Business Law

Unit one

Nature ,classification and function of law

Introduction

Dear learners, in the very beginning of this course, it is quite compulsory for you to have
understanding and basics of business law since neglect/ignorance of law has no excuse.
In this unit, we will deal with introductory aspects of what is law, features law and how
issues related to law are came in to existence.
Learning objectives:
At the end of this unit, you will be able to:-
 Explain the definition of law

 Discuss features and functions of law

 Classify law among different categories

1.1- NATURE OF LAW

Definition
The word “law” is difficult to define, particularly as it is used in many different ways. It
contains, however, the concepts of orderliness, universality and objectivity. It is
concerned with behavior and not with causes, and either contains an element of
inevitability, e.g. scientific laws, such as the laws of gravity, or of sanction, e.g. divine
laws. Some philosophers have postulated the existence of natural law by which they
mean the Law of God which regulates the actions of mankind. This concept is often
known as the principles of natural justice.
In the narrower concept of law, there must be a set of rules which can be applied
objectively with someone to enforce them. There have been many attempts to put these

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into a workable definition, some more successful than others. One of the better is that of
Salmond:
“Law consists of any principle which is recognized and enforced by the courts in the
administration of justice”. Another, which is possibly superior to that of Salmond, since
it has a slightly wider application, is that of James:
“A body of rules for the guidance of human conduct, which are imposed upon and
enforced among the members of a given state”.

1.2-Features of Law
The following are features that make law different from some mores and other forms of
social control.
i-Law is obligatory
It is repeatedly stated that laws are enacted for public good. To attain the desire goal the
law has to be obeyed by everyone. Unless specially made to or for observance of special
category of people, the law binds every one. It points out how we behave. And it is
because of this fact that one feature of law is being it obligatory.
ii- Law has to be made by competent authority (the parliament)
An organ making law shall be empowered with legislative power. As stated in the article
55 of the present constitution, the house of peoples‟ representatives makes laws
governing the Ethiopian people. Each of the state has also their law making organ. Laws
that are in acted by the state organ bind only the people within the jurisdiction of the
same state. Law making function may also be exercised through delegation. As a result
executive organs sometimes make laws. In Ethiopia, at present regulations and other
enactments subordinate to the proclamations are being made by executive organs through
delegations. The parliament may not have time to deal with subordinate rules applicable
to every office or authorities. Law making power is shared through the process known as
delegation.
iii-Every law is backed by sanction or has organized enforcement machinery.
Sanction motivates enforcement of laws. Sanction is punishments or fine that the law
imposes if subjects or low fail to obey the law. If you trespass someone‟s boundary, you
know that legal action would be taken against you and you would be punished. If you fail

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to pay tax or committed forgery, you may be sued and subjected to fine or imprisonment.
In fear of these remedies of non observance of law you obt to be abided by the rules of
law. This is specially true for individuals who are not governed by moral considerations.
-A law is established in performance
In most instances,laws are inacted for undefined period of time. The Ethiopian civil code
for instance,was inacted in 1960 and still works. Law may be modified to suit changing
situations and may be altered whenever necessary. Law may also enacted to regulate
temporary situations.

Do you know about a state of emergency? Discuss with your colleagues.

When a country faces a sudden social disorder or war, the highest organ of government
may declare state of emergency. You may consider this temporary and special order. In
most instances, laws are permanent subjected to modifications.
In addition to the above basic features of law,the other features that should be taken in to
considerations are:-
 The law has to be applicable to the people in the same situations

 The law has to be specific

 There shall be law enforcement institution

1.3-Functions of law
You may heard that every individuals are equal before law. Do you agree or disagree? To
give you illustrative fact think life without law, people without law, nation without
law, Globe without law
Now, It might not necessary to tell you about the function of law.
The primary function of law is maintaining peace and stability. The law attains this by a
number of specific functions. These are:-
 Dispute resolution

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By limiting the extent to which one exercise his/her right,the law acts as a fence by
setting boundaries to give resolution of dispute between the parties.Also by putting legal
sanctions avoids chaos.
 Protection of property

 Preservation of state

1.4-Classification of Laws
Different scholars classify law from different perspectives. The following are specific
classifications of law based on the different nature.
 Imperative Law

These are rules of action imposed on men by authority, e.g. by the state.
 Physical or Scientific Law

These are rules which formulate the uniformities of nature, e.g. the law of gravitation.
You can distinguish them from man-made laws, in the sense that they merely state
observations on a state of affairs that already exists.
 Natural or Moral Law

These are rules formulating the principles of natural justice. This conception of law is
derived from Greek philosophy and Roman law, and has found more favour with
Continental jurists than in English jurisprudence. It overlaps to some extent with physical
or scientific law. In the English language, law and justice are two separate words,
showing that we recognize them to be two separate things – a distinction that is not made
in most other languages.
 Conventional Law

These are rules agreed upon by persons for the regulation of their conduct towards each
other. Agreements entered into by, for example, the parties to a contract or members of a
company (who agree to be bound by the rules of its Articles of Association) are
enforceable under the law of the land. Other agreed systems of rules, e.g. the rules of a
football club or the laws of chess, may not be enforceable by law.

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 Customary Law-these are rules of action embodied in custom.

 International Law

These are rules which govern sovereign states in their relations with each other.
 Civil Law

This is the law of the state, as applied in the state‟s courts of justice.
 Criminal and Civil Liability

In essence, it can be said that a crime is a wrong against the state, while a civil wrong is
one
against an individual.
You should note the following major distinctions:
- State Action and Private Action
In the case of a crime, whilst under certain circumstances an individual may prosecute,
the prosecution will normally be brought by the state. In a civil wrong, such as breach of
contract, the injured party may bring an action against (or “sue”) the party liable, and
may recover damages or other forms of satisfaction.
- Redress and Punishment
The purpose of a civil action is to redress a wrong, whereas the aim of a criminal
prosecution is to punish the wrongdoer, to prevent him from repeating his crime and to
discourage others from committing similar crimes.
- Indictment and Writ
Criminal proceedings are initiated by indictment or summary procedure, whereas civil
proceedings are commenced by action resulting from the issue of a writ. A fundamental
difference thus exists between criminal law (dealing with crimes) and civil law (dealing
with civil wrongs) and each branch is, in general, administered by different courts on
different principles.
Criminal law is concerned with offences against the state, i.e. crimes such as murder,
housebreaking, theft. The more serious criminal cases are dealt with by a judge and jury;
less serious offences (the overwhelming majority) are dealt with by magistrates. The two
parties are the prosecution and the accused.

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Civil law is concerned with private litigation, e.g. breaches of contract, disputes
concerning property. The complainant issues a statement of claim, setting out the facts he
alleges against the defendant and asking for damages or other remedy. The defendant
puts in his defense to the allegations of the complainant. The case is then tried by a judge
and jury, or by a judge sitting alone, without a jury.
Today, there is normally no jury in civil cases, unless one of the parties makes special
application that a jury should be summoned. If there is a jury, it decides the facts of the
case and the judge decides the law. The judge then, if the jury has found for the
complainant, will make the appropriate order, and usually awards the complainant his
costs. It is the jury, however, which fixes the amount of the damages. If the case goes in
favor of the defendant, the judge will normally award the defendant his costs to be paid
by the complainant. Should the judge be sitting alone without a jury, he decides both fact
and law, the amount of damages, and deals with all matters.

The Set of Rules

Law, then, must consist of a set of rules which are known or readily discoverable by
those who must obey them. It is, of course, a maxim of English law that “ignorance of the
law is no defense”. However, this does not mean that each citizen is expected to know all
the rules which are in force which is clearly impossible – but that knowledge of them is
available, since they are all published. The citizen, therefore, must have a general idea of
the principles upon which English law is built, e.g. rights of property, person, contract,
and he must be prepared to consult an expert in law for finer points, when necessary. A
permitted defense of ignorance of the law would, clearly, make the administration of
justice impossible.
Objectivity
“No man can read the thoughts of another” is a principle of wide application in law.
Clearly, no authority can impose sanctions upon the thoughts of its subjects, although in
some societies in the past this has been attempted. The law will recognize motives but
only as far as they are apparent and can be imputed from the actions following them. In
other words, it is with actions, and not with thoughts and feelings, that law is concerned.
Enforcement

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It is essential, if law is to operate efficiently, that it should operate only within an area
controlled by an effective government. This may vary for different laws, since there may
be different authorities operating within the same area, e.g. state law and federal law in
the United States of America, and bylaws of local authorities in England – but,
nevertheless, the principle of territorial limits is preserved. If a government loses control
of an area of its territory, in that portion its law will not prevail. It is the duty of the
government of the area concerned to make its laws effective by establishing judicial
machinery for the investigation of alleged breaches of the law and for the enforcement of
the law by sanctions, i.e. penalties or rewards designed to influence the human will to
conform to the law.
Impartiality
Although it is not an essential component of law, in most civilized countries it is regarded
as fundamental that the rules of law should apply to all citizens alike. This principle of
impartiality is one of the principles of natural justice which has influenced English law in
particular.
The Rule of Law
The rule of law is an essential doctrine of the our constitution. It is not a written code of
rules but a general principle implicit in the common law which the courts will apply,
unless some statute can be quoted modifying its application. It has the following
important aspects:
(a) No person can be punished except for a definite breach of the law, established in the
ordinary law courts of the land.
(b) No person is above the law and everyone must bear the legal consequences of his own
acts, i.e. there is equality before the law.
1.5- SOURCES OF LAW
Unwritten Law
- Common Law
The common law, which was originally based on the merging of the various local
customary laws especially in England as a result of the decisions of the royal judges. In
fact, in the law report of Henry IV in the 15th century it is said:
“The common law of the realm is the common custom of the realm”.

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It is therefore unwritten, since it depends originally upon a judge's interpretation of the

customs of the realm. When we come to discuss the importance of case law in the
English judicial system, we shall show that the decisions of judges are, in fact, binding,
but this does not invalidate the fact that the basis of common law, which has also
absorbed mercantile law and some canon law, is essentially unwritten, although cases
heard in the courts appear in written law reports. The reports only relate the unwritten
law. You should note, at this point, that the expression “common law” has come to be
used in four distinct senses, as follows:
- Historically, as above, to denote the body of law common to all England that arose to
supplant the previous local systems of law.
- As opposed to equity (see below).
- As opposed to statute law, also considered below.
Thus, in this sense, it is sometimes said that a certain rule of common law was modified
by an Act of Parliament.
- To mean the whole body of English law, including equity and statute law, as
distinguished from any foreign system of law. Thus, we frequently speak of “the
common-law countries”, meaning England, the USA and those Commonwealth countries
which have adopted English law, especially when we wish to contrast them with
European countries, such as France and Germany, the legal systems of which have been
strongly influenced by Roman law. Just as the Romans had their “jus civile” as the basis
of their law, so English common law lies at the foundation of the English legal system.
The law of torts is almost wholly based upon the common law, as is a good deal of
English contract law. The common law has played its part in the development of the
complicated system of English land law, and has covered departments of public law like
constitutional law.
- Equity
Like common law, equity is also based on judicial decision, and not upon written rules. It
originally stemmed from the Chancellor‟s interpretation of what was fair and just
according to his conscience and, while in time it became rigid, it was originally flexible.
Its basis is, again, unwritten.
Written Law

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We have not yet discussed statute law, because it was a later development than common
law and equity. It is true that, from Norman times onwards, decisions of the King-in-
Council had the effect of law, but the promulgation of new laws was very rarely carried
out, and Magna Carta (1215) is usually regarded as the first published statute.
A statute is a written law passed by the approved legislative process of the state, i.e.
nowadays by the Queen-in-Parliament, and it supersedes any other forms of law. Thus,
statute law can override both the common law and equity, since it is enacted by the
sovereign power and is therefore superior to custom and judicial decision. Here, an
important distinction must be made between “the law” and “a law”. The former is the
whole body of law, as defined at the beginning of this study unit, while “a law” is a
written statute or an order made on the authority of a written statute. Thus, “a law” refers
only to statute law. You need to understand this distinction clearly, since it sometimes
serves as a basis for examination questions.

1.6- Unit Summery

In this chapter, we have gone through definition, function, classification and source of
law. Law could be defined as a body of rules for the guidance of human conduct, which
are imposed upon and enforced among the members of a given state. Of course there is
no universally accepted definition for the term law.
Law has its own distinct feature. The basic features of law are:
 Law is obligatory

 Law has to be made by competent authority (the parliament) and every law is
backed by sanction or has organized enforcement machinery

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Law serves the society in different manner. The basic functions of law are:-
 Dispute resolution

 Protection of property

 Preservation of state

Law could be classified to different categories based on its nature or features. We have
for example customary law, criminal law, international law etc. The team/central idea of
the different division varies based on the classifications.

1.7-Self test exercises

1-Write at least four features of law.

2-what are the primary functions of law?

3-Discuss about rule of law

4- what does State of emergency mean?

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Unit II

The Law of persons

Introduction

Dear learners, in this part you are going to see what a person is from legal perspective of
having, exercising different facts. You may familiar with the term person to mean
individual. Do all individuals are persons? We shall see it together by referring to our
articles of civil right.
Learning objectives
After completing this unit, you will be able to:-
 Define the term person

 Distinguish legal and artificial person

 Compare and contrast personality of physical and legal person

 Discuss attributes of legal personality

 Identify moments of acquisition of personality of physical persons

 Explore legal safeguards the law makes available to incapable person

2.1-Definition of person
By the term person, ordinarily we refer to physical person or individual. In this case we
all are physical persons or natural persons. In addition to physical person, the law
personifies some entities such as organizations, associations etc. After all the formalities
are satisfied organizations are legal by law. So, unless otherwise determined by the
context, the term person means both human beings(physical person) and legal persons
created by individuals(artificial person). This means, for all legal proposes, legal person

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are supposed equal to the physical persons. Physical person can do whatever human
beings can perform.
Legal (juridistic person) do have their own names and separate legal existence. Juristic
person enjoy effects of personality by the help of physical persons that act through a
representative capacity. Thus the term person embraces legal and physical person.
2.2-Attributes of legal personality
Personality distinguishes people and legal persons from other things. Animal and other
things or organizations having no legal existence cannot be responsible for what they do.
Some of the consequences of being a person are:-
i-Capacity to sue or to sued
To sue means to bring legal action demanding legal remedy. For instance if an animal say
a dog bites you ,you cannot sue a dog because it lacks legal personality. On the other
hand if an organization performs bad on you,you can sue the campany and on the other
hand if you do some evil to one organization,the organization can sue you. This is
because of the presence of capacity to sue and to be sued.

ii- Capacity to own property

iii- Capacity to enter in to contractual relationships
Contractual relations are relations in which a person promises to do, to give, or not to do
a given task to the other.

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2.3-personality of physical persons

2.3.1-Acquisition of personality
Art 1. Of the civil code, deals with the moment at which a person acquires personality. It
states; human persons are subject of rights from birth to death. Personality of physical
person‟s begins on birth and ends when they die. As stated in the article 2 of the civil
code, birth by it self is not sufficient to confer the personality. In order to be considered
as a person, the child shall be born alive and viable.
The exact time at which the child is said to be born is very important as he/she acquires
legal existence from that moment. A child may be born after full 9 th month or below that.
In this regard, it is not the time that takes the child in the mother womb that matters, but
birth. On the other hand, birth alone, however is not sufficient. The new born child shall
be born alive and be viable. The child may be born dead or die immediately. In this case
the child is not viable. If the child before his separation from his/her mothers womb or
during birth dies,the law regards, it is not viable.

The child shall have the capacity to live. This is to say, the child should be viable.
Viability is the capacity to live; if the child lives 48 hours after his/her birth ,he/she may
be taken as viable in accordance with Art. 4 of the civil code. If the child lives 48 hours
and dies after that ,he/she acquires personality.

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Exceptionally, where a child dies by external factors before living for 48 hours, she/he
may be taken as viable .If a newly born child dies because of mishandling of a nurse after
his/her birth, the death is caused by external factor. We may consider this kind of death as
a death of person. Art.2 of the civil code provides “ a child to be considered as born and
viewed as a person, the following requirements shall be met.
1-His/her interest shall demand this benefit.
2-He/she may enjoy the benefit if born alive and viable.
A conceived baby to be supposed as a born one,if his interest so requires this state. How
could the conceived baby‟s interest require the baby to be assumed born? Sometimes it
may happen that unborn baby may have interest. Assume unborn baby lost his/her
wealthy father in a car accident,what could seem seccession? This time, we say the baby
has interest and succeed his/her father even though not born.

2.3-Capacity of physical person

Capacity of a person is presumed. That is to say, everyone is considered by law as if
having capacity to enter in to any juridical act. Juridical act are acts producing legal
effect. Therefore unless the law declares certain categories of persons in capable of
exercising acts recognized by law, we may assume capacity(Art.193 and 194 of the civil
code). If a person is declared in capable ,he/she cannot be bound by juridical acts he/she
enters in to beyond the legal power guaranteed by law. Under this section we will see
incapacity and related issues next.

2.3.1-Incapacity

Art.193 and 194 of the civil code focuses on this issue and accordingly incapacity is of
two type. General incapacity, and special incapacity. General incapacity is based on age,
mental conditions of persons and consequence of criminal convictions. Special incapacity
is based on citizenship. For instance certain fields of reserves in Ethiopia is for Ethiopian
nationals only but not for foreigners.

General incapacity

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a-minors
Art. 215 of the revised federal family code defines persons regarded as a minor. It states “
a minor is a person of either sex who has not attained the full age of eighteen years”
These physical persons under the age of 18 are minors. According to the law, minors are
not capable of engaging in commercial or other juridical acts,the acts of transactions are
very important for human exsistance.To make use of such activities,minors should use
minds of capable persons. In matters relating to economic interest,minors may be
represented by tutors.According to Art.219 of the revised family code,where the parents
of the child‟s are alive,both of them are taken as guardians or tutors.Where there is
disagreement,the court determines the tutor or guardian and also according to Art.227 of
the revised family code,where there is no relative,again the court determines.
Minority ends when the person joins the age of majority(becomes 18 years old) or
emancipates.The other is merrage. There is an option to get married at the age of 16 by
the permission of the ministry of justice. Art.311 states” where a minor is married in
accordance with article 7(2) of this code,he shall be emancipated by the sole fact of such
marriage”. A minor may be emancipated by court order as stated in the Art.312 of the
revised family code by the application of his guardian/tutor to the court at the age of
fourteen.
B-person under juridical interdictions
The court interdicts the person by the initiation of some other people.The person to be
interdicted may apply for the interdiction. This may be merely ideal as the person to be
interdicted in most cases may not be able to understand the condition he/she is. In most
cases, the application thus may be lodged by some relatives or a apouse. The court
examining the condition in which the person is, may declare interdiction. From the
moment of interdiction, the person happens to be incapable to enter in to commercial
transactions or other acts producing legal effects. As incapable person may not be able to
understand what his/her advantage and disadvantage is, the hair of the incapable person
may demand invalidation. Art 373(1) of the civil code states,” acts performed by an
interdicted persons in excess of his powers may be impugned in the same circumstances

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as if the had been performed by a minor.” For porpose of invalidating acts of a minor,
you may use analogy of the invalidation of contracts of minor.
As stated in the Art 341 of the civil code,” a person shall be deemed by a low to be
notoriously insane where by reason of his mental condition ,he is an inmate of a hospital
or an institution for insane persons or a nursing home, for the time for which he remains
an insane”. The person may also be under special protection where for his example his
family or other people keep over him a watch required by his mental condition and where
his liberty of moving is restricted, the court may declare invalidation.
Similarly infirm person(persons with physical deformity) may be considered as
incapable. There are persons that may not be take care of themselves, administer their
property because of their physical condition. According to Art. 347 of the civil code,if a
person has entered in to contract during the lucid period,the contract may not be
invalidated unless the person or his representatives proves that the consent of the person
is not free.

C .Legal interdiction

Legal interdiction is a process in which a certain civil rights of the criminals may be with
drawn because of criminal sentence passed on the criminals. The court examining the
behaviors of the criminal,if assumed important,may declare interdicted on certain
matters.A criminal may interdicted for instance not to enter in to some contractual
agreement, if he/she do so,his/her acts may be invalidated by the request of public
prosecutor according to Art.387 of the civil code.

2.5-End of personality

According to Art.1 of the civil code ,physical personality starts at birth and ends on death.
A dead baby cannot be taken as a person. A person to be taken as dead,the death shall be
ascertained by medical testimony. A person may also lose personality, if he declared
absent. As stated in the article 154 of the civil code, “where a person has disappeared and
has given no news of himself for two years, any interested party may applied to the court

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to declare his absence” . If the where about of a person is not known,the court for all legal
porpose assume the person dead and declare his absence. From this time on wards,the
property of the person may devolve up on the heirs.

2.6-Summery
Dear students ,in this chapter we have studies about personality . This could be seen from
two perspectives. That is legal personality and Physical personality. Under legal
personality it is better to distinguish majors from artificial persons(organizations).
Personality distinguishes people and legal persons from other things. Persons has legal
rights and obligations. If you are a person, you have the ability to sue or to be
sued,Capacity to own property, Capacity to enter in to contractual relationships. Every
human could not do this. That is there is incapacity of individuals because of being minor
(incapacity because of age), person under juridical interdictions and due to Legal
interdiction.
2.7-Self test exercises
1-What is the difference b/n physical person and legal person?

2-What are the attributes of legal personality?

3-What makes general incapacity from special incapacity?

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Unit III

Law of contracts
Introduction
Introduction
Dear students, in this part we will see some basic concepts of contract. You may signed a
contract with someone to get performed some activity ; but that contract may be valid or
invalid before law. What distinguishes a valid contract from non valid? The chapter will
broaden your thinking on such and related concepts.
Learning objectives:
At the end of this unit, you will be able:-
 Realize the importance of law of contract
 Explain elements of valid contract
 Discuss procedures of acquiring consent
 Distinguish effects of defect in consent and capacity of contracting parties
 Explain effects of vices of consent
 Discuss the effect of failure to comply with the formality requirement in contract
 Explain important rules of the civil code regulating performance of contract
 Identify exceptional situations in which a contract may be varied
 Analyze remedies of non performance of contract

3.1-Definition of contract
The whole essence of business life is the making of contracts – contracts to perform
work; contracts to buy and sell; contracts to make something; or to employ someone; or
to use something. We must, therefore, know what a contract is, and when we have one.
A contract is an agreement between two or more people. Every contract is an
agreement but not every agreement is a contract. Two people agree about something to be
done. They are called “the parties”. First, the subject of their agreement may be such that
neither of them has the remotest intention that any legal consequences should flow from
it. For example, you invite someone to dinner and he says “Yes, I would love to come”.
You have an agreement. However, if he just does not turn up, neither of you would

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expect to hurry round to court and sue for the cost of the wasted food! So, the first
essential of a contract is that the parties should intend their agreement to have legal
consequences. In the second place, the agreement reached may have certain aspects
about it which make it such that the law will not enforce it. In other words, although it is
a contract, it is not a valid contract.
Article 1675 of the civil code provides
“a contract is an agreement whereby two or more persons as between themselves create
,vary or extinguish obligation of a proprietary nature.” This definition shows what the
nature of Valid contract should embraces.
Essential Elements of a Valid Contract
In order that an agreement can be a valid contract which the law recognises and will
enforce, it must contain certain essential features. We shall be discussing them all in
much greater detail later, but at this stage you should know what they are.
(a) There must be agreement between the parties, or a meeting of minds. This is called
“consensus ad idem”.
(b) Usually, there must be “consideration” present – that is, something of value must be
given in exchange for a promise.
(c) There must be an intention to create legal relations.
(d) The parties must have legal capacity to contract.
(e) There must be no circumstances surrounding the contract which make it
unenforceable, void
(i.e. as if it had never existed), voidable, or illegal.
Formation of Contract
Article 1678 of the civil code states:-
No valid contract exist unless:
a-the parties are capable of contracting and give their consent sustainable at law
b-the object of the contract is sufficiently defined and is possible and lawful
c-the contract is made in the form by the law ;if any
If the requirement of this article are met, the article binds the contacting
parties(art1731). Therefore, a valid formed contract has to be respected by all
contracting parties.

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3.2-Capacity of contracting parties

Contracting parties must be capable enough that means incapability by one party creates
impact to legality of a given contract. There will be legal interference to protect the
incapable persons. As minor‟s faculty of understanding is not yet developed or the faculty
of understanding of insane or persons under juridical interdiction is collapsed, these
people may easily be cheated. There economic and other interest may easily be drawn by
some deceitful people. People under legal interdiction have no physical or mental
deficiency but the law supposed them incapable as punishment for their undesired
behaviors.
The incapable if enters in to contract, beyond his or her legal power, may demand the
invalidation of the contract. If not, a tutor or heir can demand invalidation of the
contract. If the contract is invalidated, the incapable person will be free from contractual
obligations. If the contract is invalidated, things or money given under the guise of the
contract shall be returned back.
Consent
a-Communication of Offer and acceptance
In order to be effective, an offer (offeror) must be communicated to the offeree or, at
least, he must know about it. This is not quite as obvious as it sounds, because, if a person
does something in ignorance of the offer, he can neither reap the benefit nor be bound by
any obligations.
Art 1681- Form of an offer and acceptance
1-offer or acceptance should be made orally or in writing or by signs normally in use or
by conduct such that in the circumstances of the case, there is no drought as to the parties
agreement.
2-the party who makes an offer may stipulate a special form of acceptance.
b-Duty to accept
In certain exceptional cases, the law dictates a contracting party to accept the offer. As
there is no options to refuse acceptance, mere receiving of an offer creates contractual
engagement between the offeror and offeree. Article 1683 of the civil code provides:
1-No acceptance shall be required where a party is bound by law or by concession
granted by the authorities to enter in to a contract on terms stipulated in advance.

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2-In such a case , the contract shall be completed up on receipt of the offer.
A party may also bound to accept an offer if bound by a concession granted by
authorities. This is different from law. Authorities may permit certain persons to enter in
to contracts without the need to communicate an acceptance. With order given by public
authorities therefore an under taking may be compelled to accept an offer without
communicating acceptance. In such a case too mere communication of an offer brings
contractual relationship.
C- pre-existing business relationships
Where contracting parties are already in the contractual relationship and if one of the
contracting parties make an offer in relation to the contract already existing, the offer
may be accepted by silence. As that of cases of duty to accept if an offer is made on the
basis of pre-existing business ,communication of acceptance is not a requirement.
Art.1684 of the civil code regulates the process of formation a contract where there is
pre-existing business relationship.
Art.1684
1-An offer to continue or vary an existing contract or to enter in to subsidiary or
complementary contract may be accepted by silence.
2-Such shall be the case where the offer is made in special document in forming regarded
as accepted if no reply is given within a reasonable period of time.
An offer to be accepted by silence has to satisfy any of the following requirements.
i-it may be continue the existing contract. If an existing contract is going to an end ,any
one of the parties may propose for ,continuation of the contractual relationship.
A contracting party may demand extension of the contract. If one subscribe a newsletter
for a year, before laps of the time, he/she has subscribed him/her to continue the
subscription for the coming year. If the publisher after accepting the prescription keeps
silent, the silence may be taken as acceptance.
ii-If you make an offer to vary the existing contract, the offer for variation may be
accepted by silence.
iii-the offer may be related to a complementary of subsidiary contract.

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Complementary contracts are contracts that complement an earlier contract. Subsidiary

contracts on the other hand, are contracts supplementing and dependent on the earlier
contract.
iv-the offer related to any one of the aforementioned cases to be accompanied by a
written document.
D-General terms of business
The concept of general terms of business has its own legal recognition. Art. 1686 of the
civil code express instances in which general terms of business may regulate the
relationship of parties in Ethiopia. See the following facts.
-Ethiopian airlines has no time to negotiate with you.
-When you open a bank account, you follow what the bank employee directs you or
follow instruction on papers.
-Different laundries have ground rules at the back of their receipt paper, not to lose your
paper when you turn back and the like. These are the general rules, pre-determined
obligations of business given to customers to obey and this governs business transactions.
Art.1686 of the civil code a general term to have a binding effect, the following
requirements shall be met.
a-where the offeree knows and accepts the obligatory terms or
b-where the terms are prescribed or approved by public authorities
Art;1685-invoices
Particulars entered by a party in an invoice shall not bind the other party unless they
conform to a prior agreement or have been expressively accepted by the other party. Any
variation in terms enshrined in the invoice cannot bind unless the new term is accepted by
the purchaser.
It is clear that contracts may be formed orally ,in writing or in any sign ,if the contract
was concluded before preparation of the invoice, the invoice merely supports the earlier
contract.
E-Declaration of intention
Art;1687-declaration of intention
No person shall be deemed to make an offer where:

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a-he declares his intention to give, to do or not to do something but does not make his
intention known to the beneficiary of the declaration or
b-he sends to another or posts up in a public place tariffs, price lists or catalogues or
displays goods for sale to the public
As the sub article (a) shows,the declaration of intention, not to have binding effect,shall
not be communicated to the person that may benefit from it,the declaration may be taken
as offer.
If I told to you ,I will buy your sisters car by birr 250,000,and told the same thing to your
sister,both does not mean the same. In my speech with you,I am expressing my intention
and in my talk with the owner (your sister),I have declared my intention.
F-Sale by auction
Auction is a declaration of intention where person competing to win the auction are
referred as bidders. The bidders may make offer but there is no obligation to accept it.
Art.1688-sale by auction
1-who so ever offers a thing for sale by auction, shall be deemed to make a declaration of
intention and an offer
2-In such a case ,the contract shall be completed only where the thing is knocked down
upon the last bid being made.
Discuss with your colleague

Suppose, You have lost your son and declare publicly declare to give a reward to any one
who brings your child, how could your promise seen? Is it an offer or declaration of in
tention

See article 1690 of the civil code. As stated in the article:-

1-whoso ever offers to another to enter in to contract and fixes a time limit for acceptance
shall be bound by his offer until the time limit fixed expires.
2-He shall not be bound where his offer is rejected before the expiry of the time limit
fixed.

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 In the above example therefore, your promise is taken as an offer and delivering
the child is an acceptance of the offer.

Withdrawal of offer and acceptance

After a person has sent an offer ,he may change his mind and wish to avoid effects of the
offer or acceptance. Article 1693 of the civil code regulates the process of offer and
acceptance. The article states:-
1-An offer shall be deemed not to have been made where the offeree knows that it is
withdrawn before he knows or at the time when he knows of the offer.
2-The provision of sub-article (1) apply where acceptance is withdrawn.
The process of making withdrawal is also applicable for withdrawing an acceptance. If an
offer or knows the acceptance on or before he/she knows or should know both of the
offer or acceptance simultaneously.
3.3-Defective consent
1-MISTAKE
The subject of “mistakes” in contracts, and how they affect the validity or otherwise of
the bargain, is one of the most illogical areas of contract law. Many of the cases turn on
fine distinctions. As a generalization, if you make a mistake in entering into a contract,
that is your bad luck – you must suffer the consequences. However, there are certain
types of mistake which the law recognizes as affecting the agreement. In some instances,
common law will declare that a mistake has served to nullify the consent, and so made
the contract void “ab initio”, or as if it had never been made. In others, equity will step in
to allow the contract to be rectified or rescinded, or to act as a defense to a request for an
order of “specific performance” of the contract (you will remember that specific
performance is a court order compelling the guilty party to execute the contract according
to its terms).
At common law, there are two basic types of mistake which may serve to render the
contract void . These are common mistake (where both parties have made the error), and
unilateral mistake (where only one of them has made error).
To be defective the mistake must be:-
-fundamental
-the mistaken decisive

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Art.1669-mistake as to the nature or object of the contract

The contract may be invalidated on the ground of mistake where:
a-the mistake relates to the nature of the contract
b-the mistaken party has under taken to make a performance substantially greater or
receive a consideration substantially smaller than he intended.
Common Mistake
Where the mistake is shared by both parties, it may mean that there is no true agreement
or
“Consensus ad idem”. There is agreement of a sort but it is based on a false assumption,
hence,
common law may declare the contract void on the grounds that the agreement is not a
true consensus. There are only a few circumstances where this will apply.
(a) Mistake as to Some Fact Which Lies at the Basis of the Contract
If both parties assume some fact to be true, and that fact is a root condition of the
contract, and it is either false or non-existent, then the contract is nullified.
(b) Mistake as to the Existence of the Subject-matter of the Contract
This, usually, occurs in contracts for the sale of goods. If both parties think they are
contracting for a certain thing, and unknown to both it does not actually exist, then the
contract is void.
(c) Mistake as to Title
This is an uncommon type of mistake but it does occur – not least in examination
questions!
The principle is that, if a man makes a contract in the belief that the subject-matter
belongs to
the other party whereas in reality it is his own property, the contract will be void..
(d) Mistake as to the Quality of the Subject-matter
This category of mistake probably raises the greatest number of problems for the courts.
An ordinary error as to quality will not avoid the contract, although it may well give rise
to an action for damages. In order to qualify as a mistake which will serve to avoid the
contract?
- It must be common to both parties, and

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- It must be such that the quality makes the thing contracted for an essentially different
thing from that which it was thought to be.

(e) False and Fundamental Assumption

This is the last category of common mistake. “Whenever it is to be inferred from the
terms of the contract or its surrounding circumstances that the consensus has been
reached upon the basis of a particular contractual assumption, and that assumption is
not true, the contract is avoided”.
Unilateral Mistake
As we mentioned earlier, this occurs when only one party is mistaken. It is fundamental
that no
contract can validly be formed if offer and acceptance do not correspond. So, if one party
makes an offer which is accepted in a radically different sense by the other, there is no
valid agreement.
However, contracts are construed objectively – so, the test is not what the intention of the
one
mistaken party was but, rather, what would a hypothetical reasonable man have
understood from the words used? Cases can occur when there is so much ambiguity,
whether actual or latent, that no reasonable agreement could be reached. Once again,
these fall into various categories.
Mutual Mistake
If, even after applying the objective test, the parties are genuinely at cross-purposes as to
the subject matter, or as to the terms of offer or acceptance, the contract will be void.
.(a) Mistake as to the Terms of the Contract
A mistake as to the terms of a contract will serve to avoid the contract only if the mistake
is
known to the other party. In this case there is, probably, an element of bad faith, if not of
actual fraud. The normal “objective” test can, therefore, be replaced by subjective
intention. It
must, however, be an error as to the terms, not as to the quality or substance. These latter
constitute motive, and an error in motive will not avoid a contract.

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(b) Mistake as to Person

The next category of mistake is where one party is mistaken as to the person with whom
he has contracted. It is in this area where most confusion arises, and in which the courts
have drawn fine distinctions. When solving examination questions on this subject, there
are two vital questions which you must ask yourself:
“Does the identity of the person with whom the contract is being made matter?” In other
words, is it the intention to contract with that particular person, and no other? And, if
the answer is “yes”, then:
“Is the mistake as to his identity, not as to his attributes” (e.g. solvency; character; social
standing; etc.)?
If the answer to both these questions is “yes”, then, in all probability, the contract will be
avoided if a mistake has been made.
2-Froud
In the case of froud,in addition to the requirements of mistake,the law demands practice
of of some kind that may be conducted by contracting party or third party with intention
of persuading another contracting party to enter in to deceitful contract.Art.1704 of the
civil code declares the effect of froud.
Art.1704-Froud
1-A contract may be invalidated on the ground of froud where a party resorts to deceitful
practices so that the other party would not have entered in to the contract,had he not be
deceived.
2-A contracting party who has been deceived by a third party shall be bound by the
contract unless the other contracting knew or should have been known of the froud on the
making of the contract and look advantage thereof.
3-Duress
If a person is coerced into making a contract by fear for the physical wellbeing of himself
or his immediate family, or for the safety of the goods, or – on rare occasions – for his
economic profits, this is called “duress”. The coercion may be either actual or threatened.
The so-called “contract” is void.

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Duress to the Person

This consists of actual or threatened violence to the person, or imprisonment. It can be
eitherin respect of a party to the contract or in respect of his immediate family. The
degree of threat necessary varies with the physical or mental state of the person
threatened. In other words, the test is a subjective one. If the person was in a state of fear,
whether reasonably so or not, then this will suffice to permit him to avoid a contract he
was coerced into making as a result of the threats of or actual physical violence or
imprisonment. Imprisonment, in this sense, does not necessarily mean being thrown into
gaol. It also means loss of liberty, e.g. by being locked in a room.
Duress of Goods
This is actual or threatened unlawful detention of goods. This type of duress does not, at
common law, entitle a party to avoid a contract entered into as a result of the duress but,
in equity, it entitles him to recover any money paid in order to secure the release of the
goods.
Economic Duress
The threat of loss of profits if a contract is not made is called “economic duress”. It has
only fairly recently been recognised by the law as a possible cause for avoiding a
contract, and the law on economic duress is not yet fully developed.
The proposition is that, if a person is induced to enter into a contract by fear of loss if he
does not agree to the contract, this may constitute actionable duress. However, the degree
of coercion must be substantial.
Article 1706-Duree
1-a contract may be invalidated one the ground of the ground of duress where the act of
duress led a person to believe that he, one of his ascendants or descendants or his spouse
were threatened with a serious and imminent danger to the life, person, honor or property.
2-Duress must be such as to impress a reasonable person
3-the nature of duress shall be determined having regard to the age, sex and position of
the parties

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Art.1707-Duress by third party

1-A contract may be invalidated on the ground of duress not withstanding that duress was
excercised by a person other than the party who benefited by the contract
2-The party who invokes duress to avoid the effect of a contract shall make good the
damage arising out of the invalidation of the contract where duress was exercised by a
third party and the other contracting party did not and should not have known thereof.
3-UNDUE INFLUENCE
Undue influence is said to exist where one person has a special relationship with another
and, as a
result of this relationship, that other is induced to enter into a contract to his
disadvantage. A contract is voidable at the option of the innocent party if it was entered
into as a result of undue influence.
Examples of where such a confidential relationship is likely to exist are:
- Parent and child
- Guardian and ward
- Solicitor and client
- Doctor and patient
- Religious adviser and the person to whom advice is given
Strangely enough, it is not automatically presumed between husband and wife, although
it can be shown to exist. Nor is the above list exhaustive. Any situation where trust and
confidence is imposed by reason of the relationship can be one where undue influence
can apply.These persons are subjected to:
-threat to exercise their legal right
-reverential fear
-unconscionable contracts
Art.1709-reverential fear
1-fear of an ascendant or a superior shall be no ground for invalidating a contract where
no duress where exercised

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2-the provision of sub-article 1 shall not apply where the contract was made with the
person inspiring the fear and such person derived an excessive advantage from the
contract.
Generally speaking for the contract to be free from defect what should be taken in to
consideration and as an element of the contract are: object, form time ,and place of
formation of the contract.
3.4-Void and illegal contracts – A general perspective
For one reason or another, the state may either refuse to assist a person in enforcing
certain contractual rights or it will declare a contract to be null and void. Contracts falling
into these categories are, in some way, tainted. However, the reasons why they are
tainted, and why the state takes or denies the actions it does, cover a very wide range of
situations. A contract to commit murder may have all the ingredients of a perfectly valid
contract. However, quite obviously, the state is not going to enforce it. Can you imagine
the furor there would be if a judge made an order of “specific performance”, compelling a
man to carry out his contract to strangle someone‟s mother-in-law, according to its terms?
At the other end of the scale, a contract may either be only mildly naughty or it may have
no moral taint whatsoever but merely be contrary to some state regulation. A contract to
fiddle your income tax might fall into the former category, and one to sell goods without
having obtained a statutory license into the latter.
I-Objects Illegal by Statute
Statute may declare certain types of contract void ab initio – that is, the contract itself is
illegal and incapable of creating any rights. Certain gaming and wagering contracts fall
into this category.
Gaming and Wagering
The subject of gaming and wagering is extremely complex. However, a short summary is
called for. A wagering contract is one where there must be two parties or sides who both
stand to win or lose on an uncertain event. Buying a sweepstake ticket, entering a coupon
for the pools, or betting on the “tote” at a racecourse, are not wagering contracts. In all of
these, only one of the parties stands to win or lose. Another essential of a wagering
contract is that the parties have no interest in the contract, other than that created by the

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bet. This lets out of the category such transactions as insurance contracts and Stock
Exchange bargains, both of which bear a superficial resemblance to wagering.
II-Objects Illegal at Common Law
Public policy decrees that the courts will not assist parties who have made certain types
of contract. The contract is not illegal to make but its object is illegal. Public policy is an
imprecise concept, and it changes as time goes by. There are, however, broad categories.
(a) Agreements to Commit a Crime, a Tort, or to Perpetrate a Fraud
Plainly, a contract the object of which is to commit a criminal offence cannot be
enforced. However, if an illegal act is committed during the performance of an otherwise
perfectly lawful
contract, it will not necessarily render the whole contract unlawful.
b) Agreements Injuring the State in Relation to Other States
These can either be contracts with an enemy in time of war, or they can be contracts
which are hostile to a friendly state.
(c) Agreements which Tend to Harm the Public Service
Any agreement which tends to harm the public service is contrary to public policy.
Examples are:
- Contracts for the sale of public offices;
- The assignment of salaries from public offices;
- Contracts for a person to use his influence to secure for another a title, a public or
government office, or similar.
(d) Agreements to Pervert the Course of Justice
Contracts under this heading usually comprise agreements not to disclose crimes, or not
to prosecute for criminal offences. They are unenforceable but, in addition, by virtue of
the
(e) Agreements Tending to Abuse the Legal Process
These largely comprise the acts of “maintenance” and “champerty”.
Maintenance is the supporting (usually financially) of litigation in which the person
maintaining has no legitimate interest.

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Champerty is where a person assists in litigation in exchange for a share in any proceeds
gained from it – e.g. a solicitor representing a client for a percentage of the damages
awarded to his client.
(f) Agreements Contrary to Good Morals
Contracts which are for immoral purposes will not be enforced.
(g) Contracts in Restraint of Marriage which Affect the Due Discharge of Parental
Duty
It is against public policy to restrain the freedom of marriage, or to promote for a fee the
marriage between one person and another.
Likewise, agreements for a fee to promote a separation or divorce are unenforceable, or
those to transfer rights and duties in respect of a child from its parents.
(h) Agreements which Oust the Jurisdiction of the Courts
(j) Agreements in Undue Restraint of Trade
These also form a most important category of contracts which are contrary to public
policy but also one which contains fine distinctions. The problem is that, prima facie, any
agreement is void if the purpose of it is to restrict the liberty of a person in the future to
carry on trade with persons who are not parties to the contract – that is to say, to restrain
trade. But, at the same time, a person has every right to protect his interests and his
business from unfair competition. There is an obvious clash between these two
propositions. So, the principle is that a person may restrict the right of another to trade,
only so far and to the extent that is necessary and reasonable to protect his legitimate
interests.
Unconscionable contracts
Sub article (1) of the Art.1710 of the civil code defines the general rule of
unconscionablility as stated below.
“A contract may not be invalidated on the sole ground that its terms are substantially
more favorable to one party than to the other party”
Unconscionable contract tainted by simplicity of mind, senility or manifest business
inexperience may render a contract to be invalidated. This is simple on the ground of
incapacity than simplicity of mind as per Article 1710 of the civil code. So it is necessary
to show Unconscionablity rather than simplicity.

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3.5-Effect of contracts
A validly formed contract is assumed as a law for contracting parties. That is, it governs
the relationship between the parties. Article 731 of the civil code declares the effect of
contract.
1-The provision of a contract law;fully formed shall be binding on the parties as though
they were law.
2-The content of the contract shall be determined by the parties subject to the mandatory
provisions of the law.
3-The provision of this title shall apply to all contracts where such provisions are of a
mandatory nature or their application has not been set aside by the parties.
Contractual terms or obligations may be interpreted in accordance to the rules set from
Art.1732-1739 of the civil code. Techniques of interpretation may be employed where
words or phrases stated in the contract are doubtful. Where words in the contract are
clear, no need for interpretation.
3.5.1-Performance of contractual obligation
Performance is doing a promise obligation. If you agree to sell your house for birr
500,000 and hand over your cash according to your contract, you should handover the
house to the buyer. So the contract itself answers the following questions related to
performance.
-performance by whom?
-performance to whom?
Art.1743-payment to unqualified person
a-payment to a person unqualified to receive on behalf of the creditor shall not be valid
unless the creditor confirms it or such payment has benefited him
b-payment shall be valid where it is made in good faith to a person who appears without
doubt to be the creditor

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Since the subject matter of contract is related to business transaction(good and

services),the contracting parties have to perform their contract lawfully. If one of the
contracting party demands performance, the other contracting party may refuse
performance if any of the following condition is satisfied.
-Where the time of the performance is extended by agreement,unti the agreed time
lapse,the debator cannot be forced to discharge the obligation.
-where the party declaring payment is insolvent,a contracting party may refuse to
discharge his/her obligation
-Where a contracting party in clear terms informs a contracting party that he would not
perform a contractual obligation, the other party can refuse performance
3.6-Variation of contracts
In principle a contract lawfully formed has to be maintained irrespective of change of
market price or economic situation in which the contract is based on. A court cannot
modify terms of the contract to make it suitable to the changed situation. Exceptionally
however,contractual obligation may be varied. For example
-where the contracting parties agree for variation they can do it at any time i.e where the
contracting parties all agree to change their respective obligation, there is no limitation
-where the contract contains an arbitration clause for issues related to variation, the
arbitrators in accordance with power vested on them can vary the terms of the
contract(Art.1765 of the civil code)
-where there is special relationship between the contracting parties the court may vary
terms of the contract
-contracts with the government or public administration may be varied where the
economic basis of the contract was changed because of act or contribution of official
decision of public authorities or government
-terms of the contract may be varied where part of the obligation become impossible
3.7-Non-performance of contractual obligation
We have already said a contract binds the relationship between the parties. This requires
to perform in accordance to their agreement lawfully. In case if there are situation for non
performance,Art.1772 of the civil code states:

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„‟A party may only invoke non performance of the contract by the other in default by
requiring him by notice to carry out his obligations under the contract”
In certain circumstances ,the law dispenses the requirement of giving notice. See the
following points of Art.1775 of the civil code.
a-Where the obligation required from the contracting party is not to do and the party
breaches his duty by doing,the creditor of the assumed obligation may not notify the
party at fault.
b-where the date of performance is compulsory and the debator failed to discharge his
obligation on due date there is no need for default notice
c-where the debater has declared in writing that he would not perform his contractual
obligation, the creditor need not give default notice
d-contracting parties using freedom of contract may avoid the requirement of giving
default notice. If the contract discloses this,there is no need to give default
notice(Art.1775(d))of the civil code.
3.8-Remedies for non performance contractual obligation
Art.1771 of the civil code reveals three remedies for non-performance. These are:-
1-forced or specific performance
2-cancellation
3-damages
Where a party fails to respect terms of his contract, the creditor(the person demanding
performance) may ask any one of the remedies stated.
Cancellation
This could be by :-
I-Judicial cancellation- the court order cancellation depending on the criteria‟s of
art.1785 of the civil code. This based on fundamentality of breach and the requirement of
good faith(the interest of the parties)
ii-unilateral cancellation- this may be possible due to:-
-freedom of contracting parties to cancel their contract
-expiry date of contractual obligation
-where performance of obligation is impossible

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-where a debater declares in writing that he/she would not discharge an obligation he/she
owes an other
Damages/compensation
This is monitory reparation for the economic loss that may happen because of non
performance. If a debater fails to perform contractual obligations because of unexpected
events,he/she may may not be forced to pay damages. The unavoidable and unforeseen
circumstances are called force majeure.
Art-1792 –Force Majeure
1- Force Majeure results from an occurrence which the debator could normally not
forseen and which prevents him absolutely from performing his obligations.
2- 2-Force Majeure shall not exsist where he could normally have seen foreseen by
the debator or when it renders more onerous the performance by the debator of his
obligations.

An event to be force majeure,the following requirements shall be met.

-the event has to be unforeseen
-the event has to prevent performance absolutely.
The following could be seen example of force majeure
-Accidental death of a debater who has agreed to perform contractual obligation
personally
-Enactment of new legislation
-destruction of the subject matter of contract( forinstance if to sell donkey,death of the
donkey, if sell of house fire on house etc)
-war making performance fully impossible

Dear students withregard to damages to the different subject matter of contract the
calculation varies accordingly. To Broaden your understanding you can ask and discuss
with professionals on the sector and with this we came to the end of this unit.
3.9-Summery
In this unit,we have seen about contract law. Contract could be of different ,
contracts to perform work; contracts to buy and sell; contracts to make something; or to

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employ someone; or to use something. Whatever the contract is it should be lawful and
then it serves as a law between the contracting parties. Ofcourse, all contracts are not
neither fully defective, nor fully perfect. This demands correction based of freedom of the
contracting parties or by their good will for their good will. Contract impulses obligation
of performance and not to perform the contract brings to be applied what the law said for
non- performance of contractual obligation usually damages. Of course,there are cases
related to force majeure where unforeseen happened and to ask damages for non
performance is impossible.
3.10-Self test exercises
1-what are the essential elements that need to be satisfied to form a contract?
2-Differentiate offer and declaration of intention.
3-Explain exception to the rule, ”silence does not amount to acceptance”
4-What does performance of obligation mean?
5-What are the three remedies the law provides for non-performance of contractual
obligation.
6-What is the difference between normal and greater damages?
7-Is there any requirement for an event to consider as force majeure? Discuss

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Unit IV
The Law Of Sales
Introduction
Dear students, various special types of contract have additional rules superimposed on the
general ones, which are applicable only to those particular contracts, namely:
- For the sale of goods
- Of agency
- Of installment
-Of insurances
- Of carriage of people and goods by sea, land and air and so on. In this unit we will deal
with law related to sales.
Learning objectives:-
 Distinguish the essential elements of contract of sale

 Distinguish obligation of seller

 Disposes cases involving issues of obligation of seller

 Explain each of obligation of buyer

4.1-Formation of contract of sale

Contract of sale of goods is a contract by which the seller transfers or agrees to transfer
the property in goods to the buyer for a money consideration, called the price. In order to
form a contract binding all the contracting parties have to be competent enough to enter
in to legally enforceable acts. If for instance a minor is party to sales of contract, the
contract is subjected to invalidation. On the other hand for capable contracting parties,
the parties should give their consent and this has to be suitable by law. That is, it should
be free from vitiating factors. These are defined by the articles from 1696 – 1710 of the
civil code. For instance if you have purchased an item by mistake because of fraud or
someone has coerced or forced you, you may demand invalidation of the contract. In
addition, the contracting parties owe each other shall be defined possible and lawful. In
this regard Article 1678 of the civil code uses the expression”object of contract” to mean

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obligation of the contracting parties and hence a contract is combination of obligation of

the contracting parties. It encompasses a promise one makes to the other. So a person
who that desire to enter in to contract has to have the ability to charge the promise. On
the other hand if you promise a thing there is not exsist ,there is no contract. Similarly,
where contract of sale contrary to any law enacted by the Ethiopian legislature or
accepted morality .That is this type of agreement does not lead to legal effect. Immorality
also has identical effect. For example sells of kids. As a rule,sales law does not demand
parties to follow a given instruction. For instance if a buyer and seller agrees to by or sale
that is enough. But if a law prescribes a given formality, it requires the parties to go
through that formality.
The property that is sold could be tangible i.e movable and non movable properties and
intangible assets like good will. For movable properties articles from 2266 to 2367 of the
civil code are applicable.For intangible assets , it is important to to regulate by the
commercial codes.
Sale of certain things that are attached to movable properties are also taken as a movable
property. A person may sell a stunding tree. As the tree cutdown and detached from the
land,it converted to this category.Things that are attached to building,if they could be
detached without losing its value, may be sold separately. Future things may also be sold.
This a thing that is produced in the future. In the case of future things the law demands,
the main materias necessary for production delivered by the producer or the
manufacturer. And this is sale of future material. on the other hand ,if the materials are
supplied by the purchaser,this is this is contract of work.
The other essential element for the formation of sale contract is the price at which the
thing is to be sold. The price shall either be agreed or procedures enabling determination
of the price shall be determined. The obligation of the buyer is said to be fixed in the
contract of sale. If the price is not fixed in the contract, the buyer‟s obligation would be
obscure.This makes the contract of sale of no effect. Therefore unless the price is fixed or
a procedure enabling the determination is agreed,a sales contract cannot be formed. To
determine the price, the buyer and the seller may agreed or may not agreed. If not agreed,
they may refer to third party to determine the price for example in purchase of a car they

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may refer to a mechanic and if the mechanic is unable to determine or refuses to

determine, there would be no contract by referring to Article 2271 of the civil code.
If the price is not fixed at the formation of the contract and merely procedures are set, the
contract is conditional. Conditional contract are not pure and simple but depend up on
fulfillment of conditions. If the condition subsequently fails there will be no contract.
Determination of price is a condition necessary. Until the price is sharply determined
,there is contract but it is temporary, If determination of contract to neutral third until the
price is fixed, there is contract. The existence of the contract is not however final, its life
depends on the third party desire and ability to determine the price. There are other
procedures enabling determination of the price. A buyer and a seller for example refer the
determination of market price or prices usually determined by the seller. If the price at
which the things is to be sold depends on the market, the buyer and seller may refer the
determination to a given market.
In fear of price fluctuation, a buyer and a seller may agree to the effect that the sales price
to be the market price. For instance see the coffee market which fluctuates from time to
time. So,the price is arranged by the market specially the global market.
Article 2307 of the civil code, states‟‟ where the sell relates to a thing which the seller
normally sell, the parties shall be deemed to have concluded the sale at price normally
charged by the seller having regard to time when and place where delivery is to take
place.” Assume a seller sells a given item at a certain price. The price is the same in most
cases. This is the price normally charged by the seller.
4.2-Subject matter of the contract of sale
It is fairly obvious that the contract must be in respect of “goods”. But what are “goods”?
Globally different scholars of law define goods from the spirit of the following concept
in the following definition.
“Goods includes all personal chattels other than things in action and money; and in
particular „goods‟ includes emblements, industrial growing crops, and things attached to
or forming part of the land which are agreed to be severed before sale or under the
contract of sale”.
“Things (or choses) in action” are intangible rights that cannot physically be handled –
such as

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patents, copyrights, shares, securities, etc. – and “emblements” are products created by
annual industry, or the profits of a crop which has been sown. Wheat is an emblement,
but grass is not.
So, in other words, “goods” covers not only those things which are normally associated
with the word, but also agricultural produce, cut timber and so forth. In particular:
(a) Motor cars are in all respects “goods”.
(b) Ships and aircraft are covered by the definition, but they are subject to special rules,
and certain aspects of the law of sale of goods cannot apply to them.
(c) Coins – current coins of the realm are money, and therefore not goods. But collectors‟
pieces, even those which are current legal tender but which have a market value in excess
of their face value, may be “goods” (Moss v. Hancock (1899)).
(d) Water, oil, gases – these are capable of being bought and sold as goods, so come
within the definition. For example, when you buy a cylinder of CO2 for a soda stream,
you are certainly buying “goods” other than just the metal cylinder.
(e) Electricity – there is some doubt about this. It is probably best to say that electricity is
not “goods”, but other forms of power may be.
In Bentley Bros v. Metcalfe & Co. (1906) a landlord hired a machine to his tenant. He
also supplied the mechanical power by means of a shaft to drive it.
HELD: The power to drive the machine was consumed in the process, therefore it was
bought and not hired.
(f) Domestic animals – these are “goods”, but wild animals are not.
(g) Buildings – whilst attached to the land on which they stand, they are not goods; but if
they are demolished and sold, the constituent parts then become goods.
4.3-Obligation of the parties to the contract of sale
It is repeatedly pointed out that the contract of sale is a special contract that comprises
obligations of the buyer and seller. When you purchase a given item, you promise to pay
money. The seller on his own part promises to deliver a given item. A promise one makes
to the other is his/her obligation.
4.2.1-Obligation of the seller
Some of the obligation of a seller has to discharge are stated in Article 2273 of the civil
code. These are:

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a-Delivery of the thing sold

Delivery is handling the thing sold to the buyer. The buyer has to use the thing purchased.
Use of the thing is possible only if the thing sold is delivered. There are various ways of
effecting delivery.
 Modes of delivery-

Delivery could be actual. For example if the owner of the camel who sold the camel
actually handover the camel to the buyer, it is referred as actual delivery. Delivery can
also effect constructively. This is to refer the thing will not actually delivered to the buyer
but after happening of certain acts the law regards the thing delivered. For instance if you
buy TV and the TV is at the shop of the seller, the seller cannot further resale the material
and also you cannot use the TV because it at the sellers hand.
 The thing to be delivered

Article 1745 of the general contract refers that the buyer cannot be compelled to take
lesser or greater thing. This is to refer the seller has to deliver the agreed thing. And in
this instance delivery of any other thing is considered as breach of contract.
Similarly the seller has the thing he/she promised to sell. If you are a buyer and willing to
take the partial delivery, you can do so. But sometimes it may happen that part of a thing
may contest. This is to refer the seller may deny the fact that he /she agreed to sell a
portion of the things. In such a case, you may take the uncontested thing and continue
litigation for the defined one by referring to the concept of Article 1746 of the civil code.
The rule of full delivery, exceptionally, is not strictly applicable to fungible things. These
are things that may be changed one another. If you are agreed to purchase a given donkey
and the seller delivers you another donkey, you can refuse to take delivery of the given
donkey even if the donkey is similar with the one you promised to purchase. The reason
for this is the donkeys are even similar, they are different in some regards. The quality,
power and strength and age may not identical.
If the quality of fungible things is the same, the seller can deliver any of the similar
things. With regard to fungible things, a slight difference may not entitle the buyer to
refuse acceptance of the delivery. From the concepts of article 1748 if the buyer agrees to

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buy 100 kg of coffee, he/she can not refuse to take 100kg of coffee. The difference is
immaterial.

What about Gold? Discuss with your colleagues

The place at which the thing sold is to be delivered may or may not be agreed in the
contract.The buyer and the seller are free to stipulate any place that pleases them. In the
absence of agreement the law fills the gap.Article2279 and 2280 spell out the place at
which the thing sold is to be delivered. If the place where the thing delivered was not
known at the time of the formation of the contract, in the absence of agreement, the thing
will be delivered at the sellers business place. If the seller does not have specific business
place or where it is doubtful, the buyer may demand delivery at the sellers residence, it is
the place where the seller normally resides at the time of conclusion of the contract of
sale. When the place where the thing sold stipulates is known at the formation of the
contract, the buyer may take delivery from that place. If the place where the thing at the
time of the formation of the contract is changed before it is delivered, the buyer has no
obligation to take delivery from the changed.
B-Transfer of ownership
Ownership of a thing may be transferred from one person to another in two ways. As in
stated in the article 1184 of the civil code, ownership of a thing may be transferred by
operation of law and by the virtue of the contract.
i-Good faith acquisition
Art.1161
1-Who so ever in good faith enters for consideration in to a contract to acquire the
ownership of a corporeal chattel shall become the owner there of by the virtue his good
faith when he takes the possession of such chattel.
2-His rights not be affected by the fact that the person with whom he contracted had no
valid title.
Art. 1163-time when good faith must exist

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1- Good faith must exist at the time of the entry in to possession

2- Discovery by the possessor that he acquired the thing from a person who was not
entitled to transfer the ownership there shall be of no effect where such discovery
occurs after he entered in to possession

Article 1161-principle
1-Whosoever in good faith enters for consideration into contract to acquire the ownership
of a corporeal chattel shall become the owner there of by virtue of his good faith when he
takes possession of such chattel.
2-His rights shall not be affected by the fact that the person with whom he contracted had
no valid title.
For the person to be an owner of a property because of good faith, the following
requirements shall be met.
a-The acquirer has to be in good faith
b-There shall be contract of consideration between the non owner dealer the good faith
acquirer
c-The contract shall to be acquire ownership of a movable property
d-a person to acquire ownership by good faith, shall take possession of the property.
ii- Transfer of ownership by virtue of contract
Whenever a valid sales contract is entered between an owner or a representative of an
owner and a purchaser, on delivery of the subject matter of sale(the movable property)
ownership is transferred to the purchaser. In a very exceptional cases, in addition to
delivery, the law demands writing or registration. If you sell a car, delivery of the car and
its documents alone does not transfer ownership. The of the sale shall be in writing and
shall be registered. The other cases the law demands is the seller shall transfer peaceful
procession. Art.2281 of the civil code states “the seller shall take the necessary steps for
transferring to the buyer unassailable rights over a thing.”Unassailable right means
undistributed right. This means the buyer has to enjoy the property he/she has purchased
without interference of anyone. If anyone claims ownership of the thing purchased, the
seller will be responsible.

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Warranty against dispossession, therefore, is a guarantee the law confers on the buyers. If
the person claims to take property purchased, the seller is responsible as the law expects
him/her to sell a property free from any kind of claim. The seller has to deliver a peaceful
right. Disturbance may be classified in to two.
1-diterbance in fact
2-diterbance in law
Disturbance in fact is a simple material disturbance. When someone took forcefully a
book you have purchased, the seller is responsible as the law expects him/her to sell a
property free from any kind of claim.
Disturbance in law is peaceful disturbance. In this case, the third party peacefully claims
to disposes the buyer.The third party peacefully brings action against the buyer for
dispossession. The seller is responsible for peaceful disturbance. Article 2282 of the civil
code states “the seller shall warrant the buyer the buyer against any total or partial
dispossession which he might suffer in consequence of the third party exercising a right
he enjoyed at the time of the contract. ” If the entire property or part of it is taken by a
third party,the seller is responsible to the extent of the dispossession.
Whenever an action for dispossession is instituted against the buyer, he/she shall make
call on the guarantee. This means the buyer has to call the seller to defend the case.
Art.2285(1) of the civil code states “where the buyer is sued for dispossession, he shall
join the seller as a party to the proceedings instituted against him.” If the seller is called
in due time, she/he has to defend the case and avoid dispossession or compensate the
buyer.
There are certain situations in which the buyer may not enjoy warranty against
dispossession. The following are instances in which warranty against dispossession not
available.
a-where the buyer, at the time of entering in to the contract of sale was knowledgeable as
to the defective title of the seller and the buyer is not protected by the warranty against
dispossession.
Art.2283(1) of the civil code states, “where at the time of the contract, the buyer knows
that he risks dispossession, the seller does not warrant the thing unless he has extremely
undertaken to do so.”If the buyer for example before or at the time of the formation of

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contract had information that the seller is not entitled to sell the property, the law does
not protect the buyer by the shield of the warrenty against dispossession. Awareness of
defective title of the seller cannot bar or bloc the buyer‟s right against dispossession
where the seller gave an express warranty or where the thing is encumbered with pledge.
-Expression of warranty- a seller with defective title may express warrant a hesitate
buyer for warranty against dispossession.
-Where the thing sold is pledged the buyer of the pledged thing cannot be deprived to
enjoy the protection of warranty against dispossession.
Art. 2283(2) of the civil code provides, ‟‟Warranty shall, however, be due where
dispossession is due to the falling of the pledge made by the seller.‟‟
b-Exclusion of the pledge against dispassion
The implied warranty may be avoided by a contrary agreement. The implied warranty is
designed to protect the buyer. The buyer, however, may waive his/her right and agree to
purchase a thing without the protection of the warranty against dispossession.
The buyer and seller are always free to relive the seller from all obligations that may
emanate from dispossession. The obligation to refund the purchase price may also be
excluded by such express agreement. The seller, however ,may not benefit from the
exclusionary provision if he/she has cancelled important information if known the buyer
would not agree to the exclusionary provision. If the seller has cancelled threats of
dispossession for instance if committed fraud. Sub article 3 of art.2284 of the civil code
declares, “A provision exclusion or restricting the warrenty shall be of no effect where
the seller has intentionally cancelled that a third party had a right on the thing or
dispossession is due to the act of seller” Similarly if the seller has contributed or caused
the dispossession, he/she cannot make use of the limitation or exclusion of the warranty
against dispassion.
On the other hand ,in accordance with Art.2286 of the civil code, if the buyer is
absolutely sure that the third party claimant is an owner and dispossession is inevitable,
he/she may surrender the property and demand compensation and purchase price from the
seller.
4.4-Consequence of transfer of ownership

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The effect of passing the property in goods to the buyer is to transfer to him the title and
full legal interest in the goods, subject only to any rights in the goods retained by the
seller or by any third parties. It is a condition of the contract that any such retained rights
are first disclosed to the buyer. Before the property has passed, the seller can dispose of
the goods to a third party, albeit in breach of contract with the buyer, and the third party
will thereby acquire a good title to them. The reason is that the title is still vested in the
seller until the property passes, hence he (or she) is at liberty to pass that title to someone
other than the buyer. The disappointed buyer is, of course, entitled to damages for breach
of contract, but not to the goods themselves.
The exact point in time when the property passes is most important in the event that
either buyer or seller goes bankrupt (or, in the case of a company, into liquidation or
receivership). In the event of the seller becoming insolvent whilst still in possession of
the goods: If the property has passed to the buyer, he can, on tendering the price, demand
the goods themselves from the liquidator or trustee in bankruptcy. If the property has not
passed, all the buyer can do is to seek damages for breach of contract. If the seller is
hopelessly insolvent, this right may be worthless. The general rule of transfer of
ownership has certain exceptions. The exceptions are stated in Art.1758(2) of the civil
code and re-mentioned in art.2325.
Art.2325-Delay of the buyer
1-The risk shall also transfer to the buyer from the day he is late in paying price.
2-where the sale relates to fungible things, the delay of the buyer shall not transfer the
risk to him unless the thing clearly designated for the performance of the contract, has
been especially allocated to the buyer and the seller has sent notice to the buyer to that
effect.
3-where tangible things are of such nature that the seller cannot set aside part of them
until the buyer takes delivery, it shall be sufficient for the seller to have performed all the
acts necessary to enable the buyer to take immediate delivery.
Sub article 1 of Art.2325 incorporates the first exception. The buyer may bear risk even
where he/she is not an owner. In Art.1758 of the civil code, where a buyer is late in
taking delivery,though ownership is with the seller, risk transfer to the buyer. Therefore it
is important to read art 2325(1) with article 1758(2) of the civil code.

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If you buy from Ato Balchas store 10 quintals of teff and by chance all Materials in the
store is stolen,do you legally request your property? Discuss with your colleagues

In the case of international sale of goods, risk and ownership may not necessarily go
together. Risk in the case of international sale transfers after the thing sold is delivered to
the carrier or loaded on the board of ship. The moment of the transfer of risk depends up
on agreement of the buyer and the seller. They may refer to the terms set out by
international chamber of commerce.
Do you remember CIF and FOB from your marketing course?
If the inco term agreed by the parties is CIF(cost insurance freight) risk transfer to the
buyer from the moment which the thing is put at the shore of the sea, the buyer bears the
risk even before the sold thing is loaded. He/she will give the document specifying
delivery of a thing which is referred as bill of lading. The shipper after receiving the
goods for delivery gives the document that serves as receipt and that disclose the true
nature of the property received for delivery. The seller after having payment or other wise
sends the bill of lading to the buyer.So then the buyer posses now ownership. Of course
the risk transferred before the buyer get ownership.
Fob on the other hand means free on board .In this inco term the seller has the obligation
to cover all costs until the sold thing is loaded. So the risk transfer after completion of
effective loads by the seller. After effective loading the risk transferred to the buyer. For
any sudden risk or accident that may happen before the goods are loaded, the seller is
responsible.
The other widely used inco-term is container trade term. In this case, the seller delivers
the thing sold to the shipper in the in land at the container trade station. The container
trade station may stipulate in the cities like Addis Abeba. From the moment the thing is
delivered to the container station, the risk transfers to the buyer. The shipper at the
container station prepares a received bill of lading and gives to the seller.The seller sends
the bill of lading to the buyer. From the moment of receiving the bill of the bill of lading
the buyer acquires ownership over the goods delivered to the carrier.Article 2226-2328

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and art.2397-2402 of the civil code are meant to regulate legal issues relating to the sea
transport.
Sub 1 of art.2326 of the civil codes states,” where the sale relates to the thing under
voyage, the risks shall be transferred to the buyer from the day when delivery has taken
place by the thing having been handed over the carrier.” The provision is in line with the
rules of transfer of ownership in the case of CIF and container trade terms.
The other exception to the general rule of transfer of risk is where the ownership of the
thing sold is reserved on the seller. In rural areas where a rich farmer sells cattle to a poor
farmer, the farmer reserves the ownership of the cattle until the price is paid. The cattle
will be delivered to the buyer but until he/she pays the price, the seller retains ownership
of the thing.
This rule may be applicable in all cases of the sale. As stated in Art.2388 of the civil
code, where ownership is reserved on the seller, the risk transfer to the buyer. Note that,
the buyer is not the owner but bears the risk that may happen on the property sold
subjected to payment of purchase price.
Discuss with your colleagues

You have sold a car to Obbo/Ato Girma with 500,000 birr and appointed him on the tenth
day of the sale. But, before the tenth day a sudden earth quake has happened and lost the
car. Then what might happen legally? Could Obbo Girma get his money back?
Why/whynot?

4.5 – Warranty against defect

The seller should not only deliver a peaceful possession but a useful possession. The
thing delivered shall benefit the buyer. This obligation of the seller refers to the quality of
the thing sold. The thing sold should process a quality desired by the buyer. A quality
expected from the thing sold may be expressed in different ways. The thing sold should
posses any one or more of the following qualities.
-Quality for normal use

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-Quality for particular use and

-A described quality
A quality normally expected from a given item may not necessarily be the same in all
places. The required quality varies with the variation of service given by the item. A
horse may serve for ploughing or for carrying goods and people for hunting. A society
using the horse for ploughing land may regard quality of ploughing as a normal quality.
The normal quality, therefore, may vary with the variation of use expected from a given
thing. Quality of a particular purpose may not necessary be identical to that of the normal
quality.
Discuss with your colleagues

If you order someone to prepare a cake for your wedding lock and if prepared for you a
birth day cake, what is your response?

In the case of prescribed quality, the thing delivered should possess a prescribed quality.
The buyer may list down certain qualities the thing has to posses such as color, size,
weight, appearance etc.
Requirements that should be fulfilled to enjoy the effect of warranty against defects
-Ascertaining Quality of the thing delivered
Art.2291-Examination of the thing by the buyer
i-as soon as the buyer has the opportunity, he shall without examining the thing.
ii-Unless otherwise agreed, such examination shall be made as provided by the usages of
the place of examination.
iii-where the buyer intends to avail himself of the results of the examination, he shall in
due time invite the seller or his representative to attained such examination, unless the
thing is likely to perish.
The obligation to invite the seller may be dispensed if the thing to be examined demands
immediate examination that may not be sufficient enough for attendance of the seller.
The examination process may not be identical in all cases and in all places. It depends up
on business usage.
-Notification

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The other important procedure that has to be met to avail effects of the warranty against
defect is notification. The buyer has to notify the seller that the thing delivered does not
confirm the contract or that it is defective. Notifying the seller may serve as a default
notice. The seller should know the intention of the buyer to remedy the defect. The buyer
has to inform the seller that how the defect may be avoided. This means the buyer has to
indicate the nature of the defect and solutions the buyer proposes to be avoided.
Art.2292-notification of defects
1-Where examination discloses non-conformity with the contract or a defect in the thing,
the buyer shall without delay give a notice there of to the seller.
2-In notifying the defect, the buyer shall indicate the nature in accordance with the
custom and good faith.
Art.2293- Absence of notifications
1-where the buyer has notified the seller as provided in Art.2293, he may no longer avail
himself of the non conformity or defects unless the seller admitted their existence.
2-where defect is subsequently discovered which could not be discovered by normal
process of examination, the buyer may avail himself of such defect where he notifies the
seller as soon as he discovered it.
3-the seller who has intentionally misled the buyer may not avail himself of the fact that
the notification of defects has not been sufficiently precise or made in due time.
Failure to notify the seller may not always bar the buyer to enjoy effects of the warranty.
If the seller admits existence of defect or where the seller committed fraud on the thing
sold he/she may not refuse to remedy the defect merely on the ground of failure to notify
the defect.
Notification may not necessarily be immediate in all cases. Where express guarantee is
given,the buyer may notify the seller at any time before lapse of the stated time.
-to benefit the implied warranty the buyer has to be innocent (should not be
knowledgeable as to the defective nature of the thing purchased) – as indicated in
Art.2296 of the civil code unlike the case of the warranty against disposition, buyer‟s
awareness of defective nature of the thing sold can not be remedied by an express
agreement.

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-the buyer has to examine the thing prudently- sometimes the buyer may over look the
thing because it is new and normal, this may not avail effects the warranty against
defect.
-action for warranty should be instituted within one year- the one year period starts from
the date of notification. This is called period of limitation. If he/she keeps silent for a long
period of time, the law assumes as if he/she waived the right and the bar right to institute
action. Art. 2298 of the civil code prescribes one year to bring action for consequence of
warranty against defects or non-conformity.
4.6-Obligation of the buyer
Art. 2303-General provisions:
1-The buyer shall pay the price and take delivery of a thing
2-He shall be bound by any other obligation imposed upon him by the contract of sale
As you see from Art.2303 of the civil code, the two important obligations of the buyer
are:
 Obligation to pay the price at which the thing is sold

 Obligation to take delivery

 Any other obligation stated in the contract of sale

4.7-Unit summery
In this part,we have learned contract of sale which is a special type of contract. To have
valid contract of sale,all the essential elements of contract shall be satisfied. There shall
be express agreement to the nature of the thing to be sold and the price to be paid. The
other obligation of the seller and the buyer,if not expressely agreed may be filled by law.
There are also implied terms of contract of sale. This means the law imposes implied
obligation. Whatever the case,it is important for you to understand all issues related to
obligation of the seller as well as buyer as far as you are business students. Hence
contract of sale should have legal ground,that is the subject matter of contract of sale
between the parties should be legally possible to be free from legal liability or validity of
the contract of sale.

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4.8-Self test exercises

1- What are the modes of delivery of the subject matter of contract of sale?
2- What legal consequence would follow if a person delivers a non conforming
thing?
3- What is the place of delivery of the subject matter of contract where the contract
is silent
4- Discuss the two method of acquiring ownership.
5- “the seller has to deliver unassailable right over the thing sold” , Explain the
statement
6- What is warranty against dispossession?
7- What are the procedural requirements of exercising warranty against
dispossession?
8- Distance instances in which warranty against dispossession may not be enjoyed?
9- Explain an instance in which exclusionary provision avoiding or limiting warranty
against dispossession may not effective.
10- What do you mean by warranty against defects?
11- Elaborate different ways of defining quality expected from the subject matter of
sale.
12- What do you mean by examination and what are the procedural requirements for
effective examination?
13- Discuss situation in which warranty against defects may not exercised.

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Unit V

The Law Of Agency

Introduction
Dear students, this unit deals issues related to law of Agency. Since a principal or one
man by himself could not reach every place of his business, an agent becomes the
important stake holder for an individual. But this requires its own rules and procedures.
This again makes this chapter an important unit that we shall deal with.
Learning Objectives
At the end of this unit, you will be able to:-
 Discuss sources of authority of an agent
 Explain kinds of authority of an agent
 Mention duties of the agent and principal
 Discuss the reasons for termination of agency

5.1-Sources of authority of an agent

A person to represent the other person shall have authority. The source of authority may
be law or an agreement (Article 2179 of the civil code). Under the normal rule of privacy
of contract, if one person contracts with another, a third party can derive no benefit, nor
incur any obligations, under that contract. However, if one person authorizes another to
do an act on his behalf, that other becomes the agent of the first. The act of the agent,
then, under the maxim quoted above, becomes the act of the first person who, therefore,
“steps into the shoes” of the agent, and becomes liable for the act (and able to enjoy its
benefits) as if he himself had done it in the first place. The agent has no personal
liability; he “drops out” of the transaction. In commercial matters, the relationship of
agency usually arises as a result of a contract between two people, for one (the agent) to
effect a contract on behalf of the other. However, this is by no means the only way in
which the relationship can arise, nor is the effecting of a contract the only duty an agent
can perform. The fundamental principle is that, by the agreement of both parties, the
agent is enabled directly to affect the legal relations of another person. Except in the case
of “agency of necessity” about which we shall talk later in this study unit nobody can

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have an agency relationship forced upon him, nor it arise other than by agreement
(express or implied).

Definitions of related terms

There are a number of definitions on which, even at this early stage, you should be clear.
We shall be
discussing them in greater detail later but, in outline, the essential ones are as follows:
 Principal-the “principal” is the person who agrees, expressly or by implication,
that another shall do an act for and on his behalf, and that he shall be legally
bound by that act. (Note re spelling: it should be a principle to spell “principal”
correctly.)

 Agent-the agent is the person who acts on behalf of his principal, and binds his
principal in law.

 Authority-the authority of an agent is the act(s) and thing(s) which he is

permitted or is authorized to do by his principal, and which will bind the
principal. There are several different types of authority some express, some
implied – but, in general (subject to exceptions), the principal will be bound by an
act only if that act is within the authority of the agent to do on the Principal‟s
behalf.

Other Types of Relationship

There are certain basic relationships which arise out of a contract whereby one person
commits an act
(or acts) for another but which are not (or not wholly) agency relationships.
 Master and Servant (covers most employer/employee situations)

This is not primarily a matter of agency. A servant is under the contract and direction of
the master, and the master is vicariously liable for the acts of the servant. However,
vicarious liability arises by virtue of the relationship, not by reason of the servant‟s
acting as an agent and the relevant liability is generally in tort, particularly negligence. If
a servant makes a contract on behalf of his employer, then he does so as agent for the

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employer. However, the liability of the employer is much wider than if it were a strictly
agency relationship, and it extends to torts (e.g. negligence) committed by the servant in
the course of his employment. There is inevitably an overlap between the two
relationships, that of agency and that of master and servant, but essentially an employee
acts by virtue of a contract of employment, and it is only when he has occasion to
contract on behalf of his employer that he assumes the mantle of an agent for that matter
only. Some employees cannot be said to be servants because they are not sufficiently
under the control of their employers, but even most doctors working in hospitals are now
regarded as “servants”.
 Independent Contractor

This is not an agency relationship. Again, the concept arises principally in negligence. An
independent contractor carries out duties or work or services for another by virtue of a
contract. However, the “employer” of an independent contractor is not liable for the acts
of the contractor (except in rare instances). If the contractor makes a contract with a third
party in connection with his employment, he is solely liable in respect of it. The
“employer” is not liable either vicariously or under the law of agency.
 Partnership

“Every partner is an agent of the firm and his other partners for the purpose of the
business of the partnership.” That is to say, a partner can bind the firm by an act done in
the course of the business of the
partnership. The “firm” is not a legal entity in England (unlike in some other
jurisdictions) but each partner is jointly liable for all the debts of the partnership. Their
liability for debts incurred by their other partners arises by virtue of the agency, not
vicariously. However, the relationship of partners with each other extends far wider than
that of principal and agent.
5.1.1-Authority by operation of law
a-agents of minors
Minors are persons below the full age of 18 years. The minors are not permitted to
engage in acts beyond their power. They cannot act by themselves but by their
representatives/guardians or tutors. The father and mother of a minor child are

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assembled by law are agents of the minors. If the child is an orphan, the tutor may be
appointed by a court.
b- representation of persons under interdiction
Interdiction is of two types. That is Juridical and legal. Juridical interdiction is an
interdiction passed by the court. A person may be incapable or unable to act his/her task
because of mental disorder or other reason, This time interested parties may apply to the
court to represent the person.
A person may be interdicted by law. If a person is convicted by crime offence because of
the dangerous behavior of a person,a court may limit his/her civil rights and deprive not
to engage in certain acts. In such a case, necessities of life of the interdicted person may
be dealt by an agent or tutor.
c- agency of necessity
Sometimes a person may represent the other even without having the formal
authorization to represent him or her. This is true when unexpected damage happens on
belonging of any one, you may represent the person to safeguard the economic interest of
a person. But you are not contractually authorized to represent the person.
Article 2257-2265 of the civil code provides rules regulating agency of necessity. The
code calls this kind of agency “unauthorized agency”.
Art-2257- scope of application
Unauthorized agency occurs where a person who has no authority to do so undertakes
with full knowledge of the facts to manage another person person‟s affairs without
having been appointed to agent.
Where 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 not contractually authorized rather legally authorized to make the
representation. The expression is “agency of necessity” is more expressive than
unauthorized agency.
In order to make representation under agency of necessity ,the following requirements
shall met.

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-A sudden situation shall happen. 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.
-there shall be no means of communicating the matter to the principal.
The necessity agent shall manage the affairs of the principal in good faith and in
accordance with the requirement of good faith.
d-curator
A person may be does not manage his/her business because of different reasons like
illness or absence . Here to appoint an agent by the court may be quite important and
hence a curator is an agent the same to other cases but the difference lies his/her
authority is appointed by the court and limits the power of the curator is determined by
the court.
5.1.2-Contractual agency
Contractual agency is an agency that arises from contract. This is the usual method of
creating agency relationship. The principal communicates his/her offer to appoint some
one and if the agent accepts the offer ,the contractual relationship is created between the
agent and the principal. As contractual agency is special contract, it has to specify all the
requirements necessary for the formation of valid contract.
Art.1678 –Elements of contract
No valid contract shall exist unless:
a)the parties are capable of contracting and give their consent suitable
b)the object of the contract is sufficiently defined
c)the contract is made in the form subscribed by law, if any
To form a contract binding both of the agent and the principal, the parties to the contract
of the agency shall give consent. This means both the principal and the agent should
agree to engage in to a contract of agency. The consent of the parties to the contract of
agency shall not be vitiated by the factors affecting consent. Art.1696 – 1710 of the civil
code provide factors that may vitiate consent of contracting parties.

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Unless the law demands the contract of agency to be in writing, it need not to be in
writing or registered. Art.2200 of the civil code states the contract of agency even may be
formed by implication. The power of attorney however, shall always be in writing.
5.1.3-Authority of an agent
Authority of an agent may be expressed or implicit. The power of agency is said to be
explicit where it is given in writing or communicated . A person may be authorized by
implication. This means he/she may be instructed to represent a principal by conduct.
Art. 2205 of the civil code lists down activities that may be performed by an agent
conferred with special authority. A special agent may sell,donate or exchange a property.
Activities that may be operated by agent authorized to excute are mentioned in Art.2205
of the civil code and they are called acts of disposition.

Generally,there are a number of different types of authority, derived from different

sources, which an agent may possess. It is necessary to study these in some detail – but
first, let us define them.
Definition of Terms
- Actual Authority
This is the actual authority given by the principal to the agent. It may be express or
implied –
that is, given by express words, or implied from conduct or the circumstances of the case.
- Apparent Authority, or Ostensible Authority
These are two terms for the same thing. In this study unit, we shall always refer to
“apparent”
authority – but remember that, if you see the term “ostensible” authority used elsewhere,
it is the same thing. Apparent authority is the authority the agent has as it appears to
others.
An agent can plainly appear to have a certain authority which he does not actually
possess.
- Incidental Authority

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The authority given to an agent will normally be in respect of his primary tasks.
However, it is implied that he also has authority to do all such things as are necessarily
incidental to the performance of the duties given by his actual authority.
- Usual Authority
Agents in particular trades or professions usually carry out certain set duties (e.g.
insurance brokers, stockbrokers, solicitors). Hence, if a person in one of these trades or
professions is employed in respect of that business as an agent, then he is presumed to
have the authority to do whatever is usually done by agents in that particular business.
- Customary Authority
This is similar to usual authority but it is applied to the customs or usages of a particular
place,as opposed to a particular business.
- Presumed Authority
Certain relationships inevitably involve one person acting as agent for another (e.g.
husbandand wife). In such cases, the agent is presumed to have a certain authority.
-Actual Authority
(a) Express Actual Authority
The capacity of an agent to act is the same as the capacity of his principal. Subject to
exceptions already mentioned, anything the principal can lawfully do can be done for him
byan agent. Hence, the express actual authority of an agent can be co-extensive with the
powersof the principal.Express actual authority can be conferred by deed, in writing, or
orally. Authority by deed is,usually, called “a power of attorney” – and, as such, it is a
formal document and construedmore strictly than other types of express
authority.Authority granted by virtue of a power of attorney is only such as is actually
given by thewording of the power, by necessary implication, and it is necessarily
incidental for effective execution. Strict tenets of construction should be used.

(b) Implied Actual Authority

Implied actual authority is whatever authority is necessary or incidental to the effective
Carrying out of the agency in the usual way. It, therefore, includes “incidental”, “usual”
and “customary” authority. However, it is more – it is also the authority necessary to give
business

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efficiency to the agency contract. This does not mean that an agent has discretion to
contravene the express instructions of his principal if he considers them ill-advised or
impractical – it does mean that additional ancillary powers will be implied if they are not
expressly given. For instance, consider the following points.- An agent who has express
authority to receive payment or money has, prima facie, implied authority to receive it
other than in cash (e.g. by cheque).
- A managing agent has implied authority to do all those things necessary or usual
effectively to manage.
- A professional agent has implied authority to do all those things which are usual in the
profession or trade – but this does not extend to unusual things.
- Every agent has implied authority to act in accordance with the customs or usages of the
trade or market in which he operates, and with the usual and prevailing commercial
customs.
.Apparent Authority (or Ostensible Authority) (Sometimes Called Agency by Estoppel)
This type of authority occurs either where the principal has led third parties to believe
that his agent has a particular authority (called “holding out”), or where the agent has
assumed a certain authority to the principal‟s knowledge, or when it comes to his
knowledge and the principal takes no steps to correct the error or inform the third party of
the fact that his agent does not possess such authority. If this situation develops without
correction, so that the third party reasonably assumes the agent has the relevant authority,
then the principal will be bound to the same extent as if the agent were properly
authorized.
5.2-Effects of Agency
Art. 2189- Complete agency
1-Contracts made by an agent in the name of an other with in the scope of his power
shall be deemed to have been made directly by the principal.
2-The principal may avail himself of any defect in the consent of the agent at the time of
the making of the contract
3-Any fraud committed by the agent may be set up against the principal by the third party
who entered in to contract with the agent
Art.2195-Liability of the principal

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The principal shall be jointly liable with the agent where:

1-he/she informed the third party of the existence of the power of agency of but failed to
inform him of the partial or total revocation of such power
2-he failed to ask the agent to return the document evidencing the power of attorney and
failed to seek a juridical decision to the effect that such documents was revoked or
3-he caused in any other manner, in particular by his statement behavior or failure to act
a third party to believe that the person with whom he was dealing was authorized to act
on behalf of the principal
Duties of an agent
a-duty to follow the instruction of the principal
b-duty of care and diligence
c-duty to remit sums and make report
d-duty to avoid conflict of interest
e -duty not to delegate
This does not include the exception raised in the article 2215 of the civil code.These are
activities that are depends on:
-the nature of activity- urgency, perish ability and the like
-consent of the principal-by agreement with the principal(formally as well as informally)
-emergency situation
In such situations the agent may deligate a sub agent and if problem happens the
principal is also liable and the agent is liable for the improper selection of the sub agent.
Duties of the principal
-duty to remunerate
-cover the costs of the agent for performing his/her task
-release the agent from liability due to his/her act while performing the activities
5.3-TERMINATION OF AGENCY
The principal is always free to fire the agent at any time.An agent who is appointed by
contract may be appointed under numerous circumstances andconditions. The
appointment may be for a specific task (e.g. to sell a house), or for a limited time(e.g. for
one year only) or it may be indefinite. Consequently, the agency contract may
terminateunder equally diverse circumstances. As between principal and agent, the

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termination of the contract serves to revoke the agent’s authority. However, as between
agent and third party this may not necessarily be the case. The agent‟s actual authority
will be revoked – but, if the third party is unaware of the revocation, then the agent‟s
apparent authority may subsist. But more of this anon. The seven circumstances under
which an agent‟s actual authority is revoked are set out below.
(a) Agreement
Like any other contract, an agency can be terminated by agreement between principal and
agent. This is self-evident.
(b) Completion
If the agency is for a specific task, the authority of the agent automatically ends when that
task
is completed.For example, a broker was employed to sell goods for the principal. It was
held that, immediately the sale was completed, his authority ceased, so he could not
subsequently alter the terms of the contract by agreement with the purchaser without new
authority from the principal. Likewise for example, an estate agent was commissioned
either to sell or to lease a house. He succeeded in letting it but then later negotiated the
sale of it. It was held that, having let it, his job was done, and he had no authority to sell.
He was not entitled to commission on the sale.
(c) Expiration
If the agency is for a specific period of time, it is determined when that time has expired.
Equally, if it can be reasonably inferred from the circumstances that the agency was for a
limited (although not specific) time then it will lapse after a reasonable time.
(d) Specified Event
It may have been agreed, or be inferred, that the agency will cease if a certain event
occurs.
Then, it will terminate if and when that event does occur.
(e) Frustration
The frustration of the contract of agency will serve to terminate the authority of the agent.
This is likely to occur if the subject-matter of the agency is destroyed (e.g. if an estate
agent is commissioned to sell a house and, before sale, it is burnt down). Or if something
happens

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which makes either the agency or its objects illegal or impossible (e.g. an agent in a
foreign country becoming an alien enemy owing to outbreak of war between the Ethiopia
and that country).
(f) Death/Winding-up
The authority of an agent, is, normally, terminated by the death or insanity of either the
principal or the agent, or the bankruptcy of either. In the case where either is a limited
company, the winding-up of the company has the same effect.
(g) Revocation
Lastly, if either the principal or the agent revokes the agency or renounces it (whether or
not the act of so doing is in breach of the contract), the agent‟s authority will be revoked.
If it is done in breach of contract, then the innocent party – be he principal or agent – will
have the right to seek damages for breach of contract. However, this will not affect the
fact that the authority of the agent is terminated. In certain circumstances, the innocent
party may also be able to get an order of specific performance from the court, compelling
the guilty party to carry out the contract in accordance with its terms. Or, if relevant, an
injunction to prevent the guilty party from revoking the agency. However, neither of
these equitable remedies will be granted if the relationship between principal and agent is
a personal one – that is, if the character, skill, experience, etc. of the agent is an essential
element of the relationship.
Irrevocable Agency
An agency contract may be irrevocable, either by agreement or by implication, as a result
of the Circumstances. This, however, is not straightforward. The mere fact that the parties
have agreed that the agency shall be irrevocable does not, of itself, make it so. There is
nothing to prevent one party renouncing in breach of the contract, notwithstanding that he
has agreed not to. Something more is necessary to render the contract legally irrevocable.
5.4-Unit summery
These days, when every one of us occupied with different simoultinius activity ,it is
difficult to act in every corner simultaneously and this necessitated the importance of an
agent to act on behalf of the principal.By Principal we refer to the person who agrees,
expressly or by implication, that another shall do an act for and on his behalf, and that he
shall be legally bound by that act and an agent is the person who acts on behalf of his

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principal, and binds his principal in law.An agent get authority to act on the agent‟s
behalf. The authority of an agent is the act(s) and thing(s) which he is permitted or is
authorized to do by his principal, and which will bind the principal. How this goes from
the perspective of legal ground and liability of a principal due to act of agent has been the
focus of this chapter. So it is compulsory for every one of us to appoint the right agent
due to legal consequences of improper act by the agent brings liability to the principal.
5.5- Self test exercises
1-Differentiate a curator and a necessity agent.
2-What is the most important difference between a contractual agency and agent acting
with in the scope of the power entrusted on him/her.
3-Discuss the effect of agency where the agent acts within the scope of the power
entrusted on him/her.
4-Explain effects of the repudiation and ratification of unauthorized representation.
5-Differenciate special and general agency.
6-What are the requirements for representing a person because of unexpected event.
7-What are the instances in which sub agency may be repainted?
8-Differenciate renunciation and revocation.

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Unit 6
Introduction to the law of Traders and business organization
Introduction
Dear learners,we have seen previously in unit four about law of sales. The most important
agent of sales or business transaction are traders. This unit deals with law of traders and
related business organization to carry on business.
Learning objectives:
At the end of this unit, you will be able to:-
 Define who are traders
 Discuss the restriction in operating business activity
 Explain the obligations of traders
 Define unfair competition
 Differentiate the form of different business organization

6.1-The law of traders

6.1.1-Who are traders
Traders are persons that operate any one or more of the activities stated in article 5 of the
commercial code professionally and for gain. Article 5 of the commercial code
enumerates about 21 activities. If a person carries out any of these activities
professionally and for gain ,he/she is taken as trader.
All persons who carries different activities for non profit are not considered as traders.
Such as:-
-individuals who operate agriculture,cuttle breading,maintaining pasture land,fisheries
-Hand craft men
But individuals who add value for instance a farmer who fattens ox,or sheep for profit
could be considered as a trader.
6.1.2-The right to operate business activity in Ethiopia
Every one is free to engage in any kind of activity at any place with in the territory of
Ethiopia.(Art.41 of the constitution) Freedom to operate business is not absolutely
free.There are some restriction.
The following are the restriction imposed by the law.

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a-incapable person
Person who are incapable under the civil code may not carry on any business activity by
themselves.
b-married person- this is not in all instances as seen in the general nature of trade. Could
you sale your house without the will of your spose?
c-foreigners- require residential permit before dealing in business activity.
d-associations- Associations are basically established for nonprofit motives and there fore
cannot operate trade based on article 25 of the commercial code..
6.1.3-Obligations of traders
The law imposes on the persons called traders the following obligations.
a-the obligation to keep books and accounts
b-the obligation to be registered
c-the obligation to obtain business license
6.2-Business and unfair competition
The term business as implied by Art.124 of the commercial code ,it is an intangible
property that emerges out because of the activity of traders. The main component part of
business is good will.
As it is a property, in which side of the balance sheet, you register good will? Discuss
with your colleague

“Good will” is a difficult word to define as it is intangible.It has money value even if not
seen.
Goodwill is considered as a probable and possible relationship of customers and a trader.
If a trader make good relationship with customers and people who are willing or have
good out look to wards a given trader,we say money value of the goodwill is so great. Art
130 of the commercial code illustrates the term goodwill as follows. The goodwill results
from the creation and operation of a business and is the value which may vary according
to the probable or possible relations between a trader and a third parties who may require
from him/her good and services. So the goodwill is important value of the trader. It
cannot be used by third parties without the permission of the trader. If a person uses
goodwill of another person without authorization,that may be taken as usurpation of

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property of an other person. It is illegal and termed as unfair competition. Unfair

competition, as defined in proclamation No.329/2003,is any act misleading customers.

6.3-Introduction to the law of business organization

There are various ways of operating business activity. A person may operate an activity
of trade individually or in group with similar people. Business activity may also be
conducted by public enterprises and cooperatives. Each scheme of operating business has
its own advantages and disadvantages.
In a trade operated for business organization he/she can choose any one or more of the
business organizations. Business organizations are organizations that may be formed to
operate commercial activity. The commercial code recognizes 6 kind of business
organizations. Art.212 of the commercial code declares business organizations that may
be formed in Ethiopia. These are:-
-Ordinary partnership
-Joint venture
-General partnership
-Limited partnership
-Share company
-Private limited company
Article 210 of the commercial code attempts to define the term “business organization‟‟.
It states a business organization is any association arising out of partnership agreement.
The word “association” used here not to equate business organizations to non-profit
making entities that may be set up in accordance to the rules of the civil code. The code
used the word association here to mean grouping of people. A business organization is
therefore, is a grouping of business persons that comes out of the partnership agreement.
Article 211 of the commercial code defines the partnership agreement. It states, “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
carrying out activities of an economic nature and of participating in the profit and loss
arises thereof, if any.”

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General view about partnerships

In your introduction to business or marketing courses, you may see different types of
forming business. One of them is partnership. We will see it from the general
perspectives.
A partnership is based on a contract between its members and, since it can be created
informally and dissolved informally, it differs completely from a corporation. You will
remember that a corporation must be created either by charter or by statute and, once
formed, it has a continuous legal personality. Partnership, on the other hand, can be
formed by means of a deed, i.e. an agreement under seal signed by the persons who agree
to become partners, or by means of a simple agreement in writing, or even by an
agreement made orally or simply implied from
the actions of the persons concerned.
Differences Between Partnership and Corporation
We can now note the following important differences between a partnership and a
corporation:
- A partnership has no legal personality; a corporation has a legal personality of its own.
- All partners share in the management, unless it is agreed otherwise. The management of
a corporation is left to a selected body (directors, council, committee etc.).
- Each partner, except a “limited partner”, is liable for all the debts of the partnership
personally,to the full extent of his private estate.
Limited Partnerships
- No more than 20 persons (or 10, in a banking business) may usually associate in a
partnership.
- Each partner has implied authority to contract on behalf of the others in the ordinary
scope of
the partnership business, and he thereby binds all the other partners, even if they are
unaware
of what he has done. A corporation acts through appointed agents, and an ordinary
member has no power to bind the corporation.

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Differences Between Partnership and Company

The characteristic of legal entity is one of the main distinctions between a limited
company and a partnership, which is not a distinct person in law but simply the partners
acting together.

Partnerships Limited Companies

The consent of the other partners is required before one partner can dispose of any of his
interest.Shares are freely transferable(subject to the Articles).Each partner is an agent for
the firm to make contracts. A shareholder is not an agent for the company. The liability of
each partner for the firm‟s debts is unlimited, except in the case of a limited partnership.
The liability of each member is limited by shares or guarantee. Partners may make what
agreements they like inter se,(between themselves).There are some arrangements
between members of a company which are prohibited, e.g. purchase by the company of a
member‟s shares. Partners may undertake any business. The business undertaken is
restricted by the Memorandum of Association.

The Articles of Partnership

As a general rule, the partnership comes into being by means of an agreement in writing,
the document being known as the Articles of Partnership. This document, which will
be signed by all the partners, contains all the conditions, etc. under which the partners
intend to carry out their business. The Articles of Partnership usually include clauses
dealing with the nature of the business, its capital and property and the respective capitals
of each partner, the method of sharing profits and losses and the rules as to interest on
capital and drawings. Provision is also often made for the method of determining the
value of goodwill on retirement or death, and of computing the amount payable to an
outgoing or deceased partner. The partners are bound by the Articles and, if any point is
not dealt with in the articles.

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For a long time there was considerable acrimony between two of the partners, which
eventually came to a head when one assaulted the other. It was held that his expulsion
was justified, since his assault was an act of disloyalty and constituted conduct which was
clearly contrary to the good faith required of partners.
Registration – the Firm Name
A partnership is not subject to registration, unless it is a limited partnership. Legally, the
firm‟s name is merely a convenient way of alluding to existing partners. An authority to
lend to a firm does not authorise a loan to that firm when the partners have changed, but
copyright can be registered in a firm‟s name. The firm‟s name will be protected. Partners
can sue and be sued in a firm‟s name, although they must appear in person.
Rights and Duties Between Partners
The relations of partners to one another are governed by the Articles of Partnership. In
the absence of express provision, the following rules apply
- All partners are entitled to share equally in the capital and profits.
- No partner is entitled to interest on capital before the ascertainment of profits.
- No partner is entitled to remuneration for acting in the partnership, even if the partners
have
acted unequally.
- Every partner may participate in the management of the business.
- No new partner may be introduced without the consent of all existing partners.
- Differences arising as to ordinary matters connected with the partnership may be
decided by a
majority of the partners, but changes in the nature of the partnership business require the
consent of all.
- A majority of partners cannot expel one of their number.
- Each partner is entitled to be indemnified by the partnership for liabilities incurred in
the ordinary and proper business of the firm or in doing anything necessary for the
preservation of the firm‟s business or property.
- Partners making advances of capital beyond the amount of capital which they have
agreed to contribute are entitled to interest at the rate of 5%.

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- The partnership books are to be kept at the place of business of the firm, and each
partner must have access to them.
- Every partner is under a duty to his fellow partners:
(i) To tender true account and full information of all things affecting the partnership.
(ii) To account to the firm for any benefit derived by him from transactions concerning
the partnership or from his use of partnership property.
(iii) Not to compete with the firm.
In Bentley v. Craven (1853) one of the partners in a sugar-refining firm carried on a
separate business as a sugar merchant, with the consent of the other partners. He arranged
for the sale to the firm of a consignment of sugar, making a profit which he did not
disclose to his co-partners. It was held that he was under an obligation to share the profit
with his partners.
Relationship of Partners to Third Parties
As third parties are not permitted to inspect the Articles of Partnership, the court does not
presume that third parties know the contents of the Articles. No matter what the Articles
of Partnership may state with regard to the relation of partners to one another, an act
performed by a partner in the ordinary course of business will bind the firm and all the
other partners. This is known as joint and
several liability.
A distinction is sometimes drawn between the express (or actual) and implied (or
ostensible)
authority of a partner. Express or actual authority is that conferred upon a partner by the
terms of the Articles of Partnership. Implied or ostensible authority is vested in a partner
by virtue of his status as a partner, and is determined entirely by what is necessary for the
usual scope of the firm‟s business. Whether the act of a partner is necessary for the usual
scope of the business is a question of fact to be determined by the nature of the firm‟s
business and by the practice of the persons engaged in it. It is usual for partnership
articles to contain a clause imposing some agreed limitations on the authority of certain
or all partners, e.g. forbidding junior partners to negotiate loans on behalf of the firm, but
remember that such express restrictions have no effect on outsiders dealing with the firm,
unless the outsider knows, or should know, of the restriction.

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Termination of Partnership
A partnership can come to an end and, in certain circumstances, must be terminated. As a
general rule, the Articles of Partnership contain the regulations regarding the termination
of the partnership. Thus, a partnership may terminate at the end of the time fixed in the
Articles or on the completion of the purpose for which the partnership was formed, by
one party giving notice to the remaining partners of his intention to terminate the
partnership, or by the common consent of all partners.
A partnership is automatically terminated on the bankruptcy or death of any partner, or if
any event occurs which makes the business of the partnership illegal. In addition, the
court may decree the dissolution of the partnership in such circumstances as willful
breach of the partnership agreement by one partner, or action by one partner which is
prejudicial tothe continuation of the firm‟s business. In addition, if it can be shown that
the firm‟s business can be carried on only at a loss, or any circumstances arise which
render it fair and equitable that the partnership be dissolved, the court may also act by
dissolving the partnership.
Bankruptcy of Partnership
Since the liability of a general partner extends to the whole of the debts of the
partnership, or he is liable jointly with the other partners, a creditor in the bankruptcy of a
partnership can pursue one of two courses.
- In the first place, he can proceed against the partners jointly, i.e. in the name of the firm.
If he obtains judgement against the firm, the debt must be satisfied out of the assets of the
firm; if,however, the assets of the firm are insufficient, then the creditor can look to the
private assets of the partners in order to satisfy his debt.
In the second place, the creditor can proceed against any individual partner. If he obtains
judgement against a certain partner and this judgement cannot be satisfied out of the
private property of that partner, then the creditor cannot proceed against the remaining
partners. The,creditor must pursue one course or the other. If he pursues the second
course described above,the partner against whom the judgment is obtained will be liable
to pay the full amount. He has a right to call upon the other partners, however, to
contribute the shares that they should bear.

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Liability of New and Retiring Partners

Pay particular attention to the following points dealing with the liability of partners.
(a) Incoming Partner
Unless a new partner makes a special agreement to the effect that he will take over the
liability in respect of the firm‟s debts at the time of his joining the firm, he cannot be held
liable on such debts. In the absence of such an agreement, the new partner can be held
liable only in respect of debts incurred after he became a partner in the firm.
(b) Retiring Partner
A retiring partner can be held liable only in respect of debts incurred before his
retirement, provided due notice of retirement is given.

Rights of Partners on Dissolution

The rights of partners on a dissolution are usually contained in the Articles of
Partnership. Where they are not provided for in this way, the following are the more
important provisions which apply:
- The assets or property of the firm must be applied in paying off the creditors of the firm.
- The assets remaining are to be applied in paying to the partners the amounts which are
due to them as partners.
- The assets of the partnership, together with any amounts contributed by partners to
make up a deficiency, are to be distributed as follows:
(i) In paying off all creditors of the firm who are not partners.
(ii) In paying rateably to the partners the amounts due to them in respect of capital.
(iii) If any surplus remains, it is to be shared among the partners in the proportions in
which
they share profits.
6.4-General features of business in Ethiopia
A business organization is an organization that is formed for the propose of operating
profit making activity and business persons for different reasons may prefer to work
together and form business organization. Art.210 defined business organization as any
association arising out of a partnership agreement as we put also in section 6.3 above.

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Now, in addtion to the general view of business organizations, we shall see the form of
organizations the law defines one by one.

A-Partnership
The Ethiopian commercial code recognizes three kind of partnership.
i-Ordinery partnership
Art.227-270 of the commercial code contains rules regulating ordinary partnership. Rules
meant to regulate ordinary partnership are very flexible and given wider options to
partners. An ordinary partnership may set up to operate activities mentioned in article 6,8
or other activities that do not make their doer a trader.
Art.227-definition
-`A partnership is an ordinary partnership within the meaning of this title where it does
not have characteristics which make it a business organization covered by an other title of
this code.
As other kinds of partnership, partners of ordinary partnership are jointly and severly
liable to the creditors of the partnership where the partnerships assets are not sufficient
enough to meet demands of the creditors. Partners of an ordinary partnership‟s asset by
agreement may avoid a joint and several liability obligations (Art 255(2)) of the
commercial code. The exclusionary provisions cannot guard partners unless the provision
are known to their third party.
ii-General partnership
Art 280 – 295 of the commercial code contains rules regulating general partnerships.
Some of the provisions governing ordinary partnership are also applicable to general
partnership.
All partners may be appointed as managers of the partnership. Creditors of the general
partnership may not demand from the individual partners before exhausting all possible
remedy against the partnership assets.(Art.294 of the comm..code) Thus,while the
partnership is solvent,creditors cannot free the partners unless they have got fictitious
devidened.
Art 280(1) of the commercial code defines the nature of general partnership. A General
partnership consists of partners who are personally,jointly,severally,and fully liable as

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between them selves and to the partnership for the partnership firm‟s undertakings.Any
provision to the contrary in the partnership agreement shall be of no effect with regard to
third parties.
A joint and several liability of partners may avoided by agreement.However,exclusionary
provision of joint and several liability may only be effective among the contracting
parties. The provision may be enforceable against co-partners but produces no effect
against third parties.

The last provision of Art.280 of the commercial code states,”Any provision to the
contrary in the partnership agreement shall be of no effect with regard to third parties.

iii-Limitted partnership
Art.296 to 303 of the commercial code regulates limited partnership. As pointed out in
the article 303 of the commercial code, some of the provisions of the ordinary partnership
and general partnership are also applicable to the limited partnership.
Art.296-Nature of limited partnership
A limited partnership comprises two types of partners; general partners who are fully
liable personally,jointly and severly and limited partners who are liable to the extent of
their contribution.
Art 3 of Art. 301of the commercial code provides:
Limited partners may not act as managers even under power of attorney. A limited
partner who contravenes this rule shall be fully, jointly and severely liable in respect of
some or all the firm‟s undertakings.

B-joint venture
Art. 270 to 279 of the commercial code regulate the process of operating business activity
by the instrumentality of joint venture. A joint venture is a business organization that may
be formed to operate any kind of activity. It is a secret business organization since it is
not disclosed to third parties. The organization is known only to the venturers. Hence
joint venture can not get separate legal exsistance,the agreement between the venturers
should be in writing. The parties know the manager of the joint venture and he/she is

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liable for all faults and liabilities that may emerge because of the business. The power of
the manager and liability of other partners will be determined in their mutual agreement.

C. Companies
Today ,most business in Ethiopia aspire to operate in the form of company. Our
commercial code recognizes two kind of companies; share company and private limited
company. Art.304 -509 of the commercial code sets out rules regulating share company.
Art.510-543 contain special rules governing private limited companies.

Similarities between share company and private limited company

a- Liability of all members is limited to the extent of initial contribution

Art. 304 –definition of share company

1- A share company is a company whose capital is fixed in advance and divided in
to shares and whose liabilities are only met by assets of the company

2- Members shall be liable only to the extent of their share holdings

Art. 510-Definition,Nature
-A private limited company is a company whose members are liable only to the extent of
their contributions.
Therefore, members of a share company and private limited company cannot be forced to
pay company debt if they have paid contribution they owe to the company. That is to say,
individual members cannot be forced to pay company debts from their own personal
properties.
b-The partnership agreement forming both share company and private limited
company expressed in the memorandum and articles of association.
c-Both share company and private limited company are always commercial business
organizations.
As expressed in the commercial code of Art.10,share companies and private limited
companies are always commercial business organization.
Distinctions between share company and private limited company

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a- Maximum and minimum number of members that may form both of the
companies is not identical

b- The minimum amount of capital of both the companies is not identical

c- A share company can issue different kinds of shares but a share of a private
limited company are always registered

d- Shares of a share company may be offered for public subscription

e- While a share company can issue debentures a private limited company is not
permitted to issue transferable securities

f- Certain fields of activities are reserved only to share company

g- Personality of members in private limited company is important whereas,

personality of members of share companies is not important

6.5-Disolution of Business organization

From the very beginning of its establishment, a business organization will have legal
personality. Now organizations are treated as human beings for legal propose. Legal
persons are called juristic or artificial persons in general. On the other hand article 223 of
the commercial code deals with legal publicity to have legal personality for business
organization.
Art.223-Effect of publicity
A business organization shall not have legal existence nor personality until all the
provisions of this code relating to publicity have been compiled with and registration is
published.
After acquiring legal personality, the organization has the right to:-
-own property of its own and in turn capacity to sue or to be sued
-Sue or sued
-enjoy other consequences of legal personality

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But the above points are not guarentee does not mean business organization is existed for
ever. Different contingencies may take them away. Causes dissolving business
organizations are stated in Art.217,218, 258,495,279, and 542 of the commercial code.
Art.217 and 218 of the commercial code are the general provisions applicable to the
dissolution of all forms of business organizations. Business organization may be
dissolved by agreement of the persons who formed them, by operation of law and by
court. Art.217 of the commercial code provides instances in which a business
organization may be dissolved by agreements of person who formed them,by operation of
law. The court can declare a business organization to be dissolved.
Before a business organization is virtually dissolved,business at hand have to be
completed,doubts to be paid, and properties have to be facilitated in a way possible for
distribution among the persons who formed the business organization. This process is
called liquidation or winding up. The liquidation process is conducted by liquidators.
After an agreement for dissolution of a business organization is reached or decided for
dissolution,management organs of the business organization(managers in the case of
partnership and joint venture and directors in the case of companies) have to make
inventor with the liquidators and hand over documents and properties to the liquidators.
The liquidators have to finish the business at hand. They cannot start new business while
the business organization is at liquidation.The liquidators after paying all business debts
have to distribute the remaining property among persons(member or partners) who
formed the business organization.

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6.6-Self test exercises

1-what is the basic difference between partnership and joint venture with regard to
personality.
2-Partnership agreement refers to what?
3-Could business organization be formed without entering in to a partnership agreement?
4-Discuss the most important difference between association and business organization.
5-Compare and contrast a share company and private limited company.
6-What does commercial business and non commercial business organization mean?
7-Discuss the statement “joint venture is a secret business organization

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Unit Seven
Introduction to Law of Insurance
Introduction
Dear learners,this again an other important section you have to awared with due to the
fact that insurance goes with with business transaction. You are familiar with “Idir” that
sets to pay a little during a rejistered/unrejistered relatives death, depends up on the
contractual agreement of the member of the “idir” . So you may incur cost for a long
period of time with out any payment. To exsist payment,there should be death of relatives
in the given family and the payment in most cases does not balance with what the person
contributes. In the same way in modern business practice,you may buy insurance to
decrease or to transfer risk to the third party usually insurance agencies on described
contractual issues signed between you and the organization. The insurance may be paid if
there is any loss due to certain facts. Unless those things exsists ,you incur insurance
expence rather than payment. You pay for the described potencial black days on the
issues signed between you and insurance campany.
Learning objectives
At the end of this unit,you will be able to:-
 Explain functions of insurance institutions

 Discuss the process of forming insurance contract

 Distinguish person that may insure property

 Examine requirements of insurance policy

 Discuss rights and duties of the insurance policy

7.1-Background and functions of insurance

Historically most scholars believe that,first insurance was emerged in Babylon(Iraq) at
about 3000 B.C. The merchants‟ of the time pooled or combined their money to protect
to protect themselves from losses of cargo by thieves and pirates. King Hamorabi ,the
ruler of Babylon at that time dictated the traders to repay merchents who finances trading
voyage in cases thieves stolen goods in the transit in which case debt will be cancelled. In

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early times, the concept of insurance was used by Phoenencials also(Lebanon). At that
time,money was loaned to merchants to finance voyage. Merchants offer their ship as a
collateral for such loan.When the trip succedeed, the merchents would pay the trips
original loan plus the interest;the equivalent in their context.
The societies of Greece and Rome developed some of the rerliest form of life
insurance.Greek and Roman citizens formed insurance like organizations in which
members paid contribution that may be used for burial of members who died. Some
times,these societies also paid for decreased members families.Many modern form of
insurance developed in England between 16-18th centuries. The first kown insurance
were written in London in 1500s. In the 700s marine traders started pooling their risk
against damage to goods they transport by ship. Seafarers and people wishing to back
their expediment in formally to make insurance arrangement sometimes at pub called
LIoyd‟s in London;this then transferred to London‟s of London. It is this arrangement
that opened door to modern insurance.
It is difficult for an individual to shoulder a risk but if the risk is distributed over a certain
individuals ,it losses weight. Different people that are exposed to the same peril may
organize themselves as that of “idir” and distribute peril among all. In England, mutual
assurance company protected the interest of members by distributing perils through
periodical payments. Later on such business is taken on by individual underwriters that
collect money exposed to the same risk. The under writer was served as a means for
distributing risk among different people by the money collected in advance. Today‟s
giant insurance company‟s are fruits of formula devised for distributing happened on
similarly situated persons.What ever the case,insurance is exsisted because of the
exsistance of business risk.
An over view of risk

Insurance
It is a device that protects people from the financial costs that result from loss of life,loss
of health,property damage. A person or an organization may merly assume a risk of some
kind that may or may not happened. Whether the risk happen or not happen,it is difficult
to be certain. No body knows,when,how and to what extent the risk may happen. If this

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fact had been known before hand,every one would have avoided it. The uncertainity and
fear of unfortunate moment may hamper commerce or industry. The uncertainity
surrounding potencial losses could be referred as risk.If risk is insured,the person may
operate business without fear of risk. And again the following are the advantages
employed by insured person.
-If a person works with out fear of loss,he may increase production
-Insurance helps to budget money for unknown loss.
-Insurance distributes risk among different people.
-Insurance facilitates bank loan
-The insurance companies again create job opportunity for the society.etc
7.3-Insurance policy
7.3.1-Contractual requirement
Art.654-714 of the commercial code declares rules regulating parties to the contract of
insurance. Art.654(1) of the commercial code defines contract of insurance as follows.An
insurance policy is a contract where by a person called the insurer,undertakes against
payment of one or more premium pay to a person called the beneficiary,a sum of money
where specified risk materials.Hence insurance is a special contract,it shall satisfy all the
requirement of a valid contract.
The insurance contract shall be entered for lawful cause. This means the promise of the
insured and the insurance company make each other a lawful agreement. A contract shall
specify the respective obligation of the parties to the contract of insurance. The risk
insured, the premium to be paid and all the other annexed duties shall be clearly set out in
the contract of insurance.Defect to the object of the contract of agency makes the contract
of no effect.
Parties to the contract of insurance are the insurer and the insured.The insurance
company(the insurer) will pay the sum stated in the contract of insurance if a risk
happens to the insured.The insured person on the other hand promises to pay a specified
sum,usually periodically known as the premium.
Art 1725(b) of the civil code provides that the contract of insurance to be made in
writing.If the law demands a given kind of formality and not followed, there will be no
contract(Art.1720 of the civil code)

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You can enter in to valid and binding contract of insurance, if the agreement is made in
writing(art.657 of the commercial code). The written contract of insurance shall be
supported by the insurance policy.The policy can only varied where the variation
agreement is made in writing.The document is continig a varied contract of agency called
endorsement.(Art 657(2) of the commercial code.
Sub article 3 of article 657 of the commercial code states: ”the insurer and the beneficiary
shall be bound where prior to the signature of the policy or endorsement,the insurer hands
to the beneficiary a document setting up a provisional guarantee until the policy
endorsement is signed. This is called provisional guarantee ,the function of which is
almost similar to that of normal insurance apart from its provisional nature.
The provisional guarantee may be permitted until the main insurance is finalized,until the
p[olicy or endorsement is completed.The contract of insurance shall contain:-
a-the place and date of the contract
b-the names and address of the parties
c-the item,liability or person insured
d-the nature of risk insured
e-the amount of the guarantee
f-the amount of premium
g-the term for which the contract is made
Unless otherwise agreed, the contract of insurance shall be effective from the moment the
contract is signed. The contracting parties are free to extend the effective date of the
contract of insurance. It is accepted practice to extend the effective date until the first
premium is paid.
7.3.3-parties to the contract of insurance
A person capable of contracting may enter in to the contract of insurance.The person
insuring against a given risk is called the insurer. The person may be subscribe an
insurance company for his/her own benefit or for the benefit of the other people. This
means the beneficiary could be an insured or the third party. Until the beneficiary(the
assured) accepted the insurance on his/her own behalf,the subscriber is responsible to
discharge all obligation that may arise from the contract.If the beneficiary accepts the
contract of insurance, a direct contractual link is established between the insurer and the

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insured.The beneficiary may accept the insurance at any time,even after the risk has
materialized (Art. 661 of the commercial code).
7.3.4-The subject matter of insurance
The subject matter of the contract of insurance may be property(car,building
etc),payment of debt,liability to third parties. In general it could be categorized as a
physical object,intangible property, and liability.
-Physical object-refers to something that can be touched, seen and the like. For instance,
car accident, fire destruction and the like.
-Intangible property- this could be something that cannot be seen. For instance insurance
of receivables
-Liability- a person may be insured against happening of a given liability to third party. If
your car,or your property cause damage to third parties in order to benefit from the
insurance, you may have third party insurance.
The subject matter of insurance may be described in two ways. Specific description and
general description. Where a particular property is insured ,the exact nature of the
property shall be described in the policy in order to be more concise and clear and this is
specific description. For example if you by an insurance for your car,the model and other
things that differenciate your car from others should be described.
7.4-Insurable interest
A person is said to have insurable interest if he/she has interest in the subject matter of
insurance to whom the advantage may arise or prejudice may happen.The person should
have some kind of relation to the subject matter of insurance. Insurance shall protect the
relation or the concern on the property. If happening of a given peril is assumed to affect
the relation or the concern on the subject matter of insurance proved to affect the interest
of an insured, we may say that the person has an insurable interest. The happening of a
risk shall cause damage or prejudice the person insuring. The insured should be benefited
from the existence of a thing or an interest insured or should be prejudiced by its
destruction. In the case of life insurance, the insurable interest is constituted by the fact
that the subject matter of insurance(a physical object) exposed to certain peril.
7.4.1-Rights and Duties of the parties in the contract of insurance
7.4.1.1-Duties of the insurer

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The insured has to indemnify the insured where the risk insured materializes. Art.663(1)
of the commercial code states, “the insurer shall guarantee the beneficiary against the
risks specified in the policy.” The risk has to be determined in the contract of insurance.
Determination of the risk is important for different purposes. The extent of the premium
is determined by the risk. The insurer can insure the risk weighting the profit that might
be drawn. The risk cover of the policy helps the assured to know precisely the extent of
his cover,so that he/she may if he requires to take additional insurance and so that he/she
may avoid uneconomical double insurance.
7.4.1.2-Duties of the insured
1-payment of the premium
2-disclose material information-since insurance is a contract depending upon
speculation,it is necessary for the insured to disclose matters only he/she knows based on
article667 of the civil code.
3-Notify the occurrence of the risk insured- this is as soon as possible during the
occurrence to the insurer based on article 670 of the civil code.
7.5-Classification of contract of insurance
For more clarification, you can refer to your introduction to business and related courses.
The classifications are as follows.
A-classification based on nature of event
i-marine insurance
ii-fire insurance
iii-life insurance
iv-accident insurance
B-classification based on nature of interest affected
i-personal insurance
ii-property insurance
iii-liability insurance
7.6-Insurance of object
7.6.1-The concept of proximate cause
The loss to be compensated shall be caused by the peril insured. The cause and effect
relationship is very important. The cause of loss shall be proximate. That is, An insurer to

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compensate the insured, the risk caused of the subject matter may be destroyed or loss
because of contribution of different causes. The risk insured shall have approximate
cause. This is to say , the cause of destruction should have close relationship. If property
is lost by some intervening factor,we say the caused rendered destruction has remote
relationship and the insured cannot be responsible to compensate loss.
7.6.2-Making claim for compensation
Where the subject matter is lost,the insured to collect compensation has to:
-to notify the insurer on or within 5 days
-indicate how the risk happened caused loss
-prove the loss
7.6.3-Subrogation
The insurer after compensating the insured may step at his/her shoes and demand
indeminity and this is called subrogation.Where the insured impaires this right of the
insurer,the insurer will be released from the obligation of compensating the insured. The
insurer cannot claim the compensation from the people that have relationship with the
insurer.If for example,the insured‟s son caused the damage to the property
negligiently,and loss happened as a result,the insurer cannot be indempified.If the son
pays compensation to the insurer,it would be nonsense to the insured. Art.683 (3) of the
civil code states”…the insurer maynot claim against ascendants,agents or employees of
the insured person nor against persons living with him,unless such persons have acted
maliciously”
7.6.4-Insurance of liability
One of the most important and frequent type of insurance is liability insurance.In this
type of insurance the insurer promises to compensate the insured if he/she has to
compensate the third party. The first important procedural requirement for collecting
compensation from the insurer in the case of liability insurance is the third party has to
demand compensation either amicably through arbitration or by court of law(Art.658 of
the commercial law). The insurance policy may contain a provision depriving the insured
to admit liability or to compromise with out consent of the insurer.(Art.686(1) of the
comm..code.
7.6.5-Insurance of persons

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Insurance against person may be subdivided in to two. Namely: life insurance and
insurance against accident or illness.
Life insurance
The beneficiary of the life insurance may be named in the policy when the insurance is
purchased for the benefit of the third party. The insured person or his/her spouse shall
give consent in writing. Where the policy is purchased for incapable person,it shall be of
no effect unless agreed by the incapable person or by his or her representative. The policy
purchased for the life of incapable person may be invalidated by any interested party.
There are cases in which beneficiary of life insurance may not be enjoyed.These are:-
i-suicide(based on art.699 of the comm..code)
ii-murder of the beneficiary(see article 700 of the comm..code)
7.7-Summery
Insurance facilitates commerce by strengthening the actual and psychological confidence
of the traders. Because, traders or business men, act and perform in the environment
where risk is inevitable. But insurance distributes risk and minimizes risk per individual.
Business men could buy a policy that makes them to be satisfied by decreasing the
potential losses. Of course the degree of risk varies from one sector of business to the
other sector. Whatever the case, depending on the knowhow and interest of individuals
and as well risk venerability, we may buy life insurance ,liability insurance, property
insurance or all or two of them. In so doing there are policies and princibles between the
insured in addition to the existing commercial codes related to insurance that should be
followed. We hope, this chapter help you a lot in giving highlights about law of insurance
.
7.8-Self test exercises
1-Insurance distribute loss to different people susceptible- Discuss
2-what is premium?
3-Explain insurable interest
4-Distinguish remote and proximate cause of loss
5-What is the difference between personal ,property and liability insurance?
6-Discuss defenses that may make an insurer free in life insurance?
7-Explain the preconditions in liability insurance

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Unit 8

Negotiable instruments

INTRODUCTION
Dear students ,in this part, you will study about negotiable instruments. These are
instruments that are used for transaction or for your convenience near cash assets.
Negotiable instruments have their own legal procedures to use them as cash or in the
business transaction. You can go nearby bank and get a brief description to widen your
understanding of studding this unit. We go through the points from the perspective of
global general grounds since ours is not quite different.
Learning objectives

At the end of this unit,you will be able:-

 Define negotiable instruments

 Distinguish bill of exchange ,promissory note and cheque
 Discuss legal rule governing negotiable instruments

8.1-Negotiable instruments
In the last two study units of the course we will be considering the law relating to
negotiable instruments, with particular reference to bills of exchange and cheques. The
term “negotiable instrument” encompasses a wide variety of documents, e.g. bank notes,
promissory notes, dividend warrants and exchequer bills. We will not consider these
separately, because much of the law relating to bills of exchange applies equally to such
instruments. Before we look closely at the law, you should note that any document is
capable of being called a “negotiable instrument” as long as the following conditions are
met:
- The holder of the instrument may sue in his own name.
- Title to the instrument must pass on delivery, or on delivery and endorsement.

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- A “holder in due course” takes the instrument free from the defects in title of his
predecessors.
Negotiable instruments are an essential part of a business-orientated society because of
the ease with which they can be transferred from one person to another.
8.2. CHARACTERISTICS OF A BILL OF EXCHANGE
As we have already seen, the law ascribes certain privileges to the holder of any
negotiable
instrument, and because of this it is important to be able to establish whether or not the
document concerned in a dispute is a negotiable instrument. We have seen that a bill of
exchange is recognized as a negotiable instrument – all that we require, therefore, is a
strict definition of what constitutes a bill of exchange.
Definition
“An unconditional order in writing, addressed by one person to another, signed by the
person giving it, requiring the person to whom it is addressed 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.” The following example of a bill of exchange will be useful to you.
Important Terms
- The order to pay must be unconditional. For example, if the drawer stipulates
“provided the balance in my account amounts to £100”, this is not a bill of exchange
since there is a condition imposed. If the bill orders payment to be made out of a
particular fund, this is invalid as it is conditional on the fund being adequate to meet the
bill, but if the drawee says “pay the bill and debit” a particular fund, this is in order since
the acceptor can allow an overdraft.
The instrument must be in the form of an order. To say “I shall be pleased if you will
pay....”
is not an order but a mere request, but the expression “please pay.....” is a polite order.
- The instrument must be in writing. This includes print and typewriting, and also writing
done
with a pencil, though the latter is clearly undesirable, as it is open to fraudulent alteration.
- The instrument must be signed by the drawer, i.e. the person who makes out the bill of
exchange. However, a person‟s “signature” can be put to a bill by his agent.

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- The instrument must be an order to pay. If the instrument orders any act to be done in
addition to the payment of money, it is not a bill of exchange.
- It must be to pay a sum certain in money. An order to pay “all moneys due” is not a
bill of exchange, but if the bill is drawn for a certain amount “plus interest” this will be a
valid bill.
- Payments may be expressed to be made on demand. This means that it must be met
when the holder presents it for payment, whenever that might be: “on sight” or “on
presentation” arecomparable expressions in this context. Note that, where no time for
payment is expressed inthe bill, it will be treated as payable on demand.
- Instead of being payable on demand, it may be payable at a fixed or determinable
future time, e.g. “three months after date” (i.e. after the date of the bill) or “thirty days
after sight”
(i.e. after it is presented to the drawee for acceptance, the drawee being the person to
whom it is addressed or “drawn”). This maturity date of the bill may be fixed by
reference to the occurrence of some event and this will be valid, provided the event is
something that is bound to happen, e.g. “three months after I die”; if the event is not
certain to happen (e.g. “three months after I marry”) the bill will be invalid, and the
occurrence of the event will not make it valid.
- Payment may be expressed to be made to bearer, which means that the acceptor must
pay the sum stated to whoever is the holder of the bill when it is duly presented for
payment, i.e. the bill specifies no particular payee.
- It may be payable to, or to the order of, a named payee, in which case the drawer will
have named the payee in the bill; but he can pass on the bill to someone else if he
endorses it to this
effect.
Note the following points concerning payees:
(i) A bill not payable to “bearer” must indicate the payee with reasonable certainty or it
will beinoperative.
(ii) Where the payee is a fictitious or non-existent person, the bill may be treated as
payable to bearer; this point will be considered further in a later study unit.

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(iii) A bill may be drawn payable to two or more payees jointly, or it may be drawn
payable to one of two (or several) payees in the alternative.
(iv) A bill drawn in favour of the drawer himself will be a valid bill, e.g. making a
cheque out to “Cash” or “Self”. A bill drawn payable to the drawee will also be in order,
e.g. when making payment to a creditor by credit transfer one can give one‟s bank a
cheque for the amount instead of handing over cash.
(v) A bill may be drawn payable to the holder for the time being of a particular office.
(vi) A bill drawn for “Cash” (usually a cheque) will generally be treated as payable to
bearer.Strictly speaking, it is not a valid bill at all, and the acceptor may require the
endorsement in blank of the holder.
The following points about drawees should be noted also:
(i) Where the drawer is a fictitious person, or a holder not having the capacity to contract,
the holder may treat it there and then as dishonoured .
(ii) Where the drawer and drawee are the same person, again the bill may be treated as
either a bill of exchange or a promissory note.
(iii) Where the drawee is not indicated with reasonable certainty, but someone “accepts”
it, the instrument may be treated as a promissory note (Mason v. Lack (1929)).
(iv) A bill may be addressed to two or more drawees jointly, but an order to alternative
drawees will not constitute a valid bill and will be of no effect.
C. ACCEPTANCE
Definition and Use
The term “acceptance” used in relation to bills of exchange has a special meaning. In
common parlance, a person to whom something is given takes or accepts that thing, but
you should be careful to avoid this use of the word when talking about bills of exchange.
Acceptance of a bill of exchange is the signification by the drawee that he accepts the
order of the drawer to pay over the sum stated to the payee. As we have already
mentioned, a bill of exchange is used by a debtor to settle his account with his creditor,
but, it being an order to someone else to pay the sum stated (as opposed to a promise by
the drawer to pay), the creditor is not normally going to take the bill of exchange in
settlement unless the drawee acknowledges that he will meet the bill (and, in addition, is
a person of substance); until he does make such acknowledgement, the drawee is under

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no liability on the bill.In practice, the bill is normally handed to the payee to present it to
the drawee for acceptance. If the drawee agrees to pay the bill, he will sign his name
across it, and by that act he accepts the liability to meet the bill when it is duly presented
for payment.
You may, at this stage, ask why a third party should undertake to pay a bill of exchange
drawn by a debtor to settle an account with his creditor. The answer is simply that the
person drawing the bill will have an arrangement with the drawee to reimburse him for
any bills met.This, of course, leads one to the question, why go through this procedure of
drawing a bill of exchange instead of the creditor just waiting for the debtor to pay? The
answer to this is that, by using a bill of exchange, the supplier can send the debtor goods
on credit even if he is not sure of the latter‟s credit status, because before he releases the
goods he receives this document, accepted by a person on whose credit he knows he can
rely. Nowadays, bills of exchange are most commonly used in international trade and are
drawn on bankers. You will appreciate how useful an arrangement is that allows goods to
be sold on credit to someone the seller has never heard of, and against whom he would
have great difficulty in bringing an action for recovery of the debt.There are also other
advantages in that there is a market for the “discounting” of bills, so that the creditor can
receive immediate cash (for a charge, by way of interest), but this need not concern you
here.
Technicalities of Acceptance
(a) Presentment for Acceptance
Although a bill must be presented for acceptance and accepted by the drawee in order to
render the latter liable on the bill, it is not in fact necessary, as a general rule, for the
holder of a bill to present it for acceptance. He can hold on to it, unaccepted, until
maturity, or he can negotiate it to a third party, although a bill that has not been accepted
will in practice be much harder to pass on for value.
The only occasions when the Act actually stipulates that the bill must be presented for
acceptance are:
- Where the bill is payable a certain period “after sight”. In this case, the bill must be
presented for acceptance in order to fix the maturity date.
- Where the bill expressly stipulates that it shall be presented for acceptance.

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(b) Requirements of Valid Presentment

The Act lays down the following requirements for a valid presentment for acceptance:
- The presentment must be made by or on behalf of the holder to the drawee or some
person authorized to accept or refuse acceptance on his behalf.
- Presentment must be at reasonable hour, on a business day, and before the bill is
overdue.
- Where the bill is addressed to two or more drawees, who are not partners, presentment
must be made to them all, unless one has authority to accept for all, in which case
presentment may be made to him alone.
- Where the drawee is dead, presentment may be made to his personal representative.
- Where the drawee is bankrupt, presentment may be made to him or to his trustee.
- Where authorised by agreement or usage, a presentment through the post office is
sufficient.
(c) Requirements of Valid Acceptance
For an acceptance to be valid, it must:
- Be written on the bill and be signed by the drawee: the mere signature of the drawee
without further words is sufficient.
- Not express that the drawee will perform his promise by any other means than the
payment of money.
Acceptance is incomplete and revocable and does not bind the acceptor until the bill has
been
delivered – that is to say, handed back to the person presenting it, with his signature of
acceptance on it.
In Baxendale v. Bennett (1878) the defendant received from H a draft in blank as to the
drawer‟sname, written in H‟s handwriting. The defendant wrote his name across the draft
as acceptor and sentit to H who, finding he did not need it, returned it to the defendant.
The defendant placed it in an unlocked drawer in his chamber in the Temple, from which
it was taken. When it came into the handsof the complainant, a bona fide holder for
value, the document had been completed by the insertion ofthe name of W. Cartwright as
the drawer. No such person as Cartwright was known to the defendant, and the name was

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inserted without his knowledge or consent. Held: the defendant was not liable on the
document, as, although he had accepted it, he had not delivered it
Dishonour by Non-acceptance
If the drawee is not prepared to meet the bill, he will return it to the holder with a note to
this effect, and the bill is then said to be dishonoured by non-acceptance. The holder
then knows that the debtor has given him a valueless scrap of paper, and will commence
proceedings against him (the debtor, the drawer of the bill, not the drawee) to recover his
debt. Technically, such action is not an action on the debt but an action on the bill, for in
drawing the bill the drawer “engages that on due presentment it will be accepted and paid
according to its tenor and that if it is dishonoured he will compensate the holder...”
In certain circumstances, the bill can be treated as dishonored by non-acceptance without
ever
having been presented for acceptance; these circumstances are where:
- The drawee is dead or bankrupt
- The drawee is a fictitious person
- The drawee is a person not having the capacity to contract.
- After the exercise of reasonable diligence, such presentment cannot be effected.
- Although the presentment has been irregular, acceptance has been refused on some
other ground.
Qualified Acceptance
It may be that the drawee is prepared to accept the bill but only subject to some
modification. Any acceptance that varies the effect of a bill as originally drawn is termed
a qualified acceptance. A qualified acceptance may be any of the following:
(a) Partial
An acceptance to pay only part of a bill, e.g. a bill drawn for the amount of birr5,000 may
be accepted for birr4,000 only.
(b) Local
An acceptance to pay the bill only at a certain place; the acceptor stipulates that he will
pay the bill at this place only, and nowhere else.

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(c) Conditional
An acceptance to pay the bill only on fulfilment of a certain condition (e.g. an acceptance
to pay the bill on delivery of the bills of lading).
(d) Qualified as to Time
An acceptance say to pay a bill drawn payable after one month, only after six months.
(e) Acceptance by Some Only of Several Drawees
This is self-explanatory. Note, however, that a bill may be drawn on joint drawees and, if
both accept, payment may be demanded of either of them.
An acceptance will be construed as general unless clearly qualified, the acceptance being
construed most strongly against the acceptor (Smith v. Vertue (1860)).
If the holder of the bill takes such a qualified acceptance, this has the effect in most cases
of discharging from liability all prior parties to the bill except in so far as any prior party
consents to the holder taking such qualified acceptance. Such consent will be implied if
the holder gives notice ofthe qualified acceptance and the prior party does not object. In
the case of a partial acceptance, prior parties are discharged only if the holder fails to give
notice that he has taken the qualified acceptance. They have no right to object thereto.On
the other hand, the holder of a bill who is offered only a qualified acceptance is entitled to
reject it and to treat the bill as dishonoured by non-acceptance.
Acceptance for Honour
Where a bill is dishonoured by non-acceptance the holder of the bill may allow any other
person to accept it in place of the drawer. The acceptance for honour must:
- Be written on the bill and indicate that it is an acceptance for honour, and
- Be signed by the acceptor for honour.
The effect is that the acceptor for honour becomes liable to pay the bill.
PROMISSORY NOTES
Art. 823of the commercial code merely lists down requirements that have to be satisfied
in order to have a valid promissory note .Therefore,a complete promissory note shall
contain the following requirements.
-The instruments shall contain the word “promissory note”
-Unconditional promise to pay a sum certain in money

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The maker shall not attach any condition to the note. As that of the bill of exchange,the
promissory note shall not be backed by a condition subsequent.If condition is attached to
the note,the note loses the character of money. So,we can define promissory note as:-
“(1) A promissory note is an unconditional poromise 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.
(2) An instrument in the form of a note payable to maker‟s order is not a note within the
meaning of this section unless and until it is endorsed by the maker.
(3) A note is not invalid by reason only that it contains also a pledge of collateral
security with authority to sell or dispose thereof.
The following is a specimen of a promissory note payable on demand.
Necessity of Delivery
“A promissory note is inchoate and incomplete until delivery thereof to the payee or
bearer”
No precise form is necessary for a promissory note, but the essential feature is that there
must be an unconditional promise in writing to pay a certain sum in money. In a similar
manner to a bill of exchange, the note must not be made payable on a contingency,
although a note may contain a pledge of collateral security with authority to sell or
dispose thereof.
Liability of Maker
“The maker of a promissory note, by making it:
(1) Engages that he will pay it according to its tenor.
(2) Is precluded from denying to a holder in due course the existence of
the payee and his then capacity to endorse.”
Joint Notes
“A promissory note may be made by two or more makers, and they may be liable thereon
jointly, or jointly and severally, according to its tenor”
Joint liability is not the individual liability of each of the makers but the collective
liability of them all together. Thus a joint note is good against the makers jointly. Should
one of the makers of a joint note die or become bankrupt his estate is freed from all
liability, and the liability falls entirely on the remaining maker or makers. Again, all the

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parties of a joint note must be sued together. If any party is not included in the action he
will be released from liability. Should judgement be obtained against one or some of the
parties, whether that judgment is satisfied or not, then the other or others will be released.
Joint and Several Notes
Joint and several liability is the liability of all the makers together collectively and of
each of them separately. In other words, where a note is a joint and several one made by
two or more makers, the note is good against all the makers jointly or against each one of
them separately for the full amount of the note. If one of the makers to a joint and several
note dies or becomes bankrupt his estate is not freed from liability. Again, it is not
necessary for the holder of a joint and several note to sue all the parties together; the
holder can sue the parties singly or in any way he pleases and the remedy against them is
not satisfied until “twenty shillings in the pound” (i.e. the full amount) has been
recovered.

THE NATURE OF A CHEQUE

General Comparison with Bills of Exchange
Bills of Exchange for most countries defines a cheque as:
“A bill of exchange drawn on a banker, payable on demand.” Note the two special
requirements for a cheque:
- It must be drawn on a banker.
- It must be payable on demand.
Although cheques are a special type of bill of exchange, and the Bills of Exchange Act
applies to
cheques, there are a number of important points of difference:
(a) Because of the contractual relationship between banker and customer, there are a
number of special obligations on these parties.
(b) The rules relating to acceptance do not apply to cheques; the banker on whom the
cheque is drawn never “accepts” it, so that the drawer is the party primarily liable on the
instrument.
(c) There are special provisions for the crossing of cheques which do not apply to
ordinary bills of exchange.

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(d) Special statutory protection is given to bankers in relation to forged endorsements.

It may be observed further that, in practice, cheques are rarely used in the way of bills of
exchange as negotiable instruments. The vast majority of cheques are presented for
payment by the person to whom they are initially given, and negotiation of a cheque is
comparatively rare. In effect, cheques are generally used merely as a directive by the
drawer to his bank to transfer money from his account to the account of the payee.
The requirements for validity of a cheque
A cheque to be valid and binding, the following requirements shall be satisfied.
 Unconditional order to pay the sum of certain in money

 The name of the person who is to pay (drawee)

 The place of payment

 The date when and place where the cheque is drawn

 The signature of the person who draws the cheque (drawer)

Art.832 negotiation of a cheque

1-Notwith standing any provision to the contrary,a cheque in respect of which cover is
available to the drawer may be certified by the drawee if the drawer so requests
2-The cover in respect of a certified cheque shall remain blocked in a separate account
for the benefit of the holder until the expiry of the period of time for presentment
provided in Art.855
3-Certification is effected by the signature of the drawee on the face of a cheque
Cheques and Receipts
In addition to the principal points of difference between cheques and bills of exchange
referred toabove , there are a number of other special features of cheques that may be
noted .
Prior to 1957, it was common practice for the payee of a cheque to endorse it on the back
as he paid it into his bank for collection, and a cheque so endorsed was sufficient
evidence of receipt of payment for the drawer of the cheque (to whom, of course, the
paying bank would return the discharged cheque in due course). This practice was
generally found rather tedious, and in the Britain law of the Cheques Act 1957

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contained various provisions to make it unnecessary, of which S. 3 provides that “an

unendorsed cheque which appears to have been paid by the banker on whom it is drawn
is evidence of the receipt by the payee of the sum named in the cheque”. Thus a paid
cheque, whether or not endorsed by the payee (but not if endorsed in favour of some
other person) will nowadays normally be adequate evidence of receipt of payment by the
payee (for auditors, etc.), and the payer is unlikely to ask for any other receipt. However,
if he does do so the payee is bound to provide it.In this connection it may be noted that
some cheques are found with a form of receipt attached, and require as a condition that
the receipt must be duly completed before the cheque can be paid. Since such an
instrument does not constitute “an unconditional order in writing”, it is not strictly a
cheque, and falls outside the Bills of Exchange .
Negotiation of a cheque
A cheque could be transferred from one person to another person by means of
endorsement. It may be endorsed payable to certain person to his/her order or to the
bearer. If it is to bearer,the drawe may write the word “to bearer” on the face of the
cheque or simply may put his or her bar signature at the back of the cheque. As a cheque
is best substitute of money,it may be reendorsed at a different time. That is you may
endorse to kebede and Kebede may endorse to chala and chala may endorse to some one
else. Endorsement shall not be attached to any condition and it shall be absolute. A part
of money expressed in the cheque cannot be endorsed. A cheque may be endorsed to the
drawee bank but the cheque in such a case is taken as areceit. Therefore a drawee bank
to which the cheque is endorsed can not reendorse it(Art.843 of the commercial code).
The endorsement shall be written on the back side of the cheque.
Summery
In this unit,we have learned issues related to negotiable instrument. Negotiable
encompasses a wide variety of documents, e.g. bank notes, promissory notes, dividend
warrants and exchequer bills. They facilitate business transactions if valid. To be valid all
instruments should satisfy that the law demands from them. Therefore it is quite
compulsory for any business man the requirements each negotiable instruments requires.

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Self test exercises

1-What is the requirement of a complete promissory note?

2-What are the two special requirements for the cheque?
3- what are the requirements for validity of a cheque?

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