General Introduction of the Course material

If you are hoping to become a manager, at a certain point in your career, this text material will
help you to acquire knowledge and skills that pertaining to business law which an effective
manager should be vested with. This teaching material will give you more knowledge and skills
in regulating business and financial institutions which help you in your managerial
responsibility. It also integrated with the global thinking of business transactions as they are the
main juridical acts. This text material divides in to seven chapters which give emphasis on the
basic ways of running business through the financial institutions and their instruments. When
you read this teaching material always don`t forget to relate with practical business transactions.

Chapter one deals with introduction to law in general that enhances basic understanding and
gives readers clue about the proceeding chapters. It tries to show you the problem of defining
law and provides a solution to such effect. Generally, this chapter would give you general
background about the basic principle of law. Chapter two focuses on the principles of contracts
in general and its importance in performing juridical act. It also deals with the law of contracts
in general that shows basic principles and formalities required for a valid contract to conclude.
Chapter-three deals with business and business organizations of Ethiopia and the requirements to
form them. Chapter four addresses the formation of sales contract and duties of the parties.
Chapter five deals with the law of agency focus on the principles, form, scope of agency contract
and duties of the agent and the principal. Chapter six focuses on law of security devices which
explains the forms of guarantee instruments and their importance in securing credit operations.
Finally, chapter seven deals with law of insurance and its principles to form insurance contract.

Chapter One: Introduction to Law

1.1: Defining the Concept Law

In everyday life or conversation people use or define the concept law in many different ways,
however, it is very difficult or not simple to define law. As a result, different legal scholars
define law differently depending on the objectives that they have.

1
Some define law according to its characteristics. A characteristic is the existing law or positive
law. Positive or analytical school of thought focused on the existing law and tried to look what
law is.

Some of them define law according to its content. They say just law is a law but unjust law is not
a law. They relate to rationalism, that is, law is not made by man but found through reasoning,
wisdom. Such understanding not concerned with the existing law. According to them law is what
ought to be. This depends on natural law.

Some others define law according to its actual operation or function. They focus on how the law
actually serves the society not on how and who made the law.

Accordingly, the following are some of the definitions of law given by different scholars.

• Law has been defined as rules and regulations established by government and applied to
people in order for civilization to exist (American realism)
• Law is a body of rules for human conduct set and enforced by a sovereign political
authority (Thomas Hobbes and John Austin)
• Law is a body of rules for human conduct with in a community which by common
consent of this community shall be enforced by external power (Apothem)
• Law is the command of the sovereigns to be backed by sanction (John Austin)
• Law is an obligatory social rule by the public authority permanently and sanctioned by
force (Planiol)
• Law is a means of dominating and exploiting the society (Marxian)
• Law is defined as a body of principles recognized and applied by the state (Salmon A.).

These definitions of law are not an end by themselves; however, they are workable relating to the
views or purposes of scholars. From these all definitions and views of law provided by different
scholars, one can understand that the concept of law is something which cannot be defined, that
is, there is no conventional definition of law. The reasons are, there are different social
interactions, interests, political views, ideology or out looks, religions, cultures, languages,
customary practices, or traditions, etc., that influence not to have conventional definition of law
rather as indicated above there may be workable definitions of law.

2
1.2: Understanding Theories of Law

In defining what the concept of law is to mean, we need to refer the main theories of law. The
purpose of studying theories of law is to develop wider scope in understanding law. In this
regard, you will study three schools of thought such as natural law theory, positive law theory
and functional theory of law.

1.2.1: Natural Law Theory

Natural law theory is the oldest theory of law that dated back to the ancient Greek philosophers.
In the past, there was no distinction among law, religion and moral because law was defined in
relation to the Devine will. According to the classical natural law theory, law is discovered by
reason, human beings to govern and control their relations. They believed in that natural law is
revealed through “reason” because it is higher law than law made by man , that is, law made by
man must not be obeyed if contradicts with natural law. Natural law theory is classified in to
three periods that are classical natural school, medieval natural school and Neo-natural school,
though all of them have common understanding towards law.

St. Thomas Aquinas (1225-1274) leading proponent of this theory in the medieval period stated
that man-made law may be wrong, however, God’s law cannot be wrong. Man-made law shall
comply with natural law which is discovered by human rationality meaning man made law must
be governed by ideals of morality and justness discovered by human rationality. This reveals that
natural law had religious and metaphysical basis in the medieval period.

In spite of the criticisms made against natural law theory for trying to apply justness, morality
and fairness relating to religion and metaphysical out looks, its contribution still upholds. The
principle of rule of law, due process of law, equality before the law, the concept of fundamental
rights and international law have their roots in natural law theory. In natural law there is truth
about right law that mankind could discover by the use of his rationality has universal character.
It summarized that, since morality and justice are there in nature man can’t create or change the
natural law but the position of man must be to discover and accept rationally.

3
1.2.2: Imperative/Positive Law Theory:

It is sometimes known as positive or analytical law theory. The Greek philosopher Aristotle
(384-322 BC) was the philosopher who made a distinction between natural law and positive law.
He stated that positive law is written or declared law by a body or individual who has the power
to enact laws. Positivists believe that there is no higher law than a nation’s positive law that
enacted by a sovereigns body which has the power to legislate and enforce the law is supreme
and just if it is made by a democratic government, but unjust if it made by a dictator(s).

John Austin (1790-1859), the prominent positivist, defined law as the command of the sovereign
backed by sanction. He believed that morality and justness have no role in defining what law
actually is. He strengthened his argument saying that what the existence law is one thing but its
merits or demerits are another. According to john Austin the sovereign is the government which
is competent to make laws because law is separate from the concept of morality and justness.
This theory is criticized because it excludes morality and justness from the preview of law. They
said when there is a command there is a superior and inferior relationship as a result if the
inferior violated or evaded the command of the superior, the inferior is going to be punished.
Therefore, they concluded that because of sanction the law is respected and functioned.

However, criticism is forwarded against positivists saying that law is not always a command
because human beings shall have some rights; for instance, everyone has the right to elect and to
be elected. This is not a command like don’t commit theft but it is a right. Another example,
everyone has the right to marry or not to be married, it is not command but a right which is not
punishable.

1.2.3: Sociological/Functional Law Theory:

The prominent and influential American Jurist, Roscoe pound (1870-1964) saw law as an
attempt to balance social interests with individual interests. To him law is the product of the
society, and its purpose or function shall be to balance conflicting interests and considered law as
social engineering.

Justice Holmes (1841-1935) also defined law as a means to protect and promote the collective
group interests as compared with the individual interest. Justice Holmes emphasized that while

4
determining the law and legal rules by which men should be governed, lawyers and judges must
take into account the needs of the time and the needs and satisfaction of societies.

The general program of studying law in the view of the functionalist is that seek to enable to
complete law making whether legislative, or judicial or administrative or the development,
interpretation, and application of legal precept to take more complete and intelligent account of
the social facts up on which law must proceed and to which it is applied. Its basic concern is with
the effectiveness of law, that is, aim to focus on the gap between the law- in- theory and the law-
in- action. They concluded that legislators and judges shall understand the factual effect of law
and legal institutions in the social life of the society and address social problems when enforced.

1.3: Basic Natures of Law

The nature of law is based on the definition of law given which collectively can be considered
law as a system of mandatory norms made by a competent authority to regulate the social
behavior of man. The four core points from this definition can be indicated as law is about
regulating social behavior, law is normative, law is a system of mandatory norms, and is made
by a competent authority that means by a government organ which has the law making power.

1.3.1: Law has Generality

Law has generality, to apply a specific case. The level of generality of law may differ depending
on the group of human beings which described by general criteria. Rules are general statements
on a possible human behavior. For instance, the Universal Declaration of Human Rights
(UDHR) uses words like all men, everyone, no one, etc.

Article 3 of the UDHR says ‘everyone has the right to life, liberty and security of person.’ This
provision tells us that all persons should get protection of law. Art. 8 of the UDHR also say ‘no
one shall be subjected to arbitrary arrest, detention or exile.’ This is irrespective of color, sex,
culture, race, etc. All men are equal, etc. so that law has a universal character which expresses
possible human behavior and regulates human behavior in a general form.

5
1.3.2: Law Regulates Social Behavior

Law regulates general human behavior not individual behavior. When we say law regulates
social behavior, it does not concern every kind of individual behavior but the relationship
between human beings and the social behavior of man or woman. Think of somebody took away
your wallet, or committed rape, abduction, or child abuses, inflicting bodily injury, etc. all these
evils come from human behavior which the law shall regulate. Such human behaviors have to be
regulated and people have to be made to behave in a certain accepted standard.

Thus, the nature of law is not to regulate individual behaviors because behaviors are not legal
norms but technical rules, example driving a car. However, the law tries to regulate social
behavior as far as it materializes to certain social interactions of human behavior.

1.3.3: Law is Normative

Law tries to describe and regulate the general human behavior by setting norms or standards of
behavior. For instance, the law prohibits causing bodily injury, theft, arson, murder, and so on.
These are: behavioral standards set by law that everybody shall not behave below the standards.
The standard norms are permissive, prohibitive (mandatory), directive and rewarding norms.

In this case, the law has four positions. These are:

• Prohibitive norms are norms that the law prohibits some behaviors say that one must not do,
is not allowed to do, is for bidden to do, may not do, etc. for example, all criminal provisions
are prohibitive norms.
• Permissive norms- the law permits persons to act alternatively saying that one may do, is
allowed to do, is entitled to do, has the right to do, etc. For example, every citizen has the
right to elect or to be elected
• Directive norms- saying that one shall do, task of doing, etc. Example judges shall take an
oath before assuming office.
• Rewarding norms- such norms encourage persons for what they do good achievements. For
instance, to reward tax exemption for an investor.

6
1.3.4: Law is made by a Competent Authority

A competent authority makes law. Among the three branches of government, the legislative
organ is competent to make laws, in our case the House of Peoples Representatives. The
executive branch of government is also competent to make subsidiary laws when delegated by
the parliament. Laws made by incompetent organs are not laws and do not satisfy the nature of
law.

1.4: Understanding the Function of Law

The objective of law is to ensure social justice. In order to accommodate the dynamic nature of
society, the law has to be dynamic to be able to entertain such changes. Thus, law is expected to
reflect justness and fairness with the development of the needs of the society.

In fact, law can be an instrument of oppression under despotic or dictatorial regimes. However,
in a modern society, law is expected to be a powerful instrument to change the will of the people
in to practice. Concerning the function of law different scholars have different views. However,
most of them have agreed that law is an instrument of securing justice.

The major functions of law are mentioned as follows:

• Law maintains peace and order in society. That is, to enforce order that helps to protect the
life, peace and property of the society;
• Law is a mechanism of dispute resolution and promote co-operations and understanding
among the society;
• Law limits the power of important government organs and there by promote public and
personal freedoms;
• Law determines the relationship of government with its citizens;
• Law regulates and controls social behavior, this to mean it does not focus on individual
behavior;
• Law protects and respects fundamental human rights and freedoms of individuals rights and
promotes rule of law and social justice; and
• Law promotes economic growth and enables to plan and effectively implement development
activities that satisfy the needs of the society etc.

7
The FDRE Constitution of 1995 under its preamble addresses the function of law underscoring
as the goals of the constitution. The objectives and functions are mentioned below.

• To enable full and free exercise of the right to self-determination;

• To build a political community founded on the rule of law;
• To ensure peace;
• To build a democratic order;
• To advance economic and social development;
• To promote individual and peoples freedoms and rights;
• To promote equality;
• To promote unity with diversity;
• To enhance economic, social and cultural life of the peoples, etc.
From the above discussions the function of law can be summarized as:

It maintains peace and order. It serves as Conducive ground for development. Another role of
law is to resolve disputes that arises responsibility if one person has a valid legal claim against
another, as in suit for breach of contract. It is important that we bear in mind that law is not
simply a statement of rules of conduct but also a means where by remedies are afforded when
one person has wronged another. It can also be a method of social control, an instrument of
social, political, and economic change. Law is both an instrument of change and a result of
change that take place in a society. Law determines or limits power of government organs. It
determines the relationships of government with its citizens. It protects and determines
fundamental rights and freedoms of individuals. Finally, law responds to the goals, desires,
needs, and aspirations of society.

1.5: Understanding the Legal Systems

Legal system is to mean the entire legal category or arrangements of laws. In the world there are
different types of legal systems but the common and the major legal systems are: the common
law legal system and the civil law legal system. Each of them is discussed here under.

8
1.5.1: The Civil Law Legal System

The civil law tradition is based on Roman civil law which has ancient roots. There have been
series of compilations of legal rules and codifications of laws in ancient Roman. As a result, the
civil law refers to codified law. It took shape as a national law in the 19th century. Napoleon’s
rule provided France with unified national body of law after the French Revolution of 1789.
Hence, in the1804 the French civil code, the penal code, the commercial code and the codes of
civil and criminal procedures were enacted.

The civil law legal system is based on codified and written laws enacted by the legislator not
judge made law. The reasoning of the judges is based on deductive method. Judges deduce
articles and provisions from the body of laws provided then, they interpret and apply them. Civil
law legal system is not case law. The civil law legal system also called continental law legal
system, currently, applied in most European countries such as France, Italy, Germany, Latin
America, Asia and Africa. Ethiopia also follows the civil law legal system.

The formation of court structure of Ethiopia is related to the state structure because court
structure of Ethiopia changes with the dynamism of the political situation of the country and
government formation. Ethiopia was under a tradition and informal administrative structures and
judicial system. Hence, there were no established, recognized or institutionalized systems for the
administration of justice. As a result, there was no well-established and uniform hierarchy of
courts, no established procedure for hearing cases, no clearly determined law governing different
activities and affairs, no legal system, no legal profession and judicial service.

Ethiopia inherited the civil law legal system. Although the first written law of Ethiopia was
Fetha-Negast, the modern civil code was enacted in 1960 that has 5 books and 3367 Articles.
The commercial code was also enacted in 1960 and has organized into 5 books. The criminal law
was enacted in1957. This shows Ethiopia grouped itself under the civil law legal system in
the1950s when the modern laws enacted.

1.5.2: The Common Law Legal System

The origin of the English common law is traced back to the Norman Conquest in 1066 as English
legal scholars stated. One of the mechanisms that England (UK) used to unify the country was

9
the establishment of the king’s courts. As the law was based on custom or common or universal
custom to the realm, the body of rules that evolved under the kings courts is called Ceria Regis
,law that was based on general custom common to the entire realm and became the beginning of
the common law.

Judges were depended on past court decisions and regarded as binding. The practice of deciding
new cases with reference to former decisions is called the doctrine of stare-decisis, that is, to
stand on decided cases. The practice of deciding new cases with reference to former court
decisions eventually became a corner stone of the English and American common law legal
system.

The body of law that developed under the English legal system consists of the rules of law
announced in court decisions including court interpretations of statutes, regulations, and
provisions of the constitution. Such a law is a common law legal system. This is a judge made or
case law. The proponent countries to the common law legal system are England (UK), USA,
India, Canada and other countries which were former colonies of Great Britain, etc.

From 1066 up to the 18th century the type of law that was dominant in England was the common
law legal system. However, from the late 19th century it has been continuously replaced by
parliamentary legislation. Currently, statutory law is more important than common law because
when conflict arises between them statutory law is supreme. Thus, parliamentary legislation and
common law or judge made law or case law is the two sources of law in modern common law
legal system.

Currently, most of the laws in a common law legal system are enacted laws. A rule made in the
course of deciding cases, rather than legislation can become common law rule. Judgments given
by superior courts in the hierarchy are binding on lower courts, that is, precedence.

In principle, Ethiopia does not follow the common law legal system practice as of stare-decisis,
that is, to stand on decided cases. Therefore, the decision of higher courts and their interpretation
of laws, do not bind the lower courts because they are not considered as laws. However, today
decision made by federal Supreme Court cassation bench is binding to all courts of the country.
In this case, Ethiopia follows the mixture of the common law legal system approach.

10
1.5.3: Comparing Civil Law and Common Law Legal Systems

The civil law, also known as continental law, legal system is based on written law and does not
consider customary law as a base because it applies codified law which is enacted by the
legislator. Whereas the common law legal system is based on customary law, that is, unwritten
law and applies case law. Civil law legal system is based on codified law whereas common law
legal system developed gradually from decision of the courts. In civil law legal system judges
mainly depends on codified law but judges do not merely apply the law, in some cases, they
make law (judicial precedent) in the common law legal system. Judges interpret codified laws to
pass judgment. However, in the case law, they create laws but is not binding in the civil law;
whereas, the courts interpretations of law become precedence. It serves as law binding to lower
courts in the common law legal system.

In the common law legal system case law is source of law but in the civil law legal system, case
law is not source of law except in administrative adjudication. In the common law legal system
judges refer to the precedents first and then to the legislation or enacted laws whereas judges
depend only on codified law or enacted laws in the civil law legal system. The civil law legal
system does not based on customary practice as a source for decision whereas the common law
legal system based on customary practices as a source for decision. There is jury system in
criminal proceedings in the common law legal system .However; there is no jury system in the
civil law legal system criminal proceedings.

Currently, the distinction between the civil law legal system and common law legal system is not
watertight. This is because legislation of parliament has minimized the dominance of common
law in England. Thus, the main source of law in the common law countries has become enacted
legislation. Similarly, the civil law countries of Europe have incorporated to their written laws
principles which were formerly limited to common law legal system. Case law is being used in
French tort and administrative adjudicative process. Since, their similarities are more than their
distinction; making direct comparison of both legal systems today is difficult.

11
1.6: Source of Law

This section dedicated to study different sources of law. Source of law is to mean the situation
where by the law emanates or creates. Law can be made from different sources, such as
customary law, legislation, judicial decision, legal doctrine and Treaty.

1.6.1: Customary Law as a Source of Law

Customary practice can be defined as the continuous repetition of certain conduct which people
of a certain community accept as necessary are willingly bound by it. In this case, a habit or
traditional practice which does not have continuous applicability, acceptability and willingness
of persons to be bound by it, cannot be considered as customary law. Custom is one of the oldest
sources of law. Before the emergence of government, people in all communities were governed
in accordance with customary rules of their society.

Customary law is composed of those customs which have been recognized by the state as law
and the enforcement of which is guaranteed by the state. Customary law was a wide spread
source of law during the feudal times, while its significance diminished during the capital
development. The main reason for this is that usually customary law operates in social
communities below national law.

Many agree that for a custom to be accepted as governing human conduct and relationships, it
has to fulfill certain requirements. One of the requirements is, it has to be recognized as law by
the judge and influential elders of the time. For custom to be recognized it has to be a right or a
duty, which has come to exist through popular consent. In the common law legal tradition, the
judges were the one who included local custom as part of the common law legal system.

Custom to be part of the common law, it has to fulfill the requirements that to form from time
immemorial; accept continuously by the local population without a record of opposition to the
custom, that is, practiced continually without interruption and without opposition by certain
groups of the society in relation to the conduct; that shall be acceptable to bind their conduct
with certainty; the custom shall be reasonable, that is, it must conform to the norms of justice,
fairness and public values and lastly, custom to be valid must be in conformity with statute law
or already universally accepted custom common consent.

12
In Ethiopia custom serves as sources of law when it is sufficiently general and practiced by
majority of the population, which is not contrary to natural justice, which is not contrary to social
and economic progress and which can have legal clarity. This provides under Article 3347(1) of
the civic code and Art.9 (1) of FDRE Constitution.

1.6.2: Legislation as a Source of Law

Legislations or statutory laws are acts of competent state organs which directly formulate the
legal rules and equip them legal force. Today legislation being predominant source of law both in
the civil law and common law legal systems. Legislation may be direct or indirect. Direct
legislation is made by the supreme legislative body of a government. Indirect legislation is made
by other subordinate organs of a government when they are delegated to legislate by the supreme
legislative body of the government. In other words they are supreme legislation and subordinate
legislation based on who made them.

The Constitution is the supreme legislation that any laws or legislations emanate from it. The
Constitution gives power to the respective legislative organ to legislate laws. For instance, the
Constitution of the Federal Democratic Republic of Ethiopia Article 55(1) gives power to the
House of People Representatives (HPR) of Ethiopia to enact proclamations-legislations of the
legislative organ.

The House has also delegated to the Council of Ministers the power to issue or enact regulations
for the proper implementation of proclamation, that is, legislation of the executive organ such as
regulation, directives, etc. Currently, Legislations of local governments are also sources of law in
Ethiopia.

In a federal form of government there are to legislatures, that are, Federal legislative organ which
has power in issuing legislations what serve for federal or central government matters and local
or state legislators which enact laws that serve for their respective states. In a unitary form of
government there is only one legislative organ, that is, the central government legislator which
enacts laws that serves the entire nation. Generally, constitution, legislation of the legislative
organs (proclamation), legislation of the executive organ (regulation, directives, circulars) and
legislations local governments are the sources of law.

13
1.6.3: Judicial Decision as a Source of Law

Judicial precedence is important source of law in the common law legal system. There are
above, decisions of higher courts which are binding for the same court and for subordinate courts
when they decide, later on, on the same or similar case. In the civil law legal system indicial
precedent is not a source of law and lower courts are not due to bound by decisions of higher
courts. Infect, some civil law legal system follower countries, it is observed decision of supreme
courts, especially, decision made by cassation benches are binding to the lower court. This is
effective in Ethiopia, now days which the Federal Supreme Court cassation bench is given power
by proclamation its decision to be binding the lower courts of all the country.

The doctrine of precedence has two meanings. First, precedence includes reported case law
which may be cited and followed by the courts. Second, precedence means that case law has a
great binding authority that has to be followed, in the common law legal system. In the common
law legal system there are two kinds of precedence’s. These are authoritative and persuasive
precedence’s. Authoritative precedence’s are the decisions of superior courts which are binding
on subordinate courses. The judges of the subordinate courts must follow them even if they do
not approve them. It is the authoritative precedence’s which the source of law is. The pervasive
precedence’s are precedence’s that the judges are under no obligation to follow but which they
may take in to account when they pass judgment based on their own findings.

1.6.4: Legal Doctrine as a Source of Law

This is taking the research of famous legal jurists as a reference. Critique of existing law,
scholarly opinions, and case laws may have persuasive power. Judges, lawyers, legislators, and
administrators may refer to such opinions; however, they do not take them as source of law.
Academic opinions, journals of law, legal encyclopedias, law text books, completions of case
law, and manuals of laws serve as reference to widen the knowledge and application of lawyers.
However, they do not serve as a source of law in a strict sense of the word. In Ethiopia, legal
doctrine is not recognized as source of law. However, it has only persuasive and instructive
value.

14
1.6.5: Treaty as a Source of Law

Treaty is an agreement between states. If the agreement is made or singed between two states, it
is bilateral treaty. However, if the treaty is signed by more than two states, it is multi-lateral. A
treaty may have a discussion stage, signing stage and ratification stage. It is after such processes
have been performed that a treaty becomes a source of law for the respective countries. For
instance, FDRE constitution Article 9(4) state that “any international convention ratified by
Ethiopia is an integral part of the law of the land”, this means, it is after the treaty ratified by the
legislative organ that can a source of law in both the civil law legal system and common law
legal system.

1.7: Classifying Laws

Classification of law is to mean breaking down the law into a manageable size. Classification of
law is important in order to make it manageable, coherent and consistent in application. It is also
necessary to classify law in order to make it easily comprehendible by the lawyers, law enforcing
institutions and the societies; and hence, to make it accessible to justice. Thus, law can be
classified in to public law and private law, substantive law and procedural law,national law and
international law and may be classified in to criminal and civil laws.

1.7.1: Public Law and Private Law

Law is classified in to public law and private law. The detail of each of them is discussed below,
so you should read more.

1.7.1.1: Public Law

It is a branch of law that regulates relations among state organs and legal relations in which a
state as a public power is involved. It also defines relationship of a state with its citizens. The
legislative, the executive and the judiciary are the state organs that are central to public law and
determine their power. Public law is also concerned with the concepts and ideas such as the rule
of law, the supremacy of the constitution, the separation of powers and the control of powers of
the executive and administrative agencies. Public law can be classified as national public law and
public international law.

15
Public law includes those bodies of laws that affect the interest of the public or society at large,
example, constitutional law, administrative law, public finance law, criminal law, etc.
Constitution is supreme law of the land which defines powers and functions of the state organs.
Administrative law is a branch of public law which deals with the actual operation of
administrative agencies. Criminal law is part of public law that controls criminal acts.

1.7.1.2: Private Law

It is a branch of law that regulates relations among individuals and a state engaged itself in
private business sectors like activities in commercial banks, transport, tourism, industry etc. It
regulates relations among private person on equal status. It is usually formulated by an
agreement of the parties, example contract law. Private law usually has a gap filling mission
though these may sometimes be mandatory provisions of the law to be strictly observed. Even in
case of dispute private persons in their private capacity are to handle their cases, that is, the state
will not involve in their affair except, as a court. When they decide to resolve their dispute out of
courts, they are entitled to do it. Private law can be classified in Private National or domestic law
and private international law that will discuss later.

Private law encompasses the subject of contract, torts, property, etc. Private law includes
business law, that is, the major focus of this course. Before defining business law, it is proper to
define what business is to mean. Business is an occupation, employment, professional or
commercial activity engaged in for gain or livelihood (Black’s Law Dictionary).Therefore,
business law is the inter-disciplinary branch of law that regulates and facilitates business or
commercial undertakings.

Business law aims at allowing business community to do business in the way they want to do. It
tries to maintain the freedom of the business men in their bargaining with each other regarding
their contracts and which also stands to protect the court from intervention in commercial
contracts. The basis of business law lies in the autonomy or freedom of the party to freely
arrange their affairs.

Business law tries to meet the following common needs of business communities.

• They demand that their agreement has to be respected

16
• They require the decision of the court on commercial matters to be predictable so that they
would know what they should do.
• They have an interest that the law to be flexible enough to accommodate business practice.
• They need their disputes to be settled or resolved quickly without rigorous procedures and
with inexpensive manners because time itself is money for business community.

1.7.2: Substantive Law and Procedural Law

Law sometimes classified as substantive and procedural law which comprehensively helps to
achieve its intended result. They are briefly discussed as follows.

1.7.2.1: Substantive Law

It is a law that defines the rights, privileges and imposes duties of either a state or an individual.
Substantive law comprises all public laws such as constitutional law, administrative law criminal
law nationality law, Tax law, and civil or private laws such as law of contract, law property,
commercial law, etc. as well as public and private international laws. This is because all public
national and public international laws lay down rights, privileges and imposes duties by law.
Private national law and private international law also lay down rights, privileges and imposes
duties and liabilities as the result of the agreement made by the parties to be bound.

1.7.2.2: Procedural Law

It is a law that used to decide disputes is procedural law. The legal procedure or process that
determines how a law suit is begun, how the fill is open, how the trial is conducted how appeals
are taken, and how a judgment is enforced is procedural law. Procedural law establishes the
procedures or mechanisms by which rights, privileges are enforced and protected and obligations
to be executed. Procedural law comprises criminal procedure law and civil procedure law.

Criminal procedure law regulates the process for addressing violations of substantive criminal
law. Criminal procedure law is a branch of public law which facilitates the prosecution of
criminal cases and regulates criminal proceedings in a court room. It is bound by the
constitutional provisions that safe guarding the rights of suspects and criminals. Criminal cases
are handled by the state. Civil procedure law also consists of the rules by which courts conduct

17
civil trials. The rules define the process that courts will follow when hearing cases of a civil
nature. Civil court trials are concerned with the judicial resolution of claims by an individual or
groups against another(s). the rules of civil procedure explain how a law suit shall be
commenced by the plaintiff, what kind of services of process are required, the forms of
pleadings, motions, order allowed, the process for judgment and the various available remedies.

1.7.3: National Law and International Law

Law is also classified in to national and international based on their scope of application. Thus,
should identify their nature as follows.

1.7.3.1: National Law

It is also called domestic or municipal law. It is national law because it is made by one sovereign
state legislator. It is law because it regulates internal state and human behavior as well as the
character in which other laws may have. There is a relationship of authority, that is, superior
subordinate organs and laws relationships. National law also classified in to public and private
laws. Public national law consists of constitution, administrative law, criminal law, criminal
procedure law, nationality law, and public finance law. Private national law consists of laws such
as law of contract, family law, property law, succession law, commercial law (business law),
administrative contract, and civil procedure law.

1.7.3.2: International Law

It is a law which has a different character from domestic law. International law also classifies in
to public international law and private international law. Public international law is a law that
regulates relations between two or more sovereign states. It is public law because the states act
and regulate social behavior. It is a rule of behavior of states which is binding in their relations
with each other. There is a relationship of equality, that is, states have equal rights irrespective of
their size, economy, population, etc. Public international Law consists of convention, covenant,
etc.

Private international law regulates relations of individuals of different citizens. Private

international law also called conflict of laws. Private international law comprises provisions of
national law regarding contracts and law suits involving foreign laws or jurisdiction. Private

18
international law concerned with private relationships of two states citizens, example, when an
Ethiopian woman marries an Italian man. Their marriage or divorce relation shall be governed by
private international law. Any succession claim of either citizen against other citizens or any
marriage relationship or any international trade made between individual different citizens is
governed by private international law.

International law is created mainly by two ways. These are by treaty and international custom.
Treaty is a binding agreement made between states. International custom is a custom that grew
up with in the relationship of states from time immemorial. Thus, international law consists of a
body of customary and conventional rules, which are accepted as being binding by the states in
their mutual dealings with one another. In modern times the main source of international law is
treaty.

1.7.4: Criminal Law and Civil Law

1.7.4.1: Criminal law

Criminal law is a branch of public law that deals with criminal matters such as committing
murder, rape, theft, abduction, corruption, etc. Criminal law studies issues of criminal matters.
Criminal law can be classified in to national or domestic criminal law and international criminal
law. National criminal law regulates crimes proactively beforehand and lays down punishments
for offenders when they are committing offences in a given country. International criminal law
regulates crimes proactively beforehand and lays down punishments for offenders when they are
committing international offences. Crimes that are considered as international are terrorism, drug
trafficking, genocide, human trafficking, etc. The purpose of criminal law is to maintain peace
and order of the society at national and international level.

1.7.4.2: Civil Law

Civil Law is a branch of national private law that deals with civil matters such as when persons
conclude contracts to do different business transactions, concluding marriage, making a will,
donation, agreements made on buying and selling goods, etc. Civil law is also classified in to
national and international depending on its scope of application.

19
1.8: Hierarchy of Laws

Hierarchy of laws is to mean the order of laws according to which they obeyed. Hierarchy of
laws shows hierarchy of government organs. For example, constitution is superior in hierarchy
than any other laws because it is made by the higher legislative organ.

1.8.1: Definition and Nature of Hierarchy of Laws

In a government there is hierarchy of government organs. As the same time we have hierarchy of
laws. Thus, hierarchy of laws is nothing but the reflection of hierarchy of state organs. Hierarchy
of laws can be defined as a coordinated arrangement of laws among which a superior subordinate
relationship is expressed as a direct relation of the power order in the law making authorities.

The lower state organ and the lower law is a subordinate to the superior state organ and superior
laws. The term hierarchy of laws refers to a differentiation in status forming a superior
subordinate relationship in the chain of laws

Hierarchy of laws creates separation of powers of state organs such as the legislative, the
executive and judiciary. This implies that one form of state organs will control, and check the
other. It also implies that the principle of rule of law requires each state organ to work in
accordance to powers and functions given to it by law. In this case, hierarchy of laws is
necessary and decisive.

1.8.2: Primary and Secondary Legislations

Legislation can be divided in to: primary and secondary legislations. Primary legislations are
those types of laws issued by the legislative organ after having undergone a certain process of
deliberation and whose main contents are basic policies, for example, proclamation. What the
legislative organ of state legislates as statutes (proclamation) stands superior than any other law
except the constitution.

Secondary legislation is also called subordinate legislation. Subordinate legislations are laws that
are given to be issued by the subordinate organ of the state. Secondary legislations are laws made
by inferior state organs when the legislative body of the state delegates them to legislate, such

20
rules, example, regulations and directives. The subordinate or secondary legislation can be
enacted by the executive body through delegation.

The legislative organ to delegate the executive to enact subordinate laws is because of the
following three reasons:

• To reduce work load

• Due to the technical nature of the laws or technical competency. The legislative organ is
not with full of technical experts because they are elected from the society having different
back ground. Thus, the legislative body simply given for the lower organ for technical
activities or competency
• To obtain flexibility- this is in order to shorten the process of delivering the legislation.
Because the longer the time the more rigorous the process. Thus, the lower importance of
legislations is permitted to be issued or enacted by the lower organs such as council of
ministers or local government’s cabinet.
The principles of the hierarchy of laws are very important when two provision of the law
contradict each other. In such manner, the two principles of hierarchy of laws may apply.

• When two laws are in equal footing or status contradicts each other the later in time
prevails over the former.
• When two different laws, which have not equal footing or status contradict each other the
superior in hierarchy prevails over the inferior or subordinate. For example, proclamation
prevails over the regulation.

In the hierarchy of laws constitution is superior to proclamation. Proclamation is superior to

regulation. Regulation is superior to directive.

Constitution proclamation Regulation Decree Directives Notice.

In Ethiopia hierarchy of laws provided different forms in different government systems

Hierarchy of Laws during the Monarchy

• Supreme Laws were- the 1955 revised constitution and International Treaties.

21
• Primary laws were – proclamation, Decrees and Orders.
• Subordinate laws were-legal, Public and General Notice.

Hierarchy of Laws under the PDRE (Peoples Democratic Republic of Ethiopia)

1. Supreme law of the land was constitution

2. Primary Legislations
Proclamation Issued by national Shengo

Decrees and special decrees Issued by council of state

Presidential decrees, special presidential Issued by president of the republic

decrees

3. Secondary legislations were:

Regulation and directives By council of ministers

Directives By autonomous and administrative regions

Hierarchy of Laws under the FDRE (Federal Democratic Republic of Ethiopia)

Constitution of the FDRE

Proclamation issued by HPR

Regulation Decree

22
All the primary legislation (proclamation) and secondary legislations (regulation, decrees as well
as directives) shall not contradict with each other and with the constitution too.

In state governments there is also hierarchy of laws. State constitution is supreme law of the
respective states. Proclamation, enacted laws of state council is subordinate laws to the
constitution. Regulation, emergency decree and directive are subordinate laws to the primary
law. All state laws shall not contradict with federal laws.

1.8.3: Constitution as a Supreme Law in Hierarchy

Constitution is neither of the primary and secondary legislation because it is enacted by different
procedures, in adoption, interpretation and amendment. Constitution is supreme law of the land
in hierarchy. Constitution expressly spelt out the powers and responsibilities of important state
organs. It shows how the important state organs are to be established and the relationship among
themselves.

It lays down basic principles that may serve as a legal basis for other branches of laws. It lays
down fundamental rights of citizens and determines relationship between the state and its
citizens. Constitution is supreme in hierarchy because all laws are emanated from it and any laws
contrary to it shall be of no effect.

23
Chapter-Two: Law of Contracts in General

2.1. Identifying Sources of Obligation

Obligation can be define differently. It is a bond of relationship (vinculum juries) and it is a

correlative of right in person-am. It is bondage of rights and duties. An obligation may be
defined as corresponds to such right. Obligation can be emanated mainly from two sources.
These are: 1.from law, and 2.contract.

When the source is from law, the rights are created by law against her/his will or consent. For
instance, tax levied on tax payers, unjust enrichment, tort (compensation), etc. The obligation is
created by law and the rights are enforced by law. When the obligation is created by contract, the
rights are created by the parties willingly and enforced by law

2.2. Defining Contract

A contract is an agreement whereby two or more persons as between themselves create, vary or
extinguish obligations of a proprietary nature (Art. 1675 of the civil code of Ethiopia). In this
definition there are about five concepts that shall be explained.

• A contract is an agreement. It is the meeting of mind or mutual understanding of the

contracting parties.
• In any kind of contractual agreement there must have at least two persons or parties who
shall have distinct common intention.
• As explained earlier each contracting parties must communicate and express their intention
freely and such common intention must be to affect their legal relations. The obligation does
not transfer in to others who are not parties to the contract and it does not affect third party.
The legal relation that intended to be affected shall be those of parties (general principle),
however, as an exception there are situations which affect third parties, example, life
insurance.
• The contracting parties have the freedom to create (form) or vary (modify or change) or
extinguish (remit or cancel) obligations by themselves.
• A contract shall be measured or valued in terms of money (proprietary nature). The point that
the law tries to address is the obligations shall have economic nature.

24
From this definition, one can understand that a contract is an agreement but not all agreements
are contracts. For instance, a contract is a binding agreement that creates and defines rights and
obligation which formed by the parties themselves and affected only the parties where as in
marriage and adoption create and define status and the agreements made by law compulsory and
affect the whole family.

2.3. Understanding Formation of Contracts and its elements

Formation of contract is about the legal requirements for the existence of valid contractual
obligations. To say there is a valid contract, the four essential or basic elements of contract, such
as capacity to enter in to a contract, consent of the parties sustainable at law, object of the
contract and form of the contract shall be fulfilled. Non-compliance of these elements resulted in
invalidation of the contract.

A. Capacity to Enter in to a Contract

Capacity is the ability or power to do any legally binding juridical acts(civil acts) in this sense. It
is the competence of the person to do something which is legal acts. Contract is one of the
juridical acts where capacity is very important for the requirements of valid formation of
contract. In juridical acts persons may find themselves freely to do something that has legal
effect. Juridical acts are legal acts done by persons to create legal effects. The point that
underpins juridical acts is that the persons are voluntary to do because commercial law is based
on the principle that persons to do legal act freely.

In this section the concept person shall be discussed. The concept person shall be classified into
natural persons and artificial or legal persons. Natural persons have rights and duties from birth
to death. Personality of natural parsons begins at birth and ends at death. However, exceptionally
a merely conceived child shall have personality and shall be deemed born when his/her interest
so demands provided that he/she is born alive and viable. Any child lives for 48 hours is
considered to be viable. In natural person acquiring personality does not mean having capacity to
do juridical acts because there are requirements that must be observed.

The general legal principle regarding capacity of natural person is that everybody is presumed
capable when attained the age of eighteen years and has normal mental status. In addition to this

25
any natural person who is an Ethiopian and does not detained is considered as capable.
Incapacity is the exception to the principle of capacity. A natural person is considered as
incapable when s/he doesn’t attain the required age, that is, below 18 years like minors. The
other reason for incapacity is the mental status of the natural persons because of being
notoriously insane, persons that we grouped them as judicial interdicted persons. There are also
cases where by the decision of court restricts ones capacity such as case of prisoners who are
regarded as legally interdicted persons.

Persons who are feeble minded, drunkards, or habitually intoxicated or prodigals, like senile
shall in appropriate cases be assimilated to insane persons. In providing disability, capacity is
presumed because any person who alleges the disability of a physical person shall prove that
such as person is under a disability. Infirm persons such deaf-mute, blind persons and other
persons who, as a consequence of permanent infirmity, are not capable to take care of themselves
or to administer their property may invoke in their favor the provisions of the law which afforded
protection to those who are insane. Foreigners are also considered as special incapable persons
by national laws which restricts from participating civil acts. For instance, a foreign national is
not allowed to own immovable property, to own banks and insurance undertakings, to elect and
be elected, to be permanent government employees.

The legal assumption is that incapable persons cannot choose the right course of action. The
incapable persons may not understand the nature of their acts and their legal effect. If legal effect
is given for the acts of such persons, they may be victimized. Thus, the law tries to protect
incapable persons by making their acts invalid. Incapable persons can exercise or enjoy their
rights through legal representatives. For the details with regard to artificial or legal persons on
how they can acquire legal personality, you can refer unit one part three of this module.

B. Consent of the parties sustainable at law

Consent is an expression of intention or free will (communication) of persons to enter into a

legally binding agreement. It is the meeting of mind or mutual understanding of contracting
parties without any influence. In this case, a contract shall depend on the consent of the parties
who define the object of their undertaking and agree to be bound thereby. A contract shall be
completed where the parties have expressed their agreement thereto. Consent is expressed by

26
offer and acceptance because parties reach into an agreement (shall communication) through
continuous exchange of offer and acceptance.

Offer is an expression of willingness to enter into a contract if accepted by the other party.
Acceptance is an unequivocal assent to the offer. The person who offers to get acceptance or
response from someone to make a contract is an offeror. A person who is expected to give a
response or express his acceptance for such offer to conclude a contract is an Offeree. Offer or
acceptance may 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 doubt as to the party’s agreement. The party who
makes an offer may stipulate a special form of acceptance.

In principle silence where an offer is made shall not amount to acceptance. But as an exception,
an offer to continue or vary an existing contact or to enter into a subsidiary or complementary
contract may be accepted by silence (pre-existing business relations). No acceptance shall be
required where a party bound by law or by a concession granted by the authorities to enter in to a
contract on terms stipulated in advance. This is a contract of adhesion which deserves silence
amount acceptance. For instance, Telecommunication services, Air ticket services, Water supply,
etc. are contract of adhesion because the other party is required to sign on the form prepared by
such institutions.

Generally, acceptance must be positive, unconditional, unambiguous, unequivocal and must not
be changed, added to or qualify the terms. Acceptance should exactly correspond with the offer
and if any change in the terms of the offer made is counter-offer, that is, defective acceptance.

A contract may be invalidated where a party gave his /her consent by mistake or duress or fraud
which resulted in defects or vices in consent. This is to protect the right of the person who
concluded a contract under such circumstances. Who can invalidate the contract? The person or
party who affected by such act can invalidate the contract. If she/he didn`t invalid the contract, it
will continue, but it is defective. In this case a contract may be:

1. Void Contract

It is to mean the contract is null or inexistent. Here, the object of the contact is illegal or immoral
or impossible, thus, the contract is null or inexistent from the beginning and it is called absolute

27
nullity. Void contract cannot be corrected or reinstated simply. For instance, a contract of
prostitution, murders, land sellers (in Ethiopia), marriage between the same sexes (in Ethiopia),
and etc. are void contracts.

2. Voidable Contract

Voidable Contract is to mean annullable contract. The object of the contract is not illegal;
immoral or null but has a defect. It is called relative nullity. Any defects or vices in consent bring
about voidable contract. Voidable contract can easily be corrected or reinstated. For example, a
defective goods or non-conformity in quality on contract of sell or buy of a house hold goods.

Whether the contract is void or voidable the consequence will be equal or the same, that is,
where a contract is invalidated or cancelled, the parties as far as possible be reinstated in the
position which would have existed, had the contract not been made(Art.1815(1))of the civil code.

3. Unenforceable Contract

Unenforceable Contract is a contract which cannot be enforced. It is a matter of evidence. A

contract that cannot be proved by evidence, or that cannot be proved by any means is
unenforceable contract. It may not have any defects in its formation. For example, Workitu and
Lemisa have agreed on sale of Sony colored TV.24`` at a price of 4000 birr, however, they don`t
have any written or oral evidence.

Consent is considered as defective or vice when the contracting party gives his/her consent by
duress, that is, forceful act or coercion, or fraud, when the other party is under deceitful practice
or mistake. Each of them are discussed below.

1. Fraud-is an intentional perversion of truth for the purpose of inducing another person to enter
in to a contract. It is a disguising or deceiving of truth. Such kind of contract can be performed
by false representation of fact. Fraud may be categorized in to essential and incidental.

Essential fraud

It is the subjective criteria of the act measured by the deceived person. It is when the fraud or
deceived person assured that, had s/he known the truth s/he would not have entered in to a
contract. The fraud is the determining factor to enter in to a contract.

28
Incidental fraud

It is incurring burdensome obligation. It cannot be a ground for invalidation of a contract.

A contract may be invalidated on the ground of fraud where a party resorts to deceitful practice
so that the other party would not have entered in to the contract, had he not been deceived. A
contracting party who has been deceived by a third party shall be bound by the contract unless
the other contracting party knew or should have known of the fraud on the making of the
contract and took advantage thereof.

Concerning fraud the relationship of the parties shall observed, such as ordinary or special
relationship. Ordinary relationship is that when the parties did not know each other they simply
made an ordinary business transaction. They do not have any relationship before. In principle,
silence does not amount for the invalidation of the contract and also bad faith, or negligence or
false statement alone does not amount for the invalidation of the contract. The essential element
for invalidation of the contract is deceitful practice or act. For example, Alene wants to buy a
fertile land and Beletu has a dry land, however, told Alene my land is fertile and showed her by a
film false statement. In this case there is a deceitful practice that resulted in fraud in an ordinary
relationship, then, Beletu can invalidate the contract.

In a special relationship, it requires confidence between the parties because they know each
other. They have a continued relationship and trust between the parties. Thus, the law is strict
here that any simple or slight fraud resulted in invalidation of the contract. For example, a
brother to his sister by a statement or orally told her our father told me to buy a 24``colored TV
from you by 3000 birr. Then she sold the said material to her brother later on she knew that she
is being deceived by her brother`s false statement, the contract is invalid because they trust each
other. In this case, silence amounts for the invalidation of the contract.

To sum up, the contract is invalidated where the parties are in bad faith or negligence made a
false statement and a relationship giving rise to a special confidence and commanding particular
loyalty existed between the invalidation of the contract. A fraud made by a third party may not
be a cause for the invalidation of the contract unless the other party who got benefit as the result
of such fraud knew and involved in the act of the third party.

29
2. Duress-is either physical or psychological influence against the contracting party or his
family. Duress is a constraint, physical or moral placed on the will of the person which induces
him to enter in to a contract. Compelling a person to entered into a contract morally and
physically. It is a threatened with a serious and immanent or likely hood danger for the life,
honor, property or his/her ascendants or descendants or his /her spouse. The danger likely to
happen or probable is, therefore, enough to invalidate the contract. There must also punishment
criminally because the other party is committed an offence.

How do we know whether there is duress or not? There are two standards.

Absolute standard

Whether the danger is imminent or not we should consider a reasonable man standard that
means, putting oneself in to the position of the threatened person.

A relative standard

This considers the circumstances like age, sex, position of the parties, like literate or illiterate or
chief and servant, etc.

In principle duress or the forceful act or coercion shall be made by either of the contracting
parties against the other intentionally to get advantage. However, an act made by a third party
’Chernet’ against the other party ’Ali’ in order to get an advantage to “Bethlehem’ and/or
himself and if ‘Bethlehem’ has the knowledge of the act of ‘Chernet’, it is considered as duress
and the contract is invalid or void.

Threat to exercise a right is not considered as duress. For example, if Abdu borrow 4000 birr and
the other person, Bekele, would not be able to pay. Then, Abdu can threatened Bekele saying
that if you don`t pay me, I will kill you. Thus, it should not be considered as duress or forceful
act unless the Abdu used excessive advantage, like to get more money than him, for instance,
5000 birr.

Reverential fear (Art.1709of civil code.)-In principle reverential fear may not be a ground or a
cause for invalidating a contract. Reverential fear is a fear of ascendant or a superior or religious
leader influence shall not be a ground for invalidating a contract where no duress was exercised.

30
It considered as duress, where the contract was made with the person inspiring the fear and such
person derived an excessive advantage from the contract.

Unconscionable Contract (Art.1710 of civil code)-is a contract made between two parties having
more benefits to one of them. 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. That means, exploitation
may not be a ground for invalidation of the contract.

Where justice requires, any such contract may be invalidated as unconscionable where the
consent of the injured party was obtained by taking advantage of his/her want, simplicity of
mind, senility or manifest business in experience. For example, Bekele, a peasant, resides in a
remote area that has no accessible road to a far town, hospital, his son seriously sick during the
rainy season, Hamle, and took him to a doctor who is found around, the nearby, village working
privately. The standard fee for diagnosis about 20 birr, however, looking the circumstance the
doctor ordered Bekele to pay 50 birr. It was consider as duress and the contract shall be
invalidated because the doctor took an excessive advantage taking the want of Bekele.

3. Mistake-shall be decisive or fundamental to invalidate a contract. Decisive mistake, the

mistaken party shall prove the concept I would not have entered into the contract had I known
the reality or the truth. Had I known the reality or the truth, I would not have entered into the
contract refers to the mentality of the person. It is subjective criteria.

A contract may be invalidated on the ground of mistake as defined in art.1697 of the civil code
where such mistake relates to an element of the contract which the parties deem to be
fundamental or which is fundamental, having regard to good faith and to the circumstances in
which the contract was made.

Fundamental mistake lays down on the objective criteria. This mistake must be related to
elements of contract, such as, consent of the parties sustainable at law, capacity of the person to
enter in to a valid contract, object of the contract and form.

The fundamental mistake must depend on the contracting parties and to the reasonable or
concerned person. A contract may be invalidated on the ground of mistake where it relates to the
nature or object of the contract or person. It may also invalidate where the mistaken party has

31
undertaken to make a performance substantially greater or to receive a consideration
substantially smaller than she/he intended.

Contract may be invalidated on the ground of mistake where such mistake relates to the identity
or qualification of the other party and such identity or qualifications is a fundamental element of
the contract in the general opinion or having regard to the circumstances of the contract.

A contract may not be invalidated on the ground of mistake where such mistake is only relates to
motives which led to the making of the contract because it is, non- fundamental mistake. For
example, Abadi wants to buy a book and ordered Brooke to bring him but later on Abadi found
the book is freely distributed. Then, Abadi cannot invalid the contract because it is a desire. A
desire shouldn’t be a ground for invalidating a contract. Other mistakes like clerical errors,
computation errors, etc. are not fundamental mistakes and the contract may not be invalidated.

C. Object of the Contract

It is one of the essential elements for the formation of contract. Object normally refers to the
obligations of the contracting parties. In other words object is the term or content of the contract
which shows the existence of the subject matter of the obligation. The object of the contract shall
be clearly and sufficiently defined, possible, lawful and morale. So, dear students let us briefly
discuss them one by one.

The object of the contract shall be clearly and sufficiently defined, poss. A contract shall be of no
effect where the obligation of the parties, object of the contract, is not with sufficient precision.
It shall be exactly and precisely or clearly defined which shows the intent of the contracting
parties toward their obligations to perform. Even the court may not make a contract for the
parties under the guise of interpretation.

The object of the contract must be possible. The contract shall be of no effect if one of them
related to a thing or fact which is impossible and such impossibility is absolute and insuperable.
This is to mean that the object of contract shall not be humanly impossible and which cannot be
overcome by any other persons like a contractual agreement to produce crops on a sky.
Impossible is to mean when the object is inexistent at the time of the conclusion of the contract
or unachievable during performance of the contract.

32
The object of the contract shall not be unlawful or immoral. The object of the contract shall not
be unlawful is to mean, it shall not be contrary to public law, it shall not be contrary to
mandatory law or provisions of contract, shall not be contrary to public policy. If the contract is
unlawful, it shall be invalid and its effect is to be reinstated to its former position as if it was not
made. For instance, a contract of sale of a human being or to sell narcotic drugs and
psychotropic substances are unlawful and are invalid.

The object of the contract shall not be immoral, that is, contrary to good morals. The law also
requires the parties that to observe what they agreed to do is not offensive to good morals of the
public. Most of the time what is immoral which relates with religion, custom, or culture of the
society is considered as unlawful act. For instance, no one is allowed to enter into a contract for
pornography, sexual gratification.

The standard of morality varies from place to place and what is immoral in a certain community
may not be the same in other communities. Prostitution can be taken as an immoral act in
Ethiopia. For example, if a person agrees to pass a night with a woman and denied to pay her,
she cannot get the court order the contract to be performed or to get compensation for non-
performance.

D. Form of the Contract

The law does not require contracts to be necessarily in writing. Parties can make their contract in
writing, orally or by conduct depending on the nature of their contract unless it requires a written
form mandatorily. No special form shall be required unless it is stipulated by the parties or
prescribed by law. Where a special form is prescribed by law and not observed, there shall no
contract but a mere draft of a contract.

Contracts relating to immovable property, loan contract on 500 or more birr, insurance contracts,
and contracts of guarantee, administrative contracts, contracts of employment and others similar
to such contracts shall be made in writing. Parties can conclude their contracts orally other than
the issues mentioned above. Parties can make their contract by conduct like taxi or bus services,
parking services, public telephone, etc. The most reliable form is written form because it is
attested by at least two witnesses and signed by the contracting parties and served as better
evidence.

33
3.4. Effect of Contracts

This section discusses about the law which gives effect to the contract. Contracts are about
entering into obligations. Thus, how obligation of the parties to be respected and to be enforced
resulted in effects of contract. Obligations do not remain mere agreements but something more in
the sense that once they are entered into, a party cannot be relieved from the obligation unless
performed it. Effect of contracts is dealing with interpretation of contracts, performance of
contracts, variation of contracts, and non-performance of contracts.

1. Interpretation of Contracts

One of the features of law is that, it is obligatory and is backed by sanction when being violated.
It is the same to obligations created by contracts. Article 1731(1) stated that “a contract lawfully
formed shall be binding on the parties as though they were law. The contents of the contract shall
be determined by the parties subject to the mandatory provisions of the law.

Contracts shall be interpreted in accordance with good faith, having regard to the loyalty and
confidence which should exist between the parties according to business practice (Art.1732)
Where the provisions of a contract are clear, the court may not depart from them and determine
by way of interpretation the intention of the parties (Art. 1733). In this regard contract is law of
the contracting parties. When contract is interpreted, it shall be contextually in order to meet the
positive intention of the parties. The intention of the parties may be deduced from minutes of the
discussion, letters, memorandums, etc. when interpretation is necessary, it shall be positively and
in good faith that to make it effective.

2. Performance of Contract

Performance of a contract can be defined as the execution or implementation of the contract by

the concerned parties in accordance with their terms of the agreement. The contract shall be
performed in the same manner of the terms of the contract. Performance of a contract is one of
the effects of contract. In performance of a contract; it shall be assumed that the capacity, object,
consent and form requirements are fulfilled. In performance, the basic issues that need to be
addressed are: performance by whom, performance for whom, performance how, place of
performance, and time of performance. The first points that we must look at is who shall perform

34
and to whom ought payment to be made or rendered. Performance includes delivery of goods or
documents and payment of price.

In performance of a contract there are two parties. These are: the creditor and debtor. A creditor
is a person who has the right to whom a promise is to be made. A debtor is the one who has the
obligation (duty) to perform the contract. This is to mean, the debtor shall personally carry his
obligations under the contract where this is essential to the creditor or has been expressly agreed
(Art.1740 (1)). In all other cases, a third party can perform the contract (obligation) under the
authorization of the debtor, by the court or by law (Art.1740 (2)). No one is entitled to perform a
contract without authorization because the creditor has a special (essential) interest of the
contract unless the parties stipulated in their agreement. Payment shall be made to the creditor or
a third party authorized by the creditor, by the court or by law to receive it on behalf of the
creditor (Art.1741).

Payment shall be made at the agreed place. Where no place is fixed in the contract, payment
shall be made at the place where the debtor had his normal residence at the time when the
contract was made. Unless otherwise agreed, payment in respect of a definite thing shall be made
at the place where such thing was at the time when the contract was made (Art.1755).

Payment shall be made at the agreed time. Where no time is fixed in the contract, payment may
be made forthwith. Payment shall be made whenever a party requires the other party to perform
his obligation (Art.1756).There shall be simultaneous performance of a contract as provided in
Art.1757 of the civil code of Ethiopia. This is in case, when only a party who benefits by a time-
limit having regard to the terms or nature of the contract or who has performed or offered to
perform his obligations may require the other party to carry out his obligations under the
contract. Here, a party may refuse to carry out his obligations under the contract where the other
party clearly shows that he will not perform his obligations or where the insolvency of the other
party has been established by the court.

As provided under Art.1758 of the civil code of Ethiopia, during performance of contract or
delivery of a thing, there is transfer of risks to the parties. The debtor bound to deliver a thing
shall bear the risks of loss of or damage to such thing until delivery is made in accordance with

35
the contract. The risks shall pass to the creditor where he is in default for not taking over the
thing.

What constitutes performance?

The terms and conditions of the contract constitute the respective responsibility of the parties.
Performance of a contract must be exact and precise. The principle is, there must not have a
slight deviation from the agreement but with regard to fungible things in delivering the goods
there may be a slight deviation. They dealt in their generic name, in class like rice, whisky, teff,
etc. the Ethiopian contract law conforms to the principle that a creditor must get exactly and
precisely what he lent (Art. 1745 and 1746).

What if the goods deviated from the agreed quality, quantity and time?

The creditor may refuse partial performance or payment where the debt is liquidated and fully
due or matured.

3. Variation of Contract

The court may not vary a contract or alter its terms on the ground of equity except in such cases
as are expressly provided by law. Even though circumstances are changed the law must not be
changed and the contract shall be active. If a contract made between two parties in the year 2006
which will exist until the year of 2008 and if the conditions remained constant throughout the
years, the contract can continue but if the circumstances are not constant, for instance when there
is a change in market price or any other conditions, the courts have the power to change or
revise.

In fact, this principle affects the freedom of contract and the economic stability. Because of this,
many legal systems prohibit courts to vary, change or alter or modify the terms of the contract
and our law of contract (Art. 1763 and 1764 accept this principle). Only the parties vary or alter
the terms of the contract in agreement when there is a variation on certain condition that affects
the contract. When they vary a contract made in a special form shall be made on the same form.

When there is an imbalance of contract between the parties, the court may vary a contract for the
purpose of keeping the relationship of the parties who have special confidence between
themselves, for instance, the contracting parties may be families. Court can also vary a contract

36
when there are new legislations adopted or enacted by the government which affect for the
implementation of a contract.

For example, Abebe is an investor took a plot of land to possess it on lease contract for 99 years
for agricultural mechanization purpose. After a year the government enacted a law which
prohibited such lands not to be possessed privately. Thus, the court can vary the lease contract
because it is not implemented.

4. Non–Performance of a Contract and its Effects

If the contracting parties perform improperly, defective, or delayed with regard to the terms of
the contract relating to the quality, quantity, time and if the contract is not completely or partially
done that resulted in non-performance of the contract. There is non-performance of a contract
when there is total failure to perform the obligation undertaken in the contract; when there is
only partial performance; or when there is improper performance. Effects of non-performance
(Article 1771 of the civil code of Ethiopia) are a general principle of non-performance. The
effects or remedies for non-performance are: enforcement of the contract (forced performance);
cancellation of the contract either by the creditor himself unilaterally or by the court, that is,
judicial cancellation; and compensation for damage.

a) Forced/specific performance- indicates that the debtor is failed to perform his/her obligation
provided in the contract and the creditor claims the court to order enforcement of the contract to
the debtor who assumed the duty to perform (Article1776 of the civil code of Ethiopia).The pre-
requisites to demand forced performance are: a) the creditor shall have special interest, b) and the
contract can be enforced without affecting the personal liberty of the debtor.

For instance, Bethlehem is a Medical Doctor in a certain locality and concludes a contract for 2
years with Mossisa to treat him and his family, however, the doctor breaches the contract after
giving one year medical service. Then, Mossisa can claim forced performance against Bethlehem
to enforce the contract ascertaining that he has special interest in the contract and without
affecting the personal liberty of the doctor.

b) Cancellation- is after claiming forced performance; if the debtor is not willing to perform his
or her duty the creditor can cancel the contract. There are two methods of cancellation. These

37
are: unilateral cancellation and judicial cancellation. Unilateral cancellation is the case where one
of the parties declares cancellation of the contract without court authorization.

Unilateral cancellation is possible only where it is stipulated in the contract; where the time of
performance has lapsed and the other party has declared in writing that s/he will not perform the
contract; and where performance of the contract has become impossible.

Judicial cancellation can be made by a court when one of the parties claims cancellation of the
contract. The court will declare cancellation where the non- performance of the contract has
affected in a basic way, that is, when it is impossible to perform.

For example, a contract is made between Lilly and a tailor on cotton dress; however, the tailor
saw dress with polyester. In this case, Lilly can claim court order for cancellation because the
contract is affected substantially (a basic way). The effect of cancellation is reinstatement, taking
back to its former position as if the contract had not been made.

c) Compensation or damage- is a remedy that can be asked concurrently with other remedies or
individually. To demand damages the performing party has to show that s/he suffered a loss and
the loss shall directly connect with non-performance. Damage caused to the creditor by non-
performance must be made good.

Compensation is not made for profit but to make good the loss sustain equally. This is to mean,
the extent of compensation to be paid usually is equal to the loss suffered as a result of non-
performance.

Is there a possibility for the other party to escape liability on the basis of no fault as a
defense?

The answer would be no, regardless of where the person is at fault or not s/he shall pay
compensation.

A person may, however, raise force majeure as a defense that made performance impossible to
escape partial or full liability for compensation. Nevertheless, force majeure will not serve as a
defense where it took place after default notice was given or where the debtor fails to inform the
creditor immediately.

38
These remedies may apply according to the circumstances of the case. Before taking the
remedies for non-performance of the contract; the other party should give default notice, which
is the pre-requisite for taking remedies.

Before the person is asserting his privilege in court, he should put the other party in to default
requiring him by notice to carry out his obligations under the contract. Put in to default the other
party by giving notice means call the other party his attention to the fact that the obligation is
due. Notice is a warning to the other party that has not performed his duties.

Notice can be made in writing or orally but to have evidence in pleadings in courts, the most
convenient is a written notice. Notice may not be given unless the due date of the contract is
matured, notice may not be beforehand. Notice should denote the intention of the creditor of
giving notice, which serves purposes like reducing court litigation and reminding the debtor to
perform the obligations.

In exceptional cases, no need of giving notice. These exceptional cases are:

• The obligation is to refrain from certain acts. For instance, if the creditor entered in to a
contract with a singer, debtor, not to sing in any other hotel, and only to sing in the creditor’s
hotel. If the debtor breaches the contract, the creditor is not necessarily obliged to give notice
but simply can cancel the contract.
• The debtor assumed to perform an obligation which the contract allows to be performed only
within a fixed period of time and such period has expired;
• The debtor have declared in writing that he would not perform his obligations;
• If they are agreed in the contract that notice shall not be required and the debtor shall be in
default up on the expiry of the fixed date;
It may sometimes be unfair to make the debtor to pay damages where non-performance is due to
reasons beyond his control. The debtor may not be forced to pay damages if he proves that
performance is prevented by force majeure. Force majeure is not something that makes
performance difficult. But it is an event normally unforeseeable and insurmountable that
prevents performance absolutely. It results from an occurrence which the debtor could normally
not foresee and which prevents him absolutely from performing his obligation (Art.1792 (1) civil
code).

39
3.5. Extinction of Obligations

Dear students in this section you are going to study the ways or causes for the extinction of
obligation of the parties. Extinction of Obligation is to mean the non-existence of obligation of
the parties. An obligation shall cease to exist where it is performed in accordance with the
contract or where the other party remitted debts or obligation in his own will.

An obligation shall also cease to exist or extinguished where the contract is invalidated or
cancelled or terminated, or the parties agree to substitute a new obligation of the original
obligation(novation), or the debtor’s obligation is set-off by an obligation owing for the creditor
to the debtor; or the positions of the creditor and debtor are merged in the same person; or
performance of the contract has not been demanded within a fixed period (time limitation) (Art
1806 and 1807 of the Ethiopian civil code).

1. Cancellation and Invalidation of a contract

Cancellation of a contract is the efficacy of non-performance of the contract by the parties in

accordance to the terms of the contract is a cause for the extinction of an obligation.

Invalidation of a contract because of not fulfilling the essential elements of a contract, such as,
capacity of the persons to enter in to a valid contract, consent of the parties, object of the contract
and form is also a cause for the extinction of an obligation of the parties concerned.

2. Performance-is the normal and natural mode of extinction of obligation. When the parties
perform their duties according to the terms of the contract, their obligation ceased to exist.

3. Termination-shows the extinction of the legal bond between the contracting parties.
Normally, termination requires the agreement of both parties. Exceptionally, however, unilateral
termination may be possible where there is a termination clause in the contract, like, contract of
employment, where the contract is for indefinite period of time and in case of multilateral
contracts. Judicial termination is also possible where there is a misunderstanding between the
parties and in case of gratuitous (donation) contract.

40
4. Remission of debts-Release the debtor from debt by the creditor is one mode of extinction of
obligation. Since, remission is a form of a contract acceptance may be made by the debtor. In
remission of contract, silence amounts acceptance.

5. Novation-is when the contracting parties agree to substitute the original obligation by a new
obligation. Thus, the pre-requisite for novation are: existence of a valid obligation; creation of a
new obligation; there has to be a difference between the new and old obligations; capacity of the
parties; intention to novate and the new obligation shall be valid.

6. Set-off-is the total or partial extinction of two debts by the concerned parties which are
mutually paid-off. For instance, Chaltu borrowed 1000 birr from Abdisa and she has a tape
recorder with Abdisa which worth’s 1000 birr. Thus, they can set-off their debt by agreement.
After this, no obligation exists.

Set-off may be made by legal where there has to be reciprocity of obligations, that is, both
parties have to be personally liable to each other, the debt shall be liquidated and exigible
(exacted or demandable). Set-off can be made also contractual or judicial.

There are cases where set-off may not be possible. These are: Where the special nature of the
obligation requires that the creditor actually obliged to pay. For example, paying maintenance,
pension fee; where the obligation is owing to the government, like tax; where the obligation is to
restore a thing which the owner has been unjustly deprived of; and where the object is to return a
thing deposited.

7. Merger-is the uniting or merging of the capacity (position) of the creditor and debtor in to the
same person, for example in case of succession.

8. Statute or period of limitation: Statute or period of limitation is when a limitation set by law
on the creditor`s right to demand performance and this happens when the creditor remains
inactive for too long time. That means, performance of the contract has not been demanded by
the creditor within a fixed period (time limitation) (Art 1806 and 1807 of the Ethiopian civil
code).Unless prescribed by law to the respective transaction, the time limitation for any contract
is 10 years.

41
Chapter-Four: The Law of Sales

4.1. The Law of Sales Contract

This section is a little bit complicated because it has a connection with law of property and law
of general contract. It holds up acquisition of ownership and transfer of ownership. Sale is an
exchange of goods for money where as bartering is an exchange of goods for goods.

First of all, a contract of sale is a contract expressed in money. Dear students you will study the
major points of sales contract that indicated below.

4.2: Forming Sales Contract

Dear students, do you remember the procedures of forming a sales contract? I hope you
remember the basic elements necessary for the formation of a valid contract. That means, the
basic requirements of general contract such as consent, capacity and object shall be fulfilled.
Form is not a requirement because a contract of sale only governs a corporeal (tangible)
moveable goods business transaction in good faith. To form sales contract, one has to determine
the scope of sales contract and its definition. The scope of sales contract tells us that what is
actually included in it and what are not. Its definition shows what basic requirements and
obligations of the parties shall include as discussed below.

4.3: Scope of sales contract

A contract of sale only governs a corporeal (tangible) moveable goods (goods like stationeries,
households, clothes, shoes etc. are corporeal moveable goods) business transaction in good faith.
That is, it does not include immoveable properties like house and land; incorporeal moveable
goods like copy rights, patent rights etc.; special goods like car, train, ship, and airplane; and
stolen and lost corporeal (tangible) moveable goods.

The civil code of Ethiopia Art.2266 defines a contract of sale as “a contract of sale is a contract
where by one of the parties, the seller, undertakes to deliver a thing and transfer its ownership to
another party, the buyer, in consideration of a price expressed in money which the buyer
undertakes to pay him.

42
As is indicated in this definition a contract of sale is a contract. The number of parties is the
seller (vendor) and the buyer (vender). The seller undertakes to deliver a thing and transfer its
ownership and the buyer undertakes to pay a price. The basis of the relationship between the
parties is not law but consensual agreement of parties. A contract of sale is one for consideration,
which is, price expressed in money, that is, sale is the exchange of a thing for money.

In principle, the goods (current goods) shall exist to conclude sales contract as clearly discussed
here below. A contract of sale is formed after the essential obligations fulfilled, that is,
determination of price and object sold and the existence of consent. That means, without the
existence of payment of price, delivery of the object and consent of the parties, there is no
contract of sale. Who determine the price? The answer for this question is the contracting parties.
There will also be a contract of sale concluded after the third party determines or fixes the price
of the thing and the parties bound by the estimation of the third party who is an expert or a dealer
with a similar object. The thing has to exist, at the time of conclusion of the contract, otherwise;
the sales contract may be void for lack of object. The above general definition and principles of
contract of sale may be elaborated below.

The seller and the buyer shall be capable to enter in to a binding contract of sale. Students, do
you know persons that may not be bound by contract or other obligations of law? The law
exempts certain group of people from discharging obligations beyond their power. Minors
(below 18 years of age), notoriously insane (judicial interdicted) persons, and prisoners who are
convicted (legally interdicted) persons are regarded as incapable by law to enter in to acts legally
effective.

Consent of the seller and the buyer sustainable at law is required for contract of sales, because,
consent is one of the pillars of the law of contract. In contract one is bound by what she/he
consented to do, not to do. The requirement of consent is compulsory in law of sales. Thus,
where there is no consent, there will be no sale and no sale contract. When a person gave his /her
consent by mistake, fraud, duress or any other cases of undue influence the contract may be
invalidated (Art.1696 of the civil code). This is because the basis of the relationship between the
seller and the buyer is not law but their consensual agreement.

43
The object of the contract of sale shall be clearly and sufficiently defined possible, lawful and
morale, that is, basic for a contract of sale to exist. What do you mean by object of a contract? In
fact, you have studied in the general law of contract that an object of a contract means
obligations that a contracting party owes to the other party. What the seller has to discharge and
all of obligations of the buyer shall be clear enough. An ambiguity that cannot be clarified by any
means makes the agreement of no effect. In contract of sale, therefore, the thing to be sold and
the price to be paid shall be clearly stipulated. For instance, in a contract for a sale of mule, the
seller promises to the buyer to sell and deliver the mule and the buyer promises to pay price. The
thing to be sold is the subject matter of contract of sale. The subject matter or content of the
contract of sale shall be clearly stated in the contract of sale. The thing to be sold, therefore, is a
corporeal movable property or chattel / in good faith. Do you know a corporeal movable chattel?
It is a property that can move from one place to another by itself or through human agent
(Art.2267 of the civil code). Corporeal chattels are properties that can be seen by our necked eye
and that can be touched. For instance, chair, table, clothes, house hold furniture are corporeal
movable chattels which are current goods.

Future goods-Intrinsic parts of immovable properties are considered as corporeal movable

chattels. These things are movables by operation of law or by anticipation such as buying crops
or trees which are not separated that buyers purchase products of next harvest by cutting down
them. Oils, petroleum, minerals in mind of extraction or severance from the land are also
governed under sales law (Art.2268).Sale of contract related on sale of future things which are to
be manufactured or to be produced by the seller taking samples are considered as they existed
during the conclusion of the contract. These are like sale of unborn off springs of animals or sale
of crops of next harvest or seedlings of trees or goods manufactured in industries
(Art.2270(2)).Such kind of contract of sale is possible though object(future goods)is a
requirement to be existed during the contract of sale (Art.1714(1)).

In a contract of sale immovable properties, special goods, in corporeal chattels and stolen and
lost things are excluded to be governed by a contract of sale, because, they do not hold in good
faith. Immovable properties are excluded from a contract of sale because it requires registration
for title deed to transfer them from the seller to the buyer. Special goods, example, car also is not
included in this course because they require registration for title deed and the society give them

44
special attention. Incorporeal (intangible properties) chattels like copy rights, patent rights,
goodwill are excluded because registration for title deed is required. Stolen and lost things are
not also governed by law of sales because the thief, in the case of stolen things, and the finder, in
the case of lost things have no better title than the owner and shall not hold the goods in good
faith.

Acquisition of ownership in a contract of sale is basically when one become an owner over a
thing which belongs to none through occupation, acquisition in good faith, Usucaption and
accession. This is an original way of acquiring ownership. The principle of transfer of ownership
is that one cannot transfer a title which he has not ‘Nemodat quod non habet.’ The transferor
must be an owner because risk is transferred in a contract of sale with transfer of ownership.

Occupation: is holding or possessing the lost or master less things; for example bees. A person
can be an owner of the lost or master less things if the former owner of such things can`t
recapture them within a month. In fact, the finder has the obligation to inform to the owner or to
the police. After taking such measures, he/she will be an owner of the thing.

Acquisition in good faith: ownership can be acquired in good faith. Things can be possessed in
good faith provided that the things must be for consideration, must be corporeal (tangible)
moveable things, the person shall become an owner in good faith and the thing must be
possessed or delivered. In this case, the transferee has a better right than the transferor. This is an
exception to the general principle that the transferor has a better title than the transferee.

Usucaption is a legal institution and a situation that a person acquires a real right by holding or
possessing the things or goods for longer period of time. Acquisition of ownership by
Usucaption is not possible in sales contract because it is only applicable to immoveable
properties.

Accession- is a process where there is an addition to the object of some one`s ownership. It is by
virtue of the owner of a thing acquires the ownership of that entire object become united or
incorporated in his/her thing, naturally or artificially. There is accession of immoveable to
another immoveable; accession of moveable to immoveable; accession of moveable to moveable
and accession of fruits. This can be applicable in sales contract. For example, bees, animals,
crops, etc. when they acceded into another similar goods.

45
As a contract of sale has a consensual basis, the law does not prescribe some kind of formality.
Therefore, to form a contract of sale, agreement alone is sufficient. Unless a special situation is
stated for a special contract, the general assumption is that a contract of sale does not demand a
special kind of form. Where the buyer and seller have agreed to sell and purchase, the contract of
sale emerges out.

4.4: Understanding Performance of Sales Contract

Performing a contract of sale is a combination of the obligations of the seller and the buyer.
Performance of a contract of sales is not expected without clear understanding of the obligations
of both parties to the contract. Therefore; let’s see obligations of the seller and the buyer.

The Obligations of the Seller

The obligations of the seller are (Art.2273 of the civil code):

• delivery of the thing sold;

• transferring ownership of the subject matter of sales;
• warranty against dispossession of the thing sold; and
• Warranty against defects and non-conformity.
The seller has the obligation to deliver the thing to the buyer. Delivery is the voluntary handing
over of the thing sold to the buyer. Delivery consists in the handing over of a thing and its
accessories in accordance with the contract. When we talk of about delivery, it is better to
discuss place and time of delivery.

Place of delivery-Unless otherwise agreed, the seller shall deliver the thing at the place where, at
the time of the contract, he had his place of business or, failing such, his normal residence.
However, in exceptional case where the sale relates to a specific thing and the parties know the
place where such thing is at the time of the contract, the seller shall deliver the thing at such
place. This shall apply where the contract relates to fungible things selected from a stock or a
specified supply or to things which are to be made or produced in a place known to the parties at
the time of the contract.

Time of delivery: Where the date of delivery cannot be inferred from the will or agreement of
the parties, the seller shall deliver the thing as soon as the buyer requires him to do so. Where the

46
parties have agreed that delivery shall take place during a given period, it shall be for the seller to
fix the exact date of delivery unless it appears from the circumstances that it is for the buyer to
do so. Unless otherwise provided in the contract, delivery of the thing shall be simultaneous with
the payment of the price. The seller may in such case retain the thing until payment is made.

Modes of delivery

Delivery may be made by actual delivery, constructive delivery and symbolic delivery. Thus, the
seller can perform his/her obligation using either of the modes of delivery depending on the
terms of sales contract made. Each of them has discussed below.

Actual delivery-is the physical handing over of the thing and its accessories sold to the buyer.
For instance, if the subject matter of the contract of sale is an ox and the seller shall perform
his/her obligation by delivering the ox to the buyer.

The seller can perform his/her obligation by constructive delivery of the thing sold. In this kind
of delivery, the seller agreed to sale the object and then declared that she/he is to hold the thing
on a different capacity. Seller’s capacity changes from owner to a holder because the generic
species individualized in the name of the buyer in the warehouse of the seller or the seller may
sell his object found with a third party to the buyer not yet delivered actually. For example,
Dechasa bought a computer from GYB PLC and agreed to pack and stay in the warehouse of the
seller until delivery is to take place. In this case Dechasa is the owner even if he didn`t take the
computer from GYB PLC (seller).

The seller may also deliver the thing sold by symbolic delivery. Symbolic delivery is a situation
where by the seller delivers documents that represent the thing sold. Symbolic delivery may be
made whether by delivering the title deed like, bills of lading, the key of a warehouse in which
the thing is found or the key of the object sold. For instance, Major Alemayohu, the buyer,
bought 100 quintals of wheat from Ato Bekele, a supplier, for bread to cook to his regiment on
October 10/2010 to be delivered by the supplier on November 10/2010, meanwhile, the supplier
delivered the documents which represent the things sold to the buyer on November 10/2010.In
this case, the buyer is the owner and has the right to claim when any risk happened.

47
The other obligation of the seller is transfer of ownership of the subject matter of sale to the
buyer either by operation of law or by virtue of contract. When a person died his property
transfers or devolves to his/her heirs by operation of law. Here, transfer of ownership by virtue of
contract is properly to deal with. Where the seller acquired possession of the thing by a voluntary
means and sells it without having authorization from the owner and if a person purchases in good
faith assuming the seller an owner, the purchaser acquires ownership by virtue of good faith.

For example, suppose that W/ro Mulu sold a sheep belonging to Ato Worku to W/ro Yodit who
had no information that the sheep belongs to Ato Worku. W/ro Yodit was in need of sheep and
purchased it assuming W/ro Mulu was an owner. W/ro Yodit paid the money and took delivery
of the sheep. W/ro Yodit is an owner of the sheep though she purchased it from a non-owner
who had no permission to sell it. W/ro Yodit is an owner not by virtue of contract but by
operation of law. What would happen if W/ro Mulu stole the sheep and sold it to W/ro Yodit? In
this case, even if, all the elements of Article 1161 of the civil code are met, the purchaser cannot
be an owner.

The seller has the obligation to deliver the thing sold and transfer ownership to the buyer. This is
because ownership shall be transferred at the actual delivery of the thing sold and when the
purchaser undertakes possession. The law requires the seller to transfer an unassailable right over
the property. Unassailable right over a property is a peaceful right. The buyer shall use the
property purchased without any form of disturbance. If a third party claims to take the thing
purchased, the seller will be disturbed. If the ownership that is transferred to the buyer is not
peaceful, the seller is responsible for all consequences of the disturbance. The seller shall take
the necessary steps for transferring to the buyer unassailable rights over the thing (Art.2281 of
the civil code).

For instance, when a seller sells an object as a consequences of the contract of sale, given an
implied warranty to the effect that buyer`s possession will not be disturbed and the right
transferred is free from encumbrance. When disturbance comes, there is breach of warranty the
seller is liable. The dispossessor is claiming a better right than the buyer, which existed at the
conclusion of the contract. When the seller is a thief the law of property will be applicable. When
after the things sold to the buyer the things are being stolen by a thief from the buyer, in such
cases, the seller is not liable for any reason. The seller takes the necessary steps for transferring

48
unassailable ownership right to the buyer. This is to mean, the seller shall transfer rights free
from an encumbrance over the thing. The right transferred to the buyer should be free of claim of
third parties; it should not be subject to any attack by third parties coming through the seller.

Risks transferred to the buyer with delivery of the thing sold. The concept of risk in the context
of sales law is; therefore, to mean the financial responsibility, answerability or liability of the
seller and buyer for the loss, damage or deterioration of goods in commercial sales transactions
performed by the respective parties.

The seller has to give warranty against dispossession. The seller has an obligation to transfer
peaceful possession or to give warranty of title in order to transfer ownership to the buyer, which
is, transferred goods free from any encumbrance. In such case, there are warranty implied in law
and warranty in fact (by agreement). Warranty implied in law is where a seller stands as a surety
(guarantor) when there is disturbance as consequence of sales contract. Warranty in fact is a
warranty given in express terms created by agreement of parties.

The seller has an obligation to give warranty against defects and non-conformity. The seller shall
deliver goods to the buyer which is free from defects in quality. The quality expected from the
thing sold may be a normal quality, quality for a specific purpose and described quality
(Art.2280 of the civil code of Eth.).

The types of defects are obvious defects and latent (hidden) defects. During obvious defects the
principle of caveat emptor applies, that means, let the buyer be aware of the obviously observed
defects. When the defect, is not possible to trace by ordinary inspection, the defect is latent
(hidden) defect that shall inspect by an expert, thus, for such defects, the seller shall give
warranty, if not the buyer will have warranty implied at law.

Non- conformity is related with the quantity and identity of the goods sold. Seller has to deliver
an object identical to the terms provided in the contract and if she/he delivers an object different
from the terms of the contract, there is non-conformity. Even if the thing is identical when the
seller delivers, a part, lesser or greater quantity, there is non-conformity unless parties agreed
that performance is to be made by installment. Thus, the seller has an obligation to give warranty
for such non-conformity.

49
Distinguishing the obligation of the buyer

In a contract of sale the buyer has the obligations to discharge certain duties. One of the
obligations of the buyer has an obligation to pay price and to take delivery. Parties may provide
the place and payment of price to be different from the date of delivery. When parties have not
provided time of delivery in their contract, the seller shall deliver as soon as the buyer requires
him to do so. Unless otherwise agreed place of delivery, the seller shall deliver the thing at the
place where, at the time of the contract, she/he had his/her place of business or, failing such, his
normal residence.

When the parties are silent to determine the time of payment, payment of price and delivery of
goods shall be made simultaneously. When the parties are silent to determine the place of
payment, the buyer shall pay the price at the seller’s business or normal residence where at the
time of contract of sale concluded because it is only when the buyer goes there that she/he may
be sure whether delivery is ready or not.

The other obligation of the buyer is to call the seller or his/her representative during inspection in
case the seller denies the non-conformity found or the existence of defects saying that the defects
occurred when the buyer took possession. The buyer has also an obligation to notify the defects
or non- conformities found to the seller. The above duties of the buyer are remedies in case of
conflict arise with seller unless the buyer failed to comply with performing such obligations.

Identifying common obligations of the seller and the buyer

The seller and the buyer have obligations that are commonly shared. These are expenses,
customs duties and preservation of the thing sold. In fact, they have also common duties to act in
good faith and to perform their obligation in accordance with the terms of the contract of sale.

The expenses may be categorized as expenses of contract, expenses of payment, expenses of

delivery and expenses of transport. Unless otherwise agreed, the expenses of contract will be
covered by the buyer (Art. 2314 of the civil code). These are payments or expenditures making
for negotiations to enter in to the contract. Unless otherwise agreed the buyer has to pay
expenses of payment (Art. 2315 of the civil code), however, if the seller had changed the place of

50
payment, the seller has to bear the additional cost of payment. Unless otherwise agreed, expenses
of delivery will be paid by the seller (Art. 2316 of the civil code).

Any expenses after delivery will be covered by the buyer (Art. 2317 of the civil code).
Accordingly, unless otherwise agreed, expenses of transport will be covered by the buyer (Art.
2318 of the civil code). Indirect taxes like customs duties are to be paid by the buyer which
added to the price of the thing sold. Where delivery is delayed to the fault of the seller or any
person for whom the seller is answerable, the additional customs duties will not be added to the
price of the thing, the seller will cover it (Art. 2319 of the civil code).

Preservation of the thing sold is the common obligation of the seller and the buyer. The seller has
the duty of preservation of the goods sold when the buyer is late in taking delivery after paying
the price or when late in paying the price. In this case, the seller should preserve them at the cost
of the buyer. However, if the seller failed to preserve the goods, s/he will be liable for any loss.
The seller may deliver a defective or non- conformed good to the terms of the contract of sale
and if the buyer didn’t preserve, the buyer will cover any costs. However, if the buyer preserves
the defective goods until the seller taking delivery, the seller will cover any costs incurred
against the buyer.

4.5: Non- Performance of Sales Contract and its effects

If the seller perform improperly, defective, or delayed with regard to the terms of the contract
relating to the quality, quantity, time and place of delivery there is non-performance of sales
contract. If the sales contract is not completely or partially done by the seller there is non-
performance of sales contract. There is non-performance of a contract when there is total failure
to perform the obligation undertaken in the contract either by the seller or by the buyer. When
the buyer delays to pay price or in taking delivery of the goods sold. The remedies for non-
performance are enforcement of the contract (forced performance); cancellation of the contract
either by the seller unilaterally or by the buyer, by the court, that is, judicial cancellation; and
compensation for damage.

Forced performance: Dear students, what do you understand by forced performance? Forced
performance indicates that the debtor is failed to perform his/her obligation provided in the sales
contract and the creditor claims the court to order enforcement of the contract to the debtor who

51
assumed the duty to perform (Art.1776 of the civil code of Ethiopia).The pre-requisites to
demand forced performance are: the creditor shall have special interest and the contract can be
enforced without affecting the personal liberty of the debtor. Where the thing has not been
regularly delivered, the buyer may demand the forced performance of the contract where it is of
particular interest to him (Art.2329 of the civil code)

For instance, the Defense Resource Management College concludes a contract with Ahmed
(seller) on sale of 12,000 sterile cows for a year at a price of 4,000 birr for each, the seller to
deliver 1,000 sterile cows every month to the Defense Resource Management College campus
and the college to pay the price on the delivery date, however, Ahmed (seller) breach the contract
after providing six months service according to the agreement made. Then, the college can
establish forced performance against Ahmed to enforce the contract ascertaining that the college
has special interest in the contract and without affecting the personal liberty of Ahmed, the seller.

Cancellation: After claiming forced performance, as in the example given above, if Ahmed is
unwilling to perform his duty to the College, the College can cancel the contract. There are two
methods of cancellation. These are: unilateral cancellation and judicial cancellation. Unilateral
cancellation is the case where one of the parties declares cancellation of the contract without
court authorization.

The buyer may require the court to order the cancellation of the contract or may declare the
cancellation of the contract in accordance with the provisions of the title of this code relating to
‘contracts in general’ (Art.1784-1789). That means, the buyer may apply when the seller delay in
performing the contract; when there is non-conformity or defects of the goods delivered; and
when there is a change in place of delivery and time of delivery made by the seller(Art.2337 and
2340 of the civil code).

The seller may also apply to the court to order the cancellation of the contract or may declare the
cancellation of the contract in accordance with the provisions of the title of this code relating to
‘contracts in general’ (Art.1784-1789). This means the seller may forthwith declare the
cancellation of the contract in case of non-payment of price where this right has been expressly
given to him by the contract of sale. The seller may also declare the cancellation of the contract

52
up on the expiry of the period of grace, where such period has been granted by the court to the
buyer (Art.2347of the civil code).

Unilateral cancellation is possible only where it is stipulated in the contract; where the time of
performance has lapsed and the other party has declared in writing that s/he will not perform the
contract; and where performance of the contract has become impossible.

Judicial cancellation can be made by a court when one of the parties claims cancellation of the
contract. The court will declare cancellation where the non- performance of the contract has
affected in a’ basic way’, that is, when it is impossible to perform. For example, a contract is
made between Molla, a seller, and Chuchu on sale of Tomato produced at Debrezeit; however,
the seller delivered Tomato produced at Bahir Dar. In this case, Chuchu can claim court order for
cancellation because the contract is affected substantially (a basic way). The effect of
cancellation is reinstatement, taking back to its former position as if the contract had not been
made.

Compensation: Compensation or damage is a remedy that can be asked concurrently with other
remedies or individually. To demand damages the performing party has to show that s/he
suffered a loss and the loss shall directly connect with non-performance. Where the non-
performance of one of his/her obligations by his/her contracting party is detrimental to him/her,
the seller or the buyer may claim that the damage thus caused be made good by way of
compensation. Damage or Compensation may be claimed whether the contract is cancelled or
upheld, where the contract has not been regularly and exactly performed (Art.2360 of the civil
code).

Compensation is not made for profit but to make good the loss sustain equally. This is to mean,
the extent of compensation to be paid usually is equal to the loss suffered as a result of non-
performance. In fact, there may be greater or lesser damage to be paid depending on the
circumstances. Is there a possibility for the other party to escape liability on the basis of no fault
as a defense? The answer would be no, regardless of where the person is at fault or not s/he shall
pay compensation. A person may, however, raise force majeure as a defense that made
performance impossible to escape partial or full liability for compensation. Nevertheless, force
majeure will not serve as a defense where it took place after default notice was given or where

53
the debtor fails to inform the creditor immediately. The effect of paying compensation to the
party who sustain loss is reinstatement, taking back to its former position as if the contract had
not been made.

These remedies may apply according to the circumstances of the case. Before taking the
remedies for non-performance of the contract; the other party should give notice, which is the
pre-requisite for taking remedies. Before the person is asserting his privilege in court, he should
put the other party in default requiring him by notice to carry out his obligations under the
contract. Default by giving notice means call the other party his attention to the fact that the
obligation is due. Notice is a warning to the other party that has not performed his duties. Notice
can be made in writing or orally but to have evidence in pleadings in courts, the most convenient
is a written notice. Notice may not be given unless the due date of the contract is matured, notice
may not be beforehand. Notice should denote the intention of the creditor giving notice, which
serves purposes like reducing court litigation and reminding the debtor to perform the
obligations. In exceptional cases, no need of giving notice. These exceptional cases are:

• The obligation is to refrain from certain acts. For instance, if the creditor entered in to a
contract with a singer, debtor, not to sing in any other hotel, and only to sing in the creditor’s
hotel. If the debtor breaches the contract, the creditor is not necessarily obliged to give notice
but simply can cancel the contract.
• The debtor assumed to perform an obligation which the contract allows to be performed only
within a fixed period of time and such period has expired;
• The debtor have declared in writing that he would not perform his obligations;
• If they are agreed in the contract that notice shall not be required and the debtor shall be in
default up on the expiry of the fixed date;
It may sometimes be unfair to make the debtor to pay damages where non-performance is due to
reasons beyond his control. The debtor may not be forced to pay damages if he proves that
performance is prevented by force majeure. Force majeure is not something that makes
performance difficult. But it is an event normally unforeseeable and insurmountable that
prevents performance absolutely. It results from an occurrence which the debtor could normally
not foresee and which prevents him absolutely from performing his obligation (Art.1792 (1) civil
code).

54
Chapter-Five: Agency Contract

5.1. Agency Defined

Agency is the fiduciary relation which results from the manifestation of consent by one person to
another that the other shall act on his behalf subject to his control and consent by the other party
so to act. In this definition there are two parties to the contact. Agency is a contract where by a
person, the agent, agrees with another person, the principal, to represent him and to perform on
his behalf one or several legally binding acts (Art. 2199, of the civil code). It tells us that, it is a
contract created by agreement.

Agency is a legal relationship created by law or by the agreement of persons where one or more
person(s) called agent(s) conclude(s) juridical acts with third parties on behalf of another
person(s) called the principal(s) with a view to change the legal position of that other person(s)
so that only that or those other person(s) is or are bound by such juridical act. In this definition, it
is a juridical act created by contract or by law which has legally binding to the principal and the
agent.

For example, Tesfaye authorized Kedir to appear before the court representing in order to handle
his case instituted by Mohamed. Thus, Tesfaye to pay 50,000 birr to Kedir for the services that
he rendered. In this case, the act of Kedir is considered as made by Tesfaye and both of them
have legal obligation to perform in accordance to their agreement.

5.2. Sources of Agency

For different reasons one may not be able to perform a given task by himself. The only way to
avoid such problems is through representation, that is, there has to be some other person who can
undertake the act on his behalf.

Agency relationship does not emerge without a cause or reason. It is one of the most common
legal relationships that enable one to make numerous lawful acts at a time with different persons
in different places. Can you describe parties to the contract of agency relationship? The person
who enters in to legally binding act on by the instrumentality of another person is called a

55
principal. The person who concludes contracts with a principal by the medium of an agent is
called a third party.

Source of agency or representation is stated under article 2179 of the civil code of Ethiopia
which says “the authority to act on behalf of another may derive from the law or a contract”.
Therefore, agency has emanated from consent or agreement of parties sustainable at law and by
operation of law.

Agency by operation of law can be made for incapable persons like minors, legally interdicted
persons (such as convicted persons); judicial interdicted persons (such as notoriously insane
persons); bodies corporate (Legal person); Households or spouses, unauthorized agency (agency
necessity); and curator ship or representation by court authorization. Let’s see some of the power
of agency emanated by operation of law such as incapable persons, unauthorized agency and
curator ship (Judicial agency) as an example.

Under the general contact, you have seen that certain persons are considered as incapable by law
to enter into contractual obligations. These are minors who are persons below 18 years old,
legally interdicted persons who are convicted and sentenced by the court (prisoners) and judicial
interdicted persons are notoriously insane persons that cannot exercise their rights by themselves
rather by representation. The administration of properties of these incapable persons is left to the
guardians or tutors. Thus, guardians and tutors are agents of the interdicted persons by virtue of
law.

Agency of necessity (un-authorized Agency) emerges out where an urgent situation influences a
person to do a legally binding act on behalf of another. It is said to be un- authorized because the
person on whose behalf performance was conducted did not allow the representation. This is the
situation where an agent is created because of the necessity of the circumstances that authorized
by the operation of the law to perform any transaction on behalf of the principal. This is the
situation where the principal has not able to create or gives agency relationship and authorize and
agent to act on behalf of him. No need to go to the court for appeal to appoint an agent but it is
because of the necessity of the agency that the person administers the property for the interest of
the principal without being authorized. Thus, the law assumes as if agency relationship is created
by the operation of the law. For instance, if a person’s house caught fire, any person without

56
having prior agreement may prevent the fire or save properties inside the house if s/he could do
that safely.

Do you know that a court may authorize a person to represent another person?

A curator is a person who appointed by the law to perform the urgent situation happened and
the urgent situations are relatively where the principal cannot perform himself or cannot appoint
an agent to administer his property because the principal may live abroad, so that the family of
the principal may apply to the court and it is the law which authorized the agent to act any
transactions on behalf of the principal (Art. 2255 (2) civil code). Curator ship can be given
because the principal is not living around or incapable or any other reasons that the principal
could not able to give his consent and administer his property.

The other source of power of agency is agency emanated from a contract or an agreement of
parties sustainable at law. Most of the agencies relationships are the result of agreements
between the persons represented, the agent. This entails the existence of consent between the two
parties, the principal and the agent, to do any legally binding juridical act.

Agency relationship can be created with the consent of the principal and agent. The agent and the
principal must be capable to give their consent so that to create agency relationship. The
principal offer to the agent and the agent accepts so that they create agency relationship (Art.
2199+2181 civil code).

Capacity in the law of contract both the parties must be capable. However, in the law of agency,
it is only the principal required to be fully capable person, what the agent required to be is to
fully understand what is doing representing the principal. The reason is that in the law of contract
capacity is required because both of them will be bound by the agreement that they entered in to
a contract. Where as in the law of agency, it is not the agent and the third party that bound by the
contract. When the agent performs a certain act to the interest of the principal, the responsibility
lies on the principal, when any fault has done by the agent because of his minority or any other
incapability.

57
In the contract of agency, object of the contract is strictly required. The obligations the agent and
the principal promise to do shall be define, possible, lawful and of good moral. The rights and
duties of the principal and the agent shall be clearly specified in the contract of agency.

Form is not a requirement in the law of agency. Where the act to be performed the agent is under
the law to be made in a prescribed form such form shall be complied with in conferring authority
up on the agent (Art. 2200(2). Authority may be conferred up on an agent either expressly or
impliedly (Art. 2200(1) civil code). Acceptance by the agent of his appointment may be either
expressly or limpidly.

An agency can be authorized through written form and verbally call actual authority because, the
principal and the agent communicated each other and the agent has received authority from the
principal. An agency given through conduct is an apparent or implied authority because the
principal and the agent did no communicate each other, however, they simply assigned
impliedly.

Where a principal authorized the agent to buy a car, the express authority is purchasing the car.
Implied authority, on the other hand, is an authority that is not expressly given but that one
understands from the nature of the transaction or conduct of parties to the contract of agency. For
instance, the authorities to pay and receive payments of money and to appoint an advocate who
may handle court cases are express authority. However, an implied authority is an authority
which is necessary and incidental activity which is necessary and incidental activity to perform
the expressly given authority.

The purpose of this activity is to make you understand the sources of power of agency. Explain
the following question.

5.3. Scope of Agency

Agency may be created to perform almost any act which the principal can lawfully do. The
object of the contract of agency must not be crime nor is it contrary to public policy. For
instance, the principal cannot give power to the agent in order to kill a person or to commit theft
or to run business against the policy of the government. Because these are illegal acts and the
principal can’t authorize any person what he couldn’t perform by himself. It is not every act that

58
is delegated to be performed. Some acts must be performed in person and can’t be entrusted or
delegated to an agent, like voting right, testifying in a court, making a will are instances where
personal action is required.

For example, a person who has voting right is not entitled to authorize another to give vote on
behalf of him because this is strictly personal. Testifying in a court is also strictly personal as a
result a person shall not empower or delegates another to go to the court to give his testimony on
behalf of another will is also an act which is strictly personal to the deceased. Any agreement
whereby a person grants to another person the power to make, to modify or revoke a will on his
behalf shall be of no effect and a person may not entrust a third person with the task of
determining how and whom his succession is to devolve.

Agency relationship can be created with a view to develop transactions in the absence of a
person who wants to stretch his hands to various legally binding acts at the same time. It is what
the principal is permitted by law to perform, that is, juridical acts that considered as lawful acts.
As a result authority of an agent may be grouped as general or special, that we call them forms of
agency (Art. 2202(2) of the civil code). The agency power may either be general for all the
affairs of the principal or special for a particular affair or certain affairs only.

General agency is agency expressed in general terms shall only confer up on the agent authority
to perform acts of management (Art. 2203). The agent does not authorize to have or perform acts
of disposition. Acts of management are those acts which do not transfer the title of the principal
to the third party. Acts done for the preservation or maintenance of property, lease for not
exceeding three years, the collection of debts, the investment of income and the discharge of
debts, the sale of crops, goods intended to be sold or perishable commodities shall be deemed to
be acts of management (Art.2204 (1 and 2) of the civil code).

Special agency is said to be complete agency. The agent performs acts of disposition, those acts
which can transfer the title of the principal to the third party. The agent is appointed or
authorized to perform a certain specific acts which are enumerated expressly by the principal or
by law. Special agency required where the agent is called up on to perform acts other than acts of
management. The agent may not without special authority alienate or mortgage real estate, invest
capital, sign bills of exchange, effect a settlement, consent to arbitration, make donations or

59
bring or defend an action (Art. 2205 of the civil code).After understanding the scope and forms
of agency, one can authorize an agent either in the form of general agency or special agency
provided under articles 2204 and 2205 of the civil code of Ethiopia respectively but not by any
other ways.

5.4. Distinguishing the Duties of the Agent and the principal

The agency relationship is a contract that creates an obligation on the principal and the agent. As
discussed earlier, the obligation may be made by the contracting parties or the law prescribes
certain obligation.

Duties of the Agent

An agent who has contract, with the principal to perform certain acts under a contractual duty to
perform and must fulfill the obligation with reasonable care and diligence in accordance with
terms of the contract. Basically, the agent shall act with the strictest good faith towards his
principal interest (Art. 2208 (1) and 2209 (1) of the civil code) and shall disclose to the principal
any circumstance which would justify the revocation or variation of agency contract.

The agent has the duty to loyalty as basic characteristics of agency because; it is a fiduciary
relation between the principal and the agent (Art. 2211 of the civil code). The agent should
follow the principal’s wishes selflessly as stated in the contract of agency and under the law
governing the agent principal relation.

The agent is obliged by law to perform the work which he has been appointed to do. The agent
also must not exceed his/her contractual mandate, which is, the agent must act within his/her
authority (Art. 2209 (2) civil code).

The agent has the duty to follow instructions of a principal or custom or nature of the
transactions. In discharge of agency responsibility only the principal is considered as the right
person to determine representation.

The agent has the duty to take reasonable care and skill. The standard of care and skill, which an
agent has to bestow, depends upon the nature of his profession, type of the representation and
responsibility expected from him.

60
The agent has the duty to avoid a conflict of interest (Art.2187). Where there is a possible
conflict of interest, the agent should pursue, and give priority to, the principal’s interest and
obliged to act solely for the benefit of the principal to all matters connected with the contract of
agency.

The agent has the duty to remit sums received by him and all profits accruing to him in the
courses of his employment even if the sums were not owed by the principal as provided under
Art.2210 of the civil code. The agent has the duty to maintain accounts and reports, which mean
the agent, should keep clear accounts that are convincing and source documents of the entries of
accounts should be produced with sufficient clarity (Art. 2213 civil code).

The agent has the duty not to delegate another agent because the principal chooses a particular
agent who has trust and confidence in his integrity (Art.2215 (1) of the civil code). The agent
cannot further delegate the work or substitute, which has been delegated to him by his principal
unless authorized by the principal to delegate or substitute another person or agent (Art. 2215 (1
and 3) of the civil code).

Duties of the Principal

Dear students as discussed about the duties of the agent, the principal has also duties that have to
be performed. Can you mention some of the duties of the principal? The principal has the duty to
remunerate the agent because the agent has the right to be remunerated for the services rendered
that expressed in a contract of agency when he acted within his power (Art.2219 of the civil
code). The agent has also the right to be remunerated the expenses rendered for the benefit of the
principal (Art. 2220 civil code).

The principal has also the duty to indemnity an agent against any loss. In addition to this, every
agent has the right to be reimbursed all the expenses incurred in discharge of the representation
in accordance to the contract (Art. 2221 (2) of the civil code).

Generally, the principal has the obligation to pay the remuneration of the agent, advance
expenses to the agent the sums necessary for carrying out the agency (Art. 2221 (1) of the civil
code, to release the agent’s liabilities which he incurred in the interest of the principal (Art. 2222

61
(1), and liable for any damage caused by the agent not by his own default and the principal
indemnify the agent for any damage.

The principal and the agent have liabilities to the contract of agency. Principal has the duty to
take liability for the act discharged by the agent in accordance with the power of representation.
The agent has the liability for the acts that he performed or discharged beyond his power unless
ratified by the principal (Art. 2216).

5.5. Termination of Agency

Agency relation may be terminated where either of the parties stipulates some express or implied
condition, that is, by revocation of the principal and renunciation of the agent or by the operation
of law. Revocation is termination of agency relationship by the principal whereas termination of
agency relationship by the agent is renunciation. The principal may revoke the agent at his
discretion and, where appropriate, compel the agent to restore to him the written instrument
evidencing his authority (Art. 2226 (1). This is when the principal and the agent end up agency
relationship afterward agreement.

Agency relationship may also determinate by virtue of law. After certain requirements are met,
the law avoids the agency relationship. The agency relationship terminates by operation of law
are: death, incapacity and bankruptcy of an agent or a principal.

Parties may agree to end their relationship by an after warding agreement, when there is lapse of
time of the agency, when the purpose of agency is achieved, when there is occurrence of a
specified event by mutual agreement of parties, or unilateral termination of either party.

There are general grounds for the termination of agency relationship by the operation of law.
This is by the death of the agent or where the agent is declared absent, becomes incapable of
performing his duties or is adjudicated bankrupt (Art.2230(1)). Agency relationship is also
terminated by the death of the principal or where he is declared absent, becomes incapable of
performing his duties or is adjudicated bankrupt (Art. 2232 (1)). Agency relationship can
terminated when agency relationship has impossibility and illegality, and when the subject
matter of the agency has changed its circumstances.

62
Chapter-6: The Law of Security Devices

Security devices are instruments which serve as guarantees for credit operations. Security
devices are classified in to two. These are: personal Security (surety ship) and real security
devices. Personal Security devices are securities when the debtor is required to provide a person
as a guarantee whereas real security devices are securities when the debtor is required to provide
properties as guarantee. The details of these are discussed below.

6.1. Defining security devices

These are devices or instruments that assured creditor from risks of non-payments of insolvency.
Credit transactions or contracts where by creditors give service of loan of money, sale of goods,
etc. and debtor promises to pay at some future date. By having security devices two things are
secured, that is, the creditor’s fear is minimized and the debtor as well obtains the services. Thus,
the security devices enhances in financing trade. A buyer may be willing to purchase a certain
item that a seller offered for sale. However, the buyer may not have sufficient money at the
moment. The seller may also be willing to sell on credit, however, may not know the financial
status of the person intending to the thing on credit if some kind of assurance is provided. A
device that may be given to the seller either by the buyer or any other person for the benefit of
the buyer is known as security device.

Interest of the buyer and the seller may easily be met where the buyer furnishes some kind of
assurance or guarantee that may avoid or minimize fear of the seller. Assurance to the hesitating
seller may be given in to two ways. The first is, the buyer may bring some one that may
guarantee the debt, that is, personal security or surety ship. The second is, the buyer assure the
seller by giving a certain property, which would be sold should the buyer fail to discharge his/her
obligation, that is, a real security.

6.2. Classifying security devices

Dear students do you know the forms of security devices? If you don’t know them, security
devices are categorized in to two: These are: Personal and Real security devices. They are
security or guarantee contracts that enhance credit operation by providing credit facilities for
traders.

63
If the debtor provides a person physical or legal, in the form of security to the creditor, it is
personal guarantee or surety ship. While, the debtor provides property in the form of security to
the creditor, it is a real security or guarantee. For instance, lemma borrows 5000 birr from Azeb
providing Abdisa as a guarantor. In this case, Abdisa is liable to pay the money, if lemma failed
to discharge his duty on the due date. A creditor may also require many personal guarantors who
have joint liability of the debt when the debtor failed to discharge his duty. In this case, there is
an increase in the chance of payment as debtors are increased in number.

In the case of pledge and mortgage, that is, real security, the debtor is required to deliver a
certain property which equal value of the money borrowed which is pledge contract or to deliver
a document which equally represents to the amount of money borrowed which is mortgage
contract. Let us see the two forms of security devices as provided in the following sections.

A. Suretyship or personal security devices

Surety ship is to mean the personal security device or contract of personal guarantee. Its purpose
is to guarantee or to avoid risk of non-payment or non-performance. The creditor entered in a
contract with a debtor and the creditor also entered in to a contract of guarantee with third party
in a sense that when the debtor failed to perform his obligation, the guarantor will pay.

Dear students, do you know the contracting parties to surety contract?

The two contracting parties in surety contract are the surety and the creditor. Surety is the person
guarantying principal debtor’s obligation. He promises to the creditor to discharge debtor’s
obligation in his failure. The creditor, on the other hand, is the person expecting performance by
the debtor. If computer is sold on credit and a surety assured payment, the seller is a creditor and
the buyer is a debtor. The person assuring payment is the surety. Thus, surety contract is the
result of a relationship of three persons. These are the creditor, the debtor and surety (guarantor).

Surety ship is a contract between a person called surety and another person called creditor to pay
the debt or discharge an obligation should the debtor failed. The surety may agree to guarantee
an obligation, even without request and awareness of the principal debtor (Art. 1921 of the civil
code). This may usually happen when the surety has moral interest on the contract between the

64
debtor and the creditor. As the debtor is not a contracting party to the contract of surety, his
consent and awareness is not a requirement.

Surety contract has special features, such as, it is a unilateral contract, an accessory contract, and
the main obligation should be patrimonial nature. In a surety contract, the surety promises to the
creditor, if the principal debtor fails to discharge an obligation, to substitute him and perform the
obligation to the creditor.

The creditor, here is identical to the donee, the person accepting a gift. He merely receives but
gives nothing. The same is true to the creditor in the contract of surety. That is, no contractual
obligation is out standing on the creditor. The creditor merely expects performance from the
surety but gives no promises to the surety. Thus, this form of contract is a unilateral contract.
However, if both contracting parties promise one another, for example, as that of obligations of
the seller and buyer, the contract is a bilateral contract.

Surety is an accessory contract. What do you mean by the term accessory? Accessory does not
exist by itself. Accessory by itself is meaningless and hence there should be the main contract
that it serves. To have valid surety contract, there must be a valid primary obligation. Surety
contract is, therefore, a dependent contract. The existence, life, validity and enforceability of the
surety contract depend on the validity and enforceability of the principal contract. A guarantee
may not be given except in respect of a valid obligation (Art. 1923(1) of the civil code). The
guarantor shall be released when the primary debt is discharged for any reason whatever (Art.
1926 of the civil code).The other special feature of surety contract is the patrimonial nature of
the obligation.

How do you justify the term patrimonial nature?

A surety’s obligation is a contractual obligation; it should be patrimonial in nature. The surety,

therefore, may be compelled to discharge his obligation in terms of money. If you remember, the
obligation of the party should be proprietary nature. This indicates that all obligations which
arise from the contract shall be measured or valued in terms of money.

Formality requirement for formulation of surety contract is important. Where a certain form is
given by law or agreed by the contracting parties, it shall be observed. Otherwise, the agreement

65
cannot be taken as contract (Art.1720 (1) of the civil code). To have valid and viable surety
contract, prescribes or that may be agreed by a credit for and surety shall be complied. Non-
compliance of form makes the surety contract of no effect as to other contracts.

Do you know formality requirement that the law prescribes to have enforceable in surety
contract? As you have learnt in the general law of contract, surety contract shall be entered in
writing (Art. 1725 civil code). Further, as all written contracts shall be signed by the contracting
parties, the surety contract shall be signed both by the surety and the creditor. It shall also be
attested by witnesses (regarding signature and attestation, see-Art. 1727-1730 of the civil code).
The contract of surety shall be made in writing. The requirement of writing itself indicates that
the contact of surety cannot be implied.

Surety’s maximum amount of obligation shall be clearly indicated in the contract. Unless the
exact boundary of surety obligation is specified in the contract of surety, there shall be no
guarantee (Art.1922 (3) of the civil code). A guarantee may not exceed the amount owed by the
debtor nor be contracted on more burdensome (Art.1924 (1) of the civil code). Therefore, the
maximum amount of debt that a surety may be compelled to discharge is equivalent to that of the
principal debtor. The surety obligation, however, may be less than that of the principal debtor’s
obligation. A guarantee which exceeds the amount of the debt or which has been contracted on
more burdensome terms, is not void but merely reducible to the amount of the primary debt
(Art.1924(3) of the civil code.

The obligation that a surety may agree to discharge on behalf of the other may be purely future
or probable. This is where the time during which the guarantor is to be bound has not been
stipulated in the instrument is a future or conditional obligation creating the guarantee, the
guarantor may put an end to his undertaking so long as the primary debt is not yet due (Art.
1925(2) of the civil code.

The relationship between the creditor and the surety can be created in to two ways. These are:
simple guarantee and joint guarantee.

In a joint guarantor, the creditor can claim or sue the guarantor without previously demanding
payment from the debtor or realizing his securities. That means when the debt matures, even
without putting the principal debtor in to default, the creditor can claim payment from the

66
guarantor. What matter here is, the financial capacity of the debtor or guarantor, that is, an option
for the creditor, this does not mean that at the due date of the debt, the creditor, without
ascertaining the principal debtor’s failure, will ask payment from the guarantor (Art. 1920 of the
civil code)

In a normal circumstance, the debtor may fail to discharge his obligation after default notice is
given. To exercise remedies of non-performance, in principle the creditor has to give a default
notice. In fact, default notice may not be given always as you have learnt in unit-one of part II of
this module. To remind you once again where the date of payment is a compulsory one, or
where by agreement of the debtor and creditor excluded default notice or where the debtor
intimidate to the creditor that he will not discharge the obligation, there is no need to give default
notice.

The creditor may opt to sue the debtor first and may sue the guarantee or after all possible
remedies taken against the debtor exhaustively. In such case, the creditor can sue the debtor and
the guarantors jointly (Art1933 (1) of the civil code). This is because the debtor and the joint
guarantors are liable jointly and severally to the creditor.

The debtor might have given pledge or mortgage in addition to the joint guarantor, therefore, the
creditor can take action against the guarantor without realizing the property of the debtor. When
there is a partial payment imputed to the part which is not paid. This is to assure that the
possibility of payment, that is, full payment of creditor’s claim, and the whole purpose is to
secure the creditor’s claim to be paid the debt.

In a simple guarantee the creditor claim or demand payment or performance first to the principal
debtor, that is, the creditor does not ask payment or performance to the guarantor unless the
debtor failed to discharge his obligation. The creditor can resort or demand from the debtor
realizing his securities (Art. 1934 of the civil code)

A simple guarantor or surety can avail defenses, such as the defense of benefit of discussion and
any defense available to the main debtor. Benefit of discussion is the procedure which the simple
surety may require creditor to discuss assets of the principal debtor. That means, the surety or
guarantor can say to the creditor ask the debtor first and if he failed to discharge his obligation
come to me.

67
The guarantor has to raise the defense of benefit of discussion during the first appearance before
the court when proceedings made by the creditor, that is, during the preliminary objection, if not
raised it will be considered as waiver of right. The guarantor has to identify the property of the
debtor to be seized or attached and inform the creditor. If the creditor failed to seize or attach the
property of the debtor, the guarantor is released to the amount, which the creditor could have
obtained from the debtor.

Generally, the guarantor to raise benefit of discussion as a defense, it shall be as soon as he/she is
first proceeded by the creditor, has to indicate the debtor’s property that may be discussed, in
additions to indicating properties of the principal debtor has advance sufficient money for costs
of the discussion and the debtor has to be solvent.

The guarantor has the right and duty of setting up the entire defense available to the debtor (Art
1942(1) of the civil code). For instance, where the obligation guaranteed is barred by period of
limitation, or where the debtor failed to perform the obligation because of unforeseen and
unexpected event or any cause that may relive the debtor from payment of the debt may be
invoked or raised by the surety (guarantor).

In a surety ship contract there may be existence of plurality of guarantors, like providing counter
guarantor, or secondary guarantor or security of several sureties having similar positions. For
example, the debtor may produce a person who may be liable if the debtor fails to indemnify or
discharged surety. The person assuring a guarantor as to his indemnity from the principal debtor
is called counter- guarantor. The counter- guarantor will only step in where the main guarantor
has been called to pay for the principal debtor. The counter-guarantor’s obligation is similar to
the obligation of a guarantor owes to the creditor. Thus, he will be called when the guarantor
demands indemnity from the debtor.

A creditor may not know the financial position of a guarantor as that of the principal debtor,
thus, can make the debtor to call a secondary guarantor. In this case, the creditor acquires double
guarantee. The main surety may also bring a person who may be liable in his failure. The surety
(guarantor) that guarantees the creditor is called a secondary guarantor. For instance, Arkebe is a
guarantor or surety of Beletu and Chaltu is a surety of Arkebe that guaranteed to pay the creditor
where the principal debtor who is Beletu and Arkebe principal surety failed to discharge their

68
duty. In secondary guarantee, the creditor can not only challenge the guarantor but also the
secondary guarantor.

The possible distinction between the ordinary (simple) guarantor and a secondary guarantor is in
terms of liability. An ordinary guarantor is liable when the debtor failed to perform his obligation
whereas the secondary guarantor is liable when the debtor and the first guarantor failed to
perform their obligation. In personal guarantee (surety) an obligation may also be secured with
two or more sureties having identical position (Art 1951 of the civil code). Where each of the
sureties is simple guarantors, they shall pay their own share in accordance to what they agreed in
the contract of guarantee. The guarantors may not make them free discharging their share of the
debt because, each of them are guarantors for their personal guarantee and liable as secondary
guarantor for the share of others. Thus, every guarantor is not free until the whole debt is
discharged

B. Real security devices

This is when the debtor delivers property in the form of pledge or delivers documents which
have title deed in the form of mortgage or Antichresis which the debtor delivers the immovable
property instead of personal guarantee. Real security is the safest position of security devices
because there will not be a danger of non-payment. The most identifiable real security devices
are pledge and mortgage.

1. Nature and definition of pledge

Pledge is a real security given by a debtor or third party called pledgor to the creditor (the
pledgee) in the form of a corporeal movable chattel in good faith as a security for the
performance of principal obligation that is, established between the debtor and the creditor. A
contract of pledge is a contract where by a debtor undertakes to deliver a thing, called the pledge,
to his creditor as security for the performance of an obligation (Art 2825).The contract of pledge
is a common form of security whereby the main contractual obligation is secured by the
existence of a moveable good. The person securing an obligation is called pledgor. The creditor
is the person to whom guarantee of moveable goods delivered by the debtor. The person securing
an obligation is called pledgor. The creditor to whom guarantee of a moveable good is given

69
called pledgee. The agreement concluded between the pledgor and pledge is called the contract
of pledge.

The thing pledged is known as pledge. Securing an obligation through a movable property is a
usual practice. Where the moment of performance of an obligation has to be postponed because
of different contingencies, for instance, the debtor has no money to discharge the obligation
instantly and no one is there to assure performance, the most practical way of guarantying
performance of an obligation is through pledge. If the creditor is willing to accept a thing, the
debtor may guarantee the obligation delivering any movable property.

A moveable property given for the security will be possessed by the creditor until the obligation
is discharged. If the obligation is discharged pursuant to the terms of the contract the thing (the
pledge) will be given back to the pledgor. But, if the debtor failed to discharge the obligation, the
credit will be paid selling the pledge. The pledgor may be debtor or third party. The third party
may pledge a thing with or without knowledge of the debtor. A contract of pledge may be made
between the creditors and a third party to secure the debt of another person (Art 2826). Thus, the
debtor and the pledge may not necessarily be identical. The pledgor has to be an owner.
However, exceptionally where good faith acquisition may be exercised, one may pledge the
property of another and that may constitute a valid pledge.

All moveable properties that have money value may be pledged. A corporeal chattel or rights on
movable properties may be pledged to secure a debt, claims such as money receivable, thus, may
be pledged. That is to mean, all movable properties may not be subject to pledge. A thing to be
pledged should be capable of being sold in the market or through a public auction.

The thing to be pledged shall be capable of being sold separately by public auction. Accessories
and intrinsic elements of an immovable properties, if it could be separated from the immovable
may be pledged (Art 2829 (2) of the civil code). Thus, in pledge in addition to movable corporeal
chattels, incorporeal things (claiming and intangible) can be pledged. Pledge is an accessory
contract like surety ship.

What does accessory contract mean?

Accessory contract are contracts that do not exist by themselves. In the absence of a valid
principal contract, pledge may not be extinguished and the pledge shall be returned where the

70
debt is guaranteed is discharged (Art 2849 civil code). This is to mean for validity and
enforceability of an accessory contract, existence and enforceability of primary contract is
mandatory. A valid pledge contract shall fulfilled requirements.

What requirements do you know to have a valid pledge contract?

Pledge contract is valid when the parties fulfilled the requisites of capacity, consent, object and
form. The pledgor shall have the capacity of alienating the object. It needs specification of the
amount guaranteed, otherwise the contract of pledge shall be void and dispossession of the
pledgor may be made. That is, the pledgor should be dispossessed the object pledged and
transferred to the possession of the pledgee or third party creditor’s right. (Art.2828). Thus,
where the contract of pledge is silent as to the extent of the obligation that is secured by pledge,
there shall be no contract.

As pledge is a special contract, parties to the pledge contract should attain legally required age to
enter in to contractual agreement. Both the pledgor and the pledgee should give their consent
without due influence and their consent shall be sustainable at law. The object of the pledge
contract which is their obligation shall be Cleary and sufficiently defined, possible, lawful and
moral otherwise the pledge contract will have no effect. In pledge contract, written form is
required when the amount pledged is more than 500 birr otherwise parties can determine in any
other way.

In pledge contract the thing pledged shall be delivered to the hand of the creditor by debtor
(pledgor or third party). This is because pledge contract is a transfer of possession, with the
possibility of sale of pledge where the obligation guaranteed is not performed. The whole
purpose of the pledge is to enable the creditor to sell the chattel and satisfy his claim, when
debtor defaults.

The most important thing in pledge contract is that, in no way an attempt to transfer ownership to
the pledgee (creditor) that is, pledgor (debtor), remains to be an owner. The pledgee has the duty
to return the chattel in case the pledgor performed his obligation and has the duty of preservation
of the thing at the cost of the pledgor during his possession. The pledgor has certain duties to
perform.

71
Can you describe them?

The duties of the pledgor are payment of expenses and cost of preservation. The thing pledged
will be preserved at the cost of the pledgor not at the cost of the pledgee. Art 2835 of the civil
code states that the pledgor shall reimburse the pledgee the expenses incurred in maintaining and
preserving the pledge. The pledgee has also rights and duties.

What rights and duties of the pledgee can you guess?

The pledgee has the right to retain the thing pledged until the debt is paid. Until the whole debt is
discharged the whole pledge may be attached by the pledgee. The other right that the pledgee has
is, he is conferred with real right. The rights included here are right of pursuit and right of
preference (priority right).

Where a third party without having any right to do so possesses the thing pledged, the pledgee
may follow the things and bring an action for dispossession (Art. 2842 (1) of the civil code). This
is to mean the pledgee has better title until payment of the debt made and has the right to follow
(pursuit right) the thing pledged. The pledgee has also right of preference in case; the pledgor
pledged the thing to different pledgees in different times.

Thus, s/he may sell the thing pledged if the contract of pledge is silent, requests may provide by
any of the pledgees. In this case, the prior in time of the pledge contract will have prior right or
payment. In fact, a creditor whose debt is unsecured cannot compete with secured creditors. Each
category of creditors will compete for the priority of payment with in creditors in the same
category (Art. 2860 of the civil code). The mode of publicity in pledge is the dispossession of
pledgor not registration. The pledgee has duties.

Can you mention the duties of the pledgee?

Restitution and preservation of the thing pledged are duties of the pledgee. Restitution is to mean
if the whole debts including incidental costs and expenses discharged, the pledgee shall return
the thing pledged to the pledgor. The pledgee has also the duty to take care of the thing pledged
as any prudent person until debt is discharged because s/he has the duty of preservation of the
thing pledged. When the pledgor does not discharge the obligation, the pledge contract may be
executed in different ways.

72
Can you list down the forms of execution?

The general principle of execution of pledge is the thing pledged will be sold by public auction.
In some cases the court may also order the thing to be sold privately. Execution of things pledged
with banks is an exception to the execution of pledge by the court order (Art. 2854 civil code).
Where the debtor fails to discharge the debt, the bank is authorized to sale the thing without the
need of judicial assistance. The bank can have paid selling the thing pledged through a public
auction, proclamation No. 97/98).

2. Nature and definition of mortgage

Mortgage is another real security device which creates two real rights such as right of preference,
when there are two conflicting auctions, and right to pursuit. It is the safest way of real security
devices. There is no right of possession in good faith in mortgage because the status of
immovable property are confirmed by registration and publicized to third party. The debtor has
the right to possess the object mortgaged but to deliver the documents which show the title deed.

Mortgage is a guarantee in immovable property which is not delivered to the creditor and giving
the right in case of non-performance of the guaranteed obligation to be paid with the proceeds of
such property to the extent of the credit secured by the mortgage in the degree of preference
established by law.

The things that mortgaged are all the immovable and exceptionally some special movables can
be mortgaged. The two immovable properties are land and building. However, currently,
Ethiopia does not recognize private ownership of land. Thus, an immovable property that only
can be mortgaged is building. Mortgage is basically an encumbrance on immovable properties
but, exceptionally some movable properties like ship (Art. 33-40 maritime code). Airplane, a
business (Art. 171-185 commercial code) may be mortgaged.

Further, the mortgaged encumbrance may extend to accessories and intrinsic elements of
immovable property (Art. 3064 civil code). The mortgage shall charge the mortgaged immovable
together with its intrinsic elements and accessories. Intrinsic elements are things that have
attachment with an immovable property. Can you mention intrinsic elements of an immovable?

73
Windows, doors, electric appliance, that may detached from a building make up intrinsic
elements.

Accessories, on the other hand, are things not having direct physical attachment with an
immovable, however, facilitate use of an immovable. Can you mention accessories of a class
room? A chair, table, etc. any object expressly specified as an accessory in the contract creating
the mortgage shall be deemed to be an accessory (Art. 3064 of the civil code).

The claims that mortgaged by mortgage may be existing, future or conditional (Art.3046 civil
code). The mortgage can naturally be given for a credit suspended by a condition. Since, the
conditional credit forms a right immediately transmissible, the mortgage in the conditional as the
credit itself. The conditional mortgage cannot produce effect unless the credit (obligation
secured) is subsequently created.

The debtor is not dispossessed the thing mortgaged but remained with him/her. Because of this,
we can say it is the most modern (advance) way of the security devices. As a result, the debtor
(mortgagors) has an advantage to lease, sale, re-mortgage, etc. and from such profits, the debtor
can discharge his/her debt.

Can you mention the kinds of mortgage?

Yes, why not.

Mortgage can be made in three ways:

These are: conventional, legal and judicial mortgages. Conventional mortgage is created by
agreement of parties. For example, Abebe borrow 1,000,000 birr from the Commercial Bank of
Ethiopia by securing his House which worth’s 2,000,000 birr.

Legal mortgage is created by the operation of law for special category of people. Example, seller
of immovable is given a mortgage right over his former immovable until being paid the price
even if the parties did not agree. The other example is in case of partition which emanates from
succession, partnership and communal property.

Judicial mortgage is when a debtor condemned by court or any other tribunal, the court may
grant to the creditor general mortgage right over immovable property of debtor.

74
Do you know the requirements for the validity of mortgage contract?

In mortgage contract the following formalities shall be fulfilled. It shall be made in writing. The
contract of mortgage shall be specify the property mortgaged. This is to mean, the value of the
immovable should be specified and specify the value given in the form of security. The person
who may mortgage a property is also required. A person cannot mortgage property which s/he
does not own. It needs registration regardless of its type of publicity; lack of form shall result in
the contract of mortgage invalid and sale of immovable void.

Mortgage contract has an effect in creating right of preference and creates right of pursuit. I
hope you know preference right and justification for the preference. The mortgagee is conferred
with a real right. Persons having real right have preference to other persons. Thus, where a
mortgaged property is sold, the mortgagee may exercise priority in having payment. The right
of pursuit is a right that may be exercised by a person conferred with a real right. As mortgage
confers on the mortgagee a real right, s/he may follow the property mortgaged and attack it
wherever it goes, if the debtor fails to discharge the debt guaranteed.

The contract of mortgage extinct when the mortgagor (debtor) pays the principal obligation, or
when being invalidated if the registration is cancelled, or when the mortgagee renounced his/her
claim, when it is sold by auction (by creditor) and payment from the proceeds of sale, if the
mortgage encumbrance is redeemed and the price of the redemptions distributed among the
mortgagees, the mortgage security may be cancelled from the registration, if there is extinction
of usufruct and lapse of mortgage period. The contract of mortgage may be entered for defined
period of time. After the end of that period, any interested party or an officer of registration
cancel the registration of mortgage.

3. Nature and definition of Contract of Antichresis

Dear students in your earlier discussion you studied pledge and mortgage as the basic real
security devices. Now you will study antichresis as one of the security devices even though it is
not popular and usually practiced in business transactions today.

Can you define what a contract of antichresis is?

A contract of antichresis is a contract whereby the debtor undertakes to deliver an immovable to

his/her creditor as a security for the performance of his/her obligation (Art.3117 of the c.c. of
Eth.).From this definition one can understand that delivering an immovable property by the

75
debtor to the creditor is one of the basic natures of an antichresis contract. This is also the major
difference between an antichresis and mortgage contract. In an antichresis, the thing
(immovable) securing payment of a debt will be handed over to the creditor. Moreover, he/she
will use the thing delivered to him/her. If that is a house, the creditor will live in it or use it in
any suitable to him/her without affecting the interest of the owner of the thing or the terms of the
contract of antichresis (Art.3121 of the civil code).An antichresis resembles to a mortgage,
because it is security given to the creditor over an immovable. But, it is quite close to a lease,
because the immovable is delivered by the debtor to the creditor or a third party beneficiary, who
will occupy it. Without prejudice to the provisions of the following Articles (discuss here below)
the provisions of this code regarding the relations between the lessor and the lessee or farmer-
tenant (Read articles 2896-3018 of the civil code) shall apply to the relations between the parties
under a contract of antichresis (Art.3120 of the civil code).

The civil code of Ethiopia provides only 14 articles for an antichresis contract to deal. These
provisions are very small compared to other security devices regulated by the civil code. But,
you should not take as if an antichresis is less focused, although it is not practically applicable in
this country. The law articulated rules very peculiar to the contract of an antichresis as majority
of rules and procedures of mortgage are applicable to the antichresis. The rules of creation of an
antichresis are those for the creation of a mortgage (Art.3118).That is to say, the contract of
antichresis has to be made in writing, it has to specify the debt guaranteed and the contract has to
be registered. The immovable securing the debt has to be specified and it has to be delivered by a
person who can dispose it (read requirements for validity and enforceability of mortgage given in
this unit).Further, the antichresis shall have exactly the same effect as a mortgage before and
after delivery of the immovable, and after the immovable has been returned (Art.3121 (2) of the
civil code).Again, the rules for the extinction of a mortgage regulate the process of extinction of
antichresis.

However, there are distinctions between mortgage and an antichresis as described below.

A. Antichresis may be created by contract alone (Art.3119 (1) of the civil code). Hence, there is
no possibility for a legal or judicial antichresis, as there are legal or judicial mortgages. Can you
guess a reason why the law does not permit a legal or judicial antichresis? This is because the
occupation of a building, the setting down of the seat of a family is a very personal affair, and
could not be imposed by a court.

76
B. Antichresis may not be created to guarantee a claim embodied in an instrument to order or to
bearer (Art.3119 (2) of the civil code). Instruments that may be made to order or to bearer are
negotiable instruments. Though no justification revealed, obligations contained by the negotiable
instruments or that can be proved by a negotiable instrument cannot be guaranteed by a security
of antichresis. Can you guess why the law says so?

C. This is because an antichresis may not be created by the bare owner of an immovable as
mentioned under Art.3119 (3) of the civil code. Bare owner is a person not in possession of the
thing given as a security. He or She merely possesses only an abusus (the right of disposition).
Antichresis requires the thing to be delivered. As the bare owner cannot deliver the thing,
logically, he/she subject his/her property to antichresis. This is because other separate rights
(usus and fructus) are in another person’s hands.

Can you mention the difference between lease and an antichresis?

As discussed above, antichresis in some cases may resemble to lease. In both lease and
antichresis, a thing will be delivered and a person not an owner will use the property. But, there
is a sharp distinction. The following are some of the distinguishing remarks.

1. Warranty against defects (Art.3122 of the civil code).In the case of antichresis, the immovable
shall be delivered in its condition as it stands on the day of contract of antichresis(Art.3122(1) of
the civil code). The debtor does not owe any warranty against defects of the immovable as
opposed to Art.2904 of the civil code for a lessor. The creditor either accepts the immovable as it
stands, even without defects, or he/she rejects the proposal of an antichresis as a security. In the
case of lease, where the immovable under lease is supposed to be in a condition suitable for use,
the lessee wants to make use of it. Article 3122(2) of the civil code stated that the person having
created the antichresis shall give no warranty against the defects of such immovable. This
provision illustrates quite well, the fact that the focus is a security, not a contract for a service.
The only exception is where the debtor may be responsible for defect of a thing given under
antichresis is where the defects are dangerous for the occupants of the house, and the debtor
knew of such defects at the time of the contract of antichresis(Art.3122(3) of the civil code).

2. The person having created the antichresis may not be compelled to make repairs on the
immovable (Art.3123 of the civil code).

77
3. Occupier`s Rights: The person occupying an immovable cannot transfer it to another by lease
nor assign his/her right to a third party without the consent of the person having created the
antichresis(Art.3127 of the civil code).

What would happen if a property subjected to antichresis is leased or assigned to third

parties?

4. As has been indicated in Art.3127 of the civil code, “The creditor may not lease the
immovable nor assign his/her right to a third party without the consent of the person having
created the antichresis’.

5. Absence of rent: The Amharic notion for the term antichresis is “Weled Aged’ why is it said,
“Weled Aged’? This is because the debtor is not compelled to pay an interest. The use that
he/she makes of the property is taken as privilege and the creditor is not entitled to collect an
interest. What would happen if a person consents to pay an interest in addition to the use of the
property? Art.3124 (3) of the civil code provides an answer. It states: ’Any provision whereby
the creditor is entitled to interest in addition to such use, fruits and profits shall be of no effect.’

Answer the following case supporting by a relevant article of real security devices.

Ato Belay borrowed Birr 200,000 from Dashen Bank on May, 2009 and mortgages his
residential house in writing and registered. The maturity date of the debt is January, 2011.On
Jun, 2010 Ato Belay borrowed Birr 100,000 from Ato Lema in writing and registered, then
delivered his house to Ato Lema until the debt is to be paid that who have agreed the maturity
date of the debt to be on May,2011. When the first debt was due, Ato Belay failed to pay it. The
Bank after giving appropriate due notice put the house in which Ato Lema lives in to auction.
But, Ato Lema opposes.

Assuming that you are a judge, if this case is brought to you, what would be your decision?
Support your answer by a relevant article of the civil code.

______________________________ // ____________________________

78