CHAPTER ONE

INTRODUCTION

1.1. Meaning of Law and Schools of Jurisprudential Thought

There have been and will continue to be different definitions of law.

The Greek philosopher Aristotle for instance thought of law as a “pledge that citizens of a state
will do justice to one another”. Aristotle’s student, Plato, asserted that law was a form of social
control. Cicero, a Roman philosopher, believed law was the agreement of reason and nature, the
distinction between the just and the unjust.

The British legal scholar Sir William Blackstone described law as “a rule of civil conduct
prescribed by the supreme power in a state, commanding what is right and prohibiting what is
wrong”. (all are based on the nature of the law)

Now we come to the discussion of the most influential schools of thought that have embodied the
contentions in the discourse of defining law. Legal philosophers and scholars frequently disagree
on what the proper function of law should be and their disagreements have produced different
schools of jurisprudence, or philosophies of law.

a) The Natural Law School

This is the oldest and one of the most significant schools of jurisprudence. The proponents
of the natural law school of jurisprudential thought assert that “government and the legal
system should reflect universal moral and ethical principals that are inherent in human
nature”.
They argue that there can exist a positive, or conventional, or state-made, law which is
operative only within the political jurisdiction of the concerned state, such law would be
valid or legitimate and should be obeyed only if it accords with natural law.
b) The Positivist School

This school argues that there can be no higher law than a nation ’s positive law. This means
that significance and final validity would be placed in law created by a particular society at
a particular point in time.
They say as long as a law exists, whether it is bad or good, it must be obeyed
c) Legal Realism

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 The tenet of legal realism is the call for flexible application of laws in a manner that
conforms to the constant change in societal values and the recognition of judicial activism
The discourse of the legal realists principally contained three-fold aspects. Firstly, they
were opposed to the assumption that judges, at least ideally, apply the law impartially,
logically and uniformly. The legal realists rather firmly believed that each judge is
influenced by the beliefs and attitudes unique to his/her personality. Second, they claimed
that each case is attended by a unique set of circumstances and that no two cases, no matter
how similar, are ever exactly the same. Therefore, according to the realists, judges should
tailor their decisions to take account of the specific circumstances of each case rather than
rely on some abstract rule that may not relate to those particular circumstances. Thirdly, the
advocates of legal realism constructively influenced legal thought in that they called on
judges to consider extralegal factors, such as economic and sociological data, in making
decisions, to the extent that such non-legal sources illuminate the circumstances and issues
involved in specific cases.
d) The Marxist Legal Thinking
This conception of law is substantially different from other schools of thought in that it
questions the very origin and purpose of law and argued for its elimination.
According to the Marxists, law came into existence as a result of the emergence of a class
society based on private property. The formation of a class society is such that those who
have appropriated private property constituted one class and those with no private property
constituted the other class (the lower class), and law is an instrument of maintaining class
differences and an oppressive tool by the economically dominant against the have-nots.
They argue that If the society is transformed to communist mode, there would be no more
need of laws and state.
1.2. The Features of Law

i) Generality

Law is a general statement regarding a possible human conduct. Any valid legal norm is applicable
to all the subjects in the author’s territory irrespective of race, language, religion, social satatus
except on extremely exceptional circumstances (such as exemption from legal liability to a certain
degree because of immunity provisions like (the House of Peoples Representatives)

ii) Normativity

The characterization of law as a normative statement refers to the “ought ” aspect of the discourse,
the statement of what should be rather than what is. Law is not a factual statement (description is
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not in the nature of law); it is rather a prescriptive tool which purports(try) to shape human
behavior in the future.

iii) Establishment in Permanence

The coming into force of law presupposes, at least presumably, its indefinite existence in the
future.
However Law might exist exceptionally for temporary application. Eg. declaration of sate of
emergency explains such a circumstance.
iv) Intimacy with Human Behavior and State

Law is a social norm and its ultimate concern is regulation of the social behavior of human beings.
v) Strongly Institutionalized

We have said above that law is backed by an established system of a state. The state is constituted
by centrally established institutions of legislature, executive and judiciary entrusted with the tasks
of law making, law enforcement and interpretation of laws respectively. The combined operation
of these organs sanctions the law by a strong force.
1.3. Law as Distinguished from Other Social Norms

This “other social norms” category is filled perhaps by ethics, morality, culture, religion, and the
like. Law is similar with these norms in the way that they both prescribe what should be and what
should not be and accordingly shape the social behavior of man.
One important issue that differentiates law from the other social norms is mechanism of their
enforcement. Law is backed by a strong sanction of the state and would be institutionally enforced.
Ethical/moral/religious norms on the other hand lack such external and effective enforcement
mechanism
Second, scope of application; Law enjoys uniform and nationwide application. But the other social
norms are peculiar to particular groups.
Moreover, The existence of clear institutionalized system would make it easy to bring law into
effect and to amend it. Non-legal norms, on the other hand, do not normally have an easily
traceable institutional origin for they are not made in an organized way.
A further important factor that can be regarded as a virtue of law over non-legal norms is the
exhaustiveness and clarity embedded in law. Law would be exhaustively proclaimed (mostly
written) and sufficiently clear. Normative rules of ethics, morality, or religion are, on the other
hand, barely exhaustive and known for their manifest lack of clarity.
1.4. Functions of Law

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  Law is an instrumentality for maintaining order and security.
 It also steps in or governs to govern detailed individual interactions. Laws of family for
instance are concerned with the regulation of the institution of marriage and matrimonial
affairs.
 Law protects citizens from arbitrary and excessive governmental actions
 Laws are also instrumental in fighting harmful traditional practices (HTPS). E.g. Early
marriage has been the widespread practice in many parts of Ethiopia.
 Law also pays a prominent role in improving the life of the society through the
encouragement of innovation and creativity.
1.5. Classifications of Laws and Nature of Business Law
Public versus Private Law
Public law addresses the relationship between persons and their government, and between various
governments. They are public in the sense that the interest of the public at large is at stake as
represented by the government.
Private law governs direct dealings between persons. When persons deal or affect other persons,
such as in a contractual relationship, the law governing these relationships is classified as private
law
Substantive and Procedural Law
Substantive law includes all laws that define, describe, regulate and create legal rights and
obligations. This body of law establishes acts and situations producing effect at law. Procedural
law sets out the methods of enforcing the rights established by substantive law. Questions about
how a lawsuit should begin, what documents need to be filed, which court will hear the suit, which
witnesses can be called, how the judicial proceedings is conducted, and so on are all questions of
procedural law
Civil versus Criminal Law
Civil law is concerned with the duties that exist between persons or between citizens and their
government (the latter as a ordinary legal person), excluding the duty not to commit crimes.
Criminal law, in contrast to civil law, is concerned with wrongs committed against the public as a
whole. Criminal law is always public where as civil law is sometimes public and sometimes
private. In a criminal case, the government seeks to impose a penalty on an allegedly guilty person.

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 CHAPTER TWO
LAW OF PRESONS
This section introduces the basic concept in law – the law of persons. Here is where all legal
claims start and produce the intended legal effects. A student who successfully completes the study
of this part should be able to:
- distinguish the legal meaning of person from its literal meaning;
- explain the purpose of granting an individual or a fictitious being with personality;
- discuss the acquisition and termination of personality;
- identify the attributes of personality;
- analyze capacity and incapacity of physical persons.
2.1. The Concept of Personality and its Effect
The term person in law is different from its conventional meaning. Personality in law refers to the
authority accorded to a being (individual or organization) by law so that the latter would be able to
enter into various transactions having effect at law. In order to acquire rights and bear duties that
are enforceable by the machinery of a legal system, one needs to possess personality first
Personality is a fundamental concept in law because no dealings of legal significance would
produce effects without it.
Personality is granted to two categories of beings and accordingly is of types. One is physical or
natural personality that is possessed by human beings.
The other type of personality is that accorded to beings that do not have material existence.
Associations, companies, organizations, partnerships, corporations or even the state are only
perceived by the law to exist. These fictitious entities are exclusive innovations of the law and
accordingly given personality because of the necessities of modern complex legal transactions.
2. 2. Beginning and Termination of Artificial Personality
Acquisition of personality by business organizations is realized by meeting the requirements of
both registration and publicity, and only as a consequence of such they can validly undertake acts
of civil life.
2.3. Attributes of Legal Personality
Being recognized as a person by the law makes the person possess certain attributes.
i) Having a name: - names do really affect the legal position of a person because they are
mechanisms of identifying the civil identity of a specific person in the society and of legally
conferring/imposing upon it powers and disabilities and because the law provides for protective
mechanisms against abuse and usurpation of the name by others.

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ii) To sue and be sued (in one's name):- To sue is to bring a legal action against another, and,
conversely, to be sued is to face a legal action brought against oneself by another.
iii) Entering into contractual relations: - Since a legal person is an entity that can be a party to
legal transactions, it can enter into various contracts in its own name.
iv) Ownership and administration of property: - A legal person can exercise all property rights to
the exclusion of others and enjoys ownership and administration right over all chattels(property)
belonging to it.
v) Obligation to pay taxes: - A legal person is liable to pay taxes on taxable benefits and gains.
The conferring of personality upon moral persons and accordingly authorizing them to own
property and conduct business in their own name give rise to the concept of limited liability. (What
is limited liability?)
2.4. Commencement of Physical Personality
Dear students, the personality of natural persons begins through a couple of ways. There is a rule
which is generally regarded as the starting point of personality, and there is also an exception to
such rule where personality commences.
2.4.1. The Rule
Most legal systems accept birth as a time when personality of a human being begins. Similarly,
Art.1 of the Ethiopian Civil Code provides “the human person is the subject of rights from its
birth ”.
2.4.2. The Exception
Because personality begins at birth as a matter of principle, an unborn body is not a person in the
eyes of the law and can have no rights. But this general rule is excepted in that personality may be
granted to a merely conceived baby without waiting for its birth for some purposes. The
circumstance generally revolves around the interest of the unborn child. The law has invented this
fiction only for the purpose of enabling the child (if it is born) to take a benefit in all matters
affecting its interest.
The granting of personality to a fetus is subject to compliance with three cumulative requirements.
According to Art 2 of the Ethiopian Civil Code, “a child merely conceived is considered as though
born where its interest so requires provided it is born alive and viable”. Thus, the three
conditions are: the interest of the child must justify the grant of personality, the child must be born
alive, and it must be viable. These conditions are cumulative in the sense that the missing of one
suffices to deny the fetus personality.

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Viability refers to the ability to live or the potential of surviving. This is to exclude from the ambit
of personality impotent newly born babies or those incapable of surviving because of some
congenital factors.
The law takes certain presumptions to settle questions of what baby is viable and what is not. The
law irrebutably presumes that a child that lives for 48 hours after its birth is viable, so that no
contrary evidence can be admitted to disprove this presumption. The law also provides for another
presumption in the negative that a child that dies before 48 hours after its birth is deemed to be not
viable. But this presumption is rebuttable in that it can be shown to the contrary by proving the
child was viable. But we cannot challenge the non-viability of the child by using deficiency in
constitution as evidence. That is to say, if a child dies before 48 hours following its birth due to a
disease he caught in its mother's womb or due to other congenital biological deficiencies, it will be
conclusively deemed not viable. However, external factors that may have caused the death of the
child before 48 hours can be used to disprove the presumption of non-viability. If, for instance, the
baby dies on the 43rd hour after its birth because of mishandling by nurses or by hunger or due to a
car accident that occurred while it was being taken home from hospital, all such can be employed
to challenge the above presumption by proving that the baby would not have died had it not been
for the extraneous factors..
2.5. Capacity and Incapacity of Physical Persons
Capacity is a natural consequence of being recognized as a person before the law and it refers to
the authority to enjoy and exercise rights and duties by oneself. However, even if personality is a
necessary condition for capacity, it is not a sufficient one to enable one to personally carry out
juridical acts and certain conditions may incapacitate an individual still possessing personality.
Capacity or incapacity is usually thought of regarding two aspects: holding rights and duties, and
exercising rights and duties.
The principle governing the holding of rights and duties by physical person is that as soon as
personality begins all rights and duties are held by an individual.
Capacity is the rule, the full exercise of rights and duties in principle coincides with their holding.
But in certain circumstances it deems compelling, the law may explicitly declare that person is
considered incapable to exercise rights and duties and therefore he is forced to exercise rights and
duties through another person by way of representation. the legally prescribed conditions of
incapacity and their corresponding representation institutions. Some of the conditions are
protective of the interests of the incapable person (e.g. minority, judicial interdiction) while others
are either preventive or punitive of certain conduct (e.g. foreign citizenship, legal interdiction).

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a) Minority: - Minority in civil law is an incapacitating condition that occurs because of age. A
person below the age of 18 years is called a minor and is incapable of exercising rights and duties
by him/herself.
A minor may, however, validly perform acts of daily life, i.e. simple and small matters that are
quite frequently done and that do not significantly affect the legal position of the minor.
There are two institutions of representation recognized by the law to exercise rights and duties on
the behalf of the minor. One is guardianship, which is entrusted with the task of running the
personality affairs of the minorThe other representative institution is the office of tutorship. Tutor
is answerable for the protection and management of the minor's economic (pecuniary) interests
such as securing income, investing same, running business, administering property and the like.
Termination; The incapacity arising as a result of minority may terminate through two ways. (1)
A minor obviously assumes capacity to exercise rights and duties him/herself when he/she attains
the age of majority (18 years). (2) Through emancipation even if the person is still below the age
of eighteen. Eg. Marriage
b) Judicial Interdiction: - This is a court judgment that declares a person as incapable because of
mental conditions. The law steps in to protect the interests of persons with deteriorated mental
functioning as a consequence of insanity, infirmity, senility and the like. Hence, just like minors,
exercise rights and duties they hold through guardians if the interest pertains to the personality of
the incapable and through tutors where the interest is a proprietary one.
Note that the offices of guardian and tutor have certain general features in cases of both minority
and judicial interdiction.
1. The offices are compulsory – it is a civil duty to become a tutor or a guardian and no
consent is needed.
2. The offices are in principle non-remunerative. A guardian or a tutor gives the service for
free.
3. The tutor/guardian must be a capable person. It is clear that an incapable person cannot
exercise representing others rights and duties that he/she cannot personally exercise.
4. The essence of the distinction between the offices of guardianship and tutorship is the type
of activity undertaken and it does not mean that two different persons should hold the
offices. Both functions can be assumed by a single person.
5. The offices are strictly personal in the sense that they cannot be delegated to the exercise of
third party or they cannot be transferred to next of kin through inheritance.

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c) Legal interdiction: - This is an incapacity imposed by the law. A person will be legally
interdicted as a result of the pronouncement of a legally prescribed punishment for the violation of
criminal law.
d) Foreign Nationality: - This is a special incapacity because a person is prevented from
exercising specified categories of rights. For instance, the right to vote
2.6. Termination of Physical Personality
Article 1 of the Ethiopian Civil Code also provides that human person is the subject of rights from
birth to death, meaning personality ends at death.
Declaration of absence can, through interpretation, also result in termination of physical
personality. The law says that if a person's whereabouts are not known for a certain period defined
by the law, a judicial declaration of absence having the effect of death for all legal purposes may
be made.

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 CHAPTER THREE
THE LAW OF CONTRACTS
This area is crucial for businesspeople and managers. Contracts are matters of daily life especially
in commerce. Thus, the knowledge of fundamental principles of contract law is of much help in
commercial success. Dear students, as a business professional you need to check yourself at the
end of this chapter if you have attained the following.
- Discovering the nature of a civil obligation;
- Comprehending the essential principles of contracts;
- Identifying and appreciating the essential requisites in the formation of contracts;
- Noticing the effects of contracts;
- Exploring issues of performance of contracts;
- Explaining non-performance and identifying the remedies.
3.1. Some Remarks on Obligations
Legal obligations can be split into penal and civil obligations. The specific concern here is with
civil obligations existing between private citizens.
A civil obligation consists of a juridical relation between two persons, of whom the one entitled to
demand performance on the obligation is called creditor and the one who is obliged to perform is
called debtor. Thus, the obligation and its correlative right take the name of debt and credit
respectively. One of the parties occupies the active position of creditorship and the other assumes
the passive status of debtorship.
The sources of obligations are generally law and contract. In contract, the will of the parties forms
the basis of the obligation; in the absence of a contract, an obligation cannot arise except by virtue
of the law and therefore all non-contractual obligations have the law as their sole source. But it is
beyond the scope of this study to discus non-contractual obligations and our focus is on contracts
only.
3.2. Essential Notions of Contracts
Dear students, in this section I'll introduce you with certain fundamental quasi-philosophical
concepts of contracts including the definition given by the Ethiopian law. You are strongly
advised to exert your utmost effort to grasp these concepts because the whole discussion of
contracts centers upon these notions in one way or another.
The Ethiopian Civil Code adopted a Romano-Germanic jurisprudential background that
established the theory of the autonomy of will in contractual matters. This theory derives from the
philosophy of economic liberalism, and embodies three major consequences:

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 (1) Contractual freedom: there is no obligation to contract; the contracting parties are free to
determine the scope of their contract; there is no special form for contracts because consent
is sufficient.
(2) Enforceability of contracts: a contract has the force of a law between parties. The
contract is compulsory even for the judge as he has to decide disputes by referring solely to
the provisions stipulated by the parties in their contract.
(3) The relative effect of contracts: a contract has no bearing on third parties, or parties
outside that contractual engagement are unaffected.
The above notions can be explained further by considering definitional attempts. There are also
other ideas related to contracts.
Art. 1675 of the Ethiopian Civil Code defined a contract as “ an agreement whereby two or more
persons as between themselves create, vary or extinguish obligations of a proprietary nature''. The
contractual elements that emerge out from dissecting the definition and other related issues are;
A) Contracts are agreements – they are based on compulsory exchange of consent. But not all
agreements are contracts.
B) A contract needs at least two persons for its existence –
C) Privity –the principle of relative effect of contracts demands that third parties are not concerned
by the contracts made by other persons. The phrase “as between themselves ” in the definitional
provisions of the Ethiopian Civil Code reveals the concept in that it is only parties to a contract
who are entitled to the benefits or burdened with the liabilities that arise from the contract, and not
third parties.
D) The object of contracts is the establishment and performance of an obligation –
E) Contracts can be concluded for the creation, variation and extinguishment of obligations:
F) Contracts strictly speaking only concern proprietary, or better, patrimonial issues:
G) There are conspicuously abundant types of contracts in economic interactions of persons:
For instance, we can consider the following lists (which is by no means limitative):-
- Onerous contracts in which both parties undertake towards one another an
obligation (e.g. sales contract), and gratuitous contracts in which only one of the
parties undertakes an obligation towards the other party (e.g. contract of donation).
- Adhesive contracts where one party can only accept or reject what the other party
proposes to him, and freely negotiated contracts.
- Private contracts where only the parties have signed, and authenticated contracts
concluded and registered before a court or a notary.

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 - Contracts in consideration of the personal traits of a contracting party, and
anonymous contracts which are '' personality trait'' free and standard for any
contracting party.
We can cite numerous other examples of contracts that can be validly concluded.
3.3. Formation of a Contract
Article 1678 of the Ethiopian Civil Code states that no valid contract shall exist unless:-
a) the parties are capable of contracting and give their consent sustainable at law;
b) the object of contract is sufficiently defined, and is possible and lawful;
c) The contract is made in the form prescribed by law, if any.
In order to conclude a valid contract, four mandatory conditions are evident in the provision above:
capacity, consent, object and formality.
3.3.1. Capacity- discussed under chapter two
3.3.2. Consent
Consent is a defect-free mutual agreement by the contracting parties. It is a manifestation of
freedom of contract, and therefore is the basis upon which rests the entire law of contractual
obligations. Consent carries a double aspect:
first, the parties must agree on the scope of their undertaking (there must be an agreement on each
and every important detail) and,
Second, there must be a willingness( intention) on the part of the contractants to make their
undertaking legally binding. It is only when this double condition is present that the effectiveness
of the binding nature of the obligation is guaranteed by the civil law.
3.3.2.1. Offer and Acceptance
Ordinarily, mutual assent is evidenced by a contractual offer and acceptance. One party offers a
certain bargain to another party, who then accepts that bargain. The parties are required to manifest
to each other their mutual assent to the same bargain. A contract is therefore the meeting of the
offer with an acceptance.
Offer
An offer is a firm and definite (precise) proposal made by the offeror (the party who takes the
initiative to conclude a contract) to enter into a contractual engagement regarding a particular
subject matter. It expresses the willingness of the offeror to create a binding obligation. Three
elements are necessary for an offer to be effective at law: serious intention (firm proposal),
certainty or definiteness, and communication.
Termination of Offer

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An offer addressed to the offeree does not remain in force indefinitely. It will cease to have a
binding effect, and the offeror would be released from the legal bond. An offer terminates
generally by the action of the parties or through the operation of the law.
i) Termination by the Action of the Parties
An offer can be terminated by the action of the parties in any of three ways: by revocation, by
rejection or by counter-offer.
(a) Revocation: - refers to the offeror's act of withdrawing an offer. Revocation becomes effective
where it is communicated to the offeree before the offeree knows of the offer. Revocation
practically operates as a mechanism of terminating offers especially where there is a time
between the making of the offer and the knowledge of the offeree. Eg. Through post
(b) Rejection: - this is the act of the offeree to terminate an offer. The offeree is free to accept or
reject the offer.
(c) Counter-offer:- A rejection of the original offer and the simultaneous making of a new offer
by the offeree is called a counter-offer
ii) Termination by Operation of Law
The power of the offeree to transform the offer into a binding legal obligation can be terminated by
operation of the law through the occurrence of the following events: lapse of time; death or
incompetence of the offeror or the offeree.
a) Lapse of time: - An offer terminates automatically by law when the period of time specified in
the offer has passed.
b) Death or Incompetence of Either party: -
Acceptance
Acceptance is a voluntary act by the offeree that shows assent to the terms of an offer. It refers to
the pure and simple agreement given by the offeree to the offeror. In other words, acceptance must
be absolute and unconditional in the sense that one must accept just what is offered.
Acceptance must be communicated, and, conversely, uncommunicated acceptance is no
acceptance. Just as for the offer, the communication of acceptance does not call for any special
formality.
The express acceptance may be oral or in writing. The tacit acceptance results from signs normally
in use or conduct such that there is no doubt as to consent. The above lenient approach to form of
acceptance is, however, excepted where the offeror stipulates a special form of acceptance in the
offer. Such a specific term is deemed to be part and parcel of the offer itself, and therefore
acceptance, by definition, must conform to the special form demanded by the offer.

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Dear student, do you think acceptance can be effectively made when the offeree keeps silent?
Silence is a borderline and problematic concept with regard to acceptance and communication
thereof. “Silence” in the legal sense of the word has to be defined. It should not be confused with
the simple absence of verbal or written expression, because an outward behavior other than speech
can be equivalent to a tacit acceptance. In other words, silence is the total absence of any form of
expression, be it verbal, written or behavioral.
The grand rule is that silence does not constitute acceptance, and this is set out in Article 1682 of
the Ethiopian Civil Code. This principle has a logical explanation deriving from the basic ideal of
contractual liberty. If silence is to amount to acceptance, a converse situation that imposes upon
offeree to resort to mechanisms of express rejection is created. This would make life unbearable
for all of us, who are constantly subjected to a stream of unsolicited offers. It would place the
burden of evidence of rejection on the client and be unreasonable. It in effect means that freedom
not to contract is significantly restricted and creates insecurity. Thus, to protect contractual
freedom, which also includes a freedom not contract, it is traditionally established that silence
cannot amount to acceptance and that some form of outward expression is needed.
The above traditional rule is, however, not without exception. According to Art.1683 of the Civil
Code, certain persons are required by law or by concession to conclude certain contracts on terms
stipulated in advance with any one who makes an offer to them.
The second exception to the general rule that silence does not amount to acceptance is provided by
Art.1684 of the Civil Code in cases of pre-existing business relations. This is a concern of
contracting parties who have pre-existing or ongoing business relations and have previously
concluded a contract.
Nevertheless, in respect of offers relating to pre-existing business relations and their silent
acceptance, the law additionally imposes the observance of certain formalities: the offer must be
made in a special document stating expressly that the offer will be considered accepted if no
rejection is made within a specified time, or absent such time, reasonable period of time. A ‘special
document’ is a document which is specific to the contract and to the party concerned, and cannot
be a general document sent to every body every time.
In connection with this question of silent acceptance, the law also addresses issues of invoices
(Art.1685) and general business terms (Art.1686). An invoice is merely a supportive document
drawn up by the seller and addressed to the buyer evidencing the delivery of goods in a sales
contract. It may be the case that the invoice contains terms not agreed upon by the parties. The law
thus, having regard to the unilateral drawing up of the invoice, declares that particulars entered into
an invoice are acceptable only if they conform to a prior agreement or if they have been expressly

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approved, and they cannot be accepted through silence. Regarding general terms of business, very
often a trader drafts his terms of business for all future contracts by using a special pre-written
form, stating various specific clauses which he wants because they are in his interest.
A timely and definitive acceptance completes the contract. The issue as to when and where the
contract is fully created can be easily settled if the parties are present because no difference would
be there in place or time of offer and acceptance. A difficulty would, however, arise if the contract
is to be entered into between absent parties. The parties will be at different places and they may
enter into a contract using certain media of communication. Determination of place of formation of
a contract is important because it solves the problem of, for instance, jurisdiction, applicable law
and form of the contract. Ascertainment of the time when the contract begins to have a legal force
where a time-gap exists between offer and acceptance settles issues relating to rate and amount of
contractual interest, limitation of actions, and transfer of ownership, amongst others.
For absent parties who conclude a contract by sending a letter using the mailbox, Art 1692 (1) of
the Ethiopian Civil Code provides that the time and place of conclusion of the contract is when and
where the offeree sends his acceptance.
One point finally should be noted: termination of acceptance. Even if we have said above
(especially dispatch theory) that the making of acceptance completes a contract, Art. 1693(2) open
a right for the accepting party to withdraw his acceptance. The timely withdrawal of an acceptance
amounts to destroy a contract which was validly formed unlike the case of withdrawing an offer.
Timely withdrawal of acceptance that terminates the binding effect of the contract is that made
before the acceptance reaches the offeror, in which case one could say that the theory of reception
is reborn in respect of the withdrawal of an acceptance.
3.3.2.2. Vices of Consent
Vices of consent are defects that vitiate the validity of consent so that consent fails to be given
freely and in full knowledge of the obligations. Article 1696 provides for a classical list of defects
in consent – mistake, fraud and duress. The law also adds to the above traditional “vice of
consent” category the borderline problems of unconscionable contracts. While the vices of consent
proper address a psychological issue, unconscionability is an economic vice consisting in the
discrepancy between the real value of the obligations subscribed and their contractual valuation.
Art. 1710 of the Civil Code provides for a different nature and scope in the case of unconscionable
contracts.
The sanction of a vice of consent is relative nullity. This means that where it is established, this
type of contractual defect may only be raised by the person it intends to protect. If the contract is

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voidable, it remains that this must be decided by a court ruling, and the mere fact that the vice
exists does not automatically nullify the contract.
1. Mistake
A mistake is ordinarily understood as an erroneous belief in the truth of a situation or in the
existence or otherwise of something, when in fact the contrary is the case. Mistake can be a ground
for nullifying a contract as a vice of consent, only when it bears a double, cumulative nature. These
natures are,
First, the mistake must be decisive (a subjective test that requires the mistaken party to establish
that he wouldn’t have entered into the contract had he known the truth or reality and,
Second, it must carry on a fundamental element of the contract. Eg. Mistake as to the object of the
contract and mistake as to the person
2. Fraud
When an innocent party is fraudulently induced to enter into a contract, the contract normally can
be avoided because that party has not voluntarily consented to its terms. The important elements of
fraud under the Ethiopian law are deceitful practices, intent to deceive, and the innocent party ’s
justifiable reliance on the fraudulent practice. Thus, mere false statements intended to deceive the
other party to enter into a contract do not constitute fraud because they lack “deceitful practice ”.
Likewise, deceptive silence (non-disclosure of facts) would not amount to fraud. With regard to
false statements and silence, every person is expected to exercise care and judgment when entering
into contracts and the law will not come to the aid to one who simply makes an unwise bargain.
Exceptionally, however, the making of false statements and failure to disclose important facts
constitute fraud if the parties have a relationship of trust and confidence, called a fiduciary
relationship. In such a relationship, if one party knows any facts that materially affect the other ’s
interests, he must disclose them, and, similarly, a party must refrain from providing a false
statement that materially affects the other party. An attorney, for example, has a duty not only to
disclose material facts but also to make truthful disclosures to a client. Such relationships include
those between partners in a partnership, guardians and wards, employers and employees, and the
like.
The presence of knowledge on the part of the faulty party that facts have been falsely and
deceitfully represented it also an essential element of fraud.
Finally, fraud is completed when an innocent party justifiably relies on the trick designed by the
other party. If a deceitful practice thoughtfully made can be easily detected, one cannot be justified
in relying upon that practice. Fraud is deemed to exist and constitutes a defect in consent not

16
merely by resorting to a practice with intent to deceive but when accompanied by the
corresponding reasonable absence of knowledge on the part of the contractant affected.
3. Duress
Duress involves conduct of a coercive character, that is, assent to the terms of a contract is not
genuine if one of the parties is forced into agreement. Forcing a party to enter into a contract by
threatening the party with a wrongful act is legally defined as duress. For example, if A threatens
to harm B or his family unless he (B) signs a promissory note for the money that B owes, A is
guilty of duress. The threat need not necessarily be physical; it could also be psychological in the
sense.
Duress should meet the requirements of ‘seriousness’ and ‘imminence’ in order to be effectively
invoked to invalidate the contract, according to the reading of Art.1706 of the Ethiopian Civil
Code. Seriousness refers to the gravity of the danger posed that would suffice to compel a person
to conclude a contract, and it would be determined by the court having regard to the circumstances
of the case. A danger is said to be imminent when it is on the verge of materialization or where
there is almost no time gap between the communication of the threat and its projected
materialization.
the existence of duress is determined by the consideration of what a reasonable man would have
felt in the same circumstances. This objective standard of reasonable person is, however, variable
in respect of the identity of the victim of duress. The duress is differently appreciated having
regard to the age, sex and condition of the person.
There are certain borderline cases where one cannot surely say duress exists. One is a special form
of threat, that of exercising a right. In such case, a person uses a legitimate right to force the other
to conclude a contract. Generally, the threatened act must be wrongful or illegal in order to be
regarded as duress. Threatening to exercise a legal right is not ordinarily illegal and normally does
not constitute duress. Suppose that A injures B in a car accident. The police are not called. A has
no insurance for his car, but he has substantial assets. B is willing to settle the potential claim out
of court for 5,000 Birr, which A refuses. After much arguing, B loses his patience and says, “If you
don’t pay me 5000 Birr right now, I’m going to sue you for 15,000 Birr ”. A is frightened and gives
B a promissory note for 5,000 Birr. Later, A refuses to make payment. B comes back to sue A for
the 5,000 Birr. Although A argues that he was the victim of dress, the threat of a civil suit is
normally not duress. However, this is not the case of the right is abused to gain undue advantage
from the circumstances, such as, in the example above, when B demands A under the threat of
reporting the incident, which is also a crime, to the police to sign a promissory note for 50,000 Birr
while he has sustained only a minor injury. If B succeeds in forcing A, A can later on claim duress.

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Another borderline case is reverential fear, where a person has a great respect for another, for
instance, vis-à-vis an ascendant or a superior. In fact there is no threat or action from the ascendant
or superior but simply the consequence of the normal relation between two persons bound by this
type of relationship.
At last, we come to a very peculiar scenario which is significantly related to duress and the above
borderline cases – unconscionability. Of course, the principle in a liberal economy embodies that
each party to an onerous contract (a contract concluded for consideration) will try to gain the best
advantage. So, the simple fact that the contract is unbalanced and burdensome to one party is not,
as a rule, a vice of consent. But public policy does exceptionally require that there be some limit
on the power of individuals and businesses to dictate the terms of contracts. The Ethiopian law also
decides to limit the liberal approach in favor of weaker parties who have in fact been exploited.
The purpose of legislative interference here is to avoid cases if unconscionability by entitling the
economically exploited party to invalidate the unconscionable contract. Unconscionability exists,
and invalidates a contract, subject to the satisfaction of three conditions:
- the existence of “substantially more favorable” advantage to the stronger party;
- consent induced by the want, simplicity of mind, senility or manifest business inexperience of
a contracting party;
- justice requiring the invalidation of the contract.
Although judges have a wide discretionary power in the appreciation of issues of
unconscionability, the cumulative existence of the above three factors is deemed sufficient for the
invalidation of the unconscionable contract. Here, there are certain terms used by Art.1710 (2) as
elements of unconscionability that need to be defined.
3.3.3. Object of Contracts

By “object” one must not be confused with a thing, movable or immovable, concerned by the
contract. The expression “object of the contract” as employed by the Ethiopian Civil Code refers to
the obligations undertaken by the parties in a given category of contract.
Failure to define the object is a critical defect, and makes the contract void and null. If the object is
present, it should be determined or at least determinable. The principal faculty of determination of
the object of a contract resides with the contracting parties themselves, but lacunae (gap) left by
parties may be filled by making a reference to custom, good faith and equity. Generally, object
must be sufficiently defined or determinable in order to create a valid contract.
The object (obligation) undertaken in the contract may take one of three broad forms: to do, to
give, and not to do.

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In addition to its sufficient definition, object of a contract must be possible of execution. A
contract which is impossible to perform cannot be enforced. Thus, if the parties stipulate an
obligation that is impossible at the time of the conclusion of the contract, the contract is deemed as
if never created. Nevertheless, the impossibility must be absolute and insuperable.
An equally indispensable requirement with regard to object of a contract is that it should be lawful
and moral.
3.3.4. Form of Contracts
Form is the outward appearance of the contract, and so the way the will of the parties becomes
apparent. There are two extreme scenarios with regard to formality requirements – formalism and
consensualism. Consensualism bases the contractual form solely in the partner ’s consent, which
can be purely tacit in so far as it signifies the declaration of will. Formalism on the other hand will
only acknowledge a contract where an exterior, visible sign is made so much so that actual will of
the party will be regarded as secondary in so far as the contract is expressed in a certain way.
Consensualism has the virtue of stressing the individual person ’s freedom to contract. Not only is
it, this context, a from of human rights in economic affairs but it is also cheap, fast, simple and the
manifestation of society of equals. Excessive formalism in contracts is burdensome and costly
because it calls for the intervention of legal professionals or generates administrative fees and
taxes at the expense of the contracting parties. It can also be abused by parties in bad faith who try
to manipulate formal defects when they have no substantive defenses to support their claim. But
formalism is not without merits. It protects parties from acting too fast, without thinking about
their commitments. Forms tend in contemporary legislative acts to protect the weaker party in a
contract, because very often there is an economic imbalance and parties are in fact unequal. A well
employed form is a good preventive weapon against disputes, and its precision can greatly help the
judge easily settle any litigation which may arise.

The Ethiopian law takes a middle position compromising between the dangers of excessive
formalism and advantages of relative consensualism. In pursuance of this, Article 1719 of the Civil
Code provides that no special form is required of parties when they conclude a contract and
consensualism is upheld in principle. But the law imposes a certain formality requirement. In
addition, parties can impose upon themselves the compliance with a certain form. In both
exceptional cases, formality must be observed and parties are not free to set aside the prescribed
formal requisite. Strict compliance with a legally or contractually stipulated formality is a validity
requirement (ad validitatem) and sanction for the non-observance of such requirement is the
absolute nullity of the contract. The question of validity is a more fundamental a matter than the

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dictation of form to provide proof of the contractual obligations, i.e. ad probationem, because it is
concerned with the very existence of the contract. Thus, failure to comply with the exceptionally
imposed formality requirements would render a contract null and void.
Dear student, we shall now see some specific cases where the law imposes a formality. But first
remark must be made of contracts made in writing. Written contracts must be signed by all the
parties for signature signifies the individualized consent of a party. Again, they should be attested
by at least two witnesses, or in some cases they may be alternatively authenticated by a public
authority.
One of the formality provisions (Art.1721) states that a preliminary contract has to be concluded
in the form of the main contract. Let’s assume that A, residing abroad, wants to conclude a contract
of insurance with an insurer in Ethiopia and intends to authorize an agent, B, to make a deal on his
behalf with the insurer. The contract of agency concluded between A and B is a preliminary
contract because it paves the way for the conclusion of the contract of insurance, the main contract.
Now if the insurance contract is made in writing, the contract of agency must also be made in
writing. Art 1722 requires contracts for the variation of a contract to be made in the form of the
main contract, i.e. the varied contract. The main contract’s form thus extends to contracts made
after its conclusion. In the two cases above, the law intends to ensure consistency of form between
essentially related contracts concluded between the same parties.
Another contract in respect of conclusion of which the law demands a special formality is that
relating to immovables. Contracts concerning immovables include sale, mortgage, usufruct, lease,
and partition amongst other things. All such contracts relating to buildings and land have to be
concluded in writing and need to be registered with the authorities. Immovable property involves
huge capital and the law imposes a written and registration formality to ensure security of
transactions regarding such an important asset.

Again, contracts to which a public administration is party must be made in writing and be
registered with a court or notary. The state and its administrative departments are guardians of the
public interest at large and therefore must conduct their operations within an atmosphere of
transparency. And transparency is best guaranteed if affairs are documented. So, we can see the
advantage of imposing a writing formality whenever the state and its organs become parties to
contracts.
The law also demands a formality requirement with regard to contracts that last for a longer period
of time. It is obligatory that a contract for a longer period of time be made in writing. The reason
for such a requirement is obvious: unwritten agreements may not be easy to prove as witnesses

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may die, human memory may fade away as time passes. In order to avoid possible future dispute,
the law rightly requires contracts that work for long period of time to be made in writing. For
example, contract of insurance is given in the illustrative list of contracts for a longer period given
by the law, for it stays for a relatively longer time. Employment contract made for an indefinite
period of time also constitutes such a category. So, both insurance and employment contracts need
to be made in writing.
3.4. Effect of Contracts
The general effect of a validly concluded contract is its legal enforceability. Once they have
created a contract between them following legitimate formation requisites, parties are obliged to
comply with the terms the breach of which would entail a legal liability. Thus, as clearly stipulated
under Article 1731 of the Civil Code of Ethiopia, the terms of a contract shall be binding on the
parties as though they were law. A party cannot unilaterally change his mind with regard to a
contract created by the mutual consent of the contracting parties. Contracts are the law of the
parties from which derogation is disallowed and, as the famous English saying goes, a man’s word
his bond. They are binding not only on the parties but on the judge himself (the adjudicating
organ) in the sense that the judge will give effect only to the validly made terms of the contract
whenever a dispute appears before him.
A contract may contain ambiguous provisions; it may also have terms that apparently conflict with
each other. These problematic terms may not be sufficient to invalidate a contract or otherwise
render it ineffective. Here the court is authorized to remedy the defective terms through
interpretation having regard to the common intention of the parties, custom, good faith and equity.
But if the terms of the contract are clear even if they may appear to be unfair, no interpretation is
allowed. The judge cannot create a contract for the parties under the guise of interpretation when
the terms are clear, for this amounts to binding parties with an obligation they have not intended.
So, a validly formed contract will be legally binding on the parties to the extent clearly spoken by
its terms or to the extent substantiated through interpretation by courts if the terms happen to be
unclear.
3.4.1. Performance of Contractual Obligations
Performance is the execution of the obligation as per the terms of the contract. In the normal
course of things, a contractual obligation is to be discharged through performance. Indeed
performance is the purpose for the contract is formed in the first place, and is deemed to be the
natural consequence of a contractual engagement. It is to the interest of the law to see contracts to
hit their target, and it accordingly provides for the mechanisms of ensuring such performance.
(a) Performance by Whom?

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Who makes the performance is an important question because it helps to identify person obliged
to perform a contract and to inform him of the consequences of his performance. The obvious
answer to the above question is that the debtor is the one who is demanded to make performance.
But performance can be validly made by anyone authorized by the debtor, by court or by the law.
The debtor may authorize an agent to carryout an obligation. Likewise, a court appointed tutor can
discharge an obligation on the behalf of a judicially interdicted debtor, and legal heirs can execute
the debts of their deceased relative if they accept the succession. So, in principle anyone can
perform the contract, and normally there is no difference whether the contract is performed by the
debtor himself or by a third party.
Nevertheless, personal performance by the debtor may be an essential element of the contract. In
such case, no valid performance is made unless discharged by the debtor himself. It is of a special
interest to the creditor that performance be made by the debtor himself. For example, employment
contract by its nature needs performance by the employee himself. The employee cannot delegate
his job to someone else because personal discharge is of special interest to the employer. But
generally, where the personality of the contracting party is not important a contractual obligation
may be performed by any third party.
(b) Performance of Whom?
This question is concerned with the party entitled to receive performance. Normally performance
can be made to the creditor or a third party authorized by the creditor, by the court or by law.
Performance made to unqualified person is invalid in the eyes of the law. For instance, a legally
incapable creditor cannot receive payment personally, and such payment shall not be valid unless
the debtor shows that the payment has benefited the creditor; the burden of proof is on the debtor.
The debtor has to take utmost care when he makes the performance; otherwise he is obliged to face
the risk of double (second) payment.
Even though as a rule payment made to a person unqualified (unauthorized) to receive on behalf of
the creditor is invalid, it becomes exceptionally valid if the debtor shows that the payment has
benefited the creditor, if the creditor confirms the payment or where it is made in good faith to a
person who appears without doubt to be the creditor. The performance is deemed to be made the
advantage of the creditor where there is a practical enrichment or increase of his estate. With
regard to the validity of a performance made to persons who undoubtedly appear to be creditors,
appearance does not mean physical resemblance but rather it refers to a person who appears to be
authorized to receive the payment. The debtor is discharged with respect to the true creditor if the
pays in good faith to a person who has no right to receive but who unequivocally seems to be the

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creditor. This can be particularly exemplified when the debtor makes the performance to an
apparent heir because of death of his real creditor.
When there is doubt as to who the true creditor is, the debtor may refuse to pay and release himself
by depositing the amount with the court. For instance, where there is a litigation going on among
the would-be creditors which the debtor knows and makes the performance to one of the claimants,
he does it at his own risk (he will bear the risk of second payment). On the other hand, where the
case is pending and the debts due, any of the persons who hold themselves out to be creditors may
require the debtor to deposit the amount with the court.
(c) What Things (Goods or Services) are to be offered in Performance?
The provisions of Article 1745 underline the requirement of identity of the object offered in
performance with what was agreed in the contract. Contracts are laws for the parties, and what
must be offered is exactly what they have agreed. A contracting party cannot discharge his
obligation by offering his creditor something else than what he promised, even if the other thing is
of an evidently greater value than the thing agreed. This way, the law gives priority to the
compliance with the agreement between the parties rather than the value of the thing.
Logically enough, the creditor is also entitled to refuse partial performance. This is grounded on
the idea that the creditor may not be forced to grant the debtor an extended delay for performance.
And conversely, the debtor is obliged to make partial performance if part of the debt is contested.
The debtor must pay the non-contested part, pending dispute on the contested part, and cannot
delay its payment until the dispute is resolved.
The situation may be a bit complicated where the obligation is made regarding fungible things.
Fungible things are those things that can replace each other without causing substantial difference,
or things that are described normally in generic terms. Coffee and crops are good examples.
Questions of quality and quantity might arise at the moment of performance of the contract. If the
parties have specified the thing or expressly agreed on the quality and quantity of the thing, that
must be complied with. But in the absence of such an express stipulation, the debtor is given a
right to choose the thing to be offered in performance. But the thing chosen by the debtor must be
of at least average quality; he can’t offer in performance a thing of lesser value. But overall, slight
variations in quality (average or stipulated in the contract) or quantity must not be refused by the
creditor. The creditor can either proportionately reduce his own performance or claim indemnity
for the slight variation. The purpose of such a provision is to ensure that a maximum number of
contracts are performed in the interest of a dynamic economy, and, conversely, that parties avoid
taking the pretext of smallest non-conformity to nullify contracts.
(d) Place and Time of Performance

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If the parties determine the place of performance, their agreement is respected. But where no place
has been agreed, a permissive provision of the law stipulates that performance shall take place at
the place where the debtor had his normal residence at the moment of concluding the contract. This
general rule is excepted regarding specific things. If no agreement is made to the contrary,
performance in respect of a definite thing shall be made at the place where such thing was situated
at the time when the contract was concluded.
Similarly, the time of performance can be agreed upon by the parties. Where there is no such time-
limit is stipulated in the contract, performance would be made forthwith (immediately). There is no
problem if the debtor performs the contract immediately after its formation. But the creditor
demands performance from the other party after lapse of reasonable time. The creditor can oblige
the debtor to perform the contract when he benefits by a time-limit or after he performed or offered
to perform his obligations towards the debtor.
(e) Other Issues Related to Performance
A question may arise as to the currency of payment regarding the performance of money debts. As
a rule, money debts are discharged in local currency, in the currency that is the legal tender of the
country where payment is to be made, even if the amount is stated in the contract in a foreign
currency. Still parties are at freedom to reach an agreement to the contrary, or to exclude the
making of payment in local currency. Sometimes parties may leave price for determination by
reference to an index made up of certain goods or services without indicating a specific amount of
currency. This is indeed a usable and frequent technique which enables one to take into account
monetary instability and inflation.
The issue of interest and its rate is also an important matter in performance of contractual
obligations. The Ethiopian Civil Code under its Article 1751 provides that the legal rate of interest
that is to be paid on a debt is 9% unless the parties expressly stipulate a different rate. Even if
parties can stipulate interest and fix its rate in their contract, they cannot fix the interest rate higher
than 12%. Twelve percent interest rate is a maximum rate over and above which a crime of usury
is committed. In case parties fail to provide a rate or fix it above 12 %, the legal interest rate ( 9%)
is due on the debt and is payable.
To what obligation does a given payment apply? This question arises in case several debts are due
in a contract and the amount the debtor provides for payment is insufficient to cover all the debts.
A given contract may give rise to costs, interests and the principal debt, and all such obligations
may mature to be discharged. If the amount available for payment is inadequate to pay-off all the
debts, determination of the order of payment becomes an important matter. The law lays down a
rule that a partial payment is used to cover first costs, then the interest due, and finally the

24
principal debt. This solution is intended to favor creditors in that they will get paid first the
accessory elements of the debt and they will be enabled to gain extra payment as potential interest
on the remaining main debt.
Performance of contractual obligations usually entails expenses. Any accompanying cost while
performance is made is to be covered by the debtor himself. As a rule, the duty to perform a
contract and the bearing of costs of the performance are essentially related matters and are
therefore naturally attributed to the debtor, the party who is obliged to perform the contract. But
the contracting parties can agree on who bears the expenses of performance and such agreement
will be effected without having regard to the suppletory provisions of the law on the issue at hand.
3.4.2. Non-performance of Contracts
Non- performance of a contractual obligation refers to the breach or the non-compliance with the
promise made in the contract. The breach of a contractual obligation exists when a party totally
fails to carry out the obligation, if he makes fundamentally defective performance, or makes a
delayed performance. The cases of defective performance (e.g. partial performance) and delayed
discharge are to be closely scrutinized to decide if they really constitute non-performance.

Dear student, we have time and again said that contract is the law of the contractants and will be
indeed legally binging on them. That’s to say, no party can unilaterally disregard a contractual
obligation and act as they wish. The binding nature of a contract is manifested by the legal
liabilities imposed on the defaulting party in the event of its breach. There are remedies available
to the victim of the breach and, at the same time, the defaulter cannot go with impunity.
The remedies of non-performance at the disposal of the creditor are not usually to be claimed
immediately after the expiry of the time fixed in the contract. The remedies usually overlook
normal performance because they are based on the failure of the performance. But contracts are
created to be discharged through normal performance and the law declares its utmost intention to
ensure performance of the contract. Therefore, the creditor is supposed to comply with a
procedural requirement before he rushes into the legal solutions. The procedural device is the
giving of a default notice, so called because it is made after the normal performance failed and is
directed to the failing party. The debtor may have simply forgotten the performance of the
contract, or he may fail to perform because of some personal problems. Rushing into legal
remedies not only defeats the purpose of the contract but frustrates innocent debtors and thereby
jeopardizes the smooth relationship between the parties. Thus, the law rightly requires awakening
or reminding the failing party to perform the contract by giving him a chance through a default
notice. The notice helps one to determine if a debtor is willing or able to perform the obligation.

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The rule is that default notice is given before resorting to the legal remedies in cases of non-
performance. But exceptionally the giving of default notice may become unnecessary. Below
follows the brief overview of cases where the creditor can resort to remedies of non-performance
without placing the debtor in default.
The obvious case is the contrary agreement of the parties. Like many other legal provisions, the
rules of contract law that require putting debtor in default are suppletory (permissive) so much so
that parties can expressly exclude the necessity of giving default notice. This means that the non-
performance of a contract entitles a creditor to directly avail himself of the legal remedies.

A slightly different scenario is presented where the date of performance is compulsory or essential.
If the debtor fails to perform the contract on such date, no need of giving a default notice. In
illustration of this, suppose A concluded a contract of hiring of Velo (a bride’s clothing) with B for
her sister’s marriage. The date of marriage is scheduled for April 25, 2008 and B did not deliver the
Velo on that date. The time of performance is very compulsory and is indeed essential so that the
delivery of the clothing after the scheduled date is purposeless. Delivery on that very date has
become an essential requisite of the contract and no performance can be effective after such date.
A is free to claim the remedies of non-performance without the need to put B in default.

Where the obligation required of the contracting parity is not to do and the party breaches this duty
by doing (acting otherwise), the creditor of the assumed obligation cannot be obliged to notify the
defaulting party. The debtor has resorted to a conduct that he was supposed to refrain from under
the contract, and notifying him of his violation is pointless as the risk that the contract intended to
prevent has already materialized. If, for example, X concluded a contract not to compete in
business with Y and if X later on enters competition with Y, no default notice is necessary and Y
can directly invoke the remedies of non-performance.

Default notice is also not necessary where a debtor has declared in writing that he would not
perform his contractual obligation. The purpose of notice in the first place is to remind the debtor
to perform the contract. So, requiring notice while the debtor is clearly refusing performance does
not serve any purpose.

So, what are these remedies that are to be claimed for non-performance either after giving notice or
immediately where notice is unnecessary? Under the Ethiopian law, the other party can demand
the following according to the circumstances:-

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  Specific performance, or
 Cancellation of the contract by court or by himself, and
 Damages caused to him by non-performance be made good (Article 1771 of
the Civil Code).
The first two remedies, i.e. specific performance and cancellation, cannot be claimed together for
the invocation of one would naturally exclude the other. A party invoking specific performance
cannot at the same time invoke cancellation and vice versa, because the two do not go together.
But damages can be claimed in the absence of either of the other two, or in addition to either of
them. In other words, the claim for making damages good can be lodged with either specific
performance or cancellation.
3.4.2.1. Specific (Forced) Performance
When a debtor fails to perform his obligations, the first legal remedy available to the creditor is to
request the court to force the debtor to perform. Specific performance as a legal remedy is not
something always awarded to the creditor whenever he demands it. The law states that forced
performance of a contract shall not be ordered unless it is of a special interest to the party requiring
it and the contract can be enforced without affecting the personal liberty of the debtor. Thus,
forced performance is the outcome of two cumulative conditions: Special interest of the creditor
and execution without encroaching the personal liberty of the debtor. If either of these conditions
is missing, forced performance cannot be had.

It may be said that the forced performance of the contract is essential to the creditor if he cannot
enter into another similar contract or if he does not have alternative mechanism of fulfilling his
wish. For instance, if A agreed with B to sell an object that is not found any where else and if B
highly needs the thing, B can claim the forced performance of the contract in the event A fails to
carry out his contractual obligations. But, if B can get the thing somewhere else even for
substantially higher price, he can’t seek specific performance. He can however claim the difference
in price to be compensated by the debtor.
Personal liberty is a constitutional right (indeed a human right) that is internationally recognized
and protected. So, it cannot be restricted by contractual engagements under the guise of forced
performance. The non-performance of a contract is a breach of civil obligation and has got a
monetary correspondent. Personal liberty is a fundamental human right that cannot be alienated
from a person and cannot have a pecuniary value. Thus, non-performance of a contract and
personal freedom of an individual are two separate and extremely disproportionate interests, and
the occurrence of the former cannot in any way affect the later. For instance, A concludes a

27
contract with B, a singer, to entertain customers at his grocery. B fails to show up for the
performance. Now A cannot claim the forced performance of the agreement by B because this
affects B’s personal liberty. It has the effect of forcing B to personally appear on the stage and
perform without his will, and this undoubtedly denies B of his liberty.
3.4.2.2. Cancellation
Cancellation is another remedy of non-performance available to the creditor. One has to
distinguish cancellation from invalidation and termination of contracts. Both cancellation and
invalidation presuppose a problem with the contract – the former involves non-performance and
the latter arises in contracts with defective formation. But termination is a defect-free mechanism
of extinguishing contractual obligations by the mutual agreement of the parties. The effect of
invalidation and cancellation is the reinstatement of the parties to their former positions. The
parties are as far as possible to be restored to the economic status they would have assumed had
they not entered into the contract. All the three have one thing in common: they are
instrumentalities of extinguishing (breaking a legal bond) obligations between the parties.

Cancellation as a remedy for non-performance is in principle declared by the court. But as a mater
of exception, it can also be unilaterally declared by the parties, usually the creditor. We will see the
two one by one below.

i) Judicial Cancellation – This refers, as just highlighted above, to the situation that the judiciary
(the court) is vested with the power to render a final and definitive declaration of cancellation
producing full legal effects. The purpose of submitting cancellation to the judiciary stems from the
very sanctity of contractual obligations. It means that the contract is the law of the parties and they
must do their best to maintain the contract rather than demean it by being able to escape its
imperative provisions too easily. The non-performance of the contract must therefore be of some
importance before it is made to result in the cancellation. There are certain borderline cases which
may be easily remedied to uphold the contract such as partial performance, defective performance
and delayed performance. All these considerations explain that cancellations call as a rule for
judicial decision, and that the court is never compelled to sanction contractual defaults by ordering
cancellation. Thus, the submission of a cancellation case to the court helps to avoid the rush to
create contractual instability by the parties and to make only warranted cancellations.

However, there are guidelines which the court takes into account while examining a cancellation
case that the law has devised to minimize the subjectivity in judicial discretion. The guidelines

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include interest of the parties and the requirements of good faith, and the breach of fundamental
provision of the contract. The court must see to it that the cancellation is consistent with the
interest of the parties and that it is demanded by good faith considerations. The ‘fundamentality ’ of
the breach needs to be proved in the sense that the non-performance affects the very basis of the
contract which would have led a reasonable person not to enter a contract.

ii) Unilateral party cancellation – Even though the value legally attached to discharge through
performance and, if that fails, to cancellation by the judiciary is great, there are certain obvious
breaches of a contractual obligation that do not need ascertainment by a court. In such cases,
policy dictates that the party himself should be able to cancel the contract. These exceptional
scenarios are geared toward the prevention of prolonging the inevitable – circumstances so
obvious that there will be no reason for the court not to grant cancellation and that unilateral
cancellation saves the time, energy and resources consumed by waiting for court disposition. The
law has expressly stipulated these cases, as they are exceptions after all. They are stated below.

a) Essential date of performance: - This describes the circumstance whereby the

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

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

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

d) Impossibility of performance: - It refers to the situation where a specific subject

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

3.4.2.3. Damages

Dear student, we have said that an aggrieved party can claim the alterative remedies of forced
performance and cancellation in the event of non-performance of contractual obligations. But it
does not stop there. There are likely damages sustained by a party because of the failure to
discharge the contract by the other party. Damages may be due whether or not the other remedies
are claimed. Thus, damages may be awarded even along with a claim for specific performance.
Asdp;l,m nbv
a) Nature of Contractual Damages

Contractual damages are characterized by the absence of a fault requirement. That means, the
plaintiff is not expected to prove the fault of the defendant in order to obtain damages and the
defendant cannot exculpate him/herself by establishing his faultlessness. This is different from the
nature of tortuous damages which are fault-based as a rule.

However, the defendant is entitled to assert the defense of force majeure if the non-performance is
the result of force majeure, the party will be released from the payment of compensation for the
resulting damage. Force majeure is a circumstance that is unforeseen and makes performance
absolutely impossible. Unforeseeability and absolute impossibility are cumulative preconditions
for the existence of force majeure, and the absence of one denies the failing party to claim the
defense. The law makes an illustrative list of cases of force majeure. It includes the enactment of a
law that prohibits the implementation of the contract; a natural catastrophe such as earthquakes,

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thunder and floods; on outbreak of international or civil war; or the debtor ’s death or unexpected
serious accident or illness. On the other hand, cases that can never constitute defense of force
majeure include strike or lockout occurring in the debtor’s factory, an increase or decrease in the
price of raw materials necessary for the performance of the contract, or the passing of new law
which makes the debtor’s obligation more onerous.

The fault of the debtor may be exceptionally taken into account. The law recognizes two cases
where damages are due only when fault is established. One is when the contract relates to
obligations of means, in which the debtor undertakes to do his best to achieve a result without
guaranteeing the result. If the debtor in good faith has done the best within his competence and
capacity, he is not the one to blame for the failure to achieve the end because failure is in the
nature of the contract itself. Such contracts as those concerned with lawyer-client and physician-
patient relationships create obligations of means. As such, the lawyer tries his best to win a case
and not guarantee to win it, and the doctor does his best to cure the patient but not certain to cure
him/her. Thus, the failure to achieve the winning or the curing as the case may be does not result in
the award of damages unless fault is proved. The second scenario is about gratuitous contracts –
contracts made for the exclusive advantage of one party, or contracts which create unilateral
obligation. Contracts of donation and deposit are good examples. In such contracts, the debtor is
free from the payment of damages of non-performance unless he commits fault. The exclusion of
damages in these cases reveals that the party who is not benefiting from the contract in the first
place should not be further penalized by the payment of compensation for damages resulting from
non-performance without his fault. The degree of fault that needs to be established is not even
ordinary; it should be a grave fault. Of course, what constitutes grave fault is subject to the
appreciation by the judiciary of the circumstances of the case

b) Extent of Damages

The amount of damages that is payable for contractual non-performance is equal to the normal
damages that is expected to result from the non-performance. The court fixes, as a rule, this
amount having regard to all the circumstances surrounding the non-performance without the need
to ascertain the actual damage sustained by the creditor. The amount of this presumed normal
damage may be less than or could exceed the actual damage. The court awards such an amount
unless the contrary is proved by the parties.

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The amount of the normal damages that is to be awarded by the court in the normal course of
things may be increased to the actual if it is less or reduced to the actual if it is proved to be higher.
The party, normally the creditor, can claim the increase of damages by proving that the damage he
actually sustained is greeter. Conversely, the other contracting party, normally the debtor, can seek
the reduction of the normal damages by establishing that the actual damage is far less. Generally,
the court awards damages in the amount normally presumed to occur, but this amount may be
decreased or increased if it is proved by the parties that the actual damages caused by the non-
performance is less or greater than the normal damages as the case may be.
CHAPTER FOUR
LAW OF AGENCY
4.1. General
An agency relationship exists when one party, called the agent, agrees to represent or act for
another party, called the principal. The principal has the right to control the agent ’s conduct in
matters entrusted to the agent. An agency may be engaged to accomplish a single task or to carry
out several tasks.
Agency relationships permeate every aspect of modern economic life. By using agents, the
principal can conduct multiple business operations simultaneously in various locations. As
obviously human beings cannot be physically available at different places at the same time, a
person having the intent of doing business transactions at multiple places (and that is very
important in modern fast paced world of commerce) is helped by agency undertakings to fill-in the
gap created by the natural time and space constraints. Thus, for example, contracts that bind the
principal can be made at different places with different persons at the same time. A familiar
example of an agent is a corporate officer who serves in a representative capacity for the owners of
the corporate entity. In this capacity, the officer has the authority to bind the principal (the
corporate/juridical entity) to a contract. Indeed, agency law is essential to the existence and
operation of a corporate life, because only through its agents can a corporation function and enter
into contracts.
Agency is the fiduciary relation that exists between two persons so that one shall act on the behalf
and subject to the control of the other. The term fiduciary is at the heart of agency law. It can be
used both as a noun and as an adjective. When used as a noun, it refers to a person having a duty
created by his undertaking to act primarily for another’s benefit in matters connected with the
undertaking. When used as an adjective, as in “fiduciary relationship ”, it means that the
relationship is one involving trust and confidence.

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In a principal-agent relationship, a legal bond will be created between the parties so that the agent
will act on behalf and in stead of the principal in negotiating and transacting business with third
parties. An agent becomes empowered to perform legal acts that are binding on the principal and
can bind a principal in a contract with a third person. For instance, if A is hired as a booking agent
for a certain music band, A can negotiate and sign a contract for the band to appear at concerts.
The contract will be binding and thus legally enforceable against the group. The authority given to
an agent under Ethiopian law is termed as the power of attorney (Art.2179, Civ. C).
While agency is the fiduciary civil relationship between the principal and the agent, its primary
purpose is to confer on the agent the authority to transact with third parties. Thus, we would have
two categories of relationships in agency undertakings: one is the initial, or the internal,
relationship between the agent and the principal, and the other is the subsequent, or the external,
relationship between the agent and third parties. These two categories of relationships are separate
and exist in their own right, even though the second relationship somehow depends on the first so
as to produce the normal effect of agency.
4.2. Sources of Agency
The sources of agency under Ethiopian civil law are two: the law and contract. Even though the
origin may be different, it is ultimately sanctioned by the rules of law and produces effect at law.
In the majority of cases, agency undertakings originate from contracts. So, our focus in this chapter
is contractual agency. However, it is important to make enumerations of agency relationships
arising from the law.
4.2.1. Agency by Operation of the Law
The law intervenes, in the absence of formal agreement between parties, in certain cases for
reasons of public policy and to fill-in the gap created by the difficulty, and sometimes even the
undesirability, of securing consent. There could also be various specific reasons attributable to
particular cases of agency created in this way. The Ethiopian law also recognizes agency by the
operation of the law in certain circumstances.
One instance where agency arising from the law operates is representation of persons with legal
incapacity. As you may remember from your discussion in chapter two, incapable persons such as
minors, judicially interdicted persons and legally interdicted persons cannot perform juridical acts
by themselves. They exercise their rights and duties only through guardians and/or tutors. The law
obliges the court to appoint a guardian and/or a tutor for these kinds of persons. The guardian
and/or the tutor act on the behalf of incapable person not because of prior agreement but because
the law has given them the authority to do so.

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An agency also arises by law in cohabitation, i.e. it may occur in family relationships, as between
husband and wife. For example, suppose one spouse purchases certain basic necessities and
charges them to the other spouse's charge account. The law often regards the latter as liable for
payment of the necessaries, either because of a social policy of promoting the general welfare of
the spouse or because of a legal duty to supply necessaries to family members.
Agency by operation of law may also occur in emergency situations. The law encourages the
curbing of an emergency by recognizing persons who have no agency authority to contract with
others to act on the behalf of other persons anyway due to the emergency. For example, a rail-road
engineer may contract on behalf of his employer for medical care for an injured motorist hit by the
train. Such a situation is referred to in Ethiopian law as unauthorized agency, which we will deal
with later on.
In some situations, a court may also out of its discretion appoint an agent, called the curator, to act
on the behalf of another. The court grants an authority of agency where a person cannot himself
appoint an agent for reason of being away or ill, and it must make the authorization in a manner
that protects the interest of the principal.
4.2.2. Contracts
Like we cited above, the vast majority of agency relationships have their creation in contracts, i.e.
agreements between the agent and the principal. The preliminary relationship is contractual in
nature, and the parties to such contract can define the scope of the authority of the agent and are
free to determine the details of their engagement. Since the right to properly is one of the
fundamental individual rights and since agency has the effect of handing over this individual right
to another person, it is normally expected that the person himself authorizes another and he himself
has to decide on his economic fate to entrust the running of some (or all) of his proprietary rights
to another person.
4.3. Contractual Agency in Ethiopian Law
4.3.1. Definition and Formation

Agency is defined, under Article 2199 of the Ethiopian Civil Code, as a contract whereby a person,
the agent, agrees with another person, the principal, to represent him and to perform on his behalf
one or several legally binding acts. Agency in this sense is special type of contract to which the
fundamental rules of contract law should apply. The essential requirements for the formation of
any contract need to be observed in the conclusion of a contract of agency too.
Such essential requisites as capacity, consent, object and formality must be fulfilled in order to
create a legally valid agency contract. The parties, both the agent and the principal, must be

34
capable of contracting. Thus minors, judicially and legally interdicted persons cannot be parties to
a contract of agency. As it is a juridical act, capacity is required. But this is to be distinguished
from the case where the law appoints agents for these incapable persons. In this case, the incapable
persons occupy the position of principal, but that position has not arisen from a contract.
As a contractual engagement, agency cannot stand without the fulfillment of free and legal
consent. Consent is the pillar of contracts, and it needs to be manifested when entering into the
contract of agency. Object of the contract should be sufficiently defined, should be possible, lawful
and moral. The purpose for which the principal grants an authorization to the agent should be
stated with sufficient clarity; that same purpose must be possible to execute. It must not be
something that contravenes the law and morality.
A contract of agency should also comply with formality requirement if there is any such requisite
prescribed by the law. Form is not an absolute legal requisite; it is to be complied with only when
the law stipulates a specific formality. For example, the law states that preliminary contracts are
concluded in the same form as the main contract. Most agency contracts are preliminary contracts,
as they are dictated by the formality the main contract adopts. For instance, suppose A authorizes
B to conclude an insurance contract, and the law demands contact of insurance to be made in
writing. The preliminary contract (the agency authorization) should be made in the form (writing)
of the main contract (insurance).
The contract of agency, just like many other contracts, can be formed either expressly or
implicitly. The express manifestations of agency could be written or verbal communications. The
implied mechanisms of creating agency contracts are usually signs and conduct. But, all these
mechanisms must clearly show the pure and simple conformity of acceptance with offer. Silence
does not amount to acceptance, and cannot be relied upon to result in a valid contract. In
conclusion, a contract of agency may emerge in whatever way in so far as there is no doubt as to
the formation of the contract by custom, equity or other prevailing value.
4.3.2. Scope and Types of Authority
The extent of the powers of the agent in explicit authorization is rarely difficult to tell, because the
express enumerations themselves are able to display the limits of the agency authorization. But a
problem of determining the scope of authority of the agent may arise where the power is given
implicitly. In any case, the law has tried to fill-in the gaps created by the contract giving rise to the
power of attorney of the agent by providing for two mechanisms that contain matters given to the
agent. The two ways of agency authorization are general and special agency.
It may be the case that the power of attorney is fixed in general terms, without detailed
authorization. This is called a general agency. This may pose a problem as to what powers should

35
the agent exercise. The law states that agency expressed in general terms only confers upon the
agent authority to perform acts of management. Once again it looks that the law has attached a
great value to the proprietary interests of a person to as far as possible be deemed run by the person
himself. The law does not boldly allow general agency authorizations to be interpreted in a manner
that gives power to the agent to perform acts that alter the patrimonial status of the would-be
represented. Thus, the law, demanding explicit assignment in cases that affect the economic
position of the principal, limits agency powers expressed in generic terms to the performance of
acts of management.
Acts of management are by nature, as legally understood, not directed at the alteration of the
proprietary position of the principal. They are merely administrative or else maintenance functions
that aim to continue the previous economic status quo of the principal. A person with authorization
in general agency terms discharges only preservatory functions and is empowered only to sustain
the rights of the principal; he is not authorized to exercise acts of disposing of the rights of the
principal. Hence, such agents have a limited power less disposing the represented person’s rights.
The law enumerates, in article 2204 of the Civil Code, acts of management as comprising the
collection of debts, the discharge of debts, investment of income, leases for terms not exceeding
three years, and any other acts done for the preservation or maintenance of property. These acts are
taken as preservatory acts, and are more or less concerned with the continuity of the rights of the
principal and not alienating them. There is also a category of functions exercised by the agent
regarded by the law to fall in acts of management. These are the sale of crops, the sale of goods
intended to be sold, and the sale of perishable commodities. These latter acts are acts of
disposition; but a close look at these activities reveals that the purpose of conferring power to
conduct them on an agent is to prevent the loss of the rights of the person represented. The
economic rationale behind these matters shows that they would be sold anyway even by the
principal either because they don't persist longer retaining their quality or are already destined for
disposition (such as trading stock). Thus, there is no purpose served by waiting for express
authorization, and general agency suffices as it effectively saves rights on such commodities from
being lost.
On the other hand, acts other than those of management which alter the legal position of the
principal need a special authorization. Acts of disposition thus need to be particularly provided by
principal. The agent is recognized as empowered to perform acts of alienating the proprietary
affairs of the principal only if the principal has specially enumerated them in the document
evidencing power of attorney. Otherwise, the power cannot be presumed by the law.

36
Special agency confers on the agent authority only to conduct the affairs specified by the contract
of agency, and of course their natural consequences attached to the specifically enumerated acts by
usage or custom (Art.2206(1)). The fact that acts of disposition presuppose express stipulation
does not mean that the unstated but intrinsically associated activities therewith are excluded. The
law rightly includes the inevitable incidental functions that are not even necessary to be specified
in the scope of authority of a special agent.
Article 2205(1) of the Civil Code makes an illustrative list of activities that require special
authorization for their discharge. These include alienation or mortgage of real estate, investment of
capital, signing of bills of exchange, effecting settlement and consenting to arbitration, making
donations, and bringing or defending lawsuits. Dear distance learner, you may easily get that, for
example, the sale or the setting for mortgage (such as to borrow huge money) of an immovable
property seriously affects the proprietary interests of the principal. Investment of capital is
likewise, as opposed to investment of income, entails a risk of losing the principal's wealth
earmarked as venture capital for expanding business affairs. Investment of income refers merely to
maintaining that income as it is (such as by depositing it with a bank). Settlement, arbitration,
bringing or defending lawsuits all implicate the disposing of the rights of the principal. They all
carry with them an aspect of surrendering the patrimonial interest of the principal. Again, the
authority to sign bills of exchange represents an important proprietary right. Bills of exchange are
simple contracts that easily transfer the money belonging to the principal to another. All the above
cases clearly tell the possibility for the reduction, or even increase, of the patrimony of the
principal. Patrimony stands for the sum total of all assets and liabilities of the principal, and any
such acts as the above that alter the patrimony are to be specifically given to the agent. Otherwise,
or failing express enumeration, they are deemed not given to the agent and the contract of agency
is interpreted to exclude these transactions.
We may identify agency relationships having regard to the type of authority the agent acts with. By
type, we are not referring to the content of the authorization (which we have just seen above), but
to the external manifestation of the authority. In a sense, we can categorize authority into: actual
authority and apparent authority. Actual authority produces the normal effects of agency
relationship which we will see shortly. Apparent authority may also give rise to such effects but
only circumstantially. Actual authority is an authority which the agent has factually been granted
under the contract reached between the principal and the agent or by virtue of subsequent
ratification by the principal. Both express and implied authorizations constitute actual authority.
Apparent authority, on the other hand, is not an authority arising from the consent of the principal
whether express or implicit. This authority does not exist in reality, but it arises as a matter of law

37
out of the presumed position of the parties in the eyes of third parties and these third parties
assume that the agent has authority to act on the behalf of the principal. The scenario of apparent
authority (where there is no authority at all in reality) must, therefore, be distinguished from
implied authority (where authority indeed exists).
Agency authorizations may also be divided from the view point of the knowledge by third parties
of the situation. In this sense, we can have disclosed and undisclosed agency relationships.
Disclosed agency is a relationship whereby both the identity of the principal and the authorizations
he has conferred on the agent are known to third parties. Undisclosed agency on its part refers to
the situation where the agent acts with third parties without disclosing to third parties both the fact
that he is an agent and the person he has represented. An internal relationship (the actual
authorization) between the principal and the agent exists, but externally third parties believe that
the agent is acting on his own behalf. There is a difference in the effects of these sorts of agency
relationships especially as regards relation with third parties, and we now look into the effects of
each of such agency engagements.
4.4. Effects of Agency
As a juristic act involving multiple relationships, agency undertakings produce various distinct
legal effects. The effect regarding liability relationships among the various parties involved in
agency vary depending on the sorts of authorization we have tried to highlight just above. It is also
equally breathtaking to consider the right-duty correlation between the principal and the agent.
4.4.1. Liability Relationships
Complete agency that produces conventional effects between the principal and third party is the
one that comes about in actual authority and disclosed agency. In actual authority-disclosed
agency scenario, a direct legal bond is created between the principal and third parties. The agent
functioning under such a circumstance merely facilitates the transactions and does not personally
enjoy rights or bear duties arising from the transaction he has undertaken with third parties. He
simply steps out of the legal bond, and it is the third party and the principal who are personally
indebted to each other. Neither the third party nor the principal can make a personal claim against
the agent regarding the transactions created. The agent is not answerable for the performance of
the contract he has concluded with third parties, and it is the principal and third party that are
legally obliged to one another for the performance of the obligation.

In an undisclosed agency scenario, the agent is deemed to have acted on his own behalf and legal
bond in this case is created between the third party and the agent. The agent is authorized to
represent the principal, but third parties do not know the fact that he is an agent. So, the law

38
recognizes a liability relationship between the agent and third party. However, the internal liability
relationship the agent has with the principal remains intact. Thus, the agent recovers duties he has
personally borne vis-à-vis third parties through his rights from the principal, and he discharges the
rights he has personally enjoyed vis-à-vis third parties through his duties from the principal. The
principal and the third party cannot personally claim from each other, but they can claim from each
other, through subrogation, the rights and duties they each possess vis-à-vis the agent by replacing
themselves to the positions of the agent. They exercise against each other not the rights they
personally have with regard to each other but those of the agent.
In some instances, conflict of interest may arise between the principal and the agent, the agent of
interest may arise between the principal and the agent. The agent is deemed to undertake
transactions in the exclusive interest of the principal. Thus, in case his representative capacity
comes into conflict with his personal interest and the latter prevails, the agent is personally liable
towards third parties irrespective of whether the agency is a disclosed one. The principal would be
legally obliged to assume only those obligations created in his own interest. The agent may even
contract with himself, he may contract with the principal by using his representative capacity of
the principal and his own personal capacity. Here, it seems that the only party is the agent, but he
stands for two capacities (personal capacity and representative capacity) and thus a contract may
be legitimately said to have formed between the principal and the agent himself in his personal
capacity. So, if there is any conflict of interest evident in this kind of transaction, the principal will
not be bound. But, if the agent created such a relationship without prejudicing the interest of the
principal, he may bind the principal.
Let's finally see the liability relationship that underlies transacting in apparent authority.
Transactions undertaken in apparent authority may or may not create a direct legal bond between
the principal and the third party depending on circumstances. The agent who acts in apparent
authority is always personally liable to third parties with whom he transacted. The question here is
thus how to make the principal liable to third parties in addition to the agent and when to exculpate
principal.
The principle is that where an agent acts with apparent authority (such as where he undertakes with
lapsed or revoked authority, or else where he acts exceeding the authority he is given), the
principal will not be liable and only the agent is held liable to third parties. But, exceptionally the
principal is held liable together with the agent in the following cases, as provided in Art. 2195 of
the Ethiopian Civil Code.
- Where the principal has informed a third party of the existence of the power of attorney but
failed to inform him of the subsequent partial or total revocation of such power;

39
 (The principal has to notify third parties about the revocation of the authority of the agent
just as he notified them of existence of the authority. Otherwise, he is deemed to be in bad
faith and his default makes him liable.)
- where the principal failed to demand the return of a document evidencing power of attorney, if
any;
(If the authorization is supposed by a document evidencing same, which is mostly the case,
the principal has to take the document from the hands of the agent or he has to legally
claim the return in case the agent refuses. If the principal fails to do so, he will be bound by
the acts the agent makes.)
- Where the statements or behavior of the principal has made third parties believe in the
existence of authority.
(If third parties justifiably rely upon the statements or conduct of the principal, the principal
will be liable towards third parties for the acts the agent performs in apparent authority.)
These three cases are circumstances where the principal assumes joint and several liability together
with the agent towards third parties. When we say that the principal and the agent are jointly and
severally liable towards third parties, we mean that the third party would have a full recourse either
against one of these parties (principal or agent) individually or against both of them jointly. Thus,
while the agent is always liable to third parties whenever he acts with apparent authority, the
principal joins him in bearing such liability only in the above exceptional cases.

However, the principal may exempt the agent from liability through the ratification of the agent ’s
actions in apparent authority. Where the principal ratifies (approves) acts that the agent performs in
apparent authority, whether such acts entail the joint and several liability of the principal and the
agent or the personal liability of the agent only, the agent is relieved from liability whatsoever and
the principal assumes complete liability. In other words, ratification has the effect of assimilating
the liability of the principal to the normal liability that results from the combined consideration of
actual authority/disclosed agency scenarios. The whole transaction thus creates a direct legal
relationship between the third party and the principal. But in cases other than those making the
principal jointly and severally liable with the agent, the principal has the option of repudiation.
Repudiation refers to the power of the principal to reject (disapprove) acts that the agent performs
in apparent authority where the principal cannot be held liable, and this has the effect of making
the agent bear the whole liability towards the third party.
4.2.2. Duties of the Parties to the contract of Agency

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This section is devoted to the internal (preliminary) relationship between the principal and the
agent. There are respective rights and duties as between these parties. Rights and duties are
correlates, and there cannot exist a right without a corresponding duty. Thus, rights of the principal
carry duties of the agent and rights of the agent carry duties of the principal. This means that when
we discuss duties of the agent, we are discussing the corresponding rights of the principal, and that
when we are discussing the duties of the principal, we are discussing the rights of the agent. We
thus deliberate briefly only on the duties of the agent and duties of the principal in that order.
4.4.2.1. Duties of the Agent
Duties of the agent arise from the contractual stipulation made by the parties and from the
fiduciary nature of agency undertakings that come into existence as a consequence of the law ’s role
to fill the gaps created by the contract.
a) Duty of notification: - It is a maxim in agency law that all that the agent knows, the principal
knows. Thus, it is only logical that the agent be required to notify the principal of all matters that
come to his attention concerning the subject matter of the agency. What the agent actually tells the
principal is not relevant; what the agent should have told the principal is crucial. Under the law of
agency, notice to the agent is notice to the principal, and the agent should observe this duty.
b) Duty of Loyalty: - This is known in Ethiopian law as the duty to undertake authorization with
utmost good faith. The requirement of good faith is the pillar of civil law and it refers to the agent ’s
exercise of authority in the exclusive interest of the principal. Loyalty is the manifestation of this
requirement. Basically stated, the agent has the duty to act solely for the benefit of his principal
and not in his own interest or a third party. For example, an agent cannot represent two principals
in the same transaction unless both know of the dual capacity and consent to. This duty also means
that any information or knowledge, even that resulting in revocation of authority, acquired through
the agency relationship be communicated to the principal and considered confidential as regards
third parties. In short, the agent’s loyalty must be undivided. The agent ’s actions must be strictly
for the benefit of the principal and must not result in any secret profit for the agent.
c) Duty of obedience and Diligence: - When an agent is acting on behalf of the principal, a duty is
imposed on that agent to follow all lawful and clearly stated instructions dictated by the principal.
Any deviation from such instructions is a violation of the duty of obedience. In emergency
situations, however, when the principal cannot be consulted, the agent may deviate from
instructions without strictly violating the duty of obedience if the circumstances so warrant.
Whenever instructions are not clearly stated, the agent can fulfill the duty of obedience by acting in
good faith and in a manner reasonable under the circumstances.

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Diligence refers to the care and skill expected of the agent. The agent must show a good deal of
care and skill in executing his agency functions. The standard of diligence required here is that the
agent must show no less care and skill towards the affairs of the principal than he does to his own
interests/affairs. He is required to carry out all acts that a good father performs for his family.
d) Duty of Accounting: - Unless an agent and a principal agree otherwise, the agent has the duty to
keep and make available to the principal an account of all property and money received and paid
out on behalf of the principal. The agent has a duty to maintain separate accounts for the principal ’s
funds and for the agent’s personal funds, and no intermingling of these accounts is allowed.
e) Duty of Non-delegation:- The fiduciary nature of agency relationship is all about placing
personal trust and confidence in somebody the principal appoints as an agent. This very trust is
derogated from when the agent delegates his authority to someone else the principal did not
consent to. The principal authorizes an agent so that the latter discharges functions personally. This
accords with the maxim “a delegate cannot delegate ”, meaning the agent himself is a delegate and
cannot further delegate authority over which he has no absolute power.
But, the principal may authorize the agent to appoint a sub-agent. in this case, the duty the agent is
expected to show to the principal is the reasonable selection of the sub-agent. The agent may also
be allowed to delegate by law another in place of him when it is of no difference whether the act is
done by the agent himself or by a third person and when this is implied from usage or custom of
the place of performance, or where the agent is unable to perform the order himself because of
unforeseeable circumstances and the agent is unable to inform the principal of this case. This is
generally directed at the protection of the principal’s interest where the agent can no more
discharge his agency functions for reasons beyond his control.
4.4.2.2. Duties of the Principal

a) Remuneration: - This duty is about the payment made to the agent for his services. But
remuneration is not a requisite; the law even says that agency services are gratuitously made unless
remuneration is expressly agreed upon by the parties. The duty of remuneration thus comes into
the scene under Ethiopian law where the parties expressly stipulate in their contract. The duty to
pay remuneration is exceptionally demanded when the agency services are professional or where it
is customary to pay remuneration for the concerned agency services. But even in these latter cases,
parties can expressly exclude the payment of remuneration.

b) Duty to Advance Money: - The agent perhaps needs money to run the representation of the
principal. According to article 2221 of the Civil Code, the principal shall advance to the agent the
sums necessary for carrying out the agency. This would constitute all expenses that the agent needs

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to make in the discharge of his functions including transportation costs and the principal is
expected to forward these outlays in advance.

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

d) Duty of Indemnification and Compensation: - Subject to the terms of the agency agreement,
the principal has the duty to indemnify an agent for liabilities incurred because of authorized and
lawful acts and transactions. For example, if the agent, on the principal ’s behalf, forms a contract
with a third party and the principal fails to perform the contract, the third party may sue the agent
for damages. In this situation, the principal is obligated to compensate the agent for any costs
incurred by the agent as a result of the principal ’s failure to perform the contract. The principal
shall also compensate for any non-contractual damages sustained by the agent in the course of
performing his agency duties.

e) Agent’s Lien right:- As the principal is duty bound to discharge all the above functions to the
agent, the agent is entitled to hold as a security any property belonging to the principal that comes
into his possession in executing his functions until the principal makes the necessary payments.
Lien right is a security right that the agent has over the movable property belonging to the principal
in order to force the latter to discharge his own obligations or to ultimately acquire that property in
replacement for the expenses the agent has incurred.

4.5. Special Agency Relationships

Dear student, in this section you will be introduced with certain particular types of agency
relationships within the ambit of the generality we have considered so far. Let ’s see them as
recognized by the law.

4.5.1. Commission Agency

Commission agency is a professional agency service that is undertaken for the payment usually
known as a commission. It is an agency widely accepted and practiced in the world of commerce,
and for particular affairs. The Ethiopian law of agency recognizes three types of commission
agents: commission to buy and to sell, Del credere agency, and forwarding agency.

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i) Commission to buy or to sell

This is a special type of agency relationship where the agent, called the commission agent, is
empowered to discharge functions of selling or purchasing goods. Such agency confers upon the
commission agent the power to buy or sell goods in his own name but on the behalf of the
principal (Art 2243(1), Civil Code). The agent enters into the sale and purchase transactions in his
own name, yet it is professionally known that he acts not on his own behalf but representing the
principal. Thus, the fact that the name of the principal is not disclosed to third parties does not
change the liability relationship, unlike in undisclosed agency situations we have seen previously.
The agent is a professional, and for that matter, a trader under the Ethiopian Commercial Code;
therefore, the “name test” of the principal is unimportant here.

The commission agent enters only into sales and purchase transactions with third parties. He only
sells goods of the principal or buys goods for the principal. The “goods” he can sell or buy are
ordinary corporeal movables whose ownership can be transferred upon delivery under a simple
sales contract. This will be made clear in the next chapter on law of sales. The sale and purchase
power is not limited to ‘goods’, it also includes securities (such as shares) and other fungible
things. The commission agent can be both an individual agent and an incorporated body. That
means even juridical persons can be commission agents. Generally, subject to the specific
provisions applying to such an agency relationship, commission agency is governed by the general
rules of agency regarding, for example, rights and duties of parties and all other aspects.

ii) Del credere Agency

This is a special type of commission agency where the agent with the power to buy or to sell is
obligated to provide guarantee for the performance of the transaction he has entered with third
pasties. As a matter of principle, it is presumed that the agent does not guarantee the performance
of the juridical acts he has created, and he will simply step out of the legal bond by leaving the
performance of the transactions to the principal. However, it is possible to bind oneself by holding
oneself as a surety for the performance of obligations. A commission agent who guarantees the
performance of sale and purchase obligations he has created with third parties in called a Del
credere agent.

iii) Forwarding Agent

Forwarding agency is a contract of agency whereby the agent, called the commission agent,
shipper or carrier, undertakes to enter in his own name but on behalf of another person, called the
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principal, into a contract for the forwarding of goods. These agents are professional business
runners that, subject to payment of commission, forward goods or transport them. For example,
shipping lines act as agents on the behalf of the parties to deliver goods..

4 Unauthorized Agency

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

4.6. Termination of Agency Relationship

Agency is not a relationship of eternity. Just like all other juridical acts, its extinction is far from
argument. There are various factors that may operate as grounds for the extinguishment of agency
relationships. Agency may terminate either by operation of the law or the actions of the parties.
4.6.1. Termination by Law
Where there is no agreement to the contrary, the death or declaration of absence or incapacity or
bankruptcy of either the agent or the principal will result in the extinguishment of the legal bond.
Upon death, personality ends for all legal purposes and therefore the agency as a legal affair is
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outrightly terminated. Declaration of absence has the effect of death, and therefore kills legal
personality for all legal matters including agency. Declaration of incapacity also puts an end to
agency relationships because, as we repeatedly said, the personal exercise of all juridical acts
requires capacity. Absence of capacity entails absence of a juridical act such as agency.
Bankruptcy on its part impoverishes the economic status of a person. Agency relates to economic
matters and a person with no assets is not worthy of economic transactions.
4.6.2. Termination by the Parties

There is little doubt that the agent and the principal can, by mutually agreeing through contractual
faculty, terminate their agency relationships. They are free to bilaterally agree to part company.
This is an extension of their freedom of contract.
Unique to agency undertakings is, however, the fact that both the principal and the agent can
unilaterally terminate the relationship without suffering comparable risks of further claims from
each other as that evident in other contracts. The principal can any time terminate the agency by
his own discretion, without facing any claim from the agent. In agency, it is only the principal ’s
economic affair that is at stake, and so the principal has an absolute power to put an end to the
agency. He won’t face, for example, the claim of damages from the agent for the mere unilateral
termination. The power of the principal to unilaterally put an end to the authority he has given to
the agent is called revocation.
In slightly similar a fashion, the agent can terminate the agency. He is perhaps not deriving any
benefit from the undertaking, and thus the law does not require the agent to maintain the
relationship until the expiry of the agency term. This is renunciation. The agent can renounce his
authority. But the exception here is that the agent bears the duty to indemnify the principal where
the renunciation is detrimental to the principal. Even in this case, the agent, the agent will be
relieved from the duty of indemnification where he cannot continue the agency undertaking
without himself suffering considerable loss.

CHAPTER FIVE
LAW OF SALES

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Dear distance student, this chapter deals with another important area of law that you as a potential
businessperson need to acquaint yourself with. It focuses on a crucial type transaction, sale, and its
legal regulation. Thus, at the end of the chapter you must make sure that you have:
- appreciated the basic elements in sale contracts;
- grasped the effect of sale contract;
- identified the identity of a ‘thing’ that is subject-matter for sale;
- explored the concepts of transfer of possession, ownership, and risk;
- gathered rights and duties of parties to sale contract; and
- identified certain cases of like-sale transactions.
5.1. Introduction to Sales Contract and Its Formation
No body of law operates in a vacuum removed from other principles of jurisprudence. A sales
contract is governed by similar civil law principles applicable to all contracts – offer, acceptance,
capacity, performance, legality, etc – and these principles should be reexamined when sales are
studied. In regard to sales contracts, the special rules of sales would have a prior application; when
the special law of sales is silent on a given issue, then the general principles of contract law will
apply.

The objects of a sale contract we will deal with here are ordinary corporeal chattels – tangible
movable goods that can be easily transferred without any further need to register them or the like.
These types of goods are ordinary corporeal chattels in the sense that their ownership is legally
transferred upon mere transfer of possession through delivery. As sale is a medium of transferring
title; our focus here is with objects whose title passes upon delivery. In so far of the sale of special
movables, immovables, and incorporeals is concerned, there is a separate regime of law regulating
same which is, however, beyond the scope of this module.
5.1.1. Meaning and Essential Elements

Sale is an exchange mechanism that has as its essence the passing of title from the seller to the
buyer for a price. Sale is a contract and the Ethiopian Civil Code (Art 2266) defines a contract of
sale as a contract whereby one of the parties, the seller, undertakes to deliver a thing and transfer
its ownership to another party, the buyer, in consideration of a price expressed in money which the
buyer undertakes to pay him. We can gather certain fundamental characteristics that a sales
transaction embodies.
i) It transfers ownership: - Ownership in economic and legal terms represents the fullest
right a person would have over a property. So, it includes the right not only to use the

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 thing but also to demolish, abandon, alienate, or donate that thing. Sale gives a buyer all
such powers.
ii) It is an onerous act: - A contract of sale it not a liberality; it is always made for
consideration. Parties engage in a sale transaction to get some benefit each, not merely
to bind themselves to the other parties.
iii) It is a commutative act: - The contract of sale is bilateral – the obligation it entails is
divided between the parties thereto. The obligation of one party is taken up in
consideration of the obligation of the other.
iv) Trading parties and mercantible thing: - It is needed that parties to a contract of sale
are traders in the sense that they are free from insolvency or bankruptcy risks. They
must be worth transacting in commercial terms. Similarly, the thing that is subject
mater of sale must be that within commerce. The thing should be a mercantible one
upon which an exchange through legal sale can be effected. Traditionally, certain things
are outside commerce. At the forefront is the human person; this manifests the
prohibition of slavery or the sale of one’s own organs. You can’t sell your child or your
limbs for that mater.
v) It involves the fixing of a price: - A characteristic of the contract of sale is the price –
the monetary counterpart of the giving over of the good for sale. Incidental to this is
that the price must be labeled in a legal currency, that it must be certain or
ascertainable, and that it must be just – not considerably disproportionate with the value
of the good.

As a final note, one needs to distinguish a sale contract from certain similar types of exchange
modes. Such contract as hiring sale, supplies, barter, donation, transfer of rights other than
ownership, and contract of service should not be confused with sale. There is a difference between
sale proper and the other types exchange transactions.

A contract of sale may be confused with a service contract especially as regards who supplies the
basic ingredients for the manufacture of a thing that is to be delivered. Where the party who
undertakes delivery of corporeal chattels to be manufactured or produced is also to provide the
main materials necessary for the manufacture or production, the transaction is a sale one. But if the
party to whom is delivery to be made provides the essential ingredients for the making of the thing,
the contract is best described as service and not sale. For instance, A wants a full garment. A

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brought the pieces of textile by his own and hands them over to a tailor to produce the suit. This
agreement is not one of sale, but service.

Barter is also an onerous contract that is concluded with a view to transfer ownership. But there is
no monetary price in bartering, and the exchange is made between things. Price expressed in
money terms distinguishes sale from barter. Donation on the other hand is a contract of gratuity; it
is not made for consideration. One party undertakes the obligation to transfer ownership of a thing
to another. But sale is a bilateral engagement when it comes to bearing obligations.
The transfer of rights other than ownership such as usufructs (a right to use and enjoy the fruit, not
to alienate) is in essence different from sale. Usufruct is short of the power to alienate or dispose of
a thing, which ownership contains. In sale, ownership is transferred, not merely usufruct.
A contract may be concluded for hiring a thing. The intention is that the thing will be returned
back to the lessor. The contract may further provide that the tenant of the thing will become the
owner thereof upon payment of a given number of installments. Such a contract will be assimilated
to a sale contract where the said installments are paid. But the tenant can terminate the contract by
returning the thing to the original owner. A full sale contract does not produce the effect of
returning back the thing. Sale is also different from a contract of supplies, where a party
undertakes for a price to make in favor of the other party periodical or continuous deliveries of
things. This contract relates to the delivery, not to the transfer of ownership of a thing. Price is paid
for making the supply.

There are also certain “forms of sale” recognized by law. They are all forms of sale, but assume
different modes. These include sale on trial, sale by sample, sale with ownership reserved, and sale
with the right of redemption.

Sale by sample refers to the situation where a particular thing is agreed upon to be sold so that it
will also be used to conclude a sale contract in respect of the other category it represents. The
sample or pattern will operate to represent the sale of others. Thus, sale is concluded in respect of
the whole thing when the sample conforms to the description in the contract.

Sale on trial on the other hand is a conditional sale which completes only after the thing is taken
by the prospective buyer and tried to be suitable. If the thing passes the trial, the sale contract
becomes intact. Until the trial is made, ownership resides in the prospective seller and so risk
remains with him.

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Sale with ownership reserved is a contract whereby the seller reserves to himself the ownership
until the buyer pays the price of the thing he has taken possession. A sale that transfers ownership
in full is created when the buyer fully pays the price. But until then, the risk is assumed by the
buyer, and the seller may take back the thing.

Finally, there is a type of sale called sale with right of redemption. Right of redemption refers to
the right the seller exercises to buy the thing back. Parties can reach agreement so much so that the
seller can re-buy the thing he has sold within a defined period of time, usually two years, subject of
course to the refund of the appropriate amount of price to the buyer.

Dear distance student, I do hope that you would have a fair understanding of the essence of the
essence of a sale contract and its various manifestations. I also believe that the comparisons made
of contracts akin to sale help you make clear distinctions between sale and these allied contracts.
Anyway, it is hoped that you have by now grasped the essential features of a contract of sale. Let ’s
now turn to formation and then performance of sale contracts.
.
5.1.2. Formation of a Sale Contract

As the formative requirements we have considered in the third chapter are compulsory upon the
parties to be observed, they are needless to say applicable on any special contract such as sale.
Those essential requisites stated under Art.1678 of the Ethiopian Civil Code are also upheld here.

Consent of both parties, capacity, object and legal formalities should always be observed when
concluding a sale contract. Consent as manifested through offer and acceptance and which marks
the mutual meeting of minds of the parties must be expressed concerning all aspects of the sale
transaction. As sale is a juridical act, the parties must be capable of contracting. The object of the
sale, the thing to be delivered and the delivery itself, should not merely be lawful and moral but
also be sufficiently defined and possible of performance. As regards form that the contract is to
assume, parties are free to adopt whatever form they desire. They can conclude their contract in
writing, orally, in signs, or even in conduct, but the form they have agreed to adopt needs to be
observed. If there is, however, a formality requirement particularly imposed by specific sale
contracts, that should be complied with.

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The “thing” upon which a sale contract is concluded needs to be the property of the seller. As one
cannot transfer what he does not have, a person cannot sell a thing that does not belong to him. As
sale is a mechanism of passing title, one cannot engage in sale without first having title over the
thing to be sold. Exceptionally, however, it is possible to sell a thing belonging to a third party, as
when as agent is given a special authority to transact sale of things belonging to the principal. A
sale contract normally is concluded in relation to a presently existing thing, that which is already in
existence and ready to be handed over to the buyer during the time of concluding the contract. All
the same, sale may be concluded regarding a future thing, a thing that is to be manufactured or
produced pursuant to the sale contract itself.

We have already said that sale is made for payment of a price expressed in money terms. But
parties may fail to fix the price by themselves, and this by itself does not lead to the annulment of
the contract. Parties may legitimately refer the determination of the price to an external situation or
a third party. An external situation could be the market and the price can be only ascertained by
having regard to that revealed by the market. Certain goods may instantly fluctuate in price at
different places. Parties can have the price ascertained by referring to the price index revealed at a
certain place and time. A third party or arbitrator chosen by the parties can also determine the price
for them. Thus, it is after all these possibilities of determining the price are exhausted that the
contract may be annulled for lack of the essential element of certainly fixed price.

5.2. Performance and Obligations of Parties to Sale Contract

The normal effect of every contract is performance. Sale contract is no exception on this regard.
Performance is realized through the imposition of certain obligations on both the seller and the
buyer. The parties to the contract of sale have their own respective obligations to discharge. Let ’s
have a brief look at them.

5.2.1. Obligations of the Seller

The obligations of the seller bears are normally those imposed by the contract itself. The law also
imposes certain obligations of the seller either because of the silence of the contract or due to the
mandatory nature of the obligation. The most noticeable obligations of the seller in a typical sale
transaction are delivery, transferring ownership, providing warranties, and other incidental duties.

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 a) Obligation to Deliver the Thing

Delivery consists in the factual handing over (the conveying) of the thing to the future owner.
Delivery effectively transfers possession in most cases. The delivery that transfers possession over
the thing can be made in three ways. One is the actual delivery of the thing itself – the thing is
physically handed over to the buyer, i.e. both the corpus and the animus will be transferred to the
future owner. The second mode of delivery is what may be termed as constructive possession,
where the buyer after agreeing to take delivery lets the seller to hold the thing to take it at some
later time. The animus (the intention) is with buyer but the corpus (the physicals of the thing) is
still in the hands of the seller. It shows that the buyer authorizes the seller to take custody of the
thing on his behalf. In this case, the possession of the thing is deemed already passed to the buyer
and the risk will be borne by him. Thus, constructive delivery also is a mechanism of valid
delivery. The third mode is the handing over of the documents representing the thing. This also
shares some similarity with constructive delivery as the corpus is still in the seller’s hands. Such is
the case when the title deed of the thing is handed over to the buyer. Generally, delivery doesn ’t
have to be mere actual/physical delivery of the thing; it also includes the other two cases where
such is made in accordance with the law.

The determination of the quantity of the thing to be delivered is usually made by the parties in their
contract. That quantity is to be complied with, and no delivery is deemed to be valid where it
deviates from the quantity stipulated in the contract. But in certain circumstances, it is impossible
or at least difficult to determine a precise quantity of goods. For instance, the weight or volume
may vary according to time or temperature. Therefore, the seller will only undertake to deliver
only “about a certain quantity”, as expressed in the words of Art 2275(1) of the Ethiopian Civil
Code. The consequence is that it is for the seller to determine the exact quantity to be delivered.
But, the limitation is laid on the seller to prevent him from abusing his position in that a
contractual provision regarding fixing of quantity may be made in the sole interest of the buyer and
that the possible variations between agreed and real quantity is limited to 10% in the case of the
whole cargo of a ship and to 5% only in all other cases.

The time of delivery is also an important aspect of delivery and of course performance. As always,
a clearly stipulated time of delivery in the contract is given effect. But the date of delivery may not
be inferred from the will of the parties. In this case, the law requires the seller to deliver the thing

52
as soon as the buyer requires him to do so. If there is a contractual stipulation that delivery is made
over a period of time, the privilege of fixing the exact date of delivery within such range belongs to
the seller unless it appears from the circumstances that it is for the buyer to do so. However,
overall, unless provided contractually to the contrary, delivery of the thing is legally made in
simultaneity with payment of the price so much so that the seller is not obliged to deliver the thing
until payment it made. Regarding the place of delivery, the principle, as in other cases, is that the
place of delivery is fixed in the contract. Failing this, delivery is to be made at the place where the
seller had his place of business at the time of the contract or, in the absence of such, his normal
residence. But there are exceptions to this in the case of specific goods and certain kinds of generic
goods. The place of delivery is the location of a thing where the sale relates to a specific thing and
the parties know the place the thing is situated at the time of the contract. Similarly, delivery
regarding sale of fungibles selected from a stock or a specified supply or that of things to be made
or produced in a place known to the parties at the time when the contract is concluded is effected at
such place of the thing.

b) Obligation to Transfer Ownership

This obligation is evident as sale is a mechanism for the transfer of ownership and ownership is not
guaranteed by simple delivery. of course the sale we are taking about right now is that of ordinary
corporeal chattels the transfer of possession of which entails the transfer of ownership. But that
does not suffice, because title may be accompanied by various encumbrances and the buyer must
be helped to enjoy the thing he bought free from any encumbrance.

It is a rule of legal significance that the seller shall take all the necessary steps for transferring to
the buyer unassailable rights over the thing (Art 2287, Civil Code). The proprietary rights of the
buyer may be affected because of third parties ’ rights over that thing at the time the sale contract is
concluded. Thus, the buyer may face the risk of dispossession, whether partial or total. The seller
is obliged to warrant the buyer any such dispossession which he might suffer in consequence of
third parties exercising a right they enjoyed at the time of the contract. The warranty will take
different forms, from the total/partial refund of the price (plus eventual damages) to the
undertaking of settling the situation with the third party.

As sale is a contractual transaction, parties could have an express agreement even regarding
warranty for dispossession. This means that a contractual warranty is given priority. But, there are

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

c) Warranty Against Defects and Non-conformity

A sale contract carries with it a warranty both against defects and non-conformity to the contract.
In pursuance of this, Art.2287 of the Ethiopian Civil Code reads that the seller shall guarantee to
the buyer that the thing sold conforms to the contract and is not affected by defects. What are
defects and non-conformities?

Defects relate to the quality of the thing, and involve the following cases:
- quality unsuitable for normal use or commercial exploitation;
- quality unsuitable for particular use expressly or impliedly provided in the contract;
- deviance from the quality or specification provided expressly or impliedly in the
contract.

The first defect pertains to the unsuitability of the thing for the use normally expected or for a
commercial exploitation reasonably foreseen. This goes without any stipulation in the contract.
Thus, a television must serve audio-visual purposes, a pen must write, etc. The second defect
usually comes about because of a contractually fixed use. Quality for particular purpose may not
necessarily be identical to that of the normal quality. For example, suppose X ordered Y, a baker,
to prepare a cake that serves for wedding. Y makes an ordinary cake. Here the particular purpose
was wedding, but the cake is not cooked in a way serving that purpose. Thus, there is a defect in
the thing. Parties may describe the quality the thing should possess irrespective of its use. This is
the third category of defect recognized by the law. For instance, you wanted Mr. Tekola, a
carpenter, to make a wooden bed for you. The purpose of the bed is quite obvious, i.e. for sleeping.
But you instructed him to do it with the decorations you wanted. Mr. Tekola finalized a bed with

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no such decorations at all. There is a clear defect here, and you can legitimately refuse to take
delivery.

Defects could be of two types: patent and latent. Patent defects are obvious defects that can be
noticed too easily. Latent defects are those that are hidden so that they are discovered through later
examination by way of customary usage or expert inspection. The rule of warranty is that for
patent defects let the buyer beware (caveat emptor) and for latent defects let the seller beware
(caveat venditor). If the buyer takes delivery of obviously defective thing, then the risk is his. The
law expects persons to take reasonable care of their affairs. The seller cannot be held liable on a
warranty against defects which are patent that the buyer could overlook them only as a result of
gross negligence. The seller is not liable, for a stronger reason, on a warranty against defects when
it is proved that the buyer knew of the defects. In this case, an express contractual warranty given
by the seller is of no legal effect. But even in such cases, any provision excluding or restricting
warranty is void where the seller has fraudulently concealed from the buyer the defect in the thing.
The seller is exempted from the warranty if he refrains from engaging in deceptive conducts. In
latent defects, the principle is that warranty is due. But, it is possible to contractually exclude or
restrict the warranty on hidden defects too. The exclusion or restriction, however, does not produce
any legal effect if there is faulty conduct of the seller that conceals the defect.

The buyer will avail himself of warranty for defects only upon compliance of procedural
requirements of examination and notification. He has to undertake customary examination of the
thing at the earliest possible opportunity. Or else he has to have the thing technically examined by
an expertise, such as in a laboratory, etc. The effects of the examination, i.e. the defects and its
nature, must be communicated to the seller. It is upon making of these two cumulative conditions
that the buyer may avail himself of the warranties attached to a sale transaction.

Non-conformity shows a discrepancy between the thing as described in the contract and the
delivered thing in terms of quantity, type, color or other similar characteristics. Non-conformity
resulting from the discrepancy involves partial delivery, or delivery of greater or lesser quantity
than undertaken in the contract to be delivered. Likewise, delivery of a thing different to that
provided in the contract or a thing of a different species is regarded as non-conformity. The
manners of assuming warranty and the scope of such warranty are similar to the case of defects as
we summarized above.

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5.2.2. Obligations of the Buyer

The obligations of the buyer are paying the price (the main obligation), taking delivery of the
thing, and other obligation contractually imposed upon him.

a) Obligation to Pay the Price

The obligation is usually discharged quite easily by a cash payment. But as the economy develops
and the importance of commercial transaction rise, more sophisticated means of payment also
appear. For instance, cheques, bank accounts, special banking facilities, credit card payments or
even payment in foreign currencies are modes of paying the price. Art 2304(1) of the Civil Code
reads “the obligation to pay the price shall include the obligation to take any step provided by the
contract or by custom to arrange for or guarantee the payment of price ”. In a sense, the buyer must
arrange the actual payment of price and so undertake all the relevant formalities to transfer the
money through orders to the bank. For instance, he is responsible for ensuring that the money is
there on the day of the sale. He must also guarantee payment. The buyer is responsible for an
effective transfer of money to the seller. For instance, he is liable if there is insufficient cash on his
bank account when he drawn a cheque.

The place of payment is in principle that fixed in the contract. Where the contract is silent payment
is made at the address of the seller which implicitly means his business address. In cases of
simultaneity, price is paid at a place where the thing is delivered. Quite in a similar fashion, time of
payment is that stipulated in the contract which could range between payment at the contract and
postponement to a future date such as sale on credit that is realized later than the delivery of thing.
In the absence of a contractual provision, the principle is sale for cash on delivery. Payment is
simultaneous with delivery, but the buyer should be granted the opportunity to examine the thing
for defects or non-conformities so as to avoid a dispute where payment has taken place and the
seller refuses to repair defects.

b) Duty to Take Delivery

Where the delivery consists in that of a thing conforming to terms of the contract, the buyer should
take it. The buyer has a duty to cooperate in the delivery process and he may not obstruct the sale
by blocking the delivery. The obligation to take delivery includes active performance of

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procedures necessary or even customary for carrying out the delivery. He has to cooperate with the
seller, for example, in indicating the color, size or other important attributes of the thing.

5.2.3. Common Obligations of the Parties

The priority is given, like always, to a contractual term that is fixed by the parties. If there is no
agreement, the law imposes certain obligations on both parties based on circumstances. By
common obligations of the parties, we don’t mean that the duty is borne at the same time by both
the seller and the buyer; we rather mean that it is possible for both parties to assume the said
categories of duties having regard to the circumstances of the case. Thus, transfer of risk, expenses,
and preservation of the thing may be borne by either of the parties depending on differences in
time, nature and other attending circumstances.

a) Transfer of Risks

Transfer of risks is not an obligation in and by itself. It is rather a circumstance that determines on
whom certain consequential obligations should fall. Let’s first look in brief how risk passes from
one party to another, usually from the seller to the buyer.

The accepted principle as far as transfer of risk is concerned is the doctrine of res perit domino, i.e.
risk follows title. Stated differently, the transfer of ownership (title) is accompanied by the transfer
of risk. The sale of ordinary corporeal chattels transfers ownership thereof merely through factual
delivery because these goods are those susceptible to the application of the property law
presumption “one who is in possession is deemed to be the owner ”. But that is not all about it, and
transfer of risk may occur even where technically transfer of ownership has not yet taken place or
where there is a dispute as to the validity of the sale of the thing.

Risk involves the destroying, perishing, wearing and deterioration of a thing that is subject matter
of the sale transaction. Where the risks are transferred to the buyer, through delivery made in
accordance with the provisions of the contract and of the law, he is obliged to pay the price
notwithstanding that the thing is lost or altered in value (Art.2323 cum 2324, Civ. C.). The buyer
bears the risk of the thing’s being lost or deteriorated from the date of taking delivery, and his
obligation to the seller remains unaffected by these circumstances. Stated a contrario, the risk
remains with the seller in so far delivery is not made appropriately and risk is not transferred. Even

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though delivery might not yet have carried transfer of ownership, the rationale here is that the law
wants the risk of loss of the thing to be borne by the material possessor of the thing, irrespective of
the actual status of ownership rights.

The buyer bears risk not merely where he took delivery of the thing, but also from the day he is
late in taking delivery of the thing. Specific things are do not pose a problem here. If the sale
relates to fungible things, the delay of the buyer does not transfer risks because it requires
specifications and it is generally difficult to take delivery.

Things under voyage (on course of transport) may pose a problem in the determining the transfer
of risk. The idea here is that the risk of the voyage is for the buyer because the transfer of risks
happens on the day the thing leaves the hands of the seller, and it is immaterial that the thing is
handed over to the buyer. But the law prohibits the seller from abusing his position by giving a
damaged thing and pretending the damage happened during the voyage. Fraud of the seller
reserves the risk to him, and if he knew or should have known that the thing had perished or was
damaged the risk will not be transferred to the buyer.

b) Expenses

A sale transaction could entail various expenses. Who is to bear these expenses is an important
question. The noticeable expenses here are those of forming the contract, delivery, transport,
payment, custom duties and expenses because of change in business address of a party.

The law provides that the expenses of delivery (that includes counting, measuring and weighing
costs), transport (where delivery is carriage-free), customs duties linked to a delay caused by the
seller, and those incurred due to the change in business address by the seller, are all borne by the
seller. The buyer on his part bears the expenses of the contract of sale itself, expenses for payment,
expenses after delivery and expenses of transport where thing is sent to other place than that of
delivery. The nature of these expenses and their appropriation shows that they are incidental to the
primary obligations and so borne by the respective parties.

c) Preservation of the Thing

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The duty of preservation of the thing arises where the buyer fails to take delivery of the thing on
the one hand, and the seller makes a defective delivery refused by the buyer on the other. Where
the buyer is late in taking delivery or in paying the price, the seller bears the duty to preserve the
thing at the buyer’s expense. He is for that matter entitled to retain the thing until the buyer
indemnifies him of the expenses he incurred in preserving the thing. But if the thing deteriorates or
is damaged because of his failure to preserve, he will be liable. Where the thing sold has been
received by the buyer but he intends, legitimately, to refuse it, he is obliged to ensure its
preservation at the seller’s expense. He is again empowered to retain the thing until the seller
indemnifies him of his expenses of preservation. His failure to preserve the thing makes him liable
for the resulting damage or loss of the thing. Finally, the seller and the buyer can relieve
themselves of the duty of preservation by consigning or selling the thing in accordance with
general contract principles.

5.3. Non-performance of a Sale Contract

As sale is a special type of contract, and therefore the general rules of contracts will apply, mutates
mutandis. Thus, with some adjustments, the remedies of non-performance we have tackled in the
third chapter are applicable to non-performance of sale contracts. These are forced performance,
cancellation and damages, if any.

5.3.1. Forced Performance

Dear distance student, you have to recall your reading on forced/special performance of general
contracts. Specific performance is awarded only if it is of a special interest to the creditor and if it
can be carried out without affecting the personal liberty of the debtor. For example, if the buyer
finds the thing in the market, he cannot claim that the specific delivery of the thing by the
defaulting seller is of a special interest to him. In this case, the buyer is preferred to make a
purchase in replacement if the new thing conforms to commercial practice or such purchase can be
effected without inconvenience or considerable expense. By the same token, a seller cannot
claim the forced payment of a price from the defaulting buyer if he can sell his thing at equivalent
price to someone else. That is, where compensatory sale is possible or customary, the court will
not award a forced performance against the buyer.

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5.3.2. Cancellation

This is also not a novel nation as we have dealt with in relative depth on our discussion of
contracts in general. You are expected to recall all those points we put forth there and you can
make a simple adjustment to understand cancellation in a sale contract. As a rule, parties have to
seek cancellation of the contract from a judicial body. All the same, they can unilaterally declare
cancellation in exceptional circumstances. There are a couple of reasons attributable to the buyer ’s
claim of cancellation and there are other sets of reasons for cancellation raised on the part the
seller. There are also reasons available to both parties.

i) Reasons for Cancellation by the Buyer

Cancellation is either judicial (by the court) or unilateral (by the buyer in this case). In both cases,
our focus is the buyer’s right to either ask the court or do it himself.

One reason is the expiry of the compulsory date fixed for delivery. The date is compulsory if the
thing has a market price on markets to which the seller can apply to obtain it. Where this time
lapses, the buyer can cancel the contract. Where the date fixed for delivery is not compulsory, the
court or the buyer may grant the seller an additional time called grace period within which he shall
perform his obligation. The contract is cancelled as of right where the seller fails to deliver the
thing within such additional time.

Another scenario that brings cancellation to the buyer is where whole ownership is not transferred
to him. That means the seller delivers thing in sale whose title is defective or encumbered because
of other persons’ rights over the thing. If the seller fails to deliver a thing free from all
encumbrances, the court can order the cancellation of the contract. However, no cancellation is
possible where the buyer knew of the encumbrance on purchasing the thing. The law disallows
cancellation in such case because parties knowingly entering into defective transaction should not
attempt to invoke that defect at the expense of creating insecurity in transactions. Again, there will
not be any cancellation where the right with which the thing is encumbered is of a small
importance and it appears that the buyer would have bought the thing despite the encumbrance.
The intention of the law is to prohibit immaterial defects featuring during contractual formation

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from manipulations intended to avoid contractual obligations; these matters are to be objectively
appreciated by the court.

The encumbrance may be of the nature that the buyer is totally dispossessed from the thing he
bought. If the seller was bound to warrant the buyer against the dispossession, the contract is
cancelled as of right without any court involvement. The law, acknowledging that the buyer
bought the thing for enjoying it, regards total dispossession as defeating the whole object of the
sale transaction and therefore treats the contract as cancelled in its own right. In cases of partial
dispossession, it is the court that may decide on the cancellation. Cancellation is, however, not
possible where the dispossession only affects a part of the thing of minor importance and where it
is reasonably expected the buyer would have bought the thing had he even known of the potential
dispossession.

A contract may also be cancelled (as invoked by the buyer) by the order or decision of the court if
the thing is affected by a defect against which the seller warranted the buyer. Note once again that
the thing is deemed to be defective where it does not possess the quality required for its normal use
or commercial exploitation or where it does not possess a quality required for its particular use.
Where the defect relates to part of the thing only, the contract is cancelled for that defective part
only. The contract may however be cancelled as a whole where the defective part cannot be
separated from the whole.

ii) Reasons for Cancellation by the Seller

The failure to pay the purchase price by the buyer constitutes one reason for the seller to invoke
cancellation of the contract. The seller may himself declare cancellation in case of non-payment of
price where such right has been given to him in the contract. If there is no express stipulation in the
contract that empowers the seller to cancel the contract upon non-payment as agreed, the seller can
declare cancellation only upon expiry of a reasonable time fixed by him in the default notice made
to the buyer. The seller can also cancel the contract where the buyer fails to pay the price within
the grace period given by the court.

The failure of the buyer to take delivery of the thing may somehow operate as a ground for the
seller to require judicial cancellation of the contract. If the buyer ’s failure to take delivery justifies
the fear that he will not pay the price, seller can seek cancellation. This takes into account the

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situation that some buyers manifest their refusal to pay the price by failing to take delivery of the
thing they purchased. Seller can also demand cancellation where taking delivery of the thing is an
essential stipulation of the contract and the buyer fails.

iii) Reasons for Cancellation by Both Parties

Both the seller and the buyer may get the contract cancelled due to certain conditions relevant to
their respective positions, the necessary changes being made. They are considered below.

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

Impossibility in performance of an obligation entitles the respective party to cancel the contract.
Impossibility is a factual state of affairs, and occurrence of facts that make the performance of the
contract impossible evidently results in the cancellation of the contract. It is pointless for a contract
whose object has totally failed to remain in effect. Anticipatory breach is also a ground for the
cancellation of a sale contract. Anticipatory beach refers to the situation whereby one party
unequivocally (without any doubt) informs the other party that he will not perform the obligation
on his part. The other party can cancel the contract even if the breach is made before the due date
stated in the contract.

iv) Effects of Cancellation

Where contract is cancelled for any of the above grounds, the parties are released from their
obligations under the contract. This release does not affect the right to demand damages where
they are sustained. Where a party has performed his obligation in whole or in part, he may claim

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the restitution of what he had supplied including the expenses incurred. In the case where both
parties have performed their obligations, each of them may refuse restitution due by him until the
other party has effected his. Restitution is the return by a party of things he has taken under the
contract from the other party. If the seller is to refund the price, it must include interest from the
day of reception. If the buyer is to restore the thing to the seller, it includes profits derived from the
thing.

Sometimes restitution of the thing to its previous position may be impossible as a result of the
destruction of the thing in whole or in part or as a result of damage to the thing. If the loss or
damage is due to his act or due to the act of the person for whom he is responsible, the buyer loses
his right to claim to claim restitution; otherwise the buyer retains his right to cancel the contract
along with an award of damages. The buyer cannot, however, cancel the contact where he is
unable to restore the thing because he has assigned or transferred it or the thing has perished or has
been damaged by his act.

The person required to make the restitution of the thing shall be entitled to reimbursement of the
expenses he has incurred in preventing deterioration of the property or loss unless the expenses
were rendered necessary by his own fault or by the fault of a person for whom he is responsible.
Where the expenses incurred on the thing have increased its value, the person making the
restitution is entitled to the reimbursement of the expenses by the amount only of the increase in
value at the time of the restitution.

A person making the restitution of the thing may remove anything he joined to the thing which can
be separated from the thing without appreciable damage to the thing. Conversely, a person
required to make the restitution is bound to indemnify the true owner where the former has caused
deterioration of the property.

5.3.3. Damages as a Remedy for Non-performance

The non-performance by a contracting party of his obligation may be economically detrimental to

the other contractant, and the seller or the buyer, whoever the victim of the default might it be, may
claim that the damages thus caused be made good by way of compensation. Compensation is
claimed whether the contract is cancelled or maintained. It is also due where the contract has not
been regularly and exactly performed.

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If the contract is sustained through specific performance, damages are due merely because of a
delay in performance so that the contracting party is awarded compensation for a time he is
deprived of the enjoyment of the thing that he had counted on. He may also have lost a good
chance to resell the thing if that was his intention. On the other hand, if the contract is cancelled,
the person is deprived of the advantage that he could legitimately expect from it. In both cases, it is
proper to reestablish the equilibrium established by the contract by remedying the upset by the
failure to perform the contract. This is done by requiring the person who has not performed his
obligation or has performed it improperly, incompletely or late, to pay damages to the other party.

The principles of claiming damages we have raised on contracts in general are also applicable
here. Leaving that part for your reading, I briefly focus on the issues of damages specific to sale
contracts.

Where the contractual breach is only that of being late in paying the price, the amount of damages
to be awarded is that the buyer should pay interest at the legal rate. This means that if the contract
is performed anyway even though not in time, the damage is calculated to equal a simple interest at
the legal rate, i.e. 9% on the principal. A higher interest rate fixed for the contract as a whole will
not apply to the award of damages.

The amount of damages awarded where a contract is cancelled will be fixed having regard to
whether a thing has a current price. Current price refers to the price practiced on the market which
would be the normal place of business for the buyer or the seller. The amount of damages is equal
to the difference between the contractual price and the current price. The current price is the one
that prevails on the day when a party could exercise his right to declare unilateral cancellation or
on the day following the date of judicial declaration of cancellation. The defaulting party is also to
pay normal expenses linked to a purchase in replacement or compensatory sale as the case may be.

The situation is treated differently in the eyes of the law where the thing does not have a current
price. Here there is no term of reference to objectively calculate the amount of the damages. One
therefore looks at the compensation a reasonable man (in this the court) deems appropriate. Such
amount may be increased to the actual prejudice where one party sustains damages because of
intent to harm, gross negligence or grave fault committed by the other party.

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The amount of damages resulting from anticipatory breach is fixed by referring a current price of
the thing to that prevailing on the last day of the period stipulated in the contract for the
performance of the obligation. Where no time-limit for performance is fixed by the contract, the
day of reference is will be that when right to declare cancellation of the contract could be
exercised. Since anticipatory breach is usually made prior to the arrival of the contractually fixed
date of performance, the law implicitly upholds that it is fair to calculate the damage waiting for
the normal date of performance and the price in force on that day. Nevertheless, damages cannot
exceed the price actually paid for a previous purchase in replacement. Nor can it exceed the
difference between the price fixed in the contract and the price actually received for a previous
compensatory sale.

Finally, a scenario that could result in the award of damages is dispossession. In such case, the
seller should reimburse the buyer, in addition to any other damages, the judicial and extra-judicial
expenses of proceedings he had to institute. The exception here, i.e. where no damages may be
sought, is the expenses the buyer could have avoided had he informed the seller of proceedings
with third parties.

5.4. Some Issues About International Sale Transactions

Dear distance student, what we have so far been considering is almost entirely a domestic law of
sale. Law is very personal in the sense that it effectively applies in a jurisdiction of a state and not
somewhere outside. The Ethiopian sales law is given effect only in Ethiopia. Nevertheless, sale is
also an international affair transcending beyond the particular boundaries of a state because of
increased commercial and trade relations between states on the globe. So, in addition to particular
treaties signed between countries regarding a transnational sale transaction, there are some general
issues we can arise.

Generally, the international sales contract is drafted to accommodate buyers and sellers with each
other. The bargaining systems cover items such as market forces affecting prices, risk factors and
terms that relate to security of payments. The final agreement is an essentially private transaction
and calls for a private legal regime.

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Performance of an international contract involves greater distance and longer periods of time
before the goods are delivered and payment is required than in the usual domestic transaction.
There are also purely international risks such as differences in legal currencies, different
governmental regulations, difference in language, differences in legal system and society, etc.

The international sale of goods will commonly involve more than one legal relationship. That is in
addition to the basic sales agreement, there is a shipping contract and insurance contract. Further,
there is a variety of documents such as bill of lading, invoice, and marine insurance policies. Trade
problems associated with international sales contracts arise with regard to restrictive trade devices
that impede or distort trade. Classic examples include tariffs, import quotas, import licensing
procedures and complex customs procedures.

Even though many different issues are involved in international sale contract, here we are mainly
concerned with the arrangement related to security of payment in overseas trade. We thus focus on
the documentary credit, or letter of credit as it is usually called.

Because buyers and sellers engaging in international business transactions are sometimes separated
by thousands of miles, special precautions are often taken to ensure performance under the
contract. Sellers want to avoid delivering goods for which they might not be paid. Buyers desire
the assurance that sellers will not be paid until there is evidence that the goods have been shipped.
The exporting/importing Ethiopian enterprise does not trust its respective partner abroad. Thus,
letters of credit are frequently used to facilitate international business transactions. The letter of
credit is usually opened by a bank, and the bank serves as an intermediary and guarantees the
payment.

In a simple letter-of-credit transaction, the issuing bank agrees to issue a letter of credit and to
ascertain whether the beneficiary (seller) performs certain acts. In return, the account party (buyer)
promises to reimburse the issuer for the amount paid to the beneficiary. There may also be an
advising bank that transmits information, and a paying bank may be involved to expedite payment
under the letter of credit.

Under a letter of credit, the issuer is bound to pay the beneficiary (seller or exporter) when the
beneficiary has complied with the terms and conditions of the letter of credit. The beneficiary
looks to the issuer, not to the account party (buyer or importer), when it presents the documents

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required by the letter of credit. Typically, the letter of credit will require that the beneficiary
deliver a bill of lading to prove that shipment has been made. Letters of credit assure beneficiaries
(sellers or exporters) of payment while at the same time assuring account parties (buyers or
importers) that payment will not be made until the beneficiary has complied with the terms and
conditions of the letter of credit. Study the following exhibit for a better understanding.

ISSUER
BANK

SELLER LETTER OF BUYER

CREDIT

CARRIE
R

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CHRONOLOGY OR EVENTS
1. Buyer contracts with issuer bank to issue a letter of credit; this sets forth the bank ’s
obligation to pay on the letter of credit and the buyer’s obligation to pay the bank.

2. Letter of credit is sent to seller informing seller that upon compliance with the terms of the
letter of credit (such as presentment of bill of lading), the bank will issue a payment for the
goods.

3. Seller delivers goods to carrier and receives a bill of lading.

4. Seller delivers the bill of lading to issuer bank and, if the document is proper, receives
payment.

5. Issues bank delivers the bill of lading to the buyer

6. Buyer delivers the bill of lading to carrier.

7. Carrier delivers goods to buyer

8. Buyer settles with issuer bank.

The letter of credit is known for its virtue. The basic principle behind letters of credit is that
payment is made against the documents presented by the beneficiary and not against the facts that
the documents purport to reflect. Thus, in a letter credit transaction, the issuer does not scrutinize
the underlying contract; a letter of credit is independent of the underlying contract between the
buyer and the seller. Eliminating the need for banks (issuers) to inquire into whether or not actual
conditions have been satisfied greatly reduces the costs of letter of credit. Moreover, the use of a
letter of credit protects both buyers and sellers.

The compliance with a letter of credit is usually simple to assure. In a letter of credit transaction,
generally at least three separate and distinct contracts are involved: the contract between the
account party (buyer) and the beneficiary (seller), the contract between the issuer (bank) and the
account party (buyer), and finally the letter of credit itself, which involves the issue (bank) and the
beneficiary (seller). As noted, given that these contracts are separate and distinct, the issuer ’s
obligations under the letter of credit do not concern the underlying contract between the buyer and
the seller. Rather, it is the issuer’s duty to ascertain whether the documents presented by the
beneficiary (seller) comply with the terms of the letter of credit. If the documents presented by the

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beneficiary (seller) comply with the terms of the letter of credit, the issuer (bank) must honor the
letter of credit.

Sometimes, however, it is difficult to determine exactly what a letter of credit requires. The degree
of compliance required of parties by a letter of credit may vary slightly form place to place. The
Commercial Code of Ethiopia contains provisions on letter of credit (Art.959-967). It recognizes
two types of letters of credit: revocable and irrevocable. Revocable credits are not legally binding
undertakings between banks and beneficiaries. Such credits may be modified or cancelled at any
time without any notice to the beneficiary. When the revocable letter of credit had been transmitted
to a branch or another bank, the fact of modification or cancellation of such credit must be
communicated to the branch or other bank prior to payment, negotiation or acceptance of the
credit. Otherwise, the cancellation or modification cannot have effect on the conduct of the
branches or the other bank. Revocable credit is to the disadvantage of the seller (exporter) as he
may not have recourse against issuer. Therefore, he does not seem to consent to such a credit.

Irrevocable credit is, on the other hand, a definite undertaking by an issuing bank and is binding.
Irrevocable letter of credit, as the name indicates, cannot be modified or cancelled, and it would
constitute the full engagement of the issuer (bank) to the beneficiary or other bona fide holders of
drafts drawn under the letter that the provisions for payment, acceptance or negotiation contained
in the letter of credit will be duly fulfilled. Thus, irrevocable letter of credit embodies a firm
commitment by the issuing bank and its issuance imposes on the issuer (bank) an obligation from
which it cannot withdraw.

Irrevocable letters of credit require confirmation to bind other bank. When the issuer instructs
another bank to confirm its irrevocable letter of credit and when the latter does so, the confirmation
implies a definite undertaking of the confirming (advising) bank as from the date on which it gives
confirmation. In an unconfirmed letter of credit, the beneficiary will not have recourse against the
advising bank. In the case of a confirmed irrevocable credit, the beneficiary has double promise for
payment by two banks and he can quite legitimately enforce his claims of payment not only
against the issuing bank but also the confirming bank.

The advising bank is, juristically speaking, jointly and severally liable after its confirmation is
secured. After the shipment of goods, the documents are presented by the seller to the advising
(confirming) bank. If the documents comply with the specification in the letter of credit, the

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advising bank can even immediately pay the seller and demand payment of the goods from the
issuing bank. On the other hand, the buyer is the customer of the issuer (bank); he has no
contractual relationship with the confirming (advising) bank. Consequently, the buyer would have
no rights against the advising bank and vice versa.

CHAPTER SIX
INTRODUCTION TO COMMERCIAL LAW
Commercial law is a broad area of law. Our concern here is only with the fundamental principles
as particularly enshrined in the Commercial Code of Ethiopia. You will have a brief look at the
law of traders and business organizations, insurance and negotiable instruments. At the end of this
chapter, you must be able to:

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 - distinguish traders from non-traders.

- differentiate the business organizations that can be formed in Ethiopia,

- define insurance and insurable interest

- state the significance of insurance transactions

- describe negotiable instrument and negotiability

- identify the different types of negotiable instruments and their resenting features.

6.1. Law of Traders and Business Organizations

6.1.1. Traders
Who are traders? This is the foremost question that may come to one ’s mind. Traders are persons
who carry on trading activities professionally and for gain. Their professional career is indicative
of the fact that these persons engage in trade as a means of earning livelihood. Obviously, traders
pursue profit-making ends. The law has expressly stated in a seemingly limitative list, the activities
that are regarded as trading. Article 5 of the Ethiopian Commercial Code contains twenty-one
activities in which traders can engage in.
Thus, not all persons who operate a given task for profit may be necessarily regarded as traders.
For example, persons who engage in agricultural production, cattle breading, fishery and persons
who operate activities at the level of handcrafts are not treated as traders even if they derive profits
out of their activities, and they don’t have the rights and duties of traders. This shows that the type
of activity, not necessarily a profit generating one, is considered for categorizing a professional
pursuer as a trader or not.

There are some persons who from the outset cannot engage in trading activities or at least engage
subject to fulfillment of certain conditions, not because the activities they engage in are non-
trading. Incapable persons, foreigners, associations, among others, are group of persons who
cannot engage in commercial activities. Incapable human beings such as minors and persons with
interdiction are denied the capacity to carry out acts of civil life, and trade is at the top of juridical
acts. Therefore, persons with incapacity cannot operate trade personally by the application of the
law of physical personality. Foreigners on their part cannot directly go into trade matters as
nationals. First, there are activities reserved to nationals, and foreigners are totally enjoined from
participating in those sectors. Secondly, they need to secure work permit before embarking upon
trading ventures. However, for a poor nation like ours, foreign investment is necessary and the
government’s successive grant of investment permit to foreigner’s evidence to this fact.
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Associations, on the other hand, are organizations formed to operate non-profit making activities.
Religious, social or many other non-governmental organizations acquire legal personality upon
registration but are not traders, for the mere reason that they pursue end other than the realization
of commercial surpluses.

A trader can be both a physical person and a juridical person. Both human beings and corporate
entities are regarded as traders when they take part in the activities earmarked by the law as trading
ones. Thus, a trader is not to merely mean individual merchants, and the corporate form of trading
is also legitimately recognized.

Traders have certain obligations not borne by non-trading persons. They are generally required to
be registered, to obtain business license and to keep books and accounts. No trader can engage in
commercial activities unless first registered in the commercial register. The government tries to
avoid the huge potential abuse in this sensitive area by overseeing the potential and actual conduct
of the traders by, among other things, requiring registration. A similar end may be served by
requiring the trader to secure a business license form the authorities. A crucial obligation,
especially from the view point of government revenue, is the maintenance of proper and accurate
books of account. Business sector is the principal area from which the government generates
revenue through taxation to operate its multiple functions. Computations of tax liability are by and
large dependent accurate financial records by the concerned trader.

6.1.2. Law of Business Organizations

Among the two basic forms of doing business, i.e. individually or through an incorporated body,
the latter form can be split into various sub-forms. The corporate form of doing business we deal
with right now is the private one, meaning business forms taken up by non-state entrepreneurs and
that are governed by the commercial law. A corporate form of business undertaking is also
available to the public in a slightly different form from the private counterpart. Public enterprises
and cooperatives are the public forms of engaging in commerce by way of a corporate body.
Anyway, one scheme of operating business may be chosen over another for a variety of reasons.

Business organization is defined under the Commercial Code as an association arising out of a
partnership agreement. The word “association” is not used here to equate business organizations to
non-profit making entities; it is used here to mean grouping of people. A business organization is,

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therefore, a grouping of business persons that comes out of the partnership agreement. A
partnership agreement exhibits certain features and contains certain elements. According to article
211 of the Commercial Code, it is defined as a contract whereby two or more persons who intend
to join together and to cooperate undertake to bring together contributions for the purpose of
carrying out activities of an economic nature and of participating in the profits and losses arising
out thereof, if any. Let’s try to dissect the statement in order to understand a partnership agreement.
The partnership agreement is a contract in the strict sense of the term. As a contract, multilateral
instrument, it should satisfy all the legal requisites we raised on general principles of contract law
and it produces all the effects of a contract. It binds together the cooperators and contributors and it
is backed by the sanction of law for enforcement. As a contract again, two or more persons are
needed and this means that a single person cannot establish a business organization in Ethiopia.
Parties to the partnership agreement should be willing to work together for common goal. The
extent of collaboration depends on the nature of the business organization. In companies,
personality of the contractants is less important than that in partnerships. The persons also
undertake to make contributions that later constitute the business organization. The kind of
contribution may depend upon the interest of the parties and the need for investment in the
business organization. Cash contributions are the obvious modes. But in kind contributions, or
even skill (knowledge), are possible in so far as they are susceptible to monetary valuation.

Business organizations are established for the purpose of carrying out activities of economic nature
and the partnership agreement should also reveal this. That is to say, persons organize them selves
in the form we are talking about to strengthen their economic power, to collect more profit. In
other words, a business organization cannot be established for purpose other than profit making.
The contracting parties further undertake to participate in both the profit and the loss that arise out
of their operation, as the case may be. The contract cannot exclude members from either the profit
or loss or both. Mind you here that the case of limited liability is conceptually different and it is
generally recognized in companies.

The Ethiopian law recognizes six types of business organizations: three types of partnerships, two
types of companies and a joint venture. Partnerships are associations of persons and the personality
of members does greatly matter. Companies are associations of capital and the personality traits of
shareholders are not important to the existence of the company. Joint ventures are unique forms of
business organization. Let’s have a cursory look at them.

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 a) Partnerships

Partnerships would have their own legal personality upon registration and publicity. But such
personality is greatly dependent on the mutual understanding between the partners so much so that
the withdrawal of one partner may cause the dissolution of the partnership as a whole. There are
three types of partnerships: ordinary, general and limited partnerships.

Ordinary partnerships are corporate forms of doing business in non-commercial activities. A

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

General partnership is a commercial business organization in which all partners occupy the same
position vis-à-vis third parties. All partners are jointly and severally liable to third parties, and they
cannot even avoid this obligation by a contractual term. All of the partners can be managers of the
partnership. Creditors will have recourse against the partners only after they exhaust the
possibilities of recovery from the partnership.

A limited partnership comprises two categories of partners: general partners and limited partners.
The general partners of a limited partnership assume similar obligation as that of partners of a
general partnership. General partners are jointly and severally liable for the debts and
commitments of the partnership where the assets of the partnership cannot cover the debts and
commitments. This group of partners act as managers of the limited partnership. Limited partners,
on the other hand, are partners that cannot be held responsible for the debts of the partnership
beyond their original contribution. They cannot also take part in the management for that is
inconsistent with their exemption from liability.

b) Companies

The company is the best way of doing business in a corporate form. it is characterized by an
acquisition of capital from a relatively wider segment of the society. What is needed is capital and
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not persons, and thus members are not expected to take part in the operations of the company.
Ownership belongs to dispersed shareholders while management and control is in the hands of
professional managers. The basic virtue of the company form is the full recognition of limited
liability. No contributor (shareholder) is held liable for the debts of the company beyond his
contribution, and he does not risk losing his personal property because of liability incurred by the
company. The life of a company is not dependent on the life of the shareholders, unlike
partnerships. The company exists and operates independently of, and in fact remotely from,
shareholders and the company continues despite withdrawal or death of shareholders.

We have two types of companies: share companies and private limited companies. Both have their
partnership agreement expressed in what are termed as memorandum of association and articles of
association. They also have their capital divided into shares, and they issue shares, even though
shares of a very different nature. They are always commercial business organizations in the sense
that they engage only in one of the activities legally recognized trading ones. They also have
differences.

WeThe minimum capital requirement is significantly different. A private limited company has
capital ceiling but share company can raise capital to an unlimited amount. The number of
shareholders for a share company is minimum five while private limited companies can be formed
by fewer people up to two. But the latter have a ceiling on the number of shareholders, 20, while
there is no limitation on the maximum number of shareholders in share companies. Share
companies are authorized to raise capital through a subscription of shares to the public and pool
together large sums of money for the capital of the company. Private limited companies cannot
offer shares for public subscription.

Share companies can issue transferable shares and other transferable securities. They can issue
various classes of shares that can be negotiated easily. They can enter into loans by issuing
debentures. Private limited companies cannot issue such documents. In share companies, important
decisions are made by the general meeting of share holders. But in private limited companies, the
possibility or importance of such meeting is doubtful as the line between ownership and
management is often blurred.

c) Joint Ventures

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

6.2. Law of Insurance

6.2.1. General

Insurance is a social security scheme that developed because of the existence of risks. Risks are
evident especially in the business world where persons may be exposed to huge losses as a result
of the materialization of the risk. Such a phenomenon may discourage people from venturing on
sectors that may entail risk or the business sector might have been generally endangered. Insurance
policy had succeeded in responding to the abovementioned problem.

A person or an organization may merely assume a risk of some kind that may or may not happen.
Whether the risk happens or not is, however, not certain. No body knows when, how and to what
extent the risk may materialize. If this fact was known beforehand, every one would have avoided
it. It the uncertainty and fear of unfortunate moment may hamper commerce or industry. The
uncertainty surrounding potential losses is referred to as risk. An insurance coverage for the risk
will encourage people to conduct business with out the fear of the occurrence of the risk. There are
many virtues of insurance.

Insurance makes a person work with out fear and thus increase production and productivity.
Individuals perform more in a risk free or risk controlled environment. Insurance helps to budget
money for unknown loss. If a person is insured, he pays money to the insurance company at a

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continuous interval. The periodic payment, called premium, can be taken as a budgeting in advance
for an uncertain risk.

Most importantly, insurance distributes risk among different people. People under a certain risk
make payments in advance so as to address the risk in case it materializes. The public will make a
cumulatively huge contribution to the insurer, and the insured who suffered the actualized risk
would be redressed and put to his position he was before the materialization of the risk. Because
the insured has got paid from the fund pooled together by the public and we can say that the risk is
dispersed on the people generally. The distributed burden would be too easy for members of the
community to bear, but would have been very devastating on the individual persons in the absence
of insurance.

Insurance has become a significant force in the industrial sector where there is an active movement
of labor and where equally risk exists. Insurance protects workers against work related hazards.
While the workers enjoy work with out fear, that will be very beneficial to the employer for more
work is to be performed and production increased. The gigantic insurance companies create
employment opportunity. Their financial and social status makes them great contributors to the
employment sector of a nation.

6.2.2. Insurable Interest

Any party purchasing insurance must have a “sufficient interest” in the insured item to obtain a
valid policy. Insurance laws determine sufficiency of items for insurance coverage. A person is
said to have insurable interest where he has a vested interest in the subject matter of insurance to
whom the advantage may arise or prejudice may happen. There must be an economic link to the
claim of insurance.

A person should have some kind of relation to or concern in the subject matter of the insurance.
Insurance protects the relation or economic concern on a thing. We say that there is an insurable
interest if the occurrence of a given peril assumed to affect the concern on the subject matter of
insurance proved to affect the economic interest of an insured. The insured should be benefited
from the existence of a thing or an interest insured or should be prejudiced by its destruction upon
materialization of the risk.

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6.2.3. Insurance Policy and Rights and Duties of Parties

Insurance policy is basically a contract, but a special contract. It is defined under Article 654(1) the
of the Commercial Code as a contract whereby a person called the insurer, undertakes against
payment of one or more premiums to pay to a person, called the beneficiary, a sum of money
where a specified risk materializes. As a contract, an insurance policy should satisfy all essential
requirements of a valid contract. In addition, it must exhibit the special features attached to it by
the provisions of the Ethiopian Commercial Code.

Accordingly a contract of insurance must be made in writing. This is so because the law says that
the contract should be supported by a written document called an insurance policy, which, as is
mentioned in the definition is the contract itself (Art 657 (21). We can say that the law has
specifically imposed a writing requirement in the creation of an insurance contract, and that must
be observed. The insurance policy also is to contain the facts stated in Article 658. These are:

- the place and date of the contract;

- the names and addresses of the parties;

- the items, liability or person insured;

- the nature of the risks insured;

- the amount of the guarantee;

- the amount of the premium; and

- the term for which the contract is made.

In insurance contracts, the person guaranteeing against a given risk is called the insurer. In
Ethiopia, only share companies can be insurers because financial activities, viz banking and
insurance, are run only in the form of share companies. The person seeking an assurance against a
definite risk is the insured, or the beneficiary to use the Code’s terminology. The insured may
subscribe insurance policy for his own benefit or for the benefit of other person(s), i.e. the
beneficiary of the policy may be the insured or a third party.

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The insurance policy must specify the subject matter of the insurance that contains an insurable
interest. Insurable subject matter could be a property exposed to peril (such as car, building,
machinery), liability to third parties, persons themselves including their life and illness or
accidents.

The insurance of property refers to both corporeals and intangibles. Physical assets are obviously
proper subject matters for insurance policy. Equally, intangible claims such as rights and credits
(receivables) to be collected may be insured. Even though these do not have a material existence,
there is a risk that they may not be recovered or received and thus they constitute insurable
interest. A person may face a liability to third parties. He may extra-contractually fall into a
liability scenario and this is a risk. A person can cover such risk with an insurance policy so that he
normally undertakes his activities with out much fear of liability.

Another subject matters of insurance are persons. Persons insure themselves for a variety of
reasons. For example, a person’s death may seriously affect his descendant ’s or others whom he
supports. Life insurance policy provides such person to give financial security in advance to
persons he supports. The life of the insured is an insurable interest for ultimate beneficiaries whose
livelihood is dependent on the earnings of the insured. Likewise, a person may insure himself
against defined accidents or illnesses for his own benefit or for the benefit of others. An accident
may cause a serious and permanent bodily injury and may thus reduce the working and earning
potentials. Illness may cause same. Insurance is a good security for such risks. The insurance of
illnesses or/and accidents usually includes their consequences including death.

The insurance policy contains certain basic rights and obligations from which parties can not even
contractually derogate. Both the insurer and the insured do bear some duties to one another. The
insurer guarantees the insured against the risks specified in the policy, and he must pay the agreed
amount within the time specified in the policy or when the risk insured against occurs at the time
specified in the policy. This duty of the insurer is not affected even if the losses or damages
insured occurred due to the fault of a person for whom the insured is responsible, and the
obligation remains valid regardless of establishing such link. But the insurer is automatically
exempted from the duty if the losses or damages covered by the policy are caused by the negligent
or intentional fault of the insured himself.

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The main duties of the insured under an insurance policy are the payment of a fixed premium and
the disclosure of material facts. Insurance is not a gratuitous contract; it is a contract made for
consideration and each of the parties performs obligations. Thus, the insured pays a fixed sum,
called premium, which is usually paid on a time interval. The insured is equally obliged to disclose
exactly all the material facts within his knowledge. This is an essence of an insurance policy and
no contract continues without making exact statements of all the facts. By material facts, we mean
that the insurer appreciates the risks based on them and consents to enter into the policy based on
that. Thus, any concealment or false statement made by the insured that make the insurer wrongly
appreciate risks, and that lead the latter to enter into the policy which otherwise he would not have
done, would nullify the policy.

6.3. Some Remarks about Law of Negotiable Instruments

A negotiable instrument is any document incorporating a right to an entitlement in such a manner

that it be not possible to enforce or to transfer a right separately from the instrument (Art.715 (1),
Comm.C). A negotiable instrument is a special but simple document that gives the possessor a
right to the entitlement as expressed in the instrument by the presentment of the instrument to the
debtor. The right cannot be claimed without the delivery of the instrument. The instrument is said
to be negotiable because it can be transferred (with the full rights) from one person to the other by
mere delivery or, some times, by endorsement.

The Ethiopian law recognizes three categories of negotiable instruments: commercial instruments,
transferable securities, and documents of title to goods. Transferable securities are mechanisms of
holding and negotiating certain types of rights and such include shares and debentures. Documents
of title to goods represent right over goods that are on shipment. A bill of lading, a truckway bill
and an airway bill are the examples.

Commercial instruments are the most noticeable types of negotiable instruments. They are
documents that embody an entitlement to a specific sum of money. We will have some issues
regarding these categories of negotiable instruments below.

The vast number of commercial transactions that take place daily in the modern business world
would be inconceivable without commercial paper (instruments). Commercial paper is any written
promise or order to pay a sum of money. Bills of exchange (drafts), promissory notes and cheques

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are typical examples. Commercial paper is transferred more readily than ordinary contract rights,
and persons who acquire it are normally subject to less risk than the ordinary assignee of a contract
right. Commercial paper at the beginning grew out of commercial necessity, and was used in
accordance with practices set by individual merchants. But later on, it gained attention from the
legal system and its importance has resulted in the emergence and development of separate legal
regime.

Instruments function in two ways – as a substitute for money and as a credit device. Debtors
sometimes use currency, but for convenience and safety they often use instruments instead. For
example, an instrument is being used when a debt is paid by cheque. The substitute-for-money
function of instruments developed in the middle ages. Merchants deposited their precious metals
with goldsmiths to avoid the dangers of loss or theft. When they needed funds to pay for the goods
they where buying, they gave the seller a written order addressed to the goldsmith. This authorized
the goldsmith to deliver part (or all) of the precious metals to the seller. These orders, called bills
of exchange, were sometimes used as a substitute for money. Today, people use cheques and other
types of instruments in the same way.
Instruments may represent an extension of credit. When a buyer gives a seller a promissory note,
the terms of which provide that it is payable within sixty days, the seller has essentially extended
sixty days of credit to the buyer. The credit aspect of instruments was developed in the Middle
Ages soon after bills of exchange began to be used as substitutes for money. Merchant buyers were
able to give to sellers bills of exchange that were not payable until future date. Because the seller
would wait until maturity date to collect, this was a form of extending credit to the buyer.
For an instrument to operate practically as either a substitute for money, credit device, or both, it is
essential that the paper be easily transferable without danger of being uncollectible. This is the
function that characterizes negotiable instruments.
The Ethiopian Commercial Code specifies four types commercial instruments: bills of exchange
(drafts), cheques, promissory notes and traveler’s cheques. The instruments are frequently divided
into two: orders to pay (drafts and cheques) and promises to pay (promissory notes). The
instruments may also have different natures based on the form of transfer. They may be specified,
to bearer or to order documents.
Instrument which is payable to bearer may be transferred by delivery alone; the bearer simply
hands to another party. The holder of an instrument in a specified name establishes his right, upon
delivery, to the entitlement as expressed in the instrument by his designation as beneficiary therein

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and in the register held by the person issuing the said instrument. Instruments to order may be
transferred by endorsement and delivery of the instrument to the beneficiary under the transfer.
A draft (bill of exchange) is an unconditional written order that involves three parties. The party
creating it, the drawer, orders another party, the drawee, to pay money usually to a third party, the
payee. The drawee must be obligated to the drawer either by agreement or through a debtor-
creditor relationship for the drawee to be obligated to the drawer to honor the order. A cheque is
simply a bill of exchange drawn on a banker. In the case of cheque, the drawee is a banker. It is
also an instrument to order.
The promissory note is a written promise between two parties. One party is the maker of the
promise to pay and the other is the payee, or the one to whom the promise is made. A promissory
note, which is often referred to as a note, can be made payable at a definite time or on demand. It
can name a specific payee or merely be payable to bearer.
The requirements for negotiability of these instruments are: be in writing, signed by the maker or
the drawer, be an unconditional promise or order to pay, state a fixed sum of money, be payable at
sight (on demand) or at a fixed date. They are payable to order or to bearer, unless it is cheque
which is always to order.
Unconditionality of promise or order: - A negotiable instrument’s utility as a substitute for money
or a credit device would be dramatically reduced if it had conditional promises attached to it. It
would be expensive and time-consuming to investigate conditional promises or orders, and
therefore the transferability of the instrument would be greatly restricted. Substantial
administrative costs also would be required to process conditional promises. Furthermore, the
payer or any holder of the instrument would risk the possibility that the condition would not occur.

A fixed amount of money: - Negotiable instruments must state with certainty a fixed amount of
money to be paid at any time the instrument is payable, a requirement that promises clarity and
certainty in determining the value of the instrument. Any promise to pay an amount to be
determined in the future in risky, because the value of money (purchasing power) fluctuates. Also,
if the instrument’s value were stated in terms of goods or services, it would be too difficult to
ascertain the market value of those goods and services at the time the instrument was to be paid.

Promise or order: - For an instrument to be negotiable, it must contain an express order or promise
to pay. A mere acknowledgement of the debt, which might logically imply a promise, is not
sufficient because the promise must be affirmative, written undertaking. But, if such words as “to
be paid on demand” or “due on demand” are added, the need for affirmative promise is satisfied.

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

If an instrument is payable to bearer, it is negotiated by delivery – by transfer into another person ’s

possession. The use of bearer paper involves more risk through loss or theft than the use of order
paper because any one in possession, irrespective of the manner of acquisition of the instrument, is
entitled to the sum the instrument represents.

Order paper contains the name of a payee capable of endorsing. If an instrument is payable to
order, it is negotiated by delivery with any necessary endorsements. An endorsement is a signature
with or without additional words or statements. It is most often written on the back of the
instrument itself. If there is no space on the instrument, endorsements can be written on a separate
piece of paper called allogne. The allogne must be fixed to the instrument to become a part of the
instrument.

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