UNIT ONE

GENERAL INTRODUCTION
1.1. Definition of Law
There have been and will continue to be different definitions of law. Various renowned scholars and
jurists have so far been making their own assertions of what law is, and almost none of them concur
on the definition of law.

➢ Even though there is no a universally acceptable definition of law, mainly law is defined as a
system of rules, usually enforced through a set of institutions.

➢ It shapes politics, economics and society in numerous ways and serves as a primary social
mediator in relations between people.

➢ It is commonly defined as the body of rules recognized and applied by the state for
governing the conduct of people in their dealings with one another.

➢ It may also be defined as the system of rights and obligations which the state might force.
State, in order to maintain peace and order in the society, formulates certain rules of conduct to be
followed by the people. These rules of conduct are called “laws”. Hence states enact a bundle of
laws to regulate the system and guide the society.
For example, Contract law, Property law, Tort law, Administrative law, International law, etc.

1.2. Functions of the Law

Do you think that the secure condition in which you accomplish your tasks would be there had law
not been there and prevailed? I hope you say no! Yes, laws perform various functions in a society.
They are the powerful weapons to attain diversified societal needs. Laws are not ends in themselves,
but rather they are the most effective and reliable means at the disposal of the society.
• It is quite difficult to appreciate law unless we imagine what will be the situation of the
society with out a law. Had there been no law there would have been no limitation up on
individuals in doing things.
• However the law draws a line between what an individual can do and not do, what are
socially desirable behaviors and those which are not.
• A law is very broad to cover and regulate every activity of persons and hence it is difficult to
discuss all function of the law.
❖ But the following are the most important functions of a law.
1. Law is important to maintain peace, security and order.
Laws would become indispensable tools to stop unwelcoming conducts and to create peace
and stability for proper life of the society.e.g.criminal laws.
2. Law serves as a tool to bring social change.
Legislatures and policy makers are very keen/strong to use law as an instrument of change. Law
regulates the way a particular relationship is to be created, maintained and broken.Law is not
limited to mere maintenance of peace and order; it also steps in to govern detailed individual
interactions.
3. Law may also be used as a tool to encourage investment in area where the government
priorities.
Through law a lot of measures may be taken to guide investors to invest in such area. Law
administers justice. If an individual has got an injury and if his rights are violated arbitrarily, then
the law will step up to redress such problem and ensure justice is done.
4. Law is also used as an instrument of social and economic change through the
encouragement of innovation and creativity.
Law encourages individuals to engage in innovative tasks by granting rights to exclusive
enjoyment of their inventions via issuing patents, copyrights, trademarks and the like.

1.3. Meaning of Business law

What is business law?
➢ It refers to the whole regulatory environment in which individuals or ‘organizations’ engage
regularly for the purpose of securing commercial returns. It is a legal regime with the object of
shaping the behavior of “actors” in business transactions. There is a vested interest for the law to
step into the work-for-profit areas in order to ensure that commercial interactions are conducted in
a proper manner.
➢ The legal regulation of business is even more sensitive because engagement in business is an
extension of a constitutional right to property so that there must be a mechanism of the law that
enables individuals to be shielded against unwelcoming practices that prejudice their right,
without of course affecting the rights of others.
➢ That means business law intends to shape behavior in commercial transactions and ensure the
interaction is conducted in healthy and effective manner. The role of business law for our growing
 business is indispensable. Law shapes business ethics. Law guards a business from business risks
and loses.
➢ Law controls relations in business transactions. Law is a day-to-day loyal friend to business. If the
business denies the law the law denies itself.
1.4. Nature of Law
a. Generality
➢ It is known that law is general. Law is a general statement to regulate the conduct of its subjects.
The law doesn’t discriminate persons. And no law is enacted to govern a specific person like for
example Mr X or Y.
➢ Law is not meant to shape the behavior of a certain category of persons and leave others; every
one is subject to the application of any duty imposed by law, saving extremely exceptional
circumstances (such as exemption from legal liability to a certain degree because of immunity
provisions).
✓ For instance, laws passed by the Ethiopian legislator (the HPR) demands all Ethiopians to
comply with it, irrespective of race, language, religion, social status, sex and political outlook.
✓ The generality of laws also implies that a law is applicable to all similar cases, and it does not
leave others and govern some.
b. Normativity
➢ Law doesn’t only describe a behavior but also takes a position. For example the position of the
law towards rape is prohibition. This accords with the philosophical discourse on the dichotomy
between the "is" and the "ought".
➢ The characterization of law as a normative statement refers to the "ought" aspect of the discourse,
the statement of what should be rather than what is.
➢ It is a prescriptive tool which purports to shape human behavior in the future. Law prohibits,
directs or permits a certain behavior.
c. Law is enacted by the Legislator.
➢ Every rule cannot be considered as a law. In order the law to be enforced and accepted as a law, it
must be enacted by an authoritative body which has a constitutional power to do so.
➢ The authoritative bodies may differ from country to country according to the structure of their
constitution. But in the civil law legal system the parliamentis the body which enacts law.
✓ For example in Ethiopia the House of Peoples Representatives and State councils have the
constitutional power to enact law regarding matters which belongs to them.
✓ However in some countries which follow the common law legal system courts’ decisions are
also considered as a law.So besides the peoples representatives, courts are also the source of
law in common law legal system.
➢ Generally, in order to ensure the validity of a given rule as a law, it must be made by a competent
body.
d. Law is permanent
➢ In principle there is no law which is enacted for a specific period of time. Law comes in to force
to be effective for undefined period in the future.
➢ A frequently changing law creates social instability and more prone to losing legitimacy. This
does not mean, however, that laws live forever. They have to be reasonably flexible to
accommodate changing social realities.
➢ Laws violate the virtue of permanence and create instability when they change quickly and
unnecessarily without having regard to the status of the situation it is meant to govern.
✓ However a specific law for a definite period may be enacted like the case of state of
emergency. The law declaring the emergency situation remains in force until the matter that
called for the declaration of emergency secedes.
➢ Generally, law is to be established in permanence and a time frame would be fixed only in
exceptional circumstances.
e. Law is backed by sanction
➢ Law may either prohibit, direct or permit the performance of a certain act. So regarding the
behaviors which the law prohibits or directs its performance, if a certain person violates such
law, then the law imposes a sanction on that person.
➢ The sanctions of the law are fine (compensation) in case of civil cases, imprisonment, fine and
capital punishment in criminal case, or the sanction may be disciplinary measure. So the law is
binding and if one fails to comply with it, the law bites such person.

f. Law Enforcing Institutions/Strongly Institutionalized/

➢ We have said above that law is backed by an established system of a state. The state is known
for its strong institutionalization and this provides the law with institutionalized system of
enforcement.
➢ The state is constituted by centrally established institutions of legislature, executive and
judiciaryentrusted 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.
✓ The courts, public prosecutors, prison administrations, police …etc are established to
enforce the law which is enacted by the law maker and interpreted by the courts.
1.5. Sources oflaw
An enforceable human conduct /a law/ may arise from repetition of the conduct, or from enactment
of the rule.
The following can be taken as the basic sources of law.
A. Legislative sources: Legislation in the modern time especially in the continental law systems and
in Ethiopia, are the cardinal /main source of laws. Such laws could be laws enacted by the
pertinent law making body of a state. The law making organ, for example in Ethiopian case the
House of People’s Representatives (HPR), is defined by the supreme law
of the state or the constitution. The laws in general are known as statutes.
B. Judicial sources: Judicial decisions include judicial treatment of statutes and judicial rulings in
situations not governed by statutes. The typical example is the common law countries following
judge-made law.
C. Administrative sources: Laws and regulations published by government agencies, which have
the force of law.
D. Custom: The popular ordinary laws are originated from the people, little by little, through
following concordat or agreement usages with the belief that they are binding /opinion
necessitates/. In Ethiopia there is a host of such customs. They are not uniform and continuous,
but vary from place to place and from time to time. In early societies custom is the main source
of law. In Ethiopia until the era of codification/1957-1965 G.C/ customary laws were highly
dominant source of laws.

❖ Generally, the main sources of law in Ethiopian legal system arethe Constitution,
Proclamations, Treaties,Regulations, and Directives.

UNIT TWO
LAW OF PERSONS

2.1. The Concept of the term “Personality”

What is personality? Why is the understanding of the concept important under the law?

❖ The word "person" has a different meaning in law than the ordinary connotation of the word
"human being". "Person" is a legal concept and we need to study the law to define and identify
what do we mean by person and who are persons.
➢ This is because it is only persons who can have a right and assume a legal obligation.
 Personality in law refers to the authority which is given by law to be considered as
a person and hence to havea right and assume an obligation.
➢ In other words, humans and fictitious entities cannot perform juridical acts without being
recognized as persons before the law.
➢ Personality answers the basic question that whatthe subjects of the law are. Only subjects
of the law can enjoy the rights that the law confers upon them and only they can
discharge the duties it imposes upon them. Thus, the normal effect of personality is the
ability to be a party to legal transactions and perform various juridical acts (acts having
effect at law).
❖ Basically, there are two kinds of persons:
1. Physical (natural) persons-It refers to human being.
2. Judicial (artificial) persons- Legal persons include beings /existences/,
which are given rights and duties by the operation of the law. They are called artificial
persons because of they are considered as persons with the recognition of the law. They are
not actual human beings. They include Associations, companies, organizations, partnerships,
corporations, etcor even the states are only perceived by the law to exist. Judicial persons are
also referred to as legal, fictitious, and moral persons.

2.2. Acquisition of Artificial Personality /Commencement/

❖ Legal personality is an artificial or fictitious creation of law. These artificial persons acquire
legal personality in different mechanisms. These are:
i) By the issuance of a particular legislation or proclamation.
ii) Carrying outregistration.
iii) Conditions of publicity.

❖ Once the entities get legal personality they are recognized as equal before the law with the
human person. Artificial person can perform juridical acts, bears a right and assume an
obligation like the physical persons.
❖ Legal persons do have their own names and separate legal existence. They enjoy effects of
personality by the help of physical persons that act through a representative capacity.

2.3. Attributes of Legal personality

❖ Thefollowing are some of the most important features of artificial persons.

i) Having name: they can sue and be sued in their own names. Since artificial persons
have their own legal existence distnict from their associates, they can sue and be sued in their
own names. Thus, if someone claims money fron the share company, he has to bring action
the share company and not the individual shareholders. Likewise, if the share company
claims debt from others, it has to bring the action in its own name.

ii) They can enter into a contractual agreement.Artificial

persons can conclude certain juridical acts like various contracts
in their own names.
iii) They can administer their property in their own names.
iv) Obligation to pay taxes. A legal person as well as a physical person is liable to
pay taxes on taxable benefits and gains. Hence from every taxable income or benefit that they
earn, legal persons have the duty to pay tax. This is one example of obligation of persons.

2.4. Acquisition /Commencement/ of Physical Personality

2.4.1. The Rule
➢ The Ethiopian civil code sets the principle when the personality of human beings commences.

✓ It begins at birth. Article 1 of the civil code states that ‘‘the human person is the subject of
rights from its birth to its death’’. When the article provides that the human person is the
"subject of rights", it means that human beings enjoy, or hold rights starting from the time
of birth. In principle, therefore, the personality of natural persons begins at birth and ends
at death.
✓ Hence, there is no personality before birth or after death. Birth means a complete extrusion
of the child from its mother's womb. Once a human baby is born, it is a person. Besides
since rights and duties are the two faces of the same coin, the duties of a human person
also begin at birth.

2.4.2. The Exception

 ➢ Exceptionally however a child merely conceived may also be considered born and get
physical personality. As stated in Art.2 of the Ethiopian Civil Code:
A child merely conceived shall be considered born whenever his interests so demands, provided
he is born alive and viable.

➢ 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.
❖ Therefore, personality is granted to an unborn or merely conceived child up on the fulfillment of
three conditions:

i) Theconceived child interest shall demand this

recognition/the interest of the child justifies the grant of personality; i.e. only where the
advantages outweigh the duties or inconveniences.
For example, it would be the interest of the conceived child to be an heir to the succession of
which the asset would, by far, exceed the liabilities.He would be a subject of both rights and
duties.
ii) The conceived child mustborn alive; i.e. a child dead in his mother’s
womb will never be considered as having had personality.
iii) The child must be born viable.i.e. viability means the aptitude to live. A
child who lives for 48 hours is presumed to be a person from the moment of his conception.

2.5. Incapacity of Physical Persons

➢ Capacity is the ability to exercise one’s rights and duties by oneself. As a rule, the law
assumes all persons are the ability to exercise their rights and duties by themselves.
➢ But, the law regards some group of physical persons as incapable and appoints other to
exercise his/her rights on his/her rights.

❖ In the Ethiopian civil code there are two kinds of incapacity.

✓ General incapacity which is based on the age or mental condition of persons or on
sentence s pas upon them; (minors, judicially interdicted persons, legal interdiction)
✓ Special incapacity which is based on nationality.
1. Minors: pesons who have not attained the full age of 18 years.
e.g. Contracts
for the performance of acts of everyday life,contract
for employment etc.
2. Judicially interdicted persons: persons who are declared by the court as incapable because of
their mental problem/senility. Because these individuals don’t understand the consequences of
their action due to their mental condition.e.g. Notorious insane persons.
3. Legally interdicted persons:This kind of incapacity emanates from the law due to
the commission of a certain crime. A person will be legally interdicted as a result of the
pronouncement of a legally prescribed punishment for the violation of criminal law.These persons
will lose the authority to exercise rights and duties as of the date
of their interdiction.
4. Foreigners:the law imposes some limitations because of their nationality.
2.6. Termination of physical personality
Whendoes physical personality ends? In Ethiopian law, there are two basic grouds for termination of
physical personality. These are:
i. Death; and
ii. Absence.

✓ If a certain person is disappeared and no news of him has heard for two years any interested
party may apply to the court for the declaration of absence. If once the court declares that the
person is absent the absentee is considered dead.
 UNIT THREE
BUSINESS AND BUSINESS ENTITIES
3.1. Defnition
❖ In a nutshell, the term “business” embraces tangible and intangible assets, including:
✓ Tools, equipments, raw materials, goods in stock, good will, trade name, trade mark,
patent, copy right, and the right to lease of the premises.
➢ But, immovable properties cannot form part of the business. Hence, the land or buildings
which form of the business premises and the fixtures on such premises are no part of the
business even though they are owned by the trader himself.
➢ To a greater degree, the business is regarded as an entity distinct from its constituent
elements, as long as the whole is more valuable than the sum of the constituent parts.
• Article 124 of the Ethiopian Commercial Code defines business as “an incorporealmovable
consisting of all movable property brought together and organised for the purpose of
carrying out any of the commercial activities.

❖ What are business entity/Organizations?

➢ Business organizations/entities are a familiar part of every day life. Business organizations
run the supermarkets from which we buy our foods and attires; they supply the water, gas,
and petroleum products we depend on; they publish the books and newspapers we read.
➢ From a legal viewpoint, business organizations are undertakings with more than one
member, having assets distinct from the private assets of the members and a formal system
of management, which may or may not include members of the organization.
➢ Article 210 of the Commercial Code defines a business organization as “any association
arising out of a partnership agreement.”It is an association; and such association arises
from a partnership agreement.Business organization is grouping of persons having the
common purpose of sharing of profits and losses.
The General features:
• Initial plurality of membership.
• The possession of distinct assets is essential for two purposes:
✓ to identify the assets to which creditors of the organization can resort to satisfy their
claims, and
✓ to make clear what assets the managers of the organization may use to carry on business
 for the member’s benefit.
• System of management varies greatly. In a simple form of business organization the
members are entitled to participate in the management, and each member has an equal
voice in management decisions.

3.2. Elements of Business

➢ The ultimate essence or quality of any business is its incorporeality irrespective of the
existence of corporeal elements. The importance of the incorporeal elements figures in
prominently under Article 127 of the Commercial Code, which stipulates
➢ A business consists mainly of goodwill.
A business may consist of other incorporeal elements such as:
(a) the trade-name;
(b) the special designation under which the trade is carried on;
(c) the right to lease the premises in which the trade is carried on;
(d) patents or copyrights;
(e) Such special rights as attach to the business itself and not to the trader.

3.3. Types of Business Entities

➢ Business organizations may take various forms in different countries. In this regard, the
major forms of business organization are the following.
❖ Partnerships
➢ A partnership is a business organization that may be formed by two or more persons who
desire to combine their money, labors or skills to share business profits or losses.
➢ In a partnership,the personal relation of the members is the foundation of the organization.
The most usual characteristics of partnerships are the unlimited liability of members. But
even that doesn’t necessarily define partnerships since, there are limited liability partnerships.
(i.elimited partnerships).
➢ Partnerships are associations of persons organized as
co-owners with a view to carry out business for profit.
In most cases they can be general partnerships with
unlimited liability of partners or limited partnerships.
– A “Partnership interest” or “partner’s interest in the
partnership” means all of a partner’s interests in the
partnership, including the partner’s transferable
interest and all management and other rights.
– A “Partnership agreement” - the agreement, whether
written, oral, or implied, among the partners
concerning the partnership, including amendments to
the partnership agreement.
❖ Article 211 of the Ethiopian Commercial Code provides a partnership agreementas:
“A partnership agreement is a contract where by two or more persons who intend to join
together and to cooperate undertake to bring together contributions for the purpose of
carryingoutactivities of an economic nature and of participating in theprofits and losses
arising out thereof.”
• This provision lays down that each of the partners brings contributions together, the
business should be carried on for the joint benefit of the parties, and the object should be
to make profit.
❖ Companies.
✓ Companies may be public or private. In most cases, public companies are business entities
whose shares are freely transferable with complex organizational structure and with large
capital and a high volume of operations. (Share Company.)

✓ Any company whose membership interests are not freely transferable is a private company
(Private Limited Company.) A private company cannot issue transferable equity or debt
securities to the general public.

✓ Ownership interests in public companies are reflected by shares; while it is contribution that
 reflects such interests in private companies.

✓ There is distinction between paid up and subscribed shares in a public company; while
contributions of each member in a private company are always required to be fully paid up.

✓ Most legal systems provide for a minimum and maximum number of members in a private
company; while there is no limit to shareholders’ number in a public company.

✓ In both public and private companies’ liabilities of shareholders and members are unlimited.
i) Share Company
According to the 1960 Ethiopian Commercial Code, Share Company is a company whose capital is
fixed in advance and divided into shares, and liabilities are only met by assets of the company.The
aforementioned provisions envisage that company’s capital is fixed and divided into shares before
the coming into existence of the company. Further, the liability of the company is borne by the
company itself, and shareholders are only liable to the extent of their shareholdings in the company.
Nature of Share Company

➢ Limited liability
✓ Limited liability of members is one of the most common characteristics of Share Company.
✓ Share Company is a separate legal entity. Liability of the members is limited. No member is
liable to contribute anything more than the nominal value of the shares held by him.

➢ Perpetual succession
✓ Unlike partnership, Share Company will not be dissolved by the death or incapacity of its
members. It is an entity with a perpetual succession.
✓ Its life is not measured by the life of any member. It is independent of the lives of its
members. Members may come and members may go, but the company continues its
operation unless it is wound-up.
➢ Transferability of shares
✓ As a general principle shares of Share Company are freely transferable and can be sold or
purchased in the share market. This is one of the reasons why people prefer to form
companies than partnerships.
✓ However, it is possible to restrict free transfer of shares in the articles of association.
ii) rivate Limited Company (Pvt. Ltd. Co)
Private limited company is the most popular form of company in Ethiopia. The reason is that it is
particularly well adapted to small and medium–sized business and currently, the Ethiopian business
is at these stages. Private
Limited Company may be formed to pursue
any purpose or to carry on any activities, however, it may not
take banking, insurance and similar activities, such business
must be carried out by Share Company (Art 513 of the
Ethiopian Commercial code)
A Private limited company is defined as “a company whose members are liable only to the extent of
their contributions.”The above provision envisages that members of a Pvt. Ltd. Co are not liable for
the company’s debts beyond their initial contributions. It is a hybrid type of company.It resembles a
partnership in that the personal element in its membership is crucial and the shares held by its
members can not be freely transferable out side the company unless it is approved by majority vote.
❖ General Characterstics of Private Limited Company
➢ They are closely held between few individuals;
➢ They impose some degree of limit on transfer of shares;Ina Pvt. Ltd. Co,Shares are not freely
transferable, and this is one of the factors that make the companies private.
➢ They are not allowed to issue securities to the public; A Pvt. Ltd. Co does not attract huge
amount of capital as there is no public subscription in its formation, and it does not issue
transferable securities in any form.
➢ Separate legal personality and limited liability; A Pvt. Ltd. Coenjoys the benefit of limited
liability and allows business people to avoid the threat of untimely dissolution inherent in
partnerships. This implies that Pvt. Ltd. Co. is a distinct legal person that may enjoy the benefit
of perpetual life of companies or continuity of life. That it entitles the same a limited liability by
separating assets of the company from that of its members.
➢ Often managed by members;The Ethiopian Commercial Code provides that private limited
company shall be managed by one or more managers who may be members or non-
 members.Unlike Share Company, the law does not expressly require to have a board of directors
as a governance organ in Pvt. Ltd. Co. Thus, Pvt. Ltd. Co avoids the need to provide for certain
corporate formalities, among others, it could be managed by the share holders of the company
rather than the board of directors.

UNIT FOUR
LAW OF CONTRACTS
4.1. Contracts in General
❖ Sources of Obligation
In civil law, we have the generic area of law called law of obligations. Law of obligations is a law
that requires persons to do, to give or not to do something. In other words it regulates what persons
must do and must not do in their civil relations such as relations that exist in employment,
partnership etc. But the issue here is: what is the source of these obligations?
There are two sources of obligations that we encounter in our every day lives: the law and contract.
i) Law as a source of obligations
Some obligations are directly imposed on persons by law. These are legal obligations. Legal
obligations are binding or enforceable on all persons. All persons are bound by legal obligations and
do not require your consent or agreement for their existence. Because the law maker (legislature or
the parliament) wanted them to exist for whatever public good it had in mind.Therefore whether you
like it or not, you must respect legal obligations. For example, the obligations to give military
service to defend one’s country against an external enemy, the obligation to pay income tax, the
obligation to compensate the victim of one's wrong, the liability of an employer for the action of his
employee,the obligation of maintenance etc.

ii) Contract as a source of obligations

Contractual obligations or obligations created by agreement are the result of your free will. It is
something undertaken willingly. When you make contractual agreement, a binding obligation is
created.The obligations exist simply because the parties for whatever reason give their consent to be
bound by it. This agreement to establish an obligation is a contract. Here the parties are free to enter
in to the contract. For instance, the obligation of the buyer to give the price to the seller, the
obligation of the employee to work for the employer: and the obligation of the borrower to repay the
money he took from the lender.

4.1.1. Definition of contract

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

❖ Contract basically upholds the following philosophical concepts.

(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.
Contract is a binding agreement; it is a promise or set of promises for the breach of which the law
gives a remedy, or the performance of which the law in some way recognizes as a duty. A
comprehensive definition incorporating important elements is given under article 1675 of the
Ethiopian Civil Code. It states “a contract is an agreement whereby two or more persons as
between themselves create, vary or extinguish obligations of a proprietary nature''. The contractual
elements that emerge out from dissecting the definition and other related issues are stated below.
❖ What are the important elements in the definition of
contract?
1. The first element in the definition is that contract is an agreement. It is something willingly
undertaken. Contract is not something imposed on you. Nobody forces you to make a contract
only if you are willing to do so. Accordingly, a contract is the result of free will.
2. Parties to a contract are always persons. They may be judicial or physical persons. That is a
contract needs at least two persons for its existence.
3. Two or more persons create obligations only as between themselves, without affecting the
interest of third party. That it is only parties to a contract that are entitled to the benefits or
burdened with the liabilities that arise from the contract, and not third, parties. Contracting
parities A and B cannot impose obligation on C who is not party to that agreement.
4. Contracts can be concluded for the creation, variation and extinguishment of obligations: An
obligation may be created anew, may be amended in the course of its performance, and finishes
one day.
5. Parties to a contract create obligation of proprietary nature of the obligation. It is an obligation
to do something or to give something of value which involves economic interest, financial gain.

4.1.2. Formation and Elements of Contracts

What are the requirements to have a valid contract? What does the term valid contract sounds for?
The word valid means legally good. Therefore a valid contract is legally binding and fully
enforceable by law.
4.1.2.1. Capacity of the parties
What is capacity? Who are capable persons?
Capacity means the ability to understand ones actions and the effect of those actions, persons with
ability to contract are legally competent. In principle capacity is presumed unless the contrary is
proved. According to article 192 of the civil code, every physical person is capable of performing all
the acts of civil life unless he is declared incapable by the law.
Though, as a rule every physical person is incapable, the law, for some rational declares some
members to be incapable. The civil code provides general and special disabilities under article 193
and 194 respectively.
Three grounds of general incapacity are provided under article 193 of the civil code. These are:
i) Age/minor
ii) Mental condition/ insanity
iii) Sentence passed on a person /judicial interdiction
Based on the above grounds minors, insane persons and judicially interdicted persons are deemed to
be incapable.
4.1.2.2. Consent
Consent is an agreement given freely, willingly, or it is an agreement which is free from any defect.
The freedom of contract is expressed in consent. It refers to the state of mind of the contracting
parties to create a legally binding instrument.
Consent is a defect-free mutual agreement by the contracting parties. It is a manifestation of freedom
of contract, and therefore is the basis upon which rests the entire law of contractual obligations.
Consent carries a double aspect: first, the parties must agree on the scope of their undertaking (there
must be an agreement on each and every important detail) and, second, there must be a willingness
on the part of the contractants to make their undertaking legally binding.

How can parties express their consent? Two forms of expressing consent exist. These are theoffer
and acceptance.Agreements are usually arrived at by means of offer and acceptance.
A) Offer
An offer is a definite statement by one party called the offeror, of the terms under which he will
contract. In other words an offer is a proposal made by one party (the offeror) indicating his
willingness to enter into contractual agreement regarding a particular thing. An offer typically
consists of a promise or commitment by the offeror to give something, to do something or not to do
something.
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 requirements
are necessary for an offer to be effective at law: serious intention(firm proposal), certainty or
definiteness, and communication.
An offer is firm when the offeror has a serious intention to become bound by the offer. But such
serious intent is not determined by the subjective intentions, beliefs, and assumptions of the offeror
rather than by what a reasonable person in the position of the person to whom the offer is addressed
would conclude the offeror's words and action meant.
The second requirement for an effective offer involves the definiteness of its terms. An offer must
have reasonably definite terms so that a court can determine if a breach had occurred and can
provide a remedy.
A third requirement for an effective offer is communication of the offer to the offeree, resulting in
the offeree's knowledge of the offer. Ordinarily, one cannot agree to bargain without knowing that it
exists. Uncommunicated offer is no offer at all. The offer must also be addressed directly to the
offeree (the person to whom the offer is directed for his/her consideration). The manner of
communication need not necessarily be in writing or oral; the law recognizes even signs and conduct
as legitimate media for communication of an offer in so far as there is no doubt as to the making of
the offer.
There are various proposals that are not legal offers. The concept of firm intention can be further
clarified by, distinguishing between offers and numerous kinds of non-offers. As such, social
invitations, expressions of opinion, or statements of motiveall do not evidence an intention to enter
into a binding agreement.Another obvious non-offer category is constituted by advertisements,
catalogues, price lists and circulars.In preliminary negotiations, a request or invitation on to
negotiate is not an offer. It only expresses a willingness to discuss the possibility of entering into a
contract.
Termination of Offer
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.
(b) Rejection: - this is the act of the offeree to terminate an offer. The offeree is free to accept or
reject the offer. If he elects to reject the offer and communicates same to the offeror, the offer comes
to an end even though the period for which the offeror agreed to keep the offer open has not expired.
(c) Counter-offer:-A rejection of the original offer and the simultaneous making of a new offer by
the offeree are called a counter-offer. It is required that the offeree's acceptance should match the
offeror's offer exactly. Any material change in, or addition to, the terms of the original offer
automatically terminates that offer and substitutes a counter-offer. The counter-offer, of course, need
not be accepted; but if the original offeror does accept the terms of the counter-offer, a valid contract
is created (Art 1694 of the Civil Code).
ii) Termination by Operation of Law
The power of the offeree to transform the offer into a binding legal obligation can be terminated by
operation of the law through the occurrence of the following events: lapse of time; death or
incompetence of the offeror or the offeree.
a)Lapse of time:- An offer terminates automatically by law when the period of time specified in the
offer has passed. Such is the case with offers in which a time-limit has been stipulated. The time-
limit specified in an offer normally begins to run when the offer is actually received by the offeree,
not when it is sent or drawn up. When the offer is delayed (e.g. through misdelivery of mail), the
period begins to run from the date the offeree would have received the offer, but only if the offeree
knows or should know that the offer is delayed.
If no time for acceptance is specified in the offer, the offer terminates at the end of a reasonable
period of time. What constitutes a reasonable period depends on the subject matter of the contract,
business and market conditions, and other relevant circumstances. An offer to sell farm products, for
example, will terminate sooner than an offer to sell farm equipment because farm produce is
perishable and subject to greater fluctuations in market value.
b) Death or Incompetence of either party;- An offeree's power of acceptance is terminated when
the offeror or offeree dies or is deprived of legal capacity to enter into the proposed contract. An
offer is personal to both parties and cannot pass to the descendant's heirs, guardian, or estate.
Furthermore, this rule applies whether or not the other party had notice of the death or
incompetence.
B) 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. So acceptance
must unequivocally conform to the terms of the offer; it must agree in the manner, at the place, and
within the time set forth in the offer. If the acceptance is subject to new conditions or if the terms of
the acceptance materially change the original, the acceptance may be deemed a counter-offer that
implicitly rejects the original offer.
Acceptance must be communicated and it does not call for any special formality. The only
requirement, similar to the case of offer, is to have no doubt as to the intention to undertake an
obligation. Thus, acceptance can be communicated expressly or tacitly. The express acceptance may
be oral or in writing. The tacit acceptance results from signs normally in use or conduct such that
there is no doubt as to consent.
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
is the total absence of any form of expression, be it verbal, written or behavioral.
In principle, 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.Thus, to protect contractual freedom,
it is traditionally established that silence cannot amount to acceptance and that some form of
outward expression is needed.

❖ However, the principle of silence is 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 anyone who makes an offer to them.
➢ Certain activities may constitute public utilityand are indispensable for the descent life of the
community. Moreover, it is probably the case that these activities provide limited or no
alternatives, and perhaps monopolistically held, with the consumer of such goods or services
vulnerable to denial of consumption.
➢ The 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.For example, an offer to enter into a subsidiary contract that supports the
previous contract or to conclude a complementary contract that addresses a lacuna or omitted
element from the first contract, can be accepted through silence.

❖ Defects in consent (vices of consent)

Consent of the contracting parties must be free from defects. If consent is defective, a valid contract
may not be created. Vices of consent are defects that vitiate the validity of consent. So that consent
fails to be given freely and in full knowledge of the obligations.
The basic objective of consent is on the one hand to ensure justice by avoiding that persons are
trapped against their will by given contractual obligations. On the other hand, it is necessary to
ensure that contracts concluded do remain secure too liberal an approach of the possible defects of
contracts would bring about a great measure of legal uncertainty.

➢ How does the consent of contracting parties become defective? What are the defects that may
lead to the invalidation of a contract?
Article 1696- a contract may be invalidated where a party gave his consent by a mistake or under
deceit or duress.
❖ Based on the above article there are three types of defects in
consent.
A. Mistake
In contract law, mistake is defined as an erroneous belief in a thing or in a fact or about a certain
state of affairs. In the course of making a contract, it is very easy to make a mistake. Foe example, in
filling in blanks or writing letters, wrong figures may be inserted. Failure to read a contract before
signing, or a hurried or careless reading of a contract, may result in obligations that a person had no
intention of assuming.
How do you distinguish between fundamental and non-fundamental mistakes?
All mistakes do not invalidate a contract. Invalidation follows where the mistake fulfills two
important requirements set under the law. Mistake must be both decisive and fundamental.

❖ Mistake is decisive where it is the mistake that made one of the parties consent to the contract. If
the mistake is negligible, it will not invalidate the contract. If we assert that "Had it not been for
the mistake, the mistaken party would not have consented to the contract", the mistake is
decisive and may invalidate the contract given the other requirement is met.
❖ In addition to its decisive nature, mistake must be fundamental. By fundamental we mean the
mistake must be in connection with an element in the contract or the content of the contract. In
other words, it must relate to the terms of the contract as they existed at the time of the
formation of the contract. Under the law, mistakes as to the type or nature of the contract, as to
the subject matter of the contract and as to the parties to the contract are considered to be
fundamental mistakes.
a. A mistake is fundamental if it relates to the nature of a contract. For example a contract of
sale is completely different from contract of donation.
b. A mistake is fundamental if it relates to the object of the contract. The concept “object of the
contract” in this context means obligation.
c. Mistake relating to the identity or qualification of a contracting party. This is another
fundamental mistake. Financial position of a person, his personal integrity, his credit
worthiness of your contracting party matters a lot.
Therefore: non-fundamental mistakes do not affect the validity of a contract. Mistakes relating to the
motives of the parties and arithmetical errors are the only mistakes considered as non-fundamental.
Arithmetical errors are errors in computation (calculation), typing errors etc. motive is something
you have in mind.

B. Fraud (deceit)
❖ A contract may be invalidated on the ground of fraud where a party resorts to a deceitful practice
to induce another to make a contract. It is a misrepresentation of material facts to induce a
person into a contract.
❖ It is not all fraud that invalidates a contract. Normally for fraud to exist, in addition to the false
statement, there must be a deceitful action (practice) to support the lie told such as forgery of
documents, fake signature, concealments of a material fact etc. may serve as deceitful practices.
So if someone lies to you about the existence of a certain fact and gets you into a contract, you
may not be able to invalidate the contract by simply raising the false statement.
Although a mere false statement by itself may not invalidate a contract, it may be invalidated by the
existence of a mere false statement where there is a confidential relationship among the contracting
parties. Confidential relationship refers to relations that should depend upon confidence, trust and
loyalty among the people concerned. For instance, relations between close relatives, agent and
principal, and the insurer and the insured are considered to be confidential relations.
Coming to the sources of fraud, it may come from one of the contracting parties or by a third party.
According to article 1740 of the civil code, a party who has been deceived by a third party shall be
bound by the contract unless the other contracting party knew or should have known of the fraud on
the making of the contract and took advantage thereof.That means when a third party (who is not a
party to the given contract) deceives one of the parties into a contract, in principle, the contract
remains valid. However, if the other party was aware of the deceit and entered into the contract
regardless of it, the contract may be invalidated at the request of the party deceived.

C. Duress
❖ Duress refers to compelling a party to give his consent to a contract by use of threat. The threat
must be serious and imminent harm to the party or to his parents, ascendants, children or spouse.
The threat must be imminent or likely to happen soon.
❖ When under duress, a person is denied the exercise of free will in entering into contracts. For
example someone may come to you with a gun and say "unless you agree to give me your stereo,
I will shoot you". Being afraid of death, you may agree to give him the radio. In this situation,
there is no a genuine consent on your side. Thus, you have the right to avoid the agreement or
you have the right to claim your stereo back where the threat ends because you can invalidate the
 contract on the ground of duress.
❖ Like fraud, duress may come from two sources: the contracting party or a third party. But unlike
fraud, the contract will be invalidated irrespective of the sources. As far as invalidation is
concerned, it does not make any difference whether the duress is made by one of the parties or a
third party. But if the threat is by a third party, the other party may claim compensation against
the party compelled (the party who invalidates the contract) for expenses he incurred for
formation of the contact.

4.1.2.3. Object of Contract

Object of a contract means obligation undertaken by the contracting parties. It is a third essential
requisite for the formation of a valid 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. Under the provisions of Article 1678 of the Civil Code, "no valid contract shall exist
unless the object of the contract is sufficiently defined, is possible and lawful ...”
The object of the contract is thus the legal result which the parties wish to achieve. For example, the
payment of the price by the buyer and the delivery of the good by the seller are the objects
(obligations) of tile Contract. Parties have the right to define the nature and scope of the obligation
they subscribe. But, failure to define the object is a critical defect, and makes the contract void and
null. If the object is present, it should be determined or at least determinable. Generally, object must
be sufficiently defined or determinable in order to create a valid contract.
❖ The general requirements that must be obeyed are three:

1. The object of the contract must be sufficiently defined:

➢ The obligation of a contract (obligation undertaken) must be defined clearly and precisely. The
question as to whether the contract is enforceable or unenforceable largely revolves around the
level of vagueness, ambiguity or incompleteness in the contract. For instance, if the parties have
failed to state the thing in a contract of sale and if the parties fail at later time to exactly identify
the subject matter, the court has no option except to invalidate the contract.

2. The object of the contract must be possible:

➢ If they agree for the performance of impossible obligations, they cannot enforce the contract before
a court of law. This is so because there is no way for courts to enforce impossible obligations. For
instance if one of the parties assumes an obligation, say for instance, to bring up a dead man in
return for payment of a million birr, this agreement is invalid and cannot be taken to courts of law
because curing a dead man is humanly impossible.

3. The object of the contract must be lawful and moral:

The formation, purpose, and performance of the agreement must be lawful. This means it must not be
contrary to law or morality. Some types of agreements may be declared illegal by provisions of the
law. Others may be declared immoral by the given community. In either case the agreements are
void and therefore unenforceable. As to the legality of contracts, there is no much problem in
invalidating the contract since we can ascertain the illegality by merely looking at the documents of
the law. For example if a person agrees with another person to give the latter a thousand birr in
return for killing another third party, this agreement is illegal and unenforceable.

4.1.2.4. Form of Contracts

❖ Contract may be made orally or in writing. The Ethiopian law takes a middle position
compromising between the dangers of excessive formalism and advantages of relative
consensualism. According to article 1719, contracting parties have a freedom of choosing the
form of their contract unless the law prescribes special form for certain contracts. It provides that
no special form is required of parties when they conclude a contract and consensualism is upheld
in principle. Sometimes the contracting parties themselves may agree to make their contract in a
special form even if the law does not prescribe a special form.
➢ In both exceptional cases, formality must be observed and parties are not free to set aside the
prescribed formal requisite. The question of validity is a more fundamental a matter than the
dictation of form to provide proof of the contractual obligationsbecause 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.
❖ There are certain important kinds of contracts which cannot be enforced in court unless there are
written agreements. Some of such kinds of contracts are:
✓ Contracts in relation to immovable property;
✓ Contracts with public administration;
✓ Contracts of guarantee;
✓ Contracts of insurance; and
✓ Contracts to vary written contracts;

4.1.3. Effects 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.

❖ The terms of a contract shall be binding on the parties as though they were law (Article 1731 of
the Civil Code). 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. They are binding not only on the parties but on the judge himself 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. In such a case, the court is authorized to remedy the defective
terms through interpretationhaving regard to the common intention of the parties, custom, good
faith and equity.

a) 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.

1) Performance by Whom?
➢ 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.
➢ However, personal performance by the debtor may be an essential elementof the contract. In such
case no valid performance is made unless discharged by the debtor himself. In cases involving
personal skill or credit, the person who promised must perform himself in person. 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.
➢ But generally where the personality of the contracting party is not important a contractual
obligation may be performed by any third party.

2) To whom shall performance be made?

➢ Performance can validly be made to the creditor or to a third person authorized by the creditor, a
court of law or the law. But under this the basic questions are:
✓ Is performance made to an incapable creditor a valid performance?
✓ Is performance made to a third person who had no authority effective performance?
✓ Is performance to an apparent creditor acceptable performance?

➢ 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's performance is not a valid performance and he is required to do his
obligation again to other people having the authority to act on behalf of the incapable
creditor.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, first, the debtor shows that the
payment has benefited the creditor, or second,if the creditor or by the legal agents of the
incapable creditor)confirms the paymentor where it is made in good faith to a person who
appears without doubt to be the creditor.
3) What to perform?
➢ The provisions of Article 1745 underline the requirement of identity of the object (things i.e
goods or services) 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.
➢ It is the rule of law that performance must exactly be the same with the contract. Contract must be
carried out strictly in accordance with the terms of it. Failure to do so normally amounts to non-
performance. When a contract calls for payment in money, performance requires the payment of
the exact amount of money.
 ✓ For instance, delivery of Sony TV, worth 5000 Birr, while the contract requires delivery of
Vestel TV, worth 3000, is not a valid performance and the creditor (i.e. the buyer in this case)
can reject the offer of performance and demand some solution under the law.

4) Time and place of performance

➢ According to the general rules the time and place of performance of a contract are matters to be
determined by agreement between the parties to the contract.
✓ Article 1775 of the civil code, deals with the place of payment of contractual obligation,
accordingly
• Payment shall be made at the agreed place
• Where no place is fixed in the contract, payment shall be made at the place where the debtor
had its normal residence at the time when the contract was made. Where the contract is silent,
the law states the contracts to be performed at the debtors place.
✓ The time when payment is due, like the place of payment, is to be fixed by agreement between
the parties. Where no time for payment is fixed in the contract the parties are normally required
to perform their obligations immediately. A party must perform as soon as the other party gives
him default notice.(see art 1756 of the civil code)
5) 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.

➢ The issue of interest and its rateis also an important matter in performance of
contractual obligations. The legal rate of interest that is to be paid on a debt is 9% (minimum)
and 12% (maximum) unless the patties expressly stipulate a different rate (Article 1751 of the
civil code).

➢ Performance of contractual obligations usually entails expenses.Any costs while

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

❖ 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 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.
➢ However, 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. Therefore, the creditor is
supposed to comply with a procedural requirement before he rushes into the legal solutions.
The procedural device is thegiving of a default notice, so called because it is made after the
normal performance failed and is directed to the failing party.
❖ Why do we need to give notice?
➢ The creditor before invoking the non-performance of the contract by the debtor and seeking
the legal remedy, he must give notice to the debtor declaring that there is breach of the
contract and that he(the creditor) wants performance as soon as possible. The purpose of
notice is to remind the debtor of his obligations and to give him the last chance to perform
before the case goes to a court of law.

❖ Is it always necessary to give notice?

➢ There are four exceptions under which the creditor need not give notice to the debtor to
exercise his legal remedies.
✓ Where there is a clause in a contract that states notice is not required to exercise one's legal
remedies.
✓ Where the obligation of the debtor is not-to-do type of obligation; 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. For example, if 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.
 ✓ Where there is anticipatory breach. Anticipatory breach is a non-performance under which the
debtor, in advance of the time for performance, notifies the creditor in writing that he will not
perform his obligations when the time comes.Therefore, default notice is also not necessary
where a debtor has declared in writing that he would not perform his contractual obligation.
✓ Where the time for performance is compulsory and the time has expired before performance
is obtained.Compulsory periodhere is a period within which performance must be
carried out. If performance after the expiry of the period is useless or meaningless to the
creditor, we say that the period of performance is compulsory. For example, assume that you
have prepared a party for your graduation to take place on Hamle 30, 2009 E. C. and for that
occasion you invited a band to perform at your party for two hours starting from 2 pm on the
same day. The band agreed to perform in return for the 2000 Birr you promised to pay; and the
band received half of the payment in advance. But unfortunately the band failed to show up on
the agreed time.
❖ Under the Ethiopian law, the other party can demand the following according to the
circumstances:-
• Specific (Forced) 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).

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.
If either of these conditions is missing, forced performance cannot be had.
❖ Personal liberty is a constitutional right (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. It is a fundamental human right that cannot be alienated from a person
and cannot have a pecuniary value.
✓ For instance, A concludes a contract with B, a singer, to entertain customers at his grocery. B
fails to show up for the performance. Now A cannot claim the forced performance of the
agreement by B because this affects B's personal liberty. It has the effect of forcing B to
personally appear on the stage and perform without his will, and this undoubtedly denies B of
his liberty.
2) Cancellation
➢ Cancellation is another remedy of non-performance available to the creditor. One has to
distinguish cancellation from invalidation and termination of contracts.
• Invalidation can be defined as avoidance of a contract due to failure to comply with the four
formation requirements if the contract is againstthe consent, capacity, object or form
prerequisite, it is likely that the court invalidates this contract.
✓ Both cancellation and invalidation presuppose a problem with the contract. Cancellation
involves non-performance and invalidation arises in contracts with defective formation (i.e in
case of fraud, duress or mistake)
✓ 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 reinstatementor restitutionof 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.i.e. returning the parties back
to their original position, a position which would have existed before the contract was made.
➢ Cancellation as a remedy for non-performance is in principle declared by the court. But as a
matter of exception, it can also be unilaterally declared by the parties, usually the creditor.

A. Judicial Cancellation
✓ It refers 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.

B. Unilateral cancellation
✓ This is a cancellation where the creditor has the right to consider himself as released without
a requirement to go to court for getting the same decision. The creditor here is enforcing his
right by himself.
✓ Unilateral cancellation is allowed under the following four cases only.
 • Where the provisions of the contract allow the creditor to do so (essential date of
performance).Sometimes the parties may state, in their contract, that if the debtor does not
perform his obligation, the other party may cancel the contract unilaterally. For example,
assume 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.
• Where the performance of the contract becomes impossible.It may happen that the
nonperformance of a contract is triggered by impossibility. In other words, the debtor
cannot perform the contract no matter what since performance is beyond his power.
• Where there is anticipatory breach.The debtor may declare that he will not perform his
obligation before the due date.
• Where mandatory period of performance expires (expiry of time limit). There are three cases
of mandatory period, the expiry of which leads to the right of unilateral cancellation.
These periods are the period we said is compulsory under "no notice" requirement, grace
period and additional period that may be given by the creditor himself.

❖ Void and voidable contracts

Agreements which do not satisfy the essential elements of a contract may be either void or voidable.
➢ Void agreements:an agreement not enforceable by law is said to be void. A void
agreement has no legal effect. It confers no right on any person and creates no obligation. /see art
1808(1) of the civil code/.Example
• An agreement made by a minor or incapable person.
• Agreements against public policy or unlawful agreements
➢ Voidable agreement:avoidable agreement is one which can be avoided. i.e set aside
by some of the parties to it, until it is avoided it is a good contract.
Example: contracts brought about by coercion, undue influence, mistake etc.
3) Damages
❖ Damages may be due whether or not the other remedies are claimed. Thus, damages may be
awarded even along with a claim for specific performance.
a)Nature of Contractual Damages
➢ Contractual damages are characterized by the absence of a fault requirement. That means, the
plaintiff is not expected to prove the fault of the defendant in order to obtain damages and the
defendant cannot exculpate him/herself by establishing his faultlessness
➢ 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. Unforeseeabilityand absolute impossibility are cumulative
preconditions for the existence of force majeure, and the absence of one denies the failing party
to claim the defense.

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.

4.1.4. Extinction of Obligations

➢ At the end, contractual obligations come to an end by the occurrence of the following factors:
performance, invalidation, set-off, remission (release or leave), merger, termination, and
cancellation. Where one of these happens in contractual relations, the existing contractual
obligations among the parties are extinguished (ended).
➢ As a matter of the law, right holders are required to take legal actions as soon as possible if they
think that their legal rights are violated. If they do not act soon, a period of limitation may
operate and bar their actions from being presented before courts of law.
➢ The maximum period of limitation is 10 years for contractual claims. But it must be noted that
there are a number of shorter periods of limitation and as a result the law must be consulted
before determining the exact period of limitation for a given legal claim.
4.2. LAW OF AGENCY

4.2.1. Definition
➢ An agency relationship exists when one party, called the agent, agrees to represent or act for
another party, called the principal. Agency is the way a person does legally binding act by the
instrumentality of another person. The agent (a person representing the principal) acts in
accordance with the instruction given by the principal.
➢ Agency is a fiduciary relation that exists between two persons so that one shall act on the behalf
and subject to the control of the other. Fiduciary relation means that the relation ship is one
 involving trust and confidence.
➢ The Law of agency is in most cases defined as the relationship between two persons, where one
(the agent) may act on behalf of the other (principal) and bind the principal by words and actions.
➢ It is also defined as the relationship in which one person acts for or represents another by the
latter’s authority, either in the relationship of principal and agent, master and servant, employer
or proprietor and independent contractor.
➢ The law of agency could also be defined as the judiciary relation which results from the
manifestation of consent by one person to another that the other shall act on his behalf and
subject to his control, and consent by the other so as to act.
❖ The concept of agency is recognized in all modern legal systems as an indispensable part of the
existing social order.

✓ It fulfills the most diverse functions in the public and private law of today; in particular it
assists in organizing the division of labor in the national and international economy, by
making it possible for a principal to extend his individual sphere of activity.

✓ An agent is appointed when an individual is unable to act himself on account of his mainfold
occupation, absence, illness, advanced age, etc.

✓ Or a representative may be designated in order to take advantage of his special capacity,

knowledge, and experience even for the mere desire, such as not to appear personally in order
to avoid hostility, controversy, etc or similar considerations.

✓ It has made possible for individuals to utilize the services of others in accomplishing, for more
than could be done by their unaided efforts.

✓ Agency reduces the cost of internal organization and so indirectly the costs of contracting by
facilitating specialization of function and expanding the scares resources of time, energy and
knowledge available to the principal.

❖ In a nutshell, the following points can best elaborate the need for having an agent acting on
behalf of someone.
➢ The need to overcome time and space limitation: One person may wish to perform several
transactions at the same time. The inability of a person to be at different places at the same time
can thus be solved by agency representation.
➢ The need to overcome limitations of knowledge and skill:Performing one or more activities
may demand certain skills or knowledge. Hence, another individual who has the required skill
may act on behalf of the person who has no such expertise in performing the duty.
➢ The need to represent legal persons: Legal personality is endowed to non-living entities. Thus,
after acquiring the legal personality these entities will have the right to exercise all activities that
a legal person can do. For instance, they can sue and be sued, administer property etc, to
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conclude a valid contract and to transact with 3 parties etc.
✓ An agent can act on representing legal persons to exercise rights and duties that a certain legal
person enjoys. It is through the agent (human being) that a certain legal person enjoys its rights
and performs its duties.
➢ The Need to overcome incapacities: The Ethiopian civil code provides that capacity is required
in order to perform a juridical act. Certain category of people like minors and interdicted people
can not have the appropriate analytical capacity in order to enter into a juridical act. Hence they
may fail to analyze the cost and benefit of the transaction. Hence some one else who can act on
behalf of them is appointed.
4.2.2. Source of Agency
❖ A person to represent the other shall have an authority. The source of authority may be law or
an agreement (Article 2179 of the civil Code). The law sometime authorizes a person to
represent other Person.
1) Agency by the operation of the Law
➢ The law intervenes in the absence of formal agreement between the parties in uncertain cases for
reasons of public policy, to fill in the gap created by the parties and sometimes even the
undesirability of securing consent.
➢ There are various specific reasons attributable to particular cases of agency created in this way.
The Ethiopian law recognizes agency by the operation of the law in certain circumstances.

a) Agents of Minors
• Minors are persons below the age of 18 years. The minors are not permitted to engage in the acts
beyond their power. However these minors need some one to take care of their day to day
activity and business. So the Guardians and Tutors of the child are considered as the agent of
the minor by law.

b) Representation of Persons under Interdiction

• A person may be interdicted due to a mental problem or due to the commission of a certain
 crime. In this case such a person may be limited to make a juridical act. However the law may
appoint an agent who represents an interdicted person.

c) unauthorized agency
• Sometimes it may happen that a certain person may represent the principal with out the
proper authorization of the latter. For example a person may extinguish a fire which burns
his neighbor’s house. In such cases the law considers such kind of person who has been
extinguishing the fire as an agent. The situation necessitates the representation and the law
recognizes it as an agency relationship.

➢ Article 2257-2265 of the Civil Code provides rules regulating agency of necessity. The Code calls
this kind of agency, "unauthorized agency". Unauthorized agency occurs where a person who has
no authority to do so undertakeswith full knowledge of the facts to manage another person's
affairs without having been appointed an agent.
➢ Here a person who has no contractual authority to represent another person acts on behalf of
another with full understanding. The system of agency is called agency of necessity. As the law
confers authority in this case, we cannot say the agent has no authority. The agent is contractually
not authorized but legally authorized to make the representation.
➢ The necessity agent shall manage the affairs of the principal in good faith and in accordance with
the requirement of good faith.
❖ In order to make representation under agency of necessity the following requirements shall be met.
✓ Asudden and unexpected situation causing damage on economic interest of a person shall
happen.
✓ Unless represented by a necessity agent, the economic interest of the person represented shall be
affected.
✓ Finally there shall be no means of communicating the matter to the principal.

d) Curator
➢ A person may not be able to manage his property or business due to different causes. It may be
due to illness or absence. And any interested party may not available to manage the property of
that person.
➢ So the court may appoint an agent (called a curator) to administer the property. The curator is an
agent the same to other cases of agency but the only difference is that he is appointed by the
court and the court limits of the power of the curator. The law requires the curator to inform to
the principal his appointment.

2) Agency by Contract (agreement)

➢ Contractual agency is an agency that arises from contract. This is the usual methods of creating
agency relationship.
➢ The principal communicates the offeror to appoint some one and if the agent accepts the offer
contractual relationship is created between the agent and the principal. As the contractual agency
is a special contract, it has to satisfy all the requirements necessary for the formation of valid
contract.
a) Contractual Agency in Ethiopian Law:Definition and Formation
• Agency is defined, under Art. 2199 of the Ethiopian Civil code as follows:
Agency is a contract whereby a person, the agent, agrees with another person, the
principal, to represent him and to perform on his behalf one or several legally binding acts.
• From the above definition, agency is one of the special forms of a contract and as such the
rules of contract law apply to formation of a valid agency. Therefore, the elements of a valid
contract provided under art. 1678 of the civil code are also applicable for the formation of
contract of agency. These elements are capacity, consent, object and form.
➢ The principal and the agent must consent and their consent must be free from the vices in consent.
It is also necessary to have full contractual capacity in order to be the agent of another person or
the principal giving authority to another.
➢ Although the relationship of principal and agent is normally based on mutual consent, the
agreement, as a rule, does not have to be in any particular form. Unless the law demands the
contract of agency to be in writing, it need not be made in writing or registered.
➢ However, the form of agency depends in effect upon the form of the juridical act to be carried out.
If the juridical act can be performed orally, the agency created orally is valid. But if the legally
binding act must be made in writing, the agency must be in that same form.For example,power
of attorney and an insurance contract must be made in writing. If the principal wants to authorize
someone to be his agent and thereby conclude a contract of insurance on his behalf, he must give
the authority in writing.
❖ The contract of the agency shall specify what the agent has to do. The object of the agency must
be sufficiently defined, possible, moral and legal. The scope of authority of an agent is
determined by the contract of agency. The promise the agent or the principal make each other is
their respective obligation. The obligation one owes to the other shall be sufficiently defined.
 This means the authority given to the agent shall be clearly stated in the contract of agency.
4.2.3. Scope and Authority of Agency
❖ Scope of agency refers to the extent of the power or the authority given to the agent.
✓ What are the juridical acts the agent can perform on behalf of the principal?
✓ Can he for instance sell the house of the principal or can he insure the property of the
principal?
➢ The answer for these and similar other questions much depends upon the content of the contract
of agency. Normally it is up to the parties to decide the scope of the authority of the agent. If the
principal in the contract of agency authorizes the agent only to sell his computer, the scope will
be limited to this act and the agent cannot bind the principal by acts other than the specific
transaction of sale of computer.
❖ There are two classes of agency under the law: General agency and special agency.

1) General Agency

➢ An agent conferred with general authority can’t be permitted to carry out certain activities that
demand strict decision-making. It is an agency expressed in general terms. Usually, it is
expressed in terms like: all my affairs, anything related to my property, any affairs which I am
called to perform etc.
➢ The scope of such authorities conferred in general terms is limited only to the management of
the said affairs.In general agency, agent operates all acts necessary for carrying out, the affairs of
principal. It is confirmed under Art. 2203 of the civil code that “agency expressed in general
terms shall only confer upon the agent authority to perform acts of management.”
➢ A general agent is considered to have authority to carry out acts of management. UnderArt.
2204 of the civil code, acts of management are listed. These are:

✓ Acts done for the preservation of maintenance of property;

✓ Leases for terms not exceeding three years
✓ The collection of debts
✓ The investment of income;
✓ Discharge of debts and
✓ Sale of crops, goods intended to be sold or perishable commodities.
2) Special Agency
➢ An authority is said to be special when it is given for particular affair that may require great
care and that may affect the position of the principal considerably. This is an agency with
express and specific authority given to the agent.
➢ Special agency is given to matters demanding special attention and for acts other than acts of
management. It is also known as a full authority because it clearly discloses what could be
done or could not be done by agent.
➢ An agent conferred with special authority may execute all transactions given by that contract.
It helps principal by prohibiting abuse of authority by agent under general agency. It is
narrower in scope compared to general agency.
➢ Some acts under the law require special authority. These acts include:
✓ Selling or mortgaging real estate, investing capitals,
✓ Sign bills of exchange, effect a settlement, consenting to arbitration,
✓ Making donations or bringing or defending an action. The agent must show that he is
expressly authorized to do so

Authorities of an Agent
❖ An agent representing a principal should have some kind of authority. The authority may be
actual or apparent.

A. Actual authority
➢ Actual authority is the authority which in fact the agent has been given by the principal under
the agreement or contract which has been made between them or by virtue of subsequent
ratification or by law.
➢ Actual authority exists in two forms: express and implied. Agency is express when principal
clearly authorizes his agent to perform all acts pertaining to his affairs by words in contract.
Authority is implied when agency relationship is inferred from conducts of agent or principal
without verbal expression as it is difficult enumerate all activities in the contract and such
authority is determined having regard to nature of transaction.

B. Apparent authority
If a person is empowered to do a given task but simply appears to outsiders, the kind of authority
assumed by innocent third party is apparent authority. The agent’s authority here is the product of the
principal’s conduct, his conduct that the agent is authorized to act on his behalf. In reality, it does not
exist; but as a matter of law arising out of the factual position of the parties in the eyes of third
parties. In these circumstances third parties assume that the agent has authority to act on behalf of
the principal.
Apparent authority of the agent emerges out because different causes. If an agent, for example, has
got a written document authorizing him to act on behalf of a given principal. After the termination of
agency the principal has to take back the document authorizing the agent to represent him. If he fails
to take the document back, the agent may act with the lapsed authority. In this case, the agent
actually has no power to represent, but has apparent authority.
Modes of Representation
❖ The agent may enter in to contractual relation on behalf of the principal in different ways. There
are three modes by which the agent may represent the principal. These are:

1. Disclosed agency: In disclosed agency, the agent makes the representation with third party
revealing the name and identity of his principal. In this case, the third party enters in to the
contract with the agent with full understanding that the person negotiating with him is an agent.

✓ Disclosed agency is recognized under Art 2189(1) of the civil code in such a way that the
representation of the principal by the agent shall have the effect of affecting the principal
when the agent discloses the name of the principal.
✓ Where the existence of the principal and his name is known to the third party, and the agent
acts within his scope of power, the contract is taken as it was made by the principal directly.
2. Partially disclosed agency; partially disclosed agency is the situation where the agent
represented the principal on the principal’s behalf but in the name of himself. The agent instead
of disclosing the name and identity of the principal may communicate to the third party, merely
his representative character. This is made clear by Art. 2197(1) of the civil code.
3. Undisclosed agency;In this form of representation, the agent neither discloses the existence of
his principal nor his representative character. Therefore, the agent acts on his own name and he is
acting on his own behalf. The third party is not aware of the fact that the agent is acting to the
benefit and on behalf of another.
✓ This last mode of representation does not bring any effect of agency. Yet, the person who acts
in his own name and on his own behalf shall enjoy the benefits or liabilities himself.
Effects of Agency
➢ The main effect of contract of agency is that contract which is made between agent and third
party binds principal. That is, where an agent acts within ambit of power entrusted by the
principal; a direct contractual relationship emerges out between the principal and third party
(Art.2189 of cc).
➢ Contract concluded through the agent creates rights and obligations only as between the person
represented/principal and third party. This means agent neither acquires rights nor incurs
obligations.
❖ This effect of agency shall come out upon fulfillment of two conditions: the name test and scope
of representation.

➢ The name test;the agent must act in the name of the principal. This is one mandatory
requirement for the establishment of a relationship between the principal and the third party.For
the principal and the third parties to be parties to the act performed by the agent, and to be
answerable to one anther, the agent must have told the third party the fact that he was acting on
behalf of the principal.
➢ Scope of representation (power of the agent); In addition to the name test, the agent must act
within the scope of the power granted. If the agent is given by the principal express authority to
make a certain contract or type of contract with the third party and, acting in accordance with
that express authority the agent makes such a contract with the third party, the principal is bound
by it.

✓ But if the agent exceeds the power given to him, the principal can repudiate (lawfully reject)
the act done by the agent.

✓ Where the agent acts in his own name either on his own behalf or on behalf of the principal,
it is only the agent that is liable to the third party.

4.2.4. Duties of Agent

The following are some of the duties of agent.

A. Duty to follow the instructions of principal: the agent must strictly

follow directions and orders given by principal or custom or nature of the transaction to satisfy
 best interest of principal.

B. Duty to Care and Diligence:the agent shall make representation in a way, the
interest of the principal demands and only to safeguard the interest of principal. He shall exercise
the diligence of bonus patter familias (good father).

C. Duty to remit sums and make report:every representation has to be

reported and the records shall be reported. Maintaining books and accounts is a vital for the
proper performance of the agent’s duties. His representation has to be supported by source of
documents. He has settle account with principal about costs & income.

D. Duty to avoid conflict of interest:agent should act in an exclusive interest of

principal. The agent’s personal interest shall not be involved in the representation. For example,
where the agent that is authorized to purchase goods to his principal buys his own property, the
law supposes conflict of interest.
Can a person act as agent for both parties to a contract?

E. Duty not to delegate/transfer authority:as a rule, the agent is expected to

execute the agency personally i.e. agent cannot delegate the power. His personal integrity may be
very important to the principal. However, there are exceptions when agent can delegate the
authority. The following are some of the exceptions.

I. Nature of activity: in certain cases, a transaction may be of nature that can’t be operated by
agent and so delegation may justified to other person who can perform it.

II. When there is consent of principal. If the principal consents to the delegation, the agent is free
to appoint/delegate someone who may represent the principal representing the first agent.

III. When there is emergency situation: When there is unforeseen condition/event that prevents
representation by agent and agent cannot perform what is ordered by principal, agent may
delegate the authority by appointing somebody else.

F. Duty to act with strictest good faithand to notify/justify any variation or

revocation of a term. This duty shows that agent should not cheat the principal when he performs
juridical acts. The above listed duties are some of the obligations of agent but they are not the
only duties because there are also many other duties which are not discussed here.
The above duties of agents are rights of the principal.

4.2.5. Duties of Principal

The following are some of the duties that a principal has to discharge.

A. Duty to remunerate an agent:the principal should pay remuneration/salary to

the agent as provided in their contract or used customarily.

B. Duty to cover costs and expenses incurred by agent:the principal

shall give advance sum for the agent to carry out his responsibilities. Moreover, if the agent has
spent the money from himself for interest of principal, the principal has to refund that money.

C. Duty to release agent from liabilities:The principal shall make agent free
from any obligations that arise from contract while agent acts for interest of principal unless
agent has fault or exceeds power given to him.

✓ These three duties are not the only duties of principal as principal has also got other duties
which are not mentioned here. These duties of principal are taken as rights of agent.
Termination of Agency
Agency relationship may be terminated/ended by two ways: by act of principal/agent or by operation
of law.

I. Termination by act of the parties

A. Revocation by principal
The principal may revoke/withdraw the power conferred on agent at any time without the need to
give reason for revocation as agency is created by agreement of parties. If the sudden revocation
authority entrusted to the agent causes loss to the agent, the agent can demand compensation.
B. Renunciation
An agent can renounce the power entrusted on him by giving notice to principal. Thus, until the
principal takes management of his own affairs, the agent should not stop the representation.
II. Termination by operation of law
The death, incapacity or bankruptcy of an agent or principal may end up an agency relationship (see
Art.2230 and 2232 of the civil code).
4.3. LAW OF SALE OF GOODS
 4.3.1. Definition

❖ Law of sales is a branch of business law that regulates the relationship between the buyer and
seller of goods. It is a collection of rules pertaining to the formation, performance and breach of
contract of sale. It imposes certain duties on the buyers and sellers the breach of which gives rise
to remedy.
What is a sale contract?
❖ Sale is a transaction involving goods and money. If an item called “good” is exchanged for with
“money”, the result is sale. A sale is a contract in which ownership or title to goods passes from
seller to buyer for a price. Since sale is a contract, the provisions of contract law regulate sales
transaction. The main purpose of sale contract is to transfer of ownership from the seller to the
buyer for consideration. Sale contract is a special contract comprising of obligations of the
buyerand the seller.
❖ In this regard the Art. 2266 of Ethiopian Civil code states that:
A contract of sale is a contract whereby one of the parties, the seller, undertakes to deliver a
thing and transfer ownership to another party, the buyer, in consideration of a price
expressed in money which the buyer undertakes to pay him.
This definitional provision of sale contains the following important elements:

1. Contract- it is a special kind of contract. If it is a contract, the parties should comply with the
essential conditions for the validity of contracts in general.
2. Parties-there must be two distinct parties to a contract of sale, as a buyer cannot buy his own
goods.
3. Deliver and transfer of ownership- the owner of the thing must agree with the other person to
deliver and transfer ownership of the thing.
4. The thing- the subject matter of contract of sale must be “things”. Things which have material
existence and can move themselves or be moved by themselves without losing their individual
character” are said to be corporeal chattels. Assimilated incorporeal chattels are also included
under things.
5. Price-Price is another crucial element in the contract of sale. Sometimesbuyer and seller may not
agree on the price to be paid. They may refer determination of the price to a third party arbitrator.
A person when purchasing a car may refer determination of the price to a mechanic. Where the
mechanic becomes unable or refuses to determine the price of the thing sold, there is no contract
as per Art.2271 of the civil code.

❖ What is the difference between contract of slaes and contract

of services?
➢ In many situations, a contract may be concluded primarily for personal services and any goods
supplied are merely incidental.For instance a textile manufacturer may provide clothes (or textile
materials) to tailors to prepare pairs of trousers and to return them back. This contract is a service
contract that should be regulated under contracts of service or employment law. It is a service
contract because the material for the production of the trousers is fully supplied by the
manufacturer.
➢ On the other hand, when an electrician sells and installs a room air-conditioner, there is a sale
because the labor or service is a minor part of the transaction.

➢ Law of sales contract, therefore, governs and helps the movement of goods from the original
maker to the final user to fulfill social wants.
Formation of Contract of Sale
• What are the requirements which must be fulfilled in order to establish a valid contract of sale? I
hope you remember the elements of article 1678 of the civil code.
✓ In order to form a contract which is binding, the contracting parties have to be competent enough
to enter in to legally enforceable acts. So the first requirement of a valid contract, capacity of the
contracting parties, must be fulfilled.
✓ The second requirement to form a valid contract is consent. The contracting parties have to give
their consent. The consent has to be sustainable by law. This means the consent has to be free
from vitiating factors.
✓ The third obligation of a valid contract is object of the contract. The object of the contract refers to
the obligations of the parties. The obligation contracting parties owe each other shall be
sufficiently defined, possible to perform, lawful and moral. If you remember, article 1687 of the
civil code uses the expression “object of contract” to mean obligation of contracting parties. A
contract is combination of obligation of contracting parties.
✓ The last requirement for the formation of a valid contract is form. In principle the law doesn’t
require that all contracts should be made in writing. Rather the parties have the freedom to
determine the form of the contract. The formal requirement of the law, which is the last pre-
 requisite for formation of enforceable contract, must be observed. Like other contracts, a sales
agreement may be oral, written, or by conduct or sign as when a buyer takes an item from a self-
service display of merchandise in a supermarket and pays the price to a cashier at the checkout
counter.
4.3.2. Obligations of the Seller
❖ The obligation of the seller bears normally those imposed by the contract itself. The law also
imposes certain obligations up on the seller either because of the silence of the contract or due to
the mandatory nature of the law. The main obligations of the seller are; an obligation to deliver the
thing sold, transfer ownership,providing warranty and other duties.

1) Obligation to deliver the thing

➢ Delivery generally refers to transfers of possession willingly. The seller has to hand over the
thing sold to the buyer. Delivery takes place in accordance with the contract and the default rules
of the law. It consists of handing over in not only the principal subject of the contract but also its
accessories as per article 2274 of the cc. Under Article 1136 of the civil code, accessory is
defined as “anything which the possessor or owner of a thing has permanently destined for the
use of such thing”. When you buy a new laptop, you may be given a charger together with the
laptop.

Modes of delivery
The modes of delivery may be expressly stipulated in the contract of sale. If a particular mode of
delivery is stipulated, it becomes one of the terms of the contract and non-compliance to an agreed
mode may be taken as breach of the term and the party failed to comply the term be liable.Delivery
of the thing sold may be conducted in three ways. These are actual delivery, constructive delivery
and symbolic delivery.
i. Actual delivery:The usual method of delivery of a subject matter of sale is handing over of the
thing to a buyer or his representative. It is the physical handing over of the thing directly to the
buyer or his representative.If a seller of horse actually hands over the horse to the buyer, the mode
of delivery is called actual.
ii. Constructive delivery:The seller may not actually hand over the thing sold to the buyer but after
happening of certain acts the law regards the thing delivered. He may deliver them to any person
who may hold on behalf of the buyer or the thing may remain in possession of the seller after the
contract of sale. This assumed delivery is called a constructive delivery.

✓ Example1:If X has hired his horse to Y and Y is using the horse for driving a cart. If X agrees
to sell this horse to W and decides to keep the horse with Y, there is constructive delivery made
by X.

✓ Example 2: If you purchase a VCD from a shop in Mercado and put it at the possession of the
seller to pick it after a week or at anytime, the legal assumption is the thing is sold and
delivered. Do you understand the reason why the law assumes such delivery while; the thing is
not actually delivered? It is at the possession of the seller. Though the thing sold is packed and
individualized and it is still at the shop, the seller is assumed to have discharged his obligation
of delivery. The buyer put the thing in the shop with the intention to take it later on. The seller
cannot legally sell the thing because he is no more an owner of the thing. He possesses the
thing for the buyer and represents the buyer. We call such kind of delivery as ‘constructive’
because it is the law which presumes such acts amounts delivery.

➢ A seller may agree to deliver the thing to the agent of the buyer. Under the law of agency, the act
of the agent is the same as that of the principal. Delivery made to the agent of the buyer releases
the seller from his obligation towards the buyer.
iii. Symbolic delivery:In the case of symbolic delivery, the seller delivers a document representing an
item sold or that facilitates taking delivery of the thing. The seller may delivery a document (title
deed) with out which the thing can not be sold or may deliver a key that makes use of the thing
possible. For example, if the seller gives the key of the store to the buyer, he makes symbolic
delivery. Similarly, giving bill of lading to the buyer is a symbolic delivery. As soon as the
document of title is handed over to the buyer or his agent, ownership passes to the buyer. When
the seller gives a carrier a consignment note, or a bill of lading as a receipt for the delivery of the
goods, it is deemed that the contract is concluded and goods are transferred
Quantity and kind of goods to be delivered
❖ The seller has to deliver the agreed quantity of things. If the seller delivers in excess or in short of
the agreed amount, there is non-performance of contract. The buyer may accept or reject the
things delivered at his discretion. If the buyer accepts the quantity that is less than the agreed
amount, he has to pay the agreed price for quantity delivered but he cannot require additional
delivery. In cases of excess quantity, the buyer has to pay a contractual price of the quantity
delivered.

➢ The parties to the contract of sale, according to Article 2275, may agree on delivery of “about
certain quantity” of specified goods. In such case there is a possibility of delivery of a thing,
which is determined by gap filling provisions, where the seller has the discretion to decide the
 exact quantity to be delivered.

➢ However, the seller has no duty to determine the exact quantity if the stipulation about certain
quantity was made for the sole interest of the buyer. Accordingly, this benefit might be given to
the buyer where ‘it appears from the circumstances that such stipulation has been included in the
contract in the sole interest of the buyer’.

Place and time of delivery

❖ In principle, time of delivery may be agreed. The seller should deliver the thing sold at agreed
time. Failure to deliver at such time amounts to non-performance of the contract. We resort to
legal provisions only if the parties have no fixed date of delivery in the contract. If not agreed,
the seller shall deliver the thing as soon as the buyer requires to do so. Delivery of the thing shall
be simultaneous with the payment of the price unless there is contrary agreement. The seller may
in such case retain the thing until payment is made.
➢ Where the parties have agreed that delivery shall take place during a given period, it shall be for
the seller to fix the exact date of delivery unless it appears from the circumstances that it is for
the buyer to do so.For example, if the seller agreed to deliver the thing sold between July14 and
August 16, he has to make delivery during this period.
➢ However, the buyer determines the exact date where circumstances may give such power to
determine the exact date of delivery to the seller. For example, if Y agrees to deliver a wedding
cake between June 6 and 19 to X, it is clear from circumstances that X needed the cake on the
day of his wedding. Thus, it is X who should decide the exact date according to Article 2277
because Y has no interest in the date of delivery and for that matter Y does not know the date of
wedding.
Regarding the place of delivery, it depends on the agreement of the parties. Unless otherwise agreed,
the seller shall deliver the thing at the place where, at the time of the contract, he has his place of
business. If he cannot make delivery at the place of business, he must make delivery at his normal
residence. Where the sale relates to a specific thing and the parties know the place where such thing
is, the seller shall deliver the thing at the place where the thing was at the time of the formation of
the contract.

2) Obligation to transfer ownership

➢ The second important obligation of the seller is obligation to transfer ownership of the thing sold
to the buyer. Ownership is the widest right that may have on a corporeal thing. The owner has the
right to use, possession, enjoyment and the right to dispose of it. Accordingly, transfer of
ownership means transfer of all these rights. The owner has the right the buyer purchases the thing
with the intention to be an owner. The seller shall do whatever he could do to make the buyer an
owner.
➢ According to the Ethiopian law, ownership title of a thing may be transferred from one person to
the other in two ways. As stated in article 1184 of the civil code, ownership of a thing may be
transferred by operation of law (e.gsuccession) and by virtue of contract (e.gcontract of sale and
donation).
➢ To transfer ownership by contract, the seller must have a valid title on the thing. He must be the
owner or the agent of the owner. Transfer of ownership by contract presupposes that whosoever
sells a thing in consideration of a price has a valid title. One who does not have title over a thing
cannot transfer it to another. If the title of the transferor is defective, the title of the transferee also
becomes defective. According to Article 2281 of the Civil Code, the seller shall take the necessary
steps for transferring to the buyer unassailable rights over the thing. He must transfer to the buyer
a right that cannot be challenged or attacked by a third party. It is the basic principle of property
law that a person can transfer no greater right in property than he himself possesses.
✓ For example, if X steals a watch from Y and sells it to Z, then Z has no greater title to the
watch than X possessed. Thus the obligation to transfer ownership includes the obligation to
have a good title. This is expressed by the Latin expression “nemo dat quad non habet” (a
person can’t have transfer a better title than he has). Thus a non-owner cannot transfer
ownership. If the title of the transferor is defective, the title of the transferee also becomes
defective.
❖ However, the rule that holds a person can transfer no greater right than his own suffers an
exception. This exception is possession in good faith. A buyer may become owner of a movable
thing by acquisition or possession in good faith. This is effected by the operation of the law in
accordance with Article 1161 of the Civil Code. A party who enters into a contract and
consequently comes into possession of the thing sold to him the buyer must have a good reason
for his belief.
➢ Good faith must exist at the time of contract or at the time the buyer entered in to possession
of the thing. If the buyer discovers after the contract that he contracted with a person who has
no title, his right is not affected. A person, who challenges his good faith, must show that the
buyer knew of the fact that he was dealing with a wrong person.
❖ There are cases under the law where possession in good faith cannot serve as a defense. That is,
ownership cannot be acquired by acquisition in good faith on certain movables. These are:
a) Special Movables that Require Registration of Contract: you noted that in order to transfer the
 ownership of certain special movables, registration of the contract is a requirement. The
ownership of movables such as motor vehicles, ships, airplanes and TV cannot be acquired
by possession in good faith.
b) Public Domain (Public Property): Property forming part of a public domain may not be
acquired by possession in good faith.Property belonging to the state or other administrative
bodies shall be deemed to form part of the public domain where it s directly placed or left at
the disposal of thepublic or it is destined to a public service.
c) Stolen property: In this case when a person who has bought a stolen thing cannot acquire the
ownership of such thing (Article 1165 c.c.).

3) Obligation to warranty title, defects, and non-conformity

❖ Warranty, or sometimes called guaranty, here refers to assurance of quality or performance of the
thing sold and delivered to the buyer. Generally there are two types of warranty: express
warrantyand implied warranty.
An express warranty is an affirmation of a fact or a promise /express statement made by the seller
to the buyer concerning the nature of goods. That is, the buyer has purchased the goods on a
reasonable assumption that the goods were as stated by the seller. It can be made in the form of oral
or written statements. For instance, when you buy a radio, the seller may say that he gives warranty
for ordinary performance of the radio for three years. You take the radio and start to use it. But after
three months the radio stops operating. In such a case, you can go back to the seller and ask for
maintenance, or any other remedy. This right arises because the seller has given you express
warranty saying that he will give three years warranty for ordinary operation of the radio.
Implied warranty: It is a warranty created or imposed by law. In many cases, the law requires that
sellers to provide certain minimum standards of quality and performance even if no explicit
promises or representations are made at the time of the sale. In most cases, it is the seller that knows
better about the property than the buyer. He is either the producer or the maker of the thing or
retailer who is close to the manufacturer of the property. On the contrary the buyer may not have the
knowledge and expertise to check the quality of the property he buys. Therefore, the buyer should
not be exploited unfairly. That is why the principle of "let the seller beware" has emerged. This is
the principle behind the implied warranty, a warranty imposed by law. This principle says that the
seller must be careful when he sells goods to purchasers. He must sell goods that are ok for use, sale
etc. If the things suffer some undue problems, the buyer, although there is not express warranty of
quality given by the seller, can sue the seller demanding some kind of remedy.
❖ The Ethiopian law of warranty provides three heads of (implied) warranties:
a. Warranty against dispossession
b. Warranty against defect
c. Warranty against non-conformity
a. Warranty against dispossession
➢ The seller shall warrant the buyer against any total or partial dispossession which he might
suffer in consequence of a third party exercising a right he enjoyed at the time of the contract
(Art.2282). If the third parties succeed in taking the property from the buyer due to the right they
had while the property was with the seller, the buyer has a remedy against the seller on the basis
of warranty against dispossession. This is because by the very act of selling, every seller
normally warrants that the goods shall be delivered free of all encumbrances (creditors’ claims)
of which the buyer is not aware at the time of contracting.

➢ However, the seller does not give warranty against dispossession to the buyer, in the first
case,where the buyer knows at the time of the contract that he risks dispossession. So if the buyer
knew of the possibility of dispossession, it is up to him to protect himself by getting express
warranty. The second is the case where there are provisions excluding or restricting warranty.
b. Warranty against defects
➢ This is a warranty given for the use or quality of the thing. There are circumstances where the
seller gives an express warrant under the law against defect (Article 2289 cc.). These are:
✓ First, where the thing does not possess the quality required for its normal use or commercial
exploitation there is a breach of contract against defect and the seller will be liable under the
law.
✓ Second where the thing does not possess the quality required for its particular use as provided
expressly or implied in the contract. If the thing does not serve for the particular purpose the
buyer can take a legal action against the seller.

✓ Finally the seller has the duty to give warranty against defects where the thing does not
possess the quality of specification provided expressly or impliedly in the contract (i.ewarranty
of fitness specified in the contract).
➢ Under these circumstances the seller has a legal duty to give warranty.
c. Warranty against non-conformity
➢ Where a description of the goods or a sample or model is made part of the contractual
agreement, there is a warranty that all the goods supplied shall confirm to the description, Sample
or model which is provided in the contract.

➢ What is the important thing here is the difference between the thing provided in the contract and
the thing delivered to the buyer.In this case, the thing delivered must be the same with they
properly agreed. If there is any discrepancy the buyer may claim on the basis of warranty against
non-conformity. There are four cases for claim of warranty against non conformity, these are;
deliver of part only of the thing, delivery of greater or lesser quantity than they agreed, delivery
of a different thing ,and delivery of a thing with different species.For example, if the seller agrees
to deliver a Sony TV set, he breaches the warranty against non-conformity when he delivers a
tape recorder or JVC TV.

❖ The legal warranties of defect and non-conformity normally apply to all cases of contract of sale
irrespective of the parties and the subject matter. But the seller will not be responsible for defect
or non-conformity under the following four cases.

➢ Knowledge of the defect or non-conformity: If the buyer knew of the defect and nonconformity
and agreed regardless of it, he will assume the loss by himself and the warranty doesn’t protect
him.

➢ Exclusion of the warranties:A seller may sometimes be anxious to sell goods without being
obligated by warranties. The seller may know that the goods are defective and be willing to sell
them at reduced prices. So if the seller of a computer at the time of the contract said that he will
not give express and implied warranties and the buyer agrees with it, the implied warranties do
not work. If the computer fails to work, the buyer will be left on his own and he cannot take a
legal action against the seller on the basis of the legal warranties against defect and non-
conformity.

➢ Failure on the buyer's side to obey obligations imposed upon him:The buyer has an obligation
to check the thing to find out whether the thing is free from defect or conforming and to inform
the seller, if he finds some defect and/or non-conformity. If he does not carry out these
obligations (examination and notification) and the thing is found to be defective and non-
conforming, the buyer cannot have a remedy under the legal warranties. It is all about taking
responsibility for failure to obey legal obligations.

➢ Period of limitation:If the buyer, having informed the seller, must immediately proceed to
exercise his legal rights under the legal warranties. If he fails to take a legal action within a year
starting from the time when he informed of the defect or nonconformity to the seller, his action
will be prevented since the period of limitation has expired. For instance, if you informed the
defect of the computer to the seller on January 15, 2003, and if the seller does not give you a
solution for the defect voluntarily, you must go to court within a year, i.e. until January 15, 2004.
If you have not taken your legal action till that time, it is likely that you will lose your legal right
under warranty against defect.
d. Other obligations of the seller
Other obligations of the seller relate to handing over of documents and insurance. If it is customary
for the seller to hand over to the buyer documents concerning the thing sold, the seller shall, in
addition to delivery, hand over such documents.
4.3.3. Obligation of the Buyer

❖ The main obligations of the buyer under the contract of sale are the obligation to pay price, the
obligation to take deliveryand examination and notification of the thing sold.

1. Obligation to pay price:the buyer must give the price to the seller and do everything necessary to
transfer the money from himself to the seller. The obligation of the buyer to pay price includes the
obligation to take any steps provided by the contract or by the custom to arrange for or guarantee
the payment of price. For example, the contract of sale may provide that the buyer should pay the
price in check. In this case the buyer must open account in bank and deposit money in the bank
from which he orders payment to the seller.
➢ Time and place of payment:time of payment is on delivery of goods unless
agreed otherwise.
• If the contractual terms are well defined as to the amount of the money or the place and time of
payment, the contract will be enforced and the buyer must pay as agreed, i.e. the agreed amount, at
the agreed place and at the agreed time.
• Where the amount is not fixed in the contract, we look for the current price of the thing having
taken into account the place and time of payment. However, if the thing does not have current
price or it is not possible to ascertain for what the seller sells the thing to buyers, the contract of
sale should be invalidated for lack of clarity of object.
• Where the place of payment is not agreed upon, the payment normally must be made at the address
of the seller. If there is no agreed time of payment, payment must be made at the time the seller
 demands or simultaneously with time of delivery whichever is appropriate under the case.
2. Taking delivery:In the above discussion of obligation of the seller,delivery is the duty of the seller.
But how can the seller carry out his obligation of delivery if the buyer is not cooperative and
refuses to take delivery? This is the reason why taking delivery is the buyer's obligation. Unless
he has a justifiable reason, the buyer must take delivery when the seller offers the goods for
delivery. If he does not take delivery while the seller is ready, the buyer will be responsible for the
subsequent loss and expenses the seller incurs.
3. Examination and notification: While the law provides the warranty against defect and non-
conformity obligations against the seller on the one hand, it provides examination and notification
duty against the buyer on the other hand. For the buyer to benefit from the two warranties, he is
obliged to perform these duties. As soon as the buyer has the opportunity, he shall without delay
examine and look the thing for the existence of possible defects and nonconformity over the
property. The time of examination is normally at the time of delivery or immediately following
delivery. If the examination shows no defect or non-conformity in the thing delivered, there will
not be a problem. But if the examination reveals some kind of defect or non-conformity, the buyer
must immediately communicate this fact to the seller.

4.3.4. Common Obligations

❖ A seller and a buyer have some obligations in common like obligation to pay expenses,
obligation to preserve the thing and obligation to bear unpreventable risk of loss and
deterioration.

4.3.5. Transfer of Risk

➢ Risk is the liability of loss or deteriorations of a thing sold. Thus, the effect of risk allocation is
that the person who bears the risk is to cover the value of the thing which has been damaged or
lost. The risk will be transferred from the seller to the buyer at the time of delivery or from the
day when the thing has been delivered to him. Thus, the basic principle is that, the buyer shall pay
the price notwithstanding that the thing is lost or its value altered where the risks are transferred to
him. The risks shall be transferred to the buyer.Therefore, risk and ownership are inseparable.

➢ However, risk will not be transferred to the buyer even after delivery if the thing does not
conform to the contract and the buyer has cancelled the contract, require cancellation or require
replacement of the thing. Yet, even if there is non-conformity, unless the buyer has cancelled the
contract, require cancellation or require replacement of the thing, he/she bear the risk.

➢ Risk may pass from the seller to the buyer before delivery. This happens when the buyer is in
default in taking delivery. On the other hand, there is the case where the seller bears the risk
although the property is given or transferred to the buyer. This happens when the property suffers
a problem and the buyer has the right to demand the return of the thing back to the seller.

4.4. LAW OF INSURANCE

4.4.1. Definition of Insurance
❖ Insurance may be defined in various ways. Firstly, from the point view of an individual it may be
defined as a risk transfer mechanism or an economic device whereby a person, called the
insured/assured transfers a risk of a possible financial loss resulting from unforeseeable events
affecting property, life or body to a person called the insurer for consideration. Thus, it can be
seen that insurance is a device by which an insured person can protect himself from heavy loss
likely to be caused by an uncertain event by paying a comparatively much smaller sum of money
as premium.

❖ Secondly, from the point of view of the insurer, insurance may be defined as a mechanism
through which a risk is distributed among the group of persons who are exposed to the same type
of risk, i.e., persons who bear the risk of suffering a financial loss as a result of events affecting
property, life or body.

❖ Therefore, from the above definitions, insurance is a cooperative economic device to spread the
loss caused by a particular risk over a number of persons who are exposed to it and who agree to
insure themselves against that risk. This means that insurance provides a pool to which many
persons contribute a certain amount of money called the premium, and out of which the insurer
compensates the few who suffer losses.

What does contract of insurance mean?

➢ contract of insurance is a contract whereby one party undertakes, in return for a consideration
called a premium, to pay to the other party a sum of money on the happening of a certain event
(death or attainment of a certain age, or injury) or to indemnify the other party against a
financial loss arising from the loss or damage to property or from incurring civil liability.
 ➢ The party which promises to pay a certain amount of money to, or to indemnify, the other
party is called the insurer. The document containing the terms and conditions of the contract of
insurance is called the policy, and the insured is therefore, also referred to as a policyholder.
➢ A contract of insurance is a type of contingent or conditional contract. Acontingent or
conditional contract is a contract to do or not to do something, if some event, collateral to such
contract does or does not happen.
•• That is the performance of the obligation arising there from by the parties or one of them is
dependent upon the condition or contingency agreed upon by them. Accordingly, as the
obligation of the insurer to pay compensation or the agreed amount to the insured or the
beneficiary is dependent upon materialization of the risk or risks specified in the policy.
❖
❖ A contract of insurance is defined under Art 654 of the
Commercial Code of Ethiopia as follows:
➢ Insurance (policy) is 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.
•• That means insurance is a contract between two or more persons in which one person called the
insurer, agrees to pay the agreed amount of money or compensation to another person, called
the insured, or the beneficiary where the insured property is lost or destroyed (in cases of
property insurance), or where the insured person incurs civil liability (in cases of liability
insurance) or where the insured person dies or suffers bodily injury or falls ill (in case of
insurance of persons).
•• The insurer undertakes this obligation for consideration, called premium payable by the insured
person.

4.4.2. Types of Insurance

1) Insurance of objects
❖ Insurance objects or property insurance indemnifies a person who has an insurable interest in
❖
physical property for its loss or for the loss of its income-producing ability. Property insurance
protects against loss from certain "perils." A peril is a cause of loss such as fire, flood, or theft.
Unless otherwise agreed, the insurer shall not be liable for losses or damages due to international
or civil war. The policy shall terminate where the object insured is lost for a reason not specified
in the contract of insurance. The principles of insurance would apply to insurance of objects.
2) Insurance of liability
❖ A person or firm faces two broad types of liability for damages-liability for breach of contract and
❖
liability for a wide variety of torts (or liability for wrongs committed). Liability insurance does
not cover liability for breach of contract, nor does it cover losses resulting from other speculative
activities such as trading in the stock market.
➢ Liability insurance protects only against tort liability, including, however, tort liability assumed
by contract. (A tort is a legal injury or wrong to another that arises out of actions other than breach
of contract, in which courts will provide a remedy by allowing recovery in an action for
compensation.)
➢ The sources and types of tort liability fall into several categories and they include:
• Liability for one's own faults--negligent driving, professional malpractice, false imprisonment by
an individual, defamation, and so on. For instance there is malpractice insurance which protects
professionals such as doctors, lawyers, and accountants from liability for negligence in the
practice of their professions.
• Liability of an employer for torts committed by employeesin the course of their employment,
including many intentional torts. The coverage is usually called employer's liability insurance. It
may provide normally for coverage for worker's compensation claims. For instance a worker
may beat a customer. If injury is inflicted on the customer, the employer may be held liable for
the wrong committed by the employee.
• Liability for loss resulting from defective products, whether based on negligence, breach of a
warranty, or strict liability in tort. For instance a producer of goods might have distributed
defective goods. If a consumer uses the goods and as a result suffers some damage or disease,
the consumer may claim compensation for the damage he suffered against the producer.
• Liability resulting from ownership of property. For example, we can take the strict liability
attending the ownership of hazardous property. For example an ox you own may heat a
bystander and inflict damage upon the latter. For this damage, the injured bystander may claim
compensation against you.
3) Insurance of persons
❖ Policies of life and health insurance provide protection against a number of general risks:
premature death, temporary and permanent disability, temporary illness, and outliving one's
financial resources.
➢ In a family context, insurance can provide reimbursement for medical expenses, a replacement
for income lost due to disability, and at death, funds to cover the cost of the last illness, burial,
unpaid debts, and similar expenses. Insurance can also provide surviving family members with
 funds for maintaining their standard of living or adjusting to a lower one if necessary, for
supporting minor children, and for meeting special needs such as education.
➢ In a business context, a firm can insure the lives of key personnel whose untimely death would
create great financial hardship for the firm. Firms can also use insurance to enhance the
availability of credit to the firm, to assure the continuation of business, and to fund employee
benefit plans in an effort to attract and hold talented employees.
➢ A question may arise as to the amount of insurance. According to the Commercial Code, since
insurance of persons is not considered to be a contract for compensation, the amount insured may
be freely fixed and shall be due regardless of the damage suffered by the insured. Also, the rule
of subrogation in no case applies under insurance of persons.
3.1 Life insurance
❖ A life insurance is a contract whereby the insurer undertakes against the payment of one or more
premiums to pay to the subscriber or to the beneficiary a specified sum on certain conditions
dependent upon the life or death of the subscriber or third party insured. So there are insurance
contracts in the event where the insured is alive on the date specified in the contract and
insurance policy in the event of death.Lifeinsurance is applicable when the insured dies.
✓ In the first type of life insurance, the insurer who enters into a life insurance undertakes to pay a
specified capital or money provided the insured person is alive at a date fixed in the policy.
✓ The second type of life insurance, the insurer, who enters into insurance for the event of death,
undertakes to pay, on the death of the insured person, a specified capital or life interest to those
having rights from the insured person or to the beneficiary named in the policy.
❖ But there are exceptions for the application of death insurance contract.
✓ An insurance policy made for the event of death of an incapable person shall be of no effect
even where the incapable person or his legal representative agreed to the insurance.
✓ An insurance policy for the event of death shall be of no effect where the insured person
knowingly commits suicide.For example,so if Mr. X insures himself for the benefit of his wife
and, at later time, kills himself, the wife cannot benefit from the insurance contract.
✓ An insurance policy for the event of death shall be of no effect where the beneficiary
intentionally kills the insured person and is convicted thereof by a criminal court. For instance,
from the above case, if the wife, the beneficiary of the contract, kills Mr. X, she cannot claim on
the basis of insurance contract.
3.2 Insurance against accident and illness

❖ Insurance against accident and illness or simply health insurance may be defined broadly as the
type of insurance that provides indemnification for expenditures and losses of income resulting
from loss of health. This insurance is given normally for medical expenses including surgical and
hospitalization and disability.

4.4.3. Basic Principles of Insurance Contract

A) Principles of Utmost Good Faith

❖ It imposes a higher standard of honesty on parties to an insurance agreement than is imposed in
ordinary commercial contracts. The principle of utmost good faith has greatly affected insurance
practices and casts a very different light on the interpretation of insurance agreement than many
persons often suppose.
❖ According to the law, on making proposals for a policy, the beneficiary shall state exactly all the
circumstances within his knowledge and which are likely to assist the insurer to appreciate fully
the risks he undertakes to insure. This principle is mainly all about disclosing material facts. The
duty to make a full and true disclosure continues until the contract is concluded, i.e., until the
proposal of the insured is accepted by the insurer, whether the policy is then issued or not and it
is not a continuing obligation. Thus, any material fact coming to his knowledge after the
conclusion of the contract need not be disclosed.

B) Principles of Indeminity
❖ Life and personal accident contract insurances can notindemnify and money payment for loss of
life or bodily injury. Whereas in case of marine and fire insurances, the insurer undertakes to
indemnify the insured for loss or damage resulting from specified perils. In case of loss, the
insured can recover from the insurer the actual amount of loss, not exceeding the amount of
policy. If there is no loss under the policy, the insurer is under no obligation to indemnify the
insured. The purpose of indemnity is to place the insured, after a loss, in the same position he
occupied immediately before the event.
❖ This principle applies to insurance of objects (property insurances) and liability insurances.
According to this principle, property and liability insurances are contracts for indemnity or
compensation, which, in principle, is equal to the actual value of the object or the amount of
economic loss or damage sustained by the insured.
❖ Hence, in cases of insurance of objects, the liability of the insurer, if the risk materializes, shall be
to pay compensation i.e., the actual value of object on the day of occurrence, where the object is
 totally destroyed or lost or the cost of repair in cases of partial damage, provided that such
compensation cannot exceed the amount of guarantee/sum insured provided in the policy. (Arts
678, 665(2)) of the Commercial Code.
C) Proximate Cause

❖ The next principle of insurance is that the insurer is liable only for those losses which have been
proximately caused by the peril insured against. In other words, in order to make the insurer
liable for a loss, the nearest, immediate, or the last cause has to be looked into, and if it is the
peril insured against, the insured can recover.

❖ Thus, in deciding whether the loss has arisen through any of the risks insured against, the
proximate or the last of the causes is to be looked into and others rejected. If loss is caused by the
operation of more than one peril simultaneously and if one of the perils is excluded (uninsured)
peril, the insurer shall be liable to the extent of the effects of insured peril if it can be separately
ascertained. The insurer shall not be liable at all if the effects of the insured peril and excepted
peril cannot be separated.

D) Insurable Interest
❖ Consistent with the concept of insurance as a means of indemnifying an insured against a loss, is
the corollary that insurance should not provide an insured with the means of showing a net profit
from the event insured against. Insurance is not a means of making profit.

❖ Insurable interest means some proprietary or pecuniary interest. The object of insurance is to
protect the pecuniary interest of the insured in the subject matter of the insurance and not the
material property as such. A person is said to have an insurable interest in the subject matter
insured where he will derive pecuniary benefit from its existence or will suffer pecuniary loss
from its destruction. Insurable interest is thus a financial interest in the preservation of the
subject matter of insurance.

❖ A purely sentimental interest or a non-monetary benefit will not cause an insurable interest.
Accordingly, a creditor has an insurable interest in the life of the debtor but a son has no
insurable interest in the life of his mother who is supported by him.

❖ ‘Insurable interest’ is an essential pre-requisite in effecting a contract of insurance. The insured

must possess an insurable interest in the subject matter of the insurance at the time of contract.
Otherwise, the contract of insurance will be a wagering agreement which shall be void and
unenforceable.

E) Doctrine of Subrogation
❖ The doctrine of subrogation is a result of the principle of indemnity and it applies only to
property insurances. According to the principle of indemnity, the insured can recover only the
actual amount of loss caused by the peril insured against and is not allowed to benefit more than
the loss he suffered. In case the loss to the property insured has arisen without any fault on
anybody’s part, the insured can make the claim against the insurer only. In case the loss has
arisen out of tort or fault of a third party, the insured becomes entitled to proceed against both the
insurer as well as the wrongdoer.

❖ However, since a contract of insurance is a contract of indemnity, the insured cannot be allowed
to recover from both and thereby make a profit from his insurance claim. He can make a claim
against either the insurer or the wrong doer. If the insured chooses to be indemnified by the
insurer, the doctrine of subrogation comes into play and as a result, the insurer shall be
subrogated to all the rights and remedies of the insured against third parties in respect of the
property destroyed or damaged.

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

4.4.4. Signifincance of Insurance

Its significance could be derived from the definitions given above. Hence, Insurance as a mechanism
of transfer of risk has great economic and social benefits to the individual insured, his family and the
country in general. The following are some of the major benefits.
I. Indemnification for Losses
➢ Payment of compensation by the insurer for losses permits individuals and their families to be
restored to their original financial position after a loss has occurred. As a result, they can maintain
their financial security. Since they are restored either in part or in whole after a loss occurs, they
are less likely to seek financial assistance from relatives and friends. It also allows businesses to
remain in business and employees to keep their jobs, suppliers will continue to receive orders, and
customers can still purchase the goods and services they desire.

➢ The community also benefits because its tax base is not eroded. Businesses and families who
suffer unexpected losses are restored or at least moved closer back to their previous economic
position. The advantage to these individuals is obvious. The society also gains because these
persons are restored to production and tax revenues are increased. In short, the indemnification
function contributes greatly to family and business stability and therefore is one of the most
important social and economic benefits of insurance.
II. Reduction of Worry and Fear
➢ Another benefit of insurance is that it reduces worry and fear, both before and after loss. For
instance, if family heads have life insurance for adequate amount to cover the future needs of their
families, they are less likely to worry about the financial security of their dependents in the event
of their premature death.

➢ Persons insured for long-term disability do not have to worry about the loss of earnings if a
serious illness or accident occurs. Property owners who are insured enjoy greater peace of mind
since they know that they are covered (they would be compensated) if loss occurs to their
property.
III. Source of Investment Funds

➢ The insurance industry is an important source of funds for capital investment and accumulation.
Premiums, which are collected by the insurer in advance, usually at the time of conclusion of the
contract and other funds which are not needed to pay for immediate losses and expresses, can be
loaned to businesses or invested in manufacturing, real estate... sectors. These investments
increase the society’s stock of capital goods and promote economic growth.

➢ Insurance, through compensation of losses, also encourages new investment. For instance, if an
individual knows that his or her family will be protected by life insurance in the event of
premature death, his or her and the family's financial resources are protected by various types of
property insurances, he/she may be more willing to invest savings in a long-desired project such
as a business venture, without feeling that the family is being robbed of its basic income security.
In a way a better allocation of resources is achieved, i.e., idle funds/deposits are used for a more
productive purpose. As insurance is an efficient device to reduce risk, investors may also be
willing to enter fields they would otherwise reject as too risky, and the society benefits from
increased services and production.
IV. Means of Loss Control

➢ Although the main function of insurance is not to reduce loss but merely to spread/distribute
losses among members of the insured group, insurers are nevertheless vitally interested in keeping
losses at a minimum. Insurers know that if no effort is made to prevent or minimize occurrence of
insured risks, losses and hence premium would have a tendency to rise. It is human nature to relax
vigilance when they know that the loss will be fully paid by the insurer.

➢ The following illustrations are some of the areas in which insurance companies play a very
important role in loss prevention and control:
- Development of fire safety standards and public education
- Programs
- Recovery of stolen properties
- Investigation of fraudulent insurance claims and thereby deterring intentional destruction of
property and life
- The insurance industry also finances programs aimed at reducing premature deaths, accidents
and illness.

V. Enhancing Credit

➢ Insurance enhances a person’s credit, i.e., it makes the borrower/debtor a better credit risk
because it guarantees the value of the borrower’s collateral/mortgage or pledge/, and gives the
creditor /lender greater assurance that the loan will be repaid. For instance, when a house is
purchased on credit provided by a lending institution, the lender normally requires a property
insurance on the house before the mortgage loan is granted.

➢ The property insurance protects the lender’s financial interest if the property is damaged or
 destroyed. Similarly, if a purchase of an automobile is financed by bank or other lending
institution motor vehicle insurance may be required before the loan is given. It also enhances
small businesses’ competitiveness. Small businesses would not be able to compete with big
businesses without an insurance to which they transfer risks to their assets.

➢ However, in the absence of insurance, the occurrence of a certain loss may destroy the business
and put it out of the market. Big businesses on the other hand, may safely retain some of such
losses even in the absence of insurance.Hence, insurance through payment of compensation for
losses will keep small and medium businesses in the market and enable them to maintain their
competitiveness.

4.4.5. Rights and Duties of the Parties

It is obvious the effect of every contract is creating rights and obligations among contracting parties.
Not being an exception to this fact, contract of insurance creates obligations between an insured and
an insurer. The following are their respective obligations.
1. Obligations of an insurer
a) It shall guarantee the insured against the risks specified in the policy (see article 663 of the
commercial code). In other words, it shall pay the agreed sum which shall not exceed the amount
specified in the policy.
b) It shall act in good faith.
Both parties are highly expected to act in highest standard of honesty to each other.

2. Obligations of an insured
a) To pay the premium at a specified time in the policy (see article 665 of the commercial code)
The amount premium and time of payment would be clearly indicated in the policy and the
insurer shall pay the premium accordingly.
b) Disclose material information: The insured therefore has to disclose all important facts to the
insurer. The insured has to be utmost good faith. If the insured knows any information that would
influence the insurer whether to accept the application for insurance or not, the insured has to
inform to the insurer. Non disclosure of material fact vitiates the insurance contract. On making
proposals for a policy, the beneficiary shall state exactly all the circumstances within his
knowledge and which are likely to assist the insurer to appreciate fully the risks he undertakes to
insure policy (see article 667 of the commercial code). The insured is only expected to disclose
material facts within his knowledge. If the insured intentionally conceals material fact the insurer
may invalidate the contract as it would cause the insurer to wrongly appreciate the risks to be
insured.
c) Notify the occurrence of the risk insured.Unless he is prevented by force majeure, the beneficiary
shall inform the insurer of any occurrence likely to render the insurer liable as soon as he knows
of such occurrence or within not more than five days (see article 670 of the commercial code).

UNIT FIVE

LAW OF NEGOTIABLE INSTRUMENTS

V.1. Definition of Negotiable Instruments

❖ The word negotiable means ‘transferable by delivery’ and the word ‘instruments’ means a
written document by which a right is created in favor of a person. Thus, the term negotiable
instruments literally refer to a document containing rights that can be transferred by delivery.
➢ Similarly, Article 715(1) of Ethiopian Commercial Code of 1960 defines the term negotiable
instruments as any document incorporating a right to an entitlement in such a manner that it is
not possible to enforce or transfer the right separately from the instrument.
➢ According to this provision, the holder of negotiable instruments can transfer the rights
incorporated in the instrument by transferring the instrument.
• The rights that could be incorporated in negotiable instruments may be rights for payment of
money arising out of various contracts such as the contract of loan, sale, lease, rights to receive
goods under voyage or deposited in a warehouse or any other contract performed by payment
of a certain amount of money.
• Such rights may also arise from ownership in companies or loan made to the government or to
a share company.
➢ It 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.
1) Commercial instrumentsare the most noticeable types of negotiable
instrumentsincorporating rights for payment of a specified amount of money.
✓ Hence, they are used as a substitute for money. These are bills of exchange, promissory
notes,checks, travelers’ checks and warehouse goods deposit certificates as the types of
commercialnstruments recognized under the Ethiopian law.
✓ 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 ispayable to bearer may be
transferred only by delivery.
2) Transferable securitiesare negotiable instruments incorporating rights for payment of
money. The sources of such rights may be investments made in companies or loans provided to
the government or its subdivisions through purchase of government bonds and treasury bills or to
companies through the purchase of debentures, transferable shares and stocks.
3) Documents of title to goodsare negotiable instruments containing rights of
ownership over goods that are being transported, on shipment or goods which are warehoused and
which enable their holders to receive such goods. For example, bill of lading, a truckway bill
andairway bill.

❖ The main purpose of negotiable instruments are:

✓ To facilitate commercial transactions and as means of performance of money obligations;
e.gCommercial instruments.

✓ To raise capital in the form of contributions made by purchase of shares and bonds, which is
used for starting new businesses or expansion of existing businesses thereby increasing the
production of goods and services in the country; e.g. Transferable securities.

✓ To creates convenience and facilitates transactions involving the goods; e.g.a document of
title to goods.

V.2. Bills of Exchange

❖ Bills of exchange (drafts) are negotiable instruments incorporating an unconditional written order
that involves three parties.The party signing and giving it, the drawer, orders another party, the
drawee, to pay money usually to a third party, the payee.
1. Drawer: is the person who is making the unconditional order. He orders some other person,
usually his debtor, to pay the money to the bill of exchange holder.
2. Drawee:is the person who is ordered to pay the money unconditionally to the bill of
exchange holder.
3. Payee:is the person to whose advantage the unconditional order is made. He is the holder of
the bill of exchange demanding payment from the drawee, a person who is already ordered to
pay the money by the drawer.
➢ Billof exchange is therefore, a written acknowledgement of debts written by the creditor and
accepted by the debtor. It is an assignment of right. The creditor is ordering the debtor to pay his
debt to another person, the holder.
➢ Article 735 of the Commercial Code of Ethiopia enumerates the requirements to be fulfilled for
drawing a valid bill of exchange from which one may deduce the definition of the term under
Ethiopian law.
➢ Accordingly, a bill of exchange must contain:
• The term “bill of exchange”
• An unconditional order to pay a certain sum in money
• The name of the person who is to pay ( the drawee)
• The time of payment
• The place of payment
• The name of the person to whom or to whose order payment is made or an indication that it
 shall be payable to bearer
• The date when and the place where the bill is issued.
• The signature of the person who issues the bill (drawer)
➢ A bill of exchange that does not contain any one of the above requirements shall not be valid and
the drawer or any other party to the instrument can raise defect of form against any person who
claims based on the bill. (Art 717 (1)).

V.3. Promisory Note

❖ A promissory note is defined as a document incorporating an unconditional promise in writing
made by one person to another signed by the maker, engaging to pay, on demand or at a fixed or
determinable future time, a sum certain in money, to or to the order of a specified person or to
bearer.
➢ This, definition implies that promissory notes are promise to pay money and they are only two
parties i.e., the maker of the promise and the payee to whom payment is effected. It can be made
payable at a definite time or on demand. It can name a specific payee or merely be payable to
bearer.
❖ Thus, a promissory note must contain;
• The term “promissory note”
• An unconditional promise to pay a sum certain in money
• The time and place of payment
• The name of the person to whom or to whose order payment is to be made or a statement that
the note is payable to bearer
• The date when and the place where the note is issued
• The signature of the person who issues the instrument
❖ Promissory note contains promise to pay whereas a bill of exchange contains an order to pay. The
maker of promissory note is always primarily liable and its liability is the same as the acceptor of
a bill of exchange, but in case of drawer of bill of exchange once the bill is accepted he is only
liable as surety in the event of dishonoring of bill of exchange.

V.4. Cheques/Checks
❖ A check is the most widely used form of commercial instrument. It is bill of exchange drawn on a
bank and payable on demand. Therefore, since check is defined by reference to a bill of
exchange, most provision governing bills of exchange are applicable to check.
➢ It is an unconditional order in writing, addressed by one person, the drawer, to a banker, signed
by the drawer, requiring the bank to pay, on demand, a sum certain in money to or to the order of
specified person or to bearer.

❖ The basic elements for the issuance of cheque are:

✓ an unconditional order to pay a sum certain in money;
✓ the name of the person who is to pay (drawee);
✓ the place of payment;
✓ the date when and the place where the cheque is drawn;
✓ The signature of the personwho draws the cheque (drawer).

❖The following are the main differences between checks and

bills of exchange.
✓ A check is always drawn on a banker (the drawee) and is always payable on demand while a bill
of exchange may be drawn on any one and may be made payable on demand or at fixed or a
determinable future time.
✓ A check can be crossed in several ways but bills can not be crossed.
✓ Acceptance is not necessary for a check since it is payable on demand as opposed to bills of
exchange which may be made payable at fixed or determinable future time presentment for
acceptance may be necessary.
➢ It is also important to note that a drawer of a bill of exchange and a check or the maker of a
promissory note may antedate or postdate it, provided that he has not committed a fraud. In other
words, unless the drawer or maker intended to jeopardize the interest of the payee by causing the
rights contained in the instrument to lapse, the mere fact of antedating or postdating an
instrument does not make it invalid.
 UINT SIX
LAW OF BANKING TRANSACTION
6.1. Deposit of Funds
❖ A deposit of funds is a contract whereby a person agrees to deliver and transfer the ownership of
specified amount of money to a bank which agrees to repay them under the conditions agreed
upon in the contract or on the demand of the depositor.
➢ The bank, as the owner of money deposited, has right to use it in respect of its professional
activities, i.e. the bank may lend it to its customers or invest it in areas which are allowed by the
national bank /Art 896 of the Commercial code/.
➢ The contract of deposit of funds is almost identical to contracts of loan of money or other fungible
things.
➢ However, where the deposit relates to “coins and other individual monetary tokens” and where
there has been an agreement that they shall be refunded to the depositor in kind, the bank does not
acquire the right of ownership and hence cannot dispose of such items.
➢ The contract of deposit of funds results in the opening of an account in the name of the depositor
by the bank in which the latter enters all transactions made with the depositor. The bank credits
the account of the depositor with all deposits made by the depositor and debits the account where
the depositor makes withdrawals or order payments to third parties. (Art 897 of the commercial
code).
➢ The type of account opened may either be:
• Current account in which the depositor has the right to dispose of or placed the deposit at sight
or on demand. This type of account also is a check operated account, i.e., the holder may
demand repayment of part or the whole of the deposit by drawing a check on the bank payable
to himself or a third party. As the repayment may be demanded at any time, this type of deposit
does not bear interest.
• Saving account, which is interest bearing and the right of the depositor to demand repayment,
may be limited. The insured may be prevented from withdrawing an amount which is greater
than a certain amount of money within a certain period or to give notice of withdrawal (Art
897, 988 of the commercial code).
➢ However, a contract of deposit of funds does not entitle the depositor to demand withdrawal of an
amount that is grater than the balance in his favor in the account. In other words, the right of the
depositor to demand repayment is limited to the amount of money held in account in his favor
and he does not have the right to overdraw his account without a special agreement to this effect,
which is one form in which banks give loan to their customers (Art 899,945 of the Comm. Code
and Art 2471 Civil Code).

6.2. Hiring of Safes

➢ Acontract of hire of a safe is defined as a contract whereby a bank agrees to place at the disposal
of the hirer a safe or a compartment of a safe for a specified period of time on payment of a rent
or take charge of their customers. The bank under this transaction has the duty to prepare a room
where the safes are to be kept called a strong room and prepare safes for the hirer, and take the
necessary measures to ensure the up keep and safe custody of safes.
➢ However, the bank is under no obligation for the deterioration or damage of the contents of the
safe. A person may hire a safe in a bank to deposit valuables such as gold, silver, diamond
(jewelries), important documents such as title deeds, insurance policies, wills, inventions and
works of art.
✓ Such deposits are special in nature and thus do not fall under the general category of banks’
deposit.
✓ The acceptance of valuables for safekeeping from their customers is one of the essential, though
subsidiary, services of banks.
➢ Banks deposit their customer’s values in either of the following two ways:
1. By accepting the valuables for safe-custody; banks usually place the valuables in their safes
together with other deposits. This service is known as ‘safe - custody’.
2. By hiring out safe deposit boxes to their customers; in safe deposits or hiring of safes the bank
and the customer execute a contract specifying the conditions on which the safe will be hired
the contract includes the customer's duty to pay rental charges and the method of payment.
6.3. Bank Transfer
❖ Bank transfer is one mode of transferring money from one account to another upon the written
and signed order of the transferor, and a means of performing money obligations (Art. 903 of the
commercial code). That means a bank transfer is a transaction whereby the bank, upon the
written order of the depositor /transferor, debits the account of the transfer and credits the
 account of another depositor/the transferee with the amount specified in the instruction or
transfer order.
➢ In cases where the intended beneficiary of the transfer does not have an account of his own,
transfer may still be made through the account of another person. As a result, it is always a
secondary transaction by which the debtor performs his obligations by payment of money.
➢ Transfer order represents one form of demanding repayment by the depositor. Hence the transfer
can instruct the bank to transfer an amount which does not exceed the balance of his account.
Thus, the transferee or the beneficiary of the transfer shall acquire the right of ownership/title/ to
the money to be transferred at the time when the bank debits the account of the transfer.

6.4. Discount
➢ Discount is a contract whereby a bank agrees to pay to a holder of a commercial instrument or
security having a future date of payment an amount which is lesser than its actual value, against
the surrender of the instrument and the undertaking to repay the value of the instrument by the
holder where payment is not made at the maturity of the instrument.
➢ A bank discounts a commercial instrument for consideration, which is the difference between the
value of the instrument and the discounted amount paid by the bank to the holder (art. 941 of the
commercial code).
➢ The amount of commission and interest charged by the bank which discounts the instrument shall
be calculated by taking into account the time remaining until maturity of the instrument and the
value of the instrument respectively.
➢ The bank, which discounts a commercial instrument or a security, shall acquire all the rights of
the beneficiary of discount on the instrument including the right to demand payment from the
person or persons who are liable on the instrument. In addition, where the bank receives the full
value of the instrument at maturity, the obligations arising out of discount shall be extinguished.

6.5. Credit Transaction

➢ A credit transaction or documentary credit is a credit provided to persons engaged in foreign trade
particularly importers who need to pay the price of goods in foreign exchange. This type of credit
is required because it is only banks which are allowed to handle and deal in foreign exchange and
importers are required to pay the price of goods imported from abroad through opening letters of
credits.
➢ So an importer who intends to import goods in to the country has to apply to a bank to open a
letter of credit in which the seller of the goods is the beneficiary. Where the bank accepts the
application of the importer, it opens the letter of credit equivalent to the price of the goods and
transmits or communicates it to its branch (if it has a branch at the place where the seller is
situated) or to a bank with which it has a correspondence.
➢ The correspondent bank, which has received the letter of credit, shall notify the seller/beneficiary
of the credit. And the correspondent bank shall pay the price of the goods to the beneficiary of the
credit after receiving documents representing the goods such as an invoice, a bill of lading, a
packing list and an insurance policy covering risks associated with transportation and after
confirming that the documents presented by the seller confirm with terms and conditions of the
credit.
➢ The payment may also be made to third parties such as holders of bills of exchange to whom the
right to receive the part or the whole of value of the letter of credit is transferred. The
correspondent bank which has paid the agreed amount to the seller or third parties to whom the
right to receive payment is transferred, shall send the documents it has received from the seller to
the opening bank and the opening bank will hand over these documents to the importer after
receiving the amount equivalent, in Ethiopian Birr, to the amount paid to the seller, interest and
service charge (commission) for the service provided.
 UNIT SEVEN
LABOR LAW
7.1. Contracts of Employment
❖ Employment relation is established through a contract of employment and it shall be deemed
formed where a person (the employee) agrees, directly or indirectly, to perform work for and
under the authority of another (the employer) for a definite orindefinite period or piece work in
return for wages.
❖ The elements of this definition are the following.
1. Agreement:The definitional elements of an employment contract indicate that agreement is
the basis for employment relation and this automatically excludes forced labour from the ambit of
employment relations. Hence a person cannot be compelled to enter into an employment relation.
Thus in this sense it is a voluntary engagement.
2. Performance of work:The other element under the definition is the agreement from the
side of the employer is “to perform work for of the employer”. The employee will be required to
render personal service. In this sense, the employee is committing him/her/self to render personal
service for the benefit of the employer.
3. Under the authority of the employer:The employee will be required to render
the said service within the frame work of the instruction of the employer. This in effect means the
employer will possess the prerogative to direct, supervise and control the manner and performance
of the employee.
➢ Consequently, the employer will have the power to determine what work to be done; when to be
done; where to be done; how to be done and with whom to be done.
➢ However, the authority granted to the employer over the employee is not meant and intended to
establish a master and servant relationship. It should be within the framework of the terms of the
contract that the scope of the authority of the employer over the employee will be determined.
4. Length of employment:As regards to duration, a contract of employment could be
entered into either for definite period (for six months, for one yearetc), or for indefinite period (i.e.
for the life of the company).
5. Wage:As the employee is committing himself/herself to render personal service for the benefit
and under the authority of the employer, the employer will have a corresponding duty to perform.
It will be expected and required to pay wage to the employee. Hence employment relation is not a
pro bono service rather than it is a service in return for wages.
➢ The mode of payment for wage could be in cash or in kind though ordinarily payment is effected
through cash. As regards to the interval of payment, it could be in daily, weekly, bi-monthly,
monthly etc. basis or it could be assessed on piece rate. The manner or the mode of payment will
not have any effect on the relationship of the parties.

7.2. Formation and terms of Employment

❖ Individual employment relation, means is a contractual relation between an employee and his/her
employer in their individual capacity. As regards to employer for purposes of labour law, he/she
is any natural or legal person which is engaged in any lawful activity, be it profit making or
otherwise; whereas employer under the civil service is a status assigned to an exclusively federal
legal organ established by a legal instrument and fully or partially financed by government
budget.

➢ The peculiar features of employment relation under the labour law are that the legal instrument
is limiting itself towards stipulating minimum conditions of labour providing sufficient room for
 flexibility for further bargain by the parties either through contract or collective bargaining.

➢ As regards to forms of contract, the labour law regime in principle does not require any special
form for contractual validity. It is under exceptional cases that it requires written form.

Once a contract of employment is duly formed, the parties are expected to spell out their respective
rights and obligations under the contract exhaustively. The duty to provide work and the agreed
wage to the employee is among the most important obligations of the employer. On the other hand,
the employee is duty bound to provide personal and faithful service with due diligence.

The principle of non-discrimination among employees on the basis different protected grounds has
been strictly regulatedunder the labour law.

As the main element in a contract of employment has been the consent of the parties to the contract,
they are at liberty to modify the terms of their contract and to suspend it if and when the need arises
so long as their consent have been externally and clearly manifested as required by the law.
Suspension is a situation where the employee will not be required to provide service to the employer
and the employer will not be obligated to pay wages and other benefits to the employee.
Nonetheless, their contractual engagement remains intact.

➢ A contract of employment may be suspended for a variety of reasons. Some of the grounds are:
-Voluntary arrangement of the parties;
-Societal interest;
-Due to reasons beyond the control of the employer;
-Due to disciplinary reasons.

➢ Consequences of expiry of period of suspension:Normally as soon

as the duration for suspension expires, the employee will be reinstated to his/her previous
employment. But there may also be circumstances where suspension may be transformed into
termination. For instance, in case of disciplinary suspension (e.g. if the outcome of the
investigation shows a serious misconduct attributed to the employee), the contract of the
suspended employee may be terminated.

7.3. Work of Employee-Contractual Duties

ObligationsofanEmployer
✓ Provideworktotheworkerinaccordancewiththecontractofemployment
✓ Providehimwithimplementsand materialsnecessaryfortheperforamanceofthework;
✓ Paytheworkerwagesand respecttheworker'shuman dignity;
✓ Takeallthenecessaryoccupationalsafetyandhealthmeasuresandtoabidebythestandards
✓ Cover the cost of medical examination,
oftheworkerwheneversuchmedicalexaminationisrequiredbylaworthe appropriate authority.
✓ Keep a register containingtherelvantparticularshereofweeklyrestdays,publicholidays and leave
utilized by theworker,healthconditionsandemploymentinjuryoftheworker;
✓ Uponterminationofacontractofemploymentorwhenevertheworkersrequests;
✓ Providetheworker,freeofcharge,witha certificate stating
thetypeofworkheperformed,thelengthofserviceandthewageshewasearning;
✓ Observe collectiveagreement,workrules,directivesandorders issued in accordance with law.
ObligationsoftheWorkers
✓ Performinpersontheworkspecifiedinthecontractofemployment;
✓ Followinstructionsgivenbytheemployerbasedonthetermsofthecontractandworkrules;
✓ Handlewithduecare all instruments andtoolsentrustedtohimforwork;
✓ Reportforworkalwaysinfitmentalandphysicalconditions;
✓ Giveallproperaidwhenanaccidentoccursoranimminentdangerthreatenslifeorpropertyinhis place
of work without endangering hissafetyandhealth;
✓ Informimmediatelytheemployeranyactwhichendangers himself or his fellow workers
orwhichprejudicetheinterestsoftheundertakings;
✓ ObservetheprovisionsofthisProclamation,collectiveagreement,workrulesanddirectivesissued in
accordance with the law.

7.4. Wages and Working Conditions to Employee

➢ Unlike most contractual engagements where the parties to the contact are left alone to determine
the terms of their contractual relation, employment relation has its bench marks (the so called
minimum working conditions. Because as employer and employee are not on equal bargaining
strength, leaving them alone to define their terms of contract failed to bring about equitable out
come.
➢ Most provisions of minimum labour conditions are related, but not limited, to prescribing
minimum wage;
✓ Limiting daily/weekly working hours;
✓ Provision of paid leaves;
✓ Employment security;
 ✓ Maintenance of safe and healthy working condition and
✓ Compensation for employment injury.
7.5. Termination of the Employment Contract

❖ Under the Labor Proclamation grounds of termination could be categorized into the following:
• Termination by law
• Termination by the agreement of the parties
• Termination at the initiation of the employer-(dismissal)
- With out notice or summary dismissal
- With notice or ordinary dismissal
-Group termination or lay off
• Termination at the initiation of the employee-(resignation)
-Resignation with notice/ordinary resignation
-Resignation without notice (constructive dismissal)

Effects of Lawful Termination

❖ Once a contract of employment is terminated in accordance with the stipulation of the law and
the parties are separated for good, there will be some consequences which will follow the
termination. Most of the consequences are attached with the ground for termination while few
others are available to all terminations.
These are the following:
• Certificate of Service
• Payment instead of unutilized annual leave
• Severance payment
• Compensation:Employees whose contract of employment has been terminated due to
“the permanent cessation of operation of the undertaking because of bankruptcy or any other
cause” are entitled to compensation.

Business Law Handout/Note

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