1 - Law and The Life Cycle of A Business

TABLE OF CONTENTS
Course Introduction
Course Objectives
1. UNIT ONE: THE LEGAL ENVIRONMENT OF BUSINESS
 Unit Introduction
 Unit Objectives
 Section Objectives
 Section Overview
1.1. Introduction to Law
1.1.1. Nature of law
1.1.1.1. Definition of Law
1.1.1.2. Function of Law
1.1.1.3. Normatively of Law
1.1.1.4. Generality of Law
1.1.1.5. Legal Sanction
1.1.2. Classification of Law
1.1.2.1. Public Law and Private Law
1.1.2.2. Civil Law and Criminal Law
1.1.2.3. Substantive and Procedural Laws
1.1.3. Sources of law
1.1.3.1. Constitution
1.1.3.2. Federal and State Legislations
1.1.3.3. Court Decisions
1.2. Rule of Law and its Importance to Business
 Unit Summary
 Self-Test Exercises
 References/further readings
2. UNIT TWO: LAW OF CONTRACT
 Unit Objectives
2.1 Definition of Contract, the Need for Contract Law and Formation of Contract
2.1.1. Definition of Contract
2.1.2. The Need of Contract Law
2.1.3. The Formation of a Contract
2.1.3.1. Consent of Parties
2.1.3.2. Capacity of parties
2.1.3.3. The object of contract must be possible, legal and moral
2.1.3.4. Necessary legal formalities
2.2 Performance, Nonperformance of Contract and Remedies
2.2.1. Performance of contract
2.2.2. Non-Performance of Contract & Its Remedies
2.3 Termination of Contract
2.3.1. By performance
2.3.2. Mutual Consent (Art.1819)
2.3.3. Subsequent impossibility
2.3.3.1. Destruction of subject-matter of the contract
2.3.3.2. By the death or disablement of the parties
 Unit Summary
3. UNIT THREE: AGENCY LAW AND CONTRACT FORMATION
 Unit Objectives
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3.1 The Establishment of an Agency and the Parties Involved
3.1.1. Defining Agency
3.1.2. Establishing an Agency
3.1.3. Parties in Agency
3.1.3.1. The Principal
3.1.3.2. The Agent
3.1.3.3. The Relation between Parties
3.1.3.3.1. Relationship between Agent and Principal
3.1.3.3.2. The Principal-Third Party Relationship
3.1.3.3.3. The Agent-Third Party Relationship
3.1.3.3.4. Intermediary Role of the Agent
3.2 The Sources of Agent’s Authority and Duties between Agent and Principal
3.2.1. The Sources of Agent’s Authority
3.2.1.1. Actual Authority
3.2.1.2. Apparent Authority
3.2.1.3. Ratification
3.2.2. Duties between Agent and Principal
3.2.2.1. Agent’s Duty to Principal
3.2.2.2. Duties of the Principal
3.3 Termination of Agency
3.3.1. Termination by Agreement
3.3.2. Termination by Unilateral Declaration of the Parties
3.3.3. Termination by Operation of the Law
 Unit Summary
4. UNIT FOUR: SALE OF GOODS AND SECURITY DEVICES
 Unit Objectives
4.1. Law of Sales
4.1.1. Definition of Contract of Sale
4.1.2. Formation of a Contract of Sale
4.1.3. Subject matter of Contract of Sale
4.1.4. Relations between the Parties to a Sale
4.1.4.1. The Seller’s Obligations
4.1.4.2. The Buyer’s Obligations
4.1.4.3. Common Obligations of Seller and Buyer
4.1.5. Transfer of Risk
4.1.6. Remedies for Breach of Sales Contract
4.2. Law of Security Devices
4.2.1. Importance of Security Devices
4.2.2. Nature of Security Devices
4.2.3. Kinds of Security Devices
4.2.3.1. Suretyship and its Nature
4.2.3.2. Pledge
4.2.3.2.1. Formation of Pledge Contract
4.2.3.2.2. Transfer of Possession
4.2.3.2.3. Rights and Duties of the Parties to the Contract of Pledge
4.2.3.2.4. Execution of Pledge-sale of Pledge
4.2.3.3. Mortgage
4.2.3.3.1. Creation of Mortgage
4.2.3.3.2. The Rights and Duties of Mortgagee
4.2.3.3.3. The Rights of the Debtor (Mortgagor)
4.2.3.3.4. Extinction of Mortgage
 Unit Summary
5. UNIT FIVE: LABOR LAW
 Unit Objectives
5.1. Definition, Source and Scope of Labor Law
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5.1.1. What is Labor Law?
5.1.2. Basic Sources of Labor Law
5.1.2.1. The Constitution
5.1.2.2. The Labor Proclamation
5.1.2.3. The ILO Conventions
5.1.2.4. Supreme Court, Cassation Division Decisions
5.1.2.5. Directives issued by the Ministry of Labor and Social Affairs
5.1.2.6. The Pension Law
5.1.2.7. Law Regarding Persons with Disability
5.1.3. Scope of Labor Law
5.2. Employment Relation
5.2.1. Contract of Employment
5.2.2. Collective Agreement
5.2.3. The Labor Law
5.3. Duties Parties in Employment Contract
5.3.1. Duties of Employer
5.3.2. Duty of Employee
5.4. Termination of Employment Contract and its Effect
5.4.1. Lawful Termination of Employment Contract
5.4.2. Effects of Lawful Termination
5.4.3. Unlawful Termination
5.4.4. Effects of Unlawful Termination
5.5. Special Categories of Employees
5.5.1. Probationary Employees
5.5.2. Apprentice
5.5.3. Female Employees
5.5.4. Young Worker
5.6. Labor Dispute Settlement Mechanism
5.6.1. Courts
5.6.2. Conciliation
5.6.3. Arbitration
5.6.4. Labor Relation Board
 Unit Summary
6. UNIT SIX: BUSINESS ORGANIZATIONS
 Unit Objectives
6.1 Sole Proprietorships
6.1.1 General Concepts of Sole Proprietorship
6.1.2 Advantages of Sole Proprietorship
6.1.3 Disadvantages of Sole Proprietorship
6.2 Partnerships
6.2.1 Definition of Partnership
6.2.2 Nature of Partnership
6.2.3 Types of Partnerships
6.2.3.1 General Partnerships
6.2.3.2 Limited Partnership
6.2.4 Contributions
6.2.5 Merits of Partnership
6.2.6 Limitations of Partnership
6.3 Joint Venture
6.3.1 Characteristics of Joint Ventures
6.3.2 Management of Joint venture
6.4 Company
6.4.1 Concept of Company
6.4.2 Nature of Company
6.4.3 Merits of Company Organization
6.4.4 Limitations of Company Organization
6.4.5 Classification of Companies under Commercial Law
6.4.5.1 Classification based on Manner of Incorporation
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6.4.5.2 Classification in Relation with Range of Minimum Membership and Capital Subsidiary Companies
6.4.5.3 Classification Based on Extent of Control: Holding Companies and Subsidiary Companies
6.4.5.4 Classification Based on Type of Ownership and Reporting Obligations
6.4.5.5 Classification Based on Place of Establishment: Local and Foreign
6.4.6 Share Company Vs Private Limited Company
 Unit Summary
7. UNIT SEVEN: INTELLECTUAL PROPERTY
 Unit Objectives
7.1 Understanding Intellectual Property
7.1.1 Definition of Intellectual
7.1.2 Nature of Intellectual Property
7.1.3 History of Intellectual Property Organization
7.2 Branches Intellectual Property Protected by the Ethiopian Law
7.2.1 Copyright
7.2.1.1 Basics of Copyright
7.2.1.2 2 Rights of the Author
7.2.1.3 Limitation of Rights
7.2.1.4 Duration of Copy Rights
7.2.1.5 Ownership, Exercise and Transfer of Ownership
7.2.1.6 Remedies for Infringing of Copyrights
7.2.2 Patent
7.2.2.1 Basics of Patent
7.2.2.2 Reasons for Patenting an Invention
7.2.2.3 Eligibility for Patent Protection
7.2.2.4 None Patentable Inventions
7.2.2.5 Minimum Period of Protection to be Accorded
7.2.3 Trademark
7.2.3.1 Definition and Benefits Trademark
7.2.3.2 The Subject Matter to be Protected and Conditions for Registration
7.2.3.3 Term of Protection
7.2.3.4 Remedies for Infringement
7.2.4 Trade Secret
7.2.4.1 Definition
7.2.4.2 Protection of Trade Secret
7.2.4.3 Trade Secret Relation with other Intellectual Properties
 Unit Summary
 Feedback to activities
 Feedback to self-test questions
 Glossary
LAW AND THE LIFE CYCLE OF A BUSINESS
Course Introduction
Students in undergraduate business programs at all universities of the country from all
business disciplines are required to take one law courses before graduation. This course
provides students with an understanding of the nature of the legal system, and its role and
influences on business and business decision making.
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There are some very good arguments for requiring the study of law by undergraduate business
students even though it might be considered not to be a business discipline. Law is essential to
any society in that it provides the rules by which people and businesses interact. Law affects
almost every function and area of business.
The difference between winning and losing in the business world often depends upon the
ability to make good choices from a legal perspective. This is because almost every business
decision has legal repercussions, including deciding whether to incorporate a business,
obtaining financing, protecting proprietary knowledge used to develop products/services,
entering into contracts to purchase raw materials, ensuring that products meet safety
standards, disposing of plant wastes, promoting and pricing products /services, entering into
contracts to sell products/services, and providing product warranties and after-sales service.
At all stages of business, running afoul of the law can hurt a business, while playing within
the boundaries of the law can help the business to succeed. For this reason, accountants, who
play a key role in almost every aspect of operations, must have a solid working knowledge of
the law. The course is divided into seven units. Read all units carefully and attempt to solve
the in text questions, activity questions and as well as self-check review questions given in
each unity before visiting feedback answers.
Course Objective
 On successful completion of this course, students will be able to:
 Subject related knowledge:

 Know basic concepts in law that are relevant to businesses;
 Know and understand the key features, including concepts, principles,
doctrines and legislation in business law;
 Acquire an understanding of the purpose and function of business law in the
relevant context.
 Critical thinking abilities:

 Evaluate the significance of the legal principles studied and their application to
a range of problem scenarios;
 Think critically and creatively about key issues and problems in business law
and how they affect the business organization.
 Professional/practical skills:
 Develop legal problem solving skills;
 Present informed, coherent and reasoned prose;
 Apply knowledge and understanding of business law and practice.
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UNIT ONE
The Legal Environment of Business
Unit Introduction
Law concerns the relations of individuals with one another as such relations affect the social
and economic order. It is both the product of civilization and the means by which civilization
is maintained. As such, law reflects the social, economic, political, religious, and moral
philosophy of society. The law of FDRE influences the live of all Ethiopian citizens. At the
same time, the law of each state influences the lives of many noncitizens as well. The rights
and duties of all individuals, as well as the safety and security of all people and their property,
depend upon the law.
This unit will provide you an introduction to the legal environment of business. Acquiring
knowledge of the legal environment of business is essential to successful business practices.
This involves understanding what the law is, where it comes from, and specifically how it
relates to business. Moreover, different philosophies of law exist. Approaching a problem
from different perspectives allow you to explore multiple outcomes. Additionally, when
people approach the same problem from different legal philosophies, reasonable minds can
disagree on the outcome. Ultimately, businesspeople should be able to recognize legal
situations, minimize liability exposure, and know when to consult an attorney.
Because the areas of law are so interrelated, an individual who intends to study the several
branches of law known collectively as business law should first consider the nature,
classification, sources of law as a whole, rule of law and how the law affects the business.
This enables the student not only to comprehend better any given branches of law but also to
understand its relation to other areas of law.
Learning Objectives
 After you have studied this unit, you should be able to:
 Explain various definitions given to the term law by famous legal scholars;
 Determine absence of universal definition of law;
 Identify and discuss basic functions of law;
 List and explain various sources of law;
 Understand what a rule of law system is;
 Determine why the rule of law is important to business;
 Identify several areas of law that are especially relevant to business and the
importance of the rule of law to those areas; and
 Identify how the rule of law protects people from harmful business practices.
UNIT ONE - SECTION ONE
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1.1 Introduction to Law
Section overview
What is law? What roles does it play in our lives? These are important questions to consider
as you read this first chapter. People view law in many different ways. Some think of the
police, while others think of any rules governing day-to-day behavior. Each perception is
partially correct. To truly comprehend law and a legal system, one must understand the nature
of the underlying society. Law is a reflection of the people, organizations, and values it
simultaneously serves and controls. Never lose sight of the dynamic nature of any legal
system. To survive and effectively guide, it must draw from the past, reflect the present, and
pave the way for the future.
Learning Objectives
 After you have studied this section, you should be able to:
Define law
Identify the basic functions of law.
List the various sources of law.
Classify law into different categories
1.1.1 Nature of Law
The law has evolved slowly, and it will continue to change. It is not a pure science based upon
unchanging the universal truth. Rather, it results from a continuous effort to balance, through
workable sets of rules, the individual and group rights of a society. The American Supreme
Court justice Oliver Wedell Holmes writes,
The life of the law has not been logic; it has been experience. The felt necessity of the time, the
prevalent moral and political theories avowed or unconscious, even the prejudice which judge
share with fellowmen, have had a good deal more to do than the syllogism in determining the
rules by which men should be governed. The law embodies the story of nation’s development
through many centuries; it cannot be dealt with as if it contained only the axioms and
corollaries of a book of mathematics.
1.1.1.1 Definition and Philosophy of Law
What is law?
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If you were asked to define “the law,” what would you say? Is “you should eat five fruits and
vegetables a day” a law? What distinguishes law from mere suggestions or good advice? The
key difference is obviously enforcement and consequence. If you don’t eat five fruits and
vegetables a day, you are not going to be imprisoned or fined. If you steal or embezzle,
however, you may be prosecuted and face stiff financial penalties and imprisonment. Law,
therefore, is a set of rules that are enforced by a government authority.
Would you say that the law includes only the actual words that are written, or does it also
include reading between the lines to discern the spirit of the law? Would you follow a law that
you disagreed with, or would you ignore such a law? Do you believe that what the law
actually is a matter as much as who enforces it? Do you think that morality is a part of
legality, or do you think that morality is wholly separate from the law?
Based on the particular system of jurisprudence to which one ascribes, these questions will
generate different answers. Not only will the answers to these questions differ, but the
potential outcomes of legal disputes can also vary widely, depending on one’s conception of
what the law is. These differences highlight fundamental disagreements over the nature of
law.
Jurisprudence is the philosophy of law. The nature of law has been debated for centuries,
giving rise to a general coalescence of ideas to create particular schools of thought. Several
different theories of jurisprudence are explored in the paragraphs that follow.
At a most basic interpretation, some believe that law is simply power. That is, the law is
followed because the sovereign issues orders that are backed by threats. Consider tyrannical
rulers who create arbitrary laws or bad laws. If the sovereign has the power to enforce those
“laws,” then regardless of the “badness” of the law, it is still law. The Nazis executed six
million Jews pursuant to German law during World War II. Saddam Hussein routinely
tortured and executed political opponents and minority Sunni Muslims in Iraq under Iraqi law.
Those who ascribe to the idea that law is power often argue that coercion is an essential and
necessary feature of law.
Many have criticized the understanding of law as nothing more than power backed by threats.
For example, some point out that if law is nothing more than powers, then the subjects of the
law are simply at the mercy of whoever is in power. If we look at the Ethiopian system of
government, however, citizens generally do not feel that they are “at the mercy” of the
government. This is because people also have power. People can elect their government
officials, and they can vote “out” government officials who aren’t doing a good job. In this
way, those in power are accountable to the people. Other criticisms include the more piercing
observation that not all law requires the exercise or threat of overt power. For instance, many
of our laws rely on economic incentives, rather than force of power, to encourage compliance.
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Though penalty provisions may exist for violating those laws, those penalties may not be
driving compliance itself.
A competing view is that of legal positivism, whose proponents disagree that law is simply
power. Legal positivists believe that the law is what the law says. The laws are written,
human-made rules. The law is not drawn from any source higher than man. Legal positivists
do not try to read between the lines. They may disagree with the law as it is written, but they
will acquiesce to the sovereign power and follow the law as it is written. They reject any
belief that they have an individual right to disobey a law that they happen to oppose,
providing that the law is from a legitimate source. Positivists believe that law is wholly
separate from any consideration of ethics. Moreover, they do not believe that people have
intrinsic human rights other than those created by the law. This is very different from a natural
rights perspective, which is discussed in the following paragraphs.
Positivists differ from the view that law is simply power, because they believe that valid law
must be created pursuant to the existing rules that allow the sovereign to create law. Under
this way of thinking, an arbitrary declaration of law by a sovereign who did not follow the
rules for creating the law would not be viewed as valid law. Additionally, positivists would
not consider any rule or “law” created by an illegitimate ruler as valid law. Consequently, a
legal positivist would feel no need to obey an illegitimately created “law.”
A common criticism of legal positivism is that it prohibits individuals from remaining true to
their own consciences when their consciences conflict with the laws of the sovereign.
However, for a positivist, the desirability of enacting a law that might be viewed as “good” or
“bad” is not relevant for determining what the law is.
Some critics point out that legal positivism is too limited in its conception of law. For
instance, at least some laws seem to reflect a moral stance. The prohibition against insider
trading (using nonpublic information to buy or sell a stock to make money) might be said to
encompass the idea of fairness, which is a moral consideration. Likewise, due process
(fundamental fairness and decency in government actions) might be said to encompass the
ideas of both fairness and a moral position against cruelty. Moreover, not all law is the result
of a sovereign-issued, written rule. For example, international customary law has developed
through customary practices. It is valid law, but it is not a set of rules handed down from a
sovereign ruler.
A different viewpoint is legal realism, which is the belief that the law itself is far less
important than the consideration of who is in the position to enforce the law. Like positivists,
legal realists believe that law is the product of human making. However, unlike positivists,
they believe that the outcome of any issue that arises under law is dependent on the person,
such as a judge, who is in the position to exercise power under the mantle of the law.
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Additionally, realists believe that social and economic considerations should be brought to
bear in legal disputes, which may very well be “extra” considerations that are not captured by
the written law itself.
If a realist brought a dispute before a particular judge who was known to be unsympathetic to
that particular type of dispute, the realist would believe that the judge’s decision would reflect
that leaning. Critics of legal realism point out that those who are in the position to exercise the
power of the law over others should not circumscribe the checks and balances of our system
of government by considering factors outside of legitimate sources of law when making
decisions. For instance, they argue that judges should not use any factors other than the
written law when rendering decisions.
Natural law is the idea that humans possess certain inalienable rights that are not the products
of human-made law. Therefore, we can say that natural law differs from both positivism and
realism in this important respect. Humans are able to reason, and therefore they are able to
discover moral truths on their own. They are not automatons who require a sovereign power
to tell them right from wrong. Natural law adherents do not reject human-made law. However,
they recognize that human-made law is subordinate to natural law if the two types of law
conflict.
Civil rights activists often rely on natural law arguments to advance their platforms. This is
true today as well as historically. For example, a civil rights advocate might point out that
regardless of what the law “says,” discrimination based on race is simply wrong. If the written
law allowed racial discrimination, natural law adherents would not recognize the law as valid.
Each theory of jurisprudence can inform our understanding of legal issues by allowing us to
see the same thing from many different perspectives. Moreover, depending on philosophical
perspective, there may be several possible outcomes to the same legal dispute that are equally
supportable. This understanding can help us identify common ground among disputants as
well as points of departure in their reasoning.
1.1.1.2 Function of Law
Law is much more than a set of rules. Our legal system involves processes for social control.
It consists of institutions such as legislatures and government agencies for the creation of rules
of behavior. It also includes police forces and courts to enforce the rules and resolve disputes.
In short, the Ethiopian legal system encompasses a process and structure for creating,
enforcing, and interpreting those rules.
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 What roles do the law plays in our lives?
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The law establishes certain standards of conduct in an attempt to maintain order and, per-haps,
keep the peace. Keeping the peace and enforcing standards of conduct and maintaining order
help further another function of law that is especially important: facilitating planning.
Contract law is an example of this function. In making the courts available to enforce
contracts, the legal system ensures that parties to contracts either carry out their promises or
pay for the damages they cause. For example, through contracts, a manufacturing company
can count on either receiving the raw materials and machinery it has ordered or else getting
money from the contracting supplier to cover the extra expense of buying substitutes.
While all societies use law to keep peace and maintain order, societies such as ours also use
the law to achieve additional goals. The tax laws, for example, seek not only to raise revenue
for government expenditure but also to redistribute wealth by imposing higher inheritance and
income taxes on wealthy people. The antitrust laws seek to prevent certain practices that
might reduce competition and thus increase prices. Consumer laws have a wide range of
purposes, from prohibiting the sale of unsafe products to providing more information to
shoppers.
The function of these statutes is to promote social justice by protecting the disadvantaged.
Courts, in applying the law, also seem to be seeking to balance the scales to benefit the “little
guy” in dealing with big business, big labor, and big government.
Disputes, which inevitably arise in the society as complex and interdependent as ours, may
involve criminal matters and none criminal matter. Because dispute threatens the stability of
society, the law gas established an elaborate and evolving set of rules to resolve them. In
addition, the legal system has instituted societal remedies, usually administered by court, in
place of private remedies such as revenge.
The other essential function of law is preservation of the state. In our system, law ensures that
change in leadership and the political structure are brought about by political action such as
elections, legislation, and referenda, rather than by revolution, sedition, and rebellion.
1.1.1.3 Normatively of Law
The law is pervasive. It interacts with and influences the political, economic, and social
system of every civilized society. It permits, forbids, and/or regulates particularly every
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known human activity and affects all persons either directly or indirectly. Law is, in part,
prohibitory: certain acts must not be committed. For example, one must not steal; one must
not murder. Law is also partly mandatory: certain acts must be done or be done in prescribed
way. Taxes must be paid; corporations must make and file certain reports with state
authorities; traffic must keep to the right. Finally law is permissive: individuals may choose to
perform or not to perform certain acts. Thus one may or may not enter into a contract; one
may or may not dispose of one’s estate by will.
1.1.1.4 Generality of Law
Law is a general rule of human conduct. It does not specify the names of specific persons or
behaviours. Hence, its generality is both in terms of the individuals governed and in terms of
the social behaviour controlled. The extent of its generality depends on-on whom the law is
made to be applicable. Consider the following illustrations.
# Illustration
1. “Everyone has the right to life, liberty and the security of a person.” [Art 3, UNDHR;
1948].
2. “Every person has the inviolable and inalienable right to life, the security of person
and liberty.” [Article 14 of the 1995 Constitution of the Federal Democratic Republic
of Ethiopia].
Under these two illustrations, the subjects of laws are given in general terms. However, the
extents of the generalities decrease from universality to an individual person. Generality of the
subject of the law may serve two purposes. Firstly, it promotes uniformity and equality before
the law because any person falling under the group governed by the law will be equally
treated under the same law. Secondly, it gives relative permanence to the law. Since it does
not specify the names of the persons governed, the same law governs any person that falls in
the subject on whom the law is made to be applicable. There is no need to change the law
when individuals leave the group. This is what can clearly be seen from the fifth illustration.
Even if the former president’s term of office has lapsed, the same law governs the present and
future presidents without any need to change the law. The permanence of law is indicated as
relative for there is no law made by person, which can be expected to be applicable eternally.
Generality of law, as indicated above, does not only refer to the subjects governed but also the
human conduct, which is controlled. The human conduct in any law is given as a general
statement on possible social behaviour. It does not refer to any named specific act like
stealing, killing by shooting and killing by spearing. Just a law can govern millions of similar
acts and that saves the legislator from making millions of laws for similar acts, which may
make the law unnecessarily bulky.
1.1.1.5 Legal Sanction
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The primary function of the legal system is to make sure that legal rules are enforced.
Sanctions are the means by which the law enforces the decision of the courts. Without
sanctions, laws would be ineffectual and unenforceable.
An example of a sanction in a civil (noncriminal) case is the seizure and sale of the process of
a debtor who fails to pay a court ordered obligation, called judgment. Moreover, under certain
circumstances a court may enforce its order by finding an offender is contempt and sentence
to jail until he obeys the court’s order. In criminal case, the principal sanctions are the
imposition of fine, forced labor, imprisonment and capital punishment.
1.1.2 Classification of Law
Because the subject is vast classifying the law into different categories is helpful. Though a
number of classifications are possible, the most useful categories are: public law and private
law, civil law and criminal law and substantive and procedural laws
1.1.2.1 Public Law and Private Law
Law can generally be classified as public law or private law. Public law applies to everyone. It
is law that has been created by some legitimate authority with the power to create law, and it
has been “handed down” to the people within its jurisdiction. In the Ethiopia, the lawmaking
authority itself is also subject to those laws, because no one is “above” the law. If the law is
violated, penalties can be levied against the violator. These penalties are also “handed down”
from some recognized source of authority. Of course, people in the Ethiopia may participate
in many law-creating activities. For instance, they may vote in elections for legislators, who,
in turn, create legislation. Likewise, if people have a legal claim, their case may be heard by
the judiciary.
Three main areas of public law are criminal, administrative, and constitutional law. Criminal
law is the body of rules under which certain acts or omissions are punished by the state. Its
function is to maintain public safety and order for the whole of society. The state has this
responsibility because an offence is seen as being against the whole community even if only
one individual is affected. This is because the offence is seen to damage the moral order of
society.
Administrative law is the area of law that deals with government powers and decisions made
by government bodies. Administrative law cannot be used to challenge all government
dealings, for example policy decisions and the giving of advice. An example of a decision that
cannot be challenged is an increase in taxes. However, the actions of the departments that are
set up to administer these policy decisions can be challenged under administrative law. In this
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way, a taxpayer could challenge his or her tax assessment under administrative law, on certain
specific grounds.
It’s important to note, however, that not all law is public law. Private law is typically
understood to be law that is binding on specific parties. For instance, parties to a contract are
involved in a private law agreement. The terms of the contract apply to the parties of the
contract but not to anyone else. If the parties have a contract dispute, they will be able to use
dispute-resolution methods to resolve it. This is because both parties of the contract recognize
the judiciary as a legitimate authority that can resolve the contract dispute. However,
regardless of the resolution, the terms of the contract and the remedy for breach will apply
only to the parties of the contract and not to everyone else.
1.1.2.2 Civil Law and Criminal Law
Civil law is a form of private law and involves the relationships between individual citizens. It
is the legal mechanism through which individuals can assert claims against others and have
those rights adjudicated and enforced. The purpose of civil law is to settle disputes between
individuals and to provide remedies; it is not concerned with punishment as such. The role of
the State in relation to civil law is to establish the general framework of legal rules and to
provide the legal institutions to operate those rights, but the activation of the civil law is
strictly a matter for the individuals concerned. Contract, tort and property law are generally
aspects of civil law.
Criminal law, on the other hand, is an aspect of public law and relates to conduct which the
State considers with disapproval and which it seeks to control and/or eradicate. Criminal law
involves the enforcement of particular forms of behavior, and the state, as the representative of
society, acts positively to ensure compliance.
A crucial distinction between criminal and civil law is the level of proof required in different
types of cases. In the criminal case, the prosecution is required to prove that the defendant is
guilty beyond reasonable doubt, whereas in a civil case, the degree of proof is much lower and
has only to be on the balance of probabilities. This difference in the level of proof raises the
possibility of someone being able to succeed in a civil case, although there may not be
sufficient evidence for a criminal prosecution.
1.1.2.3 Substantive and Procedural Laws
Substantive law is that which defines a right while procedural law determined the remedies.
Procedural law is also called ‘law in action’ as it governs the process of litigation. Substantive
law is concerned with the administration of justice seeks to achieve while procedural law
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deals with the means by which those ends can be achieved. For example, law of contract,
transfer of property, negotiable instruments, crimes etc are substantive laws whereas the laws
of civil procedure or criminal procedure are procedural laws. The rules that are provided
under procedural law are inseparable from the substantive law. For example, civil procedure
law is inseparable from the civil; code that deals about contract, filiations, adoption, and the
like.
1.1.3 Sources of Law
 Where the law does comes from?
___________________________________________________________________________
___________________________________________________________________________
Under this topic we are going to answer the question “where the law comes from”. In this
regard we give emphasis on the federal and state laws and the decision of the federal Supreme
Court cassession bench as a formal source of law.
1.1.3.1 Constitution
The Constitution of the Federal Democratic Republic of Ethiopia clearly provides for the
individual and people’s fundamental freedoms and rights, in its preamble, as the basis to live
together without any discrimination. Accordingly, Chapter 3 of the Constitution is devoted to
fundamental rights and freedoms (Arts. 13-44). Thus, we can say that the Constitution is the
source for the rules on human rights and freedoms.
A constitution, as a supreme law in the country, serves as source for other laws as well. The
Constitution, being brief by its very nature, contains only the basic principles of law. Then,
these basic principles are needed to be given in other legislation in detail. For example, the
FDRE Constitution laid down the equality of both sexes, i.e. female and male under Article 34
with regard to ‘marital, personal and family rights’. Thus, women and men have equal rights
at the time of concluding a marriage, during marriage and at the time of divorce [Art. 34(1) of
the FDRE Constitution]. Both women and men are allowed to marry when they attain
marriageable age defined by law.
Here, the Constitution does not and not expected to define marriageable age and other
essential conditions of marriage: a subordinate law would do perform that job. Accordingly,
the legislature enacted the 2000 Revised Family Code at the federal level. The Revised Family
Code has incorporated detailed provisions that ensure the equality of women and men that is
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recognized under the Constitution. For example, according to Article 6 of the Revised Family
Code, marriage should be concluded on the free consent of a woman and a man. This
provision ensures the equality of both sexes.
In criminal cases, arrested persons have the right to be released on bail. This is a constitutional
principle enshrined under Article 19(6) of the FDRE Constitution. The Constitution only
envisages the details to be given under other law where by courts of law “may deny bail or
demand adequate guarantee for the conditional release of the arrested person” (Art-19(6) of
the Constitution). The detailed rules have been given under the Criminal Procedure Code (See
Arts, 63-79 of the Cri.P.C). It is also provided under Articles 4 and 5 of the Revised Anti-
Corruption Special Procedure and Rules of Evidence Proclamation No 434/2005. According
to Article 4(1) of the same, an arrested person charged with a corruption crime may not be
released where the crime s/he is of suspected is punishable for more than ten years.
1.1.3.2 Federal and Regional Laws
Laws that are enacted by the Federal and regions are also used as sources of Ethiopian laws.
At the Federal level, the House of Peoples’ Representative enacts laws such as a law on
commerce and foreign trade, natural resources, nationality, immigration, patents, copyrights
etc. (See Art. 55 of the FDRE Constitution). All such laws are enacted in the form of
proclamation. These proclamations incorporate laws that are intended to guide the behaviours
of the community in respective sectors of life.
Likewise, regions are empowered to promulgate proclamations with regard to matters that full
under their respective jurisdictions. For example, they could enact laws on trade in their
respective localities (see Art. 52(2) (b) of the Constitution). For example, family law is
enacted at the federal level. Regions also came up with their own family laws.
The federal Government enacted Criminal Law while Regions have the power to enact penal
legislations that are important to regulate peace and order in their respective jurisdictions [Art
55(5) of FDRE Constitution]. In general, federal and regional laws are sources of law in
Ethiopia.
1.1.3.3 Court Decision
Today, the Supreme Court Cassation division is empowered to render a decision that is
binding on federal as well as regional council at all levels [Proc. No. 454/2005, Art 4]. A
decision to be binding must be 1) rendered by the cassation division of the Supreme Court; 2)
the members of judges must not be less than five; 3) the decision should be with regard to
interpretation of laws [Proc. No. 454/2005, Art 4]. In interpreting laws, the Supreme Court
cassation division will create rules (laws). Therefore, the decision of the cassation division is a
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source of laws in Ethiopia so long as the requirements are fulfilled. In general, judgements
were/are used as source for Ethiopian laws.
UNIT ONE - SECTION TWO
1.2 Rule of Law and its Importance to Business
Section overview
Effective managers and employees must develop knowledge of both law and business because
people involved in business also are involved in, and greatly affected by, the law concerning
business. With each passing day, this link between law and business grows even stronger.
This section begins with the role of rule of law in general. Then after considers the importance
of rule of law in business.
Learning objectives
 Define rule of law
 Identify the role of rule of law
 Determine why rule of law is important to business.
 When you hear the term “rule of law,” what comes to mind?
___________________________________________________________________________
___________________________________________________________________________
It may seem like an ambiguous term, but it is used frequently in legal and governance circles.
Rule of law is a system of laws under which the people and the government are bound, which
allows predictability and restraint of government action.
A rule of law legitimizes the law. It establishes clear rules of behaviour, establishes (or
captures) precedent, and seriously undermines any defence of ignorance of the law. Moreover,
it holds people to the same standards, though in many ancient rules of law, the standards
differed depending on the person’s classification. For instance, men often had different rights
than women. Slaves were a different legal class than those who were free, and indentured
servants were often a different classification altogether. When people are held to the same
standards, we can see systems of fairness (that is, equal justice under the law) emerging, at
least for those within the same class.
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Rule of law systems establish authority, create expectations for behavior, and establish redress
for grievances and penalties for deviance. Governance of conflict and the attainment of peace
among the governed are primary goals of rule of law systems. For example, securing peace is
a goal within the Ethiopian rule of law system. The Federal Constitution’s preamble states,
we, the nations, nationalities and peoples of Ethiopia: strongly committed, in full and free
exercise of our right self-determination, to building a political community founded on the rule
of law and capable of ensuring a lasting peace, guaranteeing a democratic order, and
advancing our economic and social development.
As you may have guessed by now, the rule of law is important to business. Can you imagine
trying to do business without being able to have any reasonable expectations of other people’s
behavior? Would you be willing to conduct business if you had no legal means by which to
protect your property interests? And in the case of a dispute, without a rule of law system,
there would be no established way of resolving it. Without the rule of law, business would be
chaotic. This section provides some overarching examples of why the rule of law is important
to business.
Before getting to those examples, imagine this: What if you did not know how to play chess,
but you tried to play anyhow? You would probably become frustrated very quickly, because
you would see no logic in the movement of your opponent’s pieces, and you would not be
permitted to move some pieces like you might wish to. Sometimes you would see your
opponent move his or her knight two spaces in one direction and then one space in another.
Other times, you would see your opponent move his or her bishop diagonally. Moreover, you
would not understand what you were and were not permitted to do. You would also not know
how to penalize an opponent who moved his or her pieces incorrectly to gain advantage or to
take something of yours. This is analogous to what it’s like to do business without
understanding the rules of the game.
The rule of law establishes rules that people and businesses must follow to avoid being
penalized. The rule of law not only allows people to understand what is expected of them in
their personal capacities but also sets forth rules for businesses so that they, too, know what is
expected of them in their dealings and transactions. In addition, it restrains government and
others from infringing on property rights. Should disputes arise, the rule of law provides a
peaceful and predictable means by which those disputes can be resolved.
The rule of law provides guidance and direction in every area of business. For example, it
provides a means to bring a complaint against another party to a neutral decision maker so that
a decision can be made regarding the dispute. Because of our rule of law system, we know
that we are permitted to file a complaint in the proper court to commence litigation. Or we can
try an alternative method of dispute resolution if we do not wish to engage in litigation. We
know that we are permitted to do these things because our rule of law system allows us to do
18 | P a g e
them. Moreover, we can expect some sort of resolution when we institute such a proceeding.
This expectation is reasonable only because we have a rule of law.
Additionally, in the Ethiopia, the rule of law provides a system of federalism, where state and
federal laws coexist. This allows people and businesses to determine which system of
government pertains to them and which jurisdiction they belong to. The rule of law also
governs contracts between people and business men. Under the civil code, certain elements of
a contract must exist for the contract to be enforceable.
Additionally, because we have a rule of law system, employers know the rules of the game
regarding their relationship to employees, and employees know the rules with respect to their
obligations to employers. Likewise, business partners, members of boards of corporations, and
members of limited liability companies all know what is expected of them in their roles vis-à-
vis the business and other people within their organizations. When someone does something
that is not permitted, there is legal recourse.
The rule of law also provides protection for property. Imagine if we did not have protection
for non tangible property, such as intellectual property like trade secrets, trademarks, or
copyrights. It would be very difficult to protect this type of property if we did not know the
rules of the game. People would not have the incentive to create or share new intellectual
property if they had no reasonable expectation of being able to protect it or of being rewarded
for their creations. Likewise, the rule of law allows us to protect tangible property without
having to go to extraordinary measures. For instance, if we had no rule of law system to
convey and maintain legal ownership to us for our real or personal property, we might be
forced to hire expensive private security forces to guard our property when we could not be
there to physically protect it ourselves.
Businesses also rely on the rule of law to govern their debtor and creditor relationships. And,
if financial matters do not go as anticipated, our legal system allows businesses to ask the
court for protection from creditors under our bankruptcy law. This allows businesses to
protect their property from creditor repossessions or foreclosures while they get back on track
financially.
The rule of law also protects businesses from government. Since everyone is subject to the
rule of law, this means that government itself may not overextend its reach when regulating or
investigating businesses. Government must play by the rules, too. For example, imagine that
our government could do anything, without any limits or jurisdictional restraints. A business
operating in such a climate might find itself subject to government closure on a whim, or
excessive taxes, or requirements to pay bribes to gain permits to do business. Our rule of law
system prevents such abuses.
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 Do you think that the rule of law important to the business?
___________________________________________________________________________
___________________________________________________________________________
As you may have guessed by now, the rule of law is important to business. Can you imagine
trying to do business without being able to have any reasonable expectations of other people’s
behavior? Would you be willing to conduct business if you had no legal means by which to
protect your property interests? And in the case of a dispute, without a rule of law system,
there would be no established way of resolving it. Without the rule of law, business would be
chaotic. This topic provides you some overarching examples of why the rule of law is
important to business.
Before getting to those examples, imagine this: What if you did not know how to play chess,
but you tried to play anyhow? You would probably become frustrated very quickly, because
you would see no logic in the movement of your opponent’s pieces, and you would not be
permitted to move some pieces like you might wish to. Sometimes you would see your
opponent move his or her knight two spaces in one direction and then one space in another.
Other times, you would see your opponent move his or her bishop diagonally. Moreover, you
would not understand what you were and were not permitted to do. You would also not know
how to penalize an opponent who moved his or her pieces incorrectly to gain advantage or to
take something of yours. This is analogous to what it’s like to do business without
understanding the rules of the game.
The rule of law establishes rules that people and businesses must follow to avoid being
penalized. The rule of law not only allows people to understand what is expected of them in
their personal capacities but also sets forth rules for businesses so that they, too, know what is
expected of them in their dealings and transactions. In addition, it restrains government and
others from infringing on property rights. Should disputes arise, the rule of law provides a
peaceful and predictable means by which those disputes can be resolved.
The rule of law provides guidance and direction in every area of business. For example, it
provides a means to bring a complaint against another party to a neutral decision maker so that
a decision can be made regarding the dispute. Because of our rule of law system, we know
that we are permitted to file a complaint in the proper court to commence litigation. Or we can
try an alternative method of dispute resolution if we do not wish to engage in litigation. We
know that we are permitted to do these things because our rule of law system allows us to do
them. Moreover, we can expect some sort of resolution when we institute such a proceeding.
This expectation is reasonable only because we have a rule of law.
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Additionally, in Ethiopia, the rule of law provides system of federalism, where state and
federal laws coexist. This allows people and businesses to determine which system of
government pertains to them and which jurisdiction they belong to.
Because we have a rule of law system, employers know the rules of the game regarding their
relationship to employees, and employees know the rules with respect to their obligations to
employers. Likewise, business partners, members of boards of corporations, and members of
limited liability companies all know what is expected of them in their roles vis-à-vis the
business and other people within their organizations. When someone does something that is
not permitted, there is legal recourse.
The rule of law also provides protection for property. Imagine if we did not have protection
for non-tangible property, such as intellectual property like trade secrets, trademarks, or
copyrights. It would be very difficult to protect this type of property if we did not know the
rules of the game. People would not have the incentive to create or share new intellectual
property if they had no reasonable expectation of being able to protect it or of being rewarded
for their creations. Likewise, the rule of law allows us to protect tangible property without
having to go to extraordinary measures. For instance, if we had no rule of law system to
convey and maintain legal ownership to us for our real or personal property, we might be
forced to hire expensive private security forces to guard our property when we could not be
there to physically protect it ourselves.
The rule of law also protects people from businesses. For example, the House of Peoples
Representative has enacted consumer protection legislation that prevents certain monopolizing
market and illegal market practices. Additionally, businesses are prohibited from using
deceptive advertising and are held responsible when they manufacture or sell defective
products that cause injury.
The rule of law also protects businesses from government. Since everyone is subject to the
rule of law, this means that government itself may not overextend its reach when regulating or
investigating businesses. Government must play by the rules, too. For example, imagine that
our government could do anything, without any limits or jurisdictional restraints. A business
operating in such a climate might find itself subject to government closure on a whim, or
excessive taxes, or requirements to pay bribes to gain permits to do business. Our rule of law
system prevents such abuses.
Without a rule of law system, people would have to exact satisfaction for the wrongs
committed against them on their own. They would have to physically protect their own
property. This would lead to a breakdown in social structure, and it would result invigilate
justice and physical strength playing primary roles in dispute resolution.
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Activity 1
1. Explain a major criticism of natural law jurisprudence,
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
2. Describe legal realism.

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
3. Discuss the nature of substantive and procedural law by supporting with examples.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
4. Show how the rule of law protects businesses from government.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
UNIT SUMMARY
Different theories of jurisprudence inform our understanding of what the law is. Examining
legal issues through the lenses of different theories of jurisprudence allows us to see how
different outcomes can be defended. Law has its own unique nature and function and it can be
categorized into public law and private law, civil law and criminal law and substantive and
procedural laws. The law comes from the federal and state laws and the decision of the federal
Supreme Court cassession bench as a formal source of law.
Rule of law is a system of published laws under which the people and the government are
bound, which allows predictability and restraint of government action. A rule of law system
allows people to understand what is expected of them. It provides a system that allows many
people with different beliefs and cultures to live together in peace, by providing methods by
which conflicts can be resolved. The rule of law system in Ethiopia sets the rules of the game
for doing business. It creates a stable environment where plans can be made, property can be
protected, expectations can exist, complaints can be made, and rights can be protected.
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Violation of the law can result in penalties. The rule of law protects business, protects
consumers from harmful business practices, and limits government from engaging in abusive
practices against businesses.
Checklist
Now that you have completed the first unit, you need to check whether you have grasped
the concepts discussed in this unit. If your answer to the questions below is No, then you
have to go back and read the relevant sub-section again.
Accomplishments Yes No
Can You Know the meaning and definition of law
Examine the conceptual and theoretical approach of law
Identify the basic feature of law
Differentiate the different categories of law
Understand why law is important in business
Commandment!
So as to pass through this step, at least you have to accomplish or perform 90% of the
above requirements! If not, go back and get done the unfulfilled part!
Self-Check Exercise 1
Part I:- True/false
1) Law is essential to any society in that it provides the rules by which people and
businesses interact.
2) The law results from a continuous effort to balance, through workable sets of rules
3) Law is a set of rules that are enforced by an individual.
4) Like positivists, legal realists believe that law is the product of human making.
5) Private law applies to everyone.
6) The rule of law does not provide guidance and direction in every area of business.
7) Businesses also rely on the rule of law to govern their debtor and creditor relationships.
Part II:- Choose

1. Civil Procedure is categorized under
a) Administrative law
b) Criminal law
c) Constitutional law
d) All
e) None
2. The law that defines the rights and duties of the individuals is__________ law
a) Criminal
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b) Procedural
c) Substantive law
d) Civil
e) A and B
f) None of the above answers
3. If one of the parties to the dispute is the state, the law that regulates this dispute is
___________ law.
a) Civil
b) Public
c) Private
d) All
e) None
4. The public law that imposes a sanction on a defendant is __________ law.

a) Civil Code
b) Public
c) Criminal
d) Administrative
e) A and C
5. Law concerns about:

a) The rights and duties of all individuals
b) The safety and security of all people
c) Protection of all their people
d) All are answers
e) None are answers
6. Which one of the following is true about the purpose of law?

B. Keeping the peace and enforcing standards of conduct
C. promote social justice by protecting the disadvantaged
D. preservation of the state
E. All
7. Which one is not the main area of public law?

A. Criminal
B. Administrative
C. Constitutional law
D. Family law
8. Which one is true about the constitution?
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A. It is the source for the rules on human rights and freedoms
B. It is a supreme law of the country
C. It contains only the basic principles of law
D. All
9. Which one of the following is not a source of law?

A. Constitution
B. Legislations
C. Court decision
D. All
E. None
Part III:-Fill in the blank space

1. ______________________ concerns the relations of individuals with one another as
such relations affect the social and economic order.
2. The life of the law has not been________________________but has been experience.
3. _________________________has been debated for centuries, giving rise to a general
coalescence of ideas to create particular schools of thought.
4. ______________________________is the area of law that deals with government
powers and decisions made by government bodies.
5. ___________________________establish authority, create expectations for behavior,
and establish redress for grievances and penalties for deviance.
Further readings/references
 Comparative Legal Systems- MSN Encarta, 12/5/2006
 Rene David and John E. C. Brierley, Major Legal Systems in the World today An
Introduction to the Comparative Study of Law
 Paranjape, N. V., STUDIES IN JURISPRUDENCE AND LEGAL THEORY,( Third
Edition), Central Law Agency, Allahabad, (2001).
 Paton, George Whitecross, A TXT BOOK OF JURISPRUDENCE, (Reprinted),
Oxford, At the Clarendon Press,( 1967)
 Vago, Steven. Law and Society (7th Ed), New Jersey, 2003.
 Woldetensay Wodemelak, Perspectives on the Ethiopian Legal System, Addis Ababa,
Ethiopia (2005),
UNIT TWO
Law of Contract
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Unit Introduction
We enter into contracts day after day. Taking a seat in a bus amounts to entering into a
contract. When you put a coin in the slot of a weighing machine, you have entered into a
contract. You go to a restaurant and take snacks; you have entered into a contract. In such
cases, we do not even realize that we are making a contract. In the case of people engaged in
trade, commerce and industry, they carry on business by entering into contracts. The law
relating to contracts is to be found in the Civil Code of 1960.
The law of contracts differs from other branches of law in a very important respect. It does not
lay down so many precise rights and duties which the law will protect and enforce; it contains
rather a number of limiting principles, subject to which the parties may create rights and
duties for themselves and the law will uphold those rights and duties. Thus, we can say that
the parties to a contract, in a sense make the law for themselves. So long as they do not
transgress some legal prohibition, they can frame any rules they like in regard to the subject
matter of their contract and the law will give effect to their contract. This section begins with
definition and formation of contract and ends with termination contract. Under this unit we are
going to formation of contract, effect of contract and termination of contracts. Read all
sections carefully and attempt to solve the activity questions and as well as self-check review
questions given in each unity before visiting feedback answers.
UNIT TWO - SECTION ONE
2.1 Definition of Contract, the Need for Contract Law and Formation of
Contract
Section overview
Ask most people to describe a contract, and they will talk about a piece of paper the
documents you sign when you start a job, buy a house or hire a television, for example. While
it is certainly true that these documents are often contracts, in law the term has a wider
meaning, covering any legally binding agreement, written or unwritten. In order to be legally
binding, an agreement must satisfy certain requirements, which will be discussed under this
very section.
Section objectives
 Define contract;
 Determine essential condition of valid contract;
 Understand how and when contract is said to be formed; and
 Know how contract comes to an end.
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2.1.1 Definition of Contract
 Dear student, do you know how the civil code defines the term contract?
___________________________________________________________________________
___________________________________________________________________________
Article 1675 of the Civil Code defines a contract as an agreement whereby two or more
persons as between themselves create, vary or extinguish obligation of a proprietary. From
this definition we can drive the following elements;
A. Agreement
As already mentioned, to constitute a contract there must be an agreement. An agreement is
composed of two elements i.e. offer and acceptance. The party making the offer is known as
the offeror, the party to whom the offer is made is known as the offeree. Thus, there are
essentially to be two parties to an agreement. They both must be thinking of the same thing in
the same sense. In other words, there must be consensus-ad-idem.
Thus, where ‘A’ who owns 2 Toyota cars x and y wishes to sell car ‘x’ for Birr 30,000. ‘B’,
an acquaintance of ‘A’ does not know that ‘A’ owns car ‘x’ also. He thinks that ‘A’ owns only
car ‘y’ and is offering to sell the same for the stated price. He gives his acceptance to buy the
same. There is no contract because the contracting parties have not agreed on the same thing
at the same time, ‘A’ offering to sell his car ‘x’ and ‘B’ agreeing to buy car ‘y’. There is no
consensus-ad-idem.
B. Freedom of contract
Parties are the best judges of their own interests; they should be free to make contracts on any
terms they choose on the assumption that nobody would choose unfavourable terms. In the
same manner they can vary the existing terms of obligation or terminate it if they wish. Once
this choice is made, the job of the courts is simply to act as an umpire, holding the parties to
their promises; it is not the courts’ role to ask whether the bargain made was a fair one.
C. Two or more persons

To form an agreement, there must be at least two persons one offeror and the other offeree and
the maximum number of persons engaged in contract is unlimited. What is not possible here is
that one cannot conclude a contract with him or her or itself.
D. Consideration
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The agreement must be supported by consideration on both sides and calculable in terms
money. Each party to the agreement must give or promise something and receive something
or a promise in return. Consideration is the price for which the promise of the other is sought.
There must be some kind of exchange between the parties. If, I promise to hand over my car
and you promise to pay me a sum of money in return, we have each provided consideration on
QUID-PRO-QUO basis i.e. something in return.
# Illustration 1
Imagine that you have accepted a new position with a company. You have a valid
employment contract that you’ve successfully negotiated prior to beginning work. All terms
of the contract are valid, and both parties are bound to the contract. Basically, this means that
you have agreed to work for a specified period of time, and your employer has agreed to
compensate you with a specified salary and benefits in exchange for your work. So far, so
good, right?
# Illustration 2
Now, imagine that during your first week, your boss appears in your office and asks you to
sign a new contract that, in essence, is a noncompeting agreement. This means that your
employer now wants you to sign a new contract agreeing not to compete with the company if
you decide to terminate your employment arrangement. The employer wants you to make this
promise, but the employer does not offer anything additional in return. For the purposes of
this example, let’s say that you sign the new agreement. Is this new agreement valid and
binding on you? Probably not. Why? Because the company has not suffered any new legal
detriment or obligation as a result of the contract.
You have agreed to refrain from competing with the company if you leave, but the company
itself has not given you anything in return for your promise. To make this contract binding
against you, your employer should have provided consideration. For example, it could have
asked you to sign the non- compete agreement in consideration of an additional one thousand
dollars of salary per year. Then, the contract would have consideration and it would have a
much greater chance of being found to be valid. Better yet, the company should have
negotiated then non-compete agreement along with your original contract before you assumed
your new position.
2.1.2 The Need of Contract Law
 Why do we need contract law?
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___________________________________________________________________________
___________________________________________________________________________
The obvious answer is because promises should be binding. Why then do we need laws
specifically designed to enforce promises involving an exchange? The major reason appears to
be the kind of society we live in, which is called a market capitalist society. In such a society,
people buy and sell fairly freely, making their own bargains, both on the small scale of
ordinary shoppers in super-markets, and on the much bigger one of a project such as the
construction of the Channel Tunnel, which involved many different parties, each buying and
selling goods and services. Although, as we shall see, there are areas in which government
intervenes, in general we choose what we want to buy, who from and, to some extent at least,
at what price.
It would be impossible to run a society on this basis if promises were not binding. Long-term
projects show this very clearly contractors working on the Channel Tunnel, for example,
would have been very reluctant to invest time and money on the project if they knew that the
British and French Governments could suddenly decide that they did not want a tunnel after
all, and not be expected to compensate the contractors. On a smaller scale, who would book a
package holiday if the tour operator was free to decide not to fly you home at the end of it?
How would manufacturers run their businesses if customers could simply withdraw orders,
even though the goods had been made especially for them? A market economy will only work
efficiently if its members can plan their business activities, and they can only do this if they
know that they can rely on promises made to them.
In fact, contract law rarely forces a party to fulfill contractual promises, but what it does do is
try to compensate innocent parties financially, usually by attempting to put them in the
position they would have been in if the contract had been performed as agreed. This has the
double function of helping parties to know what they can expect if the contract is not
performed, and encouraging performance by ensuring that those who fail to perform cannot
simply get away with their breach.
2.1.3 The Formation of a Contract
 Dear student, do you know how the contract is formed?
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A contract is a legally enforceable promise. Therefore, it is important to know whether

promises made are legally enforceable. You certainly have made many promises in your life.
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You have probably broken a few promises, too. For example, if you promised your best friend
that you would be best friends forever, but then your relationship changed, we might say that
is a broken promise. However, you would not be held legally liable to pay damages for
breaking that promise. On the other hand, if you promised your bank that you would make
payments to it in exchange for the bank loaning money to you to purchase a car, and if you
broke that promise by failing to pay as scheduled, then you have broken a legally enforceable
promise. The bank could seek damages from you to make itself whole again. What is the
difference between these two promises? Why would you have to pay damages to the bank but
not to your former best friend? More specifically, why is one considered a breach of contract
and the other simply a broken promise?
Under this topic we are going to explore contract formation. We can examine the elements of
formation to determine whether the contract is valid or whether it suffers some deficiency that
renders it not legally enforceable.
2.1.3.1 Consent of Parties
Although each of the requirements for forming a contract is essential to its existence, mutual
assent is so basic that frequently a contract is referred to as the agreement between the parties.
In essence a contract in itself implies a meeting of minds, and from the moment this meeting
occurs a contract is formed. Thus, the consensual principle is a principle stating that a contract
is considered to come into existence once the parties reach a mutual consensus. Mutual
consensus is composed of two elements i.e. offer and acceptance (See Art.1681 and the
following provisions of the civil code). For a contract to exist, usually one party must have
made an offer, and the other must have accepted it. Once acceptance takes effect, a contract
will usually be binding on both parties, and the rules of offer and acceptance are typically
used to pinpoint when a series of negotiations has passed that point, in order to decide whether
the parties are obliged to fulfill their promises.
To form a contract, the parties must manifest their agreement objectively. The important thing
is what the parties indicate to one another by spoken or written words or by conduct. The law
applies an objective standard and is, therefore, concerned only with the assent, agreement or
intentions of a party as it reasonably appear from his words or actions. The law of contract is
not concerned with what a party may have actually thought or the meaning that he intended to
convey, even if his subjective understanding or intention differed from the meaning he
objectively indicated by word or conduct. For example Lelise seemingly offered to sale to
Sagni Toyota automobile but intends to offer and believes that she is offering her Ford
automobile, and Sagni accepts the offer reasonably believing it was for Toyota, a contract has
been formed for the sale of Toyota, subjectively there is no agreement as to the subject matter,
but objectively there is a manifestation of agreement, and the objective manifestation is
binding.
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A. Offer
An offer is an expression of readiness to do something which, if followed by the
unconditional acceptance of another person results in a contract. The person making an offer
is called the offeror, and the person to whom the offer is made is called the offeree. The
communication of an offer to an offeree does not of itself confer any right or impose any duty
on either of the parties. The offeror by making his offer simply considers upon the offeree the
power to create the contract by accepting the offer. Until the offeree exercises this power, the
outstanding offer creates neither right nor responsibility.
How an offer is made? It can be made by (word written or oral). The written offer can be
made by letters, telegrams, text messages, advertisements, etc. The oral offer can be made
either in person or over telephone. An offer can also be made by conduct. The offer may be
made by positive acts or signs so that the person acting or making sign means to say or
convey. However silence of a party can in no case amount to offer by conduct.
# Illustrations
1. Chaltu proposes, by letter, to sell a house to Beshatu at a certain price. This is an offer
by an act by written words (i.e., letter). This is also an express offer.
2. Chaltu proposes, over telephone, to sell a house to Beshatu at a certain price. This is an
offer by act (by oral words). This is an express offer.
3. Gemechu owns a bus which renders transport service to people from Finfine to Batu.
The bus is the only vehicle to transport passenger from and to these towns. It is now in
kality bus station and waiting for passengers by opening its doors. This is an offer by
conduct to take passengers from Finfine to Batu. The driver need not speak or call the
passengers. The very presence of the bus at the bus station and the opining of its doors
signify his willingness to do an act with a view to obtaining the assent of the other. This
is an example of an implied offer.
The offer is completed only when, it is communicated to the offeree, certain, definite and not
vague and capable of creating legal relation.
# Illustrations
1. A offered to sell to B. ‘a hundred tons of oil’. The offer is uncertain as there is nothing
to show what kind of oil is intended to be sold.
2. A invited B to a dinner and B accepted the invitation. It is a mere social invitation.
And A will not be liable if he fails to provide dinner to B.
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 How long does an offer last?
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An offer is made with a view to obtain assent thereto. As soon as the offer is accepted it
becomes a contract. But before it is accepted, it may lapse, or may be revoked. Also, the
offeree may reject the offer. In these cases, the offer will come to an end. An offer may cease
to exist under any of the following circumstances
I. Reasonable length of time

The offer lapses after stipulated or reasonable time. The offer must be accepted by the offeree
within the time mentioned in the offer and if no time is mentioned, then within a reasonable
time. The offer lapses after the time stipulated in the offer expires if by that time offer has not
been accepted. If no time is specified, then the offer lapses within a reasonable time. What is a
reasonable time is a question of fact and would depend upon the circumstances of each case.
I. Rejection
An offer lapses when the offeree rejects it. If Abalu offers to sell Badhatu her car on Tuesday,
and Badhatu says no, Badhatu cannot come back on Wednesday and insist on accepting the
offer.
II. Counter-offer
A counter-offer terminates the original offer.
# Illustration
Kamal offered to sell his seed on farm for Birr 1,000, and the Shamsu responded by offering
to buy it at Birr 950 this is called making a counter-offer. The farm owner refused to sell at
that price, and when the plaintiff later tried to accept the offer to buy at Birr 1,000, it was held
that this offer was no longer available; it had been terminated by the counter-offer. In this
situation the offeror can make a new offer on exactly the same terms, but is not obliged to do
so.
III. Withdrawal of offer

The withdrawal of an offer is sometimes described as the revocation of an offer. An offer may
be withdrawn at any time up until it is accepted. It is not enough for offerors simply to change
their mind about an offer; they must notify the offeree that it is being revoked.
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B. Acceptance
An offer gives power of acceptance to another party, and it includes the agreement’s essential
elements, which must be definite and certain. For example, if an offeror says to you, “I offer
to sell you my scooter for four hundred dollars,” then that offer is valid. It contains the price,
the person to whom the offer is made, and the object of the offer (i.e., the scooter). It creates a
power of acceptance in you, the offeree.
Acceptance must be a mirror image of the offer to constitute valid acceptance. This means that
the acceptance must be precisely the same as the offer. If the acceptance is not precisely the
same, then it will fail to meet the requirements of an acceptance, and it will not constitute a
valid element of formation in contract. The offeror may say that “I want to sale my house for
400,000.00 Birr to accept the offer, the offeree could say something like this: “I agree to buy
your house for 400,000.00 Birr.” If a counteroffer is made, then that would not be acceptance,
because the counteroffer would not be a mirror image of the offer itself.
So, for example, if the offeree said, “I agree to buy your scooter for three hundred dollars,”
that would not be an acceptance. In fact, a counteroffer is a rejection of the offer. Once an
offeree rejects an offer either outright (e.g., by declining to accept) or through counteroffer,
the offeror is free to walk away from the failed negotiation. In this example, he no longer has
to sell his scooter at all, not even if the offeree changes his mind and agrees to pay four
hundred dollars. Likewise, if the offeror revokes an offer before the offeree accepts, then the
power of acceptance has been withdrawn by that revocation. The offeror would no longer
have to sell the item originally offered. If the offeror wished to limit the time that an offer was
valid, he could do so by limiting the time that the offer may be accepted. If the offer is not
accepted during that time, then the offeror is not required to honor any acceptance that is
made after expiration of the offer (look the preceding discussions on termination of an offer).
 customer?
Can advertisement create the power of acceptance in you, a potential
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The fact is that an advertisement is not an offer. It is simply an invitation to bargain.

Advertisements are requests for people to make offers. This places the power of acceptance on
the merchant, who is free to reject offers or to choose to whom he sells.
2.1.3.2 Capacity of Parties
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The legal capacity of a party to conclude the contract serves as the second important
requirement that must be satisfied before a contract can be considered valid. Generally, all
persons are legally eligible to enter into contract. There are some categories of people whose
power to make contracts is limited by law. The main categories are minors, and people
considered incapable of contracting because of mental disorders or drunkenness. Contracts are
of course not only made between individual people. In many cases, one or both parties will
actually be groups of people, such as companies, local authorities and other organizations.
Such groups are generally called corporations, and the contracting capacity of a corporation
depends on what type of corporation it is.
A contract concluded by the above persons is considered to be a voidable contract. It is

possible that a contract of this nature can be annulled by the court on the request of the
incompetent party that entered into the contract or his tutor. The nullification of contract based
upon the incompetence of the individual mentioned above, shall cause the assets and the
parties to be returned to the state they were in prior to the entry into the contract, on the
understanding, that anything granted or paid to the incompetent party, as a result of the
contract, may only be reclaimed, to the extent that any such payment that is still in the hands
of the incompetent party, or to the extent it appears that the settlement of payment has been
beneficial to him, or that he has applied or extended the enjoyment to his use.
2.1.3.3 The Object of Contract must be Possible, Legal and Moral
In general, anything that is tradable and determinable may become an object of a contract. A
subject matter of a contract can be comprised of rights, services, or goods whether existing
now or in the future.
Impossibility under Article 1678 of the civil code follows the old rule of impossibilium nulla
obligatio, stating that a contract is void which subsequently appears to be impossible at all
times to be executed and was so at the time of the conclusion of the contract. The terms of the
agreement should be capable of performance. An agreement to do an act impossible in itself
cannot be enforced. For instance, A agrees with B to discover treasure by magic. The
agreement cannot be enforced.
Additionally, for a contract to be valid, the subject matter of the contract must be for a legal
purpose. If a distributor of illegal drugs hires a pilot to fly his illegal cargo to a particular
place in exchange for payment, this is a contract for an illegal subject matter. If the drug
dealer fails to honor his agreement to pay, or if the pilot fails to honor his agreement to
transport the cargo, neither aggrieved party will find a remedy in our courts, even if the
elements of contract are all present and perfectly formed.
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2.1.3.4 Necessary Legal Formalities
Art.1719 of the civil code provides that unless otherwise provided, no special form shall be
required and a contract shall be valid where the parties agree. Where a special form is
expressly prescribed by law such form shall be observed. According to this provision, a
contract may be oral or in writing. If, however, a particular type of contract is required by law
to be in writing, it must comply with the necessary formalities as to writing, registration and
attestation, if necessary. If these legal formalities are not carried out, then the contract is not
enforceable at law.
The contract relating to the following are required by the law to be made in special form as
provided under Ats.1723, 1724 and 1725 of the civil code.
I. Contract creating or assigning rights in ownership or bare ownership on an immovable
or a usufruct servitude or mortgage of an immovable shall be in writing and registered
with the court or notary
II. Any contract by which an immovable is divided and compromise related to an

immovable shall be in writing and registered with the court or notary
III. Any contract binding the government or a public administration shall be in writing and
registered with the court, public administration or notary
IV. Contracts for a long period of time such as; contract of guarantee, insurance contract
and any other contract in respect of which such form is required by the law.
UNIT TWO - SECTION TWO
2.2 Performance, Nonperformance of Contract and its Remedies
Section overview
The section begins with performance as the most obvious way in which a contract is
discharged is by both parties performing their obligations under it. It is under this section we
will discuss, the meaning of non-performance and its remedies. Parties to a contract may
provide their own sanctions for failure to discharge obligations. Thus, the main concern of this
topic is the remedies available under the law. Then it will discuss the prerequisites for
invoking the remedies of non-performance, particularly the giving of default notice.
Section objectives
 Understand performance as major effect of contract;
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 Describe how contract is performed and who performs it;
 Define nonperformance of contact; and
 Discuss the legal remedies available for nonperformance.
2.2.1 Performance of Contract
Performance of contract means fulfilling one’s own obligation as agreed. If the obligation is to
“do”, doing what was provided in the contract exactly in the same way as provided, if the
obligation is “not to do” forbearing from doing what is forbidden by contract and if the
obligation is to “give” delivering the thing with its accessories on the agreed date and place is
called performance of a contract.
So the major questions during performance are ‘Who perform contract’? To whom should
contract be performed? What should be performed, when and where should it be performed?
Art 1740-1762 can be taken as interpretation of a contract by legislator since these provisions
are supplementary or complementary to parties’ agreement.
The contract can be performed by the debtor, his agent or by person authorized by court or
law (Art. 1740(2). The persons authorized by law are tutors, liquidators, trustees and person
authorized by court is either a curator or an interested creditor who wants to save the rights of
the debtor by performing his obligation. However; the law never mention about performance
of a contract by a third party not authorized by debtor, court or law.
However; we can easily argue that if the creditor accepts the payment, the debtor has no right
to stop third party from performing the obligation since the creditor has a right to assign his
right to a third party without the consent of a debtor (Art. 1962). In such case, if the debtor
insists on paying the debt, he can pay it to the person who paid the creditor (Art.1824). The
law refrains from including unauthorized third party in the list of Art.1740 (2) since
assignment of a right is a contract. A creditor is not duty bound to receive payment from a
person not authorized by debtor or court or law, he is free to accept or reject such payment
without any effect on his right against the debtor.
However; the creditor may sometimes insist that debtor himself should perform the obligation
(Art. 1740(1). This is when the contract or law expressly provides that the debtor shall
perform the contract personally. For example, Ethiopian labor law provides that the employee
should perform the contract personally. So, if certain construction company employees A as a
daily laborer, he cannot authorize his son or brother to carry out the labor work and the
company can refuse to accept A’s son or brother and dismisses A from work.
Moreover, the second case where personal performance becomes necessary is when the
creditor proves that personal performance is essential to him. The creditor can be able to prove
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such only when the obligation is obligation to “do” of a professional nature or art. For
example, a lawyer, or a doctor can not authorize a duty which he agreed to do. Moreover, a
musicians, painters, Poet, actor, dancer etc cannot authorize someone to perform his
obligation. Generally, creditor should accept performance either from the debtor, his agent or
person authorized by the court of law unless he proves that personal performance of the
contract is essential to him or contract law expressly provides personal performance.
 Where do you think of the place of performance?
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The civil code provides three alternatives; agreed place, residence of the debtor and place
where the thing situates. Here we can notice that the law tries to determine place of
performance by giving much emphasis to the intention of the parties. The law encourages the
parties to determine place of performance in their contract. Contractually agreed place should
include places that can be determined by reference to usage; equity and good faith (see
Art.1713). But if they fail to mention place of performance the law then resorts to search the
possible intention of the parties (implied agreement of the parties). By so doing it reached at
the conclusion that in case of definite thing the parties should be presumed to have agreed to
perform the contract at the place where such definite thing situate at the time of conclusion of
contract.(time of conclusion of contract is to be determined by reference to Art. 1692). We
have to notice here that there may be difference between place of conclusion of contract and
place where the definite thing situate at the time of conclusion of contract.
Moreover, the place where a thing situate at the time of conclusion of contract and at the time
of performance of a contract may be different i.e. the thing might have been shifted from the
place where it was at time of formation of contract. Although it is presumed that parties had
knowledge as to the where about of the definite thing at the time of conclusion of contract
concerning such thing (since most probably the creditor/debtor does not agree without seeing
the thing and the place where he saw the thing and the place where it situate at the time of
conclusion of a contract, most of the time, overlaps) lack of such knowledge never affect
place of performance.
The last resort of the law is to rule of interpretation in favor of the debtor. Such interpretation
leads to the residence of the debtor. By so doing the law exempts the debtor from
transportation cost, inconveniences and waste of working hours. So delivery of fungible
things should be made at the residence of the debtor (Art.1755 (2).
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However; the debtor may have more than one residence (Art 177(2). In such case the place of
performance is the principal residence and the adjective normal which is used by Art. .1755
(2) to qualify the noun residence should have the same meaning with the adjective principal
which is used by Art.177(2) to qualify the same noun. Generally Ethiopian civil code advises
the parties to exercise their freedom of contract and determine place of performance. But if
they fail to do so the law imports the old maxim, debt is not portable but fetchable i.e. the
creditor has to go to either to the place where the definite thing situate or to the residence of
the debtor. The claimant has to his claim and his claim never come to him.
 Can you assume the time of performance of contract?
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Time of performance is very important to determine transfer of risk (in case of contract that
transfer ownership such as sales and donation see Art.1758), cost of maintenance and
preservation (see Art.1779-1783) and most importantly to claim damage for non-performance.
Although time is not the only cause for nonperformance, when we think of non-performance
the first thing that comes to our mind is probably time of performance. Time of performance
greatly affects the benefit parties expect to derive from the contract. This is especially true
when there is market instability which has become the feature of modern economy. The
importance of time also depends on the nature of the contract or obligation of the parties.
Time of performance generally reminds us an Amharic saying which goes as follows; ‘I am
dying this evening but the harvest is in the coming summer.’
Like in place of performance, parties are advised to determine time of performance. So

performance should be made at agreed time (Art.1756 (1). However the law still plays the gap
filling role. As indicated under Art. 1695(1) the law remedies the deficiency of the agreement
of the parties. Therefore; where there is no contractually agreed time, contract should be
performed when either the debtor Art.1756 (2) or the creditor demand performance (Art.1756
(3). This means, once the contract is concluded, time of performance can be determined either
by the debtor or creditor. If both of them determine date of performance the earliest date is
performance date. The debtor demands earliest performance either to avoid cost of
maintenance and preservation or to transfer risk or to relieve himself from psychological
burden of debt. Earliest performance can also have its own advantages and disadvantages to
the creditor. As indicated under Art. 1756(2) by the phrase forthwith the creditor must take
delivery just at the time he is informed to take delivery. Otherwise the debtor may exercise his
right under Art. 1779.
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Notice that Art.1756 (3) does not contain the phrase forthwith (See Tilahun, 1989, p.99).
Instead it contains the phrase whenever which is retranslated as soon as by G. Krzeczunowicz
(G. Krzeczunowicz 1983, p.104). This means the idea intended to be conveyed by Art.
1756(2) is different from that of Art 1756(3). Therefore; although the creditor may be required
to receive payment just at the moment the debtor wants to make payment, the creditor is
expected to give reasonable time to the debtor. A creditor never invoke non-performance
without giving default notice (Art.1772) and in his default notice he may fix a reasonable
period that enables the debtor to carry out his obligation (Art.1774). If he has not fixed time in
his default notice or the time is unreasonable he may resort to the remedy provided under
Art.1785.
In conclusion, time of performance is determined either by contract or unilaterally by any

party to the contract and the mere failure to indicate time of performance never makes the
contract incomplete. However in the following four cases the debtor may unilaterally
postpone time of performance indefinitely (Art.1757 cum.1759, see also G. Krzeczunowicz
1983, p.108-9). This is to reduce the risk of non-performance by the opposite party. As a
result Art. 1757 and 1759 exclusively relate to bilateral contracts (see also Girma 2002, p130).
2.2.2 Non-Performance of Contract & Its Remedies
Non-performance refers to parties’ failure to perform contractual obligations in conformity

with the terms of the contract and the law. It is also called breach of contract. This
failure/breach may be total, where a party totally fails to honor the terms of contract. It may
also be partial, where a party has performed his/her obligations only partly. It may also relate
to delay in performance. Offering performance at a place other than the place agreed up on
(place fixed by law) also constitutes non-performance. Delivering a thing that does not
conform to the contract or delivering a defective thing also amount to breach of contract.
Generally any deviation by a party from the terms of the contract amounts to non-
performance.
It is clear that breach by one party affects the interest of the other party, which usually is
referred to as the “Victim party”. Thus, it is logical to provide a solution/remedy for the party
affected by non-performance. As discussed elsewhere, one function of contract law is to
enforce contracts. One way of doing that is to provide remedies for non-performance
particularly by sanctioning failures. Otherwise parties would be reluctant to enter in to a
contract. It is commented that the rules on non-performance are intended to avoid the
deterrence effect of non- performance on contractants for fear that their contract may not be
performed; or in other words it is intended to secure contractual transactions.
It is important at this junction to note that the parties may stipulate contractual remedies for
breach, for example by incorporating penalty clauses. These kinds of remedies may be
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enforced by the law (see articles 1886-1895). However, the law of contract provides remedies
even if there is no contractual provision to that effect. These are called legal remedies.
The legal remedies for non-performance protect the interest of the party that is affected by
non-performance. The interest that is affected by non-performance of the contract is the
benefit, which could have been gained, had the contract been performed. Accordingly, the
remedies are supposed to put the victim party in the position he would have been had the
contract been performed. As such, in most legal systems, the law of contract generally
recognizes three remedies. The first one is the enforcement of the contract. This remedy is
designed to satisfy the victim party by enforcing the terms of the contract. It may be done
either by compelling the debtor (failing party) to perform his/her obligations or by authorizing
the creditor (victim) party to perform the debtor’s obligation at the cost and expense of the
debtor. The former is usually referred to as forced performance, while the latter is called
substituted performance.
The second remedy available to the creditor is cancellation of the contract. This may take
place either by court judgment (judicial cancellation) or unilateral act of the victim party.
Unilateral cancellation applies in exceptional circumstances. In all other cases, the victim
party may apply to court for declaration of cancellation and it is the court that has the ultimate
power to declare cancellation or not. The effect of cancellation is to put the parties the
position which would have existed, had the contract not been made. Thus, the victim party can
claim back what he has paid or delivered. In addition to this, he may claim compensation.
The third remedy is damages (compensation). The victim party can claim compensation for
the damage or loss he has incurred as a result of non-performance. This remedy may be
claimed in addition to either of the above remedies or independently. In applying any of or a
combination of these remedies, one should take in to account not only the interest of the
creditor (victim party) but also that of the debtor (failing party), for example the debtor cannot
be required to pay excessive compensation, or his liberty be deprived.
In addition, the law generally requires the party affected non-performance to fulfill certain
criteria before resorting to the remedies of non-performance. The crucial prerequisite is that
the victim party shall give default notice to the debtor, demanding the later to perform his/her
obligations within a reasonable time. The purpose is to obtain voluntary performance before
going top courts. Of course, there are certain circumstances, where the giving of default notice
is not necessary.
With this general background, let us see the remedies provided under the general provisions of
Ethiopian contract law as well as the pre-requisites for invoking these remedies. According to
Art.1771 of the Civil Code the remedies of non-performance are (1) the enforcement of the
contract, (2) Cancellation, and (3) Compensation /damages. As provided under the above
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provision, they are cumulative or alternative remedies as the case may be. So, the victim party
may choose any of the remedies or plus compensation based on the circumstances. However,
when we read this provision together with article 1790, we understand that the third remedy,
i.e., compensation, can be claimed as independent remedy or additional remedy. Thus,
damages may be claimed independently (for example where performance is delayed) or in
addition to enforcement or cancellation. One crucial question is under what circumstances
each of these remedies would be appropriate. Before addressing these issues, it is important to
discuss the pre-requisites for invoking these remedies.
A. Specific performance
The word ‘forced performance’ implies the compelling of the debtor to discharge his
obligation. It refers to performance directly imposed on the debtor through the execution
process. Thus, it take place through court order/judgment. However, it is important to note
that the court may not order forced performance merely because the creditor has requested.
The court has the power to order forced performance or decline considering the requirements
set under Art.1776. In order to order forced performance, the claimant has to proof that he
has special in performance and the individual liberty of the defendant would not be affected
by forced performance.
B. Cancellation
Cancellation is another remedy for non-performance. Cancellation brings an already existing
contract to an end. What is the difference between invalidation and cancellation? As per
Art.1784 of the Civil Code, a party may move the court to cancel the contract where the other
party has not or not fully and adequately performed his obligations within the agreed period of
time.
It is important to note that a party has applied for cancellation does not necessarily mean that
the court will order cancellation. The court may order the cancellation of the contract or not
after her the parties and considering the circumstances of each case particularly in light of the
conditions stated under Article 1785. The court does not cancel a contract when an action is
brought to this effect for simply there is non-performance of a contract. The court has
mandatory obligation to consider the good faith of the parties. Article 1785 has put the
importance of good faith to guide the court in settling on either to order cancellation or not.
The parties can incorporate a cancellation clause in their contract. Thus, the law recognizes
unilateral cancellation made according to the cancellation clause. It relieves parties from
going to court and also avoids litigation and court workload. The other cases relate to cases
where the debtor has failed to honor certain time limits. It is important to note that not all
lapses of time limits would lead to unilateral cancellation.
C. Damages (Compensation)
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Damages/Compensation is another remedy for a party affected by non-performance. The
Ethiopian law of contract provides damages/compensation as a remedy under articles 1771 (2)
and articles 1790-1805. The purpose of compensation for non-performance is to put the victim
party in a position he would have been had the contract been performed.
The reading of 1771 (2) suggests that damages/compensation is an additional remedy.

However, if we read this provision cumulative with Art.1790, it becomes clear that under
Ethiopian law damages can be claimed as an additional or alternative remedy.
UNIT TWO - SECTION THREE
2.3 Termination of Contract
Section overview
Termination refers to the stoppage of obligations created by the contract. It ceases the
existence of the obligations as of the time the contract is terminated. Termination of contract
can be either, bilateral (by the agreement of both the contracting parties), unilateral by one
party, or judicial (by court order).
Section Objectives
 Discuss how contractual obligation becomes to an end by performance;
 Describe freedom of parties in ending their obligation;
 Explain the role of law and court in terminating contractual obligation.
2.3.1 Performance
The obvious mode of discharge of a contract is by performance, that is, where the parties have
done whatever was contemplated under the contract; the contract comes to an end.
Performance of obligation is not only an effect of contract but also a ground of extinction of
obligation. Performance of the contract shall however be made according to the terms of the
contract and mandatory provisions of the law if it shall extinguish contractual obligation. It
shall be performed according to the agreement without discrepancy if it shall bring the
contractual obligation to an end (See Art.1806 of the civil code). Thus, where ‘A’ contracts to
sell his car to ‘B’ for Birr.85, 000.00 as soon as the car is delivered to ‘B’ and ‘B’ pays the
agreed price for it, the contract comes to an end by performance.
 Is a contract discharged if the contractual obligations of one of the parties

are, at that party’s request, performed by someone else?
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___________________________________________________________________________
___________________________________________________________________________
The answer depends on the type of con-tract. The general rule is that the other party cannot
object to such vicarious performance unless it prejudices their interests. If the service
contracted for is one which relies on the skill or judgment of one party, the other can insist on
personal performance. Obvious examples are employment contracts, or a contract to paint a
picture, or perform in a concert. Clearly, a contract must also be performed personally if that
is specified in the terms, or if, by implication, the terms prohibit vicarious performance.
2.3.2 Mutual Consent (Art.1819)
If the parties to a contract agree to substitute a new contract for it, or to rescind it or alter it,
the original contract is discharged. A contract may terminate by mutual consent in any of the
followings ways:
A. Novation
Novation means substitution of a new contract for the original one. The new contract may be
substituted either between the same parties or between different parties. Notice that, the
contract which is substituted must be one capable of enforcement in law. Thus, where the
subsequent agreement is insufficiently stamped and, therefore, cannot be sued upon, novation
does not become effective, that is, the original party shall continue to be liable. See
Art.1807(c) of the civil code. Art.1826 also provides that, an obligation shall be extinguished
where the parties agree to substitute therefore, a new obligation which differs from the
original one on account of its object or nature.
B. Unilateral termination
Parties may agree to the effect that the contract to the effect that the parties or one of them
may terminate the contract on notice. Where more than two persons enter into a contract,
provision may be made to the effect that the contract shall terminate with regard to one of
them and remain in force with regard to the other parties. Where a contract is made for an
undefined period of time, both parties may terminate it on notice.
C. Remission
Where the creditor informs the debtor that he regards him as released, the obligation shall be
extinguished unless the debtor forthwith informs the creditor that he 'refuses his debt to be
remitted. Where the creditor informs the debtor that he regards him as released, the obligation
shall be extinguished unless the debtor forthwith informs the creditor that he 'refuses his debt
to be remitted.
D. Merger
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A contract is said to have been discharged by way of ‘merger’ where an inferior right
possessed by a person coincides with a superior right of the same person. Merger shall occur
and the obligation shall be extinguished where the positions of creditor and debtor are merged
in the same person. Merger shall not affect the rights which a third party may have in respect
of the obligation. The obligation shall revive where merger come to an end.
Example
A man, who is holding certain property under a lease, buys it. His rights as a lessee vanish.
They are merged into the rights of ownership which he has now acquired, the rights associated
with lease being inferior to the rights associated with the ownership.
2.3.3 Subsequent Impossibility
Impossibility in a contract may either be inherent in the transaction or it may be introduced

later by the change of certain circumstances material to the contract. Examples of Inherent
Impossibility A promises to pay B Birr.50,000.00 if B rides on horse to the moon. The
agreement is void. A agrees with B to discover treasure by magic. The agreement is void. The
impossibility in these cases is inherent in the transaction. Such a contract is void abinitio.
On the other hand, where a contract originates as one capable of performance but later due to
change of circumstances its performance becomes impossible, it is known to have become
void by subsequent or supervening impossibility. We shall now consider this kind of
impossibility in details. A contract is deemed to have become impossible of performance and
thus void under the following circumstances:
2.3.3.1 Destruction of Subject-matter of the Contract
Where the subject-matter of a contract is destroyed, for no fault of the promisor, the contract
becomes void by impossibility. A music hall was agreed to be let out on certain dates, but
before those dates it was destroyed by fire. The owner was absolved from liability to let the
building as promised.
2.3.3.2 Death or Disablement of the Parties
Where the performance of the contract must be executed personally by the promisor, his death
or physical disability to perform shall render the contract void and thus exonerate him from
the obligation.
Examples
1. A and B contract to marry each other. Before the time fixed for the marriage, A dies.
The contract becomes void.
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2. A, a singer, agrees with B to give his performance at some particular theatre on a
specified date. While on his way to the theatre A meets an accident and is rendered
unconscious. The agreement becomes void.
Activity 2
1. Explain an offer as one condition for formation of contract.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
2. Discuss breach of contract.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
3. Define merger and describe it as a cause for termination of contract.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
4. Describe how counter offer terminates the contract
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
UNIT SUMMARY
For a contract to exist, usually one party must have made an offer, and the other must have
accepted it. Once acceptance takes effect, a contract will usually be binding on both parties.
The person making an offer is called the offeror, and the person to whom the offer is made is
called the offeree. A communication will be treated as an offer if it indicates the terms on
which the offeror is prepared to make a contract, and gives a clear indication that the offeror
intends to be bound by those terms if they are accepted by the offeree. An offer may be
express or implied. An agreement is not usually binding unless it is supported by
consideration. This means that each party must give something in return for what is gained
from the other party. An agreement may be unenforceable because it is illegal. Contracts may
be illegal at the time of their formation or because of the way they have been performed.
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There are some categories of people whose power to make contracts is limited by law. The
main categories are minors, and people considered incapable of contracting because of mental
disorders or drunkenness. The contracting capacity of a corporation depends on what type of
corporation it is.
The most obvious way in which a contract is discharged is by both parties performing their
obligations under it. The remedies available to the innocent party in the event of a breach of
contract can be divided into three categories forced performance, cancellation and
compensation. An award of damages is the usual remedy for a breach of contract. It is an
award of money that aims to compensate the innocent party for the financial losses they have
suffered as a result of the breach. The general rule is that innocent parties are entitled to such
damages as will put them in the position they would have been in if the contract had been
performed. When a contract is breached, a party may suffer pecuniary loss or non-pecuniary
loss. An order of specific performance is a court order compelling someone to perform their
obligations under a contract. Specific performance is only granted where damages alone
would be an inadequate remedy. A court will not order specific performance to cases where
it could cause a party great hardship or unfairness and affects his individual liberty.
Checklist
Accomplishments Ye No
s
Can You Define contract
Determine essential condition of valid contract
Understand how and when contract is said to be formed
Understand performance as major effect of contract
Describe how contract is performed and who performs it
Define nonperformance of contact
Discuss the legal remedies available for nonperformance
Discuss how contractual obligation becomes to an end by performance
Describe freedom of parties in ending their obligation
Explain the role of law and court in terminating contractual obligation
Commandment!
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Part I:-Say true or false
1. All agreements are contract
2. If you promised your best friend that you would be best friends forever, but then your
relationship changed you violet the contract
3. The communication of an offer to an offeree does not of itself confer any right or
impose any duty on either of the parties.
4. Performance of contract means fulfilling one’s own obligation as agreed.
5. Non-performance refers to parties’ failure to perform contractual obligations in
conformity with the terms of the contract and the law.
Part I: - Multiple choice

1. An intention to create legal relations:
A) Is determined by a test of whether the parties themselves actually intended to enter
into a contract.
B) Is determined by a test of whether a reasonable person would believe the parties
intended to enter into a contract.
C) Is usually presumed in a family context but not a business context.
D) Both b and c.
2. This method of termination of an offer occurs when the offeree responds with a
willingness to enter into a contract but on different terms:
A) Lapse
B) Revocation
C) Rejection
D) Counter-offer
3. Which of these is not consideration or acceptable in lieu of consideration?

A) Something a party did prior to contemplation of the contract
B) A promise to perform a pre-existing contractual obligation to a third party.
C) Money
D) A little red sticker
4. A void contract is:

A) A contract that does not meet key requirements from intention to create relations
through legality
B) A contract with no legal effect from the beginning, as though it never happened
C) A contract that is valid unless and until it is rejected at the option of one of the
parties.
D) A contract with a mistake in it
5. All of the following elements are always necessary to make a contract, except:
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A) Consideration
B) Be in writing
C) Legality
D) Competent party
6. Which of the following is usually a competent party to enter into a contract?

A) Insane person
B) Someone 17 years of age
C) Intoxicated person
D) None of the above
7. Which one is true?

A) Contract law does not lay down so many precise rights which the law will protect
and enforce
B) Contract law does not lay down so many precise duties which the law will protect
and enforce
C) Contract law contains a number of limiting principles
D) The parties to a contract make the law for themselves.
E) All
III. Fill in the blanks space

1) An acceptance of the offer which changes one or more terms of the original offer is called
a _______________. Since this now becomes a new offer, the parties switch positions
and the original offeror becomes the new _______________. Once any offer is
_______________, it is considered dead and cannot be accepted.
2) An Offer is made by the _______________. The _______________ is the person to
whom the offer is made. When the offer is _______________, a contract is formed. An
offer is considered to be held open for a _______________ time, unless it specifies a
particular time.
3) A contract is said to have been discharged by way of _______________________
where an inferior right possessed by a person coincides with a superior right of the
same person.
Part IV: - Short answer question

1. Discuss how agreement constitute contract by giving example.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
2. A contract without consideration is not a contract at all.
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___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
References/further readings
Laws
 The Constitution of the Federal Democratic Republic of Ethiopia,
 Civil Code of the Empire of Ethiopia,1960 Artt.1675-1805
 Commercial Code of the Empire of Ethiopia,1960
Books
 George Krzeczunowicz, Formation and Effect of Contracts in Ethiopian Law, Addis
Ababa University,1983
 Rene David Commentary on Contracts in Ethiopia ,Hailesellasie I University, 1973
 Girma Gizaw Ethiopian Contract Law , General Provisions Commercial Printing
Press,Addis Ababa,2002
 Tilahun Teshome, Basic Principles of Ethiopian Contract Law (in Ahmaric),Federal
Supreme Court,Addis Ababa, 1989
 S.K. Kapoor, The Law of Contracts , 8th ed , Central Law Agency, 1999
 Ryan, Introduction to Civil Law
 P.D.V. Marsh, Comparative Contract Law,England,French, Germany,Gower
Publishing,USA, 1994
 Ernest C. German Commercial Law, German American Chamber of Commerce.INC.,
1956
 G. Leroy Certoma, The Italian Legal System,Butterworths, London,1985
 G.H. Treitel , The Law of Contract, 11th ,Sweet&Maxwell,2003
 Kessler & Gilmore; Contracts, cases and materials, Second edition,
 Merton Ferson; the Rational basis of Contracts and related Problems in Legal Analysis
 Lon L. Fuller & Melvin Aron Eisenberg, Basic Contract law, Third Edition,
 Arthur Linton Corbin, Corbin on contracts law, West Pblishing Co., 1952
 David H. Vernon, Contracts: Theory and practice, Analysis and Skills Series, Times
Mirror Books, 1991
 Claude D. Rohwer and Anthony M. Skrocki, contracts in Nut Shell, 2000
 J.C.Smith, The Law of Contract, London, Sweet & maxwwell, 1989
 Samuel Williston and george J.Thomspson, Selections from Williston’s Treatise on
the Law of Contracts, Revised Edition
 Schlesinger, Formation of Contracts, A Study of the Common Core of Legal system,
1968
 Roberot W.Hamilton et al, Contracts, cases and Materials, American Casebook series,
West Publishing Co., 1984
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UNIT THREE
Agency Law and Contract Formation
Unit Introduction
In today’s marketplace, both an individual and a large multi-national corporation may find it
difficult to complete the large number of transactions they deem necessary to accomplish their
business goals. Representation can help solve this difficulty. It is in this context of an
increased need for representation that agency arose.
Agents are utilized around the world as a means of having presence in more markets,
completing more transactions and agreeing to more contracts. Whether they are called agents
in common law jurisdictions or commercial agents in civil law jurisdictions, the reasons for
having this representative remains the same: accomplishing more with less costs,
achieving more in less time.
Clearly, agency is central to business dealings. No owner of a business can do everything

himself; he must delegate some things to agents, and this is true not only of large corporations
but of sole proprietorships that have employees who work for the owner. In partnerships, the
partners act as each other’s agents. And in corporations, the shareholders are completely
unable to act on their own behalf; they delegate authority to a board of directors, who in turn
delegate authority to the officers of the corporation.
Learning Objectives
 Understand the nature of agency and its implications;
 Examine the methods by which an agency is created;
 Study the duties and rights of agents and principal; and
 Recognize the authority an agent has to enter contracts.
UNIT THREE - SECTION ONE
3.1 The Establishment of an Agency and the Parties Involved
Section overview
The agency relationship is created either by mutual consent or by operation of law or by
ratification. Express agency is created when the principal expressly appoints someone as his
agent, but an agency relationship can also be implied by the conduct of the parties. The law
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may deem that an 'agency of necessity' is created in particular circumstances. The law may
provide that an ostensible or apparent agency relationship is created if the principal holds out
to a third party that the agent's authority is greater than it actually is. Agency can be created
retrospectively, through ratification of the contract.
Section objectives
 Define the term agency
 Understand how agency contract is formed
 Know parties to agency contract
 Determine the relationship between parties in contract of agency
3.1.1 Defining Agency
 Dear student, can you define agency as one of the special contract relation?
___________________________________________________________________________
___________________________________________________________________________
Agency is a contract whereby a person, the agent, agrees with another person, the principal, to
represent him and to perform on his behalf one or several legally binding acts. (See Art.2199
of the Civil Code). Parsing this definition reveals three primary elements of an agency
relationship: (1) consent by the principal and the agent; (2) action by the agent on behalf of
the principal; and (3) control by the principal. These elements reveal the general policy thrust
of agency law if there is mutual consent to an arrangement involving an agent acting to
further the principal’s interest and subject to the principal’s control, then it is appropriate to
make the principal liable for the agent’s actions.
Consent: Consent of both the principal and the agent is necessary to form an agency
relationship. More specifically, both the principal and the agent must consent to the agent
acting on the principal’s behalf and subject to the principal’s control. Thus, agency is a
consensual relationship in which one person agrees to act for the benefit of, and subject
to the control of, another person.
The principal must manifest (or convey) his consent to the agent. This required manifestation
of consent may be written, oral, or implied from the parties’ conduct. The agent’s consent
may also be established by written or oral statements, or by implication from the parties’
conduct. Thus, if P asks A to complete a task pursuant to P’s instructions, and A does so, an
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agency relationship has been created even if A did not expressly communicate to P his
agreement to perform the task.
On behalf of: The agent must be acting on the principal’s behalf. This requirement is
generally understood to mean that the agent must be acting primarily for the benefit of the
principal rather than for the benefit of the agent or some other party. This element is critical to
the agency definition, as it allows courts to distinguish the agency relationship from more
garden-variety exchanges of compensation for services where we would not expect an agency
relationship to arise. Simply acting in a way that benefits another, in other words, even where
there is control, is insufficient to establish an agency relationship; instead, a court must
believe that the agent was acting primarily for the benefit of the other person (the principal).
# Illustration
Suppose that a homeowner calls an electrician to install a new chandelier. One might
plausibly argue that the electrician has agreed to act subject to the homeowner’s control in
several respects e.g. the homeowner has specified the particular task, the homeowner may
have required a particular time and date for the service, and the homeowner may want the
chandelier hung in a particular manner. Nevertheless, absent extraordinary facts, the
electrician’s services would be considered primarily for his own benefit, largely because the
electrician sets the price for his services and retains the profits from his labor. From a policy
standpoint, this conclusion is sensible, as we would not expect an electrician to have a
fiduciary duty of loyalty to his customer, or for the customer to be liable for the electrician’s
negligence, or for any of the other onerous obligations of the agency relationship to apply.
Control: The agent must act subject to the principal’s control, but the degree of
control exercised by the principal does not have to be significant. As one court observed:
The control a principal must exercise over an agent in order to evidence an agency
relationship is not so comprehensive. A principal need not exercise physical control over the
actions of its agent in order for an agency relationship to exist; rather, the agent must be
subject to the principal’s control over the result or ultimate objectives of the agency
relationship.
In sum, the control a principal exercises over its agent is not defined rigidly to mean control
over the minutia of the agent’s actions, such as the agent’s physical conduct. The level of
control may be very attenuated with respect to the details. However, the principal must have
ultimate responsibility to control the end result of his or her agent’s actions; such control may
be exercised by prescribing the agents’ obligations or duties before or after the agent acts, or
both.
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Thus, the requisite level of control may be found simply by the fact that the principal has
specified the task that the agent should perform, even if the principal has not prescribed the
details of how the task should be accomplished.
In addition to these three primary elements, it is important to note that the agency definition
uses the term “person” to refer to both agents and principals. The civil code defines “person”
to include individuals as well as organizations. Thus, agency relationships are not limited to
natural persons; indeed, artificial entities such as corporations, trusts, partnerships, or limited
liability companies may act as principals or as agents.
3.1.2 Establishing an Agency
Pursuant to Art.2179 of the Ethiopian civil code, we find two sources of representation: the
agreement of the parties or by law. In most cases, the authority to represent a person on a
transaction with a third person emanates from the agreement of the parties and seldom, when
the social and economic realities so demand, such authority is conferred on a person by
operation of the law. When the authority to act on behalf of another emanates from the
agreement of the parties, the outcome will be that there will be two separate contracts. These
are the internal contract between the principal and the agent and main contract concluded by
the agent in the name of the principal with a third party.
Accordingly, the internal relationship between the representative and the represented is legal
as opposed to contractual. Since such kind of relationship emanates from the law, it does not
require a special consideration. Hence, our discussion under this topic will focus on agency
contract or mandate. In order to form a contract, consideration is one among the essential
elements in the common law legal system. However, this is not an essential element of
contract under the Ethiopian law of agency. Agency is one of the special forms of a contact.
Therefore, in order to form an agency contract, consideration may not be essential under the
Ethiopian law of agency. In addition to this, the elements of a valid contract provided for
under art. 1678 of the civil code are also applicable for the formation of contract of a agency.
These elements are:
1. Sufficiently defined, possible and lawful object
2. Consent and capacity
3. Form should be fulfilled.
Now let us see each of the requirements for the formation of an agency contract.
A. Object
A contract is of no effect unless its object is sufficiently defined, possible and lawful as
provided under Art.1715 and 1716 of the civil code. When we consider the agency contract,
the most difficult area is related to sufficiently defined object. This particularly happens
especially with the extent of the power given to an agent. Because it could be very difficult to
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fix such a power, for the agent usually deals with third parties in the absence of the principal,
it is difficult for him to rely on the principal in determining whether the interests of the
principal would best be served by performing a certain juridical act except the power of
attorney given to him by the principal in advance. Hence it may not be possible to enumerate
the power of attorney all the acts whose performance by the agent would further the interest of
the principal. On the other hand, if the principal authorizes the agent to do everything he
thinks promotes the interest of the former, there is a risk of abusing the power on the part of
the agent.
The law in the above case tries to find a solution somewhere in between the two extremes.
Accordingly, under the French law, power given in general terms is construed to include any
acts of administration. According to this law, the performance of transactions other than acts
of administration calls for an express power. Therefore, an agent cannot alienate or mortgage
property where there is no express authority.
In a similar fashion, the Ethiopian civil code adopted the same solution as that of the French
for the above-mentioned problem. As stated under art. 2203 of the civil code, authority given
in general terms encapsulates only acts of management. In here one can raise the question of
what acts of managements are. The concept of acts of management is provided for under
Art.2204 of the civil code. Accordingly, acts of management are: ‘’Acts done for the
preservation or maintenance of property, collection of debts, discharge of depts., sell of
perishable things and goods intended to be sold interalia’’. In addition to this, art. 2205 of the
civil code explicitly states that express authority is demanded in order to perform acts other
than acts of management. When we look at sub art (2) of art 2205, it specially prohibits the
agent to alienate or mortgage real state property without a special authority. Hence, an agent
who is granted a general power of attorney cannot sell a property to the principal. In order to
do so, he should be given a special authorization. However, if the agent sells among the
properties of the principal where there is no authority to such effect, the principal will not be
bound to the third party. Therefore, the agent in this case will be liable towards the third party,
unless the principal ratifies the acts of the agent.
B. Capacity
He who gives a mandate exercises the will to do the act which he charges his mandatory to do
in his place. He must therefore have the capacity necessary to do such an act, so that there is
no particular capacity to a give a mandate; this capacity depends on the nature of the acts to be
done.
A principal can only delegate transactions, which he is capable to perform himself. He cannot
extend his legal capacity by acting via an agent. Therefore a minor can appoint an agent only
for the specific acts, which he is capable under the law to perform personally.
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Rights and duties are created directly on the principal by the contract, which the agent
concludes in the name of the principal with the third party. Hence, regarding this contract, the
capacity of the principal is an essential element of the contract because we have seen that this
element is required to form a valid contract. And since agency is a special form of a contract,
this element will be applicable there too.
The capacity of an agent is a matter of indifference with respect to the main contract. Hence, a
principal can appoint an incapable person as his agent. If the former is confident enough in the
honest and intellectual capacity of the incapable person. And this is owing to the fact that his
agent is not responsible for the acts he performs in the name of the principal. The views with
regard to the capacity of an agent and principal have been discussed under chapter one and no
further discussion is required in here.
When we consider the Ethiopian civil code, a contract whose object is affected by incapacity
can, upon the request of the incapable person, be invalidated [art1808 sub (1). However, if the
incapable person does not apply for invalidation, the validity of the contract persists and the
other party will be bound thereby. Therefore such a trend is equally applicable to the agency
contract as it is a special contract.
C. Consent
The agency relationship comes into existence when a principal’s manifestation to an agent
that, as reasonably understood by the agent, expresses the principal’s assent that the agent may
take action on the principal’s behalf. As a general rule, for the formation of an agency contract
no special form is required unless the law provides that the contract of agency be made in a
specified form (article 1719(2) and 2180 of the civil code), or the parties stipulate that their
contract be made in a special form (article 1719(3) of the civil code).
D. Form
There is no special requirement for the form of agency contract. It can be made in any form.
But if the law for the contract that the agent concludes in the name of the principal prescribes
a special form, the authority to make such a contract should be given in the same form. As
provided under art 2180 of the civil code, for instance, art.1725 of the civil code provides that
a contract of insurance shall be concluded in writing. Supposing principal (P) authorizes the
agent to make a contract of insurance for him, the authority for this purpose must be given in
writing. Apart from this, the contract of agency can be expressed, that is, written or oral, or it
can be implied, that is, it can be inferred from the conduct of the parties as provided under
art.2200 [1] of the civil code.
3.1.3 Parties in Agency
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 Who are parties to the agency relation?
___________________________________________________________________________
___________________________________________________________________________
Where an agency relationship exists, the agent, by entering into a contract, establishes privity
of contract between the principal and the third party. The contract is thus enforceable both by
and against the principal and third party. Generally speaking, the agent effectively drops out
of the picture and has no rights or liabilities in respect of it, provided he has acted within his
authority. It is as if the principal had made the contract himself in the first place. From
aforementioned discussion you can understand that agent, principal and third party are parties
in an agency relationship.
3.1.3.1 The Principal
The central and most important aspect of an agency relationship is the fact that the
principal is the party that directs it. The control that the principal has over the agent s actions
is the basic feature of the relationship. The principal determines the terms of the agency
relationship, has the right of control over the agent and decides when to end the agency
relationship.
A. Disclosed principals
Principals may be disclosed principals, partially disclosed principals or undisclosed principals.
The type of principal a principal is in an agency transaction is determined by the third party s
knowledge of the principal’s existence and identity.
A principal is disclosed if, when the agent and a third party interact, the third party has notice
that the agent is acting for a principal and has notice of the principal's identity. In a
transaction with this type of principal, the principal s identity is known to the third
party.
B. Partially Disclosed or Unidentified Principal

A principal is unidentified if, when an agent and a third party interact, the third party has
notice that the agent is acting for a principal but does not have notice of the principal's
identity. In a transaction with this type of principal, the third party is unaware of the
principal’s identity.
C. Undisclosed principal
A principal is undisclosed if, when an agent and a third party interact, the third party has no
notice that the agent is acting for a principal. In a transaction with this type of principal, the
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third party ignores the principal s existence and believes that the agent is acting on his own
behalf. In the agent s eyes, the agent is the one that makes the agreement with him.
In the case of an undisclosed agency the agent acting within the scope of his authority
concludes the agreement with a third party, and both the principal and the third party obtain
contractual rights against each other. Thus, although the principal is undisclosed at the time of
the agreement, he is liable to the third party. Nevertheless, the agent has entered into the
agreement in his own name, which could make him liable. Therefore, the third party may
sue the agent and vice versa until the principal intervenes in the agreement or the third party
learns of the existence of the agency relationship. At that point the third may choose to sue
the principal
A question that could arise is which type of agency is more binding to the principal: disclosed
agency or undisclosed agency. Disclosed agency is more binding to the principal because in
undisclosed agency the principal may never be held liable if the third party does not learn
of his existence or the principal never intervenes. The agent could be the only one held
liable. In disclosed agency, the principal will always be held liable.
Another interesting exercise is to compare undisclosed agency with an agent acting with
apparent authority. In apparent authority, the principal created circumstances that lead the
third party to reasonably believe that an agent is authorized to conclude the agreement on his
behalf. If an agent acts with apparent authority the third party is aware of the existence of the
principal at all times, whereas in undisclosed agency the third party may or may not become
aware of the principal’s existence. If the third party does learn of the principal’s existence it
would be until after the initial agreement with the agent.
3.1.3.2 The Agent
 Can you explain the purpose of an agent?
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The basic purpose of the agent is to represent the principal’s interests as the agent interacts
with third parties, playing an intermediary role between them. The agent also assumes a role
of representation, being this role the basis for imposing fiduciary obligation on the agent and
for binding the principal to the consequences of the agent’s acts. These roles explain the
importance of trust in agency relationships.
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 Do you know various kinds of agents?
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The agent may be of various kinds, such as subagents, co agents, general agents and special
agents.
A. Co agent
Co agents have agency relationships with the same principal. A co agent is appointed by the
principal. Since there is more than one agent acting on behalf of the principal, the principal
may designate superior and subordinate co agents. A superior co agent has the right,
conferred by the principal, to direct a subordinate co agent.
B. Subagent
The general rule is that an agent cannot, without the express authority of his principal,
delegate his authority to another, or appoint a sub-agent to act for him in the whole or in part
of his duties. The Latin maxim is “delegatus non potest delegare”: someone to whom
something is delegated cannot sub-delegate. The reason for this rule is that the appointment of
an agent involves a principal in liability and risk that is the purpose of it. An agent makes
contracts or does acts on the principal’s behalf which bind the principal. Hence, he is entitled
to expect (and rely on the fact) that his agent will himself perform the task, and not pass it
over to someone else, probably unknown to the principal. The relationship between an
appointing agent and a subagent is one of agency. Thus, subagents owe fiduciary duty to the
principal that appointed the agent.
3.1.3.3 The Relation between Parties
 Dear student, can you assume what relation exist in an agency relation?
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3.1.3.3.1 Relationship between Agent and Principal
The principal is the party that establishes the agency relationship by selecting the agent which
in his judgment possesses the appropriate talents for the task assigned. The principal defines
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the terms of the agency and has the right of control over the agent’s actions. The principal
expects loyal service from the agent, not just due performance of his duties the principal has a
duty to deal with the agent fairly and in good faith, including a duty to provide the agent with
information about risks of physical harm or pecuniary loss that the principal knows, has
reason to know, or should know are present in the agent's work but unknown to the agent.
Finally, the principal usually determines when the agency relationship concludes.
The agent has the right to determine the course of action in order to achieve the task appointed
by the principal due to the authority conferred to him by the principal. The agent behaves
trustworthily by performing his duties. Also, the agent must notify the principal of any
communication with third parties because any notice given to an agent by a third party
is effective as a notice to the principal has actual or apparent authority to receive the
notification. In turn, the principal compensates the agent for his work and reimburses the
expenses the agent may have incurred on in achieving the task appointed.
3.1.3.3.2 The Principal-Third Party Relationship
 Dear student do you know how contract made between the agent and third
party creates relation between the principal and the third party?
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The principal chooses to delegate his tasks to an agent and interacts with third parties through
the agent. Thus, the principal has duties to third parties. The principal is liable on the contracts
made in his name by the agent, and is responsible for the performance of those contracts.
Whenever an agent acting with actual or apparent authority for a disclosed or partially
disclosed principal makes a contract on his behalf, the principal and the third party are parties
to the contract. If an agent acting with actual authority acting on behalf of an undisclosed
principal makes a contract with a third party, the principal is party to the contract unless
excluded by the contract. The principal is also liable for the agent’s statements and
representations while negotiating and completing a contract.
3.1.3.3.3 The Agent-third party Relationship
The consequence for the agent in acting for the principal when dealing with third parties is
that the right of action against third parties belongs to the principal, and therefore the
agent has very limited rights against third parties. However, the agent and a third party may
agree that the agent becomes a part of the contract that he has negotiated on behalf of a
disclosed or partially disclosed principal with the third party. In the case of the agent
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making the contract on behalf of an undisclosed principal, the agent and the third party are
parties to the contract. Therefore, in those cases the agent would have the right of action
against the third party.
3.1.3.3.4 Intermediary Role of the Agent
The principal may choose to delegate his tasks to an agent. By doing so, both parties are
benefited: the principal benefits by being able to accomplish more by acting through the
agent, while the agent benefits through the compensation he receives for his efforts in acting
for the principal. The agent exercises delegated authority, because the principal chose to name
the agent his intermediary. The agent holds a representative position in the name of the
principal against third parties. Restatement (Third) of Agency’s definition of agency, when
stating that the agent acts on behalf of establishes that the agent has the power to affect the
principal’s legal relations. The agent provides a representative function and not simply a
service.
UNIT THREE - SECTION TWO
3.2 The Sources of Agent’s Authority and Duties between Agent and Principal
Section overview
There are a number of different types of authority, derived from different sources, which an
agent may possess. An agent's authority may be:
 Expressly given
 Impliedly given
 Ostensible or apparent on the basis of the principal's conduct
The agent owes a number of duties to the principal and the agent also has a number of rights.
The principal owes a number of duties to the agent and the principal also has a number of
rights.
Section objectives
After completing this section you will be able to:
 Thoroughly understand sources of agent’s authority;
 Describe duties of agent and principal; and
 Know the duty of one party is the right of another.
3.2.1 The Sources of Agent’s Authority
 Dear student can you guess from where the agent’s authority emanates
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A principal will be liable on a contract between the agent and a third party when the agent acts
with actual authority, apparent authority, or inherent authority. Even when the agent lacks
one of these three types of authority, the principal may be liable under the doctrines
of ratification.
3.2.1.1 Actual Authority
 Can you attempt what actual authority mean?
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Actual authority may be express (e.g., oral or written statements, including provisions in the
company’s organizational documents) or implied (e.g., inferred from words used, from
custom, or from the relations between the parties).
Actual express authority (often described as express authority or simply by the words
"authority" or "authorized") arises from the manifestation of a principal to an agent that the
agent has power to deal with others as a representative of the principal. An agent who agrees
to act in accordance with that manifestation has actual authority to so act, and his actions
without more bind the principal. Put differently, if the principal’s words or conduct would
lead a reasonable person in the agent’s position to believe that the agent has authority to act
on the principal’s behalf, the agent has actual authority to bind the principal.
Example: P, the owner of two retail stores, employs C to serve as credit manager. P has
orally given C the authority to review and approve requests from customers for the
extension of credit. C reviews the application of Y and approves him for the extension of
credit. C has actual authority to approve Y, and P is bound by C’s decision.
Not every detail of an agent’s work can be spelled out. It is impossible to delineate step-by-
step the duties of a general agent; at best, a principal can set forth only the general nature of
the duties that the agent is to perform. Even a special agent’s duties are difficult to describe in
such detail as to leave him without discretion. If express authority were the only valid kind,
there would be no efficient way to use an agent, both because the effort to describe the duties
would be too great and because the third party would be reluctant to deal with him.
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But the law permits authority to be “implied” by the relationship of the parties, the nature and
customs of the business, the circumstances surrounding the act in question, the wording of the
agency contract, and the knowledge that the agent has of facts relevant to the assignment. The
general rule is that the agent has implied or “incidental” authority to perform acts incidental to
or reasonably necessary to carrying out the transaction. Thus if a principal instructs her agent
to “deposit a check in the bank today,” the agent has authority to drive to the bank unless the
principal specifically prohibits the agent from doing so
.
The theory of implied authority is especially important to business in the realm of the business
manager, who may be charged with running the entire business operation or only a small part
of it. In either event, the business manager has a relatively large domain of implied authority.
He can buy goods and services; hire, supervise, and fire employees; sell or junk inventory;
take in receipts and pay debts; and in general, direct the ordinary operations of the business.
The full extent of the manager’s authority depends on the circumstances what is customary in
the particular industry, in the particular business, and among the individuals directly
concerned.
On the other hand, a manager does not have implicit authority to undertake unusual or
extraordinary actions on behalf of his principal. In the absence of express permission, an agent
may not sell part of the business, start a new business, change the nature of the business, incur
debt (unless borrowing is integral to the business, as in banking, for example), or move the
business premises. For example, the owner of a hotel appoints Andy manager; Andy decides
to rename the hotel and commissions an artist to prepare a new logo for the hotel’s stationery.
Andy has no implied authority to change the name or to commission the artist, though he does
have implied authority to engage a printer to replenish the stationery supply and possibly to
make some design changes in the letterhead.
3.2.1.2 Apparent Authority
 authority?
Dear student, do you know agency relationship exists through apparent
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Apparent authority arises from the manifestation of a principal to a third party that another
person is authorized to act as an agent for the principal. That other person has apparent
authority and an act by him within the scope of that apparent authority binds the principal. Put
differently, if the principal’s words or conduct would lead a reasonable person in the third
party’s position to believe that the agent (or other person) has authority to act on the
principal’s behalf, the agent (or other person) has apparent authority to bind the principal.
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Apparent authority commonly arises when a principal creates the impression that broad
authority exists in an agent when in fact it does not. The theory is that if a third party relies on
the appearance of authority, the third party may hold the principal liable for the action of the
agent. As mentioned, the principal is bound by the agent’s conduct within the scope of the
agent’s apparent authority, even though the conduct was not actually authorized by the
principal.
3.2.1.3 Ratification
 his power?
Do you know that the principal may be liable though the agent acted beyond
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Even if the agent possessed no actual authority and there was no apparent authority on which
the third person could rely, the principal may still be liable if he ratifies or adopts the agent’s
acts before the third person withdraws from the contract. Ratification usually relates back to
the time of the undertaking, creating authority after the fact as though it had been established
initially. Ratification is a voluntary act by the principal. Faced with the results of action
purportedly done on his behalf but without authorization and through no fault of his own, he
may affirm or disavow them as he chooses. To ratify, the principal may tell the parties
concerned or by his conduct manifest that he is willing to accept the results as though the act
were authorized. Or by his silence he may find under certain circumstances that he has
ratified. Note that ratification does not require the usual consideration of contract law. The
principal need be promised nothing extra for his decision to affirm to be binding on him. Nor
does ratification depend on the position of the third party; for example, a loss stemming from
his reliance on the agent’s representations is not required. In most situations, ratification
leaves the parties where they expected to be, correcting the agent’s errors harmlessly and
giving each party what was expected.
3.2.2 Duties between Agent and Principal
 each other?
Dear student can you assume the duties the principal and agent owe against
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3.2.2.1 Agent’s Duty to Principal
The agent owes the principal duties in two categories: the fiduciary duty and a set of general
duties imposed by agency law. But these general duties are not unique to agency law; they are
duties owed by any employee to the employer.
A. Loyalty
By establishing an agency relationship, the agent is working for and is appointed by the
principal. In this capacity, agents must be loyal, diligent, and faithful to their employers, and
act in the most professional and ethical manner, putting forth their best efforts to further the
interest of their principals.
To preclude unjust enrichment, agents may profit only by agreed upon compensation and
must not have or represent any interest adverse or opposed to the principal. They may not
accept secret gifts or fees from other parties without permission of their principals. Agents
cannot use confidential information for their own personal benefit or gain. They may not later
disclose to a third party secret information acquired as a result of the agency relationship.
Agents must not act as agents for both the principal and third parties (dual agency) without
express permission of all parties. If such an occasion arises, each party must know the
complete nature of the relationship existing between the agent and the other party, and
understand the inability of the dual agent to adhere to the fiduciary duties of sale, loyalty and
confidentiality. The agent must make a full disclosure of all pertinent facts before, during and
after the transaction.
Agents may not compete with their principals in matters covered by the agency. Agents have
the duty to keep their principals fully informed at all times of all material facts or information
obtained which could affect the subject matter of the agency. Agents must convey any
information or notice from a third party intended to be transmitted to the principal. If agents
neglect to communicate the information, the principals are as liable as though they had been
informed or received notice directly. If agents fail to inform the principal, the principal can
hold the agents liable for the resulting loss.
Although the requirement for loyalty is broad, it does not require an agent to cover dishonest
acts of the principal which the agent may discover. The agent must act in a legal manner
at all times or withdraw from the agency.
B. Duty to Preserve Confidential Information

To further his objectives, a principal will usually need to reveal a number of secrets to his
agent how much he is willing to sell or pay for property, marketing strategies, and the like.
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Such information could easily be turned to the disadvantage of the principal if the agent were
to compete with the principal or were to sell the information to those who do. The law
therefore prohibits an agent from using for his own purposes or in ways that would injure the
interests of the principal, information confidentially given or acquired.
C. Duty of Skill and Care

An agent is usually taken on because he has special knowledge or skills that the principal
wishes to tap. The agent is under a legal duty to perform his work with the care and skill that
is “standard in the locality for the kind of work which he is employed to perform” and to
exercise any special skills, if these are greater or more refined than those prevalent among
those normally employed in the community.
D. Duty to Act Only as Authorized

This duty states a truism but is one for which there are limits. A principal’s wishes may have
been stated ambiguously or may be broad enough to confer discretion on the agent. As long as
the agent acts reasonably under the circumstances, he will not be liable for damages later if
the principal ultimately repudiates what the agent has done: “Only conduct which is contrary
to the principal’s manifestations to him, interpreted in light of what he has reason to know at
the time when he acts,…subjects the agent to liability to the principal.”
E. Duty to Obey
As a general rule, the agent must obey reasonable directions concerning the manner of
performance. What is reasonable depends on the customs of the industry or trade, prior
dealings between agent and principal, and the nature of the agreement creating the agency. A
principal may prescribe uniforms for various classes of employees, for instance, and a
manufacturing company may tell its sales force what sales pitch to use on customers. On the
other hand, certain tasks entrusted to agents are not subject to the principal’s control; for
example, a lawyer may refuse to permit a client to dictate courtroom tactics.
F. Duty to Give Information

Because the principal cannot be every place at once that is why agents are hired, after all
much that is vital to the principal’s business first comes to the attention of agents. If the agent
has actual notice or reason to know of information that is relevant to matters entrusted to him,
he has a duty to inform the principal. This duty is especially critical because information in
the hands of an agent is, under most circumstances, imputed to the principal, whose legal
liabilities to third persons may hinge on receiving information in timely fashion. Service of
process, for example, requires a defendant to answer within a certain number of days; an
agent’s failure to communicate to the principal that a summons has been served may bar the
principal’s right to defend a lawsuit. The imputation to the principal of knowledge possessed
by the agent is strict: even where the agent is acting adversely to the principal’s interests for
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example, by trying to defraud his employer a third party may still rely on notification to the
agent, unless the third party knows the agent is acting adversely.
3.2.2.2 Duties of the Principal
A. Remuneration
As we have provided in the discussions, representation may be made upon consideration or
gratuitous basis. Whether a representation is gratuitous or for consideration may be expressly
provided at the formation of the contract or it may be implied at the time of the performance
of the contract.
1. Contractual Remuneration
The most important duty of the principal is to remunerate the agent for services rendered. The
obligation to pay such remuneration exists only where it has been created by an express or
implied contract between the principal and the agent. As we have provided in the above
paragraph, it is possible for an agency relationship to arise from the agreement between the
parties and yet be gratuitous. In fact, it may need construction /interpretation in each case
whether it was the intention of the parties that the agent shall work gratuitously or whether an
agreement to pay remuneration was made.
There are different forms by which agreement concerning remuneration may be stipulated.
These include: first, the agreement might have stated the payment of remuneration and fixed
the amount to be paid; second, the agreement might have stated that remuneration is to be due
but without fixing the amount to be paid; the third instance could be, the agreement says
nothing as to whether remuneration may be due or not. In the first instance the agent is
entitled to the remuneration fixed in the contract. However, the court is empowered to reduce
the amount fixed in the contract “where it appears excessive and out of proportion to the
services rendered by the agent”. The court is not expressly empowered to increase the amount
of remuneration to the benefit of the agent when it is found to be low as compared to the
service rendered. It is only empowered to reduce the remuneration when it feels it is big.
There are opposing views in relation to this measure of Art.2219 (2). Some say by way of
analogy the court should also decide in favor of the agent when the remuneration is low.
Others argue that in the absence of remuneration (stipulated), Art. 2220 assumes a gratuitous
agency relationship. This presumption does not empower the court to increase a lesser
remuneration to the benefit of the agent. This 2nd argument is substantiated by the fact that
because the law presumes gratuitous agency in the absence of agreement for the payment of
the remuneration, for stronger reasons a remuneration which is circumstantially low does not
require an increase by the court. It appears that the law has deliberately inclined towards the
benefit of the principal. This is in line with the choice of the law to presume gratuitous agency
upon silence of the contract for the payment of remuneration.
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Where the contract does not provide either by an express statement or by inference that
remuneration is fixed, it is the third case of the relationship concerning remuneration. In this
case there is no remuneration to be due. “In the absence of stipulation in the contract, the
agent shall not be entitled to remuneration…” (Art 22220(1)]. But remuneration is presumed
when the agent “carried out the agency within the scope of his professional duties or where
remuneration is customary”. The principle that remuneration shall not be due unless agreed or
implied from the contract is made otherwise in two circumstances governing agency. These
are: where the agent carries out the agency within the scope of his professional duty, or where
such remuneration is customary in the place of performance.
A professional agent (for example, an attorney) cannot be presumed to work gratuitously

unless the agreement has made it otherwise. Similarly, when the custom dictates that an
activity that is performed by the claiming agent dues remuneration, it becomes the duty of the
principal to pay the same. The amount shall be fixed by the court upon application of the
agent. The second case falls in this last allegation, that is, when the parties or the law has
assumed remuneration but failed to fix the amount. In these latter case Art.2220(2) has
provided “failing agreement between the parties, the court shall fix the remuneration in
conformity with the recognized rates and usage”. The phrase “failing agreement between the
parties” implies two cases: the case where the parties have agreed for the payment of
remuneration without fixing the amount, and the case where the agent was a professional one
carrying the activity in his professional capacity. The court in this case shall fix the amount to
be due.
One instance of professional agent is the case of a commission agent. Commission agent, as
we shall see in the chapter with special kinds of agents, is a professional agent. That is why
Art. 2243 of the civil code grants remuneration automatically without any prior agreement for
the payment of remuneration between the principal and the agent. Now compare Art. 2220 on
the one hand (agreement in principle a condition for remuneration to due) and Art 2243 on the
other hand (for remuneration due to no need to agree on remuneration). And try to appreciate
the reason why these two provisions treat the subject (remuneration) differently.
2. Duty to Advance Money

The agent may need money to run the representation of the principal. These may include for
example transportation and similar costs. “The principal shall advance to the agent the sums
necessary for carrying out the agency “Art.2221. However, this is the duty of the principal to
advance sums necessary to run the representation, no effect of the failure of the principal is
provided with this duty. Perhaps when the agent has failed to carry out his obligation for
causes of non-advancement of money by the principal, the principal, not the agent, shall be
liable.
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3. Duty to reimburse outlays and Experts
The money advanced by the principal may not be sufficient to run the affairs of the principal.
Or the principal might not have advanced money for the agent. In such cases the agent may
employ his own money or money from other persons. These outlays/expenses incurred by the
agent need to be reimbursed.
Art. 2221
(2) He shall reimburse outlays made and expenses incurred by the agent in the
proper carrying out of the agent.
(3) Interest on such outlays and expenses shall be due by the principal as from
the day when they were incurred without it being necessary to place the
principal in default.
In short the principal needs to reimburse the expenses the agent has incurred with the interests
it bears calculated from the day where the agent has used the money.
4. Duty to release the Agent from Liabilities and Damages

The principal’s duty to indemnify his agent’s losses, liabilities and expenses incurred in the
performance of the undertaking may be expressly stated in the contract of agency. But it is
more usually implied.
Art. 2221 Liabilities and Damages

(1) The principal shall release the agent from any liabilities which he incurred in the
interest of the principal
(2) He shall be liable to the agent for any damage he sustained in the course of the
carrying out of the agency and which was not due to his own default.
The point to raise here is what is the liability to be incurred and the damage to be suffered by
the agent? The liability of the agent arises in cases where he/she has interacted with third
parties necessary to run the affairs of the principal. For example, the agent may be obliged to
pay an additional customs duty or might have agreed to pay an additional tax or customs duty.
In this case the principal needs to free the agent from liability. Similarly, the agent may suffer
certain damages in carrying out the affairs of the principal. While he is carrying out his duties
the agent may destroy goods, address damages against others, etc. What is required to fulfill is
to prove that the damage sustained was not due to his own default.
UNIT THREE - SECTION THREE
3.3 Termination of Agency
Section overview
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Like any other contract, an agency can be terminated by agreement between principal and
agent. This is self-evident. If the agency is for a specific task, the authority of the agent
automatically ends when that task is completed. If the agency is for a specific period of time,
it is determined when that time has expired. It may have been agreed, or be inferred, that the
agency will cease if a certain event occurs. Then, it will terminate if and when that event does
occur. The authority of an agent, is, normally, terminated by the death or insanity of either the
principal or the agent, or the bankruptcy of either. In the case where either is a limited
company, the winding-up of the company has the same effect. Lastly, if either the principal or
the agent revokes the agency or renounces it (whether or not the act of so doing is in breach of
the contract), the agent’s authority will be revoked.
Termination of agency is possible to arise from two sources: by the act of the parties and the
law. Act of the parties could mean either agreement by the two parties or by unilateral
declaration from one of the parties.
Section objectives
 Explain sources of termination of contract;
 Describe how an agency contract comes to an end; and
 Discuss the role of law in terminating contract of agency.
3.3.1 Termination by Agreement
 Dear student, can you explain how the contract of agency terminates?
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Agreements/contracts are not only entered into to create obligation but also to extinguish
obligations as well (Art. 1675). The principal and the agent may agree to terminate a
relationship that exists among them. “A contract may terminate where the parties so agree”
(Art. 1819 via the bridge Art. 1676.) upon agreement, nothing is impossible to assume except
those prohibited by law (usually by public laws and mandatory private law provisions).
3.3.2 Termination by Unilateral Declaration of the Parties
After you have read the way agency is terminated upon agreement of the parties, you might
have asked a question, what is the fate of agency-principal relationship if the agent doesn’t
want to terminate and present an offer of termination? Also, what if the principal refuses/
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rejects when an offer of termination is presented to him? Or otherwise, when the principal
presents an offer to the agent to terminate, what if the agent refuses to accept it? These and
similar questions are proper to ask.
Agency principal relationship is not a slave-master relationship. It shall terminate, when both
parties are willing, upon agreement. But if one is not willing to do so upon a unilateral
declaration, it shall survive only upon the will of the two parties.
There are specialized terminologies employed to unilateral declarations to terminate agency

relationship. The declaration to terminate by the principal is called revocation. And the
declaration by the agent is termed as renunciation. Below, the rules and procedures as well as
the conditions of each of these concepts shall be presented in detail.
Revocation is a term linked to the principal. It is a unilateral declaration on the part of the
principal to terminate the exiting agency-principal relationship. It occurs when the principal
gives notice of termination of the authority to the agent. There is not special formality
requirement as to this notice. It may be given in any form: a document in writing is
unnecessary (not mandatory even when the original authority was contained in a document).
That is named revocation. Revocation of agency is unconditionally a discretionary right of the
principal as Art. 2226 provides.
Revocation is a choice left to the principal. In the common law, it is not discretionary for the
principal to revoke the authority only upon his need. However, in principle, the principal is
empowered to terminate the relationship upon his will. There are certain limitations on the
principal to revoke authority of the agent.
A counter right granted to the agent is the right to renounce the authority he had acquired. As
stated under Art. 2226 of the civil code, the agent may renounce the agency by giving notice
to the principal of his renunciation. Where such renunciation is detrimental to the principal, he
shall be indemnified by the agent unless the latter cannot continue the performance of the
agency without himself suffering considerable loss. Renunciation as you can grasp from the
above provision is a declaration made by the agent to terminate agency relationship that
existed with the principal. Similar to revocation, it is a unilateral declaration. There is no
limitation provided by the above provision on the right of the agent to terminate agency
relationship.
3.3.3 Termination by Operation of the Law
Aside from any agreement between principal and agent, or any unilateral act by either of
them, the relationship between principal and agent will terminate when the transaction which
has been undertaken has been performed; upon death, in capacity, or bankruptcy of either or
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both of the parties (the agent, principal). Now we will look at the termination of agency
relationship by operation of the law, as listed above.
A. Performance: The execution of his authority by the agent brings that authority to an
end.
# Illustration
An agent who has sold goods, for the sale of which he was employed (agreed) has
performed his obligations. No more obligations shall remain except to demand the
payment of remuneration depending on the agreement. And when the two parties have
performed their part no obligation is in force.
B. Subsequent physical events: Let’s assume that the property which the agency was
required to sell is destroyed. Would the agency relationship terminate or continue to
exist? You do not find a specific provision within the law of agency that would be a
solution to this problem. You need to look at the general contracts provisions. As you
might remember, the agency relationship requires object to be assumed. The object
assumed by the agent in the above example is sale of an object (good). But when this
good is destroyed the contract remains without an object. A contract without an object
is void. Hence, the relationship vanishes, extinguishes upon the good being destroyed.
C. Death, incapacity or bankruptcy of the principal. It is a general principle that death

of one of the parties does not bring the obligation assumed by the parties to vanish.
Rather the heirs or the successors shall enjoy the rights or insure the duties arising out
of the relationship established by the deceased.
When it comes to agency; the death, incapacity or bankruptcy of either or both of the parties
has its own specific effects. The main point behind the special effect upon death of the parties
is that the agency relationship is confidential and personal: hence the individual identity and
existence of either of the parties is very essential. See Art.2232 of the Civil Code.
According to Article without the need to take any further step, the death, incapacity or
declaration of bankruptcy of the principal automatically results in the termination of agency
relationship between the agent and the principal. But this can be made otherwise by an
agreement between the agent and the principal prior to the death incapacity or bankruptcy of
the principal. This is explained by the unless otherwise proviso of Art 2232. That is the parties
may agree their heirs continue their relationship even upon the death of the principal. This
usually is done when the authority granted is to execute acts which do not require the person
of the principal.
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When no agreement is made between the agent and the principal to the effect that the heirs
shall replace the deceased, then the agency relationship shall terminate and there is an
additional and consequential duty on the agent. That duty is that the agent must continue the
management of the affairs for a reasonable time. That is, he should not stop the representation
as soon as he heard the death /incapacity or bankruptcy of the principal. This is especially true
when the agent has already started representing the principal (performing his obligations).
We may wonder how long the agent should continue the management. It is only until the
“heirs or legal representatives of the principal are in a position to take it over themselves.”
The problem is what if the legal representatives or heirs representatives do not take the
management sooner? It looks that the heirs or legal representatives must take it over in a
reasonable time, with no delay. And hence, if there is a delay in taking over of the
management in a reasonable time, the agent cannot be responsible for the loss or damage over
the affairs of the principal.
Another issue to raise here is why the law uses the term “management” while the agent could
have been a special agent as well. It appears that after the death of the principal even when the
relationship was that of a special agency relationship, that is agency empowering the agent to
dispose; it is changed on the death of the principal to be a general agency. This is because
once the principal dies, succession opens and the owner of the affair is changed and the agent
is required only to preserve the affairs/rights of the inheritance.
The owner is the heir or beneficiary any way. And hence this agent becomes an agent of
necessity for the heirs or beneficiaries. A necessity agent is empowered by law to do acts of
management to save/preserve the interests of the principal (the principal by default is the heir
or beneficiary). A deceased is no more a principal. He has no rights and duties. The human
person is subject of rights and “duties” from birth to death. The death of the principal
terminates agency in principle. Therefore the agent can only mange the affairs he has
commenced. If the agent does not begin the representation, he has no duty and right to
represent the principal after he has heard of the death/incapacity/ bankruptcy/ and he/she
cannot dispose like a special agent.
d) Death, Incapacity, Absence or Bankruptcy of the Agent

Similarly the death of the agent for stronger reason takes the agency to an end. When the
agent dies, becomes incapable or adjudicated bankrupt, the relationship comes to an end. Look
at Art.2230 of the Civil Code.
There are three important points to appreciate in these provisions:

 Death/incapacity/ bankruptcy of the agent results in termination of agency (principle);
 By way of agreement prior to the death/incapacity or bankruptcy of the agent, it can be
made otherwise to continue the relationship with the heirs of the agent (exception)
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 The duties imposed on the heirs of the agent (duty to inform the circumstance to the
principal and duty to the management until the principal takes it over)
When the agent dies, we do not expect a dead body to continue the agency relationship and it
is natural to terminate the relationship. Thus it is obvious that the death of the agent
extinguishes the agency relationship. Incapacity or bankruptcy also holds the same.
It is logical to ask a question as to why incapacity of the agent automatically results in the
termination of agency. It is up to the incapable person or his representation to seek the
invalidation of the relationship. Even the other party cannot demand the invalidation of the
relationship. But here, it is provided that incapacity of the agent results in an automatic
extinction of the relationship. In fact, we can see the danger that would be addressed against
the interest of the principal upon the sober agent becoming incapable in the middle of his
carrying out the affairs.
While in the case of ordinary agency, the death, the incapacity, the absence or bankruptcy of
the principal, the agent or either of them results in the termination of agency-principal
relationship, this does not work in the case of commission agency. The death, incapacity,
absence or bankruptcy of the agent/principal or both in principle does not automatically, as of
right or duty result in the termination of the relationship. The termination comes only when
the heirs of the principal or commission agent do not like to take over the duties/the rights in
the relationship.
When the commission agent for example dies, it is the choice of the heirs to continue the
affairs of the principal or to leave it. If the heirs continue the commercial activity of the
principal, the latter cannot terminate the relationships for the sole reason that the commission
agent dies. This is the result of the fact that a commission agent is a professional agent as
defined by Art.60 of the Commercial Code. The commission agent does the work for gain and
his/her livelihood may be dependent upon this affair. This implies that the agent’s heirs (kids
and dependent individuals) are also dependent on this business.
The other rational given is affairs committed by professional agents (like a commission agent)
do not require the person of the agent. Usually, the agent himself carries them out with the
employment of other individuals. On the other hand there is no prohibition of an agreement
among the principal and the commission agent to the effect that the heirs or legal
representatives of either of the parties or both shall continue the relationship among
themselves upon the death, incapacity or declaration of absence of one or both of the parties.
Generally, unlike an ordinary agency relationship, where for the continuation of the
relationship requires an additional agreement, in the case of commission agency, the
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death/incapacity) declaration of absence of the parties (one or both) does not terminate the
relationship when there is a need on one of the party’s heirs or legal representatives.
However, if for example the agent dies and the heirs of the agent are interested to take over
the affair but the principal does not want to work with the heirs, the law entitles them to
continue the affairs (Art. 2250).
But when the heirs are judgment debtors of a claim to continue the agency it is unlikely for
the relationship to continue. The principal is empowered under Art.2226 to revoke an agency
relationship unconditionally. This latter provision empowers a commission principal to
avenge those heirs of an agent succeeded in a court of law to continue the relationship the
deceased had with the principal. He may for example revoke the agency relationship coming
from the law by order of (judgment) a court following the death of the agent. There is no
prohibition to terminate on any other cause, other than the death of the agent.
In the earlier provisions the purpose of the law is to reveal the message that upon occurrence
of one of the facts: death, declaration of absence, incapacity or adjudication of bankruptcy of
the agent or/and the principal terminates the relationship unless otherwise agreed. The latter
provision under Art.2250 is aimed at regulating the situation of transfer of rights and
obligation from the deceased to the heirs or legal representatives. Hence, this provision
governs persons who can succeed the deceased/ heirs or successors.
Does an organization (business organization) have an heir? It does not. Therefore, when an
organization is declared bankrupt while it was an agent or a principal, it results in termination
of the agency relationship it had, because there is nothing called heir to succeed organizations.
Note that bankruptcy is a technical term applicable to business organizations. Therefore, the
law has intentionally omitted the term bankruptcy under Art. 2250.
Activity 3
1. Discuss principal’s control over the agent
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2. Define apparent authority and discuss its purpose

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3. Analyze essential of agency
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4. Agency relation survives only upon the will of the two parties. Discuss
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UNIT SUMMARY
Where an agency relationship exists, the agent, by entering into a contract, establishes privity
of contract between the principal and the third party. The contract is thus enforceable both by
and against the principal and third party. Any person, who is of the age of majority according
to the law to which he is subject, and who is of sound mind, can employ an agent. As between
principal and third person a person may become an agent, so as to be responsible to his
Principal according to the provisions contained in the law of agency.
Generally speaking, the agent effectively drops out of the picture and has no rights or
liabilities in respect of it, provided he has acted within his authority. It is as if the principal
had made the contract himself in the first place. The contract made by the agent is binding on
the principal and the other party only if the agent was acting within the limits of his authority
from his principal.
The termination of the agency relationship may occur as a result of the completion of the task
assigned to the agent by the principal, because the principal no longer wishes the agent to act
on his behalf, or because the agent becomes aware that the principal no longer wants him to
act. Generally, it is the principal who determines the termination of the relationship. The agent
also may renounce any time though he cannot abandon. The agency relationship can be
terminated due to death, incapacity, or insolvency of both of them.
Checklist
Can You Define the term agency
Understand how agency contract is formed
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Know parties to agency contract
Determine the relationship between parties in contract of agency
Thoroughly understand sources of agent’s authority
Describe duties of agent and principal
Know the duty of one party is the right of another
Explain sources of termination of contract
Describe how an agency contract comes to an end
Discuss the role of law in terminating contract of agency
Commandment!
Part I
1) A person who represents another is known as a principal.
2) Anyone who is legally competent to act for himself or herself can act as an agent of
himself or herself but cannot serve as an agent for another.
3) Agents are usually classified according to the nature of their relationship with their
principals.
4) An agency by ratification results when a principal approves an unauthorized act
performed by an agent.
5) It is not necessary for the agent to obey all of the principal's reasonable and lawful
orders and instructions within the scope of the agency contract.
6) In an undisclosed agency, the agent is not contractually liable to the third party.
7) In an agency, the agent acts on behalf of the third party.
Part II
1) When an agency relationship is ratified, which of these is not true?
A) Acceptance by the principal may be implied by the principal’s behavior.
B) Ratification must occur within a reasonable time after creation of the contract.
C) The principal may accept only part of the agreement.
D) All of the above are true
2) Persons who authorize others to act for them are

A) Employees
B) Authorities
C) Principals
D) Third parties
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3) A person empowered to act on behalf of another is a(n)
A) Middleman
B) Principal
C) Agent
D) Third parties
4) In an agency relationship with a principal, the agent must

A. Be loyal
B. Obey reasonable instructions and not be negligent.
C. Account for all monies and property involved
D. All of these are answers
5) If a principal doesn't care about keeping her identity secret, she would use a/an:
A. Disclosed agency
B. Partially disclosed agency undisclosed agency
C. Undisclosed agency
D. It doesn't matter because the principal's identity is always required to be
made public
6) Agency is defined as:

A. The relationship of a child to its parents in terms of duty and obedience.
B. the fiduciary relationship reflecting one party's agreement to act on behalf of
another party and be subject to her control, with the second party's consent
C. One who works for, and receives payment from, an employer, but whose
working conditions and methods are not controlled by the employer.
D. A skilled person who controls the manner and method of his work.
7) Ratification means:
A. The appearance of agency exists when, in fact, none does exist
B. The fiduciary obligations owed by an agent to a principal
C. The act of accepting and giving legal force to an obligation previously not
enforceable
D. The act of rejecting an obligation of an agent who acted outside the scope of
her authority
8) Which of the following is NOT a method for terminating an agency?

A. The purpose is achieved
B. Through lapse of time
C. Through accounting
D. Through operation of the law
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Part II: - Short answer question
1. Explain the relation between agent and principal
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2. Describe termination of agency relation
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Further readings /References

 American Law and economics review agency law and contract formation, vol.6 no.1 2004,
 American Law and Economics Review Vol. 6 No.1 2004: Agency Law and Contract
Formation.
 Barry Nichlsa, An introduction To the Roman law, 1965,pp.201
 F.H Lawson, the Roman law Reader, 1969,p.101
 F.H.Lawson, The Roman Roman_Law Reader, (1969) p.103
 G H L Fridman, the Law of Agency, London 1990
 G.H.L fridman, the law of agency, London, 1990
 Journal of Ethiopian Law, Vol. 3 No.1 1966
 Law of agency, Am. J: comp. Law vol.6 (1957) pp.165)
 Paul Marcharty, Materials for the study of the law of Agency and business
organization,(1967)pp.2-3
 Willaim L.Church, ‘’A commentary on the law of agency representation in Ethiopia’ ’
Journal Of Ethiopian law, Vol.3, No.1, pp.308.
 William Holdsworth/sir/, A History of English Law vpl 8,1966,pp223
 William L.Burdick, The Principles of Roman Law And Their Relation To modern Law,
1938,pp426)
 Mulgeta Mengist, material on Agency law, Mekelle University, Law Faculty, May
2005, unpublished)
Laws
 The Ethiopian Civil Code, 1960
 The Ethiopian Commercial Code, 1960
UNIT FOUR
Sale of Goods and Security Devices
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Unit Introduction
The study of this unit is divided into two broad categories i.e. the law dealing with sales of
goods and the law of security devices. Sale is the most common and important of all
commercial transactions. In any exchange economy sale is the essential means by which the
various unit of production exchange their outputs, thereby providing an opportunity for
specialization and enhanced productivity.
An advanced, complex industrialized economy with highly coordinated manufacturing and

distribution system requires a reliable mechanism for ensuring that future exchange can be
entered into today and fulfilled at the later time. Because practically everyone in our economy
is a purchaser of durable and consumable goods, the manufacture and distribution of goods
evolve numerous sales transactions. The law of sales establishes a framework in which these
present and future exchanges may take place in predictable, certain and orderly fashion within
a minimum of transaction cost. The law of sales which governs contract transaction evolving
the sale of goods is specialized branch of the law of contracts.
In dealing with the law of sales, you will study various rules, principles and concepts which
regulate commercial transactions in the area of sales of goods. In the second part of the unit
you will study another area of law, i.e. law of security devices. This law also has at the same
objective as above, i.e. facilitating commercial transactions. However, the nature and content
of this law is different from law of sales.
The commercial relations emphasized in this law is not sales of goods, rather it is the relation
between creditors and debtors in the performance of various obligations with special attention
to loan system. Read both sections carefully and attempt to solve the activity questions and as
well as self-check review questions.
Learning Objectives
 Thorough understand of the essential elements of a contract of sale, and how the
sale contract;
 Thorough understand of the legal effects of a contract of sale;
 Aware of the legal duties imposed upon buyers and sellers, and the consequences
that may flow if these duties are breached;
 Identify and solve authentic legal problems with regard to sale contracts;
 Familiarize with legal concepts and terminology commonly encountered in the
law of sale;
 Identify various forms of security devices;
 Thorough understand the importance of security devices in commercial
transactions.
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 Define and discuss the contracts to secure performance of various
obligations and the basic nature and importance thereof;
 Identify and apply the essential preconditions for valid formation and
effectiveness of contracts for security of transactions;
 Effectively deal with the rights and duties of the parties involved in the
contracts for security of transactions.
UNIT FOUR - SECTION ONE
4.1 Law of Sales
Section overviews
Law of sales is a branch of business law that regulates the relationship between the buyer and
seller of goods. It is a collection of rules pertaining to the formation, performance and breach
of contract of sale. It imposes certain duties on the buyers and sellers the breach of which
gives rise to remedy. When the dispute between buyer and seller result in litigation before the
court of law, the court applies law of sales and general contract provisions to adjudicate the
dispute.
Section objectives
 Thorough understand of the essential elements of a contract of sale, and how the
sale contract;
 Thorough understand of the legal effects of a contract of sale;
 Aware of the legal duties imposed upon buyers and sellers, and the consequences
that may flow if these duties are breached;
 Identify and solve authentic legal problems with regard to sale contracts;
 Familiarize with legal concepts and terminology commonly encountered in the
law of sale;
4.1.1 Definition of Contract of Sale
 Can you define contract of sale?
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Art.2266 of the Civil Code defines contract of sale as a contract whereby one of the parties,
the seller, undertakes to deliver a thing and transfer its ownership to another party, the buyer,
in consideration of a price expressed in money which the buyer undertakes to pay him. From
this definition we can drive the following essential features of contact of sales.
3. Contract: - A contract of sale is a contract and must fulfill all the requirements of a
valid contract discussed under unit two. There must be an offer and acceptance for the
formation of sales contract. The consent of the parties, which is expressed through offer
and acceptance, should also be free from defect. Mistake, fraud, duress, unconscionable
nature of the contract undue influence renders contract of sale invalid. The obligations
of both the buyer and the seller must be defined, lawful and possible. If the parties to
the contract of sale fail to comply with these requirements the contract would be
invalid.
4. Two parties: - The sale requires existence of two parties, the seller and the buyer. The
seller is a person who sells or agrees to sell goods. The buyer is a person who buys or
agrees to buy goods. It is necessary that the same person cannot be both a seller and a
purchaser.
5. Movable goods: - The subject matter of the contract of sale must be in the form
of movable goods. Sale and purchase of immovable property are covered under the
other book of the civil code.
6. Transfer of ownership: It is the element which distinguishes a sale from several other
classes of contract like bailment, lease etc. Hence, in a sale, ownership must be
transferred from the seller to the buyer. The owner of the thing must agree with the
other person to deliver and transfer ownership of the thing. A mere agreement to
transfer possession cannot be termed as a contract of sale. The seller must transfer or
agree to transfer ownership so that contract of sale is concluded. This essential
characteristic distinguishes many contracts from contract of sale.
For example, in the contract of letting and hiring the owner (the lessor) of a thing
delivers the thing to the other person (the lessee) but ownership is not transferred.
For example, Mr. A hires a horse with its cart from Mr. B at 20 Birr per day for a week.
Mr. A takes the horse and used it for transporting certain goods from one place to
another. Mr. B (the owner) did not transfer the ownership to the Mr. A (the lessee) and
he did not agree to transfer ownership. In cases of contract of bailment, the owner (the
bailor) also delivers the thing to the other person (the bailee). Nevertheless, the owner
does not transfer ownership to the bailee. This is because transfer of possession by
delivery transfers ownership although transfer of possession does not necessarily show
transfer of ownership.
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7. Price: - Price means money consideration for sale of goods. In a contract of sale money
must be paid or promised. If there is no money consideration, the transaction is not a
contract of sale. In addition to goods consideration expressed in terms of money is also
an essential element of the definition. The consideration for contract of sales must be in
cash. This consideration in cash is price. The apparent peculiarity of sales contract from
the general contract is the presence of consideration as its element. Thus, a contract of
sale must involve consideration in return for transfer of ownership. Consideration
normally connotes reciprocal obligation of the parties assumed in the contract.
4.1.2 Formation of a Contract of Sale
 Do you make up how contract of agency is created?
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A contract of sale is made by a buyer offering to buy or a seller offering to sell goods for a
price and the other party accepting such offer. Every contract as said before thus involves two
parties one of whom must offer and the other must accept to buy or sell goods and the
consideration should be the price. A contract of sale may be in writing or by word of mouth. It
may be made partly in writing and partly by word of mouth. It may also be implied from the
conduct of the parties. The conduct of the parties may give rise to an inference of fact that the
patties intend to sell and purchase. Persons enter restaurants, order dinner and eat them, but
obviously there is a sale.
4.1.3 Subject Matter of Contract of Sale
 Dear student do you know what constitute object of contract?
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Principally the subject matter of sale is “goods”. Goods are generally things such as chair,
desk, electricity which can be appropriated by human beings. Although goods can be
classified differently, goods can be classified into existing goods, future goods and
contingent goods. Although there is no such classification in the Ethiopian law of contract of
sales Article 2266 and 2267 shows that it is corporeal chattels which are under the ambit of
contract of sale.
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I. Existing goods: - Goods owned and possessed by the seller at the time of making of
the contract of sale are called existing goods. Where the existing goods are the subject
matter of a contract, they must be in actual existence since a sale can be made only of
a subject matter having actual or possible existence. Existing goods may be specific,
ascertained or unascertained:
a. Specific goods:- ‘Specific goods’ means goods identified and agreed upon at
the time a contract of sale is made. It means goods identified and agreed at the
time when a contract of sale is made. To be specific, the goods must be
actually identified.
b. Ascertained goods: - It means goods identified in accordance with the

agreement after the contract of sale is made. Ascertained goods are sometimes
used as specific goods, but ascertained goods are not always the same as
specific goods. For example, if A had 50 chairs of the same kind and offers to
sell 40, the goods are ascertained only when 40 particular chairs be
appropriated towards the contract. On appropriation the goods become
ascertained.
c. Unascertained goods:- It means ‘generic goods’ i.e. goods defined by

description or even by samples. Unascertained goods are not definite and
specific. The seller in the case of a contract for the sale of a unascertained
goods has the option, rather the right to supply goods of the kind or the quality
contracted for. He is not bound to deliver any particular goods.
II. Goods belongs to third party:-The seller may sell the thing that belongs to the
third party at the conclusion of the contract. Things belonging to third parties are
existing goods. Bailee and pledgee sell the thing that belongs to the bailor or pledger.
The seller shall have actual control of the thing to be sold and in the examples given
above, both the bailee and pledgee have actual control over the thing. Although the
goods can belong to third party, that third party shall have the ownership or possession
of the goods to be sold. As possession does not necessarily mean actual control, a
person who does not have possession but has actual control may conclude sales
contract. Even a person who is not the owner and who does not have actual control can
also conclude sales contract whose subject belongs to the third party. An agent can be
the best example of this when he agrees to sell a thing which is under the ownership
and possession of the seller.
III. Future goods: - Future goods mean goods to be manufactured or produced or acquired
by the seller after making of the contract of sale. Future goods are not in existence at
the time of contract of sale. Article 2270 (2) clearly states “a sale may relate to a future
thing which the seller undertakes to make for delivery to the buyer”.
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4.1.4 Relations between the Parties to a Sale
 Dear student, what do you know about responsibilities the contract relation
impose upon the parties?
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Each party to a contract of sale is bound by those obligations which he or she has expressly or
impliedly undertaken. Apart from these obligations, the law may also impose certain
obligations on the parties to a contract of sale. These obligations apply to any contract of sale
unless the parties have expressly or impliedly excluded them from the contract. This section
herein discusses the duties or obligations imposed on the seller and the buyer.
4.1.4.1 The Seller’s Obligations
The seller has certain obligations under the law and the contract which shall be performed.
The seller assumes certain obligations under the contract of sales. These obligations are the
obligation to deliver, the obligation to transfer ownership, the obligation to warrant the buyer
against dispossession defects and non-conformity to the contract and other obligations. Failure
to perform these obligation amounts to non-performance. In addition to these obligations the
seller does have shared obligations with the buyer.
I. Making the thing sold available (the duty to deliver)
The conclusion of a valid contract of sale casts on the seller the obligation to make the thing
sold available to the purchaser. In terms of this duty, the seller is obliged to put the merx at the
disposal of the purchaser, to enable the purchaser, in appropriate circumstances, to take it
away without lawful let or hindrance. If no time and/or place is agreed, one must then look at
circumstances. Some of the elements of this duty are set out below:
A. To make the thing available at the agreed time and place

The seller cannot deliver the thing whenever and wherever he likes. He must observe the
provisions of the law and that of the contract. The seller should deliver the thing sold at
agreed time. Failure to deliver at such time amounts to non-performance of the contract.
However, the parties may fail to specify the time of delivery or the date of delivery cannot be
inferred from the will of the parties, the seller shall deliver the thing as soon as the buyer
requires him to do so according to article 2276.
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It must be born in mind; however, that delivery shall be made immediately is meant to show
that delivery of the thing shall be simultaneous with the payment of the price unless there is
contrary agreement. If the parties agreed on the time of payment of the price, but fail to
specify time of delivery, the seller should deliver at the time of payment of the price as per
Art.2278. The seller may in such case retain the thing until payment is made.
According to Art.2277 of the civil code, where the parties have agreed that delivery shall take
place during a given period, it shall be for the seller to fix the exact date of delivery unless it
appears from the circumstances that it is for the buyer to do so.
Concerning the place of delivery, the parties to a contract sale are at liberty to decide. If no
place is agreed in the contract, then seller must make thing available at the place where, at the
time of the contract, he has his place of business or, failing such, his normal residence. On the
other hand, where the sale relates to a specific thing and the parties know the place where such
thing is at the time of the contract, the seller shall deliver the thing at such place. The same is
true where the contract relates to fungible things selected from a stock or a specified supply or
to things, which are to be made or produced in a place known to the parties at the time of the
contract.
B. The thing must be made available in the condition that it was at the time of sale
The purchaser is entitled to delivery of the thing (when the thing is made available) in the
condition it was at the date of sale. This obligation stands subject to any agreement to the
contrary. The seller may not make available more or less than the amount stated in the
contract, nor the contract goods mixed with others of a different description
The thing shall not be deemed to conform to the contract where: the seller delivered to the
buyer part only of the thing sold or a greater or lesser quantity than he had undertaken in the
contract to deliver; or the seller delivered to the buyer a thing different to that provided in the
contract or a thing of a different species.
C. The thing must be made available with all its accessories and appurtenances
According to Art.2274 of the civil code, delivery consists in the handing over of a thing and
its accessories in accordance with the contract.
D. The seller must at his own expense do whatever is necessary to make the thing sold
available to the buyer.
This obligation can be subdivided into a number of duties. The seller must:
 Ascertain the things sold (appropriate them), if unascertained.
 If not in a deliverable state, put them in a deliverable state at his own expense.
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 Allow the buyer to examine the goods sold before acceptance if the buyer requires
this.
II. The seller’s duty to transfer ownership

The seller shall take the necessary steps for transferring to the buyer unassailable rights of
ownership over the thing. Ownership transfers upon transfer of possession. Possession
transfers upon delivery. Thus, the necessary step to be taken by the seller to transfer
ownership is to deliver the thing to the buyer in any of the modes of delivery discussed in the
previous section.
However, delivery alone does not transfer ownership. The seller must be the owner of the
thing sold. It is the basic principle of property law that a person can transfer no greater right in
property than he himself possesses. For example, if A steals a watch from B and sells it to C,
C has no greater title to the watch than A possessed. Thus a non-owner cannot transfer
ownership. This principle is called nemo dat quod non habet in Latin. Thus the obligation to
transfer ownership includes the obligation to have a good title.
In most circumstances, the seller is the owner and is therefore obliged to transfer ownership. If
the seller does not have ownership, this duty means that the seller must ensure that:
A. The right of possession is not in contest when made available or delivered. In other
words, the seller must ensure that the buyer has free and undisturbed possession.
B. The thing must be made available in such a way that no-one will in future be able to
establish a superior legal right to the thing against the buyer.
As seen above, the seller is not required to transfer ownership of the thing to the buyer - his
duty, inter alia, is to make the thing available, and to give the buyer free and undisturbed
possession. However, what happens in the situation where someone bona fide believes he is
the owner of the thing he is selling, but in fact is not the owner? The short answer to this is
that the sale is valid. But where the purchaser is disturbed in his or her possession and
enjoyment of the thing by someone claiming better legal title to it (usually the owner), it is the
seller’s duty to come to the purchaser’s assistance and protect his possession of the thing after
being notified by the purchaser. Failure to protect the purchaser’s possession will render the
seller liable in such substances out of what is known as the warranty against eviction. This
warranty provides that, in effect, the seller must undertake ‘that no party will rightfully force
possession out of the hands of the purchaser.
III. The duty to make the thing available free from defects
The seller has a duty to deliver the thing free from defects. The law distinguishes between two
kinds of defect, namely, patent defects and latent defects.
Patent Defects
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Patent defects are those defects which are obvious to the naked eye. If the defect is ‘patent’,
the buyer may sue for breach of contract by defective performance. Where the buyer has
inspected the thing at (or before) the time of sale, and the inspection ought to have disclosed a
defect, and the buyer accepts the goods without objection, the seller is not liable provided he
has not warranted (expressly or impliedly) the absence of the defect, nor has he fraudulently
concealed it. The reasoning behind this rule is that the buyer is deemed to have waived his
remedies and to have bought the goods subject to the defect which, but for the lack of
attention, he would have discovered, or which he did discover and considered of no
consequence.
Latent Defects
Broadly speaking in this context a latent defect may be described as an abnormal quality or
attribute which destroys or substantially impairs the utility or effectiveness of the thing for the
purpose for which it was sold or for which it is commonly used. Such a defect is latent when it
is one which is not visible or discoverable upon an inspection of the thing.
It should be noted that a defect is latent if it is not apparent to the ordinary man, even if
apparent to the expert. Where the seller makes the thing sold available, and it is discovered
that the thing has a latent defect, the seller will be liable to the buyer. Where a defect which
could not be discovered by the normal process of examination, is subsequently discovered the
buyer may avail himself of such defect where he notifies the seller as soon as he discovers it.
The seller who has intentionally misled the buyer may not avail himself of the fact that the
notification of defects has not been sufficiently precise or made in due time.
As provided under Art.2298 of the civil code, in addition to the above mentioned conditions,
there is also period of limitation for suing on a warranty. The buyer must sue the seller within
one year from the date of notification of the defects or non-conformity to the contract except
when the seller misled the buyer. The parties may provide in their agreement a period
exceeding two years for suing on warranty but they cannot lessen this period to less than two
years.
4.1.4.2 The Buyer’s Obligations
The buyer also has certain duties imposed on him or her in law and contract. These duties are
(a) to pay the purchase price (b) to remove the thing or, if it is brought to him, to receive it,
and (c) to reimburse the seller’s necessary expenses.
I. Payment of the purchase price

The most important duty of any purchaser is to pay the purchase price. In most cases, the
manner, time and place of payment is agreed upon in the contract. Where there is nothing in
the contract regarding the manner of payment, he shall pay the price at the address of the
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seller. Payment may be made by cheque, depending upon its being honoured. Performance
other than what is due (called substituted performance, or datio in solutum) may be rendered
if the creditor consents, and if he does not consent and the payment is so rendered, the
obligation is validly discharged.
In cash sales where there is nothing in the contract regarding the time of payment, both parties
are obliged to perform as soon as the contract is entered into. Therefore the buyer must tender
payment when the seller is bound to make the thing sold available. In credit sales, a particular
day may be agreed upon for payment, or, if not, payment must be made within a reasonable
time. Examples of this might be – the last day of the month or a specified date.
II.To remove the thing or, if it is brought to him, to receive it

The buyer has a duty to remove the thing when it is made available by the seller or to receive
it if it is brought to him. Where a buyer fails to remove or receive the thing timeously (i.e.
reasonably) he is at (delay) fault. Where the buyer fails to receive the thing sold, this has
implications for the burden of risk and the seller may be entitled to reimbursement for
necessary expenditure in the upkeep and storage of the thing.
4.1.4.3 Common Obligations of Seller and Buyer
We have already discussed certain obligations that are unique to each of the contracting
parties the buyer and the seller. These obligations are unique because what is an obligation for
one party cannot be taken as the right of the other.
Common obligations of seller and buyer are such as to be made good by both the seller and
the buyer. In other words each of the parties will have to cover some of the liabilities. For
instance, you have issues of expense in the performance of the sale contract like delivery.
Such liabilities to be shared by both the seller and the buyer are responsibility (liabilities)
pertaining to expense, preservation and matters of risk. These common obligations are one
way or the other related questions of ownership.
A. Expenses of the buyer

These are expenses which are incurred in order to make the contract a reality. Formation of
the contract may be made by legal professionals and certain expenses may be necessary. In
this case the law says that, it is the buyer who should cover such expenses. So in simple terms,
these expenses are those incurred in the formation of the contract of sale. This is clearly put in
the civil code’s Art.2314 which says that “the expenses of the contract of sale shall be borne
by the buyer.”
There are also expenses of payment. These are expenses which are incurred in order to effect
payment. So if the buyer has to send money to the seller through the bank, for example, one
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has to pay a certain amount of money for the services rendered by the bank. Such expenses are
to be covered by the buyer. This is covered under Art 2315(1) of the civil code which says
“the expenses of payment shall be borne by the buyer.” The above holds true when the place
of payment is one either stipulated by the parties in the contract of in the case of silence, the
place of business of the seller.
Sometimes the place of residence or business of the seller may change. This may be done so
owing to various reasons. The seller may far for example, more from Addis Ababa to Jimma
owing to a range of factors. In such a case, the buyer’s obligation to pay for expenses of
payment would become more burdensome though the shift of the seller’s residence or place of
business is in no way related to the interests of the buyer. In such instances, the law says that
it is the seller who has to bear such expenses because it would be unfair to the interests of the
buyer taking in to consideration that it is the seller who has, due to his own personal reasons,
decided to change the place where payment is to be effected.
This is put under Art. 2315(2) as an exception to the rule under 2315(1) which makes the
buyer incur such expenses. The rule, Art.2315 (2) is that if the seller changes his residence
and as a result the cost of payment goes up then the seller will be responsible to cover the
increase. Some times when parties enter in to a contract, they may agree that delivery is to be
carriage free which simply implies that it is the seller would cover costs of transporting the
thing to the buyer’s place (See Art. 2318(2) of the civil code).
According to Art.2318(2)of the civil code up to destination of the delivery place provided in
the contract all the expenses of transport must be covered by the seller as ownership is not
transport to the buyer. But if the thing has to be sent to another place the extra expense must
be covered by the buyer for owner ship passes to him at the place where delivery should have
been affected. But, here, as is true to all forms of expenses, if there is any contrary agreement
to this rule under the contract that provision overrides the rule we discussed here in above.
That the more fact that, under the law or the contract, one bears the expenses of transport does
not mean that person is owner (risk bearer) of the goods sold. Ownership depends on time and
place of delivery. Any provision in the contract or the law heating to any kind of expense
stipulated under the law or by parties, in particular a provision where by expenses are to be
borne by the seller, shall not in itself transfer risks (ownership) to any party to the sale
contract (See Art.2327 of the civil code).
There is one exception to the principle that an owner always bears all expenses relating to a
thing in the absence of contrary agreement in the sale contract.
Custom duties, which are expenses that are imposed by the government for importing goods
to Ethiopia, is charged to protect domestic goods or discourage the import of certain goods.
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Such expenses are to be covered by the seller. However, if such duties are increased after the
formation of the contract, it is the buyer who will be made to cover the additional expenses.
4.1.5 Transfer of Risk
 Dear student, do you know what risk mean and how it transfers from the
seller to the buyer?
___________________________________________________________________________
___________________________________________________________________________
Risk refers to the possibility that something harmful or undesirable may happen to the thing
forming the subject matter of the sale contract. Thus, risk negates to lose, alteration, a
destruction, damage or deterioration of the subject of the sale contract.
As a general rule, risk of the loss of goods is primate in the person in whom ownership
resides. Thus, when ever ownership passes to the buyer (from the seller), he will pay the
purchase price though anything harmful of undesirable happens to the thing sold (Art.2323.)
In other words, the goods remain at the seller’s risk until the ownership there in is transferred
to the buyer, but when the ownership there in is transferred to the buyer the goods at the
buyers risk whether delivery has been made or not. That is, the buyer will pay the price
whether the things are damaged or destroyed. Thus, if after the contract the goods are
destroyed, cost, their value altered, damaged or deteriorated the question who is to bear the
conciseness is to be decided not on the bases of possession of the goods at the time of
occurrence of undesirable consequences but on the basis of ownership of the goods. That is
who so ever the owner of the goods is at the time of occurrence of harmful or undesirable
consequences must bear the result.
According to Art 2324, risk transfers up on delivery, i.e., risk is transferred to the buyer from
the day when the things are delivered to him. But the seller must deliver the things agreed and
such things must be free from warrntable defects(Art.2324(1)). Otherwise, if the things are
defective or not in conformity with the letter of agreement, the buyer has the right to refuse or
reject them and, if he does so, the seller will not be deemed to have delivered the goods to the
buyer ever if the latter has actually received the goods (Art.2290(2)). Again, even if the buyer
is late in taking delivery or paying price (when payment and delivery are concurrent
conditions,) the goods are deemed to have been delivered to the buyer (Art 2325(1)). It should
also noted that even if the things are defective or not in conformity with the terms of
agreement, if the buyer has not rejected them the things will be deemed to have been delivered
to him (Art.2324(2)). These, once delivery is effected risk is also effectively transferred to the
buyer. But, before delivery, risk remains in the account of the seller.
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4.1.6 Remedies for Breach of Sales Contract
 Dear student, can you explain what remedy the aggrieved party in agency
contract has under the law of agency?
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___________________________________________________________________________
A. The buyer’s remedy where the seller has failed to take care of the thing sold
Where the damage is material, the buyer is entitled to refuse to accept delivery of the goods
and to repudiate the contract, claim damages, and a refund of the price if paid. In other words,
he is entitled to treat the situation as he would non-delivery of the thing.
B. The buyer’s remedy where the seller has failed to make the thing sold available
If the seller fails to make the thing sold available, these are clearly breaches of contract for
which the buyer's remedies are contractual. The buyer has a right to demand the thing sold to
him (specific performance). A buyer who has received less than what he contracted to receive
may prefer to accept what was tendered, but sue for the balance to be produced.
Failure to make the goods available in a contract of sale is a major breach, and entitles the
buyer to cancel the contract. If the seller fails to make the goods available, damages may be
awarded (with or without cancellation, depending on the circumstances and type of breach)
according to the general principles of contract. Where the buyer is in default of the obligations
set out above, specific performance, cancellation and damages are available to the aggrieved
seller.
UNIT FOUR - SECTION TWO
4.2 Law of Security Devices
Section overview
In dealing with the law of sales under the previous section, you have studied various rules,
principles and concepts which regulate commercial transactions in the area of sales of goods.
In this second section of the unit you will study another area of law, i.e. law of security
devices. This law also has at the same objective as above, i.e. facilitating commercial
transactions. However, the nature and content of this law is different from law of sales. The
commercial relation emphasized in this law is not sales of goods rather it is the relation
between creditors and debtors in the performance of various obligations with special attention
to loan system. As the law of security devices is based on special contracts (guarantee, pledge
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and mortgage), the general principles and guidelines from the provisions of contracts in
general are applicable. Hence, your knowledge of the law of contracts in general is important.
Section Objectives
 Identify various forms of security devices;
 Determine nature of security devices;
 Thorough understand the importance of security devices in commercial transactions.
 Define and discuss the contracts to secure performance of various obligations
and the basic nature and importance thereof;
 Identify and apply the essential preconditions for valid formation and
effectiveness of contracts for security of transactions; and
 Effectively deal with the rights and duties of the parties involved in the
contracts for security of transactions.
4.2.1 Importance of Security Devices
 Dear student, can you illustrate the role that security device can play in
enhancing business transaction.
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___________________________________________________________________________
Generally speaking, from the very purpose for the creation of securities, they are designed to
facilitate the relations between creditor and debtor. Securities play a great role in
smoothening the relation between the debtor and his creditor. The question is how do they
serve this purpose? It is by assuring the creditor that the debtor will pay the debt or perform
his obligation to the satisfaction of the creditor; if the debtor fails to pay or discharge his
obligation, then, the security right of the creditor will be enforced to satisfy the claim of the
creditor. This substantially reduces, if not avoid, the possible damages and inconveniences
which may ensue from the non-performance by the debtor.
The availability of security devices encourages those with money and lends it to other to
whom they might not land without greater security of repayment. This increases economic
activity by putting the otherwise dormant (inactive) money to produce use in the flow of
commerce. Thus, encouraging people to enter in to transaction and create societal beneficial
principal obligation is perhaps the main reason for the existence and expansion of security
device law.
4.2.2 Nature of Security Devices
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 Dear student, can you identify the distinctive feature of security devices?
___________________________________________________________________________
___________________________________________________________________________
If a right doesn’t bring an independent benefit to the owner of the right or if it simply assists
he enforcement of another principal right, then the former is referred to as accessory right.
There would be no reason for securities to exist unless there is primary obligation the
performance of which is ensured by creating security rights. Accordingly securities are
accessory as they cannot exist or can’t be enforced in the absence of the principal right
/obligation the performance of which is secured by the creation of securities. Generally,
securities are created as an alternative remedy for the creditor in case the debtor fails to
perform the principal obligation.
This accessory nature of securities can be seen from various angles. In the first place as it has
already been discussed, without valid primary obligation no security can exist. Secondly, the
enforcement of securities is conditioned upon the failure of the debtor to discharge his
obligation. In other words, securities can be enforced only after ascertaining the failure of the
debtor and in order to ascertain the failure of the debtor we need to wait for the due date of the
principal obligation. Hence, securities stay inactive until the due date of the secured
obligation. Thirdly, if the primary obligation is extinguished for what so ever reason, it
automatically results in the extinction of securities which have been created to ensure the
performance of that obligation. Securities by their nature cannot survive the extinction of the
obligation for the security of which they are created.
4.2.2 Kinds of Security Devices
The law of security devices regulates the relation between the debtor, creditor and third party
in relation to guarantee, pledge and mortgage. We will discuss the different types of securities,
the basic feature and content of each type of security, the distinction among different types of
securities, and the importance of each type of security.
4.2.2.1 Suretyship and its nature
 Dear student, can you define the term suretyship?
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The idea deriving from the wording of Article 1920 of the Civil Code is that where the
principal debtor defaults, the guarantor steps in and executes his obligation in respect of the
creditor- usually a payment in the debtor's place. So a third party is introduced in the bilateral
relation, which exists between creditor and debtor.
Thus, suretyship is defined as a contract in which a person binds himself for another already
bound and agree with the creditor to satisfy the obligation if the debtor does not. Suretyship
involves a three party relationship of creditor, debtor and surety. The obligation of the surety
presupposes and depends upon the existence of an obligation of a principal debtor. This is also
what is clearly enshrined under Article 1920 of the Civil Code. According to this provision,
whosoever guarantees an obligation shall undertake towards the creditor to discharge its
obligation, should the debtor fail to discharge it.
The fundamental advantage of suretyship is to make transactions much easier by increasing

the safety of the creditor entering such a secured transaction. The creditor has in fact two (or
more) debtors for the same debt. He is encouraged to conclude riskier contracts in the
knowledge that in case of a default of the main debtor, he can fall back on the guarantor.
Hence suretyship is a classic and extremely frequent security in commercial relationships.
This enables the trader to contract with a buyer he does not know of for instance, or with a
partner who presents an uncertain solvency. This consideration is important in countries
where commercial information is still little developed, where balance sheets are not readily
available to creditors or commercial registers still relatively uninformative.
The advantage of suretyship from the side of the debtor, on the other hand, is that he gains
credibility and will be able to trade. It is an important asset for someone setting up a business
or entering a new field of activity. Suretyship supports the creation of new businesses and
buttresses a developing economy. It is furthermore a cheap way of curing credit, obtaining
loans ... etc.
Suretyship as it develops can become an important area of activity for financial institutions
such as banks or insurance companies, who will be willing to grant their guarantee against a
relatively low fee paid by the main debtor. It indirectly encourages transparency in
commercial relationships because such financial institutions are directly interested in precisely
appreciating the risk they are covering. This in turn encourages the development and
professionalism of accounting professions, which are the best informants as to the financial
health and prospects of businesses.
The advantages of suretyship for the guarantor are not evident. The effect of a suretyship is
that the risk of not being paid is transferred from the creditor to the guarantor. The latter is at
the risk of pay, whilst he has not benefited from the performance given by the creditor.
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Furthermore, his chances of being refunded are slim, by definition, as he is only called to pay
when the debtor has refused to do so, or is unable to do so.
Even though the suretyship is an accessory obligation to that existing between the creditor and
the debtor, the debtor is not a party to the suretyship. The suretyship does not have to be
known by the principal debtor (Article 1921 of the Civil Code). He does not have to give his
express consent to such suretyship, and it can even be concluded without his knowing. This
last situation will be where the guarantor wants to make a liberality to the debtor. The
originality of this situation bears underlining: it is an exception to the very general principle
that a person may only be obliged where he has given his consent (Article 1679 of the Civil
Code). The rationale behind this exception is that the guarantor must be allowed maximum
protection where it does not conflict with the proposed increase in the number of suretyships.
To state otherwise would be to endorse an unlawful enrichment of the defaulting debtor.
A contract of suretyship must be express. The essential rule is that a suretyship may not be
presumed, it has to be expressly given. The law does not admit tacit suretyship. The rationale
is that such a security is extremely dangerous for the guarantor; he takes the final risk of
default of payment although he did not even get the counterpart execution of contract. So a
simple attitude or an equivocal action by a person cannot be deemed to be a suretyship if it is
not express. It seems unwise that an affirmation made in vague terms to induce someone to
treat with a determined person, should be taken for a veritable suretyship. Article 1922(1) &
(2) of the Civil Code provide this characteristic of suretyship. Accordingly, a logical
requirement is that, whatever the form, there must be neither doubt as to the identity of the
debtor secured, nor as to the debt secured. If not, the suretyship will be considered invalid as
being uncertain.
 Effect of suretyship between the debtor and the surety
When the surety pays the creditor, he is discharging the obligation of the principal debtor. The
principle is that the guarantor, who has paid the creditor instead of the debtor, shall be
indemnified by this debtor. Accordingly, the guarantor is entitled to be indemnified by the
principal debtor.
In this regard, the fact that the guarantee may be given without the consent of the principal
debtor does not relive the latter from indemnifying the surety what the latter paid to the
creditor. In exercising his right of indemnification, the surety enjoys two rights of action, one
which is personal to him arising from the contract of suretyship and the other which is the
action of the creditor who has been paid and which the surety obtains by subrogation. The first
is called chirographic action while the latter is the right of subrogation.
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The personal action of the surety arises from the contract of suretyship itself. The action is
based on the theory of implied mandate. Accordingly, this recourse is open to the surety only
against those debtors for whom he has become surety and not against the other debtors.
This personal action entitles the surety to claim the principal, interest, expenses and damages
if any. The principal is not just the amount of the debt paid. It includes everything the surety
has disbursed in acquitting the debtor. Thus, as regards the surety, the interest due to the
creditor and paid by the surety is considered as forming the principal of his payments, so that
they in turn produce interest. Similarly, the surety has the right to require payment of interest
on his disbursement which starts from the day of payment.
Expenses are those expenditures incurred by the surety in defending the action of the creditor
which may include costs advanced for discussion of assets under Article 1936(1) of the Civil
Code. The surety is, however, required to give notice to the debtor of the proceedings
instituted so that the latter may prevent such costs by paying the creditor. The surety is, in
principle, to be indemnified completely. Accordingly, in addition to interests, the surety is
entitled to be indemnified for all damages he suffers as a result of the debtor's fault or
negligence. In this respect, see Articles 1940 (2) and (3) and Article 1941 of the Civil Code.
4.2.2.2 Pledge
 Dear student, can you define pledge as one of the property security?
___________________________________________________________________________
___________________________________________________________________________
Pledge is a security interest in personal property represented by an indispensable instrument,
the interest being created by a bailment or other deposit of personal property for the purpose
of securing the payment of a debt or the performance of some other duty. According to
Art.2825 of the civil code, a contract of pledge is a contract whereby a debtor undertakes to
deliver a thing, called pledge, to his creditor as security for performance of an obligation.
A creditor can enjoy security right as a pledge only if there is a clear contract of pledge which
entitles him to this right. Hence, the only source of pledge is contract unlike the case of
mortgage which may arise either from the provisions of the law or judgments of courts which
will be discussed next. The pledge may consist of a chattel, a totality of effects, a claim or
another right relating to movable property. It must be capable of being sold separately by
public auction (See Art.2829 of the civil code).
4.2.2.2.1 Formation of Pledge Contract
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Specification of maximum claim and written form are the requirements which the law
prescribes to be fulfilled in order for valid contract of pledge to exist (see Art.2828 of the civil
code). These are mandatory requirements to be fulfilled in the conclusion of contract of
pledge under the pain of nullity of the contract if not fulfilled. Clear specification of the
obligation itself and the maximum amount of the part of the obligation which is secured by
conclusion of the contract of pledge is the first important and mandatory equipment here.
The second formality requirement is with written form. As you may understand from Article
2828(2), the law requires the contract of pledge to be made writing upon certain condition.
The condition is if the maximum amount guaranteed, as discussed above, exceeds 500
Ethiopian birr. Hence, the written form becomes a form prescribed by law only if the amount
guaranteed exceeds birr 500. Note that the amount referred here also is not the maximum of
the claim of the creditor, but it is the maximum part of such claim which is guaranteed
by the pledge contract. This is very important to ascertain whether the creditor is secured for
his total claim or only some part of it. This, in turn, conveys the message that whatever the
value of the security (the object) may be we cannot assume that the creditor is secured for the
totality of his claim.
4.2.2.2.2 Transfer of Possession
Transfer of possession is another important requirement which has to be fulfilled in order for
the security right (pledge) itself to be an enforceable right. Without or before transfer of
possession, which is effected through delivery of the movable thing either to the creditor or
third party, the creditor cannot claim to be secured creditor. He remains to be ordinary creditor
until he takes the possession of the pledge. The requirement for transfer of possession
basically demands that the pledge has to be dispossessed of the pledged property. He should
not continue to possess the property after giving it as security under contract of pledge. The
debtor should relinquish the possession of the pledged property into the hands of appropriate
person, either the creditor or third party.
Transfer of possession is made a requirement principally because of the nature of the thing
subject to pledge i.e. movable. As you may remember from your discussion of property law,
whosoever is in possession of movable things is presumed to be an owner and can transfer the
thing as owner to a third party in good faith (a purchaser, a creditor, etc). Once the thing is
transferred to such third party in ownership or as a pledge, the security right of the previous
creditor cannot be enforced. This is because the creditor cannot follow the movable property
in the hands of third party in good faith since the law gives priority to the protection of
such third party who has the actual possession of the thing as an owner or pledge-credit or
any other right.
4.2.2.2.3 Rights and Duties of the Parties to the Contract of Pledge
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As we have already discussed, pledge arises from the contract between the pledgee and the
pledger. In as much as it is a contract, it gives rise to the rights and duties for the parties.
Inherent to the nature of contracts in general, the rights of one party is the duty for the other
party and vice versa. Accordingly, all the rights of the pledgee give rise to duty for the pledger
and the rights of the pledger are duties for the pledgee. Hence, it is possible to see that there
are a number of rights and duties for the parties which include, among others, the duty of the
pledger to transfer possession as the pledgee has the right to have possession of the thing, the
duty of the pledgee to return the thing upon the extinction of the primary obligation as it is the
right of the pledger to get back his thing, etc. However, in the following paragraphs, we will
focus on the principal rights and duties of the parties as emanating from the contract of
pledge.
I. Rights and Duties of the Pledger

As we have already discussed elsewhere in this material, the pledger may be either the debtor
himself or third party on behalf of the debtor. This pledger, as an owner of the pledge, has
certain rights which he reserve on the pledged property. He has also certain duties which arise
from the contract of pledge. We will discuss the principal rights and duties of the pledger as
follows.
A. Rights of the pledger

The contract of pledge is concluded with the view to making use of full right of ownership on
the pledged property in satisfying the claim of the creditor. In short, the right of the secured
creditor under contract of pledge pertains to full right of ownership on the pledge. However,
the security right of the creditor is an accessory right which will be enforced only after the due
date of the secured obligation in case the debtor fails to perform it in the manner agreed.
Hence, the law does not want to seriously restrict the right of ownership on the basis of
accessory right. Moreover, if we stop the debtor from exercising his right of ownership, this
will seriously affect the property right of the debtor as he has already lost the possession of the
pledge because of the requirement of transfer of possession. Accordingly, the law clearly
provides that the pledger retains right of ownership on the pledged property and can exercise
this right of ownership in a way it does not affect the security right of the creditor.
1. Right to retain ownership

As per Art.2834 of the civil code, the pledger retains full right of ownership on the pledge and
can exercise certain rights inherent to the right of ownership. Hence, in our previous exercise
the pledger can exercise her right of ownership in various ways. For example, she can dispose
the thing in favour of third parties and the third party can acquire full right of ownership on
the property irrespective of the fact that the thing is under possession of the creditor. She can
also give the same property as security for another debt as far as it does not affect the right of
the previous creditor. The exercise of these rights may appear as practically difficult since the
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thing is under the possession of the creditor and subject to security right. But, consider the
above exercise again in order to see how it is possible to exercise these rights.
2. Right to take back the thing by discharging the secured obligation at any time
Here the right to which the debtor is entitled by law is the right to take back his property by
discharging the debt guaranteed at any time even before the due date. He has an absolute right
to claim the return of the property by discharging the guaranteed debt. This right is absolute as
it cannot be restricted even by agreement.
This debtor is provided with this right probably for two principal reasons. First, as we
have repeatedly stated contract of pledge is accessory contract and so is the security
right of the creditor. Hence if the secured obligation is discharged sufficiently, there is no
reason why the thing remains under the possession of the creditor. The only claim of the
creditor on the pledged property is just to ensure the payment of the secured obligation. Once
his claim is satisfied he has to give back the thing to the owner. Second, as stated above the
debtor is entitled to dispose the thing. Hence, if the buyer wants the thing immediately, the
debtor can take back the thing and deliver it to the buyer by discharging the debts guaranteed.
Once the pledge is sold, the pledger has a right to get any balance of the proceeds after the
secured creditor is paid sufficiently. This right also seems to emanate from his right of
ownership. Because after the claim of the creditor is settled the balance of the proceeds, if
any, is the value of the capital which belongs to the owner of the thing. Accordingly, it should
be handed over to the owner of the thing. You can read this from Art.2859 (2) of the Civil
Code.
B. Duties of the pledger
1. Duty to deliver the thing

The first duty of the pledger which we have already discussed elsewhere is the duty to transfer
possession. As you remember from our previous discussion the possession of the thing has to
be transferred either to the creditor or to a third party custodian one way or the other it is the
duty of the pledger to deliver the thing and transfer possession of the thing to the appropriate
the person, creditor or third party. This dispossession of the pledger is necessary for the
effective protection of security right of the creditor.
2. Duty to cover cost of preservation

When considered in general terms, both the pledgee and the pledger have interest in
the preservation of the thing. On the part of the pledger, he is the owner of the thing and if the
thing sustains any damage the harm is to the owner, because, the damage to a thing is actually
damage, to the owner as it affects the capital (value) of the thing. On the part of the pledgee,
the strength of his security right depends on the value of the thing. In other words, the value of
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the security right of the creditor corresponds to the value of the thing. Whenever the thing
deteriorates and loses value as such it reduces the security right of the creditor. The
probability to be paid first shrinks since the deterioration of the thing causes loss of value
which represents the extent to which the pledgee is secured.
Therefore, both parties are interested in the preservation of the thing and they have to take part
in the preservation of the thing. The pledgee has an immediate possession of the pledge and he
is presumed to have (daily information about the condition of the thing). He knows directly
what is happening to the thing. Hence he is expected to preserve the thing even by incurring
expenses if necessary. However, the pledger shall reimburse the pledgee for the cost of
preservation since the duty to preserve a thing is actually the duty of the owner of the thing. In
conclusion, the pledger has to cover the cost of preservation which might have been
reasonably incurred by the pledgee but the pledgee-creditor has to undertake immediate
preservation of the thing. Read Art.2835 of the Civil Code.
II. Rights and Duties of the Pledgee

As you may have already understood, the contract of pledge is concluded principally for the
benefit of the pledgee. This is true because the driving cause for concluding a contract of
pledge is just to provide the pledgee with the security right. Hence, the pledgee drives, from
the contract of pledge, various rights together with certain duties.
A. Rights of the pledgee
 Dear student, can you assume what rights the pledgee has in contract of
pledge relation?
___________________________________________________________________________
___________________________________________________________________________
1. Right to possess the pledged property
As we have already discussed under the section on the transfer of possession as a requirement
in the creation and execution of pledge the pledgee creditor should take the possession of the
pledge. You know that a creditor who does not have possession of the thing cannot in any way
demand enforcement of his security right. He cannot claim to be given priority in the payment
of the obligation. This clearly shows that it is the right of the creditor to take possession and
retain the pledge under his control until the debt is paid.
The creditor is considered as the lawful possessor of the pledge and can bring even possessory
action to protect his possession. Any third party even the pledger may try to intervene with or
usurp the possession of the creditor. As a lawful possessor, the creditor is entitled to protect
his possession in every manner that a possessor can protect his possession lawfully. More
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specifically, he can use a reasonable and proportional force or he may bring possessory action
for the cessation of the interference or restoration of his possession You may refer to your
course on Law of Property (Arts.1148 and 1149 of the Civil Code) or even in the law of
pledge Art.2842 (1) of the Civil Code.
According to Arts.Art.2843 and 2844 of the Civil Code, the creditor is entitled to retain the
thing under his control irrespective of the fact that it is delivered to him by the debtor who is
not able to dispose it. The principal justification seems to be that the thing is movable and
anybody who is in possession of a movable is presumed, by law, to be the owner thereof (See
Art. 1193 of the Civil Code). Hence, the creditor is entitled to assume the debtor who
possesses the thing is the owner and accept the thing as a pledge trusting this presumption of
the law.
2. The right to collect fruit

If the pledged property by its nature produces fruit, the law entitles the creditor to the full
right of ownership on the fruit. The reason seems to be that the thing produces the fruit,
presumably, because of good preservation and investment by the creditor who is having the
possession of the thing. Another reason may be that sometimes, because of its nature, it may
be inconvenient to keep the fruits or deliver them to the pledger timely (E.g. Think of a cow
given as pledge and its milk to be collected daily). Whatever the reason may be the pledgee is
entitled to collect the fruit and enjoy it as an owner from the reading of Art 2841(1). However,
the pledgee is entitled to the ownership of fruit not for free. The value of the fruits he
collected will be used to settle the claims of the creditor which includes, the cost of custody
and preservation of the pledge, the interest if the debt is interest bearing (contractual or
legal), and lastly the capital of the principal debt itself.
3. Right to be paid first (Priority Right)

This is the principal right which is a real expression of security right. This right of priority
exempts the secured creditor from competition with other creditors who claim payment from
the same debtor. It is a right which will be exercised on the proceeds from the sale of the
pledged property upon the failure of the debtor to perform (pay) his obligation. We will have a
separate section on the manner of sale of the pledge. The present discussion is based on the
assumption that the debtor has failed to discharge his obligation and the pledge has been sold
by fulfilling the requirement of the law.
It is the right to be paid from the proceeds of sale of a pledge prior to or in preference of other
creditors who claims payment from the same debtor. The secured creditor does not compete
with other creditors and is not subject to the rule of proportional payments even in situations
where the assets of the debtor are not sufficient to pay all of his debts.
B. Duties of the Pledgee
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We have stated elsewhere that the rights of the pledger constitute the duties of the pledge in
general terms. However, let us consider some basic duties of the pledgee as a person
possessing the property which belongs to another person - the pledger.
1. The duty to preserve the thing

Because of his right to possess the thing the pledge will be the under physical control of the
pledgee unless the thing is put under the custody of a third party in an exceptional situation.
Hence, as a person with a physical control of the pledge, the pledgee knows the condition of
the pledge i.e. whether the pledge is deteriorating and losing value or whether it is in a good
condition, etc. The pledgee is in a better position to check the state of the pledged property.
That is why the law provides that the duty to preserve the pledged property is the duty of the
pledgee although he is entitled to the reimbursement for the cost of preservation by the
pledger.
2. The duty not to use the thing

Although the pledge is entitled to the possession of thing as well as collection of the fruit, he
is not as of right entitled to use the thing. His possession doesn’t give rise to the right to use
the thing. He may be entitled to use the thing only under two exceptional circumstances. Read
the following provision and try to identify the circumstances in which he may use the thing.
3. The duty to return the thing upon extinction of the secured obligation
Now, it should be clear that the only right of the creditor on the pledged property is the right
to possess the thing until the secured obligation is discharged. Once the secured obligation is
discharged, there is no reason why the creditor may retain the possession of the thing. The
discharging of the secured obligation results in the extinction of pledge and the pledger can
exercise full ownership without any restriction which may arise from the contract of pledge.
This duty of the pledgee to return the pledge can be understood from Arts.2845(1) and 2849 of
the Civil Code.
4.2.2.2.4 Execution of pledge-sale of pledge
 relation?
Can you explain how sale of pledge constitutes termination of security
___________________________________________________________________________
___________________________________________________________________________
Sale of pledge is the means to the execution of the security right of the pledgee. It indicates
that the debtor has failed to discharge the secured obligation. Hence, the execution of a pledge
takes place through sale of the pledged property after ascertaining that the debtor has failed to
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discharge the secured obligation. Accordingly, we will discuss sale of pledge assuming that
the debtor has failed to perform the secured obligation.
Like the preservation of the thing, both the pledger and the pledgee have interests to be
protected during the process of sale of pledge. Regarding the interest of the pledgee, the extent
to which he is given priority depends on the amount of proceeds collected from the sale of the
pledge. If the proceeds from the sale of the pledge are not sufficient to cover the payment of
his claims, he will turn to be ordinary creditor; he will take equal position with unsecured
creditors. On the other hand, the pledger is also interested in the process of sale since he is
entitled, as an owner, to the balance remaining after settling the claims of the secured creditor.
Therefore, the process of sale of pledge should be as reasonable and fair as possible to strike
the balance of the two interests.
4.2.2.3 Mortgage
 Dear student, what is meant by mortgage in business transaction?
___________________________________________________________________________
___________________________________________________________________________
Mortgage is a security device which belongs to the category of real security. Mortgage is
defined in some jurisdictions as non- possessory right which gave the creditor only the option
if seizing and selling the property up on default. Mortgage plays an immense role in business.
Arranging mortgage is seen as the standard method by which individuals and business can
purchase residential and commercial real estate without the need to pay the full value
immediately. In many countries it is formal for home purchases to be funded by mortgage.
The case in point here is the emerging trend in our country where by the Ethiopian
commercial bank extending loan for condominium home owners by having the building as a
mort
4.2.2.3.1 Creation of Mortgage
 Dear student, can you contract of mortgage from contract of pledge?
___________________________________________________________________________
___________________________________________________________________________
The pledge is created by contract unlike in the case of pledge; however, mortgage can be
created in different ways. Art.3041 provides four ways of creating of mortgage. These are
legal, judicial, and contractual and mortgage created by other private agreement.
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Legal mortgage is sometimes referred to as tact mortgage, because the law without the
consent of the parties concerned creates it. The very purpose of legal mortgage is to protect
persons who lost possession of their immovable and may be in a difficult position to secure
possession of the price or compensation due to them. For example, as you can read from Art.
3042 of the civil code, an owner who sells his immovable is entitled to legal mortgage on the
immovable he has sold as far as he is not paid the full price of the property. This is because;
he is transferring to the buyer full right of ownership once and for all. Hence, he deserves to
be paid full price as he is loosing right of ownership on an exceptionally important property.
Co-heirs also have the same protection since they are entitled to legal mortgage against
immovable put in the share of another co-partitioner. If one of co-heirs is entitled to payment
of compensation by the co-partitioner in case the later is dispossessed of any property put in
his share or held liable for the payment of any debt arising from succession, he can demand
the payment of compensation against another co-heir by exercising his right of legal mortgage
on the immovable put in the share of such co- heir.
Contractual mortgage on the other hand is a kind of mortgage that is created by the consent of
the parties. Once again it is to be noted that like any other contract it must fulfill all the basic
elements the provisions of the exception due to the special nature mortgage, may found their
way in to the contract of mortgage.
Art. 3045 (1) of the civil code clearly provides that mortgage shall have a legal effect only
if its creation is evidenced by a written document. This is a form prescribed by law and
its non fulfillment makes the relation legally ineffective as the failure to observe a form pre
scribed by law results in the ineffectiveness of the relation. Coming to the position of our law,
registration is one of the essential preconditions for the valid existence and effectiveness of
mortgage. It is evident from the reading of Art.3052 that mortgage starts to be effective only
as of the date of registration.
Judicial mortgage is the case where the right of mortgage for the creditor is provided by
decision making organs, principally Courts and Administrative Tribunals. In the case of
judicial mortgage, the purpose of the law seems to be ensuring the better enforcement of
decisions rendered by courts or various arbitrative tribunals. As, you all probably know, the
toughest of all the stages in legal proceedings is execution of judgments. This is true because
the judgment debtor naturally evades the execution of judgment against his property by
disposing it or changing the ownership into another’s name or by any other means. Hence, the
law clearly states that courts or arbitrative tribunals may ensure the execution of their
decisions or awards by creating judicial mortgage against one or more of the immovable
belonging to the judgment debtor.
4.2.2.3.2 The Rights and Duties of Mortgagee
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The creditor (mortgagee) derives two principal rights from mortgage. The first is the right to
be paid from the proceeds of the sale of the property, in priority to any other creditor. This
right is referred to as the right of preference or priority in payment. The second right of the
creditor is the right to follow the property in the hands of third parties whose right is
registered after the registration of the mortgage. This right is referred to as the right of pursuit.
One important point about the rights of the mortgagee is that even if at the due date of the
secured obligation the security right (mortgage) becomes ineffective (the mortgaged
immovable may be totally lost or its value may not satisfy the whole claim of the creditor,
etc.), the creditor is still entitled to proceed against other properties of the debtor as an
ordinary creditor, i.e. on equal footing with creditors whose claim is not secured.
III.2.2.3.3 The Rights of the Debtor (Mortgagor)
Until the debtor fails to perform the obligation he continues to posses and exercises his right
of ownership on the thing. In addition, one importance of mortgage as stated above is that it
doesn’t necessarily result in the disposition of the debtor of his mortgage property. This, in
turn, allows the debtor to exploit his property in the manner he thinks fit even after giving it as
a mortgage. Finally, registration of mortgage and specification of the maximum value secured
by the mortgage are also to the advantage of the debtor. That is, registration indicates that the
right of mortgagee is protected by the registration of mortgage. Hence, the creditor is not
entitled to and it is unnecessary for him to take the possession of the property. This indirectly
allows the debtor to exploit his property even during the term of mortgage. On the other hand,
specification of maximum claim secured also enables the debtor to create another additional
mortgage or other real rights on the property as far as its value can be sustained.
4.2.2.3.4 Extinction of mortgage
 Dear student, can you list causes of termination of mortgage relation?
___________________________________________________________________________
___________________________________________________________________________
Extinction of mortgage is another point which needs consideration. In principle, as its
existence and effectiveness should de evidenced by registration, the extinction of mortgage
also should be evidenced by cancellation of the registration. Hence, cancellation of the
registration is the main proof of extinction of mortgage Art.3109. Cancellation may be sought
from the court if the principal claim is extinguished or settled for one or the other reason.
Another important ground for cancellation is where the creditor renounces his right of
mortgage as provided under Arts.3110 (b) and 3112 (1). But, note that the renunciation of
the mortgage doesn’t amount to renunciation of the principal claim since the mortgage is
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simply to secure the payment of the principal claim [see Art. 3112 (2)]. Another important
ground for cancellation is when the creditor makes the subrogation impossible. Where the
mortgager is not the debtor himself but third party on behalf of the debtor, such third party
mortgagor has the right to be subrogated to the right of the creditor as can be understood from
Arts.3106 cumulative Arts.3095 & 3097. Hence if the creditor makes this subrogation
impossible the third party mortgagor has a right to demand cancellation of the mortgage.
The last point about mortgage is regarding the sale of mortgage. Similar to the case of pledge,
sale of mortgage is the first and the most important step towards the enforcement of security
right of the mortgagee. However, the sale and enforcement of mortgage is not different from
that of pledge as discussed in the previous chapter. This is true if you consider the provisions
of the civil code dealing with mortgage where no detailed rules have been provided regarding
the sale of mortgage except some general principles under Arts.3060-3063 of the civil code.
Activity 4
1. Discuss the price as one of the basic constitutive element of contract of sale.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
2. Discuss why the law of sales is vital in regulating sale transactions

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
3. Contract is usually consensual i.e. the parties shall give their consent on the same thing
in the same sense. But in some instances this may not be the case in creation of
mortgage. Discuss
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
4. Discuss why contract of suretyship must be express and cannot be presumed.

________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
5. Differentiate formation of contract of pledge from formation of contract of mortgage?
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________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
UNIT SUMMARY
Sale is the most common and important of all commercial transactions. In any exchange
economy sale is the essential meanse by which the various unit of production exchange their
outputs, thereby providing an opportunity for specialization and enhanced productivity.
Art.2266 of the Civil Code defines contract of sale as a contract whereby one of the parties,
the seller, undertakes to deliver a thing and transfer its ownership to another party, the buyer,
in consideration of a price expressed in money which the buyer undertakes to pay him. From
this definition we can drive the following essential features of contact of sales.
A contract of sale is made by a buyer offering to buy or a seller offering to sell goods for a
price and the other party accepting such offer. Every contract as said before thus involves two
parties one of whom must offer and the other must accept to buy or sell goods and the
consideration should be the price. Since there is no formality criteria this contract can be made
in writing, conduct or by word of mouth. Each party to a contract of sale is bound by those
obligations which he or she has expressly or impliedly undertaken. Apart from these
obligations, the law may also impose certain obligations on the parties to a contract of sale.
The law also provides various remedies for default performance and nonperformance.
The law of security devices emphasizes on commercial relation between creditors and debtors
in the performance of various obligations. As the law of security devices is based on special
contracts (guarantee, pledge and mortgage), the general principles and guidelines from the
provisions of contracts in general are applicable. Securities are created as an alternative
remedy for the creditor in case the debtor fails to perform the principal obligation. The
purpose of the law regulating guarantee, pledge and mortgage same i.e. making the
transactions much easier by increasing the safety of the creditor entering into such a secured
transaction.
Checklist
Can You Thorough understand of the essential elements of a contract of sale,
and how the sale contract?
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Thorough understand of the legal effects of a contract of sale?
Aware of the legal duties imposed upon buyers and sellers, and the
consequences that may flow if these duties are breached?
Identify and solve authentic legal problems with regard to sale
contracts?
Familiarize with legal concepts and terminology commonly
encountered in the law of sale?
Identify various forms of security devices?
Thorough understand the importance of security devices in
commercial transactions?
Define and discuss the contracts to secure performance of
various obligations and the basic nature and importance thereof?
Identify and apply the essential preconditions for valid
formation and effectiveness of contracts for security of
transactions?
Effectively deal with the rights and duties of the parties
involved in the contracts for security of transactions?
Commandment!
Part I:- Say true or false

1. Immovable property is the subject of contract of sales.
2. The essential element in general contract can be applied to the formation of sales
contract by analogy.
3. A contract of sale is made by a buyer offering to buy or a seller offering to sell goods
for a price and the other party accepting such offer.
4. The seller may not sell the thing that belongs to the third party at the
conclusion of the contract.
5. The conclusion of a valid contract of sale does not cast on the seller the obligation to
make the thing sold available to the purchaser.
6. The seller can deliver the thing whenever and wherever he likes.
7. Failure to make the goods available in a contract of sale is a major breach, and entitles
the seller to cancel the contract.
8. The obligation of the surety does not presuppose and depends upon the existence of an
obligation of a principal debtor.
9. Pledge contract cannot be made orally.
10. Mortgage is a security device which belongs to the category of real security.
Part II: Fill the appropriate word or phrase in the blanks space
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1. _________________________________________may be described as an abnormal
quality or attribute which destroys or substantially impairs the utility or effectiveness
of the thing for the purpose for which it was sold or for which it is commonly used.
2. Where the buyer fails to receive the thing sold, this has implications for the burden of
risk and the seller may be entitled to _________________________________ in the
upkeep and storage of the thing.
3. ________________________________refers to the possibility that something harmful
or undesirable may happen to the thing forming the subject matter of the sale contract.
4. ________________________________ are designed to facilitate the relations between

creditor and debtor.
5. ______________________________is defined as a contract in which a person binds

himself for another already bound and agree with the creditor to satisfy the obligation
if the debtor does not.
6. _______________________________is a contract whereby a debtor undertakes to

deliver a thing, called pledge, to his creditor as security for performance of an
obligation.
7. ________________________________is defined in some jurisdictions as non-
possessory right which gave the creditor only the option if seizing and selling the
property up on default. Mortgage plays an immense role in business.
Part III:-Short answer questions

1. Explain the Priority right of secured creditor
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
2. Discuss the advantage of suretyship from the side of the debtor
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
References/ Further readings
Laws
 Negarit Gazeta Year, No. 2, the Civil Code of Ethiopia, Proclamation No.165/1960.
 The Negarit Gazeta, Year 19, No.3, the Commercial Code of Ethiopia, Proclamation
No. 166/1960.
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 The Federal Negarit Gazeta Year 4, No.16, the Proclamation to Provide for Properties
mortgaged/pledged with Banks, Proclamation No. 97/98
 The Federal Negarit Gazeta Year 4, No.17, the Proclamation to Provide for Business
Mortgage, Proclamation No. 98/98
Books
 Zecharias Kenea, Material for the Law of Sales and Security Devices, Addis Ababa
University, Law Faculty, (unpublished compilation)
 Planiol, M. Treatise on the Civil Law. 11th ed. Vol. II, Louisiana State Law Institute
(1959).
 ጥላሁን ተሾመ ፡- የኢትዮጵያ የዉል ሕግ መሠረታዊ መርሆች
 Gadisa Tesfaye and Mabrathom Futiwi Law of Sales and Security Devices: Teaching
material
 B Com/BBA:- Business Regulatory Frame Work Niversity of Calicut 2011
 Benjamin, J.philip. A Philip. A Treatise on the Law of Sale of Personal Property with
Reference to the Finch Code and Civil Law, 18th ed.
UNIT FIVE
Labor Law
Unit Introduction
Regulation of labor market through laws and enforcement mechanisms, and, establishing
institutions of coordination and consultation in order to ensure economic growth and
sustainability are perhaps the two most crucial of roles of the state in industrial relations.
Indeed, by effectively playing these two roles the state limits the commoditization of labor,
thus ensures productive use of human capital, and, converts economic activity from being a
purposeless pursuit of profit into an instrument that serves socially desirable goals of human
development. Obviously, these roles require a degree of, what might be called, state capacity,
that is, the existence of resources-human and financial to make and implement regulations,
and the ability of independent decision making that would allow governments to formulate
long term social and economic policies in accordance with the needs of their societies.
The fundamental principle of labor legislation is to guarantee the weaker party in the labor
market protection and basic rights in order to be in a fair position when negotiating salary and
working conditions.
Learning objective
After successfully completing this unit you will be able to:
 Define employment law
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 Explain the concept of minimum working conditions and their significance
 Identify sources of employment law
 Outlines the rights and duties of parties in employment relation
 Pin point the modalities for dispute resolution if and when it arises
 Identify special category of employees who are specially treated under employment
law
 Determine scope of labor law
 Define termination of employment relation
 Identify effects of lawful and unlawful termination of employment relation
 Resolve employment disputes on the basis of the relevant law
UNIT FIVE - SECTION ONE
5.1 Definition, Source and Scope of Labor Law
Section overview
Labor law is a brunch of law which regulates the relation between an employer and a worker.
This law is also known as industrial law, factory law and employment relation law. This law
designed to promote both labor management harmony and the welfare the society at large.
Though role the law plays in labor relation continues to be discussed throughout the unit,
under this section we will focus upon the definition, scope and source of labor law.
Section objectives
After successfully completing this section you will be able to
 Define labor law;
 Determine scope of labor law;
 List and explain sources of labor law.
5.1.1 What is labor law?
Labor law includes all the controls that regulate, direct, and protect management and labor. It
is a highly personalized type of law. In addition to meeting the terms of the law, labor law
compliance involves the personal (and personnel) element. It requires constant study of and
adjustment to all the personal pressures that bear on the employer-employee relationship.
Labor peace or violence must be weighed against production schedules, stakeholders’
demands and expansion programs. Wage bargaining; in particular, must take into
consideration possible operating losses, layoffs, increasing resort to labor-saving machinery
and the fluctuation of the purchasing power of currency. This is true even on the legislative
side. Labor law is necessarily influenced by the public interest and the public’s stake in
productive industrial peace. Thus, labor law is a highly personalized law reflecting highly
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competitive interests. Labor law is also referred to as an employment law relating to the
employment of workers or a law that governs employment relationship.
The main topics of a labor law are the contract of employment, the role of any collective
bargaining and the statutory control of minimum conditions of work; and these topics do, of
course, subdivide still further. The contract of employment is different from other kinds of
contracts in that the key issues are the unequal distribution of bargaining power between the
contracting parties, the employer and the employee. The results of such bargaining are
unlikely to be in the public interest. Contract of employment may be written or oral, although
there is now an encouragement to produce written contract. In the contract of employment the
obligations of both the employer and the employee are clearly stated. Generally, the
employer’s obligations are to pay the agreed wages and to respect any other terms of the
contract. However, the employer is not obliged to provide work. The employer has statutory
obligations relating to safe working conditions. The employee’s obligations are to give
faithful and honest service, to use reasonable skill in his/her work and to obey lawful orders,
and not commit misconduct. An employee is, nevertheless, personally liable for damages
done to property due to lack of reasonable care in his/her work.
The labor law defines minimum conditions of work that must be observed by parties to an
employment contract. Conditions of work such as hours of work, probation period, leave,
remuneration for work performed, health and safety of workers, and other conditions are set
by the law. Both parties may engage in collective bargaining in respect of minimum
conditions of work as prescribed by law.
5.1.2 Basic Sources of Labor Law
 Dear student can you explain sources of labor law?
___________________________________________________________________________
___________________________________________________________________________
Dear student under this topic we are going to discuss basic sources of the labor Relation under
which management and labor operate in Ethiopia today.
5.1.2.1 The Constitution

The constitution of the Federal Democratic Republic of Ethiopia (FDRE), among other things,
grants rights to labor, form associations, bargain collectively with employers, express
grievances including the right to strike, reasonable limitation of working hours, rest, periodic
leave with pay, remuneration for public holidays as well as healthy and safe work
environment.
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The labor proclamation and other forms of labor laws should embody observe and are
consistent with the labor rights enshrined in the constitution. If they infringe constitutional
rights, they would be declared unconstitutional and would have no legal effect.
5.1.2.2 The Labor Proclamation
The labor law which is in operation at present is Labor Proclamation No.377/2003 (as
amended). The proclamation covers contract of employment, duration, obligation of parties,
unlawful activities, suspension, termination of contract of employment with notice and
without notice, severance pay, reinstatement or compensation, home work contract, contract
of apprenticeship, hours of work and overtime, leave, working conditions of women and
young workers, occupational safety and health measures to be observed, occupational injuries
and occupational disease, trade unions and employers’ associations, collective agreement,
Labor Courts and the LRB, strike and lockout, period of limitation, labor administration,
employment service and labor inspection service, and penalty provisions.
5.1.2.3 The ILO Conventions
The International Labor Organization (ILO) was established in 1919 as part of the League of
Nations. Its purpose was and continues to be the improvement of working conditions through
international cooperation of employers, workers, and governments. Since its inception, one
major part of the ILO’s program has been the establishment of international labor standards
through the promulgation of conventions and recommendations. When an ILO convention or
recommendation is adopted, all member countries are required under Article 19 of the ILO
constitution to submit it to competent legislative bodies for enactment of legislation or other
action within 12-18 month after the Conference adopts the instrument.
Unqualified ratifications of conventions would have the force and effect of law and constitute
a multilateral treaty obligation of a country. Ratification of conventions not only could affect
the substantive requirements of domestic labor law, but would also establish an international
obligation on a country to fulfill the requirements.
Ratification of ILO conventions requires extreme caution. Developing countries should

examine whether labor standards embodied in the conventions required to be ratified go in
line with their economic policies and stage of development or not. It has taken hundreds of
years for western countries to reform their labor laws step by step in line with the pace of their
economic and social development before they arrived at the standard, form and content of
labor laws they have now. As indicated in Article 9(4) of the Constitution of the FDRE, all
international agreements ratified by Ethiopia are an integral part of the law of the land. The
ILO convention is now an integral part of the domestic law of Ethiopia.
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5.1.2.4 Supreme Court, Cassation Division Decisions
In cases where they contain fundamental error of law, the Federal Supreme Court (FSC) shall
have the power of cassation over: (1) final decisions of the Federal High Court rendered in its
appellate jurisdiction; (2) final decisions of the regular division of the Federal Supreme Court;
and (3) final decisions of the Regional Supreme Court (RSC) rendered as a regular division or
in its appellate jurisdiction.
When one of the parties to a case petitions the Supreme Court Cassation Division (SCCD) on
the ground that the final decision rendered on the case contains fundamental error of law, and
when it is determined that the case be heard in cassation, the case shall be heard by the SCCD
with not less than five judges sitting. Interpretation of a law rendered by SCCD with no less
than five judges shall be binding on federal as well as regional courts found at all levels. The
FSC shall publish and distribute decisions that contain binding interpretation of laws to all
levels of courts and other relevant bodies.
Accordingly, the SCCD has given many decisions regarding the interpretation of labor law
articles. Since the interpretations given on labor laws have binding effect, enterprises should
obtain such decisions and use them as part of the labor law when they consider taking
disciplinary or other measures.
5.1.2.5 Directives issued by the Ministry of Labor and Social Affairs
Affairs Article 170(1) of the Labor Proclamation No. 377/2003 (as amended) gives power to
the Ministry of Labor and Social Affairs (MoLSA) to issue directives necessary for the
implementation of the proclamation, i.e. directives regarding occupational safety, health and
protection of working environment, procedures for the registration of job seekers and
vacancies as well as procedures for the reduction of work force, etc.
So far, the Ministry has issued directives on procedures of reduction of labor force,
establishment of committees at enterprises which follow implementation of safety and health
conditions, on works prohibited for young workers, works prohibited for pregnant women
and guidelines on work and working procedure of the Labor Advisory Board (LAB) which is
established by the Ministry study work conditions, the safety and health of workers and the
labor law in general and give advisory opinion to the Ministry. Under Article 185(1) of the
Labor Proclamation No.377/2003 (as amended) it is indicated that violation of directives
issued in accordance with the proclamation is considered as an offence. Thus, it is important
to get the directives that are issued by the Ministry to know the guidelines.
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5.1.2.6 The Pension Law
Private Organization Employees’ Pension Proclamation (POEPP) No.715/2011 has been

promulgated as part of the country’s social policy to expand the social security system to
cover employees of private organizations who are Ethiopian nationals. Though the law affects
labor, it cannot be considered as part of labor law. But it is worth mentioning it here since
under Article 10(1) of the proclamation employers of private business enterprises are obliged
to contribute 11 percent of the monthly salaries of their employees to the Private Organization
Employees’ Pension Fund (POEPF) established in accordance with the proclamation.
5.1.2.7 Law Regarding Persons with Disability
The Right to Employment of Persons with Disability Proclamation (REPDP) No.568/2008 has
been promulgated in order to comply with the country’s policy of equal employment
opportunity as could be understood from the preamble of the proclamation. The law requires
that unless the nature of the work dictates otherwise, a person with disability having the
necessary qualification and scored more than other candidates shall have the rights without
any discrimination: (a) to occupy a vacant post in any office or undertaking through
recruitment, promotion, placement or transfer procedures; or (b) to participate in a training
program to be conducted either locally or abroad.
5.1.3 Scope of Labor Law
 Dear student, can you describe kinds of employment relation not fall under
the ambit of employment law?
___________________________________________________________________________
___________________________________________________________________________
Labor proclamation shall be applicable to employment relations based on contract of

employment that exists between a worker and an employer. According to Proc.No.377/96
Article 3, labor law shall not be applicable to:
1. Contracts made for the purpose of upbringing, treatment, care or rehabilitation,
contracts made for the purpose of educating or training other than apprenticeship,
2. Contracts made with managerial employees, contracts made for personal service for
non-profit making purposes,
3. Contracts relating to employees of state administration and contracts relating to

independent contractors, managerial employee who is vested with powers to lay down
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and execute management policies by law or by the delegation of the employer
depending on the type of activities of the undertaking with or without the
aforementioned powers an individual who is vested with the power to hire, transfer,
suspend, layoff, assign or take disciplinary measures against employees and include
professionals who recommend measures to be taken by the employer regarding
managerial issues by using his independent judgment in the interest of the employer;
4. Contracts of personal service for non-profit making purposes;

5. Contracts relating to persons such as members of the Armed Force, members of the
Police Force,
6. Employees of state administration, judges of courts of law, prosecutors and others
whose employment relationship is governed by special laws;
7. Contracts relating to a person who performs an act, for consideration, at his own
business or professional responsibility.
UNIT FIVE - SECTION TWO
5.2 Employment Relation
Section overview
Employment is not the same as work. Work can be paid or unpaid, done in a market or outside
one, but employment by its nature necessitates an economic exchange between two parties
and situates people within a market in which the capacity to labor is bought and sold.
According Art.9 of the labor proclamation, the employment relationship is usually conceived
as involving ‘full-time work, under a contract of employment for unlimited duration with a
single employer, and protected against unjustified dismissal’ (although there are different
types of contract, some of defined duration as provided under Art.10 of the proclamation).
The employment relationship is thus a creation of markets, but also distinct from them for the
simple reason that it is a market in people and operates very differently from the idealized
markets of economic theory. The legal structures we have built around the employment
relationship concern themselves both with ensuring labor markets operate smoothly and with
the need to protect employees from unfair practices. Having this view in mind we are going to
see different connective factors of employment relation.
Section objectives
After successfully completing this section you will be able to:
 Understand the role of employment relation under the labor law
 Identify different factors in employment relation
 Determine the gap filling role of law in employment relation
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5.2.1 Contract of Employment
 relation?
Dear student, can you explain the role of contract of employment in labor
___________________________________________________________________________
___________________________________________________________________________
Understanding the role of the contract of employment is fundamental to under-standing labor

law and the condition of the worker in relation to the employer. According to Art.4(1) of the
labor proclamation, contract of employment shall be deemed formed where a person agrees
directly or indirectly to perform work for and under the authority of an employer for a definite
or indefinite period of piecework in return for wage.
Prior to 1875, workers throughout a large part of the world then under British rule were not
treated as equals before the law. The legal position, formally described as “master and
servant” was such an “open and visible legal relationship of subordination” that “large
sections of the working class had revolutionary, anti-capitalist views”.1 The reinterpretation of
this relationship into a contractual partnership between equal parties demonstrates an attempt
to mask the power relationship that is at the heart of the employment dynamic.
As in every form of contract, the contract of employment is the central element in the
structure of labor law. One could succinctly say that a contract of employment is that written
document that governs the relationship between an employer and an employee. This will
generally presuppose that there is someone who is in dire need of labor and another who is in
dare need of wages.
 Basic Elements of Contract of Employment
 Dear student, recalling what you have learned under unit two of this module,
can you guise the essential elements required for the validity of employment contract?
___________________________________________________________________________
___________________________________________________________________________
1
Critical Lawyers’ Handbook Volume 1, Labour Law, Edie, A., Grigg-Spall, I., Ireland, P.
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An employment relationship is established by an employment contract between the employer
and the employee. A contract of employment, like all other contracts, is governed by the
general law of contract. Therefore, all the essential features which characterize ordinary
contracts must be present in a contract of employment before it can be said to be a valid
contract of service. A contract of employment may be under oral, in writing or inferred from
the conduct of the parties thereto. The essential elements required for the validity of contracts
are:
A. Offer;
B. Acceptance;
C. Consideration;
D. Capacity to contract;
E. Legality.
Offer:- The offer is an expression of willingness to contract made with the intention (actual or
apparent) that it shall become binding on the person making it as soon as it is accepted by the
person to whom it is addressed. It may also be express or by conduct.
Acceptance:-While an offer is an expression of willingness to contract, an acceptance on the

other hand is a final and unqualified expression of assent to the terms of an offer. For
acceptance of an offer to constitute an agreement the acceptance must be made while the offer
still subsisted, and was known to the offeree, and must be communicated to the offeror, or the
requisite act required by the offeror must have been done. One could safely conclude that
expression of interest to an offer clearly indicates an interest to accept the terms and condition
of such an offer.
Consideration: - Usually consideration takes the form of promises exchanged by the

contractual parties, or the duty undertaken by one party on account of the promises of the
other. In a contract of employment, the consideration for work is wages and the consideration
for wages is work.
Capacity to Contract:-This head forms part of the basic elements that may vitiate a contract of
employment to create legal relation. It is worthy to mention that it is also a basic requirement
for a valid contract. Apart from men and women of full age (above 14), infants, insane and
drunken persons generally lack contractual competence.
Legality:-The proposed contract must be legal in its object and manner of performance. As an
example, a contract which involves the commission of crime e.g. smuggling or the
employment of people for the purpose of sexual immorality will be null and void. So also is a
contract intended to defraud tax authorities, say by understating the salary so as to pay
less tax.
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5.2.2 Collective Agreement
 Dear student can you guess how collective agreement is formed and its
constitutional ground?
___________________________________________________________________________
___________________________________________________________________________
Freedom of association has a key part to play in the constitutional system of the International
Labor Organization. The ILO has contributed decisively to ensuring that freedom of
association is incorporated into the universal catalogue of human rights and that trade unions
are regarded not only as indispensable instruments for the improvement of labor conditions
but also as an expression of working people’s dignity, freedom and sphere of self-
determination. Trade union freedom has become an essential component of a law-based
democratic State.
The FDRE constitution under its Art.42 provides that factory and service workers, farmers,
farm laborers, other rural workers and government employees whose work compatibility
allows for it and who are below a certain level of responsibility, have the right to form
associations to improve their conditions of employment and economic well-being. This right
includes the right to form trade unions and other associations to bargain collectively with
employers or other organizations that affect their interests. As per this provision workers and
employers shall have the right to establish and form trade unions or employers’ associations,
respectively and actively participate therein (See Art.113 of the Labor Proclamation
No.377/2003).
Trade Union (an organization formed by workers) and employers association (an organization
established by employers) observe the conditions of work and fulfill the obligations set forth
in the labor proclamation; respect the rights and interests of members in particular, represent
members in collective negotiations and labor disputes before the competent body when so
requested or delegated. With a view to implement these obligation, these two independent
institutions may enter into collective bargaining and agreement.
According to Article 124(1) of the Labor Proclamation No.377/2003 (as amended), collective
agreement means an agreement concluded in writing between one or more representatives of
trade unions and one or more employers or agents or representatives of employer
organizations. The agreement is made on conditions of work.
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Collective agreements are a central pillar of labor regulation throughout the world. Union-
management agreements might not always be what we have in mind when we talk about
“labor law”, but in many countries collective agreements have a legally binding status and
play a key role in the national regulatory framework.
As stated in Article 133(2) of the Proclamation, a collective agreement shall have a legal
effect on the parties as from the date of signature. Thus, enterprises that have concluded
collective agreements with trade unions should observe the agreements as part of the labor
law. Collective agreement is valid and binding upon the parties only where it provides more
favorable condition than or equals to what the proclamation or other laws provide.
Article 2(5) of the Labor Proclamation No.377/2003 (as amended) defines work rule as
internal rules which govern working hours, rest period, payment of wages and the methods of
measuring work done, maintenance of safety, prevention of accidents, disciplinary measures
and its implementation as well as other conditions of work. The employer has obligation
under Article 12(8) of the Proclamation to observe collective agreement.
5.2.3 The Labor Law
 Can you estimate how the labor law can be a source employment relation?
___________________________________________________________________________
___________________________________________________________________________
It is widely accepted that the employment relationship is characterized by an imbalance of

power in favor of the employer. Legal regulation can restrain the unfettered exercise of this
employer power. So, for example, collective bargaining with a trade union can minimize the
exploitation of individuals at work by agreements on pay and conditions, and also by helping
to process grievances. Furthermore, legislation can establish minimum conditions of
employment (e.g. national minimum wage), and set limits on the action that an employer
might take against employees. According to Art.4(5) of the proclamation, the contract of
employment shall not lay down less favorable conditions for the employee than those
provided for by law, collective agreement or work rules. An agreement by a worker to waive
in any manner his right to annual leave shall be null and void. Again Art.133(1) of the labor
proclamation, any provision of a collective agreement which provides for conditions of work
and benefits which are less favorable than those provided for under this Proclamation or other
laws shall be null and void.
UNIT FIVE - SECTION THREE

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5.3 Duties Parties in Employment Contract
Section overview
Under the previous section, I have discussed the requirement for a valid contract of
employment. A contract of employment that is formed lawfully will have certain
consequences on the parties. The source of these obligations could be either the law or the
agreement of the parties. This section will discuss the obligation of the parties. The contract of
employment creates a complex relation the two parties. They become subjects of different
reciprocal rights and obligations. The main duties of the employee are to render services of
physical or intellectual nature to its employer under the latter’s direction. Therefore, the two
main obligations of the parties under the employment contract are to render service by the
employees and to pay wage by the employer.
Section objectives
At the end of this section, you will be able to:
 List and explain the duties of employee
 Describe the duties of employer.
An employer shall in addition to special stipulations in the contract of employment have the
following obligations:
5.3.1 Duties of Employer
The contract of employment does not normally oblige an employer to provide his
employee with work to do, provided he pays him his wages or salary as and when due.
Article 12(1(a)) provides positive duty on the employer. Accordingly, the employer has to
provide work to the worker in accordance with the contract of employment or the law and he
cannot keep him idle even if he pays him.
It is generally accepted that the most significant consideration which an employer may give
to an employee in return for work performed or services rendered to the employer is
the employee’s monetary remuneration in terms of salary or wages in legal tender such
as cheques, cash or postal orders. According to Art.12 (2) of the proclamation, the employer
has to pay the worker wages and other emoluments in accordance with this Proclamation or
the collective agreement. It will amount to a repudiating breach of contract, giving rise
to an action for damages or debt, for an employer to refuse or fail to pay agreed
remuneration.
The employee is under obligation to respect the worker's human dignity, the employer’s
obligation to treat his employees with respect is the correlative of the employee’s obligation
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of co-operation, and obedience. This implied duty requires the employer to treat his
employees with such consideration as would facilitate, and not obstruct or impede the
employee’s performance of his contractual duties.
The employer has to take all the necessary occupational safety and health measures and to
abide by the standards and directives to be given by the appropriate authorities in respect of
these measures; the duty in this case is to ensure that the employer carries out his operation in
a safe manner. It deals with supervision and safety precautions which the employer uses in his
operations.
In some situations it is not possible to completely eliminate a hazard or reduce exposures to a

safe level, so respirators, goggles, earplugs, gloves, or other types of personal protective
equipment are often used by themselves or in addition to other hazard control measures.
Employers must provide most protective equipment free of charge. Employers are responsible
for knowing when protective equipment is needed.
5.3.2 Duty of Employee
The fundamental duty of the employee is to carry out his duties in obedience to the reasonable
and lawful order of his employer. According to Art.13 (2) of the proclamation, every worker
shall have an obligation to follow instructions given by the employer based on the terms of the
contract and work rules. Breach of this duty by an employee, usually, attracts the penalty of
summary dismissal. The order which an employee is contractually bound to obey must be
lawful and reasonable. It is neither lawful to order a high ranking employee to do some
manual job which is outside his contractual job description or content, nor, reasonable to
order an employee to remain in an area though within his contractual service area, where his
life or health is exposed to grave danger.
Art. 13(5) and 13(6) of the proclamation, an employee is duty bound to give all proper aid
when an accident occurs or an imminent danger threatens life or property in his place of work
without endangering his safety and health and to inform immediately the employer any act
which endangers himself or his fellow workers or which prejudice the interests of the
undertakings. An employee shall discharge his contractual duties in a manner that promotes
the object of his employment. While this duty does not impose a positive obligation on an
employee to do more for his employer than his contract and the law requires, it does;
however, demand that an employee should execute his contractual obligations so as not to
willfully obstruct the business of his employer. To act conversely will amount to a breach of
contract.
It is recognized under Art.12 (3) of the proclamation that an employee owes his employer a
contractual and legal duty to exercise reasonable care in the performance of his contractual
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obligations. Thus, where an employee’s negligence, in the course of his employment, has
resulted in damage to third party and his employer has been made vicariously liable for the
resultant damage, the employer, can recover the damages which he has so far paid from the
employee, on account of the employer’s breach of his contractual duty of care.
While it is indisputable that a servant owes his employer an implied duty of fidelity or of
faithful service, the practical difficulty lies in giving a precise definition of this nebulous duty.
Admittedly, each must depend on its facts. However, it is unquestionable that this duty
requires an employee not to use the position which he holds by virtue of his employment, or
the knowledge which has come to him by virtue of that position, in such a way that his
personal interests conflict with his duty to his employer.
An employer’s confidential information is regarded as part of his property which, like any
other type of property is entitled to protection. It is for this reason that employers often insert
a clause in the contract of employment against disclosure of sensitive and confidential
information. In practice, such sensitive information often includes marketing plans and
business strategies, financial plans, industrial relation strategy or production formulae.
The contract of employment may contain a term which stipulates that an employee, on the
cessation of his present employment, will not set up on his own, or be employed by other
employers, in the same line of business as that of his employer.
UNIT FIVE - SECTION FOUR
5.4 Termination of Employment Contract and its Effect
Section overview
If you are discharged (fired or laid off) from your job, you need to find out what rights you
have and how to enforce them. You need to figure out whether your termination was lawful,
whether your employer owes you any continuing obligations (and whether you owe your
employer any such obligations), and how to assert your rights.
Once legally valid contract of employment is occurred, the parties to it cannot arbitrary
terminate it. Arbitrary termination of contract is unlawful. This however, does not mean that
the parties to the contract cannot terminate it forever. But termination of it shall be in
accordance with the law and shall fallow series of procedure that are stipulated by the law
regarding termination of contract. The requirements and procedures for lawful termination of
contract of employment, effect of lawful and unlawful termination of contract are discussed
below.
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Section objectives
 Thoroughly understand termination of employment relation;
 Differentiate law termination and unlawful termination of employment contract; and
 Identify the remedies for unlawful termination.
5.4.1 Lawful Termination of Employment Contract
 terminated?
Dear student, when do you think that employment contract is lawfully
___________________________________________________________________________
___________________________________________________________________________
A contract of employment shall only be terminated upon initiation by the employer or worker
and in accordance with the provisions of the law or a collective agreement or by the
agreement of the two parties.
Employment contract is automatically terminated by the law on any of the grounds stipulated
under Ar.24 (1) of the proclamation. The grounds of termination of contract by the law are:
1. On the expiry of the period or on the completion of the work where the contract of
employment is for a definite period or piece work.
2. Upon the death of the worker.
3. Upon the retirement of the worker in accordance with the relevant law.
4. When the undertaking ceases operation permanently for due to bankruptcy or for any
other cause.
5. When the worker is unable to work due to partial or total permanent incapacity.
When one of the aforementioned grounds exists, the contract will be terminated automatically.
As employment relation is brought into existence by agreement of both employee and

employer, it can also be terminated by them. The parties may terminate their contract of
employment by agreement provided, however, that waiver by the worker of any of his rights
under the law shall have no legal effect. As discussed before contract of employment is not
valid if it provides less benefit to the worker. The agreement to terminate the contract can not
include the consent of the worker to waive certain rights available to him under the law such
as the right to get compensation in lieu of annual leave. Termination by agreement shall be
effective and binding on the worker only where it is made in writing.
Contract of employment may be terminated by unilateral act of the employer. The termination
by employer may be with or without notice.
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Article 27 of the proclamation empowers the employer to terminate on certain ground the
service of employment without notice. The grounds listed under the provision are related to:
i. Repeated and unjustified tardiness despite warning to that effect;
ii. Absence from work without good cause for a period of five consecutive working days
or ten working days in any period of one month or thirty working days in a year;
deceitful or fradulent conduct in carrying out his duties having regard to the gravity of
the case;
iii. Misappropriation of the property or fund of the employer with intent to procure for
himself or to a third person undue enrichment;
iv. Returning output which, despite the potential of the worker, is persistently below the
qualities and quantities stipulated in the collective agreement or determined by the
agreement of the two parties.
v. Responsibility for brawls or quarrels at the work place having regard to the gravity of
the case;
vi. Conviction for an offence where such conviction renders him incapable for the post
which he holds;
vii. Responsibility for causing damage intentionally or through gross negligence to any
property of the employer or to another property which is directly connected with the
work of the under-taking;
The right of an employer to terminate contract of employment in accordance with this Article,
shall lapse after 30 working days from the date the employer knows the ground for the
termination.
The employer may unilaterally terminate the employment contract by giving prior notice to
the worker (See Art.28) of the labor proclamation. The following grounds relating to the loss
of capacity of, and situations affecting, the worker shall constitute good cause for terminating
a contract of employment with notice:
i. The worker's manifest loss of capacity to perform the work to which he has been
assigned; or his lack of skill to continue his work as a result of his refusal to take the
opportunity of training prepared by the employer to upgrade his skill or after having
been trained, his inability to acquire the necessary skill;
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ii. The worker is for reasons of health or disability, permanently unable to carry out his
obligations under the contract of employment;
iii. The worker's unwillingness to move to a locality to which the undertaking moves;
iv. The post of the worker is cancelled for good cause and the worker cannot be
transferred to another post;
The following grounds relating to the organizational or operational requirements of the

undertaking, shall constitute good cause for the termination of a contract of employment with
notice
i. Any event which entails direct and permanent cessation of the worker's activities in
part or in whole resulting in the necessity of a reduction of the work force
ii. Demand for the products or services of the employer resulting in the reduction of the
volume of the work and profit of the undertaking and thereby resulting in the necessity
of the reduction of the work force
iii. A decision to alter work methods or introduce new technology with a view to raise
productivity resulting in the reduction of the work force.
i. Article 30 of the proclamation entitles any worker who has completed his probation
period, may, by giving thirty days prior notice to the employer, terminate his contract
of employment. The following shall be good cause to terminate a contract of
employment without notice;
ii. If the employer has committed against the worker any act contrary to his human
dignity and morals or other acts punishable under the Penal Code;
iii. If, in the case of imminent danger threatening the worker's safety or health, the
employer, having been made aware of such danger, failed to act within the time limit
in accordance with the early warning given by the competent authority or appropriate
trade union or the worker himself to avert the danger;
iv. If the employer has repeatedly failed to fulfill his basic obligations towards the worker
as prescribed under this Proclamation, collective agreements, work rules or other
relevant laws.
Where a worker terminate his contract of employment for the reasons referred listed above, he
shall inform the employer in writing the reasons for termination and the date on which the
termination is to take effect. A worker's right to terminate his contract of employment without
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notice shall lapse after fifteen working days from the date on which the act occurred or ceased
to exist. An employer may not reduce an employee’s wages, wage rate, or any other term or
condition of employment during the period of termination notice. This remains true whether
or not work is to be performed by the employee during the notice period.
5.4.2. Effects of Lawful Termination
Once a contract of employment is terminated in accordance with the stipulation of the law and
the parties are separated for good, there will be some consequences which will follow the
termination. Most of the consequences are attached with the ground for termination while few
others are available to all terminations. These are the following:
Certificate of Service:-This is a document to be issued by the employer which testifies how

long the employee had been employed at the employer; the position he/she held; and the wage
he/she was earning while employed. Actually this document may be requested and issued
while the employee has been still employed (i.e. even without termination), in practice
however, employees request for it after termination. According to Art.12(7) of the
proclamation, upon termination of a contract of employment or whenever the worker so
requests, to provide the worker, free of charge, with a certificate stating the type of work he
performed, the length of service and the wages he was earning.
As regards to the content of this certificate, reason for termination is not an essential element
to be spelt out in such document. At times reason of termination may be unhelpful to the
employee’s future effort for employment. For example, if the contract of employment was
terminated due to the serious misdeed of the employee, mentioning such ground of
termination in the certificate may negatively affect the employability of the individual. This
seems the main reason why mentioning the reason for termination is not to be mentioned.
Nevertheless, if the employee is willing and ready to write favourable terms to the employee,
the law does not seem to have any objection.
Payment instead of unutilized annual leave:- According to Art 76(1) of the proclamation A
worker pursuant to this Article shall be entitled to uninterrupted annual leave with pay which
shall in no case be less than:
A. Fourteen working days for the first one year of service;
B. Fourteen, working days plus one working day for every additional year of service.
In principle it is prohibited to convert annual leave into cash. However, if the contract of
employment is terminated prior to the utilization of the annual leave, the employee is entitled
to his pay for the leave he has not taken. As annual leave cannot be postponed for more than
two years, the payment for this cannot be in excess of two years annual leave converted into
cash.
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Severance payment:-Unlike Certificate of Service and payment instead of annual leave which
are available to almost all grounds of termination, severance payment is available to
employees whose contract of employment is terminated on specified grounds. Worker has the
right to receive severance pay from an employer, provided the worker has completed
his/her probationary period, in the following cases where (See Art. 39, of the Labor
Proclamation):
I. The worker’s contract is terminated for economic reasons;

II. The worker’ resignation is deemed constructive dismissal;
III. The employer, informed of the danger, does not act to prevent the threat to the security
and health of the worker;
IV. The worker’s contract is terminated due to partial or complete disability (certified by a
medical examiner);
V. The worker is not entitlement to a pension fund and his/her contract of employment is
terminated upon attainment of retirement age;
VI. The worker has given service to the employer for a minimum of five years and his/her
contract is terminated because of his/her sickness or death, or termination by his/her
initiative provided that he/she has no contractual obligation related to training to the
employer; and
The severance pay is calculated as follows:

I. 30 times the average daily wage of the last week of service for the first year of service.
For service of less than one year, severance pay must be calculated in proportion to the
period of service (See Art. 40(1), of the Labor Proclamation);
II. In the case of a worker who has served more than one year, payment is increased
by one-third of the said sum for every additional year of service, provided the total
amount does not exceed 12 months’ wages (See Art. 40(2), of the Labor Proclamation);
III. Where a contract of employment is terminated because the enterprise ceases operation
due to bankruptcy or general reduction of workforce, the worker is entitled to a sum equal
to 60 times his/her average daily wage of the last week of service (See Art. 40(3), of the
Labor Proclamation). Finally, in case of constructive dismissal, the worker is entitled to
compensation, in addition to severance pay, which must be 30 times his/her daily average
wage of the last week of service (See Art. 41, of the Labor Proclamation).
The most important limitation is, an employee who is entitled to pension payment
immediately after termination is denied of severance payment. Whether an employee is
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entitled to pension scheme as soon as s/he is terminated or not will be determined on the basis
of the Pension Proclamation.
If the enterprise has already established a provident fund on the basis of work rule or
collective agreement which is more beneficial to the employee than the severance payment
available to him/her, the provident fund will be payable and severance payment will be denied
in such cases. For grounds of termination which entitle severance payment, readers are
advised to consult Art.39 (1) of labor proclamation No.377/2003.
Once the employee is entitled to severance payment, the amount of such payment will be
determined on the amount of wage the individual was earning prior to termination and his/her
length of service. Based on Art.40 of the labor proclamation, thirty times the average daily
wages of the last week of service for the first year of service; for the service of less than one
year, severance pay shall be calculated in proportion to the period of service. In the case of a
worker who has served for more than one year, payment shall be increased by one-third of the
said sum referred to in sub-article 1 of this Article for every additional year of service,
provided that the total amount shall not exceed twelve month's wage of the worker.
Compensation:-Few grounds of termination have also produce entitlements of compensation

to employees who have been separated on the basis of that particular ground. These
entitlements are applicable only to employees under the labor law regime.
Employees whose contract of employment have been terminated due to “the permanent
cessation of operation of the undertaking because of bankruptcy or any other cause” (Art.24
(4) or due to lay off (Art.29) are entitled to compensation. Moreover, employees who resigned
on an extra ordinary procedure (Art.32) are also beneficiaries of such compensation.
The amount of compensation in such cases is a liquidated sum of “sixty multiplied by the
average daily wage of the employee for the last week of service for the first two grounds of
termination and an amount equal to thirty times his/her daily wages of the last week of service
for the final ground of termination above. Unlike severance payment which takes length of
service into consideration, the amount of compensation in both cases does not take the length
of service of the employee into account.
Period of limitation: - The law contains many statutes of limitation that require you to act
quickly or permanently waive your rights. If you are terminated, several limitations periods
may apply, some of which may be only a few months long. An attorney may help you
determine what deadlines apply to your situation. Any claim to be reinstated by a worker
arising from the unlawful termination of a contract of employment shall be barred after three
months from the date of the termination of the contract of employment. Claims by a worker
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for payment of wages, overtime and other payments shall be barred after six months from the
date it become due.
In addition to fixing short of period of limitation, the law obligates the employer to effect all
payments due to the employee within seven working days from the time of termination
(refer.Arts.36-38 of the labor proclamation).
5.4.3 Unlawful Termination
 What factors constitute unlawful termination?
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___________________________________________________________________________
The labor proclamation prohibits termination of employment on the basis of age, race,
national origin, religion, gender, physical disability, or sexual orientation, as well as several
other protected categories. These characteristics may not be taken into consideration when
making the decision to fire an employee.
It is also unlawful to terminate an employee for complaining of discrimination or harassment

either internally to or to outside governmental authorities. Similarly, it is unlawful to
terminate an employee for reporting improper or illegal activities going on inside the company
to outside governmental authorities. The law views this as improper retaliation and protects
such employees. Termination on the ground of employee’s membership in a trade union or his
participation in its lawful activities and his seeking or holding office as a worker's
representative is against the law.
5.4.4. Effects of Unlawful Termination
 Dear student, do you know consequences of unlawful termination?
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___________________________________________________________________________
If an employer or a worker fails to comply with the requirements of the Labor Proclamation
regarding termination, the termination is unlawful (See Art. 42, of the Labor Proclamation). If
the contract of employment is terminated unlawfully, the labor dispute settlement tribunal
may order the reinstatement of the worker or payment of compensation by the employer (See.
43, of the Labor Proclamation). An order for reinstatement is an order requiring the employer
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to treat the employee in all respects as if he had not been dismissed or as if there had been no
variation of the terms of the employment contract.
An order for reinstatement is an order requiring the employer to treat the employee in all
respects as if he had not been dismissed or as if there had been no variation of the terms of the
employment contract. An order for reinstatement is an order requiring the employer to treat
the employee in all respects as if he had not been dismissed or as if there had been no
variation of the terms of the employment contract. An order for reinstatement is an order
requiring the employer to treat the employee in all respects as if he had not been dismissed or
as if there had been no variation of the terms of the employment contract.
The decision to terminate an employee, once made, sets in motion a number of duties of the
employer to handle the termination in a professional manner preserving the dignity of the
terminated employee and protecting the employer’s interests as the employer does not want to
see an angry former employee down the road in court. The compensation to be paid to the
worker, in addition to severance pay, must be calculated as follows (See Art. 43(4), of the
Labor Proclamation):
I. 180 times the average daily wage, and a sum equal to the remuneration for the
appropriate notice period in the case of unlawful termination of a contract of
employment for an indefinite period; or
II. In case of unlawful termination of a fixed-term or piece-work contract, a sum equal to the
wages which the worker would have obtained if the contract of employment had lasted up
to its date of expiry or completion, provided that such compensation does not exceed
180 times the average daily wage.
III. However, a worker who terminates his/her contract of employment without good reason
or without a 30-day notice, is liable to pay compensation to the employer, which must not
exceed 30 days’ wages of the worker (See Art. 45, of the Labor Proclamation).
Labor disputes related to termination of employment are dealt with by the Labor Division of
the Regional First Instance Court. A decision has to be taken within 60 days from the date on
which the claim is lodged (See Art.138, of the Labor Proclamation). An appeal to the Labor
Division of the Regional Appellate Court is possible within 30 days from the date on which
the decision is delivered. The decision of the Regional Appellate Court will be made within
60 days from the date of the appeal and this decision will be final (See Art.. 139, of the Labor
Proclamation).
No court fees will be charged in respect of cases submitted to conciliation and to the Labor
Relations Board by an employer or employers’ associations (See Art.161 (1), of the Labor
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Proclamation). Moreover, no court fees will be charged in respect of cases submitted by any
worker or trade unions (See Art. 161(2), of the Labor Proclamation).
Any claim for reinstatement by a worker must be barred after three months from the date of
the termination of his/her contract of employment (See Art. 162(2), of the Labor
Proclamation). Any claims by a worker or employer for any kind of payment must be barred
by limitation, unless an action is brought within six months from the date of termination of the
contract of employment (See Art. 162(4), of the Labor Proclamation)
UNIT FIVE - SECTION FIVE
5.5 Special Categories of Employees
Section overview
Under the preceding discussions, we tried to briefly outline what employment relation is; and
how could this relation be put to an end. Within this general framework, the legislature has
provided for special treatment to some categories of employees. The rational for the special
treatment is associated with the specific condition the employee is in. We will try to examine
these features one by one.
Section objectives
 Understand the reason why certain category of employees are specially treated;
 Identify employees who need special treatment under the labor law; and
 Determine the area of special treatment.
5.5.1 Probationary Employees
At the commencement of a contract of employment, the employer is entitled to set a

probationary period (i.e. trial period). The purpose of probation is to test the suitability of the
employee to a post in which she is intended to be assigned. Within the trial period, the
employer is entitled to dismiss the employee without any procedure if the employer is
convinced that the employee is unfit for the post.
In this connection, it is held that “whenever a person is dismissed for unfitness, it is sufficient
that the employer honestly believes on reasonable grounds that the person is unfit. It is not
necessary for the employer to prove that she is in fact incompetent.”
5.5.2 Apprentice
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This is a situation through which the employer agrees to provide a person (i.e. the apprentice)
complete and systematic training and the apprentice in return agrees to obey the instruction
given to carry out the training.
Strictly speaking, such an arrangement is not an employment relationship because the main
interest of the employer in this relationship is not to obtain service it is rather to provide
training to the apprentice. On the other hand, the main interest of the apprentice, in this
relationship, is not also to receive wage. It is rather to acquire skill. Incidentally, however, the
employer will obtain service from the apprentice and the apprentice will receive stipend.
These facts assimilate apprenticeship arrangement with employment relation.
An apprenticeship agreement is an appropriate route in transferring skill in those trades where

skill could be acquired through “learning by doing” mechanism. Traditionally, those skills
were being transferred through family line and it was members of the family who were
exposed to such an opportunity. Through passage of time and the development of
industrialization, however, contractual arrangement becomes the main channel for transfer of
skills in such areas of trade.
5.5.3 Female Employees
It is well known that women have special and irreplaceable reproductive role in society.
Because of this, their biological makeup requires special care and attention. Moreover, most
traditional cultural attitudes in society tend to discriminate against women in many respects.
As an expression of these discriminatory practices, their share in the work force in most
countries has been incomparable with their number in society. Hence, in order to do away
with such inequitable outcome many modern legal systems have already incorporated the
principle of “non discrimination on the basis of sex” in their basic laws and practices.
Because of this, the principle of non discrimination, though necessary, is not sufficient by
itself to bring about equitable outcomes in this respect. Thus, in order to bring about equity
the principle of non discrimination must be complimented by another equally important
principle so called “affirmative action”. Unless and until these two principles are reinforced
each other, past misdeeds and previous marginalization may not be rectified and thereby true
equality will not be attained.
The law tries to regulate the situation of female employees from two angles. The first type of
regulation is providing flat protection available to all females by virtue of being female.”
Women shall not be discriminated against as regards employment and payment, on the basis
of their sex” (Art.87 (1) Labor Proclamation). The other type of regulation is providing special
provisions for females under particular circumstances such as pregnancy and maternity (See
Arts. 87(3), (4),(5) &88 of Labor Proclamation) It must be noted however that the principle of
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nondiscrimination may be deviated from through what is so called “inherent job requirement
or genuine occupational qualification.
5.5.4 Young Worker
 Who are young employees?
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Employment contract as any judicial act is entered by a person who has attained majority.
Nevertheless, since employment is a means of subsistence, the legislature did not find it fair to
totally exclude minors from concluding employment contract. On the other hand considering
the immaturity of young workers, it did not leave them to be treated like adults. Therefore, the
law strikes a balance by allowing minors above 14 age to conclude employment contract and
at the same time by interdicting them from engaging in occupation which endangers their life
and health.
Based up on Art.87 (4) of the labor proclamation, The Minister of Labor and Social Affairs
may prescribe the list of activities prohibited to young worker which shall include in
particular:
1) work in the transport of passengers and goods by road, railway, air and internal
waterway, docksides and warehouses involving heavy weight lifting, pulling or
pushing or any other related type of labor;
2) work connected with electric power generation plants transformers or transmission,

lines; underground work, such as mines, quarries and similar works;
3) Work in sewers and digging tunnels.
Normal hours of work for young workers shall not exceed seven hours a day when it is eight
for adult workers. It is prohibited to employ young workers on:
1) Night work between 10 p.m. and 6 a.m.;
2) Overtime work;
3) Weekly rest days; or
4) Public holidays.
UNIT FIVE - SECTION SIX
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5.6 Labor Dispute Settlement Mechanism
Section overview
Whether an undertaking is private or public, industrial peace will be at stake if harmonious
production relation is obstacle by one factor or another. The law, therefore, went to extra
length to the governing the dispute resolution mechanism.
labor dispute means any controversy arising between a worker and an employer or trade union
and employers in respect of the application of law, collective agreement, work rules,
employment contract or customary rules and also any disagreement arising during collective
bar-gaining or in connection with collective agreement. Labor disputes are resolved through
various meanness i.e. court litigation, conciliation, arbitration and labor relation board.
Section objectives
After you complete studying this section, you will be able to:
 Define labor dispute
 Identify the dispute settlement mechanisms
 Understand period of limitation to submit labor dispute
 Solve related legal problems
5.6.1 Courts
Labor division is established in most regional and federal first instant courts. The labour
division of the regional first instance court shall have jurisdiction to settle and determine the
following and other similar individual labor disputes:
a) Disciplinary measures including dismissal;
b) claims related to the termination or cancellation of employment contracts;
c) questions related to hours of work, remuneration, leave and rest day;
d) questions related to the issuance of certificate of employment and release;
e) claims related to employment injury;
f) unless otherwise provided for in this
g) Proclamation, any criminal and petty offences under this Proclamation.
The labor division of the regional first instance court shall give decisions within 60 days from
the date on which the claim is lodged and the party who is not satisfied with the decision of
the regional first instance court may, within 30 days from the date on which the decision was
delivered, appeal to the labor division of the regional court which hears appeals from the
regional first instance court.
5.6.2 Conciliation
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Art.136 (1) defines conciliation as the activity conducted by a private person or persons
appointed by the Minister or Ministry of Labour and Social Affairs at the joint request of the
parties for the purpose of bringing the parties together and seeking to arrange between them
voluntary settlement of a labor dispute which their own efforts alone do not produce.
The conciliator shall endeavour to bring about a settlement on the following, and other similar
matters of collective labor disputes:
a) Wages and other benefits;
b) Establishment of new conditions of work:
c) The conclusion, amendment, duration andinvalidation of collective agreements:
d) The interpretation of any provisions of the Proclamation, collective agreements or
work rules;
e) Procedure of employment and promotion of workers;
f) Matters affecting the workers in general and the existence of the undertaking;
g) Claims related to measures taken by the employer regarding promotion, transfer and
training.
h) Claims relating to the reduction of workers.
The conciliator shall endeavour to bring about a settlement by all reasonable means as may
seem appropriate to that end. Whenever the conciliator fails to settle a labor dispute within 30
days, he shall report with detailed reason thereof to the ministry and shall serve the copy to
the parties involved. Any party involved other than those indicated under Sub-Article (1) (a)
of this Article may submit the matter to Labor Relation Board. If the dispute as per sub-
Article 1 (a) of this Article concerns those undertaking described under Article 136(2) of this
proclamation one of the disputing party may submit the case to adhoc Board.
5.6.3 Arbitration
Arbitration is a procedure for settlement of disputes between parties without recourse to the
court of law. It is a private arrangement by parties to submit disputes to one or more
uninvolved and impartial persons to resolve the points of disagreement. Art.143 of the Labor
Proclamation empowers the parties to refer their dispute to arbitration.
Major features of arbitration

a) Informal procedures: parties to arbitration must have agreed to terms that the procedure
will be informal and would be devoid of the complexities of court procedures in matters of
litigation. The ultimate goal is to keep the process simple.
b) Consent to arbitration: A written agreement by the parties to resolve present and future
disputes by use of impartial arbitration is a must if there is to be recourse to arbitration. The
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agreement serves as consent for the purpose of establishing the jurisdiction of arbitration.
Likewise it places the power to arbitrate on the arbiters.
c) Impartial and Knowledgeable Neutrals to serve as arbitrators: There are varied interests and
fields in human endeavor from which disputes may arise. Based on this, it is of utmost
importance that only experts knowledgeable in the subject matter and points of disputes
should arbitrate. This gives opportunity for a proper decision to be arrived at. It is also
necessary that the arbiters should share no interest in the rancour.
d) Final and Binding Awards that are enforceable by law: The opinion of consent to arbitrate
is based on the fact that the eventual outcome of resolution is final and binding. This is
pursued as long as the parties are satisfied at the point of resolution. More so, the parties agree
that the document(s) bearing the resolution agenda is binding and could be used as evidence.
e) Mutuality: There must be consensus between the parties to an arbitration agreement. It is

trite that without agreement on the side of both parties there cannot be a valid arbitration
agreement.
 Classification of Arbitration
I. Ad hoc arbitration
Ad hoc arbitration is a proceeding that is not administered by others and requires the parties to
make their own arrangements for selection of arbitrators and for designation of rules,
applicable law, procedures and administrative support. Provided the parties approach the
arbitration in a spirit of cooperation, ad hoc proceedings can be more flexible, cheaper and
faster than an administered proceeding. The absence of administrative fees alone makes this a
popular choice.
II. Institutional arbitration

Often, the contract between the parties will contain an arbitration clause which will designate
an institution as the arbitration administrator. If the institutional administrative charges, which
may be substantial, are not a factor, the institutional approach is generally preferred. The
advantages of institutional arbitration to those who can afford it are apparent. Foremost are: (i)
availability of pre-established rules and procedures which assure that arbitration will get off
the ground and proceed to conclusion with dispatch; (ii) administrative assistance from
institutions providing a secretariat or court of arbitration; (iii) lists of qualified arbitrators,
often broken out by fields of expertise; (iv) appointment of arbitrators by the institution
should the parties request it; (v) physical facilities and support services for arbitrations; (vi)
assistance in encouraging reluctant parties to proceed with arbitration and (vii) an established
format with a proven record.
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The primary disadvantages attending the institutional approach are: (i) administrative fees for
services and use of facilities may be high in disputes over large amounts, especially where
fees are related to the amount in dispute. For lesser amounts in dispute, institutional fees may
be greater than the amount in controversy; (ii) the institution's bureaucracy may lead to added
costs and delays and (iii) the disputants may be required to respond within unrealistic time
frames.
5.6.4 Labor Relation Board
Labor relation board is the other way dispute settlement mechanism. The present labor
proclamation has come up with two kinds of labor relation boards, which it refers to
permanent and adhoc board. The composition and meeting procedure of both types of boards
are similar. They also have similar power. The difference between the two boards is in the
kind of dispute they settle.
The permanent board is empowered to hear any collective labor dispute, save dispute
regarding wage and other benefits. The board exercises jurisdiction when a dispute is directly
submitted to it by the parties or when the conciliatory process fails. The ad hoc board on the
other hand hears dispute related wage and other benefits when the dispute arises in an
undertaking which is designed by the law as “essential public service undertaking”. The ad
hoc board hears cases when the parties submit their dispute to it. The law does not provide the
boards (both permanent and ad hoc) with the power to hear cases ‘ex-office’.
When collective labor dispute is submitted to it, the board attempts to solve the problem
through conciliation, special when the dispute is submitted to it directly without any attempt
to settle it through discussed elsewhere. In such a case, the board has to attempt to end the
matter through conciliation. The Board may inappropriate circumstances consider not only the
interest of the parties immediately concerned but also the interest of the community of which
they are apart and may in such circumstances grant a motion to intervene by the government
as amicus curiae.
If the attempt through conciliation becomes fertile, the board exercises its power of decision
making. However, before making any decision, it gives the parties the chance to be heard. For
this the board shall give the parties prior notice of three days specifying therein the place, date
and hour of the hearing. Trade unions, employers associations and other parties notified to
appear at the hearing may be represented by their duly authorized representatives or appointed
legal counsel. The Board may limit the number of such representatives who may actively
participate in a hearing on behalf of any single party. If any of the parties or any other person
properly summoned to appear at a hearing fails to appear at the fixed time and place, the
Board may proceed with the hearing. If failure to appear was not the fault of the person
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involved the Board shall grant that person a second opportunity to appear before it. No appeal
allowed on the decision of the board to conduct hearing in absentia.
All hearings of the Board shall be public but the Chairman for good cause may decide to the
effect that hearing shall be in camera. The hearing procedure of the board is flexible since the
permanent or the ad hoc Board shall not be bound by the rules of evidence and procedure
applicable to courts of law, but may inform itself in such manner at it thinks fit.
The board whether permanent or the ad hoc shall give decision within 30 days from the date
on which the claim is lodged. Decisions of the Boards shall be made in writing and signed by
the Board members who concur therein. Dissenting opinion shall also be made in writing and
signed by the members in dissent.
The decision of the permanent or the ad hoc Board shall have immediate effect unless appeal
is taken to the federal High court on question of law and the court reverses it.
5.6.5 Collective Bargain
Collective bargaining has a great potential for minimizing conflict and redressing
confrontational attitudes and acrimony inherently associated with the employment
relationship, thereby promoting industrial peace and ultimately economic growth. On its own,
it can serve as a mechanism for labor dispute resolution by setting out procedures for
resolution of labor disputes in collective bargaining agreements. One of the virtues of
collective bargaining is that disputes are solved at source, a factor that does not leave the
bitterness associated with such adversarial processes of dispute resolution as adjudication.
Collective bargaining is a means of regulating relations between management and employees

and for settling disputes between them. It is based upon the realization that employers enjoy
greater social and economic power than individual workers. The contract of employment is by
nature imbalanced due to the fact that its content is largely determined by the employer by
virtue of him owning the means of production and this places him/her in a stronger bargaining
position. As employees need work more than the employer needs the services of a particular
employee, they tend to accept any terms and conditions offered to them, even if they turn out
to be exploitative. This is especially true of employees who enter the labor market without
special skills. The high unemployment rate facing most countries also leaves employees with
very little choice but to accept whatever is on offer.
As individuals, workers are unable to counteract management’s economic strength.

Intervention either in the form of statute or a collective bargaining agreement is necessary to
act as a countervailing force against the powers of management. Collective bargaining has
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proved to be an effective tool in redressing the inherent power imbalance in the employment
relationship, and placing restraint on managerial prerogative.
5.6.6 The Right to Strike
The right to strike as a form of dispute settlement mechanism is a necessary corollary to

collective bargaining and is resorted to when parties have reached a deadlock in their
negotiations. The right has been described ‘as an indispensable component of a democratic
society’ and been ‘justified as a countervailing force to the power of capital’. It is an ultimate
weapon in persuading the other party to bargain. Strikes occur due to a failure in the process
of fixing working conditions through voluntary collective bargaining.
ILO instruments do not explicitly deal with the right to strike, but its supervisory bodies, in
particular the Committee on Freedom of Association and the Committee of Experts on the
Application of Conventions and Recommendations have long recognized the right to strike as
an essential means available to workers and their organizations for the promotion and
protection of their economic and social rights. This Committee inferred this right from the
Convention on Freedom of Association and the Right to Organize.
Activity 5
1. Define contract of employment contract
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2. Discuss employer’s responsibility to provide a safe workplace
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3. The worker is duty bound to help and assistance. Discuss
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4. When you have established your business, you may need to employ people to help your
business grow and develop. If you employ people, you will be subject to a range of laws
which govern all employment relationships. Briefly outlines the most important of these
laws for you.
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_________________________________________________________________________
_________________________________________________________________________
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UNIT SUMMARY
Labor law in Ethiopia is generally defined as that branch of the country’s law which regulates
industrial relations. In essence, labor laws are meant to guarantee peace and harmony in the
industry so as to increase productivity and profits. Broadly speaking, the employment
relationship is regulated by both voluntary and legal measures. Voluntary measures comprise
individual agreements and collective bargaining. A contract of employment is an agreement
on the employment conditions made between an employer and an employee. The agreement
can be made orally or in writing and it includes both express and implied terms. The parties
(employer and employee) employment agreement must be capable of contracting and give
their consent sustainable at law.
Both voluntary and legal regulation can restrain the unfettered exercise of this employer
power. So, for example, collective bargaining with a trade union can minimize the
exploitation of individuals at work by agreements on pay and conditions, and also by helping
to process grievances. Furthermore, legislation can establish minimum conditions of
employment and set limits on the action that an employer might take against employees (e.g.
in relation to discipline and dismissal). Both voluntary and legal regulation provides rights
and responsibilities of the parties to the employment relation.
In simple circumstances a termination of employment occurs where an employee’s

employment is brought to an end. This may occur because of the actions of the employee or
the employer. The employee may resign or the employer may dismiss the employee, each
event will result in a termination of employment. This can be done with or without notice.
Terminating employees is one of the most unpleasant aspects of a business owner or
manager’s job duties, but sometimes it is absolutely necessary in order to continue the
business of the employer. But if terminating an employee is necessary, then it should be
performed in the most ethical, and professional manner possible. Severance pay,
compensation and reinstatement are effects of termination of contract.
There are special categories of workers under the labor proclamation. These include young
workers above 14 years of age, female employers, apprentice and disabled workers. These
workers are special treated in labor relation by labor proclamation. The power and authority to
adjudicate on industrial and trade disputes is conferred on courts, conciliation appointed by
the minster or the parties in dispute, arbitration and labor relation board.
Checklist
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Can You Define employment law?
Explain the concept of minimum working conditions and their
significance?
Identify sources of employment law?
Outlines the rights and duties of parties in employment relation?
Pin point the modalities for dispute resolution if and when it arises?
Identify special category of employees who are specially treated under
employment law?
Determine scope of labor law?
Define termination of employment relation?
Identify effects of lawful and unlawful termination of employment
relation?
Resolve employment disputes on the basis of the relevant law?
Commandment!
Part I:-Say true or false
1. The fundamental principle of labor legislation is to guarantee the weaker party in the
labor market protection.
2. The employer has statutory obligations relating to safe working conditions.
3. Employees may sue their employers if it was the employer's intentional or grossly
negligent conduct that caused the injury or illness.
4. Discrimination in employment is prohibited on the basis of race, creed, color, sex, but
not on place of ethnic ground
5. The laws governing employer/employee relationships are based on the traditional laws
of master/servant.
6. The contract of employment is different from other kinds of contracts in that the key
issues are the unequal distribution of bargaining power between the contracting
parties, the employer and the employee.
7. Contract made with managerial employees is governed by labor proclamation.
8. A privately-owned business does not have to accept unionization of its employees
even if employees vote for union representation.
9. Contract of employment is the central element in the structure of labor law.
10. The contract of employment does not normally oblige an employer to provide his
employee with work to do, provided he pays him his wages or salary as and when due.
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Part II: - Choose the appropriate
1. Which one is FALSE about labor law?
A. It regulates the relation between an employer and a worker.
B. It promotes both labor management harmony and the welfare the society at
large.
C. It regulates the relationship between the government and civil servant
D. All
2. Workers' compensation provides that damages employers may be recovered for work-
related injuries by:
A. Employees
B. Beneficiaries
C. Trustees
D. Employers
3. It is illegal throughout the employment process, including outreach, hiring, job

classification, salary, promotions, benefits, discipline, layoffs, and termination, to
discriminate against employees who are members of a:
A. Protected class
B. Unprotected class
C. Trade union
D. Discriminated class.
4. One of the following has nothing to do with employment relation

A. Employment contract
B. Collective agreement
C. Labor law
D. All
E. None
5. One of the following is not a duty of employee

A. Providing safety tools
B. Respecting work rule
C. Giving all proper aid when an accident occurs without pay for it
D. Reasonable care in the performance of his contractual obligations
E. All
6. Which one of the following is employer’s duty

A. Providing work
B. Paying wage
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C. Respect the worker's human dignity
D. Taking all the necessary occupational safety and health measures
E. All
7. Which one of the following is not a cause for lawful termination of employment
contract?
A. Expiry of the period or on the completion of the work
B. Upon the death of the worker
C. Upon the retirement of the worker in accordance with the relevant law
D. When the worker is unable to work due to partial or total permanent incapacity
E. None
8. Which one of the following empowers the employer to unilaterally terminate the
employment contract by giving prior notice to the worker?
A. Worker’s manifest loss of capacity
B. The post of the worker is cancelled for good cause and the worker cannot be
transferred to another post
C. The worker's unwillingness to move to a locality to which the undertaking
moves
D. All
E. None
9. One of the following is not a remedy for termination of contract

A. Issuance of certificate of service
B. Severance pay or pension benefit
C. Compensation
D. Payment in lieu of annual leave
E. None
10. Which one of the following is a meanse of labor dispute resolution mechanism
A. Conciliation
B. Court
C. Arbitration
D. Labor relation board
E. All
Part II: - Fill in the blanks space the appropriate word or phrase
1. The present labor proclamation has come up with two kinds of labor relation boards,
which it refers to _________________________and
___________________________.
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2. _____________________________is a private arrangement by parties to submit disputes
to one or more uninvolved and impartial persons to resolve the points of disagreement.
3. _____________________________means any controversy arising between a worker
and an employer or trade union and employers in respect of the application of law,
collective agreement, work rules, employment contract or customary rules and also
any disagreement arising during collective bar-gaining or in connection with collective
agreement.
4. _____________________________is an appropriate route in transferring skill in those
trades where skill could be acquired through “learning by doing” mechanism.
5. _____________________________is available to employees whose contract of
employment is terminated on specified grounds.
Part IV:-Short Answer question
Collective bargaining is better that individual employee in dealing with the employer.
Discuss.
___________________________________________________________________________
___________________________________________________________________________
__________________________________________________________________________
Further readings/references
Laws
 Constitution of the Federal Democratic Republic of Ethiopia, Negarit Gazetta, 1st year
No.1(1995)
 Labour Proclamation No.377/2003, Negarit Gazetta, 10th year, No.12(2004)
 Federal Civil Servants Proclamation No.515/2007, Negarit Gazetta, 13th year,
No.15(2007)
 Public Servants’ Pension Proclamation No.345/2003, Negarit Gazetta, 9th year,
No.65(2003)
 Civil Code of Ethiopia Proclamation No.165/1960, Negarit Gazetta, 19th year,
No.2(1960)
 Council of Ministers Regulations No.77/2002, Negarit Gazetta, 8th year, No.29(2002)
 Right to Employment of Persons with Disability Proclamation No.568/2008, Negarit
Gazetta,14th year, No.20(2008)
Books
 Gernigon & et al, ILO principles concerning the right to strike, International Labour
Review, Vol.137(1998), No.4
 Guadagni, Marco, Ethiopian Labour Law Handbook (1968)
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 Guido & et al, ILO principles concerning collective bargaining, International Labour
Review, Vol.139(2000), No.1
 Mehari Redae, A Simplified Guide to Ethiopian Labour Law (2008)
 Rothstein & et al, Employment Law (Horn Book Series-West Publishers)(1994)
 Tamru & et al, Ethiopian Labour Law, Kluwar Law School(2004)
 Tecle Hagos, labour dispute settlement process, Mekelle University, faculty of
law(unpublished)
UNIT SIX
Business Organization
Unit Introduction
A business exists to make a profit for its owners. In a capitalist market-driven economy, a
business that fails to make a profit ultimately ceases to exist, overtaken by creditors and
competitors. The need to make a profit is one truism that binds all businesses together, but
beyond that, it’s hard to draw generalizations about business operations. The world of
business is as varied as human experience itself, ranging from the neighborhood kids who
shovel snow in the winter and sell lemonade in the summer, to the neighborhood pizza
restaurant, to the small tool-and-die factory on the outskirts of town making machine tools, to
the multinational corporation with hundreds of thousands of employees scattered throughout
the globe.
Some businesses make things in factories (manufacturers), other businesses sell things that
other businesses make (retailers or franchisees), and still other businesses exist to help both
the makers and sellers make and sell better (business consultants). Some businesses don’t
make things at all, and instead profit by selling their services (think of an accounting or law
firm, a house painting company, or a hotel) or by lending money at a higher rate of interest
than it can borrow.
With this breadth and diversity, it’s not surprising that there is no “one size fits all” approach
to choosing a business organization. When choosing what form of entity is best, business
professionals must consider several factors. First, they have to consider how much it costs to
create the entity and how hard it is to create. Some entities are easy to create, while others are
more complicated and have ongoing maintenance requirements that are important to consider.
Second, they have to consider how easy it is for the business to continue if the founder dies,
decides to retire, or decides to enter a new business altogether.
Third, they have to consider how difficult it might be to raise money to grow or expand the
business. Fourth, they have to consider what sort of managerial control they wish to keep on
the business, and whether they are willing to cede control to outsiders. Fifth, they have to
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consider whether or not they wish to eventually expand ownership to members of the public.
Sixth, they must give some thought to tax planning to minimize the taxes paid on earnings and
income. Finally, and most importantly, they have to consider whether or not they wish to
protect their personal assets from claims, a feature known as limited liability.
If you are ever in a position to start a new business venture, your focus is typically on growing
revenue and cutting costs so that you can maximize profit. You may not be very concerned
with entity choice at the outset, since so many other considerations are competing for your
attention. Once an entity choice is made, however, it is difficult (but not impossible) to change
to another selection. Since entity choice can have a profound effect on these considerations, it
is important to gain a basic understanding of the available choices so that you, the business
professional, can focus on the business fundamentals rather than legal or accounting details.
This unit focuses on how business organizations recognized under our law are established,
their legal personality, the rights and responsibilities of owners/share holders and the pros and
cons of each. In text question, activities self test question are provided to check your
understanding. Please attempt first before visiting feed backs for activities and self check
question.
Learning Objectives
 Understand how business organization is chosen;
 List different business organization recognized under the Ethiopian laws;
 Explain the advantage and disadvantages of the business organizations;
 Examine how one business firm is different from the other, and
 Decide the rights and responsibility of owners or share holders.
UNIT SIX - SECTION ONE
6.1 Sole Proprietorships
Section Overview
It is very simple to establish a sole proprietary concern. Any person who is willing to start a
business and has the necessary resources can set up this form of business organization. To
start and operate the business in this form, practically does not require any legal formalities to
be fulfilled. In some cases like restaurant, chemist shop etc. however, permission from the
competent authority is required to be obtained before starting the business. Similarly, setting
up a factory may involve taking permission from the local authority. But, formation of
business unit as such does not involve any complexities.
Section objectives
 After completing this section you will be able to:
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 Understand the importance of sole proprietorships in our economy.
 Explore the advantages presented by doing business as a sole proprietorship
 Assess the disadvantages and dangers of doing business as a sole proprietorship
6.1.1 General Concepts of Sole Proprietorship
A sole proprietor is a person who conducts a business in his/her own name with unlimited
liability. For a sole proprietor to operate a business, he/she has to obtain a commercial
registration certificate and a business license.
Lelise is a college student of the summer. Unable to find even part-time work in a tough
economy, she begins to help her parents by cleaning up their overgrown garden. After a few
days of this work, Lelise discovers that she enjoys doing this and is good at it. The neighbors
see the work Lelise is doing, and they ask her to help their gardens too. Within a week, Lily
has scheduled appointments and jobs throughout the neighborhood. Using the money she has
earned, she places orders for additional landscaping equipment and materials with a local
retailer. Within a month, she is so busy that she has to hire workers to do some of the more
routine tasks, such as mulching and lawn mowing, for her.
By the middle of summer, Lelise has applied knowledge she picked up in her business classes
by developing a name for her business (Lelise’s Landscaping) and developing marketing
materials such as a Facebook fan page, flyers to be posted at local stores, business cards, and a
YouTube video showing her projects. By the end of the summer, Lily has earned a healthy
profit for all her work and developed valuable know-how on how to run her business. She has
to stop working when the weather gets cooler and she returns to school, but promises herself
to restart the business next summer.
Lelise is a sole proprietor, the most common form of doing business in Ethiopia. From a legal
perspective, there is absolutely no difference between Lelise and Lelise’s Landscaping they
are one and the same, and completely interchangeable with each other. If Lelise’s
Landscaping makes a profit, that money belongs exclusively to Lelise. If Lelise’s
Landscaping needs to pay a bill to a supplier or creditor, and Lelise’s Landscaping doesn’t
have the money, then Lelise has to pay the bill. When Lelise’s Landscaping enters into a
contract to plant a new flower garden, it is actually Lelise that is entering into the contract. If
Lelise’s Landscaping wants to open a bank account to accept customer payments or to pay
bills, then Lelise will actually own the account. When Lelise’s Landscaping enters into a
contract promising to pay a worker to mow lawns or lay mulch, it is actually Lelise that is
entering into that contract. Lelise can even apply for a “doing business as” or d.b.a. filing in
her state, so that her business can carry on under the fictitious name “Lelise’s landscaping.”
Note, however, that legally Lelise’s Landscaping is still no different from Lily herself. Any
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fictitious name therefore cannot have any words in it that suggest a separate entity, such as
“PLC.” or “SC.”
6.1.2 Advantages of Sole Proprietorship
There are many advantages to doing business as a sole proprietor, advantages that make this
form of doing business extremely popular. First, it’s easy to create a sole proprietorship. In
effect, there is no creation cost or time, since there is nothing to create. The entrepreneur in
charge of the business simply starts doing business, charging money, and providing goods or
services. Depending on the business, some sole proprietors may need to obtain permits or
licenses before they can begin operating. A pizza restaurant, for example, may need to obtain
a food service license, while a bar or tavern may need to obtain a liquor license. A small
grocery store may need a license to collect sales tax. Do not confuse these governmental
permits with legal approval for a business organization; in a sole proprietorship, the license is
granted to the individual owner.
Another key advantage to sole proprietorships is autonomy. Since the owner is the business,
Lelise can decide for herself what she wants to do to Lelise’s Landscaping. She could set her
own hours, grow as quickly or slowly as she wants, expand into new lines of businesses, take
a vacation, or wind down the business, all at her own whim and direction. That autonomy also
comes with total ownership of the business’s finances. All the money that Lelise’s
Landscaping takes in, even if it is in a separate bank account, belongs to Lily, and she can do
with that money whatever she wants.
6.1.3 Disadvantages of Sole Proprietorship
These advantages must be weighed against some very important disadvantages. First, since a
sole proprietorship can have only one owner, it is impossible to bring in others to the business.
Lelise cannot bring in her college roommate to work on Web site design as a partner in the
business, for example. In addition, since the business and the owner are identical, it is
impossible to pass on the business from Lelise. If Lelise dies, the business dies with her. Of
course, she can always sell or give away the business assets (equipment, inventory, as well as
intangible assets such as customer lists and goodwill).
Raising working capital can be a problem for sole proprietors, especially those early in their
business ventures. Many entrepreneurial ventures are built on great ideas but need capital to
flourish and develop. If the entrepreneur lacks individual wealth, then he or she must seek
those funds from other sources. For example, if Lelise decides to expand her business and
asks her wealthy uncle to invest money in Lelise’s Landscaping, there is no way for her uncle
to participate as a profit-sharing owner in the business. He can make a loan to her, or enter
into a profit-sharing contract with her, but there is no way for him to own any part of Lelise’s
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Landscaping. Traditionally, most sole proprietors seek funding from banks. Banks approach
these loans just like any other personal loan to an individual, such as a car loan or mortgage.
Down payment requirements may be high, and typically the banks require some form of
personal collateral to guarantee the loan, even though the loan is to be used to grow the
business. Many sole proprietors resort to running their personal credit cards to the maximum
limit, or transferring balances between credit cards, in the early stage of their business.
Tax planning can also be challenging for the sole proprietor. Since there is no legal distinction
between the owner and the business, all the income generated by the business is treated as
ordinary personal income to the owner. The United States has several income tax rates
depending on the type of income being taxed, and ordinary personal income typically suffers
the highest rate of taxation. Being able to plan effectively to take advantage of lower income
tax rates is very difficult for the sole proprietor.
Finally, sole proprietors suffer from one hugely unattractive feature: unlimited liability. Since
there is no difference between the owner and the business, the owner is personally liable for
all the business’s debts and obligations. For example, let’s say that Lelise’s Landscaping runs
into some financial trouble and is unable to generate planned revenue in a given month due to
unexpectedly bad weather. Creditors of the business include landscaping supply stores,
employees, and outside contractors such as the company that prints business cards and
maintains the business Web site. Lelise is personally liable to pay these bills, and if she
doesn’t she can be sued for breach of contract. Some proprietors are very successful and can
generate many hundreds of thousands of Birr in profit every year. Unlimited liability puts all
the personal assets of the sole proprietor reachable by creditors. Personal homes, automobiles,
boats, bank accounts, retirement accounts, and college funds all are within reach of creditors.
With unlimited liability, all it takes is one successful personal injury lawsuit, not covered by
insurance or exceeding insurance limits, to wipe out years of hard work by an individual
business owner.
UNIT SIX - SECTION TWO
6.2 Partnerships
Section overview
While there is no distinct body of law relating to sole proprietorships discussed in the
preceding unit, there is a well-developed body of law governing the affairs of a partnership.
Partnership is the relation which subsists between persons carrying on a business in common
with a view of profit. Thus, a partnership is a joint business enterprise carried on for profit.
This section deals with partnership and its kinds, the rights and responsibilities of members
and pros and cons of this business entity.
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Section objectives
 Learn about how general and limited partnerships are formed;
 Explore the major differences between general and limited partnerships; and
 Understand major advantages and disadvantages to doing business as general or
limited partnerships.
6.2.1 Definition of Partnership
Partnership is an association of persons who agree to combine their financial resources and
managerial abilities to run a business and share profits in an agreed ratio. Since the resource of
a sole proprietor to finance, and his capacity to manage a growing business is limited, he feels
the need for a partnership firm. Partnership business, therefore, usually grows out of the need
for expansion of business with more capital, better supervision and control, division of work
and spreading of risks.
The Ethiopian law under Art.211 defines partnership agreement as: “A partnership agreement
is a contract where by two or more persons who intend to join together and to cooperate
undertake to bring together contributions for the purpose of carrying out activities of
an economic nature and of participating in the profits and losses arising out there of, if any.”
6.2.2 Nature of Partnership
Existence of an agreement: Partnership is formed on the basis of an agreement between two

or more persons to carry on business. It does not arise out of the operation of laws. The terms
and conditions of partnership are laid down in a document known as Partnership Deed. A
partnership is a contract between two or more persons: There must be at least two persons
who should join together so as to constitute a partnership, as one person cannot become a
partner with himself. Hence the intention to associate is the essence of a partnership and one
cannot join a partnership unless others consented to that effect. It could also be said that a true
partnership relationship involves a high degree of trust and reliance, where each partner is an
agent for the other partners.
This provision lays down that each of the partners brings contributions together, the business
should be carried on for the joint benefit of the parties, and the object should be to make
profit. From the foregoing definitions of a partnership, the following key elements can be
drawn.
Engagement in business: A partnership can be formed only on the basis of a business activity.
Its business may include any trade, industry or profession. Thus, a partnership can engage in
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any occupation production and/or distribution of goods and services with a view to earning
profits.
Sharing of profits and losses:-In a partnership firm, partners are entitled to share in the profits
and are also to bear the losses, if any.
Agency relationship: The partnership business may be carried on by all or any of the partners
acting for all. Thus, each partner is a principal and so can act in his own right. At the same
time he can act on behalf of other partners as their agent. Thus, every partner can bind the firm
by his acts. According to Art.236 of the Ethiopian Commercial Code; “All partners shall have
a right to act as managers, unless the partnership agreement or decision of the partnership has
appointed one or more of the partners or a third party as a manager.” From the
aforementioned provision, one can view that an ordinary partnership may be managed by one
or more managers. The managers may also be partners or outsiders, who may be named in the
partnership agreement or appointed by subsequent meetings. It is also worth to note that if a
partnership agreement is silent as to the persons managing the partnership, and if there is no
subsequent appointment, all the partners are considered as managers.
The partners fund is raised from partners’ contribution. The phrase …to bring together
contributions …’ implies that persons, who are intending to be parties to a partnership, have to
be willing to make contributions to the partnership within the meaning of Art.211 of the
Commercial Code. Contributions to the partnership may broadly be categorized in to three,
namely: contribution in cash, in kind/where property is contributed/ and in skill where a
partner agrees to work for a partnership.
As provided under Art.210 (2) of the Commercial Code it does not exist distinct and separate
from its partners. Unlike companies, therefore, the right and obligations of the firm are in fact
the rights and obligations, of the partners composing the partnership. As a result, partnership
is said to be a riskier form of business organization compared to companies and its members
are subject to internal and external liability.
6.2.3 Types of Partnerships
Different forms of partnerships could be identified with different characteristics. Thus, types
and distinctive features of partnerships will be discussed here under.
VI.2.3.1General Partnership
According to Art.281 (1) of the commercial code “a general partnership consists of partners
who are personally, jointly, and severally and fully liable as between themselves and in the
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partnership for the partnership firm’s undertaking. Any provision to the contrary in the
partnership agreement shall be of no effect with regard to third party”
Per the above provision, General partnership is a partnership in which all the partners
hold the same position. This implies that there is no category of partners in a general
partnership, and where a partnership fails to discharge its obligation; all of the partners
of a general partnership will be jointly and severally liable.
Apart from the joint and several liability of the partners in a general partnership, any
agreement to exclude joint and several liability of partners will not affect third parties but if
any it will have effect only as between the partners themselves (see Art.281(1) of the
commercial code). This implies that partners in the general partnership may avoid internal
liability or they may limit liability as between themselves. On the contrary, agreement that
avoids the joint and several liabilities of the members shall not have any effect on the third
party or they could not avoid their external liability.
To this end, where a partnership fails to respond to its creditors’ claim, the creditors can
demand payment from any one of the partners. What is more, the term personally indicates
that a partner may be compelled to pay from his personal property, the word severally on the
other hand, shows the partner may be individually liable to the full claim, and jointly
shows that the partners are together liable to the full claim of the creditors.
In France, a general partnership is designated by its business name which may incorporate
the name of one or more partners and followed by the words “societe en nom collectif”.
Similar to its Ethiopian counterpart, in French law, partners in a partnership shall have
unlimited joint liability for the debts of the partnership, and all the partners are deemed to be
merchants. In effect, the debts and obligations of a partnership are also deemed to be of the
partners own, however, a partnership’s creditors may not demand payment from a partner
before demanding the same from the partnership it self by extra judicial means.
Likewise, Art.294 of the Commercial Code of Ethiopia provides that “no action may be taken
against individual partners for the debts due by a partnership until after payment has been
demanded from the partnership.” In view of this provision individual partners cannot be sued
personally unless the creditors demand payment from the partnership first and fail to succeed.
From the foregoing discussion, it is tenable to argue that partners in a general partnership may
be individually liable without limit for the whole of the debts and obligations of the
partnership. As a result, creditors may sue any one or more partners for the payment of their
debts, and they cannot require the creditor to add the other partners as co-defendants. What is
more, the joint and several liabilities of partners in the general partnership enables the
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creditors of the partnership to sue any one of the wealthy partner that can able to discharge the
debt or can sue all the partners jointly.
VI.2.3.2 Limited Partnership
A Limited partnership is a special type of partnership, which consists of at least one general
partner and one or more limited partners. The general partners assume responsibility for the
management of a partnership, and are equally liable for its debts; other individuals called
limited partners may invest without directly involving in the management, and are liable only
to the extent of their contributions. Thus, a limited partner has no right to participate in a
general management of the partnerships and assumes no liability for the partnership debts
beyond the amount of capital that he has contributed.
A limited partnership is defined in Art.296 of the code as: “A limited partnership comprises
of two types of partners: general partners in full liable personally, jointly and severally and
limited partners who are only liable to the extent of their contributions.” The aforementioned
provisions reveal that a limited partnership comprises of two types of partners, namely the
general partners who are jointly, severally and personally liable without limit for the debts and
obligations of the partnership. The other types of partners in a limited partnership are limited
partners, whose liability for the debts of the partnership is limited to the amount of their
contributions. Hence, the very provision defined limited partnership in terms of the partners it
comprises.
In view of that, a limited partner may be insulated from personal liability for the liability and
losses of a partnership unless he plays an active role in managing a partnership. If the limited
partner infringes the prohibition and enters in to transactions with third parties on
behalf of a partnership, he may lose his shield of limited liability and is liable jointly
with the general partners for the debts and obligations of partnership.(see Art.301(3) of the
commercial code).
To sum up, by way of conclusion, in many instances, a limited partnership is governed by the
same rules that are applicable to general partnership. What is unique to the limited partnership
is the presence of limited partners who are passive investors with very limited power to
participate in the management of the firm.
6.2.4 Contributions
Every partner must make a contribution, which may be in money, debts, other property or
skill. Where contribution is made in kind, the use only of such property may be contributed. In
the absence of a contrary agreement, contributions are deemed to be equal and of the nature
and extent required for carrying out the purposes of the partnership [Article 2229]. In cases
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where contribution is made in kind, the contributor must extend to the co-partners warranty
against defect and dispossession in a manner a seller does. If the use only of a property has
been contributed, the contributor must perform the duties owed by a lessor. Where a partner
contributes a debt, he guarantees only the existence of the debt and not the solvency of the
debtor, unless otherwise agreed [Article 230]. With regard to transfer of risk, the risk passes to
the partnership by delivery in case the contribution has been made in kind. However, the risk
shall remain with the contributing partner in case where the use only of a property has been
contributed. [Art.231]
6.2.5 Merits of Partnership

A. A partnership form of organization offers the following advantages: Ease information:
A partnership is very easy to form. All that is required is an agreement among the
partners. Even the expenses to be incurred for registration are-not much.
B. Pooling of financial resources: A partnership commands more financial resources

compared to sole proprietorship. This helps in expanding business and earning more
profits. As and when a firm requires more money, more partners can be admitted.
C. Pooling of managerial stalls: A partnership facilitates pooling of managerial skills of

all its partners. This leads to greater efficiency in business operations. For instance, in
a big partnership firm, one partner can handle production function, another partner can
look after all marketing activity, still another can attend to legal and personnel
problems, and so on.
D. Balanced business decisions: In a partnership firm, decisions are taken unanimously

after considering all the major aspects of a problem. This ensures not only balanced
business decisions but also removes difficulties in the smooth implementation of those
decisions.
E. Sharing of risks: Unlike sole proprietary organization, the risks of partnership business
are shared by partners on a predetermined basis. This encourages partners to undertake
risky but profitable business activities.
6.2.6 Limitations of Partnership
A partnership form of organization suffers from the following major limitations:

A. Uncertainty of existence: The existence of a partnership firm is very uncertain. The
retirement, death, bankruptcy or lunacy of any partner can put an end to the
partnership. Further, the partnership business can come to a close if any partner
demands it.
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B. Risks of implied authority: It is true that like the sole proprietor each partner has
unlimited liability. But his liability may arise not only from his own acts but also from
the acts and mistakes of co-partners over whom he has no control. This discourages
many persons with money and ability, to join a partnership firm as partner.
C. Risks of disharmony: In partnership, since decisions are taken unanimously, it is

essential that all partners reconcile their views for the common good of the
organization. But there may arise situations when some partners may adopt rigid
attitudes and make it impossible to arrive at a commonly agreed decision. Lack of
harmony may paralyse the business and cause conflict and mutual bickering.
D. Difficulty in withdrawal from the firm: Investment in a partnership can be easily made
but cannot be easily withdrawn. This is so because the withdrawal of a partner’s share
requires the consent of all other partners.
E. Lack of institutional confidence: A partnership business does not enjoy much

confidence of banks and financial institutions. It is because the nature of its activities
is not disclosed at public and the agreement among partners is not regulated by any
law. As a result large financial resources cannot be raised by partnership and growth of
business cannot be ensured.
UNIT SIX - SECTION THREE
6.3 Joint Venture
Section overview
The joint venture is a secret the simplest form of business organization. It is not made known
to third parties. A joint venture is an agreement between partners on terms mutually agreed
and agreement need not be in writing and is not subject to registration and other forms of
publication required in respect of other business organizations.
Section objectives
After successfully completing this section, you will be able to:
 Define joint venture;
 Understand the special nature of joint venture; and
 Know effect of joint venture
A joint venture is a grouping of people arising out of a partnership agreement, which is also
known as a joint venture agreement in which two or more persons combine their labour and/or
capital for the purpose of carrying out economic activities and participating in the profits and
losses arising out thereof ( Art.271 cum 211).
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The joint venture is the simplest form of business organization. It is regulated by title III of
Book II of the Commercial Code. Joint ventures, more often than not, are used for a single
transaction or project, or a related series of transaction or project. Although joint ventures can
hardly be adapted to industrial enterprises, commercial transactions in which great amount of
capital are involved are often dealt with by joint ventures. Large organizations often
investigate new markets or new ideas by forming joint ventures.
6.3.1 Characteristics of Joint Ventures
A joint venture, being one variant of partnerships, is subject to the general principles of law
relating to partnerships [Art.271]. Exceptions to the application of partnership principles to
joint ventures include the following:
1. A joint venture is not made known to third parties. What is more, a joint venture
agreement need not be in writing and is not subject to registration ( Art.272)
2. A joint venture does not have legal personality [ Art.272(3)]. Thus, it is not going to be
considered as a legal entity. That is to say, a joint venture may not have a firm-name;
may not enjoy ownership right over the capital; may not incur liabilities; may not have
a head office; cannot sue or be sued in its firm-name; cannot be declared bankrupt.
Now, let’s attempt to elaborate on the legal ramifications of the above-mentioned two
exceptions. First, one general principle of law relating to partnership is such that any business
organization other than a joint venture must not be made known to third parties.
Art.219 (1) also, sub-article (1) of Art. 272 provides that a joint venture is not made known to
third parties. Nevertheless, where a joint venture is made known to third parties, it shall be
deemed, insofar as such parties are concerned, to be an actual partnership Art. 272(4). That is,
in case third parties happen to be aware of the existence of a commercial joint venture, it will
be presumed to be a de facto general partnership. It shall be deemed to be a general
partnership, because it is commercial. And it is a de facto business organization, because it has
not been registered.
Here we can raise two questions in connection with the effect of non-compliance with the
requirement of what is referred to as “absence of divulgation” for persons to engage in
business in the form of a joint venture. Article 272(4) of the Commercial Code stipulates
simply that “ where a joint venture is made known to third parties, it shall be deemed, insofar
as such parties are concerned, to be an actual partnership.” This provision goes no further than
providing a sanction for the said requirement. The first question, thus, is as to the time when
the joint venture is considered to have been divulgated to third parties. Put differently, when
should the knowledge of third parties exist in order that the joint venture will be presumed to
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be an actual partnership? The time has to be before they enter into a business dealing with the
manager. The reasons are two-fold:
One is third parties ought not to claim that they were misled unless there exists reliance. This
is so, because it might be the case that at the time when they entered into transaction with the
manager they had relied only on the individual manager and did not know of the joint carrying
on of the business as between the venturers and did not still know of the identity of the
venturers. Thus, what matters most is prior knowledge as long as assimilating all cases of
subsequent knowledge would defeat the rationale behind the provision. Also inclusion of
subsequent knowledge into the solution would render it one-dimensional. This is so, because
if the manager could bind the members, they would be liable with him all the time.
The second question can be put as follows: undisclosed joint venturers enjoy ownership right
over their contributions as per Article 273 of the Commercial Code. However, if the joint
venture is made known to third parties, it will be presumed to be an actual partnership. Now,
the question is what is the effect of this legal presumption as to the change in the form of the
business organization on the venturers’ liability?
There still is a possibility in which partners in the de facto partnership can enjoy the privilege
granted them by virtue of Article 273 of the Commercial Code. Despite the fact that a joint
venture does not have legal personality and is not registered, some of the venturers may not
get misled as to their status. There is no reason why the partners in the de facto partnership
should be denied of limited liability, so long as the policy of protecting the interests of third
parties remains intact. Hence, the issue of whether third parties might have been misled will
be resolved on a case by case basis. Nevertheless, the likelihood that third parties will be
misled is higher in cases of de facto partnerships. It is submitted that, non-manager joint
venturers may enjoy the privilege granted them by Article 273 even if the joint venture is
divulgated, so long as third parties are not misled, none the less.
Besides, it is important to note that what has been disclosed to third parties matters a lot. If
third parties were informed that the partners have formed a joint venture, this would be
immaterial. But, if third parties were aware only of the joint carrying on of the business in the
form of a partnership, the solution will apply as stated above.
With respect to the second exception the following comment is worth noting. Since a joint
venture has no legal personality, ownership right over the capital contributions shall remain
with individual contributors in the absence of an agreement to the contrary (Art.273). The
joint ventures will merely put certain goods or assets at the disposal of the manager, who does
not become the owner except in the case of fungibles, especially cash. If the manger acquires
goods with the funds placed at his disposal by the venturers, he retains ownership of these
goods but is obliged to account to the venturers for his acquisitions, and if he resells these
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goods at a profit he must share the profit with the ventures. Just in case the manager goes
insolvent, the goods placed at his disposal by the ventures do not form part of the assets of the
bankrupt manager and hence each joint venturer may reclaim his contribution. Being the
owners of their contributions, the venturers may freely transfer them to third parties. Finally,
each joint venture takes back the assets which he placed at the disposal of the manager if he
still has them in kind upon dissolution.
The joint ventures may conclude a contrary agreement as regards ownership of their
contributions. First, they may provide for transfer of title over their contributions to the
manager. Therefore, the manager will become the owner from the moment the venturers
explicitly or implicitly show that they want to transfer ownership. In case of cash
contributions, the manager becomes owner thereof. Any way, the manager is duty-bound to
use the goods placed at his disposal exclusively for the business purposes of the joint venture.
Second, the joint venturers are at liberty to provide for a regime of co-ownership pertaining to
their contributions, thereby rendering each venture a co-owner of the common property.
6.3.2 Management of Joint venture
A joint venture may be managed by one or more managers, who need not be venturers. Many
times, the manager is a venturer. In the absence of an appointed manager, each venturer shall
have the status of a manager. Where there is a statutory manager, his/her powers should be
specified in the memorandum of association. But, a statutory clause restricting the powers of
the manager, may not be set up against third parties. This is so, because the memorandum of
association, otherwise known as joint venture agreement, is not required to be registered. And,
as such, third parties are divested of the opportunity to have access to such information.
Furthermore, a statutory manager may not be revoked without good cause (Art.275).
The manager enters into legal relationships with third parties in his own name. Acts of the
managers can be set up against the venturers themselves. For instance, if he sells for his own
benefit a good given him by a venturer, the sale of the good cannot be challenged unless the
purchaser knew the manager was exceeding his powers. But even in this case the burden of
proof will be on the venturer-owner to show that the manager knew of the situation. If he
cannot show this, the venturer-owner only has an action for damages against the manager.
With regard to the venturers, the managers are duty-bound to act within the scope of powers
specified in the joint venture agreements. As for the rest, he acts in his own name and not in
the name of the joint venture because the organization does not have legal personality.
The venturers who are not appointed to be managers enjoy the right to supervise the work of
the manager. They may not actively participate in the external management, but in case they
do participate they are jointly and severally liable with the manager. Venturers who are not
managers and who deal with third parties can only do so in their own name. A manager is
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obliged to account to the partners. Any provision relieving the manager from this duty shall be
of no effect. [Arts.276-277]
UNIT SIX - SECTION FOUR
6.4 Company
Section overview
Company law is part of the law of business organizations, and refers to the law that deals with
the bringing together of large resources/capital to do business for profit in accordance with a
certain law(s) of organization or incorporation. It could be established either by private
individuals or private individuals in association with the state or through state ownership. The
Ethiopian commercial code recognizes two types of companies i.e. share and private limited
company.
Section objectives
After successfully completing this section, you will be able to:
 Understand the concept of company;
 Know the significance and drawbacks of establishing company;
 Explain nature of company; and
 Identify kinds of company.
6.4.1 Concept of Company
During earlier times, businesses were owned and run by private individuals and some forms of
partnerships. Though the reasons for forming such partnerships could vary, some obvious
reasons for the formation include: a) mobilizing resources for a business venture that could
not have been done without pooled resources; and b) averting the risk the associates do not
want or would not afford to take individually. Thus, forming partnership “enables people to
do things which would be difficult or impossible for them to do alone”. However, with
changes in time and unfolding challenges, these forms of making business failed to meet the
test of time and there arose a need to expand the scope and types of organizations for business.
It is noted that:
The radical changes in the industrial science made it very difficult, if not impossible,
for sole proprietorship and partnership forms to meet the requirements of expanding
scale of business. The sole proprietorships and partnerships with limited capital and
unlimited liability, limited managerial skill and other limitations could not prove equal
to the challenges posed by the changing times.
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This shows that the development of company law is related with the emergence and
development of industrialization. Needless to state, the term company ordinarily refers to an
association of a number of individuals formed for some common purpose. In law, a company
could be defined as a voluntary association of persons formed to achieve some common
objectives, having a separate legal entity, independent and separate from its members, with
perpetual succession and a common seal, and with capital divisible into transferrable shares.
Thus, the law views most business associations as persons in the sense that the business
association is a separate entity with legal rights and obligations separate and distinct from the
owners and/or managers of the business (the real people involved with the association). The
real people involved in any business association are the owners/investors (the people who
provide the capital and own the business); the managers (the people who manage the
business); and the employees (the people who carry out the tasks necessary to operate the
business, from sweeping the floor to serving as the chief executive officer).
6.4.2 Nature of Company
The following are the chief characteristics of the company form of organization:
A. A company has a separate legal personality detached from its members with
continuous existence irrespective of changes in membership. That means the
insolvency of its members, death or transfer of shares to another individual or person
would not affect the continuous existence of a company. Moreover, it owns property
or capital in its own name which would be divided among the members in terms of
shares/contributions based on their contribution. As a legal person, it can freely
transfer these shares/contributions and bring suit or be sued independently. In short, a
company can be understood as a person which is “artificial, invisible, intangible and
existing only in contemplation of the law.
B. Artificial person: A company is the creation of law and has a distinct entity. It is
therefore, regarded as an artificial person. The business is run in the name of the
company. But because it is an artificial person, its functions are performed by the
elected representatives of members, known as directors.
C. Perpetual succession: A company has continuous existence independent of its

members. Death, insolvency, or change of members has no effect on the life of a
company. The common saying in this regard is that members may come, members
may go, but the company goes on forever. The life of the company can come to an end
only through the prescribed legal procedure.
D. Common seal: Since a company is an artificial person, it has no physical existence.

The activities of the company are carried through a group of natural persons elected by
its members (called directors). Every company must therefore, have a common seal
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with its name engraved on it. Anyone acting on behalf of the company must use the
common seal to bind the company.
E. Limited liability: The liability of the members of a company is limited. It is limited to

the extent of capital agreed to be contributed. Beyond that amount, the members
cannot be personally held liable for payment of the company’s debts.
F. Transferability of shares: The capital of a company is divided into parts called shares.
Normally the shares of a company are freely transferable by its members. However,
transferability is restricted in the case of private company.
As can be concluded from the next discussion, companies are established to do some form of
business. According to Article 10(2) of the Commercial Code, (registered) companies shall
always be deemed to be of a commercial nature whatever their objects. In other words, they
are always to be deemed as traders and operate a business (Articles 5 and 125(1), Commercial
Code). Article 124, Commercial Code define business as an incorporeal movable consisting of
all movable property brought together and organized for the purpose of carrying out any of the
commercial activities specified under the Code. It consists of corporeal elements such as
equipment or goods and incorporeal elements such as the goodwill of the business, its trade
name, industrial design, patents and copyrights.
As traders, companies are professionally engaged in business activity with the motive of
making profit, which will basically be shared by the members/shareholders. Statutory
companies (enterprises) are also established with the motive of making profit. However, State
owned enterprises are primarily needed to serve public interest, and, in principle, the private
sector is not believed to have much interest in certain sectors or owing to the public utility of
particular sectors. Be that as it may, statutory companies are established with an express
motive of making a particular sector more efficient, productive and profitable competing with
the private sector. In the same manner as members/shareholders of a registered company, the
State, as owner of these companies, receives dividend at the end of every financial year.
It is pretty clear that registered companies have a profit motive behind their establishment and
operation. They are established by private individuals, and in some cases, with certain
participation of government through its enterprises. Normally, a government in its capacity as
the representative political entity of the public is not expected to make profit at the expense of
its public. However, as discussed above, governments engage in profit making ventures and,
to that extent, they play the role of the private sector. But the final gain will be for the public
as a government is not expected to have a separate coffer from that of its public. Therefore,
from the point of view of private nature, the difference that one can observe is mainly the
form of ownership.
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6.4.3 Merits of Company Organization
The most important advantages of a company organization may be stated as follows:
A. Collection of huge financial resources: The biggest advantage of a company

organisation is that it has the ability to collect large amounts of funds. This is because
a company can raise capital by issuing shares to a large number of persons. Shares of
small value can be subscribed even by people with small savings. In addition,
company can also raise loans from the public as well as different lending institutions.
Availability of necessary funds makes it possible for a company to undertake business
activities on a large scale.
B. Limited liability: Another advantage of the company form of organisation is the

limited liability of members. With the liability of members limited to the value of their
shares, company is able to attract many people to invest in its shares. It is thus in a
position to undertake business ventures involving risks.
C. Free transferability of shares: A company permits its members to transfer their shares.
Free transferability of shares provides liquidity of the member’s investment. Thus, if a
member needs cash he can sell his shares. Or, he can use the same amount to buy
shares of another more profitable company. It enables profitable companies also to
attract funds away from the less profitable ones.
D. Durability and stability: A company is the only form of organisation which enjoys
continuous existence and stability. The funds invested in a company by shareholders
are not withdrawal until it is wound up. Also any change in the company’s
membership does not affect its life. As a result of this, a company can undertake
projects of long duration and attract people to invest in the business of the company.
E. Growth and expansion: With the large resources at its command a company can
organize business on a large scale. Once the business is started on a large scale it gives
the company strength to grow and expand. This is because of high profits, which
accrue from the economies of large-scale organisation and production.
F. Efficient management: Since a company undertakes large-scale activities, it requires

the services of expert professional managers. Competent managers can be easily hired
by a company because it commands large financial resources. Thus, efficient
management is ensured in a company organisation.
G. Public confidence: A company enjoys great confidence and trust of the general
people. Companies have to disclose the results of their activities and financial position
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in the annual reports. The reports are available to the public. It is on the basis of the
annual reports and other information that investment is made in companies.
6.4.4 Limitations of Company Organization
A company organisation suffers from the following limitations:

A. Lengthy and expensive legal procedure: The registration of a company is a long-drawn
process. A number of documents are to be prepared and filled . For preparing
documents experts are to be hired who charge heavy fees. Besides, registration fees
have also to be paid to the Registrar of Companies.
B. Excessive government regulations: A company is subject to government regulations at

every stage of its working. A company has to file regular returns and statements of its
activities with the Registrar. There is a penalty for non-compliance of the legal
requirements. Filing returns and reports involving considerable time and money is the
responsibility of a company. All this reduces flexibility in operations.
C. Lack of incentive: The company is not managed by shareholders but by directors and
other paid officials. Officials do not have investment in the company and also do not
bear the risks. As such, they may not be as much motivated to safeguard the interests
of the company as the shareholders.
D. Delay in decision-making and action: In large companies, decision making and its
implementation happen to be a time consuming process. This is obviously because
individual managers are unable to take decisions on their own. They may have to
consult others which may take a lot of time. Similarly, after decisions are taken, they
have to be communicated to people working at various levels of the organization. It
also delays the implementation of already delayed decisions.
E. Conflict of interest: A company is generally characterized by a large organization with

many groups operating in it. So long as the interests of these groups do not clash with
each other they work for the good of the organization. But sometimes, individual and
group interests become difficult to reconcile. For instance, the sales manager may be
interested in the quality of products to satisfy customers and increase sales, but the
production manager may be more concerned with maximum production without
regard to the product quality. In such a situation, the business is bound to suffer in
course of time unless there is a reconciliation of the conflicting view points of the two
managers.
6.4.5 Classification of Companies under Commercial Law
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In Ethiopia, company is a form of business organization as enunciated under Article 210 of
the Commercial Code. Article 210(1) defines a business organization as “any association
arising out of a partnership agreement. And the Code defines partnership agreement as
follows: A partnership agreement is a contract whereby two or more persons, who intend to
join together and to cooperate undertake to bring together contributions for the purpose of
carrying out activities of an economic nature and of participating in the profits and losses,
arising out thereof, if any.
It can be easily inferred from this that a business organization is an “association” of persons,
based on a partnership agreement, who bring together their capital to do a business with the
objective of obtaining profit.
The terms business organization, business association, business enterprise, and business
structure could be used interchangeably. However, there is a need for caution with the term
“association” as it is defined under the Civil Code to mean a grouping formed between two or
more persons with a view to obtaining a result other than the securing or sharing of profits
[See Article 404, Civil Code of Ethiopia of 1960]. Goldberg indicates that the term
association is used in Article 210 of the Commercial Code wrongly as the more accurate
translation of the term used in the French text would be grouping. Certainly, the term
“association” as used in the Commercial Code should not be confused with the definition
proffered in the Civil Code as the Codes have mutually exclusive purposes in using the terms.
Hence, the term grouping would have been better to resolve the confusion.
Companies can be classified into numerous forms based on different criteria such as basis of
incorporation, liability, number of members, control, ownership and origin. These grounds of
classification and how they should be understood in the Ethiopian context will be reviewed
below.
6.4.5.1 Classification based on manner of incorporation

In terms of the manner of establishment or incorporation, companies can either be classified
as registered companies or as statutory companies.
a) Registered companies
A registered company is a company that acquires its legal personality upon registration. Until
it is registered fulfilling the legal requirements, it will not be considered as a company with
legal personality (Article 8(1), Commercial Registration and Business Licensing
(Amendment) Proclamation No.376/2003). In terms of registration, Article 212 of the
Commercial Code covers two types of companies among the forms of business organization.
These are Share Company (See Article 212 (e) and Articles 304-509, Commercial Code and
private limited company (See Article 212 (f) and Articles 510-543, Commercial Code). It has
to be underscored that although Article 211 of the Code defines a business organization as
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“any association arising out of a partnership agreement”, it does not define or describe what is
meant by the term “company” apart from indicating that there are only these two types of
companies (See Article 212(1) (e) and (f), Commercial Code).
The phrase any association arising out of a partnership agreement seems broad enough at first
sight, but closer review shows that it covers only few forms of association or business
organization as it depends on a partnership agreement, which has to be done in writing apart
from joint ventures. In addition to adopting a narrow conception of the term company, this
would categorically exclude the types of business organizations this research argues to include
in the realm of business organizations under Ethiopian business laws.
According to Articles 211, 221(2), 222(2), 313, 314, 516, 517 and 518, Commercial Code,
registration of companies requires the incorporation of their partnership agreement in the
Memorandum of Association and Articles of Association that will govern their operations.
Upon registration, they acquire legal personality to enter into the operational stage. Once
established and registered, the organ registering them, the Ministry of Trade and Industry or
the relevant regional bureau, recognizes their operations according to the registered
memorandum and articles of association.
Any amendment to these establishing documents (Memorandum of Association and Articles

of Association) has to be agreed upon by the members/shareholders of the companies and
registered at the Ministry of Trade and Industry in the same manner as the original
establishing documents. And, in the case of share companies engaged in the financial sector
such as banking, insurance and micro-financing, these companies have to be registered by the
National Bank of Ethiopia to acquire legal personality.
b) Statutory Companies
Statutory companies (also known as public enterprises or State owned enterprises,) are
companies that are established by law, as opposed to registered companies which are
established by a memorandum of association. Public enterprises are defined as wholly State
owned enterprises established to carry on for gain manufacturing, distribution, service
rendering or other economic and related activities. These are companies that are “formed to
carry out some special public undertakings, for example, railways, waterworks, gas, electricity
generation, etc.
There are several reasons for their establishment that include (a) national security for areas
such as defense industries and public transport; (b) revenue raising in particular in events such
as where tax collection is difficult or impossible; (c) economic control and self-reliance; (d)
lack of private investment in undertakings where large-scale investment is required; (e) equity
considerations when private companies fail to function profitably; and (f) the fear of private
monopoly situations. The major characteristics of such public enterprises include public
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ownership, public control and establishment by a separate law, having distinct legal
personality, limited degree of autonomy and public finance.
Public enterprises acquire legal personality upon establishment by Council of Ministers

Regulations to be issued pursuant to Article 6 of Proclamation No.25/1992. These
establishment Regulations have to contain, inter alia, the name and purpose of the enterprise,
the authorized and paid up capital, extent of liability and supervising authority (See Article 6,
7 and 47 (1) (a), Public Enterprises Proclamation No. 25/1992). As companies established by
Regulations, any change or amendment of the Regulations establishing such statutory
companies has to go through the formal procedure of amendment of Regulations by the
Council of Ministers.
It can be observed from review of the various Regulations establishing various types of public
enterprises in various sectors that statutory companies operate in Ethiopia under three distinct
names, i.e., corporations, enterprises and share companies. Prominent examples of
corporations include the Ethiopian Telecommunication Corporation, (See Council of
Ministers Regulations No. 99/2004, Establishing Ethiopian Telecommunication Corporation)
and the Ethiopian Electric Power Corporation; (See Council of Ministers Regulations No.
90/2003, Establishing the Ethiopian Electric Power Corporation). Examples of companies
established as enterprises include the Ethiopian Airlines Enterprise,(Council of Ministers
Regulations No. 92/2003, Establishing the Ethiopian Airlines Enterprise). Water Works
Design and Supervision Enterprise,(See Council of Ministers Regulations No.110/2004,
Establishing Water Works Design and Supervision Enterprise). Ethiopian Seed Enterprise
(See Council of Ministers Regulations No. 100/2004, Establishing the Ethiopian Seed
Enterprise) and agricultural development enterprises such as Bale Agricultural Development
Enterprise, Arsi Agricultural Development Enterprise, and Awassa Agricultural Development
Enterprise (Article 2 (1), Public Enterprises Proclamation No.25/1992). As regards State
owned share companies, these are forms of share companies that are ‘transitory’ in nature as
they are in the process of transformation and are waiting for sale to the private sector (See
Article 5, Privatization of Public Enterprises Proclamation No. 146/1998). It must be
underscored that the power to convert a public enterprise into a share company type of
business organization resides in the Council of Ministers by virtue of Article 47(2) (a) of
Proclamation No. 25/1992. The capitals of these share companies are divided into shares and
totally held as government shares.
6.4.5.2 Classification in Relation with Range of Minimum Membership and Capital
Articles 306(1) and 307(1), Commercial Code indicates that companies can be classified
based on the minimum number of membership and minimum capital. In share companies, the
requirement is to have at least five members with a contributed capital of not less than 50,000
Birr. In the case of private limited companies (PLCs), the number of members cannot be less
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than two and more than fifty with a capital of not less than 15,000 Birr (refer Articles 510(2)
and 512(1), Commercial Code).
It should be pointed out that in the light of the objectives of establishment of companies, PLCs
would be very appropriate for family and small group of friends while share companies would
be more appropriate for an expanded participation well beyond friendship or familial ties or
connections. That is so because there is no requirement of publicizing the shares in PLCs,
through instruments such as prospectus, and the members can easily pool their resources for
investment. In the case of PLCs, as the minimum requirement of membership is small, a
single individual could hold substantially all the shares and still remain legal in what is
commonly referred to as ‘one-man company’:
One man company is that company where one man holds practically the whole of the capital
of the company and in order to meet the statutory requirement of minimum number of
members, some dummy names are added. The dummy names which are added are mostly the
relatives or friends of the principal shareholder.
Although the one-man company is not a legally allowed form of PLC in Ethiopia, as provided
under Article 512(2) of the Commercial Code, it is stated that the value of a share in a PLC
could be as low as 10 Birr and a member can hold more than one share (See Article 512(2)
and (3), Commercial Code). Thus, if two individuals agree to form a PLC with a capital
worth 50 million Birr with value of each share at 10 Birr and one of them owns only one
share, then it can be said that the PLC is nearly fully owned and controlled for all practical
purposes by a single person. In addition, sometimes a person establishes a PLC (e.g. X and
His Family PLC) and controls the whole company as he contributes a lion’s share of the
capital of the PLC in his name and the remaining part in the name of his children and the
children happen to be incapable. This form of one-man PLC is bound to happen in particular
in family businesses.
In relation to statutory companies (public enterprises), they are wholly owned by the State as
provided for under Article 2(1) of Proclamation No.25/1992. However, this may not be the
case where they are converted into share company(ies) and partially privatized. In such an
instance, the number of shareholders could be two or any number more than that: the
government and the private shareholder(s). It should also be underscored that one cannot rule
out the possibility of one-man de facto share companies that would be formed in the same
way as the PLCs, with several dummy names included as shareholders.
6.4.5.3 Classification Based on Extent of Control: Holding Companies and

Subsidiary Companies
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In terms of the extent of control of one company over the other, companies can be classified
into holding companies and subsidiary companies. Although this concept of control is covered
in the Commercial Code, it is not dealt with in detail. What is meant by holding companies
and subsidiary companies and their distinctions can be discussed in light of the provisions of
the Commercial Code.
a) Holding Companies
A holding company, as the name implies, is a company which has control over another
company. A holding company is also known as a parent company. A holding could be
determined based on the control the holder plays in terms of capital or the control the holder
plays in decision-making through majority in the board of directors. Under the Commercial
Code, the concept of holding is hardly dealt with but there are few provisions on joint holding.
This is provided for under Article 344 to prohibit passage of a certain capital limit. It
determines the holding of share companies in terms of control on the capital and sub-Article 1
provides “[w]here ten per cent or more of the capital of one company is held by a second
company, the first company may not hold shares in the second company”. This implies that a
holding company can have as much a capital as possible but cross-holding is not allowed if
one of them holds 10% or more of the capital of the other company. But if the share is less
than 10%, it appears that both of them can cross-hold capital in each other. In the event that
their holding capitals exceed the 10% limit, they will be required to reduce their shares to less
than the limit under the conditions embodied under Article 344(4).
Some economic sectors such as the banking sector, for instance, require extra prudence in
their operations. This has compelled Ethiopia to adopt additional laws on top of the
Commercial Code to deal with their special nature. The Banking Business Proclamation
No.592/2008 is such law issued to govern the banking sector more stringently than the other
forms of share companies. Article 11 of this Proclamation provides for the limitation on
acquisition of shares in banks as follows:
1. No person, other than the Federal Government of Ethiopia, may hold more than five
percent of a bank’s total shares either on his own or jointly with his spouse or with a
person who is below the age of 18 related to him by consanguinity in the first degree .
[…]
3. The amount of shares that may be held in a bank by a company, which is partially or
fully owned by persons who have share in the bank, shall be determined by the
National Bank.
4. An influential shareholder of any bank may not acquire shares in other banks.”
Thus, a person other than the Federal Government may not hold more than 5% of a bank’s
share. In addition, Article 2(11) of this Proclamation introduces the concept of an “influential
shareholder”, who is a person who holds directly or indirectly two percent or more of the total
subscribed capital of a bank, and prohibits him from acquiring shares in another bank.
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Moreover, a company fully or partially owned by persons cannot have a share that exceeds the
amount of shares to be determined by the National Bank of Ethiopia. Therefore, the extent of
cross-holding is tightly regulated, which makes the role of one (person) bank in another bank
reduced.
According to Article 360(1) (c), Commercial Code, a share company is required to keep at its
head office a register showing the number and value of shares or debentures held by each
director in any holding company of which the company is a subsidiary. It should further be
noted that there are several PLCs established as holding companies to other PLCs in Ethiopia.
However, the Commercial Code does not have provisions on the status of holding companies
in the form of PLCs. All the sparse provisions in the Commercial Code are in the part of the
Code dealing with share companies. Further, the Commercial Code does not provide how
events of cross-holding should be administered in the case of PLCs.
b) Subsidiary Companies
A subsidiary company refers to a situation whereby a company would be auxiliary to another
company which would in turn be its holding or parent company. This makes the concepts of
holding and subsidiary companies relative concepts as they are interdependent. Just like the
holding companies, the Commercial Code does not provide detailed provisions on the concept
of subsidiary companies, be they public or private, apart from mentioning them in certain
provisions. Besides, it should be noted here that a subsidiary company too, say, company X
could itself be a holding company to company Y and such chain has to be clearly catered for
in the Code in the future. This will definitely have a large bearing on issues of good corporate
governance which is critical to advance private investment and attract foreign investment.
6.4.5.4 Classification Based on Type of Ownership and Reporting Obligations
From the point of view of ownership, companies can be classified as government or State
owned and non-government owned. Government owned companies are statutory companies,
and the non-government companies refer to companies owned by persons other than the
government such as individuals and other legal persons. Non-government companies can
further be divided into public and private companies. In this sense, public company refers to
share companies that are open for the general public to invest in while private companies
refers to private limited companies that are open to a smaller circle such as family members or
friends.
With regard to regulatory power that emanates from ownership, public companies present
their financial and annual reports to the general assembly of their members/shareholders as
their superior organ, while statutory companies based upon Article 6(2) (g) and (h),
Proclamation No.412/2004 and Article 6, Financial Public Enterprises Agency Establishment
Council of Ministers Regulation No.98/2004, on the other hand, present their financial and
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annual performance reports to the Privatization and Public Enterprises Supervising Agency
and through it to the Ministry of Trade and Industry. This will also have a lot of bearing on
the manner in which the different forms of companies have to be administered with the view
to promoting the interests of the State in general and the members/shareholders in particular.
6.4.5.5 Classification Based on Place of Establishment: Local and Foreign

Companies
Companies can further be classified as local and foreign based on their place of establishment.
While companies that are established according to Ethiopian law are known as local
companies, whether they operate inside or outside their country of incorporation, others
incorporated abroad are called foreign companies. Foreign companies could operate having
their principal place of business in Ethiopia or the subsidiary office (of the parent company)
based in Ethiopia. Consequently, as indicated under Article 6(2) (g) and (h), Proclamation
No.412/2004 and Article 6, Financial Public Enterprises Agency Establishment Council of
Ministers Regulation No. 98/2004, those companies that are incorporated abroad and whose
head office or principal place of business is located in Ethiopia are subject to the provisions of
the Commercial Code. In addition, those companies that are incorporated abroad and which
have subsidiary offices or branches in Ethiopia, with permanent representation, shall be
subject in respect of each office or branch to the provisions of the Commercial Code.
The Commercial Code requires under Article 557 that if the form of incorporation of a
firm/business organization is different from those it recognizes, i.e., which differs from those
provided for and covered by the Commercial Code, the foreign business organization must be
governed by the law of share companies. This would mean that the foreign firm/company
shall fulfill the minimum capital requirement; and the governing bodies such as the board of
directors, the management, shareholders’ meetings etc. This could be seen as evidence that the
Code appreciates the existence of different forms of companies abroad, but still declines to
recognize that. This could be an area that requires closer attention as it could be seen as a
discouraging factor for entities who want to come and invest in Ethiopia with different forms
of establishment. In relation to foreign investment, it should be underlined that the areas under
which such foreign companies can invest are restricted only to areas that are open to
investment by foreigners.
6.4.6 Share Company Vs Private Limited Company
A share company and a private limited company are associations of capital formally
established by the signing of a memorandum of association and articles of association. A
private limited company and a share company require a minimum of two and five
shareholders respectively. The maximum number of shareholders in a private limited
company cannot exceed 50.
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Once shareholders have signed the memorandum and articles of association before a public
notary and the same are deposited in the commercial register, the company becomes a legal
person. After registration, obtaining a business license is necessary to start business
operations. Companies are legal persons whose liabilities are met by their assets only.
Shareholders of companies are liable only to the extent of their contributions.
Both legal and physical persons can be shareholders of either a share company or a private
limited company. Foreign nationals are not allowed to invest in certain areas of investment
reserved for either Ethiopian nationals or the Ethiopian Government. Foreign nationals may
however be allowed to invest in reserved areas of investment with the approval of the
Ethiopian Investment Board. Some areas of investments can only be carried on in joint
venture with the Government of Ethiopia.
Private limited companies are not subject to detailed regulations when compared to a share
company, which the law regulates strictly. A private limited company is more of a family
company while a share company is a public company. A share company is required to have a
board of directors and auditor/s and it should also conduct a general meeting of shareholders
at least once a year. A private limited company is not required to have an auditor unless the
number of its shareholders exceeds twenty. A private limited company cannot issue
transferable securities like bonds, debentures, while a share company can issue transferable
securities.
Activity 6
1. Business organizations may be owned and managed by a single individual or group of

individuals. Discuss
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
2. Discuss general partnership and compare it with sole proprietorship

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
3. Analyze responsibility of general partners in partnership in comparison with limited
partners.
___________________________________________________________________________
___________________________________________________________________________
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___________________________________________________________________________
___________________________________________________________________________
4. Define and determine the term and status of company
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
5. Analyze why share company is preferable over other business organizations
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
UNIT SUMMARY
Business organizations are an important part of a business’s structure. Different organizations

provide different advantages and disadvantages in creation cost and simplicity, ongoing
maintenance requirements, dissolution and continuity, fundraising, managerial control, public
ownership; tax planning, and limited liability. Many business organizations take the form of
separate legal entities, which the law recognizes as nearly like persons for purposes of legal
rights.
Sole proprietorships are the most common way of doing business in the United States.
Legally, there is no difference or distinction between the owner and the business. The legal
name of the business is the owner’s name, but owners may carry on business operations under
a fictitious name. Sole proprietors enjoy ease of start-up, autonomy, and flexibility in
managing their business operations. On the downside, they have to pay ordinary income tax
on their business profits, cannot bring in partners, may have a hard time raising working
capital, and have unlimited liability for business debts.
A general partnership is formed when two or more persons agree to share profits and losses in
a joint business venture. A general partnership is not a separate legal entity, and partners are
jointly and severally liable for the partnership’s debts, including acts of malpractice by other
partners. Income from a general partnership flows through to the partners, who pay tax at the
ordinary personal income tax rate. In most states general partners can also bring in limited
partners, creating a limited partnership. Limited partnerships must be formed in compliance
with state statutes. Limited partners enjoy limited liability but generally cannot participate in
day-to-day management of the business.
Checklist
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Can You Understand the importance of sole proprietorships in our economy?
Explore the advantages presented by doing business as a sole
proprietorship?
Assess the disadvantages and dangers of doing business as a sole
proprietorship?
Learn about how general and limited partnerships are formed?
Explore the major differences between general and limited
partnerships?
Understand major advantages and disadvantages to doing business as
general or limited partnerships?
Define joint venture?
Understand the special nature of joint venture?
Know effect of joint venture?
Understand the concept of company?
Know the significance and drawbacks of establishing company?
Explain nature of company?
Identify kinds of company?
Commandment!
Part I:- Say true or false
1. Autonomy is a key advantage to share company.
2. In sole proprietorship it is possible to bring in others to the business.
3. Raising working capital can be a problem for sole proprietors.
4. Joint venture is a secret business organization.
5. A partnership can be formed only on the basis of a business activity.
6. The partnership business may be carried on by all or any of the partners acting for all.
7. General partnership is a partnership in which all the partners hold the same
position.
8. In a limited partnership limited partners, may be individually liable without limit for the
whole of the debts and obligations of the partnership.
9. A partnership facilitates pooling of managerial skills of all its partners.
10. A company has continuous existence independent of its members.
Part II:-Multiple choice questions
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1. There are ____forms of business organization.
A) Two
B) Three
C) Five
D) Six
E) All
2. Choose the correct option

A) Limited liability of the partners in limited liability partnership
B) Shareholders have limited liability
C) Single proprietor has unlimited liability
D) All the above
3. Statement A: A Partnership deed is basic document in partnership

Statement B: PLC should be registered with the Registrar of Companies.
A) Only A is true
B) Only B is true
C) Both are true
D) Neither of two
E) None of the above
4. Choose the wrong option

A) Maximum partners can be 20 in the partnership firm.
B) Maximum partners can be unlimited in Share Company
C) Maximum shareholders are unlimited in private limited
D) There may or may not be joint and several liability in partnership
5. Choose the correct option

Statement A: Joint venture has legal entity.
Statement B: PLC has no legal entity.
A) Only A is true
B) Only B is true
C) Both are true
D) Neither of two
6. Choose the wrong option

A) Minimum 2 and maximum 50 shareholders in private limited company
B) Minimum 2 and maximum unlimited shareholders in Share Company
C) Minimum 2 and maximum unlimited partners in PLC
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D) None of them
7. Which type of business organization offers perpetual life as well as limited liability?
A) General partnership
B) Sole proprietorship
C) Joint venture
D) SC
8. Which of these is false about shareholders of a corporation?

A) They have limited liability that is limited to their investment.
B) They elect a board of directors
C) They pay tax on their proportionate share of the corporation’s earnings
D) All of the above are true about shareholders
9. Which one is FALSE about business

A) A business exists to make a profit for its owners
B) The need to make a profit is one truism that binds all businesses together
C) There is no “one size fits all” approach to choosing a business organization
D) All
E) None
10. Which one of the following is FALSE about sole proprietorship

A) Easy to create
B) High owner’s autonomy to decide on the fate of the business
C) Less capital
D) Joint and several liabilities
E) All
F) None
Part III:- Fill in the blank space

1. ________________________is a person who conducts a business in his/her own name
with unlimited liability.
2. _______________________________is formed on the basis of an agreement between two
or more persons to carry on business.
3. ______________________________may be individually liable without limit for the
whole of the debts and obligations of the partnership.
4. The capital of a company is divided into parts called_________________________.
Further readings/References
I. Books and Monographs
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 Keenan, Denis, Smith and Keenan’s Company Law for Students, 11th ed. (1999)
 Goldberg, Everett F, An Introduction to Business Organizations, Journal of Ethiopian Law,
Vol. VIII, No.2
 Winship, Peter, Background Documents of the Ethiopian Commercial Code of 1960
(Artistic Printers, Addis Ababa: 1974)
 Winship, Peter, Supplementary Materials: Business Organization, Faculty of
 Law, Addis Ababa University (1974)
 Mehreteab Leul, Joint Ventures and General Partnerships under Ethiopian Law: A
 A Comparative Study (1991), Unpublished Snr. Thesis, AAU Law Library
 Betre Dawit, The Law of Business Organizations: A Comparative Study of General
 Partnerships and Private Limited Companies (1991), Unpublished Snr. Thesis, AAU Law
Library
 Church,. W.Lawrence, Cases and Materials on Agency and Business Organizations
 Mann, Richard A. and Barry S. Roberts, Smith and Roberson’s Business Law, 9th ed.
(1994).
 Barnes, A, James, Terry Morehead Dworkin, et al Law for Business, 7th ed. (2000)
 Jentz, Gaylord A. et al, West’s Business Law
 Kadar, Abby, Ken Hoyle, et al, Business Law, 4th ed. (1996)
 Jean-pierre Le Gail and Paul More, French Company Law, 2nd ed.(1992)
 K.C. Gargvijay Gupta R.C Chawlo, Company Law and Secretarial practice, (2001)
II. Law
 The Commercial Code of Ethiopian (1960)
 The Civil Code of Ethiopia (1960)
 Commercial Registration and Business Licensing Proclamation No 67/97
 Business Mortgage Proclamation No. 98/1998
 Commercial Registration and Licensing, Council of Ministers Regulation 13/1997
 Addis Ababa/ Dire Dawa Administration Commercial Registration and Licensing Council
of Ministers Regulation 14/1997
 Commercial Registration and Licensing Council of Ministers Amendment Regulation
87/2003
 Commercial Registration and Business Licensing Proclamation No. 328/2003
 Trade Practice Proclamation No. 329/2003
 Trade Marks Registration and Protection Proclamation No. 501/2006
UNIT SEVEN
Intellectual Property
Unit Introduction
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Intellectual property rights (IPR) are a set of rights associated with creations of the human
mind. If you create something, invent a product; write a program, lyrics, etc. you are engaged
in the process of creating intellectual property, which is like any other property that you can
sell, license, gift, etc. The law allows the creator to economically benefit out of the creation.
The establishment of the World Intellectual Property Organization (WIPO) is an important
milestone in the history of human-kind that recognises the legitimate rights of the creator to
their work. IPR covers literary, artistic and scientific works; performances of performing
artists, phonograms, and broadcasts; inventions in all fields of human endeavor; scientific
discoveries; industrial designs; trademarks, service marks, and commercial names and
designations; protection against unfair competition; and any other rights resulting from
intellectual efforts.
In this unit, we will discuss the concept of IPR, the history of World Intellectual Property
Organization (WIPO) and understand the basics of copyright, patents trademarks and trade
secret.
Learning objective
 After studying this unit, you are expected to be able to:
 Describe the history of the world intellectual property organization;
 Define intellectual property;
 Explain the nature of intellectual property;
 Differentiate between the different kinds of intellectual property; and
 Identify and apply the different concepts studied in this unit in day to day life.
UNIT SEVEN - SECTION ONE
7.1 Understanding Intellectual Property
Section overview
Intellectual property law is a regime of law that regulates the creation, use and exploitation of
mental and creative labor. In other words, it is a general area of law that encompasses
copyright, patents, industrial designs and trademarks. There are various explanations for the
protection of intellectual property right (IPRs): we are entitled to control which we create
(argument from creator); the creator of an intangible deserves control over its use (argument
from desert); the act of creation entails embodiment of the personality of the creator as a
person requires giving her some control over the intangible in which she has invested herself.
Under this section definition of the intellectual property, rights intellectual property protects
and historical development of world intellectual organizations are major points of discussion.
Section objectives
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 Define intellectual property;
 Explain the nature of intellectual property;
 Explain the development of intellectual property organization; and
 Know rights protected under intellectual property.
7.1.1 Definition of Intellectual Property
Intellectual property, very broadly, means the legal rights which result from intellectual
activity in the industrial, scientific, literary and artistic fields. Countries have laws to protect
intellectual property for two main reasons. One is to give statutory expression to the moral
and economic rights of creators in their creations and the rights of the public in access to those
creations. The second is to promote, as a deliberate act of Government policy, creativity and
the dissemination and application of its results and to encourage fair trading which would
contribute to economic and social development.
Generally speaking, intellectual property law aims at safeguarding creators and other
producers of intellectual goods and services by granting them certain time-limited rights to
control the use made of those productions. Those rights do not apply to the physical object in
which the creation may be embodied but instead to the intellectual creation as such.
Intellectual property is traditionally divided into two branches, “industrial property” and
“copyright.”
The Convention Establishing the World Intellectual Property Organization (WIPO),

concluded in Stockholm on July 14, 1967 (Article 2(viii)) provides that “intellectual property
shall include rights relating to:
 Literary, artistic and scientific works,
 Performances of performing artists, phonograms and broadcasts,
 Inventions in all fields of human endeavor,
 Scientific discoveries,
 Industrial designs,
 Trademarks, service marks and commercial names and designations,
 Protection against unfair competition, and all other rights resulting from intellectual
activity in the industrial, scientific, literary or artistic fields.
The areas mentioned as literary, artistic and scientific works belong to the copyright branch of
intellectual property. The areas mentioned as performances of performing artists, phonograms
and broadcasts are usually called “related rights,” that is, rights related to copyright. The
areas mentioned as inventions, industrial designs, trademarks, service marks and commercial
names and designations constitute the industrial property branch of intellectual property. The
area mentioned as protection against unfair competition may also be considered as belonging
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to that branch, the more so as Article 1(2) of the Paris Convention for the Protection of
Industrial Property (Stockholm Act of 1967) (the “Paris Convention”) includes “the repression
of unfair competition” among the areas of “the protection of industrial property”; the said
Convention states that “any act of competition contrary to honest practices in industrial and
commercial matters constitutes an act of unfair competition” (Article 10bis(2)).
The expression “industrial property” covers inventions and industrial designs. Simply stated,
inventions are new solutions to technical problems and industrial designs are aesthetic
creations determining the appearance of industrial products. In addition, industrial property
includes trademarks, service marks, commercial names and designations, including
indications of source and appellations of origin, and protection against unfair competition.
Here, the aspect of intellectual Creations although existent is less prominent, but what counts
here is that the object of industrial property typically consists of signs transmitting
information to consumers, in particular as regards products and services offered on the
market, and that the protection is directed against unauthorized use of such signs which is
likely to mislead consumers, and misleading practices in general.
Scientific discoveries, the remaining area mentioned in the WIPO Convention, are not the
same as inventions. The Geneva Treaty on the International Recording of Scientific
Discoveries (1978) defines a scientific discovery as “the recognition of phenomena, properties
or laws of the material universe not hitherto recognized and capable of verification” (Article
1(1)(i)). Inventions are new solutions to specific technical problems. Such solutions must,
naturally, rely on the properties or laws of the material universe (otherwise they could not be
materially or “technically” applied), but those properties or laws need not be properties or
laws “not hitherto recognized.” An invention puts to new use, to new technical use, the said
properties or laws, whether they are recognized (“discovered”) simultaneously with the
making of the invention or whether they were already recognized (“discovered”) before, and
independently of, the invention.
7.1.2 Nature of Intellectual Property
Intellectual properties have their own peculiar features. These features of intellectual
properties may serve to identify intellectual properties from other types of properties. Thus,
we will discuss them in brief.
Any intellectual property issued should be resolved by national laws. Why is it an issue?
Because intellectual property rights have one characteristic which other national rights do not
have. In ownership of intellectual property of immovable properties, issues of cross borders
are not probable. But in intellectual properties, it is common. A film made in Hollywood can
be seen in other countries. The market is not only the local one but also international. If a
design in China is imitated by another person in France which law would be applicable?
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It gives exclusive right to the owner. It means others, who are not owners, are prohibited from
using the right. Most intellectual property rights cannot be implemented in practice as soon as
the owner got exclusive rights. Most of them need to be tested by some public laws. The
creator or author of an intellectual property enjoys rights inherent in his work to the exclusion
of anybody else.
Since they are rights, they can obviously be assigned (licensed). It is possible to put a
dichotomy between intellectual property rights and the material object in which the work is
embodied. Intellectual property can be bought, sold, or licensed or hired or attached.
They are vulnerable to the deep embodiment of public policy. Intellectual property attempts to
preserve and find adequate reconciliation between two competing interests. On the one hand,
the intellectual property rights holders require adequate remuneration and on the other hand,
consumers try to consume works without much inconvenience. Is limitation unique for
intellectual property?
Several persons may have legally protected interests evolved from a single original work
without affecting the interest of other right holders on that same item. Because of the nature of
indivisibility, intellectual property is an inexhaustible resource. This nature of intellectual
property derives from intellectual property’s territorial nature. For example, an inventor who
registered his invention in Ethiopia can use the patent himself in Ethiopia and License it in
Germany and assign it in France. Also, copyright is made up of different rights. Those rights
may be divided into different persons: publishers, adaptors, translators, etc.
7.1.3 The History of Intellectual Property Organization
The World Intellectual Property Organization (WIPO) is one of the specialized agencies of the
United Nations (UN) system of organizations. The “Convention Establishing the World
Intellectual Property Organization” was signed at Stockholm in 1967 and entered into force in
1970. However, the origins of WIPO go back to 1883 and 1886, with the adoption of the
Paris Convention and the Berne Convention respectively. Both of these conventions provided
for the establishment of international secretariats, and both were placed under the supervision
of the Swiss Federal Government. The few officials who were needed to carry out the
administration of the two conventions were located in Berne, Switzerland.
Initially there were two secretariats (one for industrial property, one for copyright) for the
administration of the two conventions, but in 1893 the two secretariats united. The most
recent name of the organization, before it became WIPO, was BIRPI, the acronym of the
French-language version of the name: United International Bureaux for the Protection of
Intellectual Property (in English). In 1960, BIRPI moved from Berne to Geneva.
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At the 1967 diplomatic conference in Stockholm, when WIPO was established, the
administrative and final clauses of all the then existing multilateral treaties administered by
BIRPI were revised. They had to be revised because member States wished to assume the
position of full governing body of the Organization (WIPO), thus removing the supervisory
authority of the Swiss Government, to give WIPO the same status as all the other comparable
intergovernmental organizations and to pave the way for it to become a specialized agency of
the United Nations system of organizations.
Most of the intergovernmental organizations now called specialized agencies did not exist
before the Second World War. They were created for the specific purpose of dealing with a
particular subject or field of activity at the international level. However, some
intergovernmental organizations, such as the International Labor Office (ILO), the Universal
Postal Union (UPU) and the International Telecommunication Union (ITU) were in existence,
and had become the responsible intergovernmental organizations in their respective fields of
activity long before the establishment of the United Nations. After the United Nations was
established, these organizations became specialized agencies of the United Nations system.
Similarly, long before the United Nations was established, BIRPI was the responsible
intergovernmental organization in the field of intellectual property. WIPO, the successor to
BIRPI, became a specialized agency of the United Nations when an agreement was signed to
that end between the United Nations and WIPO which came into effect on December 17,
1974.
A specialized agency, although it belongs to the family of United Nations organizations,

retains its independence. Each specialized agency has its own membership. All member
States of the United Nations are entitled to become members of all the specialized agencies,
but in fact not all member States of the United Nations are members of all the specialized
agencies. Each State decides for itself whether it wants, or does not want, to become a
member of any particular specialized agency. Each specialized agency has its own
constitution, its own governing bodies, its own elected executive head, its own income, its
own budget, its own staff, its own programs and activities. Machinery exists for coordinating
the activities of all the specialized agencies, among themselves and with the United Nations,
but basically each agency remains responsible, under its own constitution, to its own
governing bodies, which are the States members of the organization.
The agreement between the United Nations and WIPO recognizes that WIPO is, subject to the
competence of the United Nations and its organs, responsible for taking appropriate action in
accordance with its basic instrument and the treaties and agreements administered by it, inter
alia, for promoting creative intellectual activity and for facilitating the transfer of technology
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related to industrial property to developing countries in order to accelerate economic, social
and cultural development.
UNIT SEVEN - SECTION TWO
7.2 Branches Intellectual Property Protected by the Ethiopian Law
7.2.1 Copyright
Section overview
Copyright protects the original literary and artistic creations of all types of authors, such as
writers, composers, software developers, web designers and many other creators. In the past,
copyright law was used to protect creative expressions of various kinds on papers or printer
media, whereas, in the current internet era, copyright is relied upon by all types of digital
content producers, distributors and retailers.
Section objectives
 Understand the basics of copyright and related rights
 Understand the importance of copyright ownership in works and how to use such
works in your business.
 Know the best way to use copyrighted works to support your business strategies.
7.2.1.1 Basics of copyright
A. Definition of copyright
Copyright law grants authors, composers, software writers, website designers, and other
creators’ legal protection for their literary and artistic creations, which are usually referred to
as “works."
Copyright protects a wide variety of original and/or creative expressions, such as novels,
poetry, music, paintings, photographs, sculptures, architecture, films, computer programs,
video games, original databases, etc. In most countries, copyright also protects sketches,
drawings or designs of manufactured products.
Copyright law gives the author of a work a bundle of exclusive rights over his work for a
limited period of time. These rights enable him to control the use of his work in a number of
ways and to receive remuneration. Copyright law also provides "moral rights" which protect
an author's reputation and integrity.
B. Requirements for copyright protection
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To qualify for copyright protection, a work must be original. In copyright law, originality
relates to expression of thought and not to the underlying idea or thought. In general terms,
originality refers to the fact that the work was independently created and it was not copied
from somewhere else. Copyright protection extends only to original contributions to a work
and does not extend to any elements of a work that were borrowed from others. For example,
if a new video game has used copyright material of others and/or has material which is in the
'public domain', then copyright protection would extend only to any original compilation of
this material, and not to the borrowed material.
Even so, works enjoy copyright protection irrespective of their creative elements, quality or
value (a drawing of a three‐year‐old child is also a work with full copyright protection), and
do not need to have any literary or artistic merit (copyright also applies to purely
technical guides, instructions manuals or engineering drawings).
The proclamation under Art.6 requires that the work be fixed in some material form. Works
that enjoy copyright protection have to be reduced to a tangible medium. This is a requisite, a
condition precedent for copyright to subsist in. In order to attract copyright protection, a work
that is a product of the creative activity of its author must exist in some objective form before
it is considered an object of copyright. In other words, an expression of an idea is
copyrightable when it is reduced to a concrete form from which reproductions can be made.
Thus "copyright arises whenever a work is created and expressed in some external form such
as a manuscript, drawing, film, or mechanical recording or it can be expressed in the form of
speech.
This requirement of material form is stated under Art 6 (1) (b) of the proclamation. It is
clearly provided that " the author of a work shall, irrespective of the quality of the work and
the purpose for which the work may have been created, be entitled to protection, for his work
without any formality and upon creation where it is: a) original; and b) fixed. Starting from
the time of creation and fixation, there is copyright protection. It is a clear provision that
requires a work be recorded in a medium which is not ephemeral. Fixation is also defined
under Art 2(11) of the proclamation as the “embodiment of works or images or sounds, or of
the representations thereof, from which they can be perceived, reproduced or communicated
through a device prepared for the purpose".
Therefore, an author’s work is protected as soon as a wok is reduced in some concrete way
because the law protects all expressions upon fixation in a tangible form. However, fixation
and giving protection for works up on creation will be inconsistent. In other words, the
requirement of fixation has no formality requirement but the fact that works would be
copyrightable upon creation is contradictory because the time of creation and fixation is
different. Though speeches, lectures and other vocal performance are stated as copyrightable
works, they will not be protected unless the author reduces them to writing or to any tangible
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form. No matter how much is invested in developing a dramatic character for public
performance, it is not copyrightable unless it is at some point reduced to a physical expression
For the purposes of copyright protection, the term “literary and artistic works” is understood
to include every original work of authorship, irrespective of its literary or artistic merit. The
ideas in the work do not need to be original, but the form of expression must be an original
creation of the author. The Berne Convention for the Protection of Literary and Artistic Works
(Article 2) states: “The expression ‘literary and artistic works’ shall include every production
in the literary, scientific and artistic domain, whatever may be the mode or form of its
expression”. The Convention goes on to list the following examples of such works:
 Books, pamphlets and other writings;
 Lectures, addresses, sermons;
 Dramatic or dramatic-musical works;
 Choreographic works and entertainments in dumb show;
 Musical compositions with or without words;
 Cinematographic works to which are assimilated works expressed by a process
analogous to cinematography;
 Works of drawing, painting, architecture, sculpture, engraving and lithography;
 Photographic works, to which are assimilated works expressed by a process analogous
to photography;
 Works of applied art; illustrations, maps, plans, sketches and three-dimensional works
relative to geography, topography, architecture or science;
 “Translations, adaptations, arrangements of music and other alterations of a
 Literary or artistic work, which are to be protected as original works without
 Prejudice to the copyright in the original work.
 Collections of literary or artistic works such as encyclopedias and anthologies which,
by reason of the selection and arrangement of their contents, constitute intellectual
creations are to be protected as such, without prejudice to the copyright in each of the
works forming part of such collections.”
The Copyright and Neighboring Rights Protection Proclamation No.410/2004 provides

similar protection for the above categories of works. The list, however, is not intended to be
exhaustive. Copyright laws also protect other modes or forms of expression of works in the
literary, scientific and artistic domain, which are not included in the list.
7.2.1.2 Rights of the Author
The principle of any kind of property is that the owner may use it as he wishes, and that
nobody else can lawfully use it without his authorization. This does not, of course, mean that
he can use it regardless of the legally recognized rights and interests of other members of
society. Similarly the owner of copyright in a protected work may use the work as he wishes,
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and may prevent others from using it without his authorization. The rights granted under the
Proclamation to the owner of copyright in a protected work are normally exclusive rights to
authorize a third party to use the work, subject to the legally recognized rights and interests of
others.
There are two types of rights under copyright. Economic rights allow the rights owner to
derive financial reward from the use of his works by others. Moral rights allow the author to
take certain actions to preserve the personal link between himself and the work.
A. Economic right
According to Art.7 of the proclamation, subject to certain limitation provided under Art.9 to
19 of the Proclamation the author or owner of a work shall have the exclusive right to carry
out or authorize the following acts in relation to the work:
a) Reproduction of the work;
b) Translation of the work;
c) Adaptation, arrangement of other transformation of the work;
d) Distribution of the original or a copy of the work to the public by sale or rental;
e) Importation of original or copies of the work;
f) Public display of the original or a copy of the work; .
g) Performance of the work;
h) Broadcasting of the work;
i) Other communication of the work to the public.
I. Right of Reproduction, Distribution, Rental and Importation
The right of the copyright owner to prevent others from making copies of his works without
his authorization is the most basic right protected by copyright legislation. The right to control
the act of reproduction be it the reproduction of books by a publisher, or the manufacture by a
record producer of compact discs containing recorded performances of musical works is the
legal basis for many forms of exploitation of protected works.
Other rights are recognized by the Proclamation in order to ensure that this basic right of
reproduction is respected (See Art.9(2) of the proclamation. Obviously, the right of
reproduction would be of little economic value if the owner of copyright could not authorize
the distribution of the copies made with his consent. The right of distribution usually
terminates upon first sale or transfer of ownership of a particular copy. This means, for
example, that when the copyright owner of a book sells or otherwise transfers ownership of a
copy of the book, the owner of that copy may give the book away or even resell it without the
copyright owner’s further permission.
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Another right which is achieving increasingly wide recognition, and is included in the
Proclamation, is the right to authorize rental of copies of certain categories of works, such as
musical works in sound recordings, audiovisual works, and computer programs. This became
necessary in order to prevent abuse of the copyright owner’s right of reproduction when
technological advances made it easy for rental shop customers to copy such works.
Finally, the proclamation include a right to control importation of copies as a means to

prevent erosion of the principle of territoriality of copyright; that is, the legitimate economic
interests of the copyright owner would be endangered if he could not exercise the rights of
reproduction and distribution on a territorial basis.
Certain forms of reproduction of a work are exceptions to the general rule, because they do
not require the authorization of the rights owner. These exceptions are known as limitations
on rights this are reproduction for personal purpose, quotation, reproduction for teaching and
reproduction by libraries, archives and similar institutions. An area of current debate
relates to the scope of one particular limitation traditionally present in copyright laws, which
allows individuals to make single copies of works for private, personal and non-commercial
purposes. The continued justification for such a limitation on the right of reproduction is being
questioned now that digital technology has made it possible to produce high-quality,
unauthorized copies of works, which are virtually indistinguishable from the source - and thus
a perfect substitute for the purchase of authorized copies.
II. Rights of Public Performance, Broadcasting Communication to the Public, Making

Available to the Public
A public performance is considered under the Proclamation to include any performance of a

work at a place where the public is or can be present; or at a place not open to the public, but
where a substantial number of persons outside the normal circle of a family and its close
acquaintances is present. The right of public performance entitles the author or other copyright
owner to authorize live performances of a work, such as a play in a theater, or an orchestra
performance of a symphony in a concert hall. Public performance also includes performance
by means of recordings. Thus a musical work is considered publicly performed when a sound
recording of that work, or phonogram, is played over amplification equipment, for example in
a discotheque, airplane, or shopping mall.
The right of broadcasting covers the transmission for public reception of sounds, or of images
and sounds, by wireless means, whether by radio, television, or satellite. When a work is
communicated to the public, a signal is distributed by wire or wireless means, which can be
received only by persons who possess the equipment necessary to decode the signal. Cable
transmission is an example of communication to the public.
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Under the Berne Convention, authors have the exclusive right to authorize public
performance, broadcasting and communication of their works to the public. Under some
national laws, the exclusive right of the author or other rights owner to authorize broadcasting
is replaced, in certain circumstances, by a right to equitable remuneration, although this sort of
limitation on the broadcasting right is less and less common.
In recent years, the rights of broadcasting, public performance and communication to the
public have been the subject of much discussion. New questions have arisen as a result of
technological developments, in particular digital technology, which has introduced interactive
communications, whereby the user selects which works he wishes to have delivered to his
computer. Opinions diverge as to which right should be applied to this activity. The WIPO
Copyright Treaty (WCT) (article 8) clarifies that it should be covered by an exclusive right,
which the Treaty describes as the authors’ right to authorize making their works available to
the public “in such a way that members of the public can access these works from a place and
at a time individually chosen by them”. Most national laws implement this right as a part of
the right of communication to the public, although some do so as part of the right of
distribution.
III. Translation and Adaptation Right

The acts of translating or adapting a work protected by copyright also require authorization
from the rights owner. Translation means the expression of a work in a language other than
that of the original version. Adaptation is generally understood as the modification of a work
to create another work, for example adapting a novel to make a film; or the modification of a
work for different conditions of exploitation, e.g., by adapting a textbook originally written
for university students to make it suitable for a lower level.
Translations and adaptations are themselves works protected by copyright. So in order to

publish a translation or adaptation, authorization must be obtained both from the owner of the
copyright in the original work and from the owner of copyright in the translation or
adaptation.
The scope of the right of adaptation has been the subject of significant discussion in recent
years because of the greatly increased possibilities for adapting and transforming works which
are embodied in digital format. With digital technology, manipulation of text, sound and
images by the user is quick and easy. Discussions have focused on the appropriate balance
between the rights of the author to control the integrity of the work by authorizing
modifications, and the rights of users to make changes which seem to be part of a normal use
of works in digital format.
B. Moral Rights
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According to Art.8 (1) of the Proclamation the author of the work shall have the following
moral rights irrespective of whether or not he is owner of economic rights:
a) To claim authorship of his work, except where the work is included, incidentally or
accidentally, in reporting current events by means of broadcasting;
b) To remain anonymous or to use a pseudonym; and
c) To object any distortion, mutilation or other alteration of his work, where such an act
is or would be prejudicial to his honor or reputation.
d) To publish his work
These rights are generally known as the moral rights of authors. The Convention requires
them to be independent of the author’s economic rights, and to remain with the author even
after he has transferred his economic rights. It is worth noting that moral rights are only
accorded to individual authors. Thus, even when, for example, a film producer or a publisher
owns the economic rights in a work, it is only the individual creator who has moral interests at
stake.
The moral right of the author shall not be transmissible during the lifetime of the author. The
rights, however, shall be transferred in accordance with the law to heirs or legatees after the
death of the author. This moral right can be waived by author or his heirs or legatees. The
waiver, shall be made in writhing clearly specifying the right waived and the circumstances in
which the waiver applies and shall specifies the nature and the extent of modification or the
action in respect of which the right waived.
7.2.1.3 Limitation of Rights
The first limitation is the exclusion from copyright protection of certain categories of works.
In some countries, works are excluded from protection if they are not fixed in tangible form.
For example, a work of choreography would only be protected once the movements were
written down in dance notation or recorded on videotape. In certain countries, the texts of
laws, court and administrative decisions are excluded from copyright protection.
The second category of limitations concerns particular acts of exploitation, normally requiring
the authorization of the rights owner, which may, under circumstances specified in the law, be
carried out without authorization. There are two basic types of limitations in this category: (a)
free use, which carries no obligation to compensate the rights owner for the use of the work
without authorization; and (b) non-voluntary licenses, which do require that compensation be
paid to the rights owner for non-authorized exploitation.
Examples of free use include:

Quoting from a protected work, provided that the source of the quotation and the name of the
author is mentioned, and that the extent of the quotation is compatible with fair practice; use
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of works by way of illustration for teaching purposes; and use of works for the purpose of
news reporting.
In respect of free use for reproduction, the Berne Convention contains a general rule, rather
than an explicit limitation. Article 9(2) states that Member States may provide for free
reproduction in special cases where the acts do not conflict with normal exploitation of the
work and do not unreasonably prejudice the legitimate interests of the author. As noted above,
many laws allow for individuals to reproduce a work exclusively for their personal, private
and non-commercial use. However, the ease and quality of individual copying made possible
by recent technology has led some countries to narrow the scope of such provisions, including
through systems which allow certain copying, but incorporate a mechanism for payment to
rights owners for the prejudice to their economic interests resulting from the copying.
In addition to the specific categories of free use set out in national laws, the laws of some
countries recognize the concept known as fair use or fair dealing. This allows use of works
without the authorization of the rights owner, taking into account factors such as the nature
and purpose of the use, including whether it is for commercial purposes; the nature of the
work used; the amount of the work used in relation to the work as a whole; and the likely
effect of the use on the potential commercial value of the work.
Non-voluntary licenses allow use of works in certain circumstances without the authorization
of the owner of rights, but require that compensation be paid in respect of the use. Such
licenses are called non-voluntary because they are allowed in the law, and do not result from
the exercise of the exclusive right of the copyright owner to authorize particular acts. Non-
voluntary licenses were usually created in circumstances where a new technology for the
dissemination of works to the public had emerged, and where the national legislator feared
that rights owners would prevent the development of the new technology by refusing to
authorize use of works. This was true of two non-voluntary licenses recognized in the Berne
Convention, which allow the mechanical reproduction of musical works and broadcasting.
The justification for non-voluntary licenses is, however, increasingly called into question,
since effective alternatives now exist for making works available to the public based on
authorizations given by the rights owners, including in the form of collective administration of
rights.
7.2.1.4 Duration of Copy Rights
Copyright does not continue indefinitely. The law provides for a period of time during which
the rights of the copyright owner exist. The period or duration of copyright begins from the
moment when the work has been created, or, under some national laws, when it has been
expressed in a tangible form. It continues, in general, until sometime after the death of the
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author. The purpose of this provision in the law is to enable the author’s successors to benefit
economically from exploitation of the work after the author’s death.
The duration of copyright provided for by proclamation is as a general rule the life of the
author plus not less than 50 years after his death. The Berne Convention also establishes
periods of protection for works such as anonymous, posthumous and cinematographic works,
where it is not possible to base duration on the life of an individual author. There is a trend in
a number of countries toward lengthening the duration of copyright. The European Union, the
United States of America and several others have extended the term of copyright to 70 years
after the death of the author.
7.2.1.5 Ownership, Exercise and Transfer of Ownership
The owner of copyright in a work is generally, at least in the first instance, the person who
created the work, i.e. the author of the work. But this is not always the case. The Berne
Convention (Article 14bis) contains rules for determining initial ownership of rights in
cinematographic works. The Proclamation also provide that, when a work is created by an
author who is employed for the purpose of creating that work, then the employer, not the
author, is the owner of the copyright in the work. As noted above, however, moral rights
always belong to the individual author of the work, whoever the owner of economic rights
may be.
The Proclamation provides that the initial rights owner in a work may transfer all economic
rights to a third party. (Moral rights, being personal to the author, can never be transferred).
Authors may sell the rights to their works to individuals or companies best able to market the
works, in return for payment. These payments are often made dependent on the actual use of
the work, and are then referred to as royalties. Transfers of copyright may take one of two
forms: assignments and licenses.
Under an assignment, the rights owner transfers the right to authorize or prohibit certain acts
covered by one, several, or all rights under copyright. An assignment is a transfer of a
property right. So if all rights are assigned, the person to whom the rights were assigned
becomes the new owner of copyright.
An assignment of copyright and licensing are legally possible in Ethiopia. Licensing means
that the owner of the copyright retains ownership but authorizes a third party to carry out
certain acts covered by his economic rights, generally for a specific period of time and for a
specific purpose. For example, the author of a novel may grant a license to a publisher to
make and distribute copies of the novel. At the same time, the author may grant a license to a
film producer to make a film based on the novel. Licenses may be exclusive, where the
copyright owner agrees not to authorize any other party to carry out the licensed acts; or non-
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exclusive, which means that the copyright owner may authorize others to carry out the same
acts. A license, unlike an assignment, does not generally convey the right to authorize others
to carry out acts covered by economic rights.
Licensing may also take the form of collective administration of rights. Under collective
administration, authors and other rights owners grant exclusive licenses to a single entity,
which acts on their behalf to grant authorizations, to collect and distribute remuneration, to
prevent and detect infringement of rights, and to seek remedies for infringement. An
advantage for authors in collective administration lies in the fact that, with multiple
possibilities for unauthorized use of works resulting from new technologies, a single body can
ensure that mass uses take place on the basis of authorizations which are easily obtainable
from a central source.
A rights owner may also abandon the exercise of the rights, wholly or partially. The owner
may, for example, post copyright protected material on the Internet and leave it free for
anybody to use, or may restrict the abandonment to non commercial use. Some very
impressive cooperation projects have been organized on a model where contributors abandon
certain rights as described in the licensing terms adopted for the project. They thereby leave
their contributions free for others to use and to adapt, but with the condition that the
subsequent users also adhere to the terms of the license. Such projects, including the open
source movement, which specializes in creating computer programs, also build their business
models on the existence of copyright protection, because otherwise they could not impose an
obligation on subsequent users.
7.2.1.6 Remedies for Infringing of Copyrights
The proclamation provides robust provisional remedies, civil and criminal remedies and
administrative remedy in the form of boarder measure. It, thus, requires regular courts to
provide prompt and effective provisional measures including in audita altera parte, a
temporary injunction, award adequate material and moral damage, grant injunction, and order
confiscation of the infringed work and impounding. A party affected by copyright
infringement may demand compensation for unjust enrichment by the infringer. The
proclamation also envisages boarder measures which include retention by the customs
authority of goods which in the opinion of the applicant constitute infringed goods. In
addition, the copyright law under discussion provides for a strong criminal sanction stating
that unless otherwise heavier penalty is provided for under the criminal law, whosoever
intentionally violates a right protected under this law shall be punished with rigorous
imprisonment of a term not less than 5 years and not more than 10 years and whosoever by
gross negligence violates a right protected under this law shall be punished with rigorous
imprisonment of a term not less than 1 year and not more than 5 years. The penalty, where
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appropriate, shall include the seizure, forfeiture and destruction of the infringing goods and of
any materials and implements used in the commission of the offence.
7.2.2 Patent
Sub-Section overview
The term "intellectual property (IP)" as defined earlier is the property resulting from creations
of the human mind, the intellect. In this regard, it is fair that the person making efforts for an
intellectual creation has some benefit as a result of this endeavor. Probably, the most
important among intellectual properties is “patent.” A patent is an exclusive right granted by a
government for an invention, which is a product or a process that provides, in general, a new
way of doing something, or offers a new technical solution to a problem. The details on the
way of acquiring patents will be provided for protecting precious intellectual properties.
Patents are governed under the Inventions, Minor Inventions and Industrial Designs
Proclamation No. 123/95 and the Regulations there under. This section discusses by giving
due attention to this proclamation.
Section objectives
 You understand how to decide whether your new technology or invention should
 be protected by one or more patents and, if so, how to do so.
 You know how the grant of a patent over an invention or technology helps you to
prevent or have an upper hand in legal disputes that may arise later on.
 If you are already involved in such a legal dispute, you know how to find a way to
minimize the damage or loss.
7.2.2.1 Basics of Patent
Definition
A patent is the title given to the intellectual property right that is granted to protect new
inventions. A patent, which is granted by the authorities in a specified jurisdiction, gives its
owner an exclusive right to prevent others from exploiting the patented invention in that
jurisdiction for a limited period of time without his or her authorization, subject to a number
of exceptions. One way of adding value to a product. Inventions, Minor Inventions and
Industrial Designs, Proclamation, No.123/1995 defines patent as means the title granted to
protect inventions; the invention may relate to a product or a process.
In an increasingly knowledge‐driven economy, you invariably need creative or inventive ideas

or concepts to improve an existing feature, add a useful new feature to your product or
develop a totally new product. If your business develops such an idea or concept that solves a
technical problem in an unexpectedly new or better way then, it should take adequate and
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timely steps to protect its creative idea, concept or knowledge by converting it into a
proprietary technical advantage by patenting it.
Unlike copyright, where protection does not require meeting with prior formalities, a patent is
not automatically available for eligible inventions. According to Inventions, Minor Inventions
and Industrial Designs, Proclamation, No.123/1995, in order to get a patent, an inventor or
other eligible person has to file an application for in which he or she wants protection and
meet certain substantive and formal requirements.
7.2.2.2 Reasons for patenting an invention
The social purpose of patent protection is to aim to provide an incentive for technological
change and in particular for further investment into research and development in order to
make new inventions. As a condition of obtaining protection, patent applicants must disclose
certain details of the invention covered in the application for protection. This would, for
example, help others to study the invention and thus build on the technology contained in it.
The patent system thus aims to contribute to the promotion of technological innovation and to
the transfer and dissemination of technology. However, as will be mentioned herein under, the
patent system also enables the patent owner to limit the extent to which others can use the
patented invention during its term of protection.
1) Competitive edge, market power and earning more money

When you are able to use a patented invention embodied in a technology in your business, it is
likely to improve your market power, provide your business with a competitive edge, and help
you to make more money.
A patent provides protection when you disclose your invention publicly. For example, it
would enable you to go to a fair, exhibition, or an industry trade show and display it without
fear. It also enables you to go to a wholesaler or distributor and say with confidence that no
one else in that market is allowed to make, sell, use or distribute your new or improved
product without your express approval. This may either diminish, or eliminate competition. If
that happens there would be typically increased sales, and if marketed properly, you may be
able to charge a higher price because your competition is barred from offering an equal
product. So, whenever you are able to use a patented invention embodied in a technology in
your business, it is likely to improve your market power, provides your business with a
competitive edge over competitors, and help you to make more money.
2) Selling the invention

Having a patent means you have a tradable asset which can therefore be sold. Generally, a
large company will not agree to even talk to you unless one or more patents protect your
technology or at least you have filed a patent application to protect your invention. It could be
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that your talks with a potential buyer end in failure. If that happens, you may need a way to
stop such a party from stealing your idea, especially if a confidentiality agreement had not
been signed or, even if such an agreement has been signed, if the other party acts in breach of
it. Having a patent and thus the right to exclude the others enables you to take preventive
action.
7.2.2.3 Eligibility for Patent Protection
A. Novelty
To be eligible for patent protection, the invention must be "new". According to Art.3(2) of the
Proclamation, an invention shall be considered new if it is not anticipated by prior art. Prior
art shall consist of everything disclosed to the public, anywhere in the world, by publication in
tangible form or by oral disclosure, by use or in any other way, prior to the filling or, where
appropriate, the priority date, of the application claiming the invention. The claimed invention
shall show a new characteristic which has not already been disclosed to the public before the
relevant date in the body of existing knowledge in its technical field (called "prior art" or
"state of the art"). In other words, the invention must not have been disclosed to the public
through having been made, carried out or used before. The ingredients of an invention may
not all be new, but the way of applying them must not have been made public before: for
example, a new type of electrical battery that uses materials not previously used for this
purpose may be considered as a novel invention. This criterion of "novelty" is generally
understood to safeguard against patenting of technologies that are already available to the
public, to ensure that a patented invention is a genuine contribution to existing knowledge.
B. Inventive step
To be eligible for protection, the invention must also be capable of industrial application for
patent protection, in addition to being new, the invention must involve an inventive step.
There is no definition of this term in the Proclamation. The invention must represent a
sufficient advance in relation to the state of the art i.e. an advance from what has been used or
described before, such that it could not be obvious to a person working in the technical field
related to the invention with "ordinary skill" or average knowledge. Sometimes, this is also
described as an "unexpected" or "surprising" effect that is not evident to the average person
familiar with that area of technology.
This criterion of "inventive step" is generally understood to safeguard against patents being
granted for inventions which while strictly new in the sense of not having been disclosed
before only represent a trivial or routine advance on existing knowledge, reserving patents for
inventions that represent a clear and non-obvious advance on the state of the art.
C. Industrial applicability
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To be eligible for protection, the invention must also be capable of industrial application.
There is no further definition of this term in the Proclamation. In some countries this is also
termed "utility." This requirement is interpreted in many jurisdictions to mean that the
invention has to be susceptible of practical use in some way in any kind of industry, including
agriculture. Activities that do not aim at any direct technical result but are rather of an abstract
and intellectual character are generally excluded from patent grant. This criterion of
"industrial applicability" or "utility" is generally viewed as reserving patents for technologies
that actually achieve a practical purpose, and do not represent a mere abstract theory or
speculative notion.
7.3.2.4 None Patentable Inventions
According to Art.4 of the Proclamation, inventions contrary to public moral, inventions

contrary to human, animal or plant life or health or seriously prejudicial to the environment,
schemes, rules or methods for playing games or performing commercial and industrial
activities and computer programmes discoveries, scientific theories and mathematical
methods, methods for treatment of the human or animal body by surgery or therapy, as well as
diagnostic methods practiced on the human or animal body and works not protected by copy
right are not patentable.
7.2.2.5 Minimum Period of Protection to be Accorded
The last principal issue in this section is the duration of patent rights and the circumstances
under which these can be terminated. The minimum term of protection available for patents
shall be a period of 50 years from the filing date. The filing date is the date of the application.
However, the validity of the patent may be extended for a further period of five years
provided that proof is furnished that the invention is being properly worked in Ethiopia.
In order to maintain the patent or the patent application, an annual fee shall be paid in advance
to the Ethiopian Science and Technology Commission. For each year, starting one year after
the filing date of the application for grant of the patent. A period of grace of six months shall
be allowed for the late payment of the annual fee on payment of the prescribed surcharge. If
an annual fee is not paid the patent application shall be deemed to have been withdrawn or the
patent shall lapse.
7.2.3 Trademark
New goods are appearing on the market daily. What do you pay attention to when you’re
going to buy an article? What is it that makes you buy it? Good overall impression, a good
brand, attractive design. No one can deny that those are key points that affect customers. For a
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corporate marketing strategy, the brand and design should be developed to attract customer’s
attention and should be legally protected. It is extremely important. Many products that are
not attractive to consumer can be seen in the shops. In this section, we’re going to look at
the importance of trademarks and how to use it in your marketing strategy. The
economics of Trademarks is quite distinct from that of copyrights or patents.
Section objectives
After completing this section, you will be able to:
 Understand the basics of trademarks and industrial designs and their impact on
business.
 Know how to create a trademark and how to use and manage it within your business.
 Know the role played by designs in reinforcing brand power and you know how to
apply it to your business.
 Know the importance of legally protecting your trademarks and designs and the steps
to be taken in case your trademark or design is infringed.
7.2.3.1 Definition and Benefits Trademark
Trademarks, roughly speaking, are words, symbols or other signifiers used to distinguish a
good or service produced by one firm from those produced by other firms. A trademark is a
word, phrase, symbol, or design used to identify the source of goods or services sold, and to
distinguish them from the goods or services of others. For example, the Coca-Cola® mark and
the design that appears on their soft drink can identify them as products of that company,
distinguishing them from competitors such as Pepsi®. Trademark law primarily prevents
competitors from “infringing” upon the trademark, i.e., using “confusingly similar” marks to
identify their own goods and services. Unlike copyrights and patents, trademark rights can last
indefinitely if the owner continues to use the mark. The term of a federal trademark
registration lasts ten years, with ten-year renewal terms being available.
The benefits of trademarks are several-fold. First, trademarks reduce consumer search cost by
allowing consumers to quickly identify products with desirable attributes. This statement
relies on several assumptions about the trademarked goods. First, for the trademark to have
this benefit, it should be the case that the attributes of the product cannot be readily identified
by simple inspection of the product. In other words, the trademarked good should be an
experience good in the sense that a consumer must be able to consume it in order to evaluate
its true characteristics. Second, the producer of the trademarked good must be able to maintain
consistent characteristics in the product, including its quality, over time. Otherwise, past
consumption would be no guide to future consumption of the same good. Consumers, in turn,
would not be willing to pay more for a trademarked product because it would not reduce their
search cost.
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Trademarks also give firms an incentive to improve the quality of their product. Without an
exclusive right on an identifying mark, a firm that is producing a lower-quality version of a
good might be tempted to free ride on the firms producing high-quality versions by
duplicating their trademarks and so misleading consumers into believing that the brands were
equivalent. Since this would make it impossible for consumers to distinguish the high quality
products, it would lower their willingness to pay for any product in this market. This would, in
turn, lower the return to investing in quality and so would lower the incentive to create high
quality products. Hence, the average quality of products in markets without trademark
protection would be lower than in markets with trademark protection.
The role of trademarks in ensuring quality can be likened to the reward effect that we have
identified in earlier sections: legal protection of trademarks allows an investment in quality to
be rewarded by repeat purchase and other reputation effects (such as word-of-mouth
advertising). This reward is associated with some “monopoly power” over the distinctive
trademark in the sense that others can be excluded from using the same or a confusingly
similar trademark. Still, to the extent that identifying names (and, in particular, fanciful
names) are potentially in infinite supply (and at low cost of development) this monopoly
power is not associated with a static welfare loss, as it is not associated with exclusion of
other identical products from the market. Further, the power to exclude under trademark
protection does not extend to the functionality of the product. Hence, it is not possible to
exclude another firm from producing a physically identical product: it is simply impossible to
identify it in a way that confuses consumers about its source. This means that there is no static
welfare loss associated with monopoly power over a product’s function under trademark law.
Notice that the diffusion of information effect is not present in the case of trademarks, as their
use discloses all relevant information.
As a result, trademarks have mostly a positive incentive effect, which suggests that they
should be legally protected as long as they are used. In fact, when trademarks are allowed to
be protected without use, they can be stockpiled. There is some evidence that this stockpiling
causes barriers to entry in some markets, as the field of potentially attractive trademarks is
reduced. In terms of the scope of protection, the economic benefits of trademarks are present
as long as confusion is not present. Hence, the economically appropriate scope is one that
permits marks as long as they are not confusingly similar.
In general, trademarks are registered and protected with respect to certain products, which are
described in detail in the trademark registration (e.g. "FedEx" for document delivery services,
"TOYOTA" for automobiles and related services and "SAMSUNG" for consumer
electronics). The owner generally only enjoys the exclusive right of use of the registered
trademark with respect to the same or similar products for which it is registered. For example,
a trademark registered for hairdressing services would not, normally, be enforceable against
use of the mark on a new range of irrigation equipment.
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7.2.3.2 The Subject Matter to be Protected and Conditions for Registration
A. Subject matter of trademark protection

Distinctive signs any sign, or any combination of signs, capable of distinguishing the goods
and services of one "undertaking" from those of other undertakings must be eligible for
trademark protection. These signs could be words including personal names, letters, numerals,
figurative elements and combinations of colors, as well as any combination of signs. This
means that in principle there is no limitation on the type of signs that can constitute
trademarks. Rather, the emphasis is on distinctiveness i.e. the ability of these signs to
distinguish products of one enterprise from those of others.
A trademark may be registered in black-and-white or color. A trademark, which is registered

in black-and-white, shall be protected in all color combinations; a trademark, which is
registered in color, shall only be protected in the color combination in which it is registered.
B. Conditions for registration as a trademark
As registration of a trademark is the principal way of obtaining trademark protection, a

number of rules concern the conditions under which trademark registrations can be obtained.
The registration process involves certain procedural steps. Under our trademark registration
and protection proclamation, the registration process can be divided into four stages: I) filing
of the application, ii) examination, iii) publication, opposition, and iv) registration.
The trademark applicant is also required to deposit a representation of the mark. Among
others, reproduction of the mark helps to define the scope of the trademark owners right and
delineate exactly what sign is protected. It also helps to ensure that third parties are able to
search the register and to ascertain things such as the scope of existing marks and to determine
whether a fresh application conflicts with earlier marks. And finally, the reproduction of the
mark requirement makes the bureaucracy dealing with the sign, its classification and
comparison with other signs, more manageable.
According to Art.8 (2) of the proclamation, an application for registration shall cover only one
trade mark. This is clearly a prohibition of a series of marks under one application i.e., one
application for one mark. It is not clear why it prohibits register of a series of marks in a
single registration. And its major purpose is to reduce bureaucracy, and other expenses. In
registering a series of marks, the applicant is required to include a separate representation of
each mark in the series.
According to Art.12 of the Proclamation, when the Ethiopian Intellectual Property Office
finds that the trademark application is acceptable, it shall publish a notice of invitation for
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opposition regarding the registration of the trademark in the Intellectual Property Gazette or a
newspaper having nationwide circulation at the cost of the applicant. This may be
supplemented by a radio or television broadcast or a website notice as deemed necessary. This
provides a reasonable opportunity to request the cancellation of the trademark, so that
interested parties can challenge a registration and this provision ensures transparency in the
trademark registration process, which is a prerequisite of an effective challenge procedure.
7.2.3.3 Term of protection
The initial registration and each renewal of registration shall be for a term of no less than
seven years. It also stipulates that the registration of a trademark must be renewable
indefinitely. This means that trademark rights, in contrast to copyright or patent rights, can
last for an indefinite period of time, provided the right owner renews the registration at the
expiry of each term and pays the required renewal fees.
At the time of the renewal, no change may be made in the trademark or in the list of goods or
services in respect of which the trademark is registered, except that certain goods or services
may be eliminated from the list. Renewal of the registration of a trademark shall be made
within three months after the expiry of the registration period; provided, however, that after
the expiry of the three months period, the registration may be renewed within the next six
months, by paying in addition to the regular renewal fee, a penalty prescribed by the
Regulations.
7.2.3.4 Remedies for Infringement
The competent court shall order prompt and effective provisional measures to prevent an
infringement of a right from occurring, in particular to prevent the entry into the channels of
commerce of import and export goods after completing customs formalities; or preserve
relevant evidence in regard to an alleged infringement of a right.
The court shall, without summoning the defendant, have the power to adopt provisional
measures where it finds it appropriate, in particular where any delay is likely to cause
irreparable harm to the applicant or where there is a demonstrable risk of evidence being
destroyed. The court hearing a case of infringement of a trademark owner’s right may pass an
injunction to stop the defendant from continuing the act of infringement; and order the
defendant to compensate the damage inflicted to the claimant due to the infringement.
The amount of compensation to be awarded shall be equal to the net profit derived by the
defendant from the use of the trademark or the amount of royalty the defendant could have
been charged had he used the trademark under the terms of a license contract whichever is
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higher, plus an amount that shall cover the expenses incurred by the claimant in connection
with the suit.
The whole of the net profit derived from the sale of the defendant’s goods or services in
connection with the use of the trademark shall be attributed to the use of the trademark unless
the defendant proves that part of the profit is attributive to other marker factors.
Unless heavier penalty is provided for under the Criminal Code, whosever intentionally
violates a right protected under this Proclamation shall be punished with rigorous
imprisonment of a term of not less than 5 years and not more than 10 years.
Whosever by gross negligence violates a right protected under the Proclamation shall be
punished with rigorous imprisonment of a term not less than 1 year and not more than 5 years.
In both intentional and negligent cases, the penalty, where appropriate shall include the
seizure, forfeiture and destruction of the infringing goods and of any materials and
implements use in the commission of the offense.
7.2.4 Trade Secret
In today's competitive market, companies need to be as innovative as possible to prosper in
the business environment and to keep the pace with progress. To this end, the development
and acquisition of useful information is crucial to create and provide new and improved goods
and services. Information about technology that makes a company’s product unique,
prototypes, or a list of key customers are just a few examples of business information. As the
latter can therefore have a great commercial value and significant importance for the company
concerned, its uncontrolled disclosure might potentially lead to serious consequences. Small
and medium-sized enterprises in particular may not be aware of this risk and thus of the
importance of keeping this valuable information “confidential”. Indeed, such information
relates to intangible assets and falls under the category of intellectual capital, but its protection
is not regulated within the intellectual property rights (IPR) system. That is why confidential
information belongs to the so-called Soft IP.
Section objectives
 Define trade secret;
 Understand the nature of trade secrets, the reasons for protecting them and the
practical challenges in identifying and protecting them.
 Know protection mechanisms
 Analyze the relation trade secret has with other intellectual properties.
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7.2.4.1 Definition
Trade secret” means information, including a formula, pattern, compilation, program, device,
method, technique, or process, that:
 Derives independent economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means by, other persons who
can obtain economic value from its disclosure or use, and
 Is the subject of efforts that are reasonable under the circumstances to maintain its
secrecy.
7.2.4.2 Protection of Trade Secret
The owner of trade secrets has to rely on relevant provisions of the national law
against unfair competition and/or by court action under the law of torts and by
appropriate clauses or provisions in employment agreements and other types of business
agreements in accordance with the contract law of the country. When misappropriation
is done by competitors who have no contractual relationship or indulge in an act of theft,
espionage, or of subversion by employees the trade owner may take legal action under extra
contractual liability.
Legal action can be taken based on an agreement when the agreement between the parties
seeks to protect the trade secret by using a non‐disclosure clause or confidentiality
clause, through an anti‐reverse engineering clause, or where an implied confidential
relationship exists, such as between an attorney and his client, or an employer and his
employee, etc.
The owner can take criminal action when an employee steals trade secrets from a
company or someone does espionage or in involved in acts that may be considered as
invasion of privacy.
7.2.4.3 Trade Secret Relation with other Intellectual Properties
Trade secrets differ from other forms of intellectual property in many ways. The most
significant difference is the role of public disclosure. Copyright law and patent law are
founded on the notion that creativity and innovation, respectively, are rewarded by limited
governmental protection to facilitate recoupment of the costs of creation. Furthermore, the
policies of patent and copyright law favor building on prior work, as well as freedom for all to
use subject matter that is outside the scope of protection.
Trade secrets last indefinitely, as long as they are kept secret. Patents, copy right and trade
mark have a limited term as set by the patent laws. Perhaps, the most famous trade secret is
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the formula for Coke. Had Coca~Cola chosen to patent that formula, Coca~Cola's rights to
that formula would have been lost long ago. This is because for one to get a patent for an
invention, one must disclose how to make and use the invention to the Patent and Trademark
Office which will in turn publish the patent application or the resulting patent.
Trade secrets differ from other forms of intellectual property in many ways. The most
significant difference is the role of public disclosure. Copyright law and patent law are
founded on the notion that creativity and innovation, respectively, are rewarded by limited
governmental protection to facilitate recoupment of the costs of creation. Furthermore, the
policies of patent and copyright law favor building on prior work, as well as freedom for all to
use subject matter that is outside the scope of protection. Trade secrets are treated exactly
opposite the trade secret owner is rewarded for keeping information that is neither new nor
original away from the public for an unlimited duration. Thus, information that could not be
patented or copyrighted is still protected for as long as the owner can keep the information
secret.
Patents, trade mark cost money in the form of filing fees (and usually attorneys' fees) to obtain
and maintain; like that of copy right this is not necessarily the case for trade secrets. With
trade secrets the typical expenses involved relate to establishing security measures for
sensitive information, educating employees about the sensitivity of the information, having
employees or collaborating companies sign appropriate agreements and prosecuting those
entities that try to misappropriate or use trade secret information.
A patent, copyright and trade mark owners can pick and choose which infringers they want to
sue. The owner of a trade secret that has been misappropriated must stop all persons using the
trade secret or the information will lose its trade secret status. Critically, even though
information may have economic value, it cannot be trade secret if it is publicly known or
generally available.
With patents one must disclose how to make and use the invention in order to get exclusive
right to invention for limited time. With a trade secret, disclosure is fatal. Hence, you cannot
claim both a patent and trade secrets on same technology. Trade secrets are creatures of law or
agreement. This distinguishes trade secrets from patents, trademarks and copyrights which are
either exclusively (patents or copyrights) or predominantly (marks) protected by law.
While patents can be used to prevent anyone from using your inventions, trade secret law only
protects one from using your information/invention if the subject information was
"misappropriated." Trade secret law does not protect against reverse engineering or
independent creation. Thus, two or more different entities can conceivably own the same trade
secret at the same time.
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Not every business will own a patent. Nor will every business own a copyright. Many, but
not all, will have trademarks, service marks or trade dress. But every business will (or should)
have trade secrets. If there is a business that does not own trade secrets, likely it will not be in
business very long.
Activity 7
1. Copyright registration is not necessary to obtain copyright protection. But this does not
mean that registration is not important. Discuss
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
2. Discuss the differences between copyright and patent.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
3. In order for an invention to qualify for patent protection, it must be new or novel.
Discuss
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
UNIT SUMMARY
Copyrights are protected by Copyrights and Neighboring Rights Protection Proclamation that
aims at rewarding those who create literary, artistic and similar creative works. Such works
play a major role in enhancing economic, scientific and technological development of the
country. This proclamation is comprehensive, up-to-date, and manifests overall clarity. And
commentators have dubbed it as strong law. It offers protection to literary, scientific and
artistic works of the mind providing us with an illustrative list of protected works, leaving a
room for future technological changes. It sets out the requirements necessary to obtain
copyright as originality and fixation of the original work of the mind on a material object as
well as those subject matters that are not eligible for copyright protection. It offers an
exclusive economic and moral right to authors or owners of a work of mind for a determined
duration. The economic rights include the right to produce, reproduce, translate, adapt, import,
display in public, perform and broadcast the work or transfer one or more of these rights
through licensing or assignment. It stipulates for cases where the public may use a
copyrighted work without payment or permission from the owner under the fair use doctrine.
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Notices and other administrative formalities are not required to get copyright protection for a
work of mind. The law provides robust provisional remedies, civil and criminal remedies and
administrative remedy in the form of boarder measure.
The patent proclamation defines a patent as a title granted to protect inventions; the invention
may relate to a product or a process. It sets out conditions of patentability of an invention
which is defined as “an idea of an inventor which permits in practice the solution to a specific
problem in the field of technology.” Such requirements for a patent to be eligible for
protection are: novelty, inventive step and industrial applicability. Upon the ascertainment of
the fulfillment of these cumulative conditions by the relevant office, a certificate of patent is
granted which gives to a patentee the exclusive right to make, use or otherwise exploit the
patented invention and prevent third parties from exploiting the patented invention without
securing his consent for a maximum of total of fifteen years from the date of filing of the
application for protection with a possible extension for five years as well as to institute court
proceedings against any person who infringes the patent by performing, without his
agreement, any of these acts or who performs acts which make it likely that infringement will
occur. The law in question also sets out conditions relating to the grant and protection of and
rights over utility models and industrial designs.
A trademark is a recognizable symbol, sign, expression, design or the like which is used to
identify and differentiate one product or service emanating from a particular source against
one emanating from another source. The association of a trademark with an entity may take
many forms, and could be visible on packaging, labels, advertisements, all company
merchandise, etc. When we speak of trade secrets, we speak for instance, of Coca Cola’s
secret recipe to manufacture their popular beverage. Trade secrets, therefore, basically refer to
information, be it a formula, a program, a method, a pattern, a process or anything of the like.
The rationale of keeping the same a ‘secret’ is to have a competitive economic advantage over
one’s competitors in one’s trade.
Checklist
Can You Define intellectual property?
Explain the nature of intellectual property?
Explain the development of intellectual property organization?
Know rights protected under intellectual property?
Understand the basics of copyright and related rights?
Understand the importance of copyright ownership in works and how
to use such works in your business?
Know the best way to use copyrighted works to support your business
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strategies?
Understand how to decide whether your new technology or invention
should
be protected by one or more patents and, if so, how to do so?
know how the grant of a patent over an invention or technology helps
you to prevent or have an upper hand in legal disputes that may
arise later on?
Understand the basics of trademarks and industrial designs and their
impact on business?
Know how to create a trademark and how to use and manage it within
your business?
Know the role played by designs in reinforcing brand power and you
know how to apply it to your business?
Know the importance of legally protecting your trademarks and
designs and the steps to be taken in case your trademark or design is
infringed?
Define trade secret?
Understand the nature of trade secrets, the reasons for protecting them
and the practical challenges in identifying and protecting them?
Know protection mechanisms?
Analyze the relation trade secret has with other intellectual properties?
Commandment!
Part I: - True or false questions

1) Copyright protection extends only to original contributions to a work and does not
extend to any elements of a work that were borrowed from others.
2) Starting from the time of creation and fixation, there is copyright protection.
3) No matter how much is invested in developing a dramatic character for public
performance, it is not copyrightable unless it is at some point reduced to a physical
expression.
4) A copyright owner has an absolute right to prevent others from making copies of his
works.
5) Translations and adaptations are themselves works protected by copyright.
6) The moral right of the author shall not be transmissible during the lifetime of the
author.
7) Trade mark is the title given to the intellectual property right that is granted to protect
new inventions.
8) A patent provides protection when you disclose your invention publicly.
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9) To be eligible for patent protection, the invention must not be new.
10) The economics of Trademarks is quite distinct from that of copyrights or patents.
Part II: - Choose the correct answer

1. What are the requirements for obtaining a patent?
A. It should be new, inventive, and useful.
B. It should be new, inventive and pleasing to the eye.
C. It should be valuable, informative and easy to use.
D. All of the above.
2. A patent gives the owner the right to:

A. Collect a monetary award from the government
B. Prevent others from making, using or selling their invention
C. Make the invention
D. Market the product free of cost
3. Which of these can you patent?

A. Literary, dramatic, musical or artistic work
B. A logo or a brand name
C. Technological advance
D. Product design
4. The closely guarded formula for making Coca-Cola is an example of what type of IP?
A. Patent
B. Trade Secret
C. Trademark
D. Copyright
5. A photographer has written a novel on Photography. How he should protect his intellectual
property?
A. Patent filing
B. Trademark
C. Copy Right
D. Trade secret
6. Which one of the following is incorrect

A. We don’t have to register copyright to be protected.
B. Copyright generally runs out 50 years before an author’s death.
C. Copyright protects original ideas.
D. Copyright lasts after an author dies
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Further Readings/References
Laws
 Proclamation No. 482/2006 Access to Genetic Resources and Community Knowledge,
and Community Rights Proclamation
 Proclamation No. 410/2004 on Copyright and Neighboring Rights Protection
 Inventions, Minor Inventions and Industrial Designs Regulations (Proclamation No.
123/1995)
 Proclamation No. 123/1995 concerning Inventions, Minor Inventions and Industrial
Designs
 Proclamation No. 91/1994 to Provide for the Establishment of the Ethiopian Science
and Technology Commission
 Trademark Registration And Protection Proclamation No. 501/2006 Entry Into Force:
July 7, 2006
 Council of Ministers Regulations to Regulate the Transfer of Technology No.
121/1993
Answer to Activities
 Unit One – Activity 1

1) A major criticism of natural law jurisprudence is that it does not provide the level of
predictability attained by legal positivism because each judge’s sense of morality may
differ.
2) Legal realism focuses on law in action rather than on the theoretical rules themselves.
It stresses that law must be considered in light of its day-to-day application. Legal
realists suggest that decision makers often mask the true basis for their decision behind
the rhetoric of the law. They believe that decisions are often more attributable to the
biases and moods of decision makers than they are to the formal legal rules that are
supposed to determine the outcome.
3) Substantive law sets out the rights and duties governing people as they act in society.
Duties tend to take the form of a command: “Do this!” or “Don’t do that!” An example
is the Labor Proclamation No.377/2003. It tells employers that they must not
discriminate among people in hiring and employment on the basis of race, color,
religion, sex, or national origin. Substantive law also establishes rights and privileges.
An example is the freedom of speech granted by the FDRE Constitution. Another is
the right you have to defend yourself if physically attacked the so-called right of self-
defense (criminal law of 2004). Procedural law establishes the rules under which the
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substantive rules of law are enforced. Rules as to what cases a court can decide, how a
trial is conducted, and how a judgment by a court is to be enforced are all part of
procedural law.
4) Since everyone is subject to the rule of law, this means that government itself may not
overextend its reach when regulating or investigating businesses. Government must
play by the rules, too. For example, imagine that our government could do anything,
without any limits or jurisdictional restraints. A business operating in such a climate
might find itself subject to government closure on a whim, or excessive taxes, or
requirements to pay bribes to gain permits to do business. Our rule of law system
prevents such abuses.
 Unit Two – Activity 2

1) The person making an offer is called the offeror, and the person to whom the offer is
made is called the offeree. A communication will be treated as an offer if it indicates
the terms on which the offeror is prepared to make a contract, and gives a clear
indication that the offeror intends to be bound by those terms if they are accepted by
the offeree. An offer may be express or implied.
2) A contract is said to be breached when one party performs defectively, differently

from the agreement, or not at all (actual breach), or indicates in advance that they will
not be performing as agreed (anticipatory breach).
3) A contract is said to have been discharged by way of ‘merger’ where an inferior right
possessed by a person coincides with a superior right of the same person. Merger shall
occur and the obligation shall be extinguished where the positions of creditor and
debtor are merged in the same person. Merger shall not affect the rights which a third
party may have in respect of the obligation. The obligation shall revive where merger
come to an end.
4) An offer terminates by counter-offer by the offeree. When in place of accepting the

terms of an offer as they are, the offeree accepts the same subject to certain condition
or qualification, he is said to make a counter-offer.
 Unit Three – Activity 3

1) The most critical element in an agency relationship is the need for the parties to
understand that it is the principal who is in control of the agent s actions. It is control
that allows the principal to be described as a master. As a master, the principal directs
the agent and the agent must follow the principal s directions. The principal can
instruct the agent to take or not to take certain actions; he can tell third parties about
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the agent’s restrictions in his authority; he can monitor the agent’s actions; he can ask
the agent for progress reports and even check the negotiations that are in progress.
2) Apparent authority, also known as “ostensible authority,” is conferred on an agent by

force of law to protect innocent third parties who rely on the impression created by the
principal that appropriate authority has been conferred on a would-be agent. Such
authority may be created by the “principal’s silence” when there is a duty to speak. It
results when the following conditions exist:
A. One willfully or negligently conveys the impression that another is his agent.
B. A third person, in reliance on the false impression, deals with the
alleged agent and as a result of the dealing, adversely changes his legal
position (some use the term “suffers damage”).
3) The essentials of agency are few. First, the relation is a consensual one; an agent
agrees, or at least consents to act under the direction or control of the principal.
Second, the relation is a fiduciary one; an agent agrees to act for and on behalf of the
principal. He is in no sense a proprietor entitled to the gains of enterprise--nor is he
expected to carry the risks.
4) Agency principal relationship is not a slave-master relationship. It shall terminate,

when both parties are willing, upon agreement. But if one is not willing to do so upon
a unilateral declaration, it shall survive only upon the will of the two parties. There are
specialized terminologies employed to unilateral declarations to terminate agency
relationship. The declaration to terminate by the principal is called revocation. And the
declaration by the agent is termed as renunciation. Below, the rules and procedures as
well as the conditions of each of these concepts shall be presented in detail.
 Unit Four– Activity 4

1) Much as sale of goods transaction is a typical contract, a given difference applied to it.
With respect to a typical contract, the consideration, could be money, or money’s
worth, some forbearance or a qui pro quo. However, in sale of goods transaction the
consideration must be money called the price. This of course implies the exclusion of
trade by barter. Nonetheless the price could be partly money and partly goods.
2) Because practically everyone in our economy is a purchaser of durable and

consumable goods, the manufacture and distribution of goods evolve numerous sales
transactions. The law of sales establishes a framework in which these present and
future exchanges may take place in predictable, certain and orderly fashion within a
minimum of transaction cost. The law of sales which governs contract transaction
evolving the sale of goods is specialized branch of the law of contracts.
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3) Legal mortgage is sometimes referred to as tact mortgage, because the law without the
consent of the parties concerned creates it. The very purpose of legal mortgage is to
protect persons who lost possession of their immovable and may be in a difficult
position to secure possession of the price or compensation due to them. For example,
as you can read from Art. 3042 of the civil code, an owner who sells his immovable is
entitled to legal mortgage on the immovable he has sold as far as he is not paid the
full price of the property. This is because; he is transferring to the buyer full right of
ownership once and for all. Hence, he deserves to be paid full price as he is loosing
right of ownership on an exceptionally important property. Co-heirs also have the
same protection since they are entitled to legal mortgage against immovable put in the
share of another co-partitioner. If one of co-heirs is entitled to payment of
compensation by the co-partitioner in case the later is dispossessed of any property put
in his share or held liable for the payment of any debt arising from succession, he can
demand the payment of compensation against another co-heir by exercising his right
of legal mortgage on the immovable put in the share of such co- heir.
4) A contract of suretyship must be express. The essential rule is that a suretyship may
not be presumed, it has to be expressly given. The law does not admit tacit suretyship.
The rationale is that such a security is extremely dangerous for the guarantor; he takes
the final risk of default of payment although he did not even get the counterpart
execution of contract. So a simple attitude or an equivocal action by a person cannot
be deemed to be a suretyship if it is not express. It seems unwise that an affirmation
made in vague terms to induce someone to treat with a determined person, should be
taken for a veritable suretyship. Article 1922(1) & (2) of the Civil Code provide this
characteristic of suretyship. Accordingly, a logical requirement is that, whatever the
form, there must be neither doubt as to the identity of the debtor secured, nor as to the
debt secured. If not, the suretyship will be considered invalid as being uncertain.
 Unit Five – Activity 5

1) A contract of employment is an agreement on the employment conditions made
between an employer and an employee. The agreement can be made orally or in
writing. Employers and employees are free to negotiate and agree on the terms and
conditions of employment provided that they do not violate the provisions of the
Employment Law. Any term of an employment contract which purports to extinguish
or reduce any right, benefit or protection conferred upon the employee by this law
shall be void.
2) Employers have the responsibility to provide a safe workplace. Employers MUST

provide their employees with a workplace that does not have serious hazards and must
follow all safety and health standards. Employers must find and correct safety and
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health problems. Employers must try to eliminate or reduce hazards first by making
feasible changes in working conditions – switching to safer chemicals, enclosing
processes to trap harmful fumes or using ventilation systems to clean the air are
examples of effective ways to get rid of or minimize risk rather than just relying on
personal protective equipment such as masks, gloves, or earplugs.
3) The worker has to render help and assistance in case of an accident which happen at
the work place or to workers. This implies that the worker has the obligation of
fraternal cooperation and mutual assistance towards the undertaking and the
community of workers in case of an accident. He is not only required to refrain from
conduct that would cause accidents but also help in the prevention of natural disaster
or occupational accidents or rectifying consequences thereof. This obligation of help
and assistance obviously bind the worker to perform work that would otherwise fall
outside the scope of his activity.
4) When I have established my business, I may need to employ people to help my

business grow and develop. If I employ people, I will be subject to a range of laws
which govern all employment relationships. These laws are the FDRE constitution, the
labor proclamation No.377/2003, The International Labor Organization (ILO), the
Federal Supreme Court, Cassation Division Decisions, Directives issued by the
Ministry of Labor and Social Affairs Pension Proclamation (POEPP) No.715/2011 and
the Right to Employment of Persons with Disability Proclamation (REPDP)
No.568/2008.
5) A single employee is helpless in dealing with an employer. He is dependent ordinarily

on his daily wage for the maintenance of himself and his family. If the employer
refused to pay him his wages that he thought fair, he is nevertheless unable to leave the
employ and to resist arbitrary and unfair treatment. Unions were essential to give
laborers an opportunity to deal on equality with their employer.
 Unit Six – Activity 6

1. Have you ever thought who brings the required capital, takes the responsibility of
arranging other resources, puts them into action, and coordinates and controls the
activities to earn the desired profits? If you look around, you will find that a small
grocery shop is owned and run by a single individual who performs all these activities.
But, in big businesses, it may not be possible for a single person to perform all these
activities. So in such cases two or more persons join hands to finance and manage the
business properly and share its profit as per their agreement. Thus, business
organizations may be owned and managed by a single individual or group of
individuals.
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2. A general partnership is the shared ownership of a business by two or more people.
Like a sole proprietorship, there is no legal separation between the business and the
individual partners. Although general partnerships are relatively easy to form, the
simplicity of their structure often comes at the cost of a significant amount of risk. A
general partnership allows each partner to act independently, pool resources, avoid
high startup costs, and avoid large amounts of formalities. However, the partners must
be able to accept potentially unequal contributions of time and resources, fully trust
the business judgment of every other partner, and be willing to take on the risk of
being fully and personally responsible for the business’s debts and liabilities.
3. Unless a partnership agreement states otherwise, both the profits and the losses of the
business are shared equally by all partners. Losses include not just debts but also
liabilities, including any legal actions against the business. Also, the actions of any
individual partner are effective against the business as a whole. For example, if one
partner purchases a new pickup truck without the authorization of any of the others
and then hits a parked car while delivering a customer’s package, the business and
every partner is responsible for not only the purchase price of the vehicle but also any
liabilities arising from litigation against the business. Every partner is “jointly and
severally liable,” meaning that not just the business but also each individual partner is
fully responsible for satisfying every debt. Even though the other partners disagreed
with the truck purchase, they still have to pay for it in addition to any of the damage it
subsequently caused.
Note that unlike a limited liability entity, a general partnership has “unlimited
liability,” meaning that it does not shield the partners from any risks. Thus, each
individual may have to use personal assets or resources to satisfy any debts owed by
the partnership. Debts can be incurred by any partner without the approval of any of
the others, so it is critical to trust each partner’s business judgment before entering into
a general partnership. Taking part in a general partnership means that you agree to let
every other partner make decisions on behalf of you and the business, and that you
agree to take full responsibility for those decisions.
4. A company is defined as a voluntary association of persons having separate legal

existence, perpetual succession and a common seal. As per the definition, there must
be a group of persons who voluntarily agree to form a company. Once formed the
company becomes a separate legal entity with a distinct name of its own. Its existence
is not affected by change of members. It must have a seal to be imprinted on
documents whenever required. The capital of a company consists of transferable
shares, and members have limited liability. The Ethiopian Commercial Code provides
two forms of companies i.e. share company and private limited company.
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5. The company form of organization is considered to be most suitable for organizing
business activities on a large scale as it does not suffer from the limitations of capital
and management of other forms of organization. The sole proprietorship, partnership
and Co-operative organization are not capable of undertaking large scale activity due
to lack of adequate capital and limited managerial abilities. In a company organization
those problems can be easily overcome. It has the advantage of attracting huge capital
from the public due to the limited liability of members. With adequate capital it can
also employ trained and experienced managers to run the business activities
efficiently.
 Unit Seven – Activity 7

1) Copyright registration is not necessary to obtain copyright protection. However, a
registered copyright can be very important in a copyright infringement suit. For
example, in a copyright infringement suit, the plaintiff must prove that: (1) she is the
owner of a valid copyright, and (2) that one of her rights associated with the copyright
had been violated (copyright owner’s rights will be discussed later). A registered
copyright is prima facie evidence of a copyright, meaning that the Court assumes that
you have a valid copyright unless proven otherwise by the defendant
Unlike protection of inventions, copyright law protects only the form of patent of
ideas, not the ideas themselves. The creativity protected by copyright law is creativity
in the choice and arrangement of words, musical notes, colors and shapes. So
copyright law protects the owner of property rights against those who copy or
otherwise take and use the form in which the original work was expressed by the
author.
2) From this basic difference between copyright and literary and artistic works, it follows
that the legal protection provided to each also differs. Since protection for inventions
gives a monopoly right to exploit an idea, such protection is short in duration. The fact
that the invention is protected must also be made known to the public. There must be
an official notification that a specific, fully described invention is the property of a
specific owner for a fixed number of years; in other words, the protected invention
must be disclosed publicly in an official register.
3) In order for an invention to qualify for patent protection, it must be new or novel. In
other words, it may not be part of the state of the art known at the time of invention or,
in some countries, at the time of filing for patent protection. The state of the art
includes everything that is available anywhere in the world to the public through
technical journals, magazines, published papers, books, patent databases, or any other
source. New uses or improvements to known processes, machines, or materials may
214 | P a g e
also qualify as novel if that particular use or improvement is not already known by the
public.
Answer for Self-Check Exercise 1

Unit one
Part I
1. T 5. F
2. T 6. F
3. F 7. T
4. T
Part II
1. E 6. E
2. E 7. D
3. D 8. D
4. C 9. E
5. D
Part III
1. Law logic 3. Administrative law
2. The nature of law 4. Rule of law systems

Unit Two
Part I
1. F 4. T
2. F 5. T
3. T
Part II
1. B 5. B
2. D 6. D
3. A 7. E
4. B
Part III
1. Offeror, offeree, accepted
215 | P a g e
2. Counteroffer, offeree, rejected
3. Merger
Part IV
1. There must be an agreement between the parties of a contract. It involves a valid offer
by one party and a valid acceptance by the other party. Agreement is created by offer
and acceptance. Therefore, an agreement is = offer +acceptance. It is only by an
agreement a contractual relation is established between the parties. For example, “A”
sends a proposal to “B” to purchase a property for Birr.10 and “B” accept the same,
then this result into an agreement.
2. Consideration means something in return. An agreement is legally enforceable only

when each of the parties to it give something and gets something. It may be past,
present or future and must be real and lawful. v A contract without consideration is not
a contract at all. The consideration must be legal, moral and not against public policy.

Unit Three
Part I
1. F 5. F
2. F 6. F
3. T 7. F
4. T
Part II
1. C 5. A
2. C 6. B
3. C 7. C
4. D 8. C
Part III
1. The principal is the party that establishes the agency relationship by selecting the agent
which in his judgment possesses the appropriate talents for the task assigned. The
principal defines the terms of the agency and has the right of control over the agent’s
actions. The agent has the right to determine the course of action in order to achieve
the task appointed by the principal due to the authority conferred to him by the
principal. The agent behaves trustworthily by performing his duties.
2. Like any other contract, an agency can be terminated by agreement between principal and
agent. This is self-evident. If the agency is for a specific task, the authority of the agent
216 | P a g e
automatically ends when that task is completed. If the agency is for a specific period of time,
it is determined when that time has expired. It may have been agreed, or be inferred, that the
agency will cease if a certain event occurs. Then, it will terminate if and when that event does
occur. The authority of an agent, is, normally, terminated by the death or insanity of either the
principal or the agent, or the bankruptcy of either. In the case where either is a limited
company, the winding-up of the company has the same effect. Lastly, if either the principal or
the agent revokes the agency or renounces it (whether or not the act of so doing is in breach of
the contract), the agent’s authority will be revoked.

Unit one
Part I
1. F 7. F
2. T 8. F
3. T 9. F
4. F 10. F
5. F
6. F
Part II
1. Latent defect 4. Security devices
2. Reimbursement for necessary 5. Suretyship
expenditure 6. Pledge
3. Risk 7. Mortgage
Part III
1) The contract of pledge is concluded with the view to making use of full right of
ownership on the pledged property in satisfying the claim of the creditor. In short, the
right of the secured creditor under contract of pledge pertains to full right of ownership
on the pledge. However, the security right of the creditor is an accessory right which
will be enforced only after the due date of the secured obligation in case the debtor
fails to perform it in the manner agreed.
2) It is an important asset for someone setting up a business or entering a new field of
activity. Suretyship supports the creation of new businesses and buttresses a
developing economy. It is furthermore a cheap way of curing credit, obtaining loans.

Unit Five
217 | P a g e
Part I
1. T 6. T
2. T 7. F
3. T 8. F
4. F 9. T
5. F 10. T
Part II
1. C 6. E
2. A 7. E
3. C 8. D
4. E 9. E
5. A 10. E
Part III
1. permanent and adhoc board
2. Arbitration
3. labor dispute
4. An apprenticeship agreement
5. Severance payment

Unit Six
Part I
1. F 5. T 9. T
2. F 6. T 10. T
3. T 7. T
4. T 8. F
Part II
1. D 4. A 7. D
2. D 5. D 8. D
3. C 6. C 9. E
10. F
Part III
1. A sole proprietor
2. Partnership Partners
218 | P a g e
3. In a general partnership shares

Unit Seven
Part I
1) T 5) T 9) F
2) T 6) T 10) T
3) T 7) F
4) F 8) T
Part II
1) A 3) C 5) C
2) B 4) B 6) C
Part III
Trademarks Seven years Trade secret
GLOSSARY
 Administrative law- is the area of law that deals with government powers and
decisions made by government bodies.
 Agent - A person authorized by another, i.e., the principal, to act for him.
 Arbitration - The determination of a dispute by a disinterested third person, or
persons, selected by the disputants.
 Breach of contract - failure by one party to a contract to uphold their part of the deal.
A breach of contract will make the whole contract void and can lead to damages being
awarded against the party which is in breach.
 Collective agreement - term used for agreements made between employees and
employers, usually involving trade unions.
 Company law- is part of the law of business organizations, and refers to the law that
deals with the bringing together of large resources/capital to do business for profit in
accordance with a certain law(s) of organization or incorporation.
 Civil law- is a form of private law and involves the relationships between individual
citizens. Criminal law is an aspect of public law and relates to conduct which the State
considers with disapproval and which it seeks to control and/or eradicate.
 Constitution- is a supreme law in the country
 Consent- is an agreement on the same thing in the same way
219 | P a g e
 Contract - A legally enforceable agreement between two or more parties made orally
or in writing.
 Contract of employment- is an agreement on the employment conditions made
between an employer and an employee.
 Forced performance- implies the compelling of the debtor to discharge his
obligation.
 Intellectual property law- is a regime of law that regulates the creation, use and
exploitation of mental and creative labor.
 Joint venture - an agreement between two or more independent businesses in a
business enterprise, in which they will share the costs, management, profits or benefits
arising from the venture.
 Labor law in Ethiopia is-defined as that branch of the country’s law which regulates
industrial relations.
 Limited partnership- is a special type of partnership, which consists of at least one
general partner and one or more limited partners.
 Law- is a rule which establishes certain standards of conduct in an attempt to maintain
order and, per-haps, keep the peace.
 Law of sales is a branch of business law that regulates the relationship between the
buyer and seller of goods.
 Mortgage- is a security device which belongs to the category of real security.
 Non-performance refers- to parties’ failure to perform contractual obligations in
conformity with the terms of the contract and the law.
 Novation- means substitution of a new contract for the original one.
 Partnership-is an association of persons who agree to combine their financial
resources and managerial abilities to run a business and share profits in an agreed
ratio.
 Performance of contract-means fulfilling one’s own obligation as agreed.
 Pledge- is a security interest in personal property represented by an indispensable
instrument
 Power of Attorney - Authorization given by one person allowing another to take
action on their behalf.
 Revocation- is a term linked to the principal. It is a unilateral declaration on the part
of the principal to terminate the exiting agency-principal relationship.
 Rule of law-is a system of laws under which the people and the government are
bound, which allows predictability and restraint of government action.
 Sole proprietor-is a person who conducts a business in his/her own name with
unlimited liability.
220 | P a g e
 Substantive law- is that which defines a right while procedural law determined the
remedies.
 Trademarks- are words, symbols or other signifiers used to distinguish a good or
service produced by one firm from those produced by other firms.
 Trade secret- means information, including a formula, pattern, compilation, program,
device, method, technique, or process.
 Withdrawal of an offer- is revocation of an offer
 Wound up - winding-up is the formal procedure for disbanding a company.
221 | P a g e

1 - Law and The Life Cycle of A Business

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1 - Law and The Life Cycle of A Business

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TABLE OF CONTENTS

LAW AND THE LIFE CYCLE OF A BUSINESS

 Subject related knowledge:

 Critical thinking abilities:

UNIT ONE - SECTION ONE

1.1.1 Nature of Law

1.1.1.1 Definition and Philosophy of Law

1.1.1.2 Function of Law

1.1.1.3 Normatively of Law

1.1.1.4 Generality of Law

1.1.1.5 Legal Sanction

1.1.2 Classification of Law

1.1.2.1 Public Law and Private Law

1.1.2.2 Civil Law and Criminal Law

1.1.2.3 Substantive and Procedural Laws

1.1.3 Sources of Law

 Where the law does comes from?

1.1.3.2 Federal and Regional Laws

1.1.3.3 Court Decision

UNIT ONE - SECTION TWO

1.2 Rule of Law and its Importance to Business

2. Describe legal realism.

Part II:- Choose

4. The public law that imposes a sanction on a defendant is __________ law.

5. Law concerns about:

6. Which one of the following is true about the purpose of law?

7. Which one is not the main area of public law?

8. Which one is true about the constitution?

9. Which one of the following is not a source of law?

Part III:-Fill in the blank space

UNIT TWO - SECTION ONE

C. Two or more persons

2.1.2 The Need of Contract Law

 Why do we need contract law?

2.1.3 The Formation of a Contract

 Dear student, do you know how the contract is formed?

A contract is a legally enforceable promise. Therefore, it is important to know whether

2.1.3.1 Consent of Parties

I. Reasonable length of time

A counter-offer terminates the original offer.

III. Withdrawal of offer

The fact is that an advertisement is not an offer. It is simply an invitation to bargain.

2.1.3.2 Capacity of Parties

A contract concluded by the above persons is considered to be a voidable contract. It is

2.1.3.3 The Object of Contract must be Possible, Legal and Moral

II. Any contract by which an immovable is divided and compromise related to an

UNIT TWO - SECTION TWO

2.2 Performance, Nonperformance of Contract and its Remedies

2.2.1 Performance of Contract

 Where do you think of the place of performance?

 Can you assume the time of performance of contract?

Like in place of performance, parties are advised to determine time of performance. So

In conclusion, time of performance is determined either by contract or unilaterally by any

2.2.2 Non-Performance of Contract & Its Remedies

Non-performance refers to parties’ failure to perform contractual obligations in conformity

The reading of 1771 (2) suggests that damages/compensation is an additional remedy.

UNIT TWO - SECTION THREE

2.3 Termination of Contract

 Is a contract discharged if the contractual obligations of one of the parties

2.3.2 Mutual Consent (Art.1819)

2.3.3 Subsequent Impossibility

Impossibility in a contract may either be inherent in the transaction or it may be introduced

2.3.3.1 Destruction of Subject-matter of the Contract