Business Law

Module One

Araya Kebede Araya

(Asst. Lecturer of Law)

Faculty of Law
Mekelle University

September 2006
 Contents Page
Introduction ................................................................................................................... 1
CHAPTER ONE............................................................................................................ 3

Introduction to Law and Ethiopian Legal system .................................................... 3

Major unit objectives ............................................................................................. 3
1.1 Meaning, Nature and Functions of law ..................................................... 4
1.1.1 Meaning ..................................................................................................... 4
1.1.2 Nature ................................................................................................. 5
1.1.3 Functions (Why do we need law?) ..................................................... 9
1.2 Classification of laws ................................................................................ 10
Emphasis on Civil and Criminal Law ............................................................. 12
1.3 Alternative Dispute Resolution Mechanisms (ADR) .............................. 13
Arbitration (Commercial) ............................................................................... 13
Conciliation or Mediation................................................................................ 14
Summary.................................................................................................................. 15
Test questions .......................................................................................................... 16
Questions for Group Discussion.............................................................................. 18

CHAPTER TWO......................................................................................................... 19
Law of Persons......................................................................................................... 19
Major unit objectives are: ....................................................................................... 19
2.1 Meaning and types of persons.................................................................. 20
2.2 Acquisition and termination of personality............................................. 20
2.2.1 Physical persons................................................................................ 21
2.2.2 Legal persons .................................................................................... 23
2.3 Attributes of personality .......................................................................... 24
2.4 Capacity of persons to exercise rights and duties ................................... 25
Summary.................................................................................................................. 28
Test questions .......................................................................................................... 29
Questions for group discussion ............................................................................... 31

ii
CHAPTER THREE .................................................................................................... 32
Law of Contracts ..................................................................................................... 32
Major unit objectives ........................................................................................... 33
3.1 Definition and analyses ............................................................................ 34
3.2 Formation of Contracts............................................................................ 36
3.2.1 Consent .................................................................................................... 37
Offer and acceptance ................................................................................... 38
3.2.2. Object and cause of contract.................................................................. 43
3.2.3 Form ........................................................................................................ 46
3.3 Effects of contracts ................................................................................... 48
3.3.1 The Performance of Contracts ......................................................... 49
3.3.2 Non-performance of contracts ......................................................... 53
3.4. Extinction of Obligation ........................................................................... 56
Summary.................................................................................................................. 59
Test questions and cases .......................................................................................... 61
Questions and cases for group discussion ............................................................... 62
Model Answers for Test Questions ......................................................................... 64
Chapter one.......................................................................................................... 64
Chapter two ......................................................................................................... 65
Chapter three ....................................................................................................... 66
Reading materials used to develop this Distance Learning Module ...................... 67

iii
Introduction

Law is a discipline that should be studied, if possible, by anybody since there is no one
outside the realm of law. All of us are always expected to act in compliance with the law.
That is why the well known legal maxim runs as ignorance of law is no excuse. It is an
accepted norm that every one is presumed to know the law. Therefore, studying law is
not a luxury rather a necessity.

As students of business law, the writer believes that this is your great opportunity to study
law; especially that part of law which is, in one way or another, related to business. Get
yourself acquainted with the general principles of the basic business laws. It should be
noted that great effort has been exerted to keep the relevance of the distance learning
module in line with business and economics field of studies. Although the whole part of
the material can be studied by students of business and economics; there are indications
in this module that students of a given department (like Management, Accounting and
Finance, Business Education, or Economics) may emphasis on some chapters more than
on others.

As many writers of business law agree, the subject can be loosely defined as a field of
study that comprises laws concerning trade, industry, and commerce. It is an ever
growing branch of law with the changing circumstances of trade and commerce. With the
increased complexities of the modern business world, the scope of business law has
enormously widened. It is generally understood, however, to include the laws relating to
Persons, many kinds of Contracts, Trade and Business Organizations (Partnership and
Companies), Banking, Insurance, Negotiable Instruments, Employment (Labour),
Commercial Arbitration, etc.

Regarding the sources of this material, the writer has tried to consult as many local and
foreign business law reading materials as possible. This is manifested in the very body of
the module. To the materials much extent, we have tried to make it feel an Ethiopian in

1
that virtually all the examples and illustrations, for example, are provided in the context
of Ethiopia. In this connection, it is important to note that Ethiopian laws, as they stood
today, are heavily utilized. We would like also to tell the reader that the book entitled
“Commentary on Contracts in Ethiopia” written by Professor Renè David, the drafter of
the preliminary draft of the 1960 Ethiopian Civil Code, is much referenced for it is an
„official‟ commentary and explanation on the Ethiopian Civil Code preliminary draft
provisions on contracts.

The distance learning module is prepared in two parts viz. module one and module two.
This part one module comprises Introduction to Law, Law of Persons or Personality, and
the core of Business Law - Law of Contracts. Each of the units of the module is well
illustrated and explained so as to enable distance learners provide with the necessary
readings. To broaden their horizons on the course, students can read the materials
indicated as references in this module and other Business, Commercial, or Mercantile law
books.
As to the manner of presentation of the module, each chapter has got its own major
objectives spelt out at the beginning of their own respective chapters. Besides to the
summaries of the chapters, there are test questions for individuals and groups for each
chapter. Model answers for the questions are also included after the end of chapter three
of the module. Annexed is a copy of the law of General Contracts part of the 1960
Ethiopian Civil Code.

2
CHAPTER ONE

Introduction to Law and Ethiopian Legal system

Dear distance learners! Welcome to the first chapter of your study on

Business/Commercial Law. Before dealing with the very substance of business law, it is
good to acquaint you with some introductory concepts on law in general and Ethiopian
legal system in particular. This chapter is instrumental in the sense that it will help you
study the rest part of the module with a good knowledge on the basics of law.

In this chapter we are going to study many concepts of law. These concepts are divided
into topics that deal with their own respective subject-matters. In the immediately
following sub-unit we will try to see the meaning, nature, and functions of law. I wish
you to have a nice reading.

Major unit objectives

There are some objectives that students are expected to know from this chapter.
 To know and describe to other peers what the major characteristic features of law
in general are. You are supposed to know after you have studied this unit. The
major expected achievements are:
 To know and tell what the meaning of law and what the main elements of the
 Able to answer the basic question: why do we need law? In this part of the unit,
students are advised to focus on the role of law on business in general and how
law regulates the economy of one country.
 For there are various types of laws we need to adopt a systematic ways of
classification of laws. It is the objective of this chapter to enable students to
categorize laws in their own respective groups.

3
  To help students differentiate civil and criminal laws having some factors or
standards in mind.
 In our country, courts are the major and formal justice rendering institutions.
However, there are other alternative and informal dispute resolving mechanisms.
One of the major objectives of this unit is, therefore, to acquaint students with
these methods.

1.1 Meaning, Nature and Functions of law

In this section, we will have three sub-sections. The first section deals with the definition
of law. The second sub-section discusses various features of law. Lastly, a sub-section is
also devoted for the purpose of discussing some functions of law. While studying the
three sub-sections, keep in mind the points you have read and try to relate them with the
points of the sub-section you are reading now. Have a pleasant reading.

1.1.1 Meaning

Defining law is not an easy task. Several legal scholars have attempted to define
the discipline since centuries. However; due to some reasons, they were not successful in
coming up with a single and universally accepted definition of law. They do not agree on
the elements a definition of law should constitute. A main element in one definition is
completely missing in another definition. Another problem is that those legal scholars or
jurists define law in their own understanding. For example, while some define it in terms
of its function, others define it in terms of its nature.

For the purpose of this distance learning module, we can avail ourselves of the
following definition. The writer of this material wants to remind you that it is not a
perfect definition. It is just for our understanding on what looks like a definition of law
that we are going to see it. Next to the definition, a paragraph analyzing same follows.
The writer believes that the analyses will help students of Business Law develop their
knowledge on some basic elements of the definition. Here we go!

4
Law is a body of rules, created by the state, binding within its jurisdiction and enforced
with the authority of the state through the use of sanctions. (Alix, Adams; Business Law)

Before winding up our discussion on the meaning of law, let us see the analyses of some
of the main elements of the above definition. The first element in the definition is law is a
body of rules. In majority of cases rules are commands aimed at regulating behavior.
Rules tell us what we can/cannot do.; sometimes they may permit behavior subject to
fulfilling a condition. Foe example, an extension of business premises is illegal unless
planning permission obtained. Another element is that law is created by the state.
Parliament is responsible for the creating most of the laws applicable in one country. The
third element in the above definition is law can only be enforced in a jurisdiction of a
given state. In other words, the law of any country is binding only with in its territory.
Enforcement is still another point that we can take as element. A legal dispute may
require formal resolution by the court or tribunal. The state or the party to the dispute
may initiate the enforcement proceedings.

1.1.2 Nature

There are many features that characterize law. They are defining elements of the
discipline that they clearly show its nature. To begin with:

 Law is reflection of the contemporary behavior of a given society.

Law does not live on the air. Neither does it stand as a skeleton on its own. It lives with
in the society. Illustrated, it recognizes the currently living values of the society. It is said
that law protects the values the society wants to be preserved.

Another point of this part is that law is not worried about the past in the sense that it
merely regulates the existing activities of the society. It safeguards the contemporary
values of the society. It does so by way of requesting people to be in conformity with the

5
established standards. Someone‟s activities contrary to the pre-set norms are not tolerable
in front of the law.

 Law is dynamic.

By the statement law is dynamic; we mean that it changes as time goes. This is in line
with the statement: law reflects the existing social, economical and political behavior of
a given society. Explained, we all know that society‟s behavior is never static. It is
dynamic. We also know that law regulates the behavior of a society. Therefore, it is not
illogical to conclude that law should change since it is an instrument of the very changing
substance - i.e., behavior. Hence, law changes.

Let us see some illustrations. The following instances clearly show how law changes as
the social, economical, and political atmospheres of a society change.

One can learn from the near past history of Ethiopia that the economic ideologies
followed during the previous regime and the present are not the same. While Dergue used
to follow the command economy system, the present FDRE government adheres to that
of free market or mixed. Amongst other mechanisms, economic policies of a given
country are implemented via law. Here is the point. If economic policies are subject to
change; and policies are implemented through laws, laws should change as policies
change.

The same holds good to that of politics. Change in constitution more or less results from
change in regimes. For example, the 1955 Revised Constitution of the Imperial Regime
was suspended by the Dergue in 1974 just after the toppling down of the then regime.
The 1987 PDRE Constitution was also changed and replaced by the Transitional Charter
in 1991. The latter was eventually substituted by the present FDRE Constitution, adopted
in 1995. All these changes in the legal (constitutional) documents are caused by the
continued political changes in this country.

6
Two more examples suffice to show how social or attitude change results in legal change.
In the family law part of the 1960 Ethiopian Civil Code, divorce was in principle not
allowed unless there was a good cause to require so. On the contrary, virtually all the
currently in force family laws of states of the FDRE came up with laws considering
divorce as a right. To add one more example, grounds of abortion in the 1957 Penal Code
and 2004 Criminal Code are different. While termination of pregnancy on medical
ground was the only justified or legal abortion according to the 1957 Penal Code, some
more grounds like incest and rape are added in the new criminal code as justified reasons
of abortion.

 Law is pervasive.

Law is everywhere. It governs diverse relationships in a society. Almost all our daily
activities are in one way or another related to and regulated by law. That is why it is said
that law regulates the overall behavior of the society. It governs the social, economical,
political behaviors of a given community.

 Law is prospective.

In principle, law is forward-looking in that it governs situations or activities that happen

only after the coming into effect or promulgation of law. Negatively speaking, a given
law does not govern activities that have already happened before the coming into force of
same. Therefore, a certain conduct could be legal at one time and illegal at another time.

 Law is general.

Most laws are expressed through rules which in turn are written in the form of articles,
provisions, or sections. These legal rules by their nature are general. This generality
nature of legal rules could be interpreted to mean that: (1) legal norms do not deal with
any particular person. Law does not name persons. That is they are not meant to regulate
the behavior of a given person. Rather, legal rules are designed in a way to address the

7
society or part of it. Law could also be made to govern a group of persons or a certain
office. (2) It could also be understood to mean that legal rules are general since it is
possible to apply a single rule to a potentially unlimited number of cases. It is humanly
impossible for the legislature to legislate so specific laws to cover all specific activities.
In other words, legal rules will not go into the minute detail of social interactions. Rather,
they set general guidelines by which many acts and situations are covered. (3) Legal rules
are usually designed to be applicable for indefinite period of time in the future. This
indefinite application of law is also taken as general feature of law. Students should
remind here that „indefinite application‟ does not mean perpetual application. It is
obvious that law changes as circumstances change. It is only meant that nobody can
foresee termination of application of the enacted law. It is good to note here that there are
some laws characterized by features contrary to this: some laws are temporary in that
their application is limited for definite period of time. For instance; decree of the Council
of Ministers of the FDRE stays only for the period (state of emergency) it is decreed for,
fiscal law serves only for a given budget year.

 Law is normative.

Laws are expressed in terms of normative statements and not factual statements. By
normative we mean that laws set rules or standards so that everybody in the jurisdiction
where the laws apply is expected to behave accordingly. They are norms. Traditionally,
these rules, standards, or norms are categorized into four classes.

The first class of rules is permissive legal rules. Generally, they are „right‟ giving or
„right‟ recognizing rules. They allow persons to do something. That is, it up to the
individual to do/enjoy or not to do/enjoy the allowed thing. In other words, if the
individual wants to do the act, one is at liberty to do so. If one does not want, one is not
obliged to act according to the rule. Any way they only give permission. They do not
compel. Examples are all right giving or right recognizing provisions of the law.

8
The second class of rules is prohibitive legal rules. The terminology by itself is telling
that such types of laws prohibit or do not allow certain ways of behaving. They state what
a person is not to do. In case the person violates the law he will face some criminal or
civil sanctions. Penal laws are characterized by such types of rules. These types of rules
are also found outside the penal law. For example, minors and insane persons are not
allowed to enter into contract with any body. They can act through their agents. The idea
is that they are not in a position to perform juridical acts on their own.

The third class of rules is directive legal rules. These types of rules give directions for
those who are supposed to perform a certain duty. By way of providing the ways how to
do the duties, they order or command the one in charge of it. Persons are obliged to act in
conformity with the provisions of these laws. If they fail to act accordingly, they may be
civilly or criminally liable.

The fourth and last class of rules is rewarding legal rules. These laws exempt a person
from fulfilling their obligations for some good reasons like involving in certain useful
activity. For example, an investor may be entitled to exemption from payment of income
tax for a certain period if he invests in peripheral areas of a given country or somewhere
else in which infrastructure is not that much developed. These types of laws are rare

1.1.3 Functions (Why do we need law?)

Dear distance learners! Have you ever thought of the necessity of law? Have you asked
yourself ' why do we need law?' Any society or group with in it despite its size makes
laws for several purposes: for the purpose of organization, to promote safety and
convenience of members, and to regulate their relationships with each other. One can
enlist a number of purposes to be fulfilled. In what follows, we will try to see some
purposes along with the law(s) that discharge the function.
A. To maintain peace and order. Manly criminal law is involved in promoting public
order and preserving national security.

9
 B. To give legal validity to approved relationships and transactions between
members of the society. This involves the law of contract, the law of property,
the law of business organizations or company and partnership laws, and the
family law ( laws relating to marriage and divorce).
C. To provide a governmental structure; and legislative, executive and judiciary
procedures. Constitutional and administrative laws are mainly involved in such
activities.
D. To provide public services and to raise taxes to pay for them. In this connection,
some laws also regulate and promote the economy of one country.
Administrative, some civil, criminal and esp. tax (revenue) laws are involved
here.
E. Law also gives or recognizes individual embers personal rights and duties in
relation to others and to enable personal enforcement of these rights: the civil
law. Students, it is good to note here that civil law duties may arise through
agreement between the parties/ contractants (the law of contract) or be imposed
directly (the law of non-contractual liability).

1.2 Classification of laws

There are some ways of categorization of laws. These ways of classifications help
students see and understand laws in different perspectives.
It is customary to classify laws into international and national. While the former are
applicable cross border, the latter are applicable only with in as given nation.
International laws essentially emanate from treaties concluded in between or amongst
countries. These treaties could be bilateral, trilateral or multilateral. You should note here
that bilateral or trilateral treaties are international laws do not mean that they enjoy
international application. Their enforcement is limited only to the territories of the
member states of the treaty. It just only means that their application crosses the boarder of
a given nation.

10
Some international laws could also emanate from international custom. This means that
some state practices in their relation with some other states repeatedly done over a
relatively long period of time are eventually takes as binding practices. Some of them are
also driven from natural law. Hence, international laws. These days, most of these laws
are converted into treaties so as to ensure their observance. Examples of international
laws that source from international customary practices are the laws on genocide, slavery,
apartheid, other grounds of unwarranted discrimination, piracy, etc.

There are also other sources of international laws like the decisions of international courts
and writings of international law scholars or jurists.

National laws are laws that are enacted by the law maker or law makers of a give country.
They are of various natures. Let us divide them into some groups.

National laws could be classified into public or private laws. While public laws govern
the relationship between the government or society and private individuals; private laws
regulate a relationship of purely private nature. If either parties of a case (plaintiff or
defendant) in a court of law are from the government side, the case is a public case; and
the law essentially used to solve the case is a public law. However, if both litigants of a
case are private individuals, the case is of a private nature; and the law used to dispense
with the dispute is a private law. Examples of public laws are constitutional law,
administrative law, criminal law, and revenue or financial (tax) laws. Family law, law of
successions, law of contracts, property law, law of agency or representation, law of trade
and business organizations, etc are with in the class of private laws.
Laws can also alternatively be grouped according to the subject matters they deal with.
Courses in the curriculum of the Ethiopian Legal education are arranged according to
their subject matters. Examples are law of Persons, Family Law, Law of Successions,
Law of Contracts, Property Law, Law of Agency or Representation, Law of Trade and
Business Organizations, Constitutional Law, Administrative Law, Criminal Law,
Revenue or Financial (tax) Laws, Insurance Law, Law of Security Devices, Law of
Banking, Law of Bankruptcy, Maritime law, Law of evidence, Law of Criminal

11
Procedure, Law of Civil Procedure, etc. This is the most useful and effective way
categorization of laws.

The immediately above classification can also be crudely categorized into substantive
and procedural laws. While substantive laws such as Family Law, Law of Successions,
Law of Contracts, Property Law, Law of Agency or Representation, Law of Trade and
Business Organizations, are laws that define individuals‟ rights and duties; procedural
laws such as Law of Evidence, Law of Criminal Procedure, and Law of Civil Procedure,
provide mechanisms of enforcement of these rights and duties.

Emphasis on Civil and Criminal Law

Most laws in daily use are known by the names civil and criminal laws. They are widely
known by our society as „Fit-ha Biher‟ and „Yewenjel hig‟. Pondering on these points
counts for a business law student.

There are so many differences between civil and criminal laws/ civil proceedings and
criminal proceedings. Although it is possible to use more factors, let us compare and
contrast them in terms of purpose, procedure and penalty.
Purpose: In general terms, criminal law regulates behaviors perceived as being anti-
social and dangerous to the society. It also provides machineries by which the state may
take action against offenders.
On the other hand, civil law gives legal rights to individuals to govern their formal and
informal relationships with each other. This type of law provides the means by which
they may enforce the right arising from these relationships. (Civil Procedure Law)

Procedure: Generally, criminal actions are started by the police, but few laws are
enforced by other agencies like Customs Authority. Exceptionally, a private suit or
prosecution may be brought by an individual. The victim usually plays no part in the
decision to prosecute.

12
In criminal proceedings, once an action is started a case will proceed to trial in the
appropriate court: a court with jurisdiction. One final point is that, the prosecutor (usu.
public but it could also be private) must prove that the accused is guilty beyond a
standard to be set by the law of a given country. For example, beyond all reasonable
doubt
Civil proceedings are taken against the alleged law breaker by the party who claims that
they have been wronged or their interests have been affected. A civil case may not go to
trial even if proceedings are started. Most civil claims are settled out of court just without
any threat of legal action. In many others, the cases are abandoned before trial.

Penalty: Criminal law focuses on the accused and the need to protect society against
criminal conduct. The ultimate aim of this field of law is to punish the criminal while, at
the same time, protecting the society from anti-social conduct. A penalty (other than
capital punishment may be used to contain criminals by depriving them of their freedom,
or to rehabilitate them; it may be intended to deter them or others from committing future
crimes.
Civil law penalties focus on the needs of the victim and generally require the wrongdoer
to pay damages/compensations. Exceptionally the court, by injunction or other equitable
remedy, may require some practical correction of the wrong.

1.3 Alternative Dispute Resolution Mechanisms (ADR)

Due to the cost and other difficulties raised by taking a case through the court, such as
time consumption and easy accessibility, a happier outcome may be achieved through
using an alternative method of dispute resolution.

Arbitration (Commercial)
It is common for an arbitration clause to be a term of contracts between businesses; the
parties may subsequently agree to submit a dispute to arbitration. In such situations the
parties voluntarily submit their case to a third party and agree to be bound by the
resulting decision: an award. An award is a verdict passed by the arbitrators after hearing

13
the arguments of the two parties .This method is a favorable method for settlement of
commercial disputes. Its value is recognized by the courts and it is governed by law. In
that, the law empowers arbitrators and regulates the process.

Who can be an arbitrator? Any party acceptable to both parties may act as their arbitrator.
In practice, however, they will tend to choose somebody with skill and experience in the
relevant field.

Conciliation or Mediation

Conciliation or mediation is an informal process in which the conciliator or mediator (the

third party) tries to bring the disputants to agreement, by lowering tensions, improving
communications, interpreting issues and exploring potential solutions, so that they can
discuss their dispute and come to a negotiated settlement.(Kuchhal; Mercantile Law, P.
588)
A conciliator or mediator aims to assist the parties to a dispute to find a resolution. He
assists the parties to communicate with each other and find their own resolution to their
disputes However, the conciliator may suggest a solution, but has no power to impose
and enforce it. In other words, his main function is to induce the parties to come to a
settlement themselves.

A conciliator does not engage in any formal hearing, though he may informally consult
the parties separately or together. Thus, unlike an arbitrator, a conciliator is not a judge,
but only a facilitator. The conciliator derives authority from the parties. In discharge of
his duties, he is to be guided by the principles of objectivity, fairness and justice. The
case proceeds to a tribunal if and only if the conciliation process is refused or is
unsuccessful.
Out of the two processes – conciliation and arbitration – the former is preferable because
it is quicker, less expensive, less stressful, and more private and the parties retain much
more control over the outcome then arbitration because they, the parties, ultimately make
the decision.

14
Summary

Because of the nature of law itself and legal scholars‟ understanding of the field in their
own perspective, it was not easy to have a single and universally agreed definition of law.
The discipline is better understood when one discusses its nature. There are some
characteristics of law: law is general, normative, forward looking, pervasive, etc.

Why do we need law? There are several functions law discharges. It regulates the social
behavior of the society; it resolves disputes; it maintains order; it secures efficiency,
harmony, and balance amongst the government institutions; it protects citizens against
excessive use of power; etc. There are some classes of laws each of these roles.

There are many types of laws. They differ in nature, in source, in function, in value, in
the ways they are implemented, etc. Due to such varieties, laws are categorized into some
classes. In effect, law could be alternatively grouped into international and national; or
public and private; criminal and civil; or substantive and adjective (procedural). Laws can
also be classified according to their subject matter.

Finally, this unit discusses alternative ways of dispute resolving institutions. Other than
courts that are formal litigation entertaining institutions; there are less costly, more
effective, suitable to commerce, able to bring happier outcome – win-win, etc
mechanisms. They are called by the generic name ADR (Alternative Dispute Resolving
Mechanisms). Commercial arbitration, and conciliation or mediation are examples.

15
Test questions

1. Why is law needed in our society?

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
2. What is the purpose of substantive laws?

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

3. What do you understand by pervasive nature of law?

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
4. What are the possible sources of business law?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
5. What is the advantage of arbitration over formal court litigation?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
6. How do you differentiate arbitration from conciliation?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

16
 7. Write at least five points that a given definition of law should fulfill as
elements?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
8. What are directive legal norms?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
9. What are public laws?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
10. Legal rules are general. Do you agree with this assertion? Why? Why not?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

11. Do you think that international laws can bind Ethiopian citizens?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

17
Questions for Group Discussion

Make a group of at least three students and discuss the following issues

1. Why do you need to study Business Law as Management, Accounting and

Finance, Business Education, or Economics student? In other questions,
what is the relationship between, for example, Law and Management?

____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
2. Keeping the Ethiopian culture and mentality in mind, do you think that
Conciliation or Mediation are good and effective ways of resolving
disputes in general and commercial disputes in particular
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________

18
CHAPTER TWO

Law of Persons

Dear students we hope you are now already acquainted with some basic concepts of law.
In this chapter, we are again going to see some more concepts that are necessary for the
study of the subsequent chapters.

This chapter concerns the concept of personality. This concept is a fundamental one in
business law for it provides the meaning or definition of those beings, either natural or
artificial; those will be bound by law. In order to be bound by law, a being need to be a
person; since it is only a person that can be bound by law. Beings or things other than
persons cannot be bound by law. Therefore, it is essential to know and define what a
person is.

In order to study other branches of law like family law, law of Succession, law of
property, law of contracts, law of agency, law of trade and business organizations, etc;
the study of law of persons is a pre-requisite. Before proceeding to the next chapter, you
need to make sure that you are clear with the following major points of this chapter.

_________________________________________

Major unit objectives are:

 To acquaint students with the meaning of a person

 To let students know how many types of persons and what they are.
 To help students understand the ways of acquisition of physical and legal
personality as is put by the law
 To make the distance learners know how personality of both types of persons can
come to an end.

19
  To discuss the attributes of personality, again, as are put in our laws.
 To make students acquire knowledge on juridical acts, and
 To prepare learner‟s mind to study the elements of contract in chapter three by
making them know what we mean by capacity, which is one of the basic
elements.
 In connection to the immediately above objective, to make student understand
what constitutes grounds of incapacity and appreciate the legal effects of the
latter.

2.1 Meaning and types of persons

Biologically speaking, a person is simply a bipedal being capable of thinking, analyzing

and able to express his thoughts using language, i.e., a human being. No doubt, the
human being is the most obvious entity to which legal rights and duties may be ascribed.
The law, as we shall se presently, does treat other non-human entities as legal persons.
Therefore, legally speaking, a person is not only a human being but generally a being or a
thing capable of holding rights and duties. It is not only human beings that can hold
rights and duties. Any other thing capable of holding rights and duties is a person. With
in the scope of the legal definition, there are other non-human entities that can hold rights
and duties. These entities are called legal, artificial, moral or juridical persons or body
corporates. They are artificial creation of the law. Thus, associations, business
organization, companies, corporations, group of persons coming together for some
purposes, the state and its various agencies, and other entities of all kinds which are
recognized as holding rights and duties in the same way as human beings are persons.

2.2 Acquisition and termination of personality

20
Almost all legal systems prescribe some rules or standards that things or beings need to
fulfill in order to acquire personality. These factors or elements to be fulfilled are not the
same in all the legal systems. The requirements that should be fulfilled by human persons
and artificial persons are not the same. Dear distance learners! In the following two sub-
sections, we are going to see what requirements are expected of physical and juridical
„persons‟ in order to get personality according to the Ethiopian laws. Have a nice
reading!

2.2.1 Physical persons

When does personality of physical or natural persons begin? According to the first
provision of the 1960 Ethiopian Civil Code, a human person is subject of rights and
duties from birth to death. Therefore, the only requirement that our law puts in order a
person to be granted personality is birth. This is a principle.

In the near past, there were some human beings who were not considered as persons.
Examples are slaves, monsters – human beings who do not have normal human figure,
monks or nuns. They were considered as civilly dead. In effect, they could not exercise
any juridical act – an act that can be given effect before the law. These days, that is not
the case. All legal systems grant personality to all human beings indiscriminately.
Articles two, three, and four of the same code are concerning the personality of a fetus in
one‟s mother‟s womb. Basically, as is put by the first article of the civil code, the unborn
„child‟ is not a person and does not have any right and cannot assume any legal duty or
responsibility.
Cumulative reading of the three articles of the civil code provides that an unborn baby,
for some purposes and under certain circumstances, can exceptionally be granted
personality provided it fulfills three cumulative conditions: have an interest, born alive
and be viable.

Regarding the element of having an interest, a fiction was invented that in all matters
affecting its interests, the unborn child in the womb should be regarded as already born –

21
but only for the purpose of enabling the child, if born, to take a benefit. (Mamo Wedjega,
Business Law, P.5) For example, it is thought reasonable that a child who lost his father
should not be further punished by losing any interest which he would have secured had
he been born before his father‟s death. Generally, the term interest should be interpreted
to mean any material benefit that the unborn child could have. Succession, donation, and
compensation are some instances. In most cases, the interest of a merely conceived child
comes into the fore where a father dies before the birth of the child, leaving some
property. Had it not been for these articles, according to the principle, a merely conceived
child cannot inherit his father‟s property since he is not a person and only persons are
capable of exercising rights – getting property through succession.

Besides the interest of the child, two more conditions need to be fulfilled: being born
alive and viability. It is self explanatory that in order to be considered as a person, the
baby must be born alive. Regarding viability; just from the moment of birth, a child
should be able to live for forty-eight hours in order to be considered a person back from
the time of conception. This presumption of the law is irrebutable or is not subject to
challenge.

However, it is also presumed that the baby is not to be considered viable if he dies before
forty-eight hours after birth. This presumption can be attacked by proving that the cause
of the death is other than a deficiency in the baby‟s constitution, i.e., his overall (esp.
internal systems) body building. Medical evidence will be essential as the party
challenging this presumption will have to prove in a court of law that the death is not a
result of deficiency in the child‟ constitution. What is required to be established is that
death was caused by some external factors like physical harms and in-take of something
dangerous to the baby.

Legal personality of human persons can come to an end by two means: death and
declaration of absence. The former cessation of physical personality can be driven from
article one of the civil code as it declares that human beings are persons only from birth
to death. A contrario reading of this statement tells us that there is no personality after

22
birth. The second cause of termination of physical personality is declaration of absence.
A person is to be declared absent if he disappeared and there is no news of him since the
last two years around his principal residence. Such a person is considered as though he is
dead for all legal purposes.

2.2.2 Legal persons

For physical persons, the beginnings of legal and natural existence coincide. Regarding
the personality of juridical persons, the mere fact of birth, i.e., mere actual establishment
or formation of an association, etc does not accord it legal personality. In addition to
other requirements, basic conditions like registration and publicity must be satisfied so as
associations, etc be conferred with legal personality.

Publicity is making the entity known by the society. For example, article 219 of the 1960
Ethiopian Commercial code provides that any business organization other than a joint
venture shall be made known to third parties. Such publicity shall be made by a notice
published in a newspaper empowered to publish legal notices; and by the deposit of two
copies of the memorandum and all complementary documents with the office in charge
of the commercial register; and by registration in the commercial register.

In addition to registration and publicity, there could be other conditions that a given
entity, in respect of their nature, is expected to fulfill. Common to many entities are
memorandum of association, articles of association, minimum and sometimes maximum
number of me.
In this connection, the effect of publicity is prescribed by article 223 of the same code.
Accordingly, a business organization shall have neither legal existence nor personality
until all the provisions relating to publicity have been complied with and registration is
published in accordance with the relevant law.

Some entities like public enterprises, government higher education institutions,

government agencies, commissions, bureaus, authorities, ministries, and largely the state

23
itself are established by the legislations. For example, the Federal Democratic Republic
of Ethiopia is established by the FDRE constitution Proclamation No. 1/1995.

Existence of legal persons can come to an end if the entity is for some reasons dissolved
wound up. There could be so many reasons that result in the dissolution of an entity. For
example, as per article 260 of the Commercial code, an ordinary partnership shall be
dissolved where one of the partners dies or is no longer able, under the law, to be a
partner. A partnership could also be dissolved where a partner is declared bankrupt or
where one of his personal creditors cause his share to be disposed of.

2.3 Attributes of personality

Generally speaking, an attribute of a person is able to perform a juridical act or/and enjoy
rights, liberties, freedoms, interests, etc; assume and carry out responsibilities or duties.
By juridical act we mean an act that has got a legal effect or consequence.

General characteristics of personality are having a name, residence or domicile,

nationality (if applicable), etc. Others like able to enter into transactions, able to sue or be
sued, owning property in one‟s own name, and discharging duties (e.g., paying tax) are
also attributes of personality. It is important to note here that legal entities have got their
own names and are not the same with those who founded them. They are, in majority of
cases, separate.

A person, including a legal person, may enter into commercial (e.g., contracts) or non-
commercial (e.g., marriage) transactions in their own name. These agreements, mutatis
mutandis could be in between physical persons; or in between juridical persons; or in
between a physical person and a legal person. These persons may act so either on their
own or through their representatives.

Definitely, in all relevant respects legal persons are going to act via their human agents,
i.e., managers or others who are given authority to represent the entity. A legal person

24
acquires rights and incurs liabilities through the acts of its human agents or
representatives in accordance with the provisions governing agency.

Any person may bring a legal action in his own name if he is interested in a proceeding or
has got an interest to satisfy or defend. The other side of the story is that, one can be sued
in a court of law or other institutions that are conferred with the power adjudication. Here
again, both types of persons can stand on both sides of a litigation.

A person can own and administer his own property. In this connection, a person has an
obligation to pay taxes on its property and other incomes. If we say that a legal person
may own property in his own name; and if a legal person may carry on business; it is not
illogical to conclude that in the same way that a physical person pays tax on his income, a
legal person is also required to pay tax on any income it drives.

Property belonging to a legal person is different from that of individuals‟ or entities who
own the legal establishment. In other words, in majority of cases, the property belonging
to an entity is distinct from the property belonging to its owners.

2.4 Capacity of persons to exercise rights and duties

All persons are holders of rights. However, holding rights does not necessarily mean able
to exercise same. There are some groups of people who, for different reasons, cannot
directly exercise juridical acts. They perform all their activities indirectly through their
agents.

As per Articles 192 and 196 of the civil code, capacity is presumed. In other words, every
physical person is capable of performing all the acts of civil life (juridical acts) unless he
is declared incapable by the law. Any person who alleges the disability of a physical
person shall be of no effect unless it is justified by a lawful interest. There are limited
number is grounds of disabilities.

25
Incapacity under law may result from either general disabilities or special disabilities.
While the former depend on the age or mental condition of persons or on sentences
passed upon them; special disabilities may be prescribed by reason of the nationality of
persons or of the functions exercised by them.

The first ground of incapacity is minority or being under age. A minor is a person of
either sex who has not attained the age of eighteen years. These persons cannot enter into
juridical acts except in certain conditions specified by law. Juridical acts necessary for
minors are taken care of by their guardians, tutors, and the court.

The second ground is insanity and others related to it. An insane person is one who, as a
consequence of his being insufficiently developed or as a consequence of a mental
disease or of his senility, in not capable to understand the importance of his actions. In
this connection, persons who are feeble-minded, drunkards or habitually intoxicated, and
persons who are prodigals shall in appropriate cases be assimilated to insane persons.
Still, the deaf-mute, blind persons, and other persons who, as a consequence of a
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 (discussed in this very
paragraph) which afford protection to those who are insane. A court may pass a decision
of judicial interdiction upon an insane and the others related to them where their health
and their interests require. Notoriously insane persons are considered by our law as
judicially interdicted. A person shall be deemed by law to be notoriously insane where by
reason of his mental condition; he is an inmate of a hospital or of an institution for insane
persons or of a nursing home, for the time for which he remains an inmate.

The third ground of incapacity within the group of general disability is legal interdiction.
Legally interdicted person or a person interdicted by law is one from whom the law
withdraws the administration of his property, as a consequence of a criminal sentence
passed on them. Generally, the cases in which a person is to be considered as interdicted
by law are determined by criminal law.

26
The fourth ground of disability arises from nationality or citizenship of a person. In some
circumstances, nationals and non-nationals of a given country may not be treated equally.
There are some rights that are exclusively given to Ethiopians. For example, majority of
the democratic rights enshrined in chapter three of the FDRE constitution. In other
words, foreigners are not allowed to exercise such rights. Lets us see Articles 389 and
390 of the civil code which are relevant to the point at hand.

Foreigners shall be fully assimilated to Ethiopian subjects as regards the enjoyment and
exercise of civil rights. Illustrated, all rights the exercise of which does not imply any
participation in the government or administration of the country shall be considered to be
civil rights. Specifically, there is a law regarding the restriction of ownership of
immovable properties. Article 390 runs as: no foreigner may own immovable property
situate in Ethiopia except in accordance with government‟s order. This being a rule, there
is an exception in our investment law that allows foreign investors to own a house or a
building that is necessary for his investment. Our present land policy does not allow any
body, including Ethiopians, to own land. It is public property.

The last ground of incapacity is based on certain functions exercised by one. Compared
to the other grounds, this is narrow and happens only at few circumstances. Moreover,
the person is regarded as incapable only in respect of such status. For example, the tutor
of a minor is not allowed to enter into contract with the minor regarding the property of
the minor. In this respect, he is incapacitated. The reason is to avoid conflict of interests.

27
Summary

In the language of the law, a person is a being or an entity that is capable of holding
rights and duties. In line with this, we have got two types of persons: physical persons
and juridical persons. While the former are human beings, the latter are artificial persons.

According to Ethiopian laws, human beings acquire personality by the time they are
given birth to. In other words, birth is the only requirement in order one to acquire
personality. This being the principle, a fetus in his mother‟s womb may acquire
personality provided he has got an interest, born alive and is viable – able to live for forty
eight hours. Similarly, artificial persons acquire personality if declared so by the law or if
they are, at least, actually established, registered, and publisized.

In principle, all persons are capable of exercising juridical acts. Juridical acts are acts that
can be given effect before the law. However, in exceptional circumstances, the law may
declare some groups of the society as incapables. For example, minors, insane persons,
infirm persons, persons interdicted by law are not capable of performing juridical acts.

Personality of physical persons can come to an end by death and declaration of absence.
In the case of legal persons, dissolution is the means of bringing their existence before the
law.

28
Test questions

1. What is a person?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
2. According to Ethiopian laws, what are the conditions to be fulfilled in order a
human being to acquire personality?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
3. Who can exercise juridical acts?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
4. What is the justification behind making minors and insane persons incapable of
exercising some juridical acts?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
5. What conditions should a business organization satisfy in order to acquire legal
personality?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
6. A merely conceived child cannot at all acquire personality. True or false? Justify.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

29
7. Mention some attributes of a legal person.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
8. What is declaration of absence?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
9. Discuss viability.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
10. A legal person can be involved in commercial transactions. Discuss.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

30
Questions for group discussion

Make a group of at least three students and discuss the following issues

1. Why are foreigners, in principle, treated as incapables under Ethiopian laws?

_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
2. Discuss the legal effects of acquiring personality.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
3. What do we mean by a person is under incapacity? What are the legal
consequences of the declaration of incapacity?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

31
CHAPTER THREE

Law of Contracts

Dear students! So far we have been discussing some preliminary but basic points that are
important for the study of the rest part of business law. Now we are on the heart of this
course. You are going to feel the theme of business law right away since law of contracts
is a basic course in the study of law in general and business law in particular. In effect,
compared to other chapters, this one is a little bit broad and detailed. It is deliberately
done so, one, in order to equip you with the necessary knowledge on the score. And, two,
to make the chapter clear and well elaborated since the subsequent chapters will be
referring, now and then, to this chapter. Therefore, you need to budget much of your time
for the study of law of contracts.

In this chapter so many examples and illustrations are provided so as to help readers
understand the main part of the course well. This part of the module heavily relies on the
law of contracts part of 1960 Ethiopian Civil code. Therefore, it is important to make
reference to that material if available around. Alternatively, the necessary provisions of
the law are attached at the end of this distance learning module.

Before dealing with the discussions, be ware that you are supposed to know the following
main points. Therefore, at the end of this chapter, do not forget to make sure that the
distance learning material has enabled you to acquire all the necessary knowledge in line
with the belowmentioned objectives of the unit.

32
Major unit objectives
 At the end of the unit, students are expected to know the definition, along with its
elements, of contract according to the 1960 Ethiopian Civil Code
 It is one goal to make sure that learners are clear with the analyses of the basic
elements of the definition. Note that definition is a statement that is believed to
include all the necessary and exclude unnecessary elements in a given discipline.
Hence, focus on definition and analyses of its elements.
 Learners will know what the legal effect of the non-observance of the basic
elements of a contract is
 Students will understand what consent is
 Students will grasp the knowledge on how consent can be vitiated. Especially,
learners should be able to understand and then teach their peers on how the vices
of consent: mistake, duress and coercion result in the invalidation of contract
since the consent given is not sustainable before the law.
 Learners will know what the meaning of object of a contract is
 Learners will know what values an object of a contract must uphold and should
not violate
 Distance learners will be able to identify those types of contracts that should be
entered into following the required special form
 Students will know what offer and acceptance mean
 Learners should tell what the moment a contract is said to be concluded is
 Students shall know the meaning of performance of a contract
 Students will be able to know who can perform a contract
 Students will be able to know whom a contract can be performed to
 Learners shall know the legal conditions as to place and time of performance of a
contract
 One is expected to know how and when is a risk said to be transferred

33
  One shall be able to tell others regarding the consequences and possible solutions
of a contract is not performed due to some reasons
 After studying this chapter, one should be able to tell the meaning of specific or
forced performance; and the situations it can happen.
 It is also an objective of this chapter to let students know the normal and other
grounds of extinction of obligations of the parties to a contract. Specifically,
students should be clear with the meaning of legal terminologies like
invalidation, cancellation, novation, setoff, and merger of contracts.

Now, let us have some hours to discuss the definition of the term contract according to
the Ethiopian law.

3.1 Definition and analyses

Article 1675 of the Ethiopian Civil Code provides that a contract is an agreement
whereby two or more persons as between themselves create, varies or extinguish
obligations of a proprietary nature. As will be seen bellow, there are so many elements in
this definition.

Next we shall break down the definition into elements and analyze them.

The first element in the definition is contract is an agreement. By agreement we mean

that the parties to the contract should give their free consent. The consent should be
sustainable before the law in that it should be free of any defect. The possible causes that
can affect consent are decisive and fundamental mistakes or basic errors, fraud or
deception and coercion or threat.

Mistake relates to misunderstandings on the part of one party as to the nature of the
contract. Entering into a contract for lease while intending to buy a house, paying
substantially a large amount or receiving a substantially smaller amount than expected or
mistakes as to the identity of the other party are instances of mistake. It is not any mistake

34
that constitutes a vitiation to consent. In order to make consent invalid, the mistake must
be decisive (the party would not have entered into the contract had he known the truth),
fundamental (the mistake must relate to an important aspect of the contract) and invoked
in good faith (the person invoking the mistake should not act in bad faith). Where these
conditions are fulfilled, the contract shall be invalidated by the mistaken party and he
shall pay the damages resulting from the invalidation unless the other party should have
been or was aware of the mistake upon the formation of the contract.

Fraud relates to deceitful practices by one of the parties, by a third party or false
statements by one of the parties. In the case of deceitful practices by one of the parties,
the practice should be that the other party would not have entered into the contract but for
the deceitful practice. Deceitful practices by third parties, however, have effect only if
one of the parties knew or should have known of the deceit.

In this connection, false statements refer to situations where one of the parties in bad faith
or through negligence made false statements; where a relationship giving rise to special
confidence or loyalty existed or if one party by his silence cause the other arties to
believe that the fact is true.

Duress is the application of force or threat by one party on another to make him conclude
a contract. Such a contract may be invalidated on the ground of duress where the acts of
duress led a party to believe that he, one of his ascendants or descendants, or his
descendants, or his spouse, were threatened with a serious and imminent danger to the
life, person, honor or property.

The second element in the definition is the phrase „two or more persons‟. This phrase is
to mean that a valid contract can only be concluded between two or amongst more
persons. In other words, there is no unilateral contract. However, Article 2188 of the law
of agency part of the civil code seems to provide that an agent may conclude contract
with him self. In such cases, the contract may be cancelled at the request of the principal
where the agent made the contract with himself. Dear students! Do you think that such

35
type of contract is a unilateral one? It seems on the face. However, the agent is entering
into contract having two statuses: an agent on one side and principal on the other side.
The person is only physically one. No doubt, there could be conflict of interests.

The third element in the definition is that, in principle, the contract is effective as
between the parties themselves only. Article 1731 of the civil code explains that the
provisions of a contract lawfully formed shall be binding on the parties as though they
were law. No one is bound by an agreement created by other parties but by one self.
However, there is no problem if one enters into contract for the benefit of others.

The fourth element can be driven from the phrase – create, vary or extinguish - an
obligation. The formation of a contract can be for three reasons. The parties can enter into
contract in order to create a new agreement. Our law also provides for the possibility of
contracting in order to vary an existing agreement. Finally, the element provides for the
possibility of the parties to agree so as to extinguish or bring to an end of existing
contract.

The last basic element of the Ethiopian contracts law definition is a contract needs to be
of a proprietary or pecuniary nature. In other words, an agreement that does not involve
money as its basic element is not a contract. Therefore; there are agreements which are
not contracts (like marriage and adoption), but a contract is an agreement.

3.2 Formation of Contracts

Articles 1678 up to 1730 of the code discuss the formation of contract. In order to have a
valid contract, there are certain conditions that should be fulfilled. The requirements for
the existence and validity of contracts are enumerated in Article 1678 of the code. These
are: capacity of parties; consent of parties; sufficient definition, legality, possibility and
morality of the object of the contract. The subsequent provisions of the code deal with
each (except capacity) of these requirements.

36
3.2.1 Consent

Dear distance learners! Consent and various vices that can vitiate consent are discussed
above in the section that deals with the analyses of the elements of consent or agreement
in the definition. In this very section, some more points on consent are taken up. You are
advised to re-read the above section before reading this section. Alternatively, you can
refer to that section while studying this section.

Article 1679 emphasizes the overriding importance of the parties‟ consent for the
formation of the contract and the definition of its contents. But goes further and specifies
that in order for a contract to exist the parties must intend their agreement to have an
obligatory character. Therefore, the mere fact that the person has given consent does not
mean that he is bound by same. The consent should carry a sense of legal obligation. The
following illustrations show consents devoid of legal obligation. Hence, no contract.

Illustrations

A. A father promises his son a reward if he passes his examination.

B. A person promises a friend he will invite him if Trans-Ethiopia Foot Ball Club
wins a match.

According to Article 1680 the declaration of the parties are considered in order to
discover if they have reached an agreement. In principle, one does not try to find out what
the parties intended or internally desired. In other words, the external manifestations of
the parties‟ are legally significant. Only such external signs are considered in order to
determine whether or not there is legally binding consent and in effect a contract is
formed. Exceptions to this rule are discussed later. For the purpose of exemplifying this
rule, let us use the following illustration from Renè David‟s „Commentary on Contracts
in Ethiopia‟ (1973, P. 10).

37
Illustration

A undertakes to do some work for B “within six months from the conclusion of the
contract.” A thinks, in using this formula, that it means “within six months from the day
work is begun.” Therefore, he actually never intended the same thing as B. Nevertheless,
a contract exists, since A‟s declaration of intention accords with B‟s. The internal
intention of B is irrelevant to the formation of the contract.

Offer and acceptance

An offer is a proposal freely made by one party to another indicating a willingness to

enter in to contract. Its existence is the first element, the second being acceptance, of a
valid contract. The person who freely makes an offer is called an offeror while the person
to whom the offer is made is called an offeree. An offer is valid only if it has serious
intent, has clear and reasonably definite terms, and has been communicated to the offeree.
(Gordon Brown, W., et al P. 104) When are we going to say that an offer is made? What
about acceptance? Articles 1682 – 1686 of the Ethiopian Civil Code are regarding offer
and acceptance of consent. We will come back to this point later on. Now let us have
some time to discuss the possible forms of offer and acceptance. Paragraphs are also
given for the consideration of the point if, according to Ethiopian law, silence to an offer
amounts to acceptance.

There are several expressions or forms of consent (offer and acceptance) to conclude a
contract. This intention can be shown orally, in a written form or by any other
unequivocal sign or conduct. This being a rule, there are some contracts the law requires
them to be concluded in a given form. Similarly, the offeror himself, when he makes an
offer, can require that the acceptance of the offer be made, or communicated to him, in a
particular way. Unless the said form is complied with, the contract will be held invalid. It
should be emphasized that the requirement of a certain form is only an exception.
Basically, our law merely requires that the intention to enter into contract be clear.

38
Illustrations

A. A person does not need to tell the shoeshine worker that he wants his shoes be
cleaned. Just putting his leg on the instrument the worker usually uses for
collecting and carrying his items of shoe shining suffices for the worker to clean
his customer‟s shoes.
B. X writes to Y to order certain goods. Y sends the goods. A contract is formed. It
makes no difference whether or not Y writes X and tells him that he is accepting
the offer and is sending the goods. (Renè David, PP. 10-11)

As you can see from the provisions of the law, as a general rule, the silence of a person
who has received an offer is insufficient as an acceptance of the offer. The response that
the offeree (one who receives offer) intends to make is uncertain as long as he is silent,
and that equivocal behavior cannot be interpreted as tacit acceptance. Renè David, in his
commentary indicated above advices readers to take care not to confuse silence, which is
not sufficient to constitute acceptance, with outward conduct other than speech that can
amount to a tacit acceptance. An offer might be accepted, for instance, where the offeree
performs the contract without any reservation. (See the illustration regarding the
shoeshiner above)
Once again the above is a principle. There are some exceptions to the general rule –
silence is not acceptance. One exception concerns imposed contracts. Such types of
contracts are agreements in which the offeree has no option but to accept. In such
situations, silence amounts to acceptance since whether the one an offer cannot discus the
merit of the contract.
Article 1683 of the code deals with persons who are required, by the law or according to
the terms of a concession granted them by the government, to conclude certain contracts
with any one who makes them an offer. Since the law or concession requires the offeree
to accept the offer, there is no difficulty in deciding that silence, in such a case, amounts
to acceptance.

39
Explanation

This provision of the law is in particular applicable to enterprises which are entrusted
with the management of a public service or the provision of supplies that are necessary to
the life of a community. These matters are public utility concerns. Examples are the
Ethiopian Telecommunication Corporation, the Ethiopian Electric Power Corporation,
and the Water Supplies Enterprise. The society simply accepts the tariff set by these
entities. If not, the service will be discontinued. The justification is that the prices are
fixed and believed to be commensurate.

Dear students! If you closely read Article 1684, you can learn that there is one more
exception to the rule. It is regarding contracting parties who have on-going business
relations and have already concluded a contract. They exchange correspondence and one
of them proposes to the other the renewal of an expired contract, the modification of an
existing contract, or the conclusion of a second contract supplementing the first. He states
that if he does not receive a response within a particular period of time, he will consider
that his proposition has been accepted. Hence, silence in such situations amounts
acceptance. (Renè David, P.11)

When is a person said to have made an offer? Article 1687 of the Civil Code provides
that declaration of intention does not amount to making an offer. It is rather an invitation
for others to make an offer. Therefore, it is not binding. In the words of the law, no
person shall be deemed to make an offer when he declares his intention to give, to do or
not to do something but does not make his intention known to the beneficiary of the
declaration. Similarly, sending to another or posting up in a public place tariffs, price-lists
or catalogues or displaying goods for sale to the public do not mean offering.

40
Explanation

Invitations to trade

By contrast, an invitation to trade is not an offer. An invitation to trade is a published

announcement, intended to reach many persons for the purpose of creating interest and
attracting responses. Newspaper and magazine advertisements, radio and television
commercials, store widow displays, price tags on merchandise and prices in catalogue
are included in this definition. In the case of an invitation to trade, no binding agreement
develops until a responding party makes an offer that the advertiser accepts. (Gordon
Brown, W., et al P. 106)

In case of sale by auction, care should be taken regarding differentiating the moment an
offer is said to be made or not. This again is an invitation for offer. Whosoever offers a
thing for sale by auction shall be deemed to make a declaration of intention and not an
offer. In such a case, a contract shall be completed only where the thing is knocked down
upon the last bid being made. In other words, offer is made when somebody bids on the
item and the auctioneer, accepting the offer of the bidder, says „sold‟ in response to such
offer.

An offer could be public. At times, an offer might be communicated to a party whose

name, identity or address is unknown. In such cases, the public offer is made. A public
offer is one that is made through the public media but is intended for only one person
whose identity or address is unknown to the offeror. A classic example of a public offer
is an advertisement in a lost-and-found column in a newspaper. Although this is a public
offer, it is legally no different from other types of offers. (Gordon Brown, W., et al P.
106) In the words of our law, Article 1689 of the Civil Code, captioned „Public promise
of a reward‟, runs: a promise published by posters or in any other manner to reward the
person who will find an object which has been lost or who will perform a certain act shall
be deemed to be accepted where a person brings the object back or performs the act,

41
notwithstanding he did not know of the promise. As a result, the promisor shall give the
promise reward.

Illustration

The GREAT ETHIOPIAN RUN together with MOENCO sets 5000.00 ETH. Birr for the
winner of a competition to be made in Hidar 17, 1999 E.C. The reward is communicated
to the public through the print and electronic media. The one who wins the competition
can require that the prize be paid to him.

Regarding offers with time limit for acceptance, our law dictates that whosoever offers to
another to enter into a contract and fixes a time limit for acceptance shall be bound by his
offer until the time limit fixed expires. He cannot revoke it. However, he will not be
bound by the duration fixed where his offer is rejected before the expiry of the time limit.
The following two illustrations taken from Renè David can exemplify the point at hand.

Illustrations
 A offers to sell B his house for $50000.00; offer to be good until May 15. B
accepts this offer by a letter that is put in A‟s postal box on May 14. A does not
go to pick up his mail at the post office until May 16. He cannot claim that B‟s
acceptance is late. B‟s letter was not read until May 16, but it arrived May 14.

 In the same situation, B writes on May 5 to say that the price proposed is too
high. Then, he changes his mind and, in a letter written May 10, which comes to
A before May 15, accepts A‟s offer. No contract is formed; A‟s offer lapsed when
B rejected it on May 5. B‟s letter of acceptance of May 10 is a new offer. In
effect, A can accept or reject that offer.

In cases of offers without any time limit set, the law has something to say. The law
provides that whosoever offers to another to enter into contract and does not fix any time
limit shall be bound by his offer until the time when he can reasonably expect the other

42
party to decide on the offer. Where acceptance is late, the offeror shall forthwith inform
the other party where he does not intend to be bound. But, how can we know the
reasonable time the offeror should stay? What standards can be adopted in order to
determine the reasonableness of the period? Factors like the kind of business, the way in
which the offer is sent to the offeree can be of helpful. If the offeror, having received the
acceptance, immediately declares that it is late, and if the acceptor (offeree) when so
informed does not accept, this position and protests that his acceptance was timely and
insists that the contract be performed, the question of whether the acceptance was made
within a reasonable time or not will arise.

In order to determine the time and place of the conclusion of the contract between absent
parties, our legal system follows the theory of emission rather than theory of reception. In
other words, unless there is contrary agreement by the contractants, a contract made
between absent parties shall be deemed to be made at the place where and time when the
acceptance was sent to the offeror. A contract made over the telephone shall be
considered to be made at the place where the party was called.

As per Article 1693 of the Civil Code, an offer shall be considered not to have been made
where the offeree knows that it is withdrawn before he knew or at the time when he
knows of the offer. In a similar fashion, the acceptance can be revoked if the revocation
reaches the offeror before or at the same time that he learns that his offer has been
accepted. In such cases, the offeror cannot validly argue that the contract was irrevocably
concluded the acceptance was sent.

3.2.2. Object and cause of contract

This is the second fundamental element in the formation of a valid contract. What do we
mean by object of a contract? According to Renè David (P. 29) the object of the contract
is the obligations undertaken by the parties, and not the things to which these obligations
relate. The object of the contract of sale, for example, is the seller‟s obligation to transfer
to the buyer the ownership of the thing sold and the buyer‟s obligation to pay the price;

43
the thing sold, movable or immovable is not the object of the contract. The cause of the
contract, on the other hand, is the relationship of the parties‟ obligations to each other.

Both Articles 1711 and 1731 of the code provides that the contents of the contract shall
be determined by the parties subject to the mandatory provisions of the law. While
declaring so our code, similar to that of Western legal systems, recognizes the principle
of contractual freedom which is fundamental to a society and an economy that want to
leave considerable scope to private initiative. The ultimate expression of the granting of
the freedom of contract is allowing the individuals to devise other contracts other than the
particular kinds of contracts regulated by the code. However, some public policies or
values should not be jeopardized. The law clearly states that the object of a contract shall
be freely determined by the parties subject to such restrictions and prohibitions as are
provided by law.

There are certain categories of obligations that the parties can include in their contracts.
These are obligations to give, to do or not to do. While obligations to give are situations
where a person undertakes to transfer all or part of the ownership of something to the
other party; obligations to do are circumstances where one party undertakes to act in a
certain way that will benefit the other party. A person‟s undertakings to abstain from
acting in a particular way are known as obligations not to do.

Illustration

In obligations to do, there are some cases where a person undertakes strictly to procure a
particular advantage to the other – obligations of result. There are others where one
undertakes only to do his best to procure the advantages to the other – obligations of
means. The doctor and the advocate, for example, do not undertake to cure the sick or to
win a law suit for the client; they only undertake to d their best to obtain this result. The
carrier, on the contrary, undertakes to see to it that the object sent arrives at its
destination, and thus he guarantees its arrival. (Renè David, P. 29)

44
As we have indicated it above, there are certain conditions an object of a contract should
fulfill if the contract is going to be valid. These are:
 the object must be defined
 the object must be possible
 the object should not be unlawful or immoral

As the law rightly puts it, a contract shall be of no effect where the obligation of the
parties or of one of them cannot be ascertained with sufficient precision. In other
words, the agreement will be considered void or with out any legal consequence if its
object is not clear. By considering the contract, the laws‟ provisions concerning the
interpretations of contracts, and its suppletory provisions; one must be able to
determine the object of the contract, the obligations that the parties have undertaken.

Illustration

Ataklti agrees to buy Solomon „a nice cloth‟ if the latter helps the former in drafting
the sketch Ataklti drew. Solomon does his work very well. Their agreement lacks
precision since the phrase „a nice cloth‟ is not sufficiently defined. Thus, the contract
is not valid.

Persons enter into contract in order to satisfy their needs by performing their agreement.
The contract is concluded to be performed and not „not to be performed‟. If this statement
can hold water, it is logical to say that the object of the contract must be possible to be
performed. It should be real. It should exist. On the contrary, a contract shall be of no
effect where the obligations of the parties or of one of them relate to a thing or fact which
is impossible and such impossibility is absolute and insuperable. If the obligation
undertaken is impossible to perform, the contract is not valid and no liability is incurred
by a failure to perform the obligations created by it.

45
Illustration

A sells B a shipment of cotton, loaded on a particular ship. Unknown to the parties, the
ship and cargo have perished before the contract is made. The performance of the
contract is impossible. A cannot transfer to B the ownership of something that does not
exist. The contract is invalid. (Renè David, P.31)

A contract with unlawful or immoral object is invalid. Article 1716 of our civil code
dictates that a contract shall be of no effect where the obligations of the parties or of one
of them are unlawful or immoral. There will be definitely a problem in determining what
constitutes immorality. Usually, the moral code or the prevalent conception of morality in
a certain locality controls. As to illegality it is not difficult to imagine what we mean by
illegal acts. Any agreement that the obligation of the parties is some how contrary to law
is sufficient to render the contract invalid.

3.2.3 Form

Dear students! We are about to finish our discussion on the formation of contract. The
remaining point not discussed is regarding form of a contract. It will be take up
immediately in a brief manner. It is important to note here that the fourth element that
should be considered during the formation of a contract, i.e., capacity, is discussed in
chapter two last section.

We have discussed above, while illustrating on the expressions of consent, that there are
several ways or forms of entering into contract. We have also said that parties to a
contract have got freedom of form; in that unless otherwise provided (by law or by either
of the parties, esp. the offeror) no special form shall be required and a contract shall be
valid where the parties agree. If there is any requirement of form by the law, no valid
contract shall exist unless the prescribed form is complied with. In the words of the law,
Article 1719 of the civil code dictates that where a special form is expressly prescribed

46
by law or if the parties have stipulated that the contract shall be made in a special form,
such form shall be observed.

Keeping the freedom of form as it is, the law puts the requirement of form in the list of
basic element of the formation of a contract. Therefore, non compliance of such condition
results in invalidation of a contract. Where a special form is prescribed by law and not
observed there shall be no contract but a mere draft of a contract. Similarly , a contract
which the parties agree to make in a special form not required by law shall not be deemed
or considered to be completed until it is made in the agreed form.

However, a contract shall be valid notwithstanding those fiscal provisions, such as

provisions relating to stamp duty (tax) or registration fee, have not been complied with.
Similarly, unless otherwise provided, a contract shall be valid notwithstanding that
prescribed measures of publication have not been complied with. The law, however,
imposes fine and other measures to correct such irregularities.

There are certain types of contracts the law requires them to be made in a written form.
These are agreements of greater importance. The first type of contract relates to
immovables. A contract creating or assigning rights in ownership on an immovable or an
usufruct, servitude or mortgage of an immovable shall be in writing and registered with a
court or notary. In this connection, any contract by which an immovable is divided and
any compromise or partition relating to an immovable shall be in writing and registered
with a court or notary.

The second and third types of contracts that should be concluded in a written form are
agreements made with a public administration and agreements for long period of time.
Any contract binding the Government or a public administration shall be in writing and
registered with a court, public administration or notary. Contracts establishing lasting
relations or that stay for a long period of time need to be made in a written form.
Contracts of guarantee, insurance contracts and any other contract in respect of which
such form is required by law examples of contracts those shall be made in writing.

47
According to Article 1727 of the civil code, any contract required to be in writing shall be
supported by a special document signed by all the parties bound by the contract.
Specially, such types of contracts are with out effect unless they are attested by two
witnesses.

In principle, everybody can equally stand as a witness. Especially sex and nationality
shall not be considered in determining the capacity to act as a witness. However, as you
can well remember from the discussion we have made on the section that deals with
capacity of persons to exercise some juridical acts, there are some group of people who
are not eligible to be witnesses – exercising a juridical act. Unless otherwise expressly
provided, witnesses shall be of age (no minors) and not judicially interdicted. In
connection to witnesses, the law prescribes some duties of them. Where necessary, the
witnesses shall certify that a contract was made and the terms thereof. As to the
performance of the contract, the witnesses shall not guarantee its performance unless they
act expressly as guarantors in addition to being witnesses.

3.3 Effects of contracts

Under this heading, our contracts law governs point like performance of contracts, non-
performance of contracts, variation of contracts, and interpretation of contracts. However,
due to limit of time and space and since we are forced to make preference, the last two
points are not included in this module. Students, nevertheless, read provisions of the law
annexed in this module. Let us proceed.

As per Article 1731 of the Civil Code, the provision of a lawfully made contract shall be
binding on the properties as though they were law. This provision reaffirms solemnly, on
the legal plane, the moral; rule that a man‟s word is his bond. Contracts legally formed
become law for those who sign them: pacta sunt servanda. As we have seen it in the
previous sections, such provision may be freely agreed upon by the parties subject to the

48
mandatory provision of the law. That is, the parties may not agree to avoid the mandatory
proscriptions of the law or violate the mandatory proscriptions of the law.

3.3.1 The Performance of Contracts

Dear students! Do not get tired. Now we are going to teach you some important issues
regarding the performance of contracts which is the very purpose of entering into
contracts. Specifically, questions like who must perform a contract? To whom ought
payment be made or performance be rendered? What constitutes performance? To what
obligation does a given payment apply? When is it due? Who bears the costs of payment?
are directly or indirectly discussed.

As to the essence, the performance of the contract refers to the fulfillment of the
obligations of the parties. Who is supposed to perform the contract? Basically, the debtor
is required to carry out the obligations under the contract personally where personal
performance is important for the validity of the contract or where it has been specifically
agreed. The necessity of personal performance may derive either from the rules of the
law or the contract or the factual circumstance of the contract. Rules pertaining to the
hiring of service, .agency, partnership etc…specially require personal performance. In
such cases the creditor may invoke these provisions and demand personal performance.
Other cases pertain to contracts where the personal qualities of the debtor are essential for
the object of the contract.

Illustration

A contract for the drawing of a portrait is based on the appreciation of the personal skills
of the painter by the creditor. In such a case, the debtor cannot be relieved of the
obligation through another painter doing the job.

In all other cases, performance may be by a third person authorized by the debtor. Such
authorization may also be by the court or by a provision of law. In some cases, the law

49
may even require a third party (e.g. co-debtor, guarantor) or encourage such payment
(e.g. dishonored bill of exchange) while the consent of the creditor is required in some
cases (payment with subrogation).

Illustration

Ato Amare is to dig an irrigation canal on Mahlet‟s land. It makes no or little difference
to Mahlet whether that canal is dug by Ato Amare or by any other person as long as the
work is done. Ato Amare can, for example, have Ato Belete; do the work under his
responsibility.

Next we will see the other part of the story: Payment to whom made? Serious provisions
of the law of contract provide that payment can be made to the creditor or the third party
authorized by the creditor, a court of law or a provision of the law. But, payment to a
creditor suffering from incapacity is not valid under normal circumstances. Such payment
will only be valid if the estate of the incapable person has been enriched by the payment
in a permanent way.

Illustration

If payment is made to a minor, the profit to the minor at the time of the payment is
immaterial unless the minor either remits the payment to his tutor (the person who should
have received the payment in the first place) saves the money or spend on necessaries.
Otherwise, the payment will be considered invalid. (Except to the extent of the benefit to
the minor‟s estate) and the debtor will still be able to pay the amount. Any way it is safe
to make payments to legal representatives of the minor.

Similarly, the law declares that payment to an unqualified person will be invalid unless
confirmed by the creditor or it could be shown that the creditor has benefited by the
payment. In this case, however, the debtor can claim payment from the unqualified
person to whom he wrongly made payment. Where the unqualified person objectively or

50
reasonably appears to be a creditor; (e.g. an heir whose inheritance has been affected by a
later will) the payment made to him shall be considered valid due to the consideration of
good faith of the debtor.

In cases where the identity of the creditor is uncertain, the debtor can refuse to make the
payment and relieve himself by depositing the amount with the court. Here, a debtor
making a payment knowing that there is a litigation affecting the identity of the creditor
going on, he makes payment at his own risk.

What things, goods, or services are to be delivered? Articles 1745 and the following few
provisions purely govern the situation of object of the contract. In relation to this, the
creditor may refuse to accept an object other than the one agreed even if the value of the
thing is greater than the one agreed upon. He may also refuse part payment. This,
however, does not prevent the creditor from claiming the payment of the agreed part
payment until the contested amount had been settled. Let us see the following
illustrations from Prof. David‟s commentary.

Illustrations

1. A sells B three cases of Champagne. A delivers two cases. B can refuse to accept
this performance.
2. A and B are discussing the amount that B owes A. A claims it is $ 1300; B claims
it is only $1100. A writes to B, “Send me $1100; we will settle our dispute later.”
B must send the $1100.

Basically, many debts are presumed to be settled in the currency of the place of payment
and the creditor may not refuse to accept the payment on the basis of agreement to pay in
foreign currency. Agreement to pay in a currency other than the legal tender at the place
of payment merely implies obligation to pay at the prevalent rate of exchange at the time
of payment in the local currency. This does not include cheques which can distinguish the

51
debt only upon being honored by the debtor‟s bank. Moreover, the creditor is not obliged
to provide change upon payment

The law also prescribes the possible places of payment for the purpose of discharging the
obligation of the contract. According to Article 1755 of the Civil Code, there are three
alternative as to the place of payment arising from a contractual agreement. First, unless
special and mandatory rules apply, the parties may agree on the place of payment either
expressly or implicitly by usage. For instance, a creditor may stipulate that a loan be
payable at his place of work or an insurer may stipulate that the premium be paid at its
main office. Second, when no place of payment is stipulated by the agreement of the
parties and the law, the place of payment shall be at the normal residence of the debtor at
the time when the contract was signed. Where the debtor has changed his place of
residence, the debtor will have the obligation to make the payment at his previous
residence or the creditor‟s address. Thirdly, where the contract relates to a definite thing,
the place of payment is the place where such thing is found at the time of the contractual
agreement. Illustrated:

A sells B a carpet. The carpet is to be put at B‟s disposal at the place where it is located
when the contract is concluded.

Similar to the provisions of the law on place of performance of a contract, under normal
circumstance, the time of payment is determined by the express or tacit (usually
determined by usage) agreement of the parties. In case where there is no express
agreement or usage relating to the time of payment, the presumption is that payment will
be made immediately. But, the debtor is only required to make the payment when the
creditor makes a request for payment. Yet, usually, only a party having performed his
side of the bargain may require that the only party goes the same. And in cases where one
of the parties is clearly not intending to perform his obligations, the other party may
refuse payment despite an express request.

52
Dear learners! Now we are about to proceed to the sub-section that discusses the legal
consequences of not discharging one‟s duty properly. Let us go through by disposing
with the last point on performance of contracts, i.e., transfer of risks. It refers to the
bearing of costs where the object of the contract is damaged or deteriorates. If such
deterioration happens before delivery, it is the debtor who will bear the risk, unless the
delivery failed due to the fault of the creditor. That is, the debtor wills loss payment for
delivery.

Illustration

If A undertakes to deliver a horse to B for a payment of 500.00 ETH Birr at the city
center on Saturday and the horse dies on the way to the agreed place of delivery. B is not
obliged to make the agreed payment. But, if the creditor fails to take delivery on Saturday
and horse died on Sunday while being kept in a temporary stable at the city center, B will
be obliged to make the payment to A.

3.3.2 Non-performance of contracts

Well! Students, it is not uncommon to see things in this world going not smoothly. There
could be variety of factors that hinder from performing our activities as are planned. In
cases of transactions, these failures of ours may happen to affect other peoples‟ lives.
What do you think are the possible legal effects of failing to discharge our
responsibilities? Articles 1771 and the following of the 1960 Ethiopian Civil Code
regulate such circumstances. Failure to perform a contract on the part of one of the
parties entitles the other party to invoke or apply legal remedies against the non-
performing or improperly performing party. Such party may request the enforcement of
the contract or request or declare the cancellation of the contract.

Besides, the creditor may require the damage caused to him by non-performance be
compensated. In order to enjoy such rights, however, the party invoking non-performance

53
should, as a rule, first put the other party in default by giving him a notice showing his
intention to obtain performance on or after the time when the performance is due. The
default notice should include a reasonable period of time for the performance of the
unperformed obligation. At this our contracts provisions do not put any sanction in case
one does not comply with the words of the law.

As one can learn from the reading of Article 1775, the requirement of notice is not
necessary in four exceptional cases. These are in the case of obligation not to do
something; where the obligation could only be performed with in a fixed period of time
and the debtor let it lapse; where the debtor had declared in writing that he will not
perform his obligation and where the contract declares that the debtor will be in default
without the need for notice.

Specific performance or forced performance, i.e. performance imposed on the debtor in

the execution process, can only be applied where two requirements have been satisfied:
the special interest of the creditor and the preservation of the personal liberty of the
debtor. The creditor, to claim forced performance, should first show that he has a special
interest in the execution of the obligation by the debtor himself. This is usually the case
in the contracts for the provision of cervices by a public or private monopoly.

Illustration

If the Ethiopian Telecommunications Corporation, the debtor, is in breach of contract to

provide telecom services, the customer has a special interest in the personal performance
by a debtor, since the latter is currently the only entity that can provide the service.

The requirement of the preservation of the personal liberty of the debtor refers to cases
where forced performance will limit such liberty. In such cases the debtor will only be
required to compensate the creditor for losses. For instance, an employer may not be

54
forced to reinstate an employee unfairly dismissed since this would limit his freedom to
choose his employees.

Basically, it the debtor himself that should perform his contractual duty. However, in
some special circumstances where the debtor fails and the performance is needed, the
creditor may be authorized by a court to act to insure that obligations of the debtor are
performed in to two ways. First if the obligation of the debtor involves obligation to do or
not to do something; the creditor may perform the debtor‟s obligation at the expense of
the debtor.

Illustration

If A undertakes to deliver two liters of milk per day to B for a period of one month at a
monthly cost of 200.00 ETH Birr and fails to deliver the milk, B, after putting A in a
default, may order the milk from C at the expense of A.

Conversely, if the obligations of the debtor relate to obligation not to do, the creditor may
be authorized to destroy what has been done in a default of the contractual agreement.

Illustration

If A agrees with B that he will not build a fence baring B‟s way and does build the fence,
B may be authorized by a court of law to demolish the fence at the expense of the debtor,
i.e., A

What happens in case a party to a contract is not, for some reasons, willing, to accept the
delivery or generally performance of the contract? The answer to this question depends
on circumstances or reasons and time of performance of the contract. This situation refers
to cases where the creditor refuses to accept the delivery of the object of the contract
without lawful reasons. In such cases, the debtor may deposit the thing offered at the risk
and expense of the creditor. Here, the place of deposit is to be determined by the court.

55
The same right to deposit applies where delivery is impossible due reasons attributable to
the creditor (e.g. disappearance, uncertain identity). To benefit from this right, the debtor
must first put the creditor in default unless the refusal is in writing. The refusal of the
creditor may be expressed through lack of cooperation as indicated in the contract. For
instance, the creditor may fail to appear at the place of delivery or fail send transportation
as agreed upon in the contract. Where the thing is of a perishable kind, the debtor may
sell it as indicated by the court and deposit the proceeds of the sale. Read the annex for
more on this score.

3.4. Extinction of Obligation

Dear students! This is the last part of our lesson on the law of general contracts for the
purpose of business law. We hope you will enjoy our brief discussion on the interesting
part of law of obligations: extinction of obligations of contractants. Stay alert!

Obligations of any contract are normally extinguished through performance consistent

with the terms of the contract. But, there are also other causes that bring contractual
obligations to an end. These are, as are put in our Civil Code, (1) when contract in which
the obligation is provided is invalidated or cancelled; (2) where the parties or one of them
enforce a provision made in the contract for the termination of the contract;(3) where the
parties agree to substitute a new obligation for the original obligation; (4) where the
debtor‟s obligation is set off by an obligation owing from the creditor to the debtor ; (5)
where the position of a creditor and a debtor are merged in the same person; and (6)
where performance of the contract has not been demanded within a fixed period. Now let
us see them one by one.

Invalidation and Cancellation: invalidation and cancellation refer to situation where the
parties terminate their obligations under a contract. This happens in a six ways. These
are: (1) where both parties agree to terminate the contract; (2) where the provision of the

56
contract allows one of the parties to terminate the contract; (3) where the contract is for
undefined period (one of the parties may terminate the contract by giving reasonable
notice); (4) where, in the case of contract based on the special relationships, the special
relationship giving rise to the contract are no longer existent; (5) where a contract
benefiting only one party is terminated by a court order; and (6)here the creditor releases
the debtor from his obligations. The second way of extinction of an obligation is creating
a new contract just substituting the existing one.

Novation, setoff and merger: novation refers to cases where parties agree to substitute a
new obligation in lieu of the obligations under the contract. Where the parties have
shown an unequivocal intention to replace the obligations under a contract, the
obligations under the original contract will be extinguished. In this connection, set off is a
situation wherein the relative debts of two parties are cancelled out.

Illustration

If A owes his employer B a sum of Br. 100 and earns a salary of Br. 500 the obligation of
A to pay Br. 100 is set off against the obligation of B will be reduced to the payment of
Br. 400.

Set off may be provide by a law or be determined by the agreement of parties. Lastly,
merger happens when the same person becomes both the debtor and the creditor. Such
happenstances are rare.

Illustration

If company A owes company B a sum of Br 1 million, and if company A is bought by

company B, company B becomes both the debtor and creditor. In such a case, the
obligation under the original debt will be extinguished

57
 Cheers! You have done a great job. We believe that you have benefited much from the
wee illustrated discussion. This is the end of module one, of course, with the main part of
business law – law of contracts. Now you are ay ease position since the subject matters in
the second distance learning module mainly emanate from this module. In order to check
how much you have understood the part of the subject discussed so far, be composed and
have the courage to answer the questions following the summary of each chapter. For
now the writer would like to thank for our stay.

58
Summary

In order a certain agreement be considered a contract, there are certain basic elements
that should be fulfilled. According to the 1960thiopian Civil Code, a contract is an
agreement whereby two or more persons as between themselves create, vary or
extinguish obligations of a proprietary nature. The last phrase should be stressed.

For a valid contract to exist, the parties of the contract should be capable of contracting
and able to give their consent sustainable before the law. On top of these, the object of
the contract should be sufficiently defined, possible, lawful and in line with the morality
of the society. Finally, if there is any form prescribed by the law or the parties; it should
be complied with.
More important of the elements of contract is consent. Consent should not be vitiated by
any defect. Fundamental and decisive mistake; fraud or deceit; and duress or threat or
coercion or forces are the three grounds that our law recognizes as vices of consent.

There are several forms of offering and accepting consent to enter into contract. Both
offer and acceptance may be made orally or in writing or by signs normally in use or by a
conduct such that, in the circumstances of the case, there is no doubt as to the party‟s
agreement. Silence to an offer does not amount to accepting the offer.

Contracts are concluded in order to put them into effect. Our law is strict in making
parties of a given contract bound by their agreement; the provisions of a contract lawfully
formed shall be binding on the parties as though they were law – pacta sunt servanda.

In our contracts law, there are provisions dealing with who can perform a contract, who
can accept performance, and the place and time of performance of a contract.

59
In case a debtor does not perform his duty, the creditor can require specific or forced
performance if two elements are cumulatively fulfilled: existence of special interest on
the part of the creditor and the liberty of the debtor should not be affected.
Basically, an obligation of a contract comes to an end if the contract is performed.
Substitution of an existing contract by anew one, setting off two contracts, merging of
two contracts, and invalidation or cancellation of a contract are other ways of
extinguishing an obligation of a contract.

60
Test questions and cases
Make a group of at least three students and discuss the following issues and cases Comment [G1]:

1. Berhe and Selam are supporters of Manchester United FC and Arsenal FC,
respectively. Both agreed to bet 500.00 ETH. Birr each that their respective clubs
will win the game. However, they did no hand the money to a third party. The
Man Utd fan was fortunate enough to win the betting. Selam denied. Do you think
that Berhe can sue Selam and succeed in getting his money?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
2. A undertakes to deliver “his crop of sugar cane this year” at so much per quintal.
Do you think that there is valid contract?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
3. What are the basic elements in order to form a valid a contract?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
4. Who can perform a contract?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
5. What are the general conditions to be fulfilled in order one to claim forced
performance of a contract?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

61
 6. What are the legal effects of refusing to accept delivery of a thing?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

7. State some examples of contracts that need to be made in a written form.

_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
8. Elaborate the three vices of consent
_____________________________________________________________________
_____________________________________________________________________
9. What are contracts of personal nature?
_____________________________________________________________________
_____________________________________________________________________
10. Discuss the situations where setoff, merger, and novation can arise.
_____________________________________________________________________
_____________________________________________________________________

Questions and cases for group discussion

1. A loans money to B. B intends to use this money to buy a boat and organize a
smuggling expedition. Although the illegal use to be made by B of the money lent
was not a condition of the loan, A knew while entering into contract what the
motive of B was. Do you think that the contract is invalid?
_____________________________________________________________________
_____________________________________________________________________

2. Discuss the extinction of obligations.

________________________________________________________________________
________________________________________________________________________

62
 3. A contract is an agreement but the reverse is not necessarily true. Discuss.
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
4. D and his wife, daughter and grandson, lived in the house owned by D. At the
request of daughter and grandson, P made some improvements to the house. D did
not authorize these but he knew that some improvements were being made and
not object to them. P and D for the reasonable value of the improvements. Is D
obliged to pay for such improvements?

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

5. If a person does not perform a contract, what legal measures can the creditor take?
(Clue: Consult the provisions of the law attached at the end of this module.)
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

63
Model Answers for Test Questions

Chapter one

1. The law is needed because, although people know moral conduct and other social
rules better, they do not always follow these principles. The law consists of rules
of conduct established by the government of a society to maintain harmony,
stability, and justice in that society. It does this by defining the legal rights and
duties of the people. It also provides a way to protect the people by enforcing
these rights and duties through the courts and other dispute resolving institutions.

3. By pervasive nature of law we mean that almost all our daily activities are
regulated by law. Law is every where. While shopping there is law – consumer
protection law. While learning there is law – take the fact that you have entered
into contract with Mekelle University to learn by paying a fee. While entering
campus there is law – the guards ask you to show your ID and if necessary they
will search your body – administrative and criminal procedure laws are involved.
Etc.

5. Compared to that of court litigation, taking one‟s case to an arbitration tribunal is

less costly, speedy and with lessened tension. More importantly, the out come of
court litigation is win – lose; in that in majority of cases, either of them loses the
case and the other wins. In case of arbitration, on the contrary, there is a happier
outcome since both of the parties feel winners. Etc.

7. ~ it is made by the state

~ it is binding to all with in a jurisdiction
~ it is the collection of rules which regulates the social behavior
~ it is territorial in that it can only be enforced in a given nation
~it is normative

64
 9. Public laws are a class of laws that protect the interest of the society as a group.
They regulate the relationship between the state and private citizens. When a public
law is violated it affects the interest of the society and the state as well as the
individual.

11. Yes. If it is ratified by the House of Peoples Representatives of the FDRE, it is

considered as national law. Therefore, it can bind us as national laws can.

Chapter two

1. A person is a being or an entity capable of holding rights and assuming duties.

Note that in addition to human persons, artificial persons can also hold rights and
incur responsibilities.

3. The basic rule is that, any person that is not declared incapable by the law can
exercise juridical acts.

5. In addition to being actually established, some legal requirements like registration

and publicity should be met.

7. Amongst the attributes of personality, having a name, having residence, able to

exercise some juridical acts (bringing a legal action in a court of law, entering into
transactions, etc ) are to be mentioned.

9. Viability is a legal requirement, together with having an interest and being born
alive, that should be fulfilled in order a merely conceived child or fetus to be

65
 considered as if born so as to confer him personality and in effect enable him
enjoy some rights.

Chapter three

1. Berhe cannot win the case since there was no contract. The contract is invalid for its
object is illegal. Ethiopian law does not allow betting – it amounts to gambling.

3. The basic elements that should be observed are the parties should be capable; the
consent should be free and sustainable before the law.

5. The creditor should have special interest and the debtor‟s personal liberty should not
be affected.

7. Contracts of guarantee, contracts of insurance, contracts regarding immovables,

contracts entered into with government agencies, any other contract in respect of which
such form is required by law.

9. Contracts of personal nature are contracts that should be performed by the parties
themselves. Such types of contracts involve a profession.

66
Reading materials used to develop this Distance Learning Module

Books

1. Renè David (translated by Michael Kindred), Commentary on Contracts in

Ethiopia, (Hailesellasie I University, 1973)
2. Kuchhal, M.C., Mercantile Law, (5th Rev. Ed., Vikas Publishing House Pvt Ltd)
3. Browm, G.W. & Sukys, P.A., Business Law with UCC Applications, (9th ed.,
GLENCOE, McGraw-Hill)
4. Mamo Wedjega, Business Law, (Addis Ababa Commercial College)

Laws

1. Ministry of Pen, Civil Code of Ethiopia, 1960, Proc. No. 165 of 1960,
Negarit Gazetette, 19th year No. 2
2. Ministry of Pen, Commrcial Code of Ethiopia, 1960, Proc. No. 166 of
1960, Negarit Gazetette, 19th year No. 3
3. House of Peoples Representatives, Constitution of the FDRE, 1995,
Proc. No. 1 of 1995, Fedrel Negarit Gazette, Yr 1, No. 1

67