Business Law Lecture Notes by Girma G.

(Ambo University, School of Law 2018/19)

Chapter Four
The Law of Obligations (Law of Contract in Focus)
4.1. What is contract?
Practically every personal business activity involves a contract:
 Purchase of television set
 Enrollment in college
 Rental of an apartment
 Taking a taxi
 Purchase of groceries and stationeries, etc.
The greatest revolution in the modern era is the transformation from status to contract. In slave
owning society we have a slave-master relationship that is a relationship determined by a place
or position one held in the society. In the same way there was no contract between a serf and
land lord. This situation changed the advent of industrial revolution. Now when one hires or
sells his labor power to the manufacturers he does it with his own consent.
Contract is a binding agreement it is a promise or the set of promises for the breach of which the
law gives a remedy or the performance of which the law in some way recognizes as a duty.
Ethiopian Civil Code Art.1675 also defines the concept of contract.
Art 1675 - “A contract is an agreement whereby two or more persons as between
themselves create, vary or extinguish obligations of proprietary nature”
 Elements of the definition
i) Contract is an agreement…the basis for contract is an agreement (consensual), not
legally imposed. But this does not relate to each & every agreements, rather
agreements with intention to be bound.
ii) … Two or more persons- contract presupposes the existence of at least two persons
that is one cannot contract with himself. The law has not put the maximum limit.
iii) …. as between themselves … this shows the limit of effect of contracts. It only binds
the parties to it and do not affect the right of third parties (outsiders).
iv) …. create, vary or extinguish … this recognizes freedom of contract i.e. the parties
can agree on any subject matter of their choice in creating new obligations,

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Business Law Lecture Notes by Girma G. (Ambo University, School of Law 2018/19)

varying/modifying that already existing or even extinguishing them but subject to

mandatory provisions of the law.
v) … Obligations of proprietary nature – means ordinary contract creates obligations of
patrimonial (economic) nature, that is, which can be expressed & valued in
economic or money terms. Hence it excludes agreements of status such as marriage,
betrothal, adoption, etc.
Contract serves one of the sources of obligations. Some obligations originate from the direct
operation of law, that is, the law itself sometimes imposes obligations on persons. For instance:
people are required by law to pay taxes on the incomes they earn, obligations to supply
maintenance for the members of the family and etc. Contractual obligations are however those
emanating from the free will of the parties.
4.2. Formation of contracts (legal requirements for the formation of valid
contract.)
Art 1678 of the Ethiopian civil code enumerates the four basic essentialities for the making of
valid and sustainable contract: Capacity, consent, object and form, if any.
4.2.1. Capacity
Contracting parties should be capable of doing juridical act. i.e. acts which can give rise to legal
consequences. Capacity is mainly governed under law of person & you can make a reference to
it. Generally contracting parties should not be minors, insane, judicially interdicted person, and
legally interdicted person etc. unless the law expressly permits.
4.2.2. Consent
It is the basis for any contractual relationships. Consent is an agreement that is free from any
defect. Ones willingness & desire to enter in to and bound by the effects of such contract are
expressed through consent. There is no contract legally imposed. But what are the modes/
mechanisms of expressing consent by the parties. We have two important channels- offer and
acceptance.
A. Offer and Acceptance
Both are the mechanisms though which ones consent and intention to be bound is expressed.
Offer means a person’s expression of intention to enter in to a contract. It is the proposal of one’s
willingness to enter in to and to be bound by the contract. The person initiating contractual
formation by offer is known as offeror.

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Business Law Lecture Notes by Girma G. (Ambo University, School of Law 2018/19)

The response given to or ones assent to the terms of offer is known as acceptance. Contractual
negotiation will be completed & lead to the creation of binding contract when accepted by the
other party called an offeree. The important requirement in both cases is that both offer &
acceptance has to be specifically communicated to the other. Un communicated or undisclosed
offer cannot be the basis for acceptance & similarly un communicated acceptance cannot also
create a contract. An offer or acceptance can be made in any form as orally, in writing, by signs
normally in use or by conduct unless a special formality is prescribed.
Under Ethiopian Law silence after offer is not count to acceptance i.e. it is not sufficient to create
contract. But the law also recognizes certain exceptions which after offer silence amounts to
acceptance. These include:-
 When there is duty to accept. Ex. an offer made to public utility undertaking to get
vital goods & services as to Tele, ELPA, etc
 When there is a pre-existing business relationships b/n the parties &
 When a proposal for variation or renewal is demanded by the other party.
Ethiopian Law also enumerates certain acts which do not amount to an offer such as posting up
tariffs, price lists or catalogues or displaying goods for sale, or an action to the public. All these
are considered as more declaration of intentions and an invitation to treat any interested offerors.
B. Defects in consent
The importance of consent to the making of contract is unquestionable. However the mere giving
of consent is not sufficient to create a legally valid and sustainable contract.
There are certain factors which may affect or vitiate the giving of free & full consent. Commonly
known grounds for defect in consent under Ethiopian law are:-
 Mistake/ error
 Fraud /deceit
 Duress/ violence
Mistake is when one of the parties concludes a contract with some wrong or erroneous belief.
Misunderstanding or misconception of certain factual or legal situation leads to a mistake.
However the law does not recognize every mistake as grounds for vitiating consent. The two
important tests should be proved:- Mistake must be decisive and fundamental. It is decisive when
it is capable of determinating or convincing the other party to enter into contract. In other words,

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Business Law Lecture Notes by Girma G. (Ambo University, School of Law 2018/19)

had it not been for erroneous belief, the other party would not have concluded such contract or
concluded differently.
Fundamentality requirement relates to the elements of the contract. This is when the mistake is
committed on the person (identity or qualification) of contracting parties, the nature (type) of
contract or the subject matter of contract or obligation assumed by the other party. In most cases
proof of such facts are difficult.
Fraud is when the deceitful practice of the other party erroneously leads to the making of the
contract. In both mistake & fraud, there is misunderstanding of the real situation. But in the later
case, erroneous belief is created by the fraudulent act or deeds of the other party or third party.
Here also the fraud committed should be decisive so as to invalidate the contract. E.g. P, a well-
known jewelry, approached Q and asked him to buy his 20 gm golden ear ring for birr 5000. Q
being sure about P`s statement agreed to buy and paid the money immediately. But later on Q
discovered that the ring is really made from silver only with small covers of gold. Is such a K
valid?
Duress is when the consent of the other party is obtained/ exacted by violence. Here consent is
secured by coercive acts depriving ones freedom to make a choice. Such coercive act may be
committed against the life, person or property of the party himself or to his close relatives
(spouse, ascendants, descendants, etc).However such act of violence should be reasonable i.e.
serious & imminent (about to happen).
Example:-Ato B was one of the influential coffee exporter in Awassa. But now things are not
good for him. One day he threatened Ato C, another coffee exporter, to sign on a cheque for birr
500,000 ordering the Dashen bank to pay. But Ato C now objects the payment under such order
which is obtained by force. Can he succeed?
4.2.3. Object
It is another essential element for the formation of valid contract.
Object refers to the respective obligations of the parties. Any obligation assumed by the parties
under the contract constitutes an object. Example, take simple case of contract of sale. Here we
have two parties - the seller & the buyer. The seller’s obligation is mainly to deliver the thing
sold & transfer its full ownership. The buyer’s obligation is mainly to pay the price of the thing.
Hence the respective obligation of both parties constitutes an object of contract of sale.
Object of K could be one of the three types

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Business Law Lecture Notes by Girma G. (Ambo University, School of Law 2018/19)

 to do – to perform or achieve certain outcomes

 to give – to deliver /transfer something
 not to do –to refrain from doing sth
For the validity of contract, there are some further elements of object.
Object of the contract must be defined sufficiently. Parties to a contract must clearly state the
object of their contract i.e. the obligations of the parties should be ascertainable.
If the object of contract is not sufficiently defined or vague or ambiguous, it renders the contract
void & unenforceable.
i) Object must be possible
This means that the performance of the obligation of the parties must be humanly
possible. It should not be beyond the capacity or power of human beings. Initial
impossibility renders the contract of no effect /void.
E.g. A K to construct a G+10 building by only using pure water
ii) Object must be lawful & of good moral. The obligation of the parties must be to
perform something lawful and moral. The object of the contract should not
contravene legal provisions and go against the generally accepted moral standards.
Failure to observe this rule also renders the K of no effect (void abinitio) E.g.
Contracts on the sale of land, sacred and cultural heritages/objects, to commit crime
(contraband),
4.2.4. Form
Form is the last exceptional requirement for the validity of contract. This is because parties can
affect their contract in any form, that is, there is freedom of form. Mandatory or special formality
comes by way of exception when:-
 The law expressly prescribes, or
 When agreed by the parties.
Owing to their nature, importance and the value involved, certain transactions may be required to
be completed in special forms. The following are among the categories of contracts required to
be made in writing:-
 Preliminary contracts made to facilitate the main contracts of special formality. Ex. K
of agency to sell immoveable property.

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Business Law Lecture Notes by Girma G. (Ambo University, School of Law 2018/19)

 Variation in the same form

 Any contracts relating to immoveable properties
 Contracts with public administration
 Certain contracts for longer period of time .E.g. K of insurance, guarantee, loan
exceeding 500 birr, etc.
The parties can by their agreement impose or create special formalities. E.g. written formality
Hence when a special formality is prescribed by the law or agreed by the parties, it has to be
seriously complied with otherwise it remains void.
Finally for those contracts of special form, signature of the parties & attestation by at least two
witnesses are legally required.
4.3. Effects of contracts
An interesting feature of the institution of contract is that once it is validly and lawfully formed,
it is considered as a law on those so creating.
Art.1731 (1) Civ. C.:- “The provisions of a contract lawfully formed shall be

binding on the parties as though they were law”

A voluntarily created relationship becomes a binding law on the parties so creating and any
unjustifiable deviations from it will entail certain liabilities. E.g. duty of compensating for
economic losses due to its breach (non-performance).
A discussion on the effect of contract will be made under the following major subsections-
interpretation, performance, variation, and non-performance & its remedies.
4.3.1. Interpretation of contract
A contract validly formed has to be properly carried out. However dispute may arise between
the parties over the meaning of the provisions of the contract. Such disputes are resolved by way
of interpretation either judicially or extra-judicially.
Interpretation is the process of ascertaining or discovering the true intention of the parties.
However, the need for interpretation arises only when there is ambiguity, vagueness or
equivocality of the terms/provisions of a particular contract. In other words, clarity avoids
interpretation.
Once interpretation is sought, it will be made based on custom, equity (fairness), good faith and
the norms of normal business practice. The purpose is searching for the common intention of the

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Business Law Lecture Notes by Girma G. (Ambo University, School of Law 2018/19)

parties. In achieving this, events and practices before and after the making of contract will be
assessed. The context of the document may also give some support.
If the problems cannot be resolved in discovering the joint intention of the parties, contract law
favors positive interpretation and interpretation in favor of the debtor.
4.3.2. Performance of contracts
Performance means the process by which one or both parties carry out his/their obligation under
the contract. If contractual obligations are properly discharged, it serves as one ground for
extinction.
In relation to performance, there are two persons- the debtor & the creditor. A debtor is a person
who assumes an obligation and expected to perform for the benefit of the other party. A creditor
on the other land is a person who claims a right under a K and demands its performance from the
other party (the debtor).
Exercise: - Suppose Ato Cheno lent birr 4000 to his neighbor W/o Arenge. The loan is to be
paid back after 2 years with a 4% interest rate. But W/o Arenge failed to pay the money on the
agreed time. Identify as to who is the creditor the debtor in this particular dispute?
Under this subsection, brief discussion will be made as to who may perform, to whom, what to
perform.
A). who may perform?
Ethiopian law gives some flexibility as to who may actually perform contractual obligations.
Hence performance can be made by any person authorized by the debtor (his agent), the court
or the law. Agents can be delegated to substitute the debtor and perform on his behalf. There
may also be certain persons authorized by the law or the court to carry out the obligations of
the debtor. E.g. Guardians/tutors of incapables, liquidators of succession, trustees of bankrupt
estate, etc.
Hence, personal & direct performance by the debtor himself is exceptional & this is when:-
 it is essential to the creditor- for those performances requiring personal qualification or
competence of the debtor ( E.g. artists, painter, professional service, etc)
 It is expressly agreed by the parties. Here there is no need to prove essentiality to the
creditor.
B). Performance to whom made

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Business Law Lecture Notes by Girma G. (Ambo University, School of Law 2018/19)

Basically performance (payment) has to be made directly to the creditor or to a third person
authorized by the creditor (his agent), the law or the court (as tutors, liquidators, trustees, etc). If
there is still a doubt as to whom to pay, it is safe to deposit in the court of law or bank authorized
by the law.
However payment to unqualified, incapable or doubtful creditor is not a valid performance and
risks the debtor for double performance unless the real creditor confirms or the payment has
benefited him.
C). what should be performed?
This related to the subject matter of the K. performance relates to what is agreed in their K, no
more no less. The creditor is not obliged to accept the thing other them the one agreed in the
contract be it in species, or amount (quantity) or quality. However when it comes to fungibles
(things or items replicable/ interchangeable with one another in nature as cereals, coffee, etc),
minor or small deviations in quality or quantity may be tolerated. Still the debtor cannot go
below the average quality. But this toleration functions only when it is not essential to the
creditor or not expressly agreed.
D). Place and Time of performance
Determination of place & time of performance of contract has an implication on cost, currency to
be used, jurisdictional issues, payment of interest for default, etc. The law respects the agreement
of the parties in determining the place and time of performance i.e. the agreed place & time. In
the absence of such agreement, payment will be made in the address (residence) of the
debtor (place) and when the creditor demands upon giving notice (time).
4.3.3. Transfer of risk
Risk in K means loss, damage or deterioration of the subject matter of the contract. It relates to a
K for determined or specific thing such as horse, chair sack of grain, cask of wine, etc. Here the
point is that who bears the risk if the subject matter of the K is lost, damaged, reduced in value,
etc.
Under Ethiopian law, the debtor bears the risk until the date (moment) of delivery. Upon
delivery, risk is transferred to the creditor. Hence the moment of delivery is the dividing line for
the transfer of risk. However sometimes risk may be transferred to the creditor by legal
supposition without there being actual transfer of the subject matter of K. This happens when the
creditor is late in taking delivery. Lateness in taking delivery transfers risk to the creditor and the

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later is obliged to discharge his obligation (ex. Pay the price) even if the subject matter of k is
lost or deteriorated in the hands of the debtor.
E.g. Ato A sold 100 quintals of fresh mango to Ato C, an owner of Yamare Grocery in Awassa.
Ato A is ready to deliver on agreed date9Sept.1, 2000 E.C.), but Ato C failed to appear for 5
consecutive days despite A`s repeated call. The fruit was totally destroyed in one of the nights
due to heavy rainfall. Who shall take the risk for the loss? Since the creditor (Ato C) is late in
taking delivery though repeatedly warned, he bears the risk and therefore he will be compelled to
pay the price even if the fruit is no more there.
4.3. 4. Variation of Contracts
TO vary a contract means to change, modify or alter the terms or provisions of an already
existing contract. It is the situation where one or both parties require the revision of the original
terms of the K for different reasons as change of economic situation, problems of performance,
etc.
A contract validly formed will remain in force even if the obligation of a party becomes more
burdensome due to certain unforeseen event. Ethiopian Law does not admit variation for change
of market or economic situation rendering the obligation assumed more onerous. The court is
strictly prohibited from interfering on such grounds. It is up to the parties to regulate the
consequences of possible future events either in their original K or a new one to adjust such
changes. The justification for such prohibition is mainly to guarantee security of trade and to
avoid high probability of litigation. Judges cannot also accurately assess the changes in economic
matters.
The above prohibition is a generally recognized rule. But exceptionally the Law also recognizes
limited grounds for court variation of contractual terms. These include:-
 When there is a special relationship between the parties demanding a special confidence
and loyalty to treat each other. The law expects a flexible solution when the parties are
specially related as blood, marriage or other close relations as patient-doctor, client-
lawyer, agent-principal, etc
 When the K is with public administration & when the decision (law) of such organ
renders the obligation of the other party more burdensome. Here the K is varied in favour
of the non-government party affected by the official decision or law.

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 When performance is partially impossible & when cancellation of the whole K is not
justified. Here variation is made proportionately by reducing the part impossible.
 When the court grants period of grace for the other party. Grace period (additional) time
may be granted when time of performance is not sufficient & reasonable.
Ex1. Addo concluded a contract of supply of sugar to Ambo University at 5 birr per Kg for 2
years. But after 6 months the price of sugar has alarmingly increased to birr 8 due to shortage of
sugar cane. Addo wants to adjust the terms of K. Can he succeed? Here there is no way to revise
the terms of K unless they have a variation clause in their original K or latter agreed to regulate
such change of market situation.
Ex2. Jemal is a known contractor in A.A. He agreed with theOromia Rural Road Authority to
construct the new Ambo-Wolliso road. However after Jemal has begun his work, the government
passed a decision imposing 15 % tax on gravel stones. This has created difficulty for Jemal and
incurred an extra expense of 800,000 birr. What should he do?
Jemal can demand the revision of the K b/n him and the authority to the extent of the
inconvenience created by the official decision of the government or claiming damages for extra
costs incurred.
4.3.5. Non-performance and its remedies
An agreement lawfully formed should be properly discharged. Failure to do so entails certain
liabilities. Non-Performance of a contract occurs when the other party (debtor) fails to carry out
his obligations under the K. It is breach of one’s contractual commitments. This may include
total or partial failure (inadequate performance) or delayed performance.
When the fact of non- performance is proved, the aggrieved party can invoke one of the remedies
for breach. However, before involving such remedies, giving default notice is an important
precondition. Default notice is a notice (reminding) by which the creditor indicates that he wants
to obtain performance of the k. It means a warning which brings the maturity of the debt and
possible measures to follow to the attention of the debtor. Giving default notice is advantageous
in that it reduces court litigation when complied, transfers risks, serves as beginning for default
interest, etc.
However, there are some instances where the creditor may not be required to give notice. Notice
becomes unnecessary in the following circumstances:-

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Business Law Lecture Notes by Girma G. (Ambo University, School of Law 2018/19)

 Where the obligation is to refrain from doing something (not to do obligation) & when
already breached.
 Where the debtor has declared in writing that he will not perform. This also serves as a
ground for unilateral cancellation of K.
 Where the parties have agreed in the contract that notice will not be given. Here remedies
can be invoked automatically.
 When performance is expected on a particular date or occasion & when such time is
expired. E.g. Cake to be prepared on weeding ceremony or birthday, etc
The debtor may fail to discharge his obligation even after being warned by default notice. Such
breach of duties entails certain consequences. The law has devised some remedies to which the
creditor may resort. These remedies are:-
 Forced performance (specific performance)
 Cancellation(judicial/unilateral)
 Payment of damages/compensation
A). Forced performance: -
As its name partly explains, forced performance or sometimes specific performance means a
remedy by which the court orders the debtor to carry out his obligation. It is a remedy where the
debtor is forced (compelled) to execute his contractual commitments. It is an exceptional remedy
in that it requires court order and proof of two stringent conditions.
The two cumulative conditions to obtain forced performance are: -
 Proof of special interest of the creditor, &
 Consideration of the liberty of the debtor.
Special interest of the creditor relates to the essentiality of performance by the debtor, that is, if
there is no possibility for the creditor to obtain a similar performance from other sources or even
if there are other sources where it entails the creditor considerable expenses. E.g. Case of
corporations providing vital goods & services.
Consideration of liberty of the debtor is that such order of the court should not violate the
personal liberty of the debtor. This is because contractual obligation does not result in loss of
personal liberty.
Exercise:- Muger Cement Factory agreed to sale 500 quintals of cement to Teddy Building
Works PLC in Sept. 2000 E.C .for birr 250 per quintal. But the factory failed to deliver the
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Business Law Lecture Notes by Girma G. (Ambo University, School of Law 2018/19)

products on time. Now there is no domestic factory producing the same item. Importing from
abroad is also highly costly i.e. four times the agreed price. Can the PLC demand for forced
performance?
B).Cancellation of contract
If non-performance occurs & when forced performance has not or cannot be sought, the next
common remedy is cancellation. It is the mechanism of avoiding or bringing to an end a
contractual relationship due to reasons of non-performance. This can be achieved either through
the order of the court (judicial cancellation) or by unilateral decision of one of the parties
(unilateral cancellation).
I). Judicial cancellation
This is when contractual relationship is avoided through the mediurn of the court. A party
aggrieved by non-performance can initiate cancellation action and the court can declare
cancellation upon finding justifiable grounds. In its decision, the court will be guided by the
requirements of art. 1785 Civil Code as fundamentality of the breach & its effect on the very
essence of the contract, the interest of parties, good faith, etc. If the contract is successfully
cancelled, the effect is reinstatement to the original position before the making of contract.
Exercise: -Ato Kacha is a mechanic in A/Minch. He agreed with A/Minch University to
maintain two vehicles and finalize them within two months. Though 45 days have been lapsed,
no significant work is carried out. Being worried about the delay, the University warned him by
giving 20 days additional time. At the end of additional grace period, no more than ¼ of the
maintenance work is done. Now the University wants to take the matter to the court for
cancellation of the contract and claim damages for losses suffered. What do you think will be the
outcome of the action of the University? Give your opinion under arts.1784&1785 of Eth. Civ.
Code!
ii). Unilateral Cancellation
This is also another mode of cancellation where one of the parties unilaterally cancels without
going to the court. It is an exceptional right or power derived either from the contract itself or the
law. That is in principle cancellation should be demanded through the court.
Ethiopian law recognizes certain limited & exceptional grounds for unilateral cancellation.
These are:-

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 Cancellation clause- this arises from the express stipulation in the contract. It suffices
when the conditions are satisfied.
 Expiry of time limit in the K or upon giving notice- This is one of the consequences
of giving notice.
 When performance becomes impossible this is the last option when variation cannot
be effected by way of reducing the impossible part.
 Anticipatory breach- this is when the debtor informs the creditor of his refusal to
perform in writing before the due date. Here there is no purpose to go to the court.
C).Payment of Damage
Damage is a payment made to the creditor by the debtor to make good what the creditor has lost
due to the debtor’s failure to perform his obligations. It is a form of monetary reparation
(compensation) paid for economic losses due to non-performance.
Damage can always be claimed by proving the fact of non-performance & resulting losses even
in the absence of fault (strict liability). The debtor is liable to pay damage except when his failure
is due to force majeure. ‘Force majeure’ means an occurrence (event) that the debtor could not
have normally foreseen and prevents him absolutely from performing his obligations. Hence any
foreseeable occurrences or those only rendering the obligation more onerous are not considered
as force majeure.
The following are some of the cases of force majeure (Art 1793 Civil Code):-
 Unforeseeable act of persons outside the contract
 Prohibition of the performance of the obligation by a newly enacted law.
 Natural catastrophes such as earthquake, lightening, floods, etc.
 International or civil war
 Death or serious accident or unexpected serious illness of the debtor himself.
Unless one or more of the above grounds are proved, payment of damage is mandatory
irrespective of fault.
Can you mention few exceptional grounds where damage may be paid only upon proof of fault?
How amount of damage fixed? The amount of damage can be fixed by the contract called
penalty clause or assessed under the Law

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The amount of damage that the debtor pays is as a rule equal to the damage that the creditor has
suffered. That is the damage that is normally & reasonably expected due to breach of a particular
contract. This is called normal damage.
Some times greater damage than the normal damage may be demanded when the debtor is
informed with special situation & need of the creditor or such is due to the debtor’s intention to
harm the creditor. Lesser Damage can also be paid when the debtor proves that the loss is less
them the normal damage.
What do you think is damage for money debts? Payment of default interest is the substitute for
damages in money debts. The rate of interest may be fixed in the contract (contractual rate) or
paid at the rate fixed by law (legal interest) that is 9%.
Exercise: -Ashu is, a known comedian in Awassa, agreed to lead a music concert organized by
Climax nightclub for Sept month of 2000. Many people from Awassa and the surrounding
bought tickets to attend the concert for Ethiopian Millennium. Bedele beer factory agreed to
supply a great deal of beers. Elifora Agro-Industry also agreed to supply fresh meat for the
occasion. However the concert cannot be conducted as scheduled because Ashu changed his
mind and went to Addis for another attractive concert to be held in Sheraton Addis. Please
advice as to what remedies are available for the nightclub and those affected by the act of Ashu?
4.3.6. Extinction of obligations (contracts)
Contracts are not lifetime commitments. They are made by people for a certain period of time for
some specific purpose. Hence such contractual relationship may extinguish (come to an end) due
to various causes. The following are common ground extinguishing contractual relations under
Ethiopian Law: -
 Where they are properly and adequately performed by the parties in accordance
with the terms of K (performance)
 Where the contract is invalidated for problems at formation stage or cancelled due
to problems of performance.
 Where the K is terminated i.e. its future force & effect is avoided either by the
agreement of the parties or the court order.
 When a new obligation is substituted for the original obligation by the agreement
of the parties called novation. E.g. Kassim borrowed birr 2000 from Murrado. But
Murrado is unable to pay. Thus they agreed that Murrado will continuously

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deliver his future coffee harvests. Hence the original loan K is changed(novated)
to new K of delivery
 When the debtor’s obligation is set off by an obligation owing from the creditor to
the debtor – reciprocal cancellation of two debts. E.g. X owes 1500 birr to Y;
while Y owes 1000 birr to X in another K. Here the two debts can be set off up to
1000 birr. X will only pay the remaining balance i.e. 500birr
 When the positions of creditor and debtor are merged in the same person – called
merger. E.g. M & S are father and son. M lent 1200 birr to his son (S). But M died
before receiving the money from S. Now S is the only heir of M and he is no
more a debtor because there is merger b/n S & the rights of his father (M).
 When the creditor has not demanded performance of the obligation within the
period fixed by law called period of limitation. (ይርጋ)

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