Chapter Three

Law of Contracts in General

1. Sources of Obligation

Source of obligation indicates from where the obligation emanates. There are
two sources of obligations. Obligations may arise either from the law or a
contract.

1.1. Law as a source of obligations

Some obligations result from the direct operation of the law .This is to
mean that the law itself sometimes imposes obligations on persons.
Legal obligations are binding or enforceable on all persons. Legal obligations
do not depend on the willingness of persons. Whether you like it or not, you
must respect legal obligations.

The following instances explain obligations which make law their source:

• All persons are bound by legal obligations, for example, every person
who earns income is required to pay taxes. Thus, the obligation to pay
tax is binding on all persons.

• Obligation to give military services or obligation to defend one's

country against an external enemy is another example of a legal
obligation.

• Obligation of maintenance also has the same effect. The obligation to

maintain your parents in their old age does not depend on your
willingness.

• Similarly parents are duty bound to pay maintenance of their children.

It is the law that imposes such obligations. In this regard, Art. 198 of
the Revised Family Code is pertinent.
1.2. Contract as a Source of Obligations

Obligations can also be created by the agreement of the contracting parties.

Contractual obligations are different from legal obligations (imposed by law)
for it is something undertaken willingly. One may enter into a contract only if
he/she is willing. When a contractual agreement is made, a binding
obligation is created.

Since contractual obligations are created by agreement, they are binding on

the parties who agreed to be bound by. Contractual obligations are not
binding on third parties or on non-contracting parties. Two persons, by their
agreement, cannot impose an obligation on a third party save exceptional
situations provided by law.

• Dear students, what is a contract?

Contract is one of the important legal devices ever developed in the quest
for economic security and stable society. All persons make contracts in their
daily lives. When you go to shop and buy a stationary material, when you
take a taxi and served thereby, when you go to a restaurant and get service,
when you visit your doctor in a clinic, when you rent a dwelling house, etc.
you are making contracts.

Although the government has a power to command obedience, much of its

work is accomplished by means of contract entered into voluntarily. Thus,
contract is a binding agreement; an agreement enforceable by law. It is a
promise or set of promises for the breach (violation) of which the law
provides a remedy. One can also truly contend that a contract is an
agreement the performance of which is recognized by law.

The pertinent provision of the Ethiopian Civil Code which defines the term
‘contract’ is Art. 1675. It reads:
 “A contract is an agreement whereby two or more persons as between
themselves create, vary or extinguish obligations of a proprietary
nature.”

This is a standard definition of a contract under the Ethiopian law. It applies

to all types of contracts. The definition of a contract contains the following
elements.

a) An agreement;
b) Two or more persons;
c) Obligation; and
d) Proprietary nature.

 The first element in the definition is that a contract is an agreement. It

is something willingly undertaken. Contract is not something imposed on.
Nobody forces you to make a contract. You make a contract only if you
are willing to do so. Accordingly, a contract is the result of free will of
contracting parties.

 Two or more persons; Parties to a contract are always persons. They

may be legal or physical persons. To a contract the persons shall be two
or more parties. This excludes promise of a person for him/herself from
the domain of contracts.

 All contractual agreements create obligations. If no obligation is

created in an agreement, that agreement is not a contractual agreement.
The freedom of the parties is not limited to the creation of obligations.
After creating obligations, contracting parties may want to vary
(change) some terms of their obligations. They are free to do so.
Obligations created by two contracting parties may be varied only by
those two parties. Contracting parties can create and vary obligations
freely. In addition, they can extinguish obligations; they can bring the
 obligations to an end totally by their agreement. Parties to a contract
create obligations only as between themselves, without affecting the
interest of a third party.

 The obligation in a contract should be a proprietary nature that means

it shall have a pecuniary effect. The obligation created aims at economic
benefit not at social or moral values. For instance, ‘eder’, ‘debo’,
invitation for dinner, etc. are not contracts for they basically meant to
serve social or moral value.

Now it is safe to conclude that for an agreement to be a contract it has to

meet the above mentioned criteria. If it fails to pass those tests it can be an
agreement but not contract.

2. Formation of Contracts
Dear students, did you remember the definitional elements of a contract,
which distinguishes it from ordinary agreements, in Ethiopian law? It is not
sufficient for contracts to be enforced for the mere fulfillment of definitional
tests. All jurisdictions set their own respective essential conditions for a
contract to produce effect i.e. to get legal protection.

2.1. Elements of Contract: - Art. 1678 of the Civil Code states that:
• No valid contract shall exist unless:
 the parties are capable of contracting and give their consent
sustainable at law;
 the object of contract is sufficiently defined, and is possible and lawful;
 the contract is made in the form prescribed by law, if any.

In line with the above provision of the Civil Code, no valid contract shall exist
unless four essential conditions are satisfied. If these elements are not met
the contract becomes invalid: Either voidable or void. These basic or
essential elements of contract are:
 1) Consent
2) Capacity
3) Object; and
4) Form if any

Let us see these essential requirements one by one.

1. Consent

Consent/assent is one of the essential conditions for the existence of a valid

contract.

Art. 1679 C.C. Consent necessary

A contract shall depend on the consent of the parties who define the object
of their undertakings and agree to be bound thereby.

Consent is an agreement that is free from any defect. The freedom of

contract is expressed in consent. There are two aspects to consent. First,
there must be an agreement on each detail (identity, price, mode and dated
of delivery and payment, etc). Secondly consent is the willingness of the
parties to be bound by the agreement.

There are two theories of consent of the parties: the objective and
subjective theories.

• The subjective theory of contract gives emphasis that the true

intention of the parties can be only ascertained by whether each party
subjectively intended to make the contract. This theory primarily focuses
freedom of contracts. Proponents of this theory affirm that parties should
not be liable beyond what was not intended during the conclusion of
contracts.

• The objective theory holds that the true intention of the parties to a
contract is to be ascertained from their ‘words and conduct’ rather than
 their unexpressed intentions. To ascertain whether parties consented to
the terms of the contract it is only based on the declared will of the parts
which are determined by analyzing external evidences. This theory
focuses on security of contracts which in turn refutes the ability of
humans to read the mind or the intention of another unless expressed.

Consequently, the Ethiopian law has adopted chiefly the theory of

declaration without totally ignoring the subjective one. Therefore, the
consent of the parties must be declared. The contract is completed when the
parties have expressed their agreement. But if the consent of the parties is
affected by any defects it is susceptible to invalidation

 Offer and Acceptance

Consent is expressed through offer and acceptance.

• Offer

An offer is a definite (certain) statement by one party called the offeror, of

the terms under which he will contract. Offer expresses the willingness of
the offeror to enter into contractual agreement regarding a particular thing.
It is a promise which is conditional upon an obligation (to give something or
to do something), a forbearance (to refrain from doing something) or return
a promise that is given in exchange for the promise or its performance. Offer
is the element of the would be contract.

Offer may be declared in writing, orally or by using sings (physical

movement) or conduct. Social invitations or invitations to social affairs are
not “offers” in the eyes of the law. See Art.1681of the Civil Code of Ethiopia,
1960. The acceptance of social invitation, such as an invitation to go to
dinner, does not give rise to legally binding contract. Likewise an
extravagant offer of a reward made in the heat of excitement cannot be
acted upon as an offer.
There are also some instances that appear to be “offers” but not offer in the
legal sense. Ordinarily, a seller sending out circulars or catalogues listing
prices is not regarded as making an offer to sell at those prices, but merely
indicating willingness to consider an offer made by any person on those
terms. This principle is also applied to merchandise that is displayed with
price tags in store windows and to most advertisements. However, it must be
noted that there are also implied terms. Although an offer must be definite
and certain, not all of its terms need to be express. Some of the omitted
terms may be implied by law.

The offer must be communicated to the offeree. Until the offer is made
known to the offeree, the offeree does not know that there is something that
can be accepted. To be effectively communicated the offer must be made
verbally, or indicated by the actions of the offeror or authorized agent. If the
offeree learns of the offeror’s intentions from some other source, no offer
results because no offer has been communicated. In addition to intention to
create a binding obligation, an offer must be definite and certain to be
enforceable. If a vague or indefinite offer is accepted, courts will not enforce
the apparent agreement against either party.

Very often, an invitation to negotiate is confused with an offer. There are

also some instances (cases) that appear to be offers but not offer in the legal
sense. There are cases called declaration of intention. In this regard, Art.
1687 of the Civil Code provides the following

 No person shall be deemed to make an offer where:

 he declares his intention to give, to do or not to do something but does

not make his intention known to the beneficiary of the declaration, or

 he sends to another or posts up in a public place tariffs, price lists or

catalogues or displays goods for sale to the public
Ordinarily, a seller who sends out catalogues of his products listing prices is
not making an offer to sell at those prices. But he is merely indicating
willingness to consider an offer made by any person on those terms.

• Acceptance

An acceptance is unequivocal agreement of the other party, called the

offeree, to the proposal stated by the offeror. When the offeror expresses a
willingness to enter into a contractual agreement, the offeree has many
choices: he may ignore, accept or reject the offer extended to him.
Acceptance of an offer is a manifestation of one's agreement to the terms of
the offer in a manner invited or required. It is measured by outward
manifestation. Reservations or restrictions intended by one party shall not
affect his agreement as expressed.

The offeree must manifest his acceptance (his agreement to the proposal) in
a manner that is clear. In other words, acceptance must be definite and
certain. The offeror is entitled to know whether the offeree accepts the offer.
The terms of the offer must be sufficiently defined and certain to allow a
court to determine what was intended by the parties, and to state the
resulting legal rights and duties. Acceptance must be absolute and
unconditional. Acceptance must agree to the terms of the offer, it must
conform to the manner prescribed by the offeror. If the offeree changes
terms of the offer, or adds new conditions or qualification, there is no
acceptance because the offeree does not agree to what was offered. The
addition of any qualification converts the acceptance into a “counter offer”.
In effect, a counter offer is a rejection of the offer

• Mode of acceptance

In the absence of a contrary requirement, an acceptance may be indicated

by an informal Ok; by a mere affirmative nod of a head, or by performing the
act called for.
Acceptance of an offer can also be shown by conduct. But it must be clear
that the offeree intended to accept the offer. An offer may be accepted only
by the person to whom it is directed. If anyone else attempts to accept it, no
contract with such a person arises. If the offer is not directed to a specified
individual, but to a class of persons, any person within that class can accept
it. If the offer is made to the public at large, any member of the public may
accept it (public promise of reward).

Acceptance must conform to any condition expressed in the offer concerning

the manner of acceptance. When the offeror specifies that there must be a
written acceptance, it must be accepted in writing. In this case, an oral
acceptance may not lead to the formation of a contract.

Art. 1682 is a principle governing silence. In principle, silence of the

offeree does not mean acceptance. But exceptionally as per art 1683 in
the case of public enterprises dealing with public utilities such as electric
light, water supply, telephone services, etc silence amounts to acceptance.

These enterprises make contracts on terms stipulated in advance. If a

member of a public agrees to enter into a contract on the terms stipulated
by the enterprise, the enterprise does not have any reason to reject the
offer. Thus, it has a duty to accept an offer made by any person provided he
has agreed to the terms stipulated. Once the offer is received by the
enterprise, there is a complete contract even if the enterprise does not
respond.

The second exception is provided under Art. 1684 which deals with the cases
where the offeror and the offeree have pre-existing business relation. There
are two conditions to be met so as to apply the aforementioned provision.
These are: First, the offer to extend the contract must have been made in a
special document (a document prepared for the purpose of making an offer);
and second, the offeror must specify the time within which he expects the
 response of the other. If the offeree does not respond within a reasonable
period of time, the offer shall be deemed to have been accepted.

An offer communicated to the offeree does not remain in force (open)

indefinitely. It may laps or it may be revoked. Thus offer may come to an
end by:

a. Revocation
b. counter – offer
c. Rejection
d. lapse of time
e. Death, disability or declaration of absence of either party.
I. Revocation

Ordinarily, an offer may be revoked (withdrawn) at any time before it is

accepted even though the offeror had expressly promised that the offer shall
remain in force for a stated period of time and that period has not yet
expired, and even though the offeror had expressly promised to the offeree
that the offer would not be revoked before a specified time. Thus, the bidder
at an auction sale may withdraw or revoke a bid (offer) before it is accepted.

But there is very important question that should be answered: when the
contract is between absent parties when does revocation become effective?
Is it when the letter of revocation is dispatched (mailed), or is it when the
letter is accepted by the offeree? There are two theories: the theory of
dispatch and the theory of reception.

According to the theory of reception, a letter or telegraph revoking an offer

to a particular offeree is not effective until it is received by the offeree. It is
a revocation neither at the time it is written by the offeror nor even when it
is mailed or dispatched. On the other hand, the dispatch theory states that
revocation is effective only up to the time the letter is mailed or dispatched.
 The second theory (dispatch theory) is supported by Art.1692 (1) of the
Ethiopian Civil Code.

II. Lapse of time

Offers may be made with or without time limits. Whosoever offers to another
to enter into a contract and fixes a time limit for acceptance shall be bound
by his offer until the time limit expires. The offer remains active until the
time limit expires. On the other hand, if the offer does not specify a time
limit acceptance, it will lapse after a reasonable period of time. What
constitutes a reasonable period depends on the circumstances of each case:
the nature of the subject matter, the nature of the market in which it is sold
and other factors of supply and demand.

III. Counter offer

According to Art.1694 of the Civil Code, the offer shall be deemed to be

rejected where the acceptance is made with a reservation or does not
exactly conform to the terms of the offer and it constitute a new offer by the
offeree. Thus, any departure from or addition to the original offer is counter
offer and brings an end to the original offer.

IV. Rejection

If the offeree rejects the offer and communicates his rejection to the offeror
the offer comes to an end even though the period for which the offeror
agreed to keep the offer open has not expired.

V. Death, disability or declaration of absence of either party

If either the offeror or the offeree dies or become incapable (insane) before
the offer is accepted, it is automatically terminated. Declaration of absence
of either party also produces the same effect.

 Defects in consent (vices of consent)

It has already been noted that in order to create a binding obligation, the
consent of the contracting party must be free from defect. But how does
consent become defective and give rise to the invalidation of a contract? A
contract may be invalidated on the ground of consent given by mistake, or
where fraud or duress is exercised by a contracting party on the other, or as
the case may be by a non-contracting party (third party). Thus, the major
defects in consent are mistake, fraud and duress.

a. Mistake

According to Art 1696 of the Civil Code a contract may be invalidated where
a party gave his consent by mistake. In contract law, mistake is defined as
an erroneous belief in a thing or in a fact. In order to invalidate a contract,
the mistake must be decisive. It is decisive where a mistaken party
wouldn’t have entered into the contract had he known the truth.
This criterion of the knowledge of the mistaken party is subjective.

On the other hand, there is an objective standard (criterion): the mistake

must be fundamental. It must relate to some fundamental elements of the
contract. If the mistake is non-fundamental, a contract cannot be invalidated.
A mistake is fundamental if: It relates to the nature of a contract. There are
different contracts each with it’s own nature. One contract may be different
from the other in several ways. For instance, contract of sale is completely
different from the contract of donation.

It relates to the object of contract. The concept "object of contract" in this

context means the obligations that parties assume towards each other.
Mistake relating to identity or qualification of a contracting party. This is
another fundamental mistake. But why is the identity of a contracting party
important? It is important because you don't make a contract with any
person in the street. You select your contracting party. When you select,
you use different criteria: financial position of the person, his personal
integrity, his credit worthiness, etc.

b. Fraud Art 1704

A contract may be invalidated on the ground of fraud where a party resorts

to a deceitful practice to induce another to make a contract. It is act or
practice made with the intention of misleading another. Fraud creates a
wrong impression (belief) in the mind of another. Fraud exists where a
person intentionally acts in such a way as to mislead into entering into a
contract.

Accordingly, an act intended to mislead another is fraud and it invalidates a

contract. On the other hand, a mere false statement is not fraud. A false
statement becomes fraud where the false statement is made in bad faith or
by negligence. A relationship of confidence and loyalty must exist between
the contracting parties. . For instance, if a contract is made between a
father and son, and the father intentionally makes a false statement to
induce his son into the contract, you can say that the false statement of the
father amounts to fraud. This is because there is a relationship of confidence
between the two.

c. Duress

Duress is the other vice that vitiates consent of the contracting parties. If
one person compels another to enter into an agreement by threat of force, or
by an act of violence, the agreement is said to be obtained under duress.
Duress makes an agreement voidable. When there is duress, a person is
denied the exercise of free will in entering into contract. When a person is
forced or threatened, he is not free to make his own decision. Even if he
agrees under that situation, he does it only to avoid the danger. The
threatened or actual violence may be to the life, liberty or property of the
victim, the victim's immediate family or near relatives.
To invalidate a contract on the ground of duress, the existence of duress
(danger) by itself is not sufficient condition. The danger must be relatively
serious and imminent to impress a reasonable person. An imminent danger
is an immediate danger. If you don't have means of avoiding the danger, it is
imminent. It is a danger that cannot be avoided (averted) without submitting
to the threat. If you have a possibility of avoiding the danger, then it is not
imminent.

Sometimes, duress may be exercised by a person other than a contracting

party. But whether it is exercised by a contracting party or a third party, the
effect is the same.

Art. 1708 - Threat to exercise a right.

A threat to exercise a right shall be no ground for invalidating a contract

unless such a threat was used with a view to obtaining an excessive
advantage.

2. Capacity

For contracts to be enforceable, the persons who make them must have the
capacity to contract. Capacity means the ability to understand ones actions
and the effects of those actions. Persons with the capacity to contract are
legally competent. Legal capacity depends on the age of a person, mental
condition of a person and a criminal sentence (penal sanction) passed on a
person. Under the Ethiopian law, a person must be at least eighteen years of
age of a sound mind and free from any judicial interdiction.

Capacity is presumed. Every party to a contract is presumed to have

contractual capacity until the contrary is proved. According to Art. 192 of the
civil code“Every physical person is capable of performing all the acts of civil
life unless he is declared incapable by the law.”
Though, as a rule, every physical person is capable, the law, for one reason
or another, declares some members or groups of society incapable.

Art. 193, identifies three grounds for general incapacity: age, mental
condition and sentence passed on a person. Based on that identification,
there are three groups of incapable persons under the Ethiopian Law:
minors, insane persons and judicially interdicted persons.

a) Minority

Art.198 of the Ethiopian civil code and Art.215 of the Revised Family Code
defines a minor as a person of either sex who has not attained the full age of
eighteen years. Minors are treated differently by the law than adults when it
comes to capacity to contract. Minors are given special protection under the
law. For their own protection, minors are restricted in their freedom to
contract.

The assumption of the law is that minors are inexperienced in business and
in life. If they are left to make contracts, there is a possibility that adults
may take advantage of their inexperience. If left by themselves, minor may
not make wise and reasonable decisions.

As the result of their immaturity, they may make decisions that may
negatively affect their own interests. For his own protection, a minor is
placed under the authority of other persons: the guardian and the tutor. The
guardian is responsible for the proper care of the minor's person. On the
other hand, the tutor is responsible for the pecuniary interests of the minor
and the administration of his property, if any. The tutor looks after the
financial interest of the minor.

b) Insanity and Infirmity

An insane person is one who, as the result of insufficient development of

mind or as the result of mental disease or senility, is not capable to
understand the consequences of his actions. To determine the effect of
insanity on the juridical acts of persons, the law classifies insanity into
Notorious and non-notorious. A person is deemed to be notoriously insane
where; by reason of his mental condition he is an inmate of a mental hospital
or of a nursing home for the time for which he remains an inmate.

As a rule, a valid contract requires that the parties to it have a contractual

capacity. An insane person lacks such capacity. He or she cannot make a
binding contract.

c) Judicial Interdiction

Judicial interdiction is the withdrawal of a person’s legal capacity by the

order of the court to protect his interest, or the interest of his presumptive
heirs. Judicial interdiction may also be pronounced in the case of a person
who is unable through permanent disability to govern himself or to
administer his estate (Art. 340 and 354 and 351 civil code).

A distinction must be drawn between judicial interdiction and legal

interdiction. According to Art.380 of the civil code, a Person interdicted by
law is one from whom the law withdraws the administration of his property
as a consequence of a criminal sentence passed on a person. Judicial
interdiction may be demanded by the insane person himself, by his/her
spouse, by any relative by consanguinity or affinity or by public prosecutor
as it is indicated under Art.353 of the Ethiopian civil code.

3. Object of a Contract

Object of contract means obligations undertaken by the contracting parties.

Contracting parties are free to create and to determine the nature (terms
and conditions) of their obligations, termed as freedom of contracts. Nobody
shall determine a contractual obligation to the contracting parties as it is
also clear from the reading of the Art.1675 defining the term ‘contract’. But
their freedom is not absolute. There are restrictions and prohibitions
provided by law. Contracting parties cannot violate public policy in
determining their obligations. They cannot create obligations against the
moral values of the society. the object of a contract may be positive or
negative.

 The object of a contract must be defined with sufficient precision. A

contract shall be of no effect where the obligations of the parties or of one
of them cannot be ascertained

 The object of a contract must be possible to be performed at the

time of conclusion. A contract shall be of no effect where the
obligations of the parties or of one of them relate to thing or fact which is
impossible and such impossibility is absolute and insuperable.

 The object of contract must be lawful. Where the obligations of parties or

of one of them are unlawful or immoral, the contract is void. The relevant
provision of the Ethiopian civil code is Art. 1716. The object of contract
must be lawful. If the object of the contract is not lawful, the contract
shall have no effect.

4. Form of a Contract

Contracting parties have a freedom of choosing the form of their contract

unless the law specifies or parties agreed a special form for certain contracts
(Art.1719). Where a special is expressly prescribed or agreed such form shall
be observed failure leave the contract with no effect but a mere draft. Most
contracts are oral. Many are made by telephone. Others are made and
carried out in a single face to face conversation.

 The following are contracts which are to be made in written form.

• Contracts relating to immovable.

 • Contracts made with a public administration; and

• Contracts for a long period of time (contract of guarantee, insurance

contracts).

3. Effects of Contracts

Contract is nothing but a law for the contracting parties. Pursuant to Art.
1731 of the civil code, the provisions of a contract validly formed shall be
binding on the parties as though they were law.

4. Performance of contract

Contract creates two relationships between the contracting parties: the

relationship of a creditor and a debtor. Creditor is a party who demand
performance or who receives performance. On the other hand, debtor is the
one who makes performance. It is clear that the debtor performs. But the
important question is, should the debtor always perform personally or can a
third party perform on behalf of the debtor?

a) Performance by whom Art. 1740 -

The debtor shall personally carry out his obligations under the
contract where this is essential to the creditor or has been
expressly agreed.

In all other cases, the obligations under the contract may be

carried out by a third party so authorized by the debtor, by the
court or by law.

Where the obligation relates to the payment of money or delivery of a thing,

it makes no difference whether the creditor receives the money or the thing
directly from the debtor or a third party.
The creditor is interested in getting the money or the thing. Identity of the
person who makes payment or delivery is not important. But where the
obligation of the debtor is to do something, his skill or qualification is
involved. Therefore, he must perform personally because the creditor may
attach importance to the skill or qualification of the debtor.

b) Payment to whom made Art. 1741 -

Payment shall be made to the creditor or a third party authorized by the

creditor, by the court or by law to receive it on behalf of the creditor.

c) Payment to unqualified person Art. 1743 -

Payment to a person unqualified to receive it on behalf of the creditor

shall not be valid unless the creditor confirms it or such payment has
benefited him.

Payment shall be valid where it is made in good faith to a person who

appears without doubt to be the creditor.

In principle, if you make payment to unauthorized person, your payment is

not valid. That means you are not released from your obligation. You may
be required to make another payment. But there is an exception to the
principle in any one of the following conditions.

• if the creditor confirms it;

• if the debtor proves that the payment has benefited the creditor;

• if the payment is made in good faith to a person who appears to be the

creditor.

• Identity of the object Art. 1745 -

 • The creditor shall not be bound to accept a thing other than that due to
him notwithstanding that the thing offered to him is of the same or of a
greater value than the thing due to him.

Art. 1747 - Fungible things

• Unless otherwise agreed, the debtor may choose the thing to be

delivered where fungible things are due.

• The debtor may however, not offer a thing below average qualify.

Where the debtor had undertaken to deliver a definite (specific, identified)

thing, he must deliver the exact thing

Where the debtor had undertaken to deliver a fungible thing, the applicable
rule is different. Fungible things mean a class of things, which has within
that class, different qualities but serve the same purpose. Wheat is the name
of a class. There are different varieties, qualities within this class of wheat.
Where the contract mentions only the name of a class the obligation of the
debtor (seller) is not the same.

d) Place of payment Art. 1755 -

Payment shall be made at the place agreed.

Where no place is fixed in the contract, payment shall be made at the

place where the debtor had his normal residence at the time when the
contract was made.

Unless otherwise agreed, payments in respect of a definite thing shall be

made at the place where such thing was at the time of the contract.

e) Time of payment Art. 1756 -

Payment shall be made at the time agreed.

 Where no time is fixed in the contract, payment shall be made forthwith.

Payment shall be made whenever a party requires the other party to

perform his obligations

f) Transfer of risk Art. 1758(1)

The debtor bound to deliver a thing shall bear the risks of loss or of damage
to the thing until delivery is made in accordance with the contract.
Therefore, the determining factor is the time of delivery. It is only under
exceptional cases that risk of loss may pass to the creditor before delivery.
So, that is the exceptional cases where the risk passes before delivery.

5. Non-Performance of Contracts

Non-performance is breach of contract or violation of agreement. It may also

be defined as failure to carry out contractual obligation. Non-performance or
breach may be total, partial or improper. As the name indicates, total breach
means that there was no performance at all. Partial breach shows a case
where part of the obligation was performed and the other part breached. In
improper performance, there is an attempt to perform but it is carried out
irregularly or improperly. Whether the breach is total, partial or improper, it
all amounts to non-performance.

Art. 1772: A party may only invoke non-performance of the contract by the
other party after having placed the other party in default by requiring him
by notice to carry out his obligations under the contract. Where a party does
not carry out his obligations, the other party is given certain remedies for
such a breach.

However, before asserting or exercising his right arising from the non-
performance, the creditor must put the debtor in default. In other words, the
creditor must give the debtor a notice. Notice is a reminder to the debtor.
Its purpose is to remind the debtor that time for performance has become
due (has matured).

The form of notice may be written or any other means of communication.

The only requirement is that it must indicate (denote) the creditors’ intention
to obtain performance. But notice may not be given before due date for
performance.

Art. 1775

Notice need not be given where:

– the obligation is to refrain from certain acts; or

– where the contract was to be performed only within a given period

of time and that time has expired;

– the debtor has declared in writing that he would not perform his
obligation;

– it has been agreed in the contract that notice shall not be required.

6. Remedies for non-performance

6.1. Specific Performance (Forced performance)

The term “specific performance” or forced performance refers to a case

where the debtor may be forced by the court to carry out his obligation
specifically as agreed. To order specific performance, two conditions must
exist. These two conditions are indicated under Art. 1776.

The first condition is that the creditor must show (prove) that he has a
special interest in the performance of the debtor. If there is another remedy
that is adequate, specific performance is not ordered. The second condition
is that the enforcement must be carried out without affecting the personal
liberty of the debtor. Contract of employment may not be the object of
specific performance. Forcing a person to work for another is the same as
slavery. Rather than forcing a person to work against his free will, the court
may order monetary compensation to the injured party.

6.2. Cancellation of a Contract

According to Art.1784, a party may move the court to cancel the contract
where the other party has not or not fully and adequately performed his
obligation within the agreed time.

A contract may be cancelled only if a fundamental provision of a contract is

breached. For instance, the obligation of a seller is to deliver a thing at a
specific place agreed. Instead of delivering at the place agreed, he may
make delivery at a different place. If a contract is cancelled, the parties are
reinstated in the positions which would have existed had the contract not
been made. This is the effect of cancellation. The thing sold is returned to
the seller and the money paid is refunded to the buyer. Sometimes, this
process is called restitution.

6.3. Damages (Monetary Compensation)

Compensation may be awarded to the injured party independently or in

addition to other remedies. Compensation may be ordered as an adequate
(sufficient) remedy by itself. If a contract is cancelled, there is something
that the other party loses. Therefore, compensation may be ordered even if
the contract is cancelled.

If a contract is enforced (if specific performance ordered), there is a time gap

between due date and the time of enforcement. There is also a possibility
that the creditor may lose something. Accordingly, the purpose of
compensation is to re-establish that balance that was disturbed by non-
performance. Compensation is not awarded whenever a contract is
breached. It is awarded only when the non-performance has caused the
creditor to suffer some economic loss.

There is only one case where the debtor may not be forced to compensate.
Art. 1791(2) provides that if performance was prevented by force majeure,
the non-performing party is released (is excused). It is a defense available to
the debtor. He must show that his performance was prevented by force
majeure.

Force majeure is an event or occurrence which takes place after the contract
and that prevents you from carrying out your obligation. It is something
beyond your control or something for which you are not responsible.
According to Art.1792, force majeure results from an occurrence which the
debtor could normally not foresee and which prevents him also lately from
performing his obligations.