by
intentionally making the provision of the contract vague, ambiguous, silent or contradictory.
 While concluding a contract, it is presumed that parties neither know a problem nor
thoroughly examined each provision believing that controversies would not arise i.e. they
trusted each other that none of them would attempt to avoid the effect of contract (Art. 1732).
 In short, good faith means that at the time of conclusion of a contract each party believes
that everyone in the contract intends to get his own fair benefit without harming another
party.
 Interpretation becomes necessary either because parties were not able to imagine the dispute,
or words are imprecise by their nature, or errors are committed in formulating contract.
When to Interpret a Contract
 As addressed herein above, if the provision of the contract is clear, there is no
need to interpret.
Therefore, contract is interpreted when it is:
vague,
silent,
illogical,
ambiguous, and
contradictory

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How to Interpret a Contract

 We said that interpretation is searching the intention of the parties (Art. 1734(1). In other
words, to interpret a contract is to search for the intention of parties to the contract.
 While interpreting a contract, the court should take into account the following techniques
A. Conduct of the parties: - a conduct of a person may be taken as a means of
ascertaining what he was intending and what the other party understood from such
conduct. As per Art. 1734 (2), the general conduct of the parties before and after the
making of the contract shall be taken into consideration to [ interpret a contract].
B. Context of the contract: - the meaning of a contract should be searched from the
contract itself since there is a possibility that one provision may indicate the meaning
of another provision or word in the contract. (See Art. 1736(1)
C. Business practice: - Business practice should also be taken into account to interpret a
contract.
D. Good Faith: - Here good faith indicates the innocent expectation of a party from a
contract (Art. 1735) This is in accordance with the golden rule, “had I been in the
position of my opponent what would I have expected from the contract?”
E. Equity: - The fairness aspect should also be taken into account.
F. Positive interpretation: - Provisions capable of two meanings shall be given a
meaning to render them effective rather than a meaning which would render them
ineffective.
G. Interpretation in Favor of Debtor: - if the court is unable to know the intention of
the parties, the law guides the court to interpret the controversial provision or word in
favor of the debtor (Art 1738(1)). But this is not always true, Esp., if the obligations of
the parties to the contract are stipulated by the debtor b/c the debtor cannot be double
beneficiary
ii. Performance of contracts (Art. 1740-1762
 Performance of contract means fulfilling one’s own obligation or executing validly formed
contract as agreed.
 To elaborate a little bit, If the obligation is to “do”, doing what was provided in the contract
exactly in the same way as provided, if the obligation is “not to do” forbearing from doing
what is forbidden by contract and if the obligation is to “give” delivering the thing with its
accessories on the agreed date and place is called performance of a contract.
 Performance of a contract extinguishes the obligation of the parties to the contract.
 Performance of an obligation addresses questions such as:
1. Who performs a contract’?
2. To whom should a contract be performed?
3. What should be performed?
4. Where to perform a contract? and
5. When to perform a contract?

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1) Who performs a contract’?

 As per (Art. 1740), a contract can be performed by the debtor or his agent or by a person
authorized by court or by a law.
 The persons authorized by law are tutors, liquidators, trustees and person authorized by court
is either a curator or an interested creditor who wants to save the rights of the debtor by
performing his obligation.
 However; the law is silent about performance of a contract by a third party not authorized by
debtor, court or law.
 Nevertheless, it can be argued that if the creditor accepts the payment, the debtor has no
right to stop third party from performing the obligation. In such case, if the debtor insists
on paying the debt, he can pay it to the person who paid the creditor (Art. 1824).
 However, a creditor is not duty bound to receive payment from a person not authorized by
debtor or court or law, he is free to accept or reject such payment without any effect on his
right against the debtor.
 The 2nd rule of performance of a contract, as per Art. 1740(1) is performance of an
obligation only by the debtor. The debtor may perform his obligation personally in two
cases. The 1st case is when then contract or law expressly provides that the debtor shall
perform the contract personally and the 2nd case is when the creditor proves that personal
performance is essential to him.
 To start with the 1st one, a contract or law may expressly provide that the debtor shall
perform the contract personally. E.g, Ethiopian labor law provides that the employee should
perform the contract personally. So, if certain construction company employ’s “A” as a daily
laborer, he cannot authorize his son or brother to carry out the labor work and the company
can refuse to accept “A”’s son or brother and dismisses “A” from work.
 As stated herein above, the second case where personal performance becomes necessary is
when the creditor proves that personal performance is essential to him. The creditor can
be able to prove that personal performance is essential to him only when the obligation is
obligation to “do” of a professional nature or art. E.g., a lawyer, or a doctor cannot
authorize a duty which he agreed to do. Moreover, a musician, painters, Poet, actor, dancer
etc. cannot authorize someone to perform his obligation.
 But do you think that the term “personally” imply performance only by the debtor
without any assistance? No, it may include performance with the assistance of others but
under the control of the debtor. However, the assistance should be limited assistance to say
the debtor performed himself.
2) To whom should a contract be performed? (Art. 1741-1744)
 Payment/ performance should be made to the creditor or a 3rd party authorized by the
creditor (an agent) or by the court or by the law (tutor, liquidator, or trustee). Art. 1741
Payment to Incapables (Art.1742)
 If the creditor is a minor or judicially and legally interdicted person, payment should not be
made to such creditor; rather it should be made to his tutor or legal representative.

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Payment to Unqualified Creditor (Art.1743)

 In principle, payment to unqualified person (a person who is not authorized to receive
payment per Art. 1741) is invalid. But in the following cases, such payment is valid.
These are when: -
A. Payment benefited the real creditor
B. Payment is confirmed or
C. Payment is made to a person with a valid title
A. Payment benefited the real creditor
 This is the case when the debtor pays the debt of his creditor. E.g. “X” borrowed 2000 Birr
from “Y”. “Y”, in turn, once bought a jewelry that worth 2000 Birr from “Z” but not paid
him. If “X” pays “Z” 2000 Birr, the debt of his creditor i.e. “Y”, the payment benefits “Y”.
Thus, this is an exception to the principle, ‘payment to unqualified person is invalid.’
 Notice that such payment may be paid either without the knowledge of creditor or even
against his express opposition.
B. Payment confirmed
 Here even if the creditor did not benefit from the payment, he may confirm the
payment. E.g. “A” borrowed 5000 Birr from “B”. “C” is the daughter of “B”. “A”
paid the money to “C” in the belief that she would give it to her father. If she
consumed the money for her private affairs and her father confirms that, it is a
valid payment. However, if her father is not willing to confirm, “A” can claim
recovery of the money from “C” under the rules of undue payment (Art. 2164).
C. Payment to a person with a valid title
 Here the holder of the title is legally entitled to claim payment although he is not
the real creditor. The document gives an apparent right to the holder. The payment
made to an apparent creditor is valid even if the document is invalidated later on.
The following two cases elaborate this fact.
i. Document evidencing power of agency: a principal might have revoked the
agency power but he may fail to collect the document from the agent and the agent may
use the document to collect principal’s claim. If the debtor, in good faith, pays to the agent
whose agency power is revoked, the payment is valid b/c failure to collect the document
authorizing the agent is the fault of the principal not the fault of the debtor.
ii. Holder of Negotiable Instruments (Art. 716 & 751 of comic):- A debtor who paid to a holder
of negotiable instrument in accordance of the rules of transfer of negotiable instrument is
released from his obligation.
E.g. “A” issued a check to “B” and thief stolen the check from “B”’s pocket and received
payment from Dashen Bank. “A” is released by such payment.
NB: - In both cases the debtor should be in good faith.
Doubt as to the Creditor

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 when the debtor is unable to know the real creditor (b/c two or more persons may
independently claim the payment of a debt), he shall deposit the debt in court
either by his own initiative or by the request of the claimants. (Art.1744)
iii. What should be performed? (Art. 1745 – 1751)
 What to pay (perform) answers the question relating to
 identity,
 quality or
 quantity of the thing to be delivered. To properly answer such question, we may
classify things into definite thing, fungible things and money debts.
i. Definite Thing (Art. 1745 – 1746)
 Definite thing is a thing that can easily be identified from similar things of the
same species. In short definite thing has its own peculiar identity. Animals and
immovable are most prominent examples of definite things.
 If a thing is definite thing, we cannot find its replicate in the world.
 However, for contract law definiteness of a thing simply indicates that a thing which
is a subject of sale is indicated in the contract in its own specific name.
 As per Art. 1745, the debtor shall deliver the thing agreed i.e. the creditor is not
bound to accept other than the thing agreed. The creditor may however, accept things
of different identity if he wants.
 If the creditor accepts the new thing offered to him by the debtor, it means that they
agreed to vary or modify contract. For instance,
Abel unable to get Adai teff, he supplied Men jar teff of the same quality. Gebru
would have an option either to reject or accept the delivery.
 The creditor has also a right to refuse partial payment of a definite thing. He has also a right
to claim partial payment and bring court action for the remaining part or give grace period for
such part payment (Art 1746).
ii. Fungible Things
 Fungible goods are goods that are indicated in the contract by using generic
terms such as pasta, teff, wheat, barely etc.
 Unlike definite things, since fungible goods are those goods which cannot be
expressly indicated in the contract, the contract is interpreted in favor of the debtor
(Art. 1738 (1) and the debtor can freely determine its quality (Art. 1747) though the
quality should not be less than the average quality (Art.1747 (2). For example, if a
seller agreed to sell five hundred quintals of teff, he can deliver teff of average quality
regardless of where the teff is from.
 As per Art. 1748(1): - The creditor may not refuse fungible things on the ground
that the quantity or quality offered to him does not exactly conform to the
contract, unless this is essential to him or has been expressly agreed. The theme of this

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provision is that since exact conformity between the offer and acceptance may not be
met b/c of various reasons, the creditor is recommended to tolerate small deficiency
unless exact conformity is agreed upon or essential to him or unless it is declared
to be fundamental breach of contract.
 To use an example given by George krzeczunowicz, where [a debtor] accepted that he
would deliver 100 liters of alcohol of 90 % concentration but delivers instead 99 liters
of 89% concentration, common sense and commercial usage require that the creditor
does not refuse them where this is not essential to him
 In the above example, it is for the creditor to prove that exact conformity is essential to
him, through showing, for instance, that the alcohol was ordered for medical or
chemical purposes where 1% concentration deficiency makes an essential difference.
 Small deficiencies due to climate, transportation, etc. are sometimes unavoidable and
are customary tolerances.
 But even if the quantity /quality is not essential or fundamental to the creditor, the
contract may provide unilateral cancellation if such quality or quantity is violated (Art.
1786 cum. 1748 (1)
iii. Money Debts (Art. 1749–1751)
 If the debt is money debt, payment should be made in local currency of place
of payment (Art. 1749 (1). This is so for two reasons:
 Firstly,
the debtor may not be able to get the foreign currency in the place of
performance for this could be allowed only for some groups or prohibited totally.
 Secondly, it may be illegal to carry foreign currency for more than a certain time
limit.
 If payment is in a local currency, the exchange rate is determined on the basis of exchange
rate on the day of payment (Art 1750).
 But the law never answers the place that is to be used as a reference to determine
the rate. For example, the exchange rate of birr in dollar may differ in USA and
Ethiopia on the same days.
 Although the law is silent on this point, the writers believe that the place where the
currency indicated on the contract serves as medium of exchanges should be taken as
a reference market to determine the exchange rate.
 Notice that parties may agree that payment shall be made in actual currency indicated
on the contract (Art.1750).
 Incidental to money debt are inflation of currency and interest rate. Parties may avoid
inflation by determining the amount of money debt in reference to the price of a specified
good. For example, a person who lends birr 200,000 to be repaid after ten years may say that
the amount to be repaid shall be able to buy 50 tons of first quality Ada’a teff at the time of
payment.

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Appropriation of payment (Art. 1752-1754)

 Appropriation of payment is important when the debtor pays only part of his obligation.
Principal Debts and its accessories
 If a person is unable to pay the whole debt (principal, interest and cost) at one time, the
partial payment made by the debtor shall be appropriated
 firstly, to the cost;
 secondly to the interest; and
 finally, to the principal (Art. 1752).
 For example, Belaynesh borrowed birr 100,000 in 2000 at a rate of 9% per annum and
debt was to be paid after five years. But Belaynesh failed to pay the debt, and the creditor
brought court action and incurred cost of birr 10,000. So, the principal debt is 100,000,
interest, 72,000 and cost 10,000. Assume Belaynesh made a payment of 30,000; the
appropriation is first to the cost so the cost is extinguished and the remaining 20,000 is
apportioned to the interest. So, the debt of Belaynesh is principal 100,000 and interest
52,000. The effect is that the interest continues to count on the total 100,000 birr.
Multiple principal Debts (Art. 1753-1754)
 In case of multiple debts, choice is given to the parties and only if they fail to exercise
their right of choice that the legislator chooses the debt to be paid first and the debt that
follows.
 Choice by the parties (Art.1753): - unless the parties agree that choice should be
made by the creditor, the law presumes that the right to choose is for the debtor (Art 1753 (1). This is
in accordance with the principle of interpretation in favor of the debtor.
 However, if the debtor has failed to indicate his choice to the creditor and has not opposed the
appropriation written on the receipt, the debtor is presumed to have given this chance to the creditor.
So, the choice of the creditor binds the debtor (Art. 1753) (2).
 Choice by the law (Art. 1754): - When both the debtor and creditor fail to indicate
the appropriation the law presumes the following appropriation:
A. Debts already due: - Appropriation is to the debt which is most advantageous to the
debtor (Art.1754 (2). For example, the loan of 500,000 which imposes 12% interest rate
and which was due on Jan 2, 2008 and sale price without penalty.
B. Debts due vs. future debts: - Appropriation shall be made to the debt which is
already due (Art. 1754(1).
C. Future debts Vs future debts: - appropriation is to the debt which becomes due
earlier (Art.1754 (1)
D. Future debts having the same due date: - appropriation is to the debt which first
appropriation benefits the debtor most (Art. 1754(2) but if the advantages are equal
payment shall be appropriated proportionally (Art. 1754(3).
4. Where to perform a contract (Place of Performance)

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 Place of performance/payment has an implication on cost of payment, currency for

money debts and territorial jurisdiction of court.
 The civil code, under Art. 1755, provides three alternatives regarding place of
performance; agreed place, residence of the debtor and place where the thing situates.
 According to this provision, the 1st option as to the place of performance is left to the
agreement of the contracting parties. This is pursuant to freedom of contract addressed in
the earlier sections.
 However, if parties to the contract failed to mention the place of performance by them
agreement, as a 2nd option, it is determined by the law (1755(2,3)).
 In this regard, the place of performance for the delivery of fungible things is the place where
the debtor had his normal residence at the time when the contract was made & the place
for the performance of definite thing is the place where such definite thing situates at the
time of conclusion of the contract.
 We have seen that the place of performance for the delivery of fungible things is the place
where the debtor had his normal residence at the time when the contract was made. This
law reflects the principle of interpretation in favor of the debtor (Art. 1738,1). Here, the
law aims at exempting the debtor from transportation cost, inconveniences and waste of
working hours.
 Dear students, where shall be the place of performance in case if the debtor has more than
one residence? In such cases, performance shall be made at the principal residence of
the debtor.
 Coming to the place of performance for a definite thing, we have to notice that there may
be difference between place of conclusion of contract and place where the definite thing
situates at the time of conclusion of contract.
 Moreover, the place where a thing situates at the time of conclusion of contract and at
the time of performance of a contract may be different i.e. the thing might have been
shifted from the place where it was at time of formation of contract.
 Generally, Ethiopian civil code advises the parties to exercise their freedom of contract and
determine place of performance. But if they fail to do so the law imports the old [French]
maxim, “payments are not portable [by the debtor to the creditor] but “fetchable” [by the
creditor from the debtor] i.e. the creditor has to go to either to the place where the definite
thing situates or to the residence of the debtor.
5. When to perform a contract:-Time of Performance
 The last but not least question that should be addressed in the performance of a contract is
time of performance.
 Time of performance is very important to determine transfer of risk, cost of maintenance and
preservation and most importantly to claim compensation for non-performance (see
Art.1779-1783).

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 Time of performance greatly affects the benefit parties expect to derive from the
contract. This is especially true when there is market instability which has become the
feature of modern economy.
 The importance of time also depends on the nature of the contract or obligation of the parties.
 Like in place of performance, in principle, payment shall be made at the agreed time. Art.
1756(1).
 In the absence of contractually agreed time, payment may be made “forthwith” Art. 1756(2).
 But the question is when is “forthwith”? Should it be construed as immediately?
 The general consensus is that the term “forthwith” should not be construed as
immediate performance. This is b/c by their nature, most contracts cannot be
performed immediately. Instead, the creditor is expected to give the debtor a
reasonable time to perform his obligation.
 A creditor never invokes non-performance without giving default notice (Art.1772) and in
his default notice he may fix a reasonable period that enables the debtor to carry out his
obligation (Art.1774).
 Article 1756(3) comes with 3rd type of requiring performance. i.e., whenever a party
requires the other party to perform his obligation though this should not depend on the
whim & will of requiring party but upon fulfilling the standards provided under Art. 1757.
 As per Art. 1757, a party can require another party to perform his obligations
when 2 things are fulfilled. These are:
1. The requiring party should be beneficiary of time limit having regard
to the terms or nature of the contract or
2. He should himself performed or offered to perform obligation on his
side. i.e., to require the other party to perform his/her obligations, one
should either perform his/her obligations or, at least, show his or her
preparedness to perform his obligations.
 But when it is clearly provided that the other party is not performing his obligations or his
insolvency is declared by court, a party can refuse to carry out his obligations. This
phenomenon is known as anticipatory breach of contract and it is provided under
Art.1757(2).
 In conclusion, time of performance is determined either by contract or unilaterally by any
party to the contract and the mere failure to indicate time of performance never
makes the contract incomplete.
Transfer of Risk
 According to Article 1758(1), “the debtor bound to deliver a thing shall bear the risks of loss
of or damage to such thing until delivery is made in accordance with the contract.”
 However, sub-article 2 of the same provision provides that the risk is transferred to the
creditor if he fails to take over the thing.

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 Transfer of risk is dependent on time of performance. However, transfer of risk is an issue

only in contracts that involve transfer of ownership. It is not a common characteristic of all
contracts. The relevant law to discuss transfer of risk is law of sales.
Cost of Payment (Art.1760)
 Costs of payment are those of counting, measuring, weighing, packing etc. Cost of payment
(also) comprises those of the receipt that is in practice the amount of any stamp duty on it, to
be reimbursed by the debtor.
 The unless otherwise agreed clause under Art. 1760 is to mean that when the court is unable
to ascertain a party that should bear the cost of payment by reference to their contract or
custom, equity and good faith as indicated under Art 1713, the debtor should cover such
costs.
Debtor’s Right to Receipt (Art.1761-1762)
 Whenever required, the debtor has a duty to prove that he has properly discharged his
obligation (Art.2001 (2). One means that the debtor can use to prove the performance of the
contract is by obtaining written evidence from the creditor (Art.2002).
 Receipt is, therefore; such written evidence given by the creditor to the debtor. The debtor
has a right to claim receipt and a creditor has an obligation to give receipt.
 As per Art. 1761(1), the debtor can demand receipt for the payment s made, even if it is
partial payment, and if the debt is fully paid, he can demand the delivery or cancellation of
the document supporting the debt.
 Moreover, If the debt is partly performed, such part performance has to be indicated on the
document evidencing the obligation. If the creditor alleges that the document is lost, he has to
give to the debtor another written document that
contains his allegation. Art. 1762
Variations of Contracts
 Another effect of contract is its variation. Variation is making amendments to the provisions
of a contract. Variation of Contract is equivalent to amendment of law.
 As we have addressed earlier, variation of a contract by parties is a contract itself
(Art.1675).
 Here parties to the contract can vary it for whatever reason and at any time.
 However, to vary a given contract, the validity requirements provided under art. 1678 should
be observed.
 Variation normally becomes necessary because of fundamental changes in circumstance
that the parties or the legislator does not want to tolerate. Minor changes may not lead to
variation of Contract.
 It is not only the parties who can vary a given contract; it can also be varied by the legislature
and the judiciary.

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 Since a contract is a law the legislator may vary its contents either by a law issued prior to
the conclusion of such contract or by a law that is issued to modify certain already concluded
contracts.
Judicial Variation of Contract
 Dear students can a court vary a given contract? How do you understand Articles
1733 & 1763? Do you think they contradict or support each other?
 A court may be delegated by the legislature to vary a contract. However, it is not at
all times that the court can vary a given contract; it is when fundamental change in
circumstance affects the object of the contract (Art.1766-1770). These can be taken
as exceptions provided by the law.
 Moreover, court may also vary a contract where there is undue influence or
lesion that never leads to invalidation of the contract.
 But if the defect in consent is a kind of defect that leads to invalidation, the court
cannot vary the contract but only invalidate it.

General, a court of law may modify the following contracts: -

1. Contract between persons having Special Relation, (Art. 1766): -
Here the phrase special relationship must refer to relations that are recognized by the law
such as spouses, relation by consanguinity and affinity, employer-employee, lawyer-client,
doctor-patient and agent principal etc. As it is widely addressed under consent part, a contract
made in the afore listed relations may be varied on the ground of lesion, and undue influence
(reverential fear) i.e. on the ground of defect in consent if such defect is not enough to
invalidate the contract.
2. Contract with public administration, (See Art. 1767)
3. Partial Impossibility of Performance: - on justified grounds such as force
majeure (See Art. 1768)
4. Time of Performance:- This is about the grace period that can be given by the court
taking into account the position of the debtor. (See Art. 1770). This is an exception to Art.
1756.

Chapter IV:
Non-Performance of Contract and Its Consequences
Chapter objectives
 The major objective of this chapter is to enable you identify remedies available for the
creditor in case where there is nonperformance of contracts or in other words to
enable you identify consequences of non-performance of a contract.

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Definition of Non-Performance
 Non-performance (breach of contract) refers to parties’ failure to perform contractual
obligations in conformity with the terms of the contract and the law.

In general non-performance includes: -

 Total non-performance, where a party totally fails to honor the terms of contract or
 Partial non-performance, where a party has performed his/her obligations only partly or
 Delay in performance or
 Offering performance at a place other than the place agreed up on (place fixed by law) or
 Delivering a thing that does not conform to the contract or delivering a defective thing.
Default Notice: Requirement and Exceptions
 Before resorting to the remedies of non-performance (Specific performance, cancellation or
Compensation), the victim party shall put the other party in default by giving him a notice. (See
Art.1772).

 Default notice is demanding the debtor to perform his/her obligation within a certain time
limit
 It has a number of functions including that of reminding the debtor and reducing
litigation. Though contested, it also helps to transfer risks as the date of notice denotes date
of transfer of risks.
 Moreover, default notice is an indispensable proof of the intention of non-performing party
because it helps the performing party to solicit the real intention of the party to be put in
default.
 Nevertheless, before giving a default notice to the non performing party, questions like when
to give notice, in what form and how much time should be given to the defaulting party to
perform his obligations should be addressed
 These questions are addressed under Articles 1773 & 1774. Art. 1773(2) answers the
question when to give notice. Accordingly, notice should be given only after the obligation
is due.
 On its part, Art. 1773(1)) answers the question in what form notice should be given? As
per this article, there is no formal requirement for default notice & it may be given in any
form: in writing, orally or clear conduct. What is crucial is an unambiguous, clear
communication/expression of the creditor’s intention to obtain performance of contract.
 In general, the law of notice does not force us to follow one or another form; however, issues
of proof oblige us to give a notice which later on can be adduced without difficulty.

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 The last question that should be addressed before giving a default notice is the time that
should be given to the defaulting party to perform his obligations. Article 1774 addresses
this question. As per Art. 1774(1) “The creditor may in the notice fix a period of time after
the expiry of which he will not accept performance of the contract.”
 As per this sub-article, creditors have the right to fix a period of time within which
they expect performance of the Obligation. Under such notice, the creditor will clearly show
his intention not to accept performance after the lapse of the stipulated time.
 The other question, in this regard, is how much time should be given by the creditor to the
debtor to perform his obligations within fixed time? Even if the law does not fix such
period, the creditor is expected to give a reasonable time having regard to the nature and
circumstances of the case.
 Thus, nature and circumstances of the case are the criteria to determine whether the time
fixed in the default notice is reasonable or not.
 However, there are exceptional circumstances to the rule of default notice where the
creditor can resort to the remedies of non-performance without giving default notice to his
debtor. These circumstances are provided under Article 1775 where the law rules out the
importance of giving notice in four circumstances. They are: -
 If the obligation is to refrain from doing something;
 if the obligations assumed are those to be carried out within fixed period of time and
when
 they are not carried out within this fixed period of time;
 If the debtor clearly shows in writing his/her intention not to perform his obligation or
 When the parties have an agreement not to give notice.
 In the 1st case, i.e. when the obligation is to refrain from doing something (obligation not to
do or negative obligation), non-performance results from the debtor’s doing of the
prohibited act. Since, the non-performance cannot be reversed /rectified by notice, the
giving of default notice serves no purpose, and thus becomes useless/unnecessary.
 In the 2nd case, i.e. when obligations should be carried out within fixed period of time but
not observed, the nature of the obligation is a determining factor. It may be inferred from the
contract that any performance after the expiry of the time fixed is useless for the creditor.
E.g. X ordered cakes and drinks for the celebration of his birthday but Y, the debtor, fails to
perform his obligation within the time fixed. Here X need not give default notice to Y simply
because performance is no more necessary after the birth date. He may invoke the remedies
of non-performance without giving default notice.
 In the 3rd case, i.e., when the debtor clearly shows in writing his/her intention not to perform
his obligation notice should not be given. The debtor’s refusal to perform his obligation in
writing, also known as anticipatory breach, relieves the creditor of his obligations to give
default notice.
 However, it is only when the refusal is communicated in writing that the creditor be relieved
of the pre-requisite of default notice.

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 The last case indicated in sub (d) of Art. 1775 is when the parties have in their contract
(agreement) excluded the giving of default notice. This is a recognition and implementation of
freedom of contract; the parties are free to disregard/exclude the provisions of article 1772,
thereby non-performing party is in default as of the expiry of the time fixed for performance
without need for the creditor to give a default notice. Thus, the creditor may invoke the remedies
of non-performance immediately.

Consequences of Non-Performance
 Consequences of non-performance of obligation by the debtor or otherwise
remedies available for the creditor because of non-performance of an
obligation by the debtor are: -
1. Forced (Specific) Performance;
2. Substituted performance;
3. Cancellation and
4. Compensation (Damages)

 As addressed in the opening, save for the cases under Art.1775 where the creditor may
directly resort to the remedies of non-performance without giving the default notice, as of a
rule or in all other cases, he should give default notice to the debtor before resorting to these
remedies.
 But if the debtor still fails to perform his/her obligation/s even after default notice, the
creditor can resort to one or more of the remedies provided hereinabove.
1. Forced (Specific) Performance
 One of the effects/consequences of non-performance of a contract by the debtor is
forced/specific performance which implies the physical compulsion of the debtor to
discharge his/her obligation.
 refers to performance directly imposed on the debtor through the execution process. Thus, it
takes place through court order/judgment.
 Nevertheless, specific performance can be ordered only if it meets the two cumulative criteria
provided under Article 1776 of the CC,
 which is especial interest to the requiring party and
 without affecting the personal liberty of the debtor.
 Pursuant to this Art, the first thing that the court shall determine is whether performance is
‘of special interest to the creditor’. The presence of special interest can be inferred from
the importance of the obligation required to be discharged towards the creditor and its
possibility of being discharged otherwise. If forced performance has no special advantage
to the creditor, then the court may not order it.
E.g. special interest to the creditor(consumer) exists with supply of vital goods like water.
Where water supplying gov.t entity cuts off the supply, a court forces it to supply the same
because it is of special interest to the creditor i. e. Life is unthinkable without water.
However, physical coercion is contested here.

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 The other important thing that the court shall determine is whether performance affects the
personal liberty of the debtor. In short, if specific/forced performance affects the personal
liberty of the debtor, the court shall not order it.
 Contracts should affect only the proprietary interest of parties not their liberty. A person
cannot be deprived of his liberty for failure to discharge his contractual obligations.
 The jurisprudence behind prohibiting forced performance emphasizes that since contracts are
not servitudes/slavery, they should not go to the extent of subjugating the personal liberty of
the debtor.
 There is freedom of contract subject to the requirements of law and morality but there is no
slavery in the contract under the guise of freedom of contract or non-performance.
 Forced performance cannot be employed as an instance of self-help; it takes place through
court order/ judgment.
2. Substituted performance
 Another remedy for the creditor because of non-performance by the debtor is substituted
performance, performance by the creditor himself or by the person authorized by the creditor.
 Substituted performance is made at the expense and cost of the debtor. The cost may
include the increased cost due to non-performance.
 Court authorization is, however, indispensable for substituted performance because without
such authorization the creditor cannot recover the costs and expenses from the debtor.
 The rules concerning substituted performance are provided under Arts. 1777& 1778. They
are similar with the rules of law of sales provided under Arts. 2330 & 2333.
 Article 1777(1) addresses substituted performance during non-performance of obligation to
do. As per this Art. the creditor may be authorized to do or to cause to be done at the debtor's
expense the acts which the debtor assumed to do.
E.g. If Ato Belay, the debtor, fails to dig a well, Ato Abel, the creditor can dig the well
himself or have dug the well by any one at Ato Belay's expense up on court authorization.
 On the other hand, Article 1777(2) addresses substituted performance during non-
performance of obligation not to do (obligation to refrain from doing she). The provision
reads “The creditor may be authorized to destroy or to 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.”
E, g. If “A”'s obligation was to refrain from erecting a building and fail to do so by erecting a
building, “B”, the creditor, can have the building destroyed or destroy himself.
 Article 1778 also deals with substituted performance in respect of obligation to deliver
fungible things. It reads: Where fungible things are due, the creditor may be authorized by
the court to buy at the debtor’s expense the things which the debtor assumed to deliver.
E.g. If Mr. A fail to perform his obligation of delivering 500 quintals of coffee in due time,
the creditor may buy the agreed amount of coffee from the market upon court authorization.

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 The provisions of Articles 1779-83 also are aspects of substituted performance but they
apply in different circumstances; when the debtor is ready to perform but unable to
discharge his obligation either because the creditor refuse to accept performance or the
creditor is unknown or uncertain or where delivery cannot be made for any reason personal
to the creditor.
 In all these situations, the debtor has no fault; ready to perform but prevented from
performing. Thus, the law allows him to discharge his obligations by depositing the thing or
money at such place as instructed by the court. This will relieve the debtor from his
obligations. However, the deposit shall be made upon court order and the debtor shall obtain
a court confirmation as to the validity of the deposit.
3. Cancellation
 One of the effects/consequences of non-performance of a contract by the debtor is
cancellation. In other words, it is another remedy for the creditor because of non-
performance of the obligation by the debtor.
 A creditor may opt for the cancellation of the contract where the above discussed two
remedies are unavailable or for any other reasons.

 Cancellation ends an already existing contract. Cancellation may take two

forms-
i. Judicial cancellation, which is a rule (Art.1784 & 1785) &
ii. Unilateral cancellation (Art.1786 & 1789) which is an exception to the rule.
i. judicial cancellation
 In principle, cancellation of a contract takes place through court action, i.e., the party who
claims cancellation as a remedy of non-performance shall bring an action to that effect.
 The court decides, after hearing the parties, upon the request for cancellation submitted by
the aggrieved party. But it does not mean that the court automatically cancels the contract
upon the mere request of the aggrieved party. See Art. 1784, which reads: A party may
move the court to cancel the contract where the other party has not or not fully and
adequately performed his obligations within the agreed period of time
 The term ‘may’ in the above provision indicates that the court may or may not decide in
favor of the party requesting cancellation; instead, it should take into account the conditions
provided under Article1785 of the CC. As per this Article, good faith should guide the court
in deciding on cancellation.
 let us analyze sub-Article 1 of Art. 1785 which reads: - In making its decision, the court
shall have regard to the interests of [both] parties and the requirements of good faith. As
per this provision, the court should consider both the interest of the creditor and of the
debtor. E.g. if the creditors interest is only slightly affected by the debtor’s incomplete
performance while the debtor’s interest would be gravely affected by a cancellation of the
contract, or
vice versa, such factor should be taken into account.

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 Both Sub-articles 2 &3 of the same provision addresses fundamental breach of a contract
which means that non-performance of a contract is total and irreversible. In such case,
cancellation must be granted irrespective of sub article 1 which addresses interest of the
parties and the requirement of good faith.
 The breach is fundamental were, because of its importance in relation to the whole contract,
it can be reasonably assumed that the claimant would not have concluded the contract had
he foreseen such breach.
 The burden of proving that the breach is fundamental rests on the party who requires such
cancellation. As discussed right now, minor deviations from the terms of the contract
(whether in quantity or quality or delay etc.) may not be sufficient to cancel it. We may
reiterate Art. 1748 (1) which reads that: the creditor may not refuse fungible things on the
ground that the quantity or quality offered to him does not exactly conform to the
contract,
unless this is essential to him or has been expressly agreed.
 But the refusal of the court to grant the cancellation does not affect the aggrieved
party’s right to compensation.
ii. Unilateral cancellation (Art.1786-1789 )
 Unilateral cancellation connotes cancellation of a contract by one party without going to
the court of law.
 It is an exception to judicial cancellation of a contract. There are policy reasons for the
introduction of these exceptions such as the rapidity of modern business, which requires
quick solution and the need to avoid work load of courts of law.
 As addressed under Articles 1786-1789, there are four circumstances under which a
party can unilaterally cancel a contract without going to the court of law. These are: -
i. Where there is a cancellation clause in the contract;
ii. Where the debtor has failed to honor certain time limits;
iii. Where performance becomes impossible and
iv. The case of anticipatory breach of contract
 Now let us analyze the circumstances one by one.
 The first case, as indicated under Article 1786, is where there is a cancellation clause in the
contract. Article 1786 reads as: A party may cancel the contract where a provision to this
effect has been made in the contract and the conditions for enforcing such provision are
present.
 This provision is a reaffirmation of freedom of contract which enables parties to incorporate
a cancellation clause in their contract.
 The second case as indicated under Article 1787, is where the debtor has failed to honor
certain time limits. According to this Article: A party may cancel the contract where the other
party has failed to perform his oblations within the period fixed in accordance with Art.
1770 [i.e. period of grace], 1774 [i.e. period fixed in the default notice], or 1775 (b)
[obligations that are such that they must be performed within the time fixed].

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 In legal parlance, such periods are called compulsory periods.

 The third case as indicated under Article 1788, is where performance becomes impossible.
The Article reads as: - A party may cancel the contract even before the obligation of the other
party is due where the performance by the other party of his obligations has become
impossible or is hindered so that the essence of the contract is affected.
 This provision envisages situation where performance was possible at the time of the making
of the contract but which becomes impossible afterwards. This is usually referred to as
intervening impossibility. Here, the material fact for the cancellation of a validly formed
contract occurs after the conclusion of the contract.
E.g “X” agrees to deliver his bracelet to “Y”. Unfortunately, “X” lost it before he delivers
to “Y”. In this case, because performance is impossible, “Y” can unilaterally cancel the
contract. “Y” can do this
 The last case where unilateral cancellation can be invoked is the case of anticipatory
breach of contract. Anticipatory breach of contract is when party to the contract refuses to
perform his obligation. Read Art. 1789 of the CC carefully.
 As per sub – Article 1 of this provision, when one of the parties expressly communicates his
refusal to perform, the other party may unilaterally cancel the contract if he chooses.
 But the question that may be posed under sub- Article 2 is that why the party who intends to
cancel the contract shall place the other party in default even if the defaulting party
expressly communicated his refusal to perform his obligation?
 Sub- Article 3 answers this question. As per this sub- Article, it is only where the defaulting
party communicates his refusal orally that the other party may place him in default. However,
if the refusal is communicated in writing, there is no need of default notice and the other
party can immediately cancel the contract unilaterally.
 Under sub- Article 2, the party who orally communicated his refusal may prevent the
cancellation of the contract by furnishing, within fifteen days, sufficient security to
guarantee that he will perform his obligations at the agreed time. The furnishing of the
sufficient security within fifteen days is an indication of change of mind.
 Dear students do you think change of mind benefits a party who has communicated his
express refusal in writing? The law is clear enough here, it is only a party who has refused
orally who can benefit from the change of his mind.
 Even if this point is covered under chapter 7, the last but important point that should be
raised in relation to cancellation of a contract is its effect. The teaching material wrongly
states that the effect of cancellation is reinstating parties to the position which would have
existed, had the contract not been made. As we shall see in chapter 7, however, the effect of
cancellation is putting the parties in the position had the contract been performed, not had the
contract not been made.
4. Damages /Compensation (Art. 1771 (2) & 1790-1805)

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 Damages/Compensation is another remedy for a party affected by non-performance. The

cumulative reading of Articles 1771 (2) and 1790 shows that under Ethiopian law damages
can be claimed as an additional or alternative remedy.
 Dear students what do you think is the purpose of compensation?
 The purpose of compensation for non-performance is to put the victim party in a
position he would have been had the contract been performed.
 According to Article 1790(1) of the CC, a party is entitled to compensation only if he /she
has incurred loss or damage as a result of non-performance. The central notion here is no
loss, no compensation.
 Dear students, do you think absence of fault is a defense against the claim of
compensation for non-performance?
 Article 1791(1) answers this question. It reads: - “the party who fails to perform his
obligations shall be liable to pay damages notwithstanding that he is not at fault”. As
per this sub- Article (In principle), absence of fault is not a defense against the claim of
compensation for non-performance.
 However, Article 1791(1) should be read in conjunction with Article 1790 i.e. a party who is
not at fault may pay compensation for non-performance only if the creditor incurs
loss/damage because of such non-performance.
 Drear students, do you think there are defenses for the party required to pay compensation?
 The answer is positive; There are two defenses for the debtor against the claim of
compensation by the creditor. The first defense is the absence of fault. Even if we said that
in principle absence of fault is not a defense against the claim of compensation for non-
performance, under Articles 1795& 1796 of the CC, there are certain exceptions to this
general rule.
 As per these exceptional provisions, the plaintiff has to prove fault or grave fault on the part
of the debtor so as to succeed in claiming compensation.
 The 2nd defense for the debtor is force majeure. Art.1791(2) states that “[the debtor] shall
not be released unless he can show that performance was prevented by force majeure”.
Theacontrario reading of this provision suggests that the debtor is released of payment
of compensation if he can show that performance was prevented by force majeure.

 It is also important to look at: -

 Article 1792 which provides the criteria for determining what constitutes force majeure;
 Article 1793 which provides list of specific cases that constitute force majeure &
 Article 1794 which provides list of specific cases that do not constitute force majeure.
 Nevertheless, pursuant to Article 1798 of the CC, force majeure is not defense if it happened
after the debtor had been already placed in default.

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 Once, the liability of the debtor for damage is determined, the next question is to assess the
amount of compensation (damages) to be paid to the creditor. Compensation is assessed
according to the rules of Articles 1799-1805.
 The basic principle in assessing compensation is that compensation shall be equal to the
damage/loss which non- performance would normally cause to the creditor in the eyes of a
reasonable person (Art.1799 (1)) i.e., damage=damages. Thus, we have objective criteria
for assessing damage.

NB: - in case of money debts, a creditor is entitled to compensation at the rate fixed under
1803 & 1804 without the need to prove the extent of loss/damage he has sustained as a result of
non-performance. However, the creditor may claim more compensation if the compensation to
be assessed according to 1803 & 1804 are not adequate for the greater damage/loss he has
sustained (see Article 1805)

Chapter V:
Special provisions relating to contracts
Chapter Objectives
 At the end of this chapter, you will be able to:
 Explain time provisions;
 Discuss conditional contract and their types;
 Explain alternative obligations;
 Define earnest and its effect;
 Discuss contractual provisions as to liability
Introduction
 Special provisions relating to contracts are those provisions which help as gap fillers i.e. they
help to fill those gaps left by parties to the contract.
 The most frequent areas where the parties do leave gaps or agree less clearly
are stipulation as to: -
 time,
 earnest,
 liability (penalty clause),
 alternative obligations and
 Conditional Contractual Obligations.
1. Provision as to time

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 Parties to the contract may more probably provide the time of performance within certain
period of time without specifically stating the time. They may also provide the time in
certain number of days, weeks, months, or ambiguously on first, last, or middle of a month.
 The presence of different days in months in Gregorian calendar and the presence of
thirteen months in Ethiopian calendar coupled with the presence of holidays in between
the stipulated time might continually and unexpectedly create gap as to time.
 Provisions as to time generally deals with the time at which performance is due in order that
the debtor can be clear as to exactly when to perform his obligation.
 Article 1858 addresses time fixed in days. According to this provision Where the period is
fixed in days, the debt shall be due on the last day of such period, the day of the making of
the contract not being included.
 For instance, if a contract made on Hider 23/03/09 stipulates that performance should
be within 7 days from the date of formation of the contract, the last date for the
performance of the contract is on Hider 30/03/09 excluding the reference time Hider
23/03/09. It is counted within 24, 25, 26, 27, 28, 29 ,30 (7 days excluding the date of
formation).
 Article 1859 reveal the calculation of the period fixed in weeks. As per this Article, Where
the period is fixed in weeks, the debt shall be due on such day of the last week as corresponds
by its name to the day of the making of the contract.
 To illustrate, assume Samson concluded a contract to perform his obligation on Monday Sene
1/3/1998. He agreed to perform his obligation after three weeks from the making of the
contract. The due date is then Monday 22/1998.
 Here, Monday in the time of formation of the contract should correspond to Monday in the
time when performance shall be made.
 Article 1860 reveal the calculation of the period fixed in months.
 As per sub-article 1 of Article 1860, Where the period is fixed in months or so as to include
several months, the debt shall be due on such day of the last month as corresponds by its
number to the day of the making of the contract.
 As per this sub-article, the last date to perform an obligation is the day of the last month
which corresponds the day of the making of the contract in number, not in name.
 For example, the last date for someone, who entered into contract on Hider 23, 2009
promising to perform his obligation within three months, is Yekatit 23, 2009.
 Here, Sameness shall be in date not in name. If the date in the formation of the contract is 23
and the date of performance shall also be 23. Sometimes certain dates of a month in
Gregorian calendar might not have corresponding number in other months.
 In such cases, the absence of corresponding number might create uncertainty whether it will
be transferred to the next month or it will be the last day of the month, which does not have a
corresponding number.

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 In filling such gaps, Sub Article (2) of Article 1860, stipulates the due date to be the last day
of the last month. Read the whole sub article
 for instance, the due date of someone who concludes a contract on October 31 to
perform his obligation in four months is February 29. Normally the corresponding
number shall be 31. But there is no such number in February. This is because
February does not have the date 31. Its last date is 29.
Accordingly, the due date is February 29.
 Coming to Ethiopian Calendar, there could be a gap because of its 13th month, Phagume.
This is because, as the thirteenth month has five or six days, the probability of not getting
corresponding date is more probable.
 Hence, Phagume is not taken into account in monthly calculation of time and a contract
concluded on any day of Phagume is considered that it has been made on Meskerem 1 in
the Ethiopian calendar.
 Sometimes, contracts may stipulate time provisions with less clarity using indistinct and
puzzling expressions like, at the beginning, in the middle or at the end of a certain month.
 Article 1861 is designed to fill such gaps. As per Article 1861(1), Where the period expires
at the beginning or at the end of a month, such period shall expire on the first or on the last
day of such month.
 As per Article 1861(2), Where the period expires in the middle of a month such period shall
expire on the fifteenth of such month.
 The law also wants to fill gaps which might be created because of holidays. According to
Article 1862, Where the period expires on a day which is holiday at the place of payment,
such period shall expire on the next working day.
 But the law is not clear as regards the type of holiday; is it only national holiday? Or limited
to Saturday and Sunday? Or Religious or customary holiday? The writers believe that the
holiday should not necessarily limited to national holiday.
 There are also some provisions addressing other time related issues from Article 1863-1868
which should be read by yourselves
2. Conditional Contractual Obligations
 Providing a condition upon the fulfillment of which the effect of contract depends is one way
by which parties to the contract exercise their freedom of contract.
 It is one way by which parties may determine the fate of their agreement.
 Contracting parties can make their contract conditional as a whole or partially (one of its
terms).
 The rule (principle) of conditional contractual obligations is stipulated under Article 1869
of the CC which reads as: “A contract shall be deemed to be conditional where it relates to
an obligation whose existence [or non-existence] depends on the occurrence or non-
occurrence of uncertain event.”

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 Condition determines the effect of contract in two ways. It either makes the contract effective
upon its fulfillment or ends the effect of contract.
 While a condition which makes the contract effective upon its fulfillment is called
A. Condition precedent or
B. suspensive condition the one which ends the effect of contract is called
 condition Subsequent or
 resolutive condition.
A.Condition precedent (suspensive) condition
 As we discussed it right now, a precedent (suspensive)condition is a condition of uncertain
event upon the happening or fulfillment of which a contract subject to it becomes effective.
 In short it is a condition which keeps the contract in suspense until its fulfillment. Contract
is effective only upon the fulfillment of a condition.
 Now look at Article 1871 which states that: - “Unless otherwise agreed, the contract shall
be effective as from the day when the condition is fulfilled”.
 This provision provides a presumption in favor of condition precedent in the absence of
agreement otherwise.
 For instance, Getachew concluded a contract with Alemu that he is going to sell his car
if he wins foreign scholarship. In the case at hand, the contract of sale of car will have
effect only if Getachew wins foreign scholarship.
B. Condition Subsequent (Resolutive condition)
 Is a condition of an uncertain event upon the fulfillment of which the contract subject to it
ceases to exist(terminated). This condition is direct opposite of a precedent condition.
 In this type of condition, the effect of the contract starts immediately after the formation
of the contract but the contract ceases to exist (terminated) upon the occurrence of the
event.
 Now look at Article 1872 which addresses this type of condition.
1. A contract whose cancellation (termination) depends on the occurrence of an uncertain
event shall be effective forthwith.
2. It shall cease to be effective where the event occurs.
E.g. Chala concluded contract of house rent with Abdi on the condition that he lives in the
house until Abdi gets married.
 Even if the effect of the condition subsequent is termination of the contract up on its
fulfillment an uncertain event, it is not followed by compensation since the termination is
because of the agreement (Contract) of the parties.
 Another point worth mentioning as regards Condition Subsequent (Resolutive condition) is
that during the agreement, parties to the contract should expressly agree that the condition is
Condition Subsequent (Resolutive condition) for otherwise the law presumes the condition to
be condition precedent. Art. 1871.

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Good faith in conditional contractual obligations

 Dear students, what do you think if one of the parties to the contract prevents the fulfillment
of certain event in a bad faith?
 Article 1870 has an answer for this question. It reads as: - A party may regard a condition as
fulfilled where the other party has prevented its fulfillment in a manner contrary to good
faith.
 Even though the condition is not fulfilled, if its fulfillment is hindered by one of the parties
and his act of hindrance emanates from bad faith, the condition can be presumed to have
been fulfilled. Then the party may require the right he would have done so had the condition
been fulfilled.
 Let us see an example provided by the writers. assume that Ato Abebe entered into a contract
with Senait to sell his house if he is employed. Later, if Ato Abebe refuses the employment
having got the chance, Senait can require performance of the contract proving that he did it in
bad faith.
 Article 1870 is equally applicable to condition subsequent (Resolutive condition too).
 In the earlier example, i.e. in the contract of house rent concluded between Chala and Abdi
on the condition that Chala lives in the house until Abdi gets married if Chala prevents the
marriage of Abdi by whatever way to stay in the house, the law presumes that the condition is
fulfilled i.e. Abdi got married so that Chala should search for another house to rent.
 Article 1873 lacks clarity even if it seems redundant in the presence of Article 1870.
Acts of management with regard to the object of the contract subject
to condition
 It does not mean, however, that the parties are absolutely excluded from any act with regard
to the object of the contract subject to condition.
 Strict restriction not to do anything on the object of the contract not only renders it
unproductive but also denies the holder the right to take necessary measures to protect
damage and depreciation and administer the thing.
 In line with Article 1874 of the CC, despite certain restrictions, the holder may exercise
certain acts on the object of the contract subject to condition.
 According to Article 1874, Acts of management done prior who exercises the right shall
remain valid where the condition is fulfilled. Damage may be claimed where such acts were
done in bad faith.
 Acts of management are provided under Articles 2204 which include Lease for term less
than three years, the collection of debits, investment of income, discharge of debts, are acts of
management.
 These two provisions are not exhaustive lists which exclude other acts. Other acts may also
be included by analogical interpretation now that these lists are illustrative lists.

Acts beyond management with regard to the object of the contract subject to
condition (Art.1875)

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 Acts beyond management are those acts made to affect the interest of the party for whom
performance will be made. They are acts made in bad faith and are subjected to
invalidation.
 Acts beyond management are provided under Article 2205 and includes alienating or
mortgaging real-estate, investing capitals, signing a bill of exchange, effecting a settlement,
giving consent to arbitration, making donations or bringing or defending an action are acts
beyond management
 However, the invalidation of acts beyond management should not prejudice the rights of 3rd
parties who have dealing with the actual holder.
 The law protects the interests of 3rd parties too. Art.1875(2).
 Another point worth mentioning as related to Conditional contractual obligations is about
 Unlawful,
 immoral or
 impossible conditions.
 In this regard, Unlawful, immoral or impossible conditions are regulated by applying
provisions relating to the impossible, unlawful or immoral object of a contract, starting
Art.1715-1716.
 Class Discussion: - Discuss in groups what it means by Unlawful, immoral or impossible
condition by giving examples to each kind of conditions.
3. Alternative Obligations
 Another manifestation of parties’ freedom of contract is their agreement for alternative
obligations.
 Alternative obligation happens in a contract when the debtor is to discharge one among
different obligations.
 For instance, if Abeje, who is an engineer, borrowed 2,000,000 Birr from Merkebu and their
agreement provides that Abeje performs the obligation either by paying back the money in
cash or building a house for merkebu, Abeje has the right to choose which one to perform.
 According to Article 1880, the debtor is released by performing either of the obligations
provided in the contract. In the above example, Abeje is released by either paying the
money in cash or building a house which can be built by 2,000,000 Birr.
 Dear students! Who, do you think, has a right to choose the obligation to be carried out
among the agreed alternatives? Article 1881 has an answer to this question.
 Dear students! What do you think is the fate of performance if one of the obligations
becomes impossible? Article 1882 has an answer to this question
 As per sub-article 1 of Article 1882, if one of the obligations becomes impossible, the debtor
shall discharge the other obligation.
 On the other hand, As per sub-article 2 of the same article, if the impossibility is owing to
fault of the party that is not entitled to choose, damage is required to be paid to the party that
is entitled to choose.

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4. Earnest
 is an old and frequent practice which is considered to be testament for the conclusion of a
contract.
 As per Article 1883 of CC, the giving of earnest is the proof of the making of the contract.
 There are, however, different positions as to whether earnest entitles a party the right to
terminate a contract unilaterally.
 When we see the position held by the Ethiopian law, termination of promise guaranteed by
earnest unilaterally is possible upon certain limitations.
 As per Article 1885(1), unless otherwise agreed the party who has given earnest may
cancel the contract subject to forfeiture of the earnest given by him.
 As per Article 1885(2), unless otherwise agreed, the party who has received earnest may
cancel the contract subject to repayment of double of the amount received by him.
 As it can be easily inferred from the provision, a contract secured by earnest can be
cancelled unilaterally by either party. However, as it can be seen from the sub provisions,
the effect is not the same for both parties Unless otherwise agreed .

 Dear students, what do you think happens to earnest if the contract is

performed? Article 1884 has an answer and stipulates:- Unless otherwise
agreed the party who has received earnest shall return it or deduct it from
his claim where the contract is performed.
 But what is controversial regarding earnest is the issue of compensation upon
nonperformance of the contract. Do you think it is possible to claim compensation? If yes, in
what amount, i.e. can one who has given earnest claim more than double of what he has
given as earnest if he can establish damage in this effect? What about the one who received
earnest in the same situation?

5. Penalty Clauses/ Provisions as to liability

 The Ethiopian law of contract has provided remedies of non-performance as a gap
filling ones. Nevertheless, freedom of the parties to the contract to set aside such
gap filling provisions and provide their own is permitted.
 The parties can either extend or limit their liability subject to the legal limitation of
unconscionable contract.
 As per article 1886 of the CC, the parties can agree to extend their liability even in
the presence of force majeure.
 Contrary to this, they may also agree that one of them held liable only upon
committing a fault. Article 1887.
 Determining penalty by the parties to the contract helps to encourage performance
of the contract or in other words it discourages nonperformance.
 Parties to the contract can fix penalty clause either in the main contract or in a
separate document.
 However, freedom to fix the amount of damage (penalty) might on the other hand
create unconscionable contract (Lesion) which is subjected to invalidation.
 Article 1710 shall, consequently, be applied to limit the extent of the amount of
damage at the time of non- performance of contract.

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 If the penalty is terribly maximum and backed up by condition that renders the party
in unequal bargaining power, it is subjected to invalidation on the account of
unconscionable contract pursuant to Article 1710(2) or to rectification pursuant to
Article 1812.
 Dear students, what do you think is the fate of penalty clause in case if the
contract in which it is prescribed is invalidated?
 On the other hand, what do you think is the fate of the contract if the penalty
clause is invalidated?
 Article 1894 has a clear answer to these questions. As per this provision:-
1. A penalty shall be of no effect where the contract in which it is
prescribed is invalidated
2. A contract shall remain in force notwithstanding that the penalty is not
valid.
 The validity of a penalty clause can be affected by the validity of the main contract.
Not Vice Versa.
 Another important point regarding penalty clauses is that the aim of inserting
penalty clauses in a contract is not to give an option to the contracting party
either to perform or pay penalty, rather it is to discourage nonperformance.
 In other words, penalty clause should not be equated with earnest which gives option
to the parties either to perform or cancel the contract upon paying the amount of
earnest provided by the law or the agreed amount of earnest.
 Dear students…! Do you think a creditor can require both performance and
penalty from the debtor?
 Look at Article 1890 which reads:-
1. Unless otherwise agreed, the creditor may require the performance of a contract
which includes a penalty.
2. He may not require both the enforcement of the contract and the penalty unless
the penalty was provided in respect of delay or the non-performance of collateral
obligations.
 Dear students…! Do you see any problem between sub-article 1 and 2? Do
you think they are contradicting each other or one is principle and the other
exception?
 As to my position, sub-article 2 is more feasible compared to sub-article 1
 Dear students…! Look at also Articles 1891 vs 1892(1)! Are they exception
to one another or contradicting each other?
 How can we apply Article 1892(1) in the absence of agreement? Do you
think it possible to claim compensation in addition to penalty? Article
1892(2)?
 Another point worth mentioning is variation of penalty provided under Article 1893
which reads: - The agreed amount of penalty due for non-performance may not be
reduced by the court unless partial performance has taken place.
 As per this article, the court can vary (reduce) the penalty clause if there is partial
performance. This seems to be justified on account of securing justice…; ordering the
whole penalty while there is partial performance is actually unfair which begs
correction.

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 Contrary to what is addressed under chapter 4, (the part addressing non-

performance of a contract) where there is contractual liability in the absence
of fault, here, the parties may agree that they would be liable only where they
commit a fault. See Article 1887 in this regard.
 Parties to a contract cannot, however, exclude liability of non-performance
because of fault as it encourages deliberate breach of contract.
 There is, however, an exception to Article 1887 under Article 1888
 Article 1888 (2):- The effect of such limitation of liability should be only on the
contracting parties.
Chapter 6:
Plurality of Debtors or Creditors
Chapter Objectives
 At the end of this chapter, students will able to:
 Define joint and several liability or solidary obligations;
 Explain the effect of joint and several liabilities among co-debtors;
 Discuss the relationship of co-debtors with the creditor;
 Discuss the relationship of co-debtors among themselves;
 Define joint obligations in the case of plurality of creditors;
 Explain the effect of joint creditorship;
 Discuss the relationship of the joint creditors inter se;
 Distinguish indivisible and divisible obligations and explain their effects.
Introduction
 So far, we were addressing contracts which involve only single debtor and single creditor.
Law of contract also addresses contracts which involve several creditors and debtors.
 The concept of plurality of debtors or creditors is treated as solidary obligations in the civil
law and as joint and several obligations in the common law.
 The Civil law concept of solidary obligation and the common law concept of joint and
several obligations have a common feature, i.e., the contract binds all obligors jointly as well
as severally for the performance of the total obligation.
 Actually each party contracts a several promise to discharge the total obligation in addition to
contracting a joint promise with the other.
Joint and several liabilities in case of plurality of debtors under the
Ethiopian law
 As we have addressed in the introduction part, an obligation is said to be joint and several
among the debtors when each debtor is considered in his relation with the creditor as debtor
of the entire performance (as if he were the only debtor) or where both debtors are jointly
liable for the whole debt.
 In other words, each solidary debtor or both solidary debtors, in so far as the creditor or
creditors are concerned, is/are the debtor (s) of the entire amount individually (severally) or
jointly.

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 Thus, each debtor is held liable until the obligation is fully discharged.
 The principles of solidary obligation are provided under Articles 1896 & 1897 of the Civil
Code.
 As per Article 1896, unless otherwise agreed or provided by law, co-debtors shall be jointly
and severally liable. This implies that failing an express provision to the contrary, the very
fact that there are two or more debtors makes them jointly and severally compelled to
perform the obligation.
 Unlike the foreign legislation such as French and German which favors debtors, the
Ethiopian Civil Code is in favor of creditors regarding the point at hand.
 In joint and several liability of debtors, the creditor does not have to divide his actions
between the joint debtors: he has a right to simply select the one most likely to be able to pay
in full and lets him later take the risk of getting refunded from his co-debtors per Article
1908.

The effect of joint and several obligations on the relations between creditor(s)
and co-debtors
 All the effects, among debtors, derive from the principle that each of the co-debtors, taken
separately, is bound towards the creditor so completely and absolutely as if he was the only
debtor.
 Since the co-debtors are bound one for the others and each for all, for the entire debt, they
must be considered in their collective relations with the creditor as representing each other.
This representation benefits both the creditor and the co debtors.
 In addition to those effects addressed so far, joint & several liability of debtors
produces the following effects too:-
A. Effect on Resjudicata
 Resjudicata is a ppl which prohibits a plaintiff from bringing a court action for a
second time against the defendant on the case finally decided. See Art. 5 of CPC.
 Coming to resjudicata in cases of joint and several liabilities, it does not work. As per
Article 1898 of the CC, Proceedings instituted against one of the debtors shall be
no bar to similar proceedings being instituted against the other debtors.
 The acontrario reading of Article 1898 implies that, the creditor who has
instituted a court action against one joint debtor is prohibited from proceeding
against the same person. This is implied from the phrase "other debtors".
B. Effect on Default notice
 As we know, a creditor who has a right to demand performance from co-debtors is
required to put the debtors in default to claim rights arising from the non-performance
of the debtors unless it is unnecessary according to Article 1775 of the Civil Code.
 A notice given to one is deemed given to all, and interrupts limitation (see Article
1899 of the Civil Code).
 Thus, the notice sent to one transfers risks for all debtors.
C. Effect On void and voidable contracts
 Do you remember what void and voidable contract is from our previous sessions?
 Where the contract is void, any of the co-debtors can raise this defense against the
creditor(s). This defense is common defense available to all.
 For instance, if the object of the contract is unlawful, immoral or the
contract doesn't fulfill the prescribed formality requirement, any co-debtor
can raise such defense.

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 In addition to this, payment and limitation of actions are other common defenses that
are available to all the co-debtors. Article 1901
 On the other hand, where the contract is voidable this may not be raised by all the co-
debtors. It is only a debtor who has the right to invoke invalidation of such contract that
may raise it as a defense. Accordingly, the defense is said to be a personal one.
 For instance, if the contract suffers from defect in consent or in capacity by
one of the co-debtors, it is only this co-debtor, who is mistaken, deceived,
compelled, or incapable, that can raise this defense.
 Effect of joint and several liabilities on void and voidable contracts is provided under
Article 1900. In this regard sub-Article one seems to refer to void contracts while the
second sub Article relates to contracts which are voidable .
D. Effects on remission of debt
 Remission is cancellation of debt by the creditor in favor of a debtor.
 As per Article 1902(1) where the creditor remits the debt to one of the co-debtors, then all
the co-debtors will benefit from such remission. I.e. all of them become free from the
obligation.
 However, the creditor can make the remission to benefit only one of the co-debtors and
reserve his right against the others for the remaining amount. In other words, he can
collect from the other debtor/s the remaining amount deducting the amount he has
remitted for one of the debtors. Art. 1902(2)
 Can he collect the full amount even if he has exclusively remitted the debt of one
of the co-debtors? As per the rule of joint and several liabilities, the answer
seems positive but it contradicts the requirement of good faith in contracts.
 The acontrario reading of Article 1902(2) implies that if the creditor fails to specify that the
debt is remitted for the exclusive advantage of one debtor, remission made for such debtor
releases all co –debtors.
 There is, however, inconsistency between the two versions of Sub-Article 3 of Article 1902.
The English version erodes the presence of shares among the debtor. The Amharic version on
the other hand, implies the presence of shares and thus in line with the concepts of the other
sub-articles. So, it prevails over the English version which is confusing.
E. Effects on Novation
 Novation, as we shall address under chr7, is to substitute a new obligation for the
original one.
 In the same way to that of remission, in case where the creditor agrees with one of the
co-debtors to substitute a new obligation for the original one,(where novation
occurs between one of the co-debtors and creditor), all the other co-debtors will be
released from their obligation entirely. (Article 1903(1).
 As it is the case in remission of debt, the creditor may limit the effect of the
novation only to one of the co-debtors during which the remaining co-debtors will
remain liable to the creditor but their liability will be reduced to the extent of the
share of the co-debtor who has agreed with the creditor,( Article 1903(2).
 By the way…what is the difference between novation and alternative
obligations(the one we have addressed under chapter V)
F. Effects on set off
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 Set off, as we shall see under chr7, is the counterbalancing of debt between the
creditor and debtor.
 This is the situation where the creditor himself is the debtor of his debtor in another
contract.
 As per Article 1904 of the Amharic version, the co-debtor who is owed by the
creditor can invoke setoff.
 In such case, the remaining co-debtors will remain liable to the creditor but their
liability will be reduced to the extent of the share of the co-debtor who agreed to
make set off with the creditor.
 It also seems that when the question for set off is invoked by a co-debtor against
the creditor, both the co-debtor with such right and other co-debtors are liable to
the remaining amount unless the creditor limits the effect of set off to the former.
 Unlike in the cases of remission and novation, the law is silent whether set of made
with one of the co-debtors releases all co-debtors.
 The two versions of Article 1904 seem to have discrepancy. However, the
Amharic version seems appropriate for it clearly addresses issue of share.
 The issue, however, is whether or not the other co-debtors can invoke set-off on behalf
of their co-debtor. What do you think?
G. Effects on Merger
 Literally defined, merger is the combining of two things e.g. 2 companies combined
to form 1 company. Legally, merger is the combining of two estates or titles to form
a single estate or title.
 As per article 1905 of the Amharic Version, if there is merger, on the debt between
one co-debtor and creditor, the portion of the common debt that relates to one of the
co-debtors will no longer exist.
 For example, C, D and E are joint debtors of A for 3,000 Birr. A dies and
C is his heir. Merger therefore happens between A and C, the latter may
request of D and E their share in the contribution, or 1000 Birr each.
 As usual there is inconsistency between the Amharic and English versions of Article 1905.
The Amharic Version seems appropriate.
The relation of the co-debtors inter se
 Is to mean the relation of the co-debtors as between themselves or among themselves.
 Where several debtors are bound jointly and severally for the performance of one and the
same obligation, they are duty bound to promote the betterment of the condition of all of
them.
 Accordingly, a debtor is required to abstain from doing anything which might aggravate the
situation of the other co-debtors. This principle is incorporated under Article 1906 of the
Civil Code.
 For instance, failure to raise defenses available to all co debtors. In fact, failure to raise
defenses available to all co debtors makes the failing co debtor liable. Article 1906(2).
 The co-debtors will share the common debt after payment. After the performance of the
obligation, the obligation becomes divisible among the co-debtors.
 Once the creditor has been paid, joint liability ceases and the principle is that of the division
of the debt between the debtors, on an equal basis, unless otherwise provided (Article 1907).
Right of recourse: In so far as each debtor is liable to contribute to the extent of his part in
the common debt, a debtor who has paid in excess of his share will be entitled to a right of
recourse against the remaining co-debtors for the excess amount as per-Article 1908.

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 However, where one of the debtor's shares cannot be recovered, Sub Article (2) of
Article 1908 provides that such unrecovered amount is to be repaid by the other co-
debtors in proportion to their share.

Right of subrogation: - a debtor who has paid in excess of his share will be entitled to a
right of recourse against the other co-debtors who have not yet paid their shares pursuant to
Article 1908 of the Civil Code.
 Such action is what is called the legal right of subrogation as a result of which such paying
debtor will be placed in the position of the creditor to the extent of the amount paid by
him to the creditor.
 In such cases, the creditor is legally required to hand over any document and make available
all information to the paying debtor to enable the latter to claim from his co-debtors. Failure
of this may rise to his liability. Article 1909(3)

Joint Creditors As regards joint creditors, even if Article 1910 seems to stipulate the
reverse of joint and several liability, the phrase “ unless otherwise agreed” in the same
provision and the articles (1911 and 1912) do not show any opposite stipulation.
 The question that should be well addressed here is that what is the purpose of
articles (1911 and 1912) if the idea of joint creditorship is the reverse idea of joint
and several liability?
 In this regard there is no clear-cut answer but only arguments. Accordingly, the first argument
is that Article 1911 & 1912 of the Civil Code are applicable only when there is agreement
between creditors as to joint and several entitlements.
 The second argument relates the applicability of Articles 1911 and 1912 with the concept of
mutual representation or mutual agency even though it is not clear on how such mutual
representation is created without an agreement.
 To my understanding, the applicability of Articles 1911 and 1912, which is exactly the same
with the concept of joint and several obligation of debtors, should be based on agreement of
joint creditors only which seems feasible compared to the argument of representation.
 Thus the discussion on Articles 1911 and 1912 seems redundant since it is exactly the same
with the concept of joint and several liabilities despite change of parties from co debtors to co
creditors.
 Still, Articles 1913-1916 which address issues of remission, novation, set off, and ultimate
sharing, respectively, are not in line with the ppl of joint and several obligations.
 Firstly, as per article 1913, none of the joint creditors can remit the entire debt
without the consent of the others. Where remission of debt is made by one joint
creditor, the credit remains intact with regard to the other creditors. The remission
will be effective only as to the part of the joint creditor who effected the remission.
 Secondly, similar to remission, a joint creditor does not have the mandate to enter
into a novation agreement with regard to the entire credit. Any novation agreement
made by a joint creditor will have effect only with respect to the share of that creditor
as per Article 1914 of the Civil Code.
 Thirdly, in case where the debtor becomes creditor of one of the co-creditors, the
debtor may invoke set off against the other co-creditors only to the extent of the share
of such creditor pursuant to Article 1915 of the Civil Code.

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 Lastly, where one of the co-creditors has collected the entire amount of the debt from
the debtor(s), he is held liable to the others for the share in the obligation
corresponding to them. A joint creditor who is paid more than his share must then
distribute the surplus between his co-creditors, in proportion of their respective
shares. Article 1916
Non Joint Obligations And several one. The obligation may be either indivisible or
divisible. Indivisible obligation is treated under Article 1917 of the Civil Code and divisible
obligation is treated under Articles 1918 and 1919 of the Civil Code.

A. Indivisible obligations
 Indivisibility is generally a characteristic of the object of the obligation. For instance,
a car is indivisible if this is the object of the obligation. The same applies to a given
obligation to perform a service.
 Where the obligation is indivisible, the debtor cannot execute the obligation in part. In
such cases, it is impossible for the debtor to perform his obligation in part, but must be
performed altogether.
 An obligation could be indivisible either by its nature or by the operation of law or by the
agreement of parties to the contract.
 Article 1917 provides that the provisions regarding joint obligations shall apply by
analogy to obligations which are indivisible owing to their nature.
 Indivisibility of an obligation has its own effects in case of plurality of debtors and
creditors.
 In terms of their effect indivisible obligations are the same with joint and several
obligations. Accordingly, the provisions’ dealing with jointly and severally liable co-
debtors is applicable for those co-debtors whose obligations are indivisible by its own
nature (see Articles 1896 through 1909 cum 1917 of the Civil Code).
B. Divisible obligations
 According to Article 1918,an obligation is said to be divisible where it is neither joint
nor indivisible.
 The principle underlying divisible obligations among several debtors is that the debt
is to be divided into as many fractions as there are debtors.
 In divisible obligation, there is no representation among the co-debtors.
 The following effects arise from the principle of divisible obligation:
 Firstly, each debtor is bound to pay, only his respective portion of the debt
which of course is not necessarily equal to that of the others, rather depends
on their contract or law in every case.
 Secondly, acts interrupting the period of limitation directed against only one
of the debtors cannot be asserted against the other debtors.
 Thirdly, the risk of insolvency of one of the debtors is assumed by the
creditor and not by the other debtors.
 Fourthly, where the divisible obligation is accompanied by a penalty clause,
the penalty is incurred by the debtor who breaches the obligation and only for
the portion of the principal obligation for which he is bound.
 Fifthly, the default of one of the debtors is absolutely without effect as to
others.

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 Sixthly, the remission of the debt made to one of them is without incidence on
the others. The remission does not profit nor burden them, because their
obligation is divisible.
 Lastly, a novation agreement made between a creditor and a co-debtor will
release only such co-debtor, but no effect with respect to the other co-debtors.
 In general, the effect of a divisible obligation is that each link to the creditor is independent
of the others and in this regard there are many similarities between the effects of divisible
obligations and the effects of joint obligations provided under Articles 1913-1918
Chapter 7:
Extinction of Obligations
Chapter Objectives
 At the end of this chapter, you will be able to:
 Distinguish invalidation, cancellation, and termination and explain their effects;
 Explain remission of debts and its effects;
 Discuss novation, set-off, limitation of actions and merger as grounds for
extinction of obligations;

Introduction
 Extinction of an obligation Can notes the stoppage of an already existing obligation.
 As per the Cumulative reading of Arts.1806 & 1807 of the C.C,
grounds of extinction of obligation include:
1. Performance, 6. Novation,
2. Invalidation, 7. Set off,
3. Cancellation, 8. Merger and
4. Termination, 9. Period of limitation of a contract.
5. Remission
1. Performance of a contract
 Is not only an effect of contract but also a ground of extinction of obligation?
 Performance of the contract shall however be made according to the terms of the
contract and mandatory provisions of the law if it shall extinguish contractual
obligation.
2. Invalidation of a contract
 As it is discussed under chapter 2, Invalidation of a contract happens when there is
defect in the formation of the contract (Defect in consent or Incapacity).
 The effect of invalidation is restitution (reinstatement or retrospective). The
contracting parties are put in the place where they were before the formation of the
contract.
 Sometimes compensation might be ordered when a contract is invalidated.
 The damages/compensation following from an invalidation of a contract aims at
putting the contracting parties in the place they would have been had the contract
not been formed/made.

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 Under Ethiopian law of contract, it is not anyone who can request the invalidation of
a defective contract. It shall be the party who is affected by the invalid contract that
can invalidate the contract. Article 1808 (1)
 This is to protect the interest of the affected party. The other party who is not affected
is considered to have full information or rationality behavior. Hence, there is no
reason to help him by empowering him to invalidate the contract
 Representatives of the party that is potential to be adversely affected by the invalid
contract might be in a position of enforcing the rights of the party.
 Unless an invalid contract is invalidated, the contract is upheld and becomes
effective. Logically speaking, it seems that, even if invalid, the contract which is
not invalidated by court of law should be performed for otherwise the remedies
of non-performance will be due. However, Article 1809 stipulates the reverse of
this. How do you see it? Don’t you think it is inconsistent with the ideas under
Article 1808 and 1810?
 The other controversial point as regards invalidation of a contract is the invalidation
of a void contract as provided under Article 1808(2). As per this sub article,
 “A contract whose
 object is unlawful or
 immoral or
 A contract not made in the prescribed form may be invalidated at the
request of any contracting party or interested third party”.
 The question is that if void contract is a contract which does not exist from the very
beginning, how can one invalidate something which does not exist? How can we
demolish a house that we have not built from the very beginning?
 Coming to the invalidation of voidable contract, the presence of invalid contract does not
necessarily mean that the contract will be invalidated and the obligation will be
extinguished.
 As we addressed under chapter 2, voidable contract can be cured where the party who
is affected by defect in consent or capacity confirms the continuation of the kt. In this
regard, Article 1811 reads “the party whose consent was vitiated may waive his right to
require invalidation where the cause which vitiated his consent disappeared.” Article
1814 also deals with this point.
 Moreover, the right to invalidate a contract is limited by lapse of a certain period of
time. Article 1810 connotes that a contract shall not be invalidated unless an action to this
effect is brought within two years from disappearance of the ground for invalidation
except, unconscionable contract for which the starting point is the formation of the
contract.
 If the ground for invalidation is a mistake, within two years from the knowledge of the
misperception , if the ground is duress, within two years from the avoidance of the threat,
and if the ground is incapacity, within two years from the time the incapable becomes
capable are the points where counting starts.
 But regarding unconscionable contract, period of limitation starts to count immediately
after the formation of the contract and lasts only to two years from that specific date. But
the law is silent regarding the counting of period of limitation if the injured is under age.

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 But one point worth consideration regarding the period of limitation to invalidate a
contract is inconsistency between Articles 1810(1) and 1845, the former provides 2
years while the latter provides 10 years? Shall we use the term “unless otherwise
provided by law” under Article 1845, to precede Article 1810 over Article 1845? What
about the redundancy?
 The other point worth consideration in the invalidation is the interest of 3rd parties to
the contract. In this regard, Article, 1816 provides that “Acts done in performance of a
contract shall not be invalidated where the interest of third parties in good faith
requires”
3. Cancellation of a contract
 Another very important ground of extinguishing a contract is its cancellation.
 Cancellation is making validly formed contract ineffective when there is non-
performance.
 It serves both as a ground of extinguishing a contract and remedy of non-performance
(as addressed under chapter 4).
 Even if there exist some similarities between invalidation and cancellation, the two
concepts are not the same.
 To discuss the similarities first:-
 both invalidation and cancellation are the grounds to extinguish a
contract,
 both invalidation and cancellation are the grounds to claim compensation,
 Coming to the points of difference between invalidation and cancellation:-
 The first point of difference is their ground. Accordingly while the ground for the
invalidation of a contract is defect in the formation, the ground for the cancellation
of a contract is nonperformance.
 The second difference between invalidation and cancellation is in their effect as
related to compensation. In this regard, Even though the effect of both invalidation
and cancellation is restitution, cancellation additionally entitles the party a
compensation that rewards the benefit of contract. i.e., reinstatement + entitlements
to the compensation that rewards the benefit had the contract been performed.
 In other words, while the compensation following from an invalidation of a contract
aims at putting a contracting party in the place he would have been had the contract
not been formed/made, i.e. restitution, the compensation following from cancellation of
a contract aims at not only restitution but also to the entitlements had the contract been
performed.
 This shows compensation for cancellation is more stringent when compared to
compensation for invalidation. I.e. in cancellation, compensation is paid not only to
restitute a party but also to entitle him benefit of a contract. This shows that
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 In this regard, Article 1815, which makes the effects of invalidation and
cancellation the same thing, is a wrong provision which might be applied only to
invalidation. The phrasing “invalidation or cancellation” is wrong as they are
different concepts.
 Another point which makes Article 1815 meaningless as regards compensation due to
non-performance of a contract is the presence of Article 1790(1) which is rightly
provided under the title of non-performance of a contract. In this regard please look at
George Krzeczunowicz’s analysis of the provisions at page139 of his book (Formation
and Effect of Contracts in Ethiopian Law).
 He concludes that in case of inconsistency Article 1790(1) should prevail over Article
1815.
4. Termination of Contract (ዉል ስለ ማስቀረት)
 Is also one way by which obligation is extinguished.
 Is making the contract ineffective starting from the time of termination of the contract.
Similarities and differences between invalidation and cancellation on the one hand
and termination
 The similarities between termination and the other two (invalidation and cancellation) is that
all are the grounds to extinguish obligation.
 The basic difference between z two categories is their effect and ground.
 In terms of effect, while the effect of Invalidation and cancellation is retrospective [even
though cancellation additionally entitles the party a compensation that rewards the benefit of
contract], that of the termination is prospective (forward looking).
 As per the definition of contract provided under Art.1675, agreement to terminate a contract
is a contract itself. i.e. for it reads, agreement to extinguish obligation of proprietary nature.
 Based on these grounds, there are
Three types of terminations:
1. Bilateral Termination: - is putting an end to a contractual obligation by the agreement of
both parties. i.e. either by inserting bilateral termination clause in the contract or by later
agreement.
2. Unilateral Termination:- is made in two ways.
 The 1st one is by the effect of agreement, i.e. by inserting a unilateral termination
clause in the contract and when a condition which entitles unilateral termination is
fulfilled. The best examples are conditional contractual obligations, especially,
subsequent condition. In this regard, please correct both your notes and the teaching
material by substituting termination in the place of cancellation. See Prof. Tilahun
Teshome’s book (Basic Principles of Ethiopian Contract law) p 157-160.
 The 2nd way of unilateral termination of a contract is by giving notice in advance. The
time of notice might be either fixed by law, by custom, or reasonably by parties to the
contract.

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3. Judicial Termination: Court termination is the principle and termination by the parties is an
exception as parties shall not be judges on their own case.
 The other important point in termination of a contract is that termination of a contract
should not affect the rights of third parties to the contract. Look at the examples given
by Prof. Tilahun at page 158. E. g sub-contractors…
 Termination of a contract also better suits temporary nature of obligations or contract.
E.g. termination of employment contract entered into for a certain period of time,
termination of contract of rents, termination of contract of service, termination of
contract of usufruct, termination of contract of agency etc.
 But one important thing that should not be ignored is the importance of giving
default notice in the above cases.
 In general, look at Articles 1819-1824 for Termination of contracts.
4. Remission of debt
 Is also one way of extinction of obligation?
 Is voluntary release of debtor from his obligation by the creditor?
 As per Art.1825, “Where the creditor informs the debtor that he regards him as
released, the obligation shall be extinguished unless the debtor forthwith informs the
creditor that he refused his debt to be remitted .”
 Dear students, why do you think the debtor may refuse the remission of the debt?
 According to Article 1825 of the C.C the mere willingness of the creditor to release the
debtor by remission is not enough to make the remission effective and result in
extinguishing of obligation. The willingness of the debtor to that effect is also required.
 However, the provision does not put express acceptance of the remission as a mandatory
requirement. The debtor shall object when he is informed of the remission if he wants the
remission not to be made. Unless such protest is made the law seems to presume silence
as acceptance in the case of an offer to effect remission of debt to the debtor.
5. . Novation
 Is also another way of extinguishing an obligation?
 Is substitution of an existing obligation by new obligation in its nature or object?
Mere difference without substantial change either in the object or in the nature does
not amount to novation; rather it is variation in fact. Art.1826.
 For instance, change of place of the contract is not novation. In such case, neither z
nature nor z object of the original obligation is different. Change of sugar by coffee
is, however, novation as the object of the contract has been changed/ substituted.
 When original obligation is different from the substituted obligation in its cause, it is
also considered to be novation.
 E.g. Assume that Bekele owes Ayele Birr 20,000 for some goods he purchased
from him; it is agreed later in the new contract that Bekele will keep the 20,000
Birr as a loan from Ayele. This is novation by change in the cause: Bekele’s debt

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has the same object, but henceforth, it has a different cause. Bekele owes Birr
20,000 because Ayele lent it to him, not because he purchased the goods from him.
 Novation is required to be intentional so that it can have the desired consequence in
accordance with Article 1828. As per this provision, Novation shall not occur unless the
parties show the unequivocal intention to extinguish the original obligation.
Replacement of certain obligation with other obligation in the absence of intention to
make novation does not have the effect of novation.
 Read also Art. 1829 for the negative meaning of novation and Art. 1827 for effects of
novation.
 As per article 1827, Novation in its effect extinguishes not only the principal obligating
but also the accessory ones. Accessory obligations in pledge, mortgage and personal
guaranty are extinguished as the principal obligation extinguished by novation.
6. Set off
 Is also among the grounds by which a contract is extinguished.
 Happens when parties to the contract are creditors to each other in different transactions.
Article 1831
 Set-off can be made upon the fulfillment of certain conditions. These conditions have been
put as positive and negative conditions under Articles 1832 & 1833 respectively.
 The conditions that are provided in Article 1832 are.
a. The debts shall be money debt or fungible things of the same species.
b. The debts shall be liquidated/due.
 Set-off is not possible if someone owes in item and the other owes in money. Nor is set-off
possible when the debts are items unless the items are fungible things of the same species.
 However, there is exception to the requirement of “liquidation” of the debt. According to
Article 1841 even though one of the debt is not liquidated, the court may decide that set-off
has been made to the extent of the admitted amount.
 The other condition is that the debt shall be due at the time set-off is required. The time
when both obligations are required to be performed shall be at the same time. If one of the
debts is to be paid on September 1 and the other debt is to be paid on October 3, set-off
cannot be made with regard to these two debts on September 1 since both debts are not due
by then.
 This requirement protects the debtor who can be beneficiary of time limit. The one who shall
perform the obligation in October 3 is the beneficiary of time limit and refusal of set-off is
not to affect such counteractant adversely
 An exception to this requirement has been provided under Article 1834 dealing with period
of grace. Granting of period of grace does not bar set-off although the time in which payment
shall be made is protracted by the court order of period of grace.
 The other point regarding set off is that for the set off to occur, the debt should not be
necessarily equal always. Article 1836.
 As per Article 1837, Set- off shall not affect the interest of third parties.

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 Moreover, set-off cannot be made in the absence of intention to do so. Article 1838 provides
that if the debtor fails to inform the creditor his intention to effect set-off, set-off does not
occur.
7. Merger
 Is another method by which an obligation is extinguished?
 As per Article 1842, Merger shall occur and the obligation shall be extinguished where
the position of creditor and debtor are merged in the same person.
 The position of creditor and debtor are merged in the same person for the reasons of
succession, merger of companies, and formation of partnership and so on.
 Once the creditor and debtor become the same, performance of obligation after merger is
not actually realistic since performing certain obligation towards one self is actually
absurd.
 As is true in other grounds of extinction so far discussed, the rights of third parties
should not be affected by merger. Article 1843.
8. Limitation of Action/Period of Limitation
 Is also one and the last way of extinguishing an obligation.
 Making period of limitation a means of extinction of obligation creates security of
business transaction by avoiding uncertainty among parties to the contract.
 It is important to first see what the concept of Prescription is before going into the
details of Period of limitation.
 Accordingly, "Prescription is defined as a manner of acquiring the ownership of
property, or discharging debts, by the effect of time, and under the conditions
regulated by law.“
 Period of limitation is one component of the broader concept of prescription which, in
turn, classified into liberative and acquisitive prescription.
 Liberative prescription:- relieves (liberates) the beneficiary from certain obligations
(duties) after the expiry of certain period of time.
 Acquisitive prescription:- entitles the beneficiary with certain right after the expiry of
certain period of time. i.e., a party acquires certain right after the expiry of certain period of
time.
 Where do you think limitation of actions/period of limitation falls?
 Limitation of actions/period of limitation falls under Liberative prescription.
 In liberative prescription, there can be limitation of right and limitation of action.
Limitation of right absolutely extinguishes the right of the other party while limitation of
action/period of limitation extinguishes the right to bring action i.e. court action.
 For the purpose of Ethiopian contract law, period of limitation is provided under Article
1845, which reads: Unless provided by law, action for performance of a contract, action
based on non-performance of a contract and action for invalidation of a contract shall be
barred if not brought within ten years.

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 According to this provision “action for performance” refers to bringing a court action to
effect performance, “action based on non-performance of a contract” refers to bringing court
action aimed at remedies of non-performance like damage, cancellation and even forced
performance, and “action for invalidation of a contract” refers to bringing court suit to have a
contract invalidated.
 Except for the controversial relation between Articles 1810 and 1845, addressed so far, all
the rest actions shall be barred unless brought forward within ten years.
 As related to period of limitation, there is a controversy whether it bars right or action/suet
only. In this regard, while some argue that it bars only an action/suet, for instance, raising
Article 1850 and the title itself, some groups argue that in spite of the title, period of
limitation bars rights after 10 years.
 The other important point regarding period of limitation is about annuities (Beyegizew
yemikefel). In this regard, Article 1847 provides that “in respect of annuities, the period of
limitation shall run from the day when the first payment not made was due.”
 Regarding calculation of period of limitation, you are expected to read Article 1848 in line
with gap filling time provisions addressed under chapter 5.
 The other important point regarding period of limitation is about collateral claims provided
under Article 1849 which reads “Interests and collateral claims shall be barred where the
principal claim is barred.”
 Read the rest provisions related to period of limitation Arts. 1851, 1852 and 1853 this
addresses interruption of period of limitation, its effects and special relation between the
parties.
 Interruption of period of limitation is of a great importance for the creditor as this prevents
his right from being barred.
Chapter 8:
Suretyship
Chapter Objectives
 Upon successful completion of this chapter, you will be able to:
 explain the nature of suretyship;
 discuss the effects of suretyship on guarantor towards the creditor;
 explain the effects of suretyship on debtor towards the guarantor;
 distinguish simple guarantor from joint guarantor;
 distinguish counter guarantor from secondary guarantor;
 Explain different effects of suretyship.

Nature and Effects of Suretyship

Nature of Suretyship
 “Suretyship" is a contract by which a person binds himself to a creditor to satisfy an
obligation in case if the main debtor fails to satisfy (perform) it. This person (whether natural
or artificial) is called surety and he/she/it is considered as a second debtor for the creditor.

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 Suretyship, thus, involves a three party relationship of

 creditor,
 debtor and
 surety.
 The obligation of the surety presupposes and depends upon the existence of an obligation of
a principal debtor.
 The ppl of suretyship is provided under Article 1920 which reads: - Whosoever guarantees
an obligation shall undertake towards the creditor to discharge the obligation, should the
debtor fail to discharge it.
 The fundamental advantage of suretyship is to make transactions much easier by
increasing the safety of the creditor entering such a secured transaction.
 In suretyship, the creditor has in fact two (or more) debtors for the same debt in which in
case of a default of the main debtor, he can resort to the guarantor(who is considered as a 2nd
debtor).
 It is not only the creditor who can be benefited by Suretyship. It has advantages for the
debtor too. The debtor who produces surety gains credibility and will be able to trade.
 However, the advantages of suretyship for the guarantor are not evident. Can you mention
them?
 Suretyship supports the creation of new businesses and buttresses a developing economy. It
is furthermore a cheap way of curing credit, obtaining loans ... etc.
 Even though the suretyship is an accessory obligation to that existing between the creditor
and the debtor, the debtor is not a party to the suretyship. The suretyship does not have to be
known by the principal debtor. Article 1921. I.e. He should not necessarily give his express
consent to such suretyship, and it can even be concluded without his knowledge.
 You should not confuse suretyship with other institutions such as warranty, insurance and
property securities such as pledge and mortgage.
 warranty is a written guaranty by the manufacturer promising to repair or
replace a purchased thing if it is defective
 Insurance is also d/t from suretyship in that in a contract of insurance, one party,
the insurer, undertakes to pay a second party, the insured or a person nominated
by the party for the loss occasioned by the happening of the specified event. In
other words, suretyship is a collateral contract while insurance is an
independent original contract involving only two parties owing obligations
each other.
 When we come to property securities, just for the sake of your general knowledge,
security/surety might be classified into two, personal security/surety and real security/surety
or property securities, namely, pledge and mortgage.
 The scope of this chapter is on personal security/surety. Accordingly, when we say
suretyship under this chapter and course, it is to mean only personal security/surety.

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 Even if the Civil Code provisions dealing with suretyship are silent regarding the form of
suretyship contract, Article 1725 which addresses contracts for a longer period of time
stipulates that it should be made in a written form.
 Pursuant to Article 1727 of the Civil Code, a contract of guarantee needs satisfaction of
three elements:
 Special document,
 signature of parties bound and
 Attestation of two witnesses.
 Since suretyship contract binds only the guarantor (i.e. since it is unilateral kit), it is
only the guarantor who should sign on the kit of guarantee in the presence of two witnesses
who also should sign on the document for the purpose of better evidence.
 A contract of suretyship must be express. The essential rule is that a suretyship may not be
presumed, it has to be expressly given for the law does not admit tacit suretyship.
 A suretyship must have limits and a maximum amount must be indicated, the law requires
that the contract of suretyship must specify the maximum amount of which the surety will be
held liable for. Article 1922(3). The sanction for failure to fulfill this requirement is simply
that the suretyship would be void.
 The provisions of the Civil Code dealing with suretyship equally apply to guarantees for a
person in the contract of employment.
 Would the surety be liable to pay interests and legal cost even beyond the maximum
amount fixed in the suretyship agreement?
 Article 1930 of the Civil Code states that unless there is agreement otherwise, the surety is
held to pay interests when the debt guaranteed bears interest. But this extension of his
obligation remains limited to the maximum amount he has given his suretyship for.
 The scope of the suretyship may not exceed that of the principal obligation Article 1924.
Suretyship cannot exceed that which is due by the debtor. The surety may undertake an
obligation equal to or less, but not greater, than that of the principal debtor.
 Suretyship is an accessory obligation; it does not stand by itself in the absence of the
principal obligation (kit). Pursuant to sub-Article (1) of Art 1926 of the Civil Code, the
fact that the principal obligation is discharged results in the release of the surety. Similarly,
where the principal obligation is void, there cannot be any guarantee with respect to such
obligation, Article 1923.
 As per sub-article 2 of Article 1923, a contract affected by defect in the formation cannot
be guaranteed unless the guarantor/surety was aware of such defect/s.
Another very important point regarding suretyship is that it works not only for the current
obligation but also for future and conditional obligations. In other words, it is not
necessary that the debt to be secured be presently in existence. Just as one can promise future
things, one can become surety for a future debt. Article 192

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 The scope of the suretyship may not be extended by the contracts concluded between the
principal debtor and the creditor after the consent for the suretyship is once given. So, the
guarantor's conditions may not be worsened through a posterior agreement between the
principal debtor and the creditor.

 The code does not prohibit, on the other hand, the agreement tending to reduce the extent of
the guarantor's obligation, because it is obviously in his favor (Art. 1928 (1)

 Suretyship may be applied to every obligation, whatever its object. But in fact it is
principally used to guarantee the payment of money debts.

Effects of Suretyship
 Suretyship produces effects b/n the creditor and the surety on the one hand and b/n the
debtor and the surety on the other hand.

1. Effects of Suretyship between the Creditor and the Surety

A. The moment for action
 Period of Limitation will probably be amongst the first line of defense of the surety. As per
Article 1929 Proceedings instituted against the principal debtor shall interrupt the period of
limitation as regards the guarantor. Thus, in this regard, the surety cannot benefit from the
period of limitation.

B. Maturity of debt
 The surety may not be required to perform his obligation prior to the maturity of the debt.
(See Art. 1932(1) of the Civil Code).

 Apart from this, where the principal parties (the principal debtor and the creditor) had
agreed to a notice before the debt is due, such a notice has to be served to the surety too.
Art. 1932(2&3)

C. Effects of suretyship in simple suretyship and joint suretyship

I. Simple suretyship
 Simple suretyship is a suretyship in which a surety/guarantor is required to perform an
obligation only if the principal debtor failed to perform it. In other words, the obligation
of the guarantor is secondary obligation, not primary/direct obligation.

 Simple suretyship is a principle and joint suretyship an exception.

 The provisions of the Code dealing with simple suretyship are Articles 1934 through 1937 of
the Civil Code.

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 Article 1934, which reinforces Article 1920, provides that a guarantor shall not pay the
creditor unless the principal debtor fails to discharge his obligation.

 This indicates that the obligation of the simple guarantor subsidizes the principal debtor. i.e.
it is only where the principal debtor fails to perform his obligation that the guarantor is
required to perform the obligation. Article 1920.

 Then, when is the principal debtor deemed to have failed to discharge

obligation? In this respect, we can think of three situations: Soon after
performance is due; after the debtor has been placed in default; after the creditor
brings action against the debtor and fails to obtain performance.

 Article 1934, which reinforces Article 1920, sets the principle of simple guarantee. The
main condition/ppl to obtain payment from the guarantor is the non-execution of contract by
the principal debtor.

 Even if an action is brought against the guarantor following this procedure, the guarantor
could have appropriate defenses. The first defense, in this regard is benefit of discussion as
provided under sub-article 2 of Article 1934 and Article 1935. In the case of simple
suretyship, the engagement of the surety is subsidiary; he images himself to pay only if
the principal debtor does not. The idea is that he is not to pay simply because the main
debtor arbitrarily refuses to do so.

 From the reading of Article 1935(1), we see that the benefit of discussion is not automatic
and has to be required by the guarantor when he is himself sued. By availing himself of this
benefit, the guarantor can compel the creditor to first seize the property of the debtor.

 Additional conditions that should be fulfilled by the guarantor are provided under Article
1936 which reads:-

1. A guarantor requiring discussion shall indicate the debtor's assets to the creditor
and advance sufficient money for the costs of their discussion.
2. He may not indicate such debtor's properties as are subject to litigation, or
situate outside the country of payment, or mortgaged as security for the debt but
no longer in the debtor's possession.

 As per sub article 1, the burden of identifying the debtor‘s property that can be discussed and
also covering the cost of discussion are on the guarantor.

 Obviously, the guarantor cannot exercise benefit of discussion where the insolvency of the
principal debtor has already been judicially established. This is obvious since an insolvent
does not have assets that can be discussed.

 What do you think would happen when the guarantor has successfully
managed to satisfy all the conditions necessary to exercise the benefit of
discussion?

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 Where the guarantor has raised the benefit of discussion at the earliest possible time,
identified the debtor's properties that can be discussed, advanced the costs for their
discussions, the court will suspend the suit against the guarantor and grant the creditor
permission to institute fresh action against the principal debtor pursuant to Article
278(2) of the Civil Procedure code.

 Accordingly, the consequences of the defense of the benefit of discussion are the
following:-

1. If the assets are sufficient for a total or part payment of the main
debt, the guarantor benefits accordingly and is discharged in part or
totally of his suretyship.
2. If no money can be made from the debtor's assets, the guarantor has
no option but to pay the main debt, pending his action against the
principal debtor.
3. Art. 1937, where the guarantor has indicated the assets as provided in
Art. 1936 and has supplied sufficient money for their discussion, the
creditor is answerable to the guarantor, up to the value of the assets
thus indicated, for an insolvency of the principal debtor due to the
creditor's failure to proceed
 Is joinder of the principal debtor and the guarantor possible in our legal system?
 Even if our substantive law on suretyship is silent on this issue, it is possible for the
principal debtor and the guarantor to be joined in the same suit pursuant to our procedural
laws (i.e., Art 36 of cpc).

 The other defense of guarantor, which, of course, not special for simple guarantor,
is the possibility to raise the principal debtor's defenses. Article 1942 (1) of the
Civil Code.

II. Joint suretyship

 The concept of joint guarantee is provided under Article 1933 which reads where the
person undertaking the guarantee described himself as joint guarantor, co-debtor, or
used equivalent terms, the creditor may sue him without previously demanding payment
from the debtor or realizing his securities.

 Unlike in simple suretyship where the obligation of the guarantor is secondary, the
obligation of joint guarantor is primary and direct obligation. Where the suretyship is
joint, the creditor is entitled to proceed against the guarantor without demanding payment
from the principal debtor.

 In principle, pursuant to Article 1920 and 1934, every suretyship is presumed to be

simple. There can be joint guarantee only where the person who becomes a surety
expressly described himself as joint guarantor by using words implying the same.

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 The direct effect of joint guarantee is the deprivation of the surety of his benefit of
discussion.

 Joint guarantee is a dangerous situation for the guarantor, who may then be
required to pay for a debtor who still has some assets(since z guarantor can not raise
benefit of discussion).

D. Acceleration of action by guarantor

 Address those things which should be done by the guarantor to minimize the risk of
paying to the creditor. Article 1938 and 1939.

2. Effect of Suretyship between the Debtor and the Surety

 Occurs where the guarantor has paid the debt in place of the debtor because of the latter’s
failure to pay.

 When the surety pays the creditor, he is discharging the obligation of the principal
debtor. The principle is that the guarantor, who has paid the creditor instead of the
debtor, shall be indemnified by this debtor. Accordingly, the guarantor is entitled to be
indemnified by the principal debtor.

 Do you think the guarantee given without the consent of the principal
debtor relives him from indemnifying the surety?
 The fact that the guarantee may be given without the consent of the principal debtor does
not relive him/her from indemnifying the surety what the latter paid to the creditor.
Article 1940(1)

 In exercising his right of indemnification, the surety enjoys two rights of action; the right
arising from the contract of suretyship and the right of subrogation, which arises from
the substitution of the principal creditor after paying him/her. The first is called
chirographic action while the latter is the right of subrogation in which the previous
guarantor becomes the new creditor of the debtor by substituting the former principal
creditor.

 The personal action of the surety arises from the contract of suretyship itself. The action
is based on the theory of implied mandate. Accordingly, this recourse is open to the
surety only against those debtors for whom he has become surety and not against the
other debtors.

 This personal action entitles the surety to claim the principal, interest, expenses and
damages if any.

 The principal is not just the amount of the debt paid. It includes everything the surety has
paid in acquitting the debtor. Thus, as regards the surety, the interest due to the

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creditor and paid by the surety is considered as forming the principal of his
payments, so that they in turn produce interest.

 In addition to interests, the surety is entitled to be indemnified for all damages (including
costs) he suffers as a result of the debtor's fault or negligence. In this respect, see Articles
1940 (2) and (3) and Article 1941 CC.

 There are two kinds of subrogation: conventional and legal subrogation. As the terms
imply, conventional subrogation is achieved by the agreement of the parties, whereas
legal subrogation is achieved by the effect of the law.

 The surety is entitled to legal subrogation because he is the one who, being bound for
others for the payment of the debt, had an interest in discharging it. Legal subrogation is
provided under Articles, 1944 and 1971 of the CC.

 The details on rules of subrogation will be addressed in the 9th chapter, ahead.
Protection of guarantor's action against debtor
 Addresses the following concerns:-
i. Duties of a creditor,
ii. Securities obtained from principal debtor (Recourse before payment),&
iii. Loss of Right.
I. Duties of a creditor
 The creditor who has been paid has a duty to ensure that, as far as possible, the guarantor
enjoys an effective action against the debtor. Three situations are provided for:
1. Article 1945 of the Civil Code: - The creditor shall hand over the documents of title to
the guarantor who pays him and perform such formalities as will enable the guarantor to
exercise his remedy and realize the securities available to the creditor.
2. Article 1946 of the Civil Code: - The guarantor shall be relieved of his obligation
towards the creditor where the guarantor's subrogation to the rights, mortgages and liens
of the creditor can no longer be effected owing to the creditor's act or omission. For
instance, where through his negligence, the creditor let a mortgage expire. So, before
paying, the guarantor has a right to check that the subrogation in the rights of the
creditor is still possible.
3. Article 1947 of the Civil Code:- Debtor's bankruptcy
1. Where the debtor becomes bankrupt the creditor shall prove in the
bankruptcy.
2. He shall inform the guarantor of the bankruptcy as soon as he is aware
of it.

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3. Where the creditor fails to comply with these rules, he shall lose his
rights against the guarantor to the extent of the latter's loss resulting
from such failure
II. Securities obtained from principal debtor (recourse before payment)
 The surety who has paid to the creditor has a right of recourse against the debtor for
indemnification.
 The guarantor, who is informed of a serious chance that the principal debtor is not going
to pay, may take protective measures through securities demanded of the debtor, even
before any payment is made to the creditor.
 Three situations are imitatively mentioned under Article 1948.
 The guarantor, even before he has paid, may take action against the debtor and
demand securities from him where:
a. The debtor has been given notice to pay his debt;
b. The debtor has been declared bankrupt;
c. Either by reason of the losses the debtor has suffered or as result of a fault
committed by him, the guarantor runs a considerably greater risk than
when he undertook the guarantee.
III. Loss of Right
 The general principle is that upon payment the surety has a right of recourse against the
debtor. However, there are two situations in which the surety loses his right against the
debtor.
 The first exception is where the indemnity claim has lapsed. The guarantor has a duty to
set up all available defenses of the debtor he reasonably knew of. If not, he is debarred
from indemnification by the debtor. Article 1942 of the Civil Code. You may compare
Article 1942 with 1940(3)
 The second exception to the principle is the case where a second payment is made by the
debtor (Article 1943 of the Civil Code).

Plurality of Guarantors
 The idea of a plurality of guarantors is that the risk of suretyship is spread over several
persons. Three situations can be considered:-
1. Counter guarantor
2. Secondary guarantor and
3. Plurality of simple and /or joint guarantors.
1. Counter Guarantor
 Is the mechanism whereby the main guarantor is protected by having himself a guarantor?
 In suretyship, counter guarantor appears only for the benefit of the guarantor, not for
the benefit of the creditor.

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 This counter-guarantor will only step in where the main guarantor has been called to pay for
the principal debtor.

 It must be noted that, there is no relation (nexus) between the counter guarantor and
the creditor. Since the counter guarantor appears only for the benefit of the guarantor, not
for the benefit of the creditor, he involves only between the principal debtor and the
guarantor.

 Article 1949 of the Civil Code which governs counter guarantors state that, “[t]he counter
guarantor guarantees towards the guarantor the effectiveness of his indemnity claim against
the principal debtor.”

 How do you understand the phrase "guarantees the effectiveness of indemnity

claim against the principal debtor"? Does this mean that the counter-guarantor
agrees to act so that the debtor pays the guarantor, or simply undertakes to pay in
his (debtor’s) place?
 In fact, both duties seem enforceable.
 What are the relations between guarantor and counter-guarantor? Can counter-
guarantor, for instance, impose discussion of assets of the main debtor, where it is
possible, although the guarantor has not required it?
 The answer should appear to be positive: the counter-guarantor must benefit of all the
particular advantages of the main guarantor, even if this seems against the will of main
guarantor.
2. Secondary Guarantor
 Unlike with the counter guarantor where he appears only for the benefit of the main
guarantor; not for the creditor, secondary guarantor appears for the benefit of the creditor.
 Unlike with the counter guarantor where there is no relation between the creditor and the
counter guarantor, there is a relation between the creditor and the secondary guarantor for
the latter stands for the sole benefit of the creditor.
 Compared to counter guarantor where the creditor can challenge only the principal debtor
and the main guarantor, in secondary guarantor, the creditor can challenge not only the debtor
and main guarantor, but also the secondary guarantor.
 So, we see that the creditor is more secured in secondary guarantor than counter guarantor
because he has wider option with secondary guarantor than counter guarantor. Accordingly,
we have longer chain in secondary guaranty than in counter guaranty.
 Article 1950 of the Civil Code, which deals with secondary guarantors reads:
1. A person [the creditor] may stand surety not only for the principal debtor but also for
his guarantor.
2. The secondary guarantor shall be in the same position towards the guarantor as a
simple guarantor is towards the principal debtor.
3. Merger between the principal debtor and the guarantor shall not extinguish the
creditor's right of action against the secondary guarantor.

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 As of a rule, unless the creditor exhausts all his remedies against the principal debtor and
the main guarantor, the secondary guarantor shall not be held liable. But if the secondary
guarantor is willing to pay the creditor without seeking benefit of discussion, he can do
so.
 In such cases, both the principal debtor and the main guarantor are considered as
principal debtors of the secondary guarantor and he can be indemnified from either or
both of them. But the principal debtor and the main guarantor are considered as principal
debtors of the secondary guarantor after the secondary guarantor paid to the creditor
w/o seeking benefit of discussion, not before payment made to the creditor.
 His action against the simple guarantor is justified pursuant to Article 1950(2). His
action against the principal debtor is justified, for the latter is the one who should bear the
ultimate burden of the debt as he benefited from it.
 Even if the law is silent, from the normal rules for suretyship, it follows that the
secondary guarantor who paid the creditor is subrogated in the rights of the creditor
against both the debtor and the main guarantor.
3. Plurality of Simple and/or Joint Guarantors
 A creditor may seek and obtain guarantees from more than one person in respect of the
indebtedness of one principal debtor. This is the situation whereby the creditor wishes to
spread his risk over several persons acting as guarantors for the same debt and for the
same debtor.
 This situation is governed under Article 1951 of the Civil Code. Art. 1951.
- Plurality of guarantors.
1. Where several persons became at the same time guarantors of the same debtor in
respect of the same debt, each of them shall be liable as simple guarantor for his
share and as secondary guarantor for the shares of the others.
2. Where the guarantors entered into their undertakings by successive acts, he who
bound himself in the second place shall be held liable as secondary guarantor of
the guarantor who bound himself before him
3. Where the guarantors expressly bound themselves as joint guarantors either with
the principal debtor or as between themselves, each of them shall be answerable
for the whole debt, subject to contribution from the others proportionate to their
shares.
 As per Article 1951(1), the creditor has to divide his action in as many actions as there
are guarantors, who are called benefit of division, and ask the appropriate amount from
each b/c a guarantor shall not be compelled to pay the debt of his co-guarantor if the
latter can pay him. But if not, liable as 2ry
 What Article 1951(2) tries to address is when guarantors granted security at different
time.
 Article 1951(3) affords the maximum protection to the creditor because he can ask the
whole debt from one guarantor only. E.g. He can demand the whole debt from the one
who can pay him so that the latter initiate several actions against his co-guarantors.

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Relationship between/among Co-sureties

 When there are several sureties for the same debtor in respect of the same debt, the one
who pays the creditor is entitled to contributions from the others.
 The basis of contribution is payment by surety of more than his share and equity.
 Under our law, Article 1951 provides that guarantors who are either severally, or jointly and
severally liable for the same debt and who stand as surety for the same debtor at the same
time are entitled to proportionate contribution.
 The other point worth consideration as regards the relationship between co-sureties is that a
co-surety who paid the creditor can demand contribution from his co- sureties only after
the creditor is fully paid.
 This is because there could be a situation where he can still be liable for the creditor
if he has not been fully paid. So, to exactly know their shares, co –sureties are
expected to wait until the whole debt is discharged.
 The other point worth consideration as regards the relationship between co-sureties is that a
co-surety who paid the creditor even if he has valid defenses, which might relieved him
from payment, loses his right of contribution from his co-sureties.
 Still, another point as regards the relationship between co-sureties is that you should bear in
mind that the claim of contribution is not limited only to the principal/actual share only;
rather extended to costs incurred and legal interests.
 Last but not least, even though the law is silent it can be argued that because of the ppl
underlying the benefit of division and contribution between the co-sureties, the security held
by one co-surety should be deemed to have been held for the benefit of all the co-sureties.
 However, if the security have been prejudiced or destroyed by the surety, the co-
sureties will be relieved of their obligation to contribute to the extent of the value
of the property so prejudiced or destroyed.
Extinction of Suretyship
 As suretyship is a contract, it can be concluded that most of the grounds of extinguishing a
contract, discussed under chapter 7, are the grounds to extinguish suretyship.
 Accordingly, payment, novation, remission, set off, merger, period of limitation, nullity of
the principal obligation etc. are the grounds to extinguish suretyship.
 Just to see the grounds one by one briefly:-
 The first ground to extinguish suretyship is payment/performance. Even if the effect of
surety might be continued sometime between the principal debtor and his guarantor or
between the co-guarantors, payment to the creditor extinguishes suretyship. The creditor is
entitled to only one payment for otherwise he would be liable by law of unlawful enrichment.
 The second ground of extinguishing suretyship is novation.
 As we have addressed under chapter 7, Novation is substitution of an existing obligation by
new obligation in its nature or object.
 Accordingly, if the creditor and the principal debtor agree to substitute the
existing (guaranteed) obligation with a new obligation, such new agreement
extinguishes the suretyship.

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 For instance, if the object of the existing contract which is guaranteed was soap
and later the creditor and the debtor agreed to substitute with sugar, suretyship
extinguishes. But this should not be construed as the former guarantors cannot
be guarantors for the new obligation if they are willing to do so.
 Thirdly, a voluntary remission by the creditor to the debtor discharges the surety as
well, since the remission of the main obligation also extinguishes the accessory
obligation.
 However, remission to a surety/guarantor alone does not discharge the principal debtor
as the creditor is considered to have abandoned only the security, but not the primary
obligation.
 Fourthly, set-off extinguishes suretyship when the creditor and principal debtor are
indebted to each other. In fact, the surety/ies can raise set off as a defense against the
claim of the creditor.
 But the question is what if the amount to be set off is not equal, is the set off of
whatever amount extinguishes surety as a whole or the surety is relieved only by
the amount of set off made?
th
 The 5 ground of extinguishing suretyship is merger. As per Article 1842, Merger shall
occur and the obligation shall be extinguished where the position of creditor and debtor
are merged in the same person. Regarding suretyship, there are three possible cases of
merger.
 The 1st case is merger of debtor and creditor. Accordingly, a merger of debtor and
creditor extinguishes the principal obligation and the accessory suretyship
obligation. E.g. if the debtor is the heir of the creditor and the creditor dies.
 The 2nd case is merger of surety and creditor. Merger of surety (guarantor) and
creditor extinguishes the obligation of suretyship but does not extinguish the
principal debtor’s obligation. E.g. if surety dies and the creditor is his sole heir or
vice versa.
 The 3rd case is merger of debtor and surety. In the same way to the 2nd case, merger
of debtor and surety does not extinguish the main obligation of the debtor but
extinguishes the obligation of suretyship. This is because the person cannot be his
own surety
 However, the merger which takes place when the principal debtor and his surety become
heirs for one another does not extinguish the creditor's rights against a sub-surety of the
surety.“
 The 6th ground of extinguishing suretyship is nullity of the main obligation. i.e., if the
main obligation is void, the accessory contract of suretyship is also void. However, in
cases where the principal obligation is voidable, the contract of suretyship may or may
not be invalidated. See Article 1926 (3) and 1923.
 The 7th ground of extinguishing suretyship is period of limitation.
 The 8th ground of extinguishing suretyship is where the creditor has accepted a
payment in the form of an immovable or any good, even if he is later dispossessed

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(Article 1927 of the Civil Code). The creditor, not the surety, bears the risks of the thing
accepted in payment.
 The last but important ground of extinguishing suretyship is where the creditor,
without special permission given by the guarantor, has granted a delay (prolonged
time) to the debtor (Article 1928 (2) of the Civil Code).
 This is because the creditor is extending on the back of the guarantor the delay
during which he is held liable.
 An extension of time for performance or payment, granted by the creditor to the
debtor, is an alternation of the original obligation which is considered
prejudicial to the surety. Thus, the prolongation of the time granted to the
principal debtor without the consent of the surety, operates as discharge of the
latter from his obligation.
Chapter 9:
Third parties in relation to contracts
Chapter objectives
 After successful completion of this chapter, you will be able to:-
 Explain the nature and effects of promises and stipulations for third parties;
 Discuss the conditions for valid assignment of rights;
 Explain the concept of subrogation and its different types;
 Explain the effects of assignment of rights and subrogation;
 Discuss delegation and assignment of obligations;
 Discuss the rights of creditors of the parties and the limitation thereof.
Introduction
 Both in civil law and common law legal systems, the ppl is that contracts shall produce
effects only as between the contracting parties. The same is true as regards Ethiopian
Contract law (Article 1675cum 1952(1)).
 In spite of this ppl, there may be exceptions in which case a contract may produce effect
(whether negative or positive) on third parties. This chapter discusses such exceptions
or situations.
 The 1st exception, in this regard, is that of promises and stipulations concerning
third parties, whereby a party to the contract sets out that the contract will have
effect on a third party.
 The 2nd exception is where the right of a contractual party is assigned to a third
party.
 The 3rd exception addresses the reverse situation where a liability may be
assigned to a third party.
 And the final exception concerns the special situation of the heirs of the parties
and the protection of creditors of contractual parties.

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1. Promises & stipulations concerning third parties

 It is legally possible that persons may conclude a contract by reserving a right to substitute a
third party in their place or by promising that a third party will commit a certain act or omit
from performing an act.
 It is also possible to make contractual stipulations for the benefit of third parties.
 The contracting parties may provide in their agreement that a future third party may become
part of their contract.
 Three situations are considered by the Civil Code. The third party:
 may be substituted to a contracting party,
 will become the debtor of the contract, and
 Will become the creditor of the contract.
The option to substitute a third party
 As per Article 1953, [A]t the time of the making of a contract, a party may reserve the
option to substitute for himself another person assuming the rights and obligations under
the contract.
 It should be noted that the identity of the third party to be substituted is not required at
the time of the formation of the contract. In fact, such a third party may be perfectly
unknown to the other party and we can also imagine that he is still unknown to the party
stipulating such possibility.
 Another remark is that such an option is open both to the creditor and to the debtor. Each
side can introduce a clause of this type and it is theoretically possible that the parities
actually performing the contract are not the parties who concluded it.
 The advantage of the possibility opened by Article 1953 is to introduce flexibility in the
choice of partners. It corresponds to a great number of modern transactions, where the
identity of the person who will perform the contract is irrelevant, and what matters is only the
quality of the work.
 It enables a person who does not have the adequate facilities or equipment to perform the
contract to substitute himself a person better equipped.
 It makes it possible to contract secretly in the name of a person who does not want to be
known to the other party until the contract is concluded.
 One may also consider the potential of the provision to introduce a third party to perform part
of the contract concluded, as a co-debtor, or as often in construction cases, as a sub-
contractor. For instance, a builder concludes a contract for the construction of an entire
house, but reserves the possibility to substitute him an electrician for the electrical
installation.
 The effect of the contract where the substitution effected within 3 days or not is provided
under Article 1954 of the Civil Code.
 Sub Article 1 states that where the third party is substituted within the following
three days from the formation of the contract, the contract will produce effect as

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between the third party substituted and the other party. In this respect it can be said
that the person who reserved the option of substituting another person for himself is
the agent of the third person.
 As per sub Article 2, where the appointment/substitution is not made within three
days, the contract shall be effective as between the parties who made it.
The promise for third party
 As per Article 1955, “A person may stand promisor for a third party by promising an act
or omission by the said third party”.
 Even if the provision looks very vague, its idea seems that a current contracting party
may enter into temporary kit with another current contracting party who promises to
conclude future permanent kit with 3rd party and a current contracting party, i.e., the
one who is concluding a kit with the promisor believes that the 3rd party, in turn,
promises an act or omission.
 The point here is there are two contracts in such promise; the temporary or current kit
concluded b/n a contracting party and the promisor and permanent but future kit between
the promisor and the 3rd party.
 The effects of such promise are provided under Article 1956 that reads:
1. Where the third party ratifies the promise concerning him, the person who stood
promisor shall be released. Means, where the third party concludes a kit with the
promisor, the person who stood promisor (i.e., a contracting party with the
promisor) shall be released.
2. Unless otherwise agreed, such person shall not guarantee the proper performance
of the contract. ‘Such person’ refers to [the person who stood promisor i.e., a
contracting party with the promisor]
3. Where the third party does not ratify the contract, [i.e., when he fails to conclude
a kit with the promisor] the person who stood promisor for him (i.e., a contracting
party with the promisor) shall be liable towards the other contracting party [the
promisor] for the damage resulting from the non-performance of the contract.
Stipulation for the benefit of a third party
 Art.1957 and the following of the CC open the possibility for two contracting parties
to conclude a kt for the benefit of a third party. A best example here is life insurance
for the benefit of 3rd party.

2. Assignment of Rights and Subrogation

Assignment of Rights (መብትን ስለ ማስተላለፍ)

 The assignment of right is a transfer of the right to the performance of the contract.
 The principle of assignment of rights is provided under Article 1962 of the Civil Code
which reads: [A] creditor may assign his rights to a third party without the consent of the

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debtor, unless such assignment is forbidden by law or the contract, or is barred by the very
nature of the transaction.

 Thus, an assignment is a contract concluded between the assignor and the assignee,
whereby the assignor transfers his rights under the contract or part of it to the assignee.

 It must be noted that the consent of the debtor is not required for an assignment to be
valid. The debtor is normally indifferent (uninterested) to an assignment because it only
changes the beneficiary of his performance or payment and not the scope of such
performance or payment. This may be the reason why the debtor is not informed of the
assignment of rights.

 There are two types of assignments; an onerous assignment and gratuitous assignment.
 An assignment of right made for consideration is said to be an onerous assignment. This
consideration (economic benefit) which can either be in kind or in cash or both, is furnished
by the assignee for the assignment of the right.

 A gratuitous assignment, on the other hand, is a voluntary transfer of the creditor's

right to the assignee which is made without consideration. In such cases, the assignor gets
no economic benefit.

 In case of assignment of rights, warranty may or may not be required depending on the
form of the assignment.

 Article 1964 (1) of the Civil Code provides that the assignor has to guarantee the existence
of the right at the time of the contract when the assignment is made for consideration.

 As per Article 1964 (2), the assignor does not guarantee the solvency of the debtor.
 However, the situation is entirely different where the assignment is made gratuitously in
which case the assignee should not expect any legal warranty (Article 1964(3).

 Article 1966 deals with the valid defenses the debtors have against the assignor and
assignee.

Subrogation
 Subrogation is the situation where a right, with all its accessories, is transferred from one
person to the other.

 In case of subrogation, there are three persons: subrogor (z original creditor), subrogee (the
new creditor who is subrogated on the right of the original creditor), and the debtor.

 The mechanics of subrogation involve the substitution of the subrogate to the position
occupied by the subrogor, who is a creditor of the principal debtor. The subrogate is then able

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to exercise the rights of the creditor- subrogor after he has effected the subrogation by
payment of the debt.

 Thus, subrogation can be said is a situation where an obligation extinguished with regard to
the original creditor by payment which he has received from a third person. Thus,
subrogation always accompanies payment.

Types of Subrogation
 Generally, subrogation is classified into two:
1. Conventional (contractual) subrogation and
2. Legal subrogation.
 Conventional or contractual subrogation is, in turn, divided into two:
A. subrogation by the creditor and
B. Subrogation by the debtor.
1. Conventional (contractual) subrogation is a subrogation created by a contract
concluded between the subrogor and the subrogate b/c of payment made by the subrogee to
the subrogor.

A. Subrogation by the creditor:

 The most frequent form of contractual subrogation is where the creditor subrogates to his
rights the third party who has paid him the debt (Article 1968 of the Civil Code).

 The third party is thus exactly transferred into the position of the creditor and is granted to
refund by the original debtor.

 The contract of subrogation must be express and must provide that the subrogation takes
place at the time of payment.

B. Subrogation by the debtor

 Occurs when the dry & 3rd party agrees so that z 3rd party pays z cry even against his (car’s)
consent.
 Here, z 3rd party is discharging the duty of the original debtor. Then, the creditor's rights
against the debtor are transferred to the third party [who paid z cry). I.e. air paying to the cry,
the 3rd party is entitled to the rights the original creditor have against the debtor. Even if
vague you may see Articles 1969 and 1970 for these points.
2. Legal subrogation
 Is subrogation by the operation of the law, without the necessity of any agreement at
all?

 In legal subrogation cases, the law recognizes a special interest of the payer in the
extinguishment of the other person's debt.

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 Article 1971 provides three situations where there could be legal subrogation:
1. Payment by a person bound with another or on behalf of others, i.e., subrogation as co-
debtor or guarantor.
2. payment by a person who is owner of a property or who enjoys the rights of lien,
mortgage or pledge, i.e., Subrogation as holder of sureties &
3. Other cases of subrogation provided by law.
 In essence, legal subrogation does not differ from the conventional type as both are
based upon payment of the debt or obligation to the creditor and their effect is the
same. Accordingly, a legal subrogate as well as a conventional subrogate is subject to any
defenses which were available to the debtor against the original creditor.

Effect of subrogation and assignments

 Articles 1973 and following of the Civil Code state the consequences common to
assignments and subrogation. Accordingly, The assignment or subrogation to a right
entails:

 The right to exercise the liens, securities and accessory rights attached to it, with an
exception in respect of a pledge.

 The original creditor has a duty to cooperate to ensure as much as possible that the
assignee or subrogate has the best chances of being paid by the debtor.

3. Delegation and Assignment of Obligations

 Unlike assignment of rights, what is delegated is obligation; thus, in case of delegation,
the debtor may delegate performance of his duties to a third person. On the other hand, rights
arising out of a contract with its corresponding duties can be transferred to a third person by
way of assignment of obligation.
A. Delegation of Obligations
 Delegation is the act by which a person delegates the performance of his obligation to a
third person.

 The ppl of delegation is provided under Article 1976 of the civil code, which reads: “A
debtor may with the consent of the creditor, or without such consent in cases provided
by law or usage, delegate to another the performance of his obligations.”

 There are three persons in cases of delegation. These are: the delegator, the person who
makes the delegation (i.e., the original debtor); the delegate (the new debtor also known
as the delegate-debtor or the delegate or the third party who is delegated and becomes a
debtor), & the creditor.

 NB: - There might be some confusing usage of these terms in your teaching material.
So, you need to take these ones as the correct terms.

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 In case of delegation of obligation, in principle, unlike assignment of rights, the debtor

has to ask the creditor to accept a third person as his debtor, who consents to bind
himself to him. The change of debtor could be very detrimental to the creditor, this is why
the latter's consent is required as a rule.

 The Ethiopian law, however, reserves cases where usage or the law itself allows such
substitution of debtors without the consent of the creditor.

 In the delegation of obligations, most often, the delegator is the creditor of the delegate
and delegation is a means whereby he (the delegator) frees himself from his obligations
towards the delegate.

 The economic importance of delegation is that it simplifies transactions and obtain, by

means of a single act, the same result as if two payments will be made successively, one
by the delegate debtor (delegate) to the delegator the other by the delegator to the
creditor.

Types of delegation and their consequences

 Delegation of obligations may be
1. perfect delegation or
2. Imperfect delegation.
1. Perfect delegation is the case in which a creditor who has been provided with sufficient
securities by the delegate debtor releases the original debtor. In such cases the creditor has no
right over the original debtor after delegation.

 In perfect delegation, the creditor consents to release the delegator (the original debtor)
except for the insolvency of the delegate debtor at the time of delegation, not after the
delegation has been made. If it is after the delegation, the creditor has no right to
demand performance from the original debtor. Article 1981(2).

2. Imperfect delegation, on the other hand, is the case in which the creditor who has
consented to delegation still retains his right against the original debtor in case if the delegate
debtor fails to pay him. Article 1977 gives recognition for imperfect delegation.

 In the case of imperfect delegation, the relationship of the original debtor vis-a-vis the
creditor is that of a simple guarantor and a creditor. The creditor retains his right against
the original debtor but he may not demand satisfaction from the original debtor before
demanding performance from the delegate debtor (see Article 1977(2) of the Civil
Code).

Effects of delegation on third parties

 Third parties who have secured the debt of the original debtor by their property or guarantors
(personal securities) will not be liable towards the creditor upon delegation unless they
consented it. Art. 1982.

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 So, the delegation extinguishes the obligation of the security unless the security re-
consented to be bound. This is because, they have given a surety in respect of the first
contract; the one linking the creditor to the original debtor and cannot be presumed to have
extended it to benefit the delegate debtor.

B. Assignment of Obligation
 Can be taken as special forms of delegation of obligation and addressed by Articles 1983 to
1985 of the Civil Code, which all rest on the same idea of an amalgamation of estates
which include both assets and liabilities. Article 1984, which deals with
amalgamation(merger) is more clear to understand the point at
4. Heirs and creditors of the parties
 The last instance in which contract produces effect [on third parties] is upon heirs and
creditors of the parties.
 The heirs of the contracting parties may be accorded the right to acquire rights and duties
from a contract made by the deceased by the mere fact that they are heirs. This is clearly
governed by Articles 1986 and 1987 of the Civil Code.
 Similarly, creditors are accorded with certain rights so as to make them able to enforce
their rights. These rights include preservatory measures and revocation, among others.
Such rights are provided under Articles 1988 through 1999 of the Civil Code.
A. Heirs of the Parties
 Heirs of the parties continue the person of the deceased if they have accepted the
succession. As per Article 1986 “The heirs of a person shall be substituted for him in
contracts to which he was a party, unless the contrary was stipulated or flows from the
nature of the contract.”
 In respect of stipulations for third party beneficiaries (as addressed under Articles 1957
and following) the heirs of such a party are entitled to the performance of the obligation
considered, if the deceased had already accepted the stipulation but dies before receiving
the performance. Article 1987.
B. Creditors of the Parities
 When it is said creditors of the parties, it means that the creditors of parties to a contract
(creditors of the creditor or creditors of the debtor) by another contract. It is the concept
of plurality of creditors because of contracts concluded with different creditors by the
same debtor.
 Creditors of the parties can be taken as a special category of third parties in respect of
the contracts made by their debtor. i.e., One creditor considers another creditor as
third party
 The ppl here is that the debtor should not conclude a contract if he cannot adequately
secure the performance of the contract. Article 1988, which talks about attachment is all
about property security.
 As per Article 1988, a creditor has a general right to attach and have sold any asset
belonging to the debtor in order to get paid. However, certain assets cannot be attached

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essentially the basic living commodities and tools of the debtor's trade (seeArt.404
CPC).
Agreements entered into by the debtor
 The mere fact that someone is a debtor of another does not totally preclude him from
entering into agreements regarding his property. Article 1989

Exceptions, in which Article 1989 will not apply:

 Article 1990 of the Civil Code which deals with preferred creditors (secured creditors).
Preferred creditorship may arise from a contract or from the law.
 The second important exception is that of simulation. Simulation is defined by Article
1994 of the Civil Code as the case where the debtor enters a simulated contract with a
third party, i.e. a contract which was not intended to be carried out.
 The simulated act is the apparent/unhidden act, whilst the reality of the situation is in a
hidden act, called the counted deed or back letter. For instance, the debtor shows the
contract of sale for a car at 10,000 birr, when the counter-deed was in fact for
100,000 birr just for the sake of tax evasion
 Every simulation presupposes the concurrence of two contradictory agreements, to
which it is impossible to give a cumulative effect with regard to the same person.

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