Construction law handout for COTM 4th year regular students

CHAPTER-3
The practice of contracting (in Ethiopian context)
3.1. Definition and type of contract
3.1.1. Definition of Contract

According to Article 1675 of the 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 definition contains the following elements.

 That the contract is an agreement;
 The agreement is to be made between two or more persons;
 That the agreement is binding between such two or more persons;
 The agreement is to create, vary & extinguish obligations;
 The agreement is to create obligations
 That the nature of obligations is proprietary;

The construction contract clearly full fills all the elements given to the definition of contract.

The Form of Agreement, in the construction contract, clearly presents the Agreement reached
between the employer & the contractor. In principle, contracting with oneself is impossible. The
construction contract, in principle, is only binding between the employer & the contractor. This
concept is related to the doctrine of the privity of contract.

Privity of contract means that the contract is binding only the parties who have made it. The main
contract is only applies between the employer & the main contractor. It does not apply to sub-
contractors or to Engineers.

There are some exceptions to this rule. Third parties may come to the original contract. For example,
by way of:-
 Succession;
 Assignment;
 Subrogation; and
 Other grounds;
The construction contract reached between the original employer & the original contractor could be
binding to the successor of the employer or the contractor.

Assignment of rights may bring third parties to the contract. (NB: Please, see Sub-clause 1.1.2.2 &
1.1.2.3 of Harmonized FIDIC) as to the definition of “Employer” & “Contractor”, respectively, legal
successors of the Employer or the Contractor may become party to the construction contract.

The employer & the contractor may also agree to terminate their relationship & therewith liberate
themselves from the previously created obligations. It means that the parties to the construction
contract may extinguish their obligation through a contract/ agreement.

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The construction contract obviously creates obligations between the employer & the contractor. A
construction contract creates obligations on the employer & the contractor. For example, the
contractor assumes a performance obligation, whereas the employer assumes a payment obligation.
The nature of obligation created by a construction contract is that of proprietary or patrimonial or
financial in nature. It does not have a purpose to create status.

3.1.2. Types of Contract

Contracts may be classified based on certain criterion. For example, in terms of:-
 Reciprocity of rights & obligations;
 Time parameter for the performance of the assumed respective obligations;
 Form requirement;
 The presence of freedom of negotiation or not;
 Obligation of result or diligence; and

I) Reciprocity
Based on the criterion of reciprocity, a type of contract could be classified in to:-
 Contract on onerous title; and
 Contract on gratuitous title;
Contracts on onerous title create reciprocal rights & obligations on both parties to the contract.
 Construction Contract can be a good example for this. The contractor is obliged to execute,
complete & remedy any defects in the works, if any. Whereas, the employer is also obliged to
pay the contract price to the contractor.

Contracts on gratuitous title create an independent obligation in the contractual agreement.

 Under gratuitous type of contract, one party is obliged to the other, whereas the other party to
the contract owes nothing to the other party.
 There are no reciprocal rights and obligations. For example, a donation agreement.

II) Time
By taking time as the classification criterion, contracts may be classified in to:-

 Commutative contracts; and

 Aleatory contracts;
Commutative contracts
 Commutative contracts are such type of contracts in which the performance of the contract by
both parties to the contract is made at the same time.
 If one gets a service & pays the service fee instantly, it is a commutative type of contract.
 In commutative type of contract, there is no time gap during the performance of the contract
by both parties to the contract.
Aleatory contracts

 Aleatory contracts are quite to the contrary to the commutative types of contract.
 There is a certain time interval between the performance of the obligation of one party to
contract & the other.

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 Insurance contracts & construction contracts may be classified under this type of contract.
 Under the insurance contract, the premium is paid immediately by the insured, whereas the
obligation of the insurer to pay the indemnity to the insured may not come in to picture unless
the uncertain event or risk happened in future.
 Under the construction contract, the contractor executes first his performance obligation &
the employer pays the contract price long after the works are executed by the contractor &
certified by the engineer.
 Under the types of contract (insurance & construction), performance of obligation by
respective contracting parties is not simultaneous.

III) Form
On the basis of form, contracts may be classified in to:-

 Consensual contracts; or
 Solemn contracts;
Consensual contracts

 Consensual contracts require no written form, whereas solemn contracts do.

 The construction contract, especially if it is made with the public body should necessarily be
made in writing.
 In that case it becomes a solemn contract.

IV) Freedom of Negotiation

Based on the criterion of freedom of negotiation, the following categories of type contract are
recognized:
 Contract of consultation; and
 Contract of adhesion;
Contract of consultation

 In case of contract of consultation both contracting parties have full freedom to negotiate &
determine the entire terms of their contract.
 Whereas, in case of contracts of adhesion one party has already prepared the terms of the
contract & the other party has no freedom of negotiation.
 Such party has but the option ether to accept or reject the contract. In this case, such type of
contract is called contracts of adhesion.
Contract of adhesion
 The construction contract, especially in case of public works, is based on general conditions of
contract, special conditions of contract and other numerous contract documents, which have
been already prepared by the public project owner.
 Shall we say that construction contract is a contract of consultation or a contract of adhesion?
 By whom the contract document is prepared has its own effect in terms of interpretation of
contracts. (See Article 1738 of the Civil Code).
V) Diligence v. Result
 The construction contract, for example, is a result type of contract & not of diligence.
 Most professional services are diligence type of contract.

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3.1.3. Components of a Construction Contract

The tender documents become contract documents if completed by the prospective contractor, and
finally agreed & signed by the parties (i.e. the employer & the contractor) to the Construction
Contract. The Tender Document, in addition to the following shall also include the Invitation for Bids
& Instruction to Tenderers & Amendments thereto, if any.

The following are typical tender (contract) documents in a given large & complex construction
contract & divided in to the following components:
1. Legal part;
2. Commercial part;
3. Technical part; and
4. Technological part, (if any);

1. Legal Part  Insurance Forms;

 The Contract Agreement;  Retention Money Security Form;
 Minutes of Meeting, if any;  Others, if any
 Letter of Acceptance (Award), if any; 3. Technical Part
 The Tender (NB: Including the  Technical Specifications;
Appendix to Tender, if any);  Drawings;
 Special Conditions of Contract;  Bill of Quantities; (or is it a payment
 General Conditions of Contract; document?)
 Others, if any;  Schedule of Requirements, if any;
2. Commercial Part  Others, if any;
 Performance Security Form; 4. Technological Part
 Payment Security Form;  In relation to some process aspect of
 Advance Payment Guarantee Form; the construction project, if any;
 Bid Security Form;
The Contract Agreement shall also declare the priority of the Contract Documents i.e. which contract
document shall have precedence or priority over the other in case of ambiguity or discrepancy
between or among the relevant parts of the contract documents.

3.2. Elements of Contract

According to Article 1678 (Elements of Contract) of the Civil Code:

No valid contract shall exist unless
A. The parties are capable of contracting and give their consent sustainable at law.
B. The object of the contract is sufficiently defined and is possible and lawful.
C. The contract is made in the form prescribed by law.
The following are the fundamental elements of contract.
 Capacity of the contracting parties;
 Consent of the contracting parties;
 Object of the contract; and
 Form of contract, if any;

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A) Capacity
 Please, see Article 1678(a) of the Civil Code.
 Capacity means competence to enter in to a legally binding agreement.
 Parties entering in to an agreement or contract shall, therefore, be capable of contracting.
 Legal capacity is of two types.
 Personal (Own)capacity; and
 Representative(Agent)capacity;
 Capacity of persons is legally presumed unless the contrary is proved.
 Persons could be:-
 natural (physical) persons; or
 legal or juridical persons;

Natural Persons
 Natural or physical persons are human beings.
 Their legal capacity is determined by law.
 The scope of capacity of physical persons is relatively unlimited unless the
contrary is proved.
 Physical persons are the subject of rights & duties from birth to death. See
Article 1 of the Civil Code.

Legal Persons
 Legal persons are of two types in terms of determining their coming in to being
& their legal capacity.
 These are:-
 By legislation; (in case of public bodies/institutions); and
 By registration; (in case of non-public bodies);
 The existence of public bodies (Ministries, Commissions, Bureaus, Authorities, Agencies
…) & their legal capacity to enter in to contract & bind themselves emanates from the Civil
Code & the special legal instrument (legislation), which establishes that specific public
body.
 The legal capacity of non-public bodies (Plc’s, Share Companies, Corporations…) & their
legal existence comes in to being by registration. The act of registration by competent
public authority confers legal personality & therewith (limited) legal capacity to enter into
contract & bind themselves.
 The capacity of legal persons is only related with their purpose or objective, for which
they are created.
 The following may not have (legal) capacity to enter in to contract & bind themselves.
 These are:-
 Minors (under the age of 18);
 Companies adjudged or declared bankrupt;
 Judicially interdicted persons;
 Legally interdicted persons;
 Persons, whose civil rights are suspended by the judgment of the court;
 Non-nationals, unless permitted by law or special prerogative;

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 Non-authorized Agents;
 Agents, whose Power of Attorney has been revoked;
 Agents , the Scope of their Power of Attorney does not cover the intended
transaction(ex. Tendering or Negotiation or Contract Signing)
B) Consent
 Please, see Article 1678 (a) and Article 1679- Article 1710 of the Civil Code)
 Consent is a declared will of the individual to enter in to contract.
 It is the willingness of the parties to enter in to a legally binding relation.
 Consent of the intended contracting parties decomposes in to :-
 Offer; and
 Acceptance;
I) Offer
 Offer is defined as a proposal expressing the declared willingness of the offeror to enter in to
an agreement, if the offer is accepted.
 Offer is a legal process which is a declaration of willingness or intent to be bound by specific
terms set out.
 Offer may be made:-
 Orally;
 In writing;
 By sign;
 By conduct;
 By specially stipulated manner for acceptance;
 In case of (public) construction contract, offer shall be made in writing.
 Characteristics of Offer
 The following are characteristics of a valid offer.
 Certain;
 Communicated;
 Unconditional;
 Distinguished from invitation to treat;
A) Certainty
 The terms of a contractual offer must be certain or capable of being made
certain.
 Unless the details of the bargain are certain, the parties could not be expected
to reach any real agreement.
B) Communicability
 The tender is an offer on the part of the bidder contractor.
 The offer, i.e. the tender must be communicated to the offeree, i.e. the
prospective employer.
 Unless the bid/tender prepared by the bidder (prospective contractor)
communicated to the (offeree) on or within the specified time in the
instruction to bidders, one can not say that there is a bid or tender.
C) Unconditionality
 If the offer is accepted, it may go to the creation of an agreement.
 For the offer to be valid & acceptable, it should not, thus, be unconditional.

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 Unconditional offer is not clear, thus not acceptable.

D) Not being Invitation to Treat
 The following are not offers but invitation to treat:
 Display of goods;
 Advertisement;
 Tender;
Tender
 Invitation for bids or invitation to tender prepared by the employer or the
project are not offers.
 They are invitation to treat.
 Bidders are making offers, for ex. in terms of
o submitting filled & signed Form of Tender;
o priced BOQ;
o alternative proposals, if allowed;
 The employer is within his right to accept or reject such offers, however;
Termination of Offer
 The following could be the way by which the offer could be terminated.
 By Death; -of either party before acceptance of the offer;
 By Counter offer; -of the offeree;
 Revocation; -by the offeror, within the time limit;
 Withdrawal; -by the offeror; within the time limit;
 By lapse of Time; -on part of the offeree, i.e. accepting the offer after the
prescribed time has elapsed;
 By failure to accept in the stipulated manner;- by the offeree, if a specific
mode of acceptance was prescribed in the offer;
 By silence of the offeree; -silence is not acceptance, in principle;
 By Liquidation;- if the offeror construction company has been liquidated
before the offer accepted by the employer;
 By Insolvency;-in case the construction company declared by the court
insolvent, before the offer has been accepted; If the offer were accepted &
contract concluded, that contract is going to be terminated by the employer
on the ground of bankruptcy of the contractor;
 By being adjudged bankrupt;-by the court, before the offer has been accepted;
If the offer were accepted & contract concluded, that contract is going to be
terminated by the employer on the ground of bankruptcy of the contractor;
II) Acceptance

 Acceptance is a declaration of will to enter in to a legally binding contract.

 By acceptance, a contract shall be completed, where the offeree accepts the offer without any
reservation.
 Forms of Acceptance
 The following could be forms of acceptance.
 Orally;
 In writing;

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 By sign;
 By conduct;
 As specially stipulated by the offeror;
 In the construction contract, especially for public works, acceptance in writing is the most
common & legally imperative practice.
 The Letter of Acceptance is a clear example to this.
 Characteristics of Acceptance
 Acceptance could be conditional or unconditional.
 Conditional acceptance rejects the original offer made by the bidder (offeror) &
creates a counter offer or new offer by the project owner.
 Unconditional or unreserved acceptance of an offer by the project owner creates a
Contract Agreement between the bidder & the project owner subject to other
subsequent actions, ex. negotiation.
 In case of Public Projects, approval of the Contract by higher authorities may be
required. In that case, legally, the Contract is not yet concluded until the required
approval is secured.

C) Object of Contract
 Please, see Article 1678 (b) cum Article 1711 – Article 1718 of the Civil Code);
 The object of contract is the very obligations of the contracting parties ex, in the
construction contract, the obligations of the employer and of the contractor.
 The possible objects, i.e. the obligations of the contracting parties, of contract are:-
 obligation to do (perform);
 obligation not to do; or
 obligation to deliver;
 The obligations of the contracting parties could be divided in to two broad terms:
 Promises; and
 Considerations;
 The object of contract (i.e. both promises & considerations) shall be:-
 Sufficiently defined; Art. 1678(b) cum Art. 1714;
 Possible; Art. 1678(b) cum Art. 1715;
 Lawful; Art. 1678(b) cum Art. 1716(1);
 Not immoral; Art. 1716(1);
 The object of a construction contract shall be sufficiently defined.
 In the construction contract the whole purpose of all parts of the contract documents (the
BOQ, the Drawing, the Technical Specification, notably, & including the Conditions of
Contract (both General and Special Conditions of Contract), and other documents) is to
sufficiently define the object of the construction contract, i.e. the very respective
obligations of the contractor & the employer.
 The contractual obligation of the contractor (i.e. Promises) shall be determined from the
contract documents in terms of:
 What to do: i.e. to construct:-
 water supply dam & systems; or
 irrigation dam; or

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 Hydropower dam; or
 other hydraulic structures; or
 road; or
 building; or
 other type of structures;
 In terms of its:-
 scope;
 quality;
 cost;
 time;
 safety; and
 Other aspects of its promises.
 The Payment, obligation to do, or (Considerations)and other contractual rewarding
obligations of the employer shall also be sufficiently defined in terms of:
 Payment obligation
o extent of contract price;
o types of payment;
o timing for payment;
o conditions of payment;
o other related issues;
 and other obligations in terms of other benefits, exchanges, &
rewards;
 These obligations are the very promises & considerations of the contractor & the
employer in the construction contract, respectively.
 Unless the principle of implied terms or the rule of interpretation of contract supports to
resolve the issue of the object of contract, it is difficult to define the object of contract by
anybody else except by the contracting parties themselves.
 The object of contract, even though sufficiently defined, it has to be possible or capable of
performing.
 Impossibility of performance of one’s obligation may relate to physical or legal
impossibility.
 Impossibility of performance must not be confused with difficulty of performance
 The object of contract shall be lawful. Contract agreements cannot serve to achieve illegal
objectives.
 There shall not be any contract agreement on legally prohibited matters.
 Contracts shall not also go contrary to accepted moral values (as to the principle of right
or wrong) of the society.
 If the contract found to be unlawful or immoral, the legal remedy available is invalidation
of the contract at the request of any contracting party or interested third party. See Art.
1808(2) of the Civil Code.

D) Form of contract
 Please, see Article 1678 (c) cum Article 1719 – Article 1730 of the Civil Code.
 Form may mean types of contract.

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 Form may also mean the making of the contract orally or in writing.
 Should the contract is to be made in certain prescribed form, it means that contract should be
made in writing.
 In this case, form is related with the validity & proof of the contract itself.
 By form, under these circumstances, we mean the making of the contract in writing, if the law
imperatively prescribes so or if the parties voluntarily wish to do so.
 In the absence of the law requiring the contract to be in writing, (see Art. 1719(1), the parties
are free to make their contract as they wish. They can make it orally or in writing. See Art.
1719(2).
 Should the parties wish to conclude a type of contract which should be made in writing, any
preliminary contract in respect thereof, shall also be made in writing. See Art. 1721.
 This is true in case of a contract of agency, which is a preliminary contract for the basic
contract to be concluded between the agent & the third party.
 Should the parties once choose to make or create their contract in writing; any variation (see
Art. 1722) thereto shall be made in writing.
 Contracts with public (government) body shall be made, legally, in writing. (See Article 1724
of the Civil Code).
 If the contract shall be made in writing, there are two possibilities:
 Preparing fully tailor-made contract to the project at hand; or
 Using standard conditions of contract suitable for the project at hand;
 The first type of contract is called contract of consultation, whereas the second one is called
contract of adhesion.
 In public works, the use of standard conditions of contract is common.
 Standard conditions of contract could be international or national in origin.
 If the contract should be made in writing, the following additional legal formalities have to be
fulfilled, namely:
 There must be a special contract document prepared for that purpose; (ex.
Form of Agreement, which summarizes the whole Agreement & sets out the
whole contract document);
 On that document (including on the whole pages of all the Contract Documents)
the parties to the contract agreement shall put their signature; see Art. 1728;
 In case of body corporate, their corporate seal has to be affixed on all parts or
pages of the contract documents;
 The contract agreement shall be attested, at least, by two witnesses. The
witnesses shall also sign the contract agreement but only on the designated
space in the contract agreement. (Ex. On the last page of the Form of
Agreement); see Art. 1729;
 Then, the contract said to be, legally, formed or created.

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3.3. Contractual obligation, non-performance and the associated remuneration

3.3.1. Effects of contract

Effects of contract may have two dimensions;

 The time when the contract is considered bound by the contracting parties; and
 The fulfillment or performance of the set of promises prescribed in the contract;
The first dimension relates to the effectiveness of the contract, whereas the second is related to the
performance of obligations of the contracting parties under the contract.
 Effectiveness of the Contract (Time Dimension)
 This may be expressed in the following three ways:
a) Contract is effective and thus is binding on the contracting parties from the
moment of the conclusion of the contract;
b) Contract can be considered effective after some days are passed from the
conclusion of the contract; and
c) Contract can be considered effective after the performance of some actions by
the contracting parties; ex.
 Making advance payment a condition precedent for the effectiveness of
the contract.
 Securing approval of the contract by higher authorities;
 Other pre-conditions;
 This has a time dimension.
 Performance of the Contract (Discharge Dimension)
 The following discussions are focused on the real performance of the contract as
agreed.
 This concept is related to the Latin maxim: pacta sunt servanda- one who enters into
a contract is legally bound or agreement to be kept.
Effects of contract may bring:-
a) Contractual effects; and /or
b) Legal effects;
1) Contractual Effects
 The discussion refers the contractual provisions (Sub-clauses) of the Harmonized Edition
Contract Conditions & the Civil Code.
 According to Article 1731 of the Civil Code:
 A contract lawfully formed shall be binding on the parties as though they were law;
 The contents of the contract shall be determined by the parties subject to the
mandatory provisions of law;
 The lawful or valid formation of contract is related with the fulfillment of all the four elements
of contract, namely, capacity, consent, object, and form, if any.
 Validly formed contracts are binding on the contracting parties, as they were law.
 It means that contracts are producing rights, obligations & privileges & therewith remedial
rights to & liabilities on the contracting parties.
 Effects of contract are, in principle, on the contracting parties, for ex. on the employer & the
contractor.
 This principle is called privity of contract or relative effect of contract.

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 Third parties, in principle, are not entitled to rights or owe no obligation. (See Article 1731(1)
cum Article 1952(1) of the Civil Code.
 Contracts made by contracting parties have no effect on non-contracting parties.
 These non-contracting parties are called, legally, third parties.
 The Construction Contract made by the Employer & the Contractor is not binding on
the Sub-contractor.
 The Sub-contract Contract made by the by the Main Contractor & the Sub-
Contractor is not binding on the Employer
 The Consultancy Agreement made by the by the Employer & the Engineer is not
binding on the Contractor.
 The Construction Contract made by the by the Employer & the Contractor is not
binding on the Engineer.
 By way of exception, third parties may have rights and/or owe obligations in the contract
made by other contracting parties.
 For example in case of:
 Assignment of benefit or subcontract (under the Harmonised Edition) see Clause
4.5 & Article 1952(1) of the Civil Code;
 Assignment of right to the bank or financial institutions : see (under the Harmonised
Edition) Clause 1.7;
 Subrogation by the Insurance institutions; see Article 1971of the Civil Code &
Article? of the Commercial Code;
Major Areas of contractual effects
 Effects of contract basically concerned with the following four issues.
 Interpretation of Contract; - (Article 1732-Article 1739 of the Civil Code);
 Performance of Contract; -Article 1740-Article 1762 of the Civil Code);
 Variation of Contract; - (Article 1675 & Article 1763-Article 1770 of the Civil Code);
 Non-performance of Contract; - (Article 1771-Article 1805 of the Civil Code)
 Interpretation of Contract
 Interpretation, generally, means the process of determining the true meaning of a written
document. Interpretation is a judicial process, affected in accordance with a number of rules &
presumptions.
 Conditions of contract, based on the principles of interpretation of contract, are interpreted,
depending on the circumstances:
 Interpretation may be classified in to:-
 Formal interpretation;
 Informal interpretation;
Formal interpretation
 Formal interpretation may be conducted;
 By the court;
o The court which has a competent jurisdiction over the case;
o The role of interpretation has been given to the court on the constitutional
principle called, separation of powers;
o The specific jurisdiction of the court is determined by specific statute or law
to that effect;

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 By the arbitral tribunal;

o The formal power of interpretation of contracts of the arbitral tribunal is
based on the agreement of the parties & recognized by law;
o This is related with the recognition & enforcement of the agreement to
arbitrate & recognition & enforcement of the arbitral award;
o The very source of the power of the arbitral tribunal for the purpose of
interpretation emanates from the agreement of the parties, except in case of
compulsory arbitration.
o See Sub-clause 20.6 of the Harmonized Edition & the applicable law.
Informal interpretation
 Informal interpretation may be done;
 By the Conditions of Contract itself;
 (See (under the Harmonised Edition) Sub-Clause 1.1 Definitions; and
 Sub-Clause1.2 Interpretation);
 By the contracting parties themselves; In case of negotiation or other forms of
amicable dispute settlement;
 By the Engineer;
 by giving Clarification for ambiguities or discrepancies in the Contract
Document;
 (See (under the Harmonised Edition) Clause 1.5-Priority of
Documents);
 by Determination see (under the Harmonised Edition) Clause 3.5 cum
Clause 20.1 on the Claims of the Contractor; Clause 2.5 on the Claims of
the Employer ; and on any requests of the Contractor & of the Employer;
 By the Adjudicator (DB);
 See under Clause 20.3 of the FIDIC Harmonized Edition;
 Adjudication not yet legally recognized in Ethiopia.
 see also the PPA Conditions of Contract on Adjudication;
 Performance of Contract
 Performance of Contract may mean the carrying out or discharge of the obligation
under taken by the contracting parties.
 That is, respectively, from the perspective, for example, of the Contractor & of the
Employer, under the construction contract i.e.
 promise dimension; and
 Consideration dimension.
 The effect of contract is fulfilled by performance of the very contractual obligations of
the contracting parties.
 It means that :
 the Contractor has executed the works within the time for completion,
within the cost agreed, as per the quality specified…;and
 the Employer has paid fully the Contract price, and any other sums agreed
in or implied from the contract, to the Contractor;
 Both parties have discharged their obligations, as agreed. They have given full effect
to the contract.

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 Variation of Contract
 Variation of Contract could be done:
 By the contracting parties, contractual variation, (as a rule); or
 By the Court, judicial variation, (as an exception);
Variation of Contract by the Parties
 The contracting parties, in principle, are free to create & vary their contractual
agreement. (See Article 1675 of the Civil Code).
 Variation of contract & its effect are regulated under the Conditions of Contract.
See Sub-clause 13-Variations & Adjustments; Harmonized Edition;
 Variation of contract, under the construction contract, may result from:-
 Requirement change by the employer,
 Design change by the engineer;
 Proposal by the contractor;
 By variation, parties are giving a modified effect to their contract & perform the
Contract, as varied.
Variation of contract by Judicial (Article 1763-Article 1770 of the Civil Code)
 Judicial variation or variation of contracts by the court is not allowed, in principle. See
Article 1763 of the Civil Code.
 Contracts may get their effect through judicial variation, by way of exception,
however. See Article 1763 of the Civil Code.
 Judicial variation of Contracts, as opposed to variation of Contract by the parties, is
regulated by the applicable law.
 Under the applicable law, the Ethiopian court may vary the terms of the contract
under the following circumstances.
 Where it is expressly provided by law; see Article 1763;
 Where a special relationship between the contracting parties exists; see
Article 1766;
 Where one of the contracting parties is a state or one of its institutions; see
Article 1767;
 Where it is partially impossible to perform the contract; see Article 1768;
 Let us focus on Article 1767.
 The issue of one of the contracting parties being a state or one of the state institutions
(Article 1767) is related to the concept of Administrative Contract.
 Administrative Contract is defined under Article 3131 of the Civil Code.
 This concept is important in relation to construction contract of public works nature.
 Judicial variation may apply, for ex., in case of Administrative Contracts.
 See Article 1767-Contracts with a Public Administration;
(NB: Power of the court to vary contracts, in case of Administrative Contract
due to official decision, Bringing the performance of the contract by the
Contractor more onerous or Impossible);

 See Article 3190-General Measures -1. Affecting Substance of Contract;

 See Article 3191- 2. Making the Performance of the Contract More Onerous;
 See Article 3192 - Particular Measures -1. Taken by Contracting Authorities;

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 See Article 3193 – 2. Taken by another Authority

 Non-performance of Contract
 Non-performance of contracts means the failure of the contracting party or parties to carry
out the obligations they have undertaken under the contract.
 The effects of contract are sanctioned by applying the provisions of the law or the
agreement of the parties.
 Non-performance involves the following legal concepts.
 Notice requirement;
 Notice necessary (Article 1772-Article 1774);
 Notice unnecessary (Article 1775);
 Specific performance; (Article 1776-Article 1783)
 Actual performance;
o Performing the very contract or obligation by the contractor
itself;
o This requires court decision;
o Important considerations for specific performance decision by
the court are: special interests of the creditor & preserving the
personal liberty of the debtor;
 Substitutionary performance;
o By the employer himself;
o by surety, in case of calling a Performance Bond by the
employer;
o by another contractor;
 Cancellation of contract may result from non-performance of contract.
 The contract may be cancelled by the party to the contract or by the court.
 Damages;
 Liability for damages; see (Article 1791-Article 1798);
 Quantum of damages: see Article 1799-Article 1805)
 Damages may be requested due to
 Non-performance of the contract; and
 Invalidation of the contract.
 No payment of damages in case of force majeure.
 Non-performance may arise in case of construction contract on the following instances.
 Total non-performance;
 Partial non-performance;
 Defective performance;
 Delayed performance; and
 Delayed payment;
 Types of damage could be immediate / direct loss or indirect loss of gain. The first one is
called actual damage, whereas the latter consequential damage.
 Damages may also be further categorized in to liquidated or unliquidated/general damages.

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 Liquidated damages are a pre-agreed & determined sum in the contract. It is enforceable in
case of delay in performance. No need of proof as to the sustaining of damage by the employer,
ex. in case of the construction contract.
 General damages require proof of the occurrence of the damage, the cause & the extent
thereof.
 Interest is paid, by way of damages, in case of money debts. See Article 1803 ff of the Civil
Code.
 Invalidation of contract may arise in case of failure to fulfill the elements for the valid
formation of contract. See Article 1808 of the Civil Code;
 In case of non-performance of contract, the creditor may or may not oblige, under the contract
& the law, to give or not to give notice. (Notice Requirement)
 The creditor shall have the following alternative remedies;
 Specific/forced performance or substitutionary performance;
 Cancellation of the contract;
 Damages;
 Non-performance of contract may reveal itself in construction contracts in the following forms
of deviations.
 In late completion of the works (time deviation i.e. delay);
 In defective performance of the works; (quality deviations)
 Non-performance of the works; (by way of abandonment or otherwise);
 Partial performance of the works;
 In non-performing of the payment & other obligation(by the Employer);

3.3.2. Extinction of Obligations

 See the definition given to Contract under Article 1675 of the Civil Code, “… to create, vary &
extinguish…”
 The obligations of the contracting parties may come to an end on the following grounds.
 By performance of the contract; see Article 1808 & Article 1740-Article 1762 of
the Civil Code;
 By invalidation of the contract; see Article 1807 & Article 1808-Article 1818 of the
Civil Code;
 By cancellation of the contract; see Article 1807 & Article 1808-Article 1818 of the
Civil Code;
 By termination of the contract; see Article 1807 & Article 1808-Article 1818 of the
Civil Code;
 By remission of debt; see Article 1825 of the Civil Code;
 By novation; see Article 1807 & Article 1826-Article 1830 of the Civil Code;
 By set-off; see Article1807 & Article 1831-Article 1841 of the Civil Code;
 By merger; see Article1807 & Article 1842-Article 1844 of the Civil Code;
 By limitation of action; see Article 1807 & Article 1845-Article 1856 of the Civil
Code;
A) By performance of the contract
 This is the case where the Contractor & the Employer under the Construction Contract
perform all of their obligations under the said Contract.

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 The Contractor has executed the Works under the Contract within the time, cost,
quality & scope…, as agreed or as varied.
 The Employer has discharged all of its obligations including payment as agreed or as
varied.
B) By invalidation of the contract
 Invalidation of contract may result with respect to void & voidable contracts.
 A contract is voidable due to vices of or defects in consent & incapacity. That is the
contract was concluded as a result of mistake, duress, or fraud.
 A contract is void (ab initio) because of the object of the contract being unlawful,
immoral or lacks the prescribed form.
 The effects of invalidation of contract is that the parties shall, as far as possible, be
reinstated in the position which would have existed, had the (invalidated) contract
not been made.
C) By cancellation
 Cancellation of contract may result from non-performance of contract.
 The contract may be cancelled by the party to the contract or by the court.
 Cancellation of contract may (see Article 1772) or may not require (see Article 1775)
prior written notice to be given to the defaulting party.
 The effect of cancellation is the same as the invalidation of contract.
D) By termination
 A contract could be terminated by both parties to the contract (jointly) or by one of
them (unilaterally)
 Termination of contract shall be accompanied by prior written notice.
 The extent of the period of notice may be fixed in the contract or by custom.
 The effect of termination of contract results the non-performance of the contract by
the parties.
 Termination of contract shall have no retrospective effect. All contractual acts done
before termination remain intact with their effects.
 Termination of contract liberates the parties from the future performance of the
contract. This effect is contrary to the invalidation and cancellation of contract. The
latter have retrospective effect.
E) By remission of debt
 Remission of debt results where the creditor releases the debtor from its obligation.
 The remission may not exist where the debtor immediately refuses the remission of
the said debt.
F) By novation
 Novation occurs where the parties agree to substitute therefore a new obligation
which differs from the original one on account of its object or nature.
 The original obligation shall clearly be extinguished otherwise there is no novation.
G) By set-off
 Set-off occurs where two persons owe debt to one another.
 Pre-conditions for the existence of set-off:
 the obligations:-shall be in money, or in fungible things;
 both debts are liquidated (capable of ascertainment); and

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 Due or matured.
 All obligations may not be subject to set-off (obligation to the State, ex tax, wages to
the employees...)
 Effect of set-off is that the debts shall extinguish each other as from the day when they
both exist & to the extent of the amount of the lesser debt.
H) By merger
 Merger shall occur & the obligation shall extinguish where the positions of creditor &
debtor are merged in the same person.
 Merger shall have no effect on third parties & it may survive.
I) By limitation of action
 This is the effect of time on rights, unless exercised within the legally allowable time.
 The creditor may lose his rights unless he demands same within a given time.
 The extent of time within which an action could be brought against the debtor is ten
years in contract, subject to special laws.
 The action may relate to the performance of a contract, non-performance of a contract
& action for the invalidation of contract.
 The effect of not bringing an action by the creditor against the debtor is liberating the
debtor from the said obligation.
 The creditor’s action is limited by operation of time.
 Period of limitation may be interrupted by certain acts of the creditor, by admission of
the debt by the debtor, by bringing an action against the debtor.
 The period of limitation should be pleaded during the court action by the defendant or
the debtor & cannot be raised by the court itself. (see Article 1856(2) of the Civil Code
and also Article 244(2)(f) of the Civil Procedure Code);
 The Construction Contract is subject to the ten years period of limitation.

3.3.3. Proof of Contract

 See Article 2001-Article 2026; Proof in Relation to Contracts;(of the Civil Code;
 Proof of contract is important in case of construction claims & disputes.
 Proof or evidence is important to prove the existence or non existence of a given fact, which
is disputed or denied.
 Admitted facts do not need proof.
 Laws do not require proof. A judicial notice has been taken; it should be taken, by all
concerned, by operation of the law. The legal basis for this is Proc. No. 3/1995, which
establishes the Federal Negarit Gazeta.
 All persons, natural & legal, including the legislative, the executive & the judiciary branch of
the government shall all take judicial notice of an enacted & publicized law.
 The form of proof in relation to Construction Contract could be:
 Documentary evidence;
 Factual witness;
 Expert opinion;
 Project site visit;
 Others, if any;
Documentary evidence

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 Documentary evidence has a wider application in case of Construction Contract.

 It may include the following:
 The Construction Contract itself;
 Records in relation to the:
 Time aspect of the project;
 Cost aspect of the project;
 Quality aspect of the project;
 Safety aspect of the project;
 Payment aspect of the Contract;
 Site & Access thereto;
 other contractual or legal obligations of the Contractor and/or the Employer;
 Variation in the works;
 Outside Records;
 Others, if any;
 The records may appear in diverse forms:
 Correspondences or Exchange of Letters;
 Notices;
 Reports;
 Minutes of Meeting;
 Site Diary;
 Site Instructions;
 Payment Certificates or related documents;
 Executed Standard Forms;
 Others, if any;
Factual Witness and expert opinion
 Factual Witness Statements are prepared by those who have a direct factual knowledge
about a given aspect of the project ( ex, time, payment, …)
 Expert Witness Reports are prepared & submitted to court or arbitral tribunal to show
some professional conclusions about the disputed matter.
 Expert Reports are reflections of professional opinion & they are not necessarily
binding on the judge or the arbitrator.

 The proof is required to be submitted by the one who alleges the existence of a given fact.
This is called a burden of proof.
 The burden of proof has two elements:
 Burden of production; and
 Burden of persuasion.
The one who submits a proof has also a burden of persuading the judge or the arbitrator.

 The proof shall fulfill two cumulative ingredients:

 Relevancy of the evidence; and
 Admissibility of the evidence;
 To consider the relevancy & admissibility of a given proof is left to the judge or arbitrator.

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 The hearing, judicial or arbitral, is an important phase of the process at which the relevancy
and/or the admissibility, if admitted its weight, of every proof so submitted may be
challenged, by way of cross-examination.
 The judge or the arbitrator shall decide thereon.

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