CHAPTER SIX

INTRODUCTION TO COMMERCIAL LAW

Commercial law is a broad area of law. Our concern here is only with the fundamental
principles as particularly enshrined in the Commercial Code of Ethiopia. You will have a
brief look at the law of traders and business organizations, insurance and negotiable
instruments. At the end of this chapter, you must be able to:

- distinguish traders from non-traders.

- differentiate the business organizations that can be formed in Ethiopia,

- define insurance and insurable interest

- state the significance of insurance transactions

- describe negotiable instrument and negotiability

- identify the different types of negotiable instruments and their resenting features.

6.1. Law of Traders and Business Organizations

6.1.1. Traders

Who are traders? This is the foremost question that may come to one’s mind. Traders are
persons who carry on trading activities professionally and for gain. Their professional
career is indicative of the fact that these persons engage in trade as a means of earning
livelihood. Obviously, traders pursue profit-making ends. The law has expressly stated in

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a seemingly limitative list, the activities that are regarded as trading. Article 5 of the
Ethiopian Commercial Code contains twenty-one activities in which traders can engage
in.

Thus, not all persons who operate a given task for profit may be necessarily regarded as
traders. For example, persons who engage in agricultural production, cattle breading,
fishery and persons who operate activities at the level of handcrafts are not treated as
traders even if they derive profits out of their activities, and they don’t have the rights and
duties of traders. This shows that the type of activity, not necessarily a profit generating
one, is considered for categorizing a professional pursuer as a trader or not.

There are some persons who from the outset cannot engage in trading activities or at least
engage subject to fulfillment of certain conditions, not because the activities they engage
in are non-trading. Incapable persons, foreigners, associations, among others, are group
of persons who cannot engage in commercial activities. Incapable human beings such as
minors and persons with interdiction are denied the capacity to carry out acts of civil life,
and trade is at the top of juridical acts. Therefore, persons with incapacity cannot operate
trade personally by the application of the law of physical personality. Foreigners on their
part cannot directly go into trade matters as nationals. First, there are activities reserved
to nationals, and foreigners are totally enjoined from participating in those sectors.
Secondly, they need to secure work permit before embarking upon trading ventures.
However, for a poor nation like ours, foreign investment is necessary and the
government’s successive grant of investment permit to foreigner’s evidences to this fact.
Associations, on the other hand, are organizations formed to operate non-profit making
activities. Religious, social or many other non-governmental organizations acquire legal
personality upon registration but are not traders, for the mere reason that they pursue end
other than the realization of commercial surpluses.

A trader can be a physical person or a juridical person. Both human beings and corporate
entities are regarded as traders when they take part in the activities earmarked by the law

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as trading ones. Thus, a trader is not to merely mean individual merchants, and the
corporate form of trading is also legitimately recognized.

Traders have certain obligations not borne by non-trading persons. They are generally
required to be registered, to obtain business license and to keep books and accounts. No
trader can engage in commercial activities unless first registered in the commercial
register. The government tries to avoid the huge potential abuse in this sensitive area by
overseeing the potential and actual conduct of the traders by, among other things,
requiring registration. A similar end may be served by requiring the trader to secure a
business license form the authorities. A crucial obligation, especially from the view point
of government revenue, is the maintenance of proper and accurate books of account.
Business sector is the principal area from which the government generates revenue
through taxation to operate its multiple functions. Computations of tax liability are by and
large dependent on accurate financial records by the concerned trader.

6.1.2. Law of Business Organizations

Among the two basic forms of doing business, i.e. individually or through an
incorporated body, the latter form can be split into various sub-forms. The corporate
form of doing business we deal with right now is the private one, meaning business forms
taken up by non-state entrepreneurs and that are governed by the commercial law. A
corporate form of business undertaking is also available to the public in a slightly
different form from the private counterpart. Public enterprises and cooperatives are the
public forms of engaging in commerce by way of a corporate body. Anyway, one scheme
of operating business may be chosen over another for a variety of reasons.

Business organization is defined under the Commercial Code as an association arising

out of a partnership agreement. The word “association” is not used here to equate
business organizations to non-profit making entities; it is used here to mean grouping of
people. A business organization is, therefore, a grouping of business persons that comes
out of the partnership agreement. A partnership agreement exhibits certain features and

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contains certain elements. According to article 211 of the Commercial Code, it is defined
as 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.
Let’s try to dissect the statement in order to understand a partnership agreement.
The partnership agreement is a contract in the strict sense of the term. As a contract,
multilateral instrument, it should satisfy all the legal requisites we raised on general
principles of contract law and it produces all the effects of a contract. It binds together the
cooperators and contributors and it is backed by the sanction of law for enforcement. As a
contract again, two or more persons are needed and this means that a single person cannot
establish a business organization in Ethiopia. Parties to the partnership agreement should
be willing to work together for common goal. The extent of collaboration depends on the
nature of the business organization. In companies, personality of the contractants is less
important than that in partnerships. The persons also undertake to make contributions that
later constitute the business organization. The kind of contribution may depend upon the
interest of the parties and the need for investment in the business organization. Cash
contributions are the obvious modes. But in kind contributions, or even skill
(knowledge), are possible in so far as they are susceptible to monetary valuation.

Business organizations are established for the purpose of carrying out activities of
economic nature and the partnership agreement should also reveal this. That is to say,
persons organize themselves in the form we are talking about to strengthen their
economic power, to collect more profit. In other words, a business organization cannot be
established for purpose other than profit making. The contracting parties further
undertake to participate in both the profit and the loss that arise out of their operation, as
the case may be. The contract cannot exclude members from either the profit or loss or
both. Mind you here that the case of limited liability is conceptually different and it is
generally recognized in companies.

The Ethiopian law recognizes six types of business organizations: three types of
partnerships, two types of companies and a joint venture. Partnerships are associations of

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persons and the personality of members does greatly matter. Companies are associations
of capital and the personality traits of shareholders are not important to the existence of
the company. Joint ventures are unique forms of business organization. Let’s have a
cursory look at them.

a) Partnerships

Partnerships would have their own legal personality upon registration and publicity. But
such personality is greatly dependent on the mutual understanding between the partners
so much so that the withdrawal of one partner may cause the dissolution of the
partnership as a whole. There are three types of partnerships: ordinary, general and
limited partnerships.

Ordinary partnerships are corporate forms of doing business in non-commercial

activities. A commercial business organization is the one that picks up one of the
activities listed under Article 5 of the Commercial Code. A business engaging in those
activities cannot be run in the form of ordinary partnerships. An ordinary partnership may
be set up to operate other activities that do not make their doer a trader. Most of the
provisions of ordinary partnerships are informal and flexible, compared to the provisions
governing general and limited partnerships. Partners in an ordinary partnership are,
however, all jointly and severally liable for the debts of the partnership. But partners may
avoid the joint and several liability by contractually stipulating to the contrary.

General partnership is a commercial business organization in which all partners occupy

the same position vis-à-vis third parties. All partners are jointly and severally liable to
third parties, and they cannot even avoid this obligation by a contractual term. All of the
partners can be managers of the partnership. Creditors will have recourse against the
partners only after they exhaust the possibilities of recovery from the partnership.

A limited partnership comprises two categories of partners: general partners and limited
partners. The general partners of a limited partnership assume similar obligation as that of
partners of a general partnership. General partners are jointly and severally liable for the

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debts and commitments of the partnership where the assets of the partnership cannot
cover the debts and commitments. This group of partners act as managers of the limited
partnership. Limited partners, on the other hand, are partners that cannot be held
responsible for the debts of the partnership beyond their original contribution. They
cannot also take part in the management for that is inconsistent with their exemption from
liability.

b) Companies

The company is the best way of doing business in a corporate form. it is characterized by
an acquisition of capital from a relatively wider segment of the society. What is needed is
capital and not persons, and thus members are not expected to take part in the operations
of the company. Ownership belongs to dispersed shareholders while management and
control is in the hands of professional managers. The basic virtue of the company form is
the full recognition of limited liability. No contributor (shareholder) is held liable for the
debts of the company beyond his contribution, and he does not risk losing his personal
property because of liability incurred by the company. The life of a company is not
dependent on the life of the shareholders, unlike partnerships. The company exists and
operates independently of, and in fact remotely from, shareholders and the company
continues despite withdrawal or death of shareholders.

We have two types of companies: share companies and private limited companies. Both
have their partnership agreement expressed in what are termed as memorandum of
association and articles of association. They also have their capital divided into shares,
and they issue shares, even though shares of a very different nature. They are always
commercial business organizations in the sense that they engage only in one of the
activities legally recognized as trading ones. They also have differences.

The minimum capital requirement is significantly different. A private limited company

has capital ceiling but share company can raise capital to an unlimited amount. The
number of shareholders for a share company is minimum five while private limited

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companies can be formed by fewer people up to two. But the latter have a ceiling on the
number of shareholders, 20, while there is no limitation on the maximum number of
shareholders in share companies. Share companies are authorized to raise capital through
a subscription of shares to the public and pool together large sums of money for the
capital of the company. Private limited companies cannot offer shares for public
subscription.

Share companies can issue transferable shares and other transferable securities. They can
issue various classes of shares that can be negotiated easily. They can enter into loans by
issuing debentures. Private limited companies cannot issue such documents. In share
companies, important decisions are made by the general meeting of share holders. But in
private limited companies, the possibility or importance of such meeting is doubtful as
the line between ownership and management is often blurred.

c) Joint Ventures

Joint ventures in investment law parlance refer to the collaboration between two persons
(usually where the government is a party) already in another business. Under the
Ethiopian Commercial Code, a joint venture is a secret business organization. The
existence of a joint venture cannot be disclosed to third parties. The organization is
known only to the venturers. The agreement forming a joint venture need not be made in
writing. A joint venture need not be registered and publicized by any way. Accordingly, a
joint venture cannot be a person; it cannot sue and cannot be sued. Third parties only
know the manager of the joint venture. The manager is responsible for all faults and
liabilities that may emerge because of the business. The powers of the manger and
liability of other partners will be determined in their internal mutual agreement.

6.2. Law of Insurance

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6.2.1. General

Insurance is a social security scheme that developed because of the existence of risks.
Risks are evident especially in the business world where persons may be exposed to huge
losses as a result of the materialization of the risk. Such a phenomenon may discourage
people from venturing on sectors that may entail risk or the business sector might have
been generally endangered. Insurance policy had succeeded in responding to the
abovementioned problem.

A person or an organization may merely assume a risk of some kind that may or may not
happen. Whether the risk happens or not is, however, not certain. No body knows when,
how and to what extent the risk may materialize. If this fact was known beforehand,
every one would have avoided it. It the uncertainty and fear of unfortunate moment may
hamper commerce or industry. The uncertainty surrounding potential losses is referred to
as risk. An insurance coverage for the risk will encourage people to conduct business
with out the fear of the occurrence of the risk. There are many virtues of insurance.

Insurance makes a person work with out fear and thus increase production and
productivity. Individuals perform more in a risk free or risk controlled environment.
Insurance helps to budget money for unknown loss. If a person is insured, he pays money
to the insurance company at a continuous interval. The periodic payment, called
premium, can be taken as a budgeting in advance for an uncertain risk.

Most importantly, insurance distributes risk among different people. People under a
certain risk make payments in advance so as to address the risk in case it materializes.
The public will make a cumulatively huge contribution to the insurer, and the insured
who suffered the actualized risk would be redressed and put to his position he was before
the materialization of the risk. Because the insured has got paid from the fund pooled
together by the public and we can say that the risk is dispersed on the people generally.
The distributed burden would be too easy for members of the community to bear, but
would have been very devastating on the individual persons in the absence of insurance.

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Insurance has become a significant force in the industrial sector where there is an active
movement of labor and where equally risk exists. Insurance protects workers against
work related hazards. While the workers enjoy work with out fear, that will be very
beneficial to the employer for more work is to be performed and production increased.
The gigantic insurance companies create employment opportunity. Their financial and
social status makes them great contributors to the employment sector of a nation.

6.2.2. Insurable Interest

Any party purchasing insurance must have a “sufficient interest” in the insured item to
obtain a valid policy. Insurance laws determine sufficiency of items for insurance
coverage. A person is said to have insurable interest where he has a vested interest in the
subject matter of insurance to whom the advantage may arise or prejudice may happen.
There must be an economic link to the claim of insurance.

A person should have some kind of relation to or concern in the subject matter of the
insurance. Insurance protects the relation or economic concern on a thing. We say that
there is an insurable interest if the occurrence of a given peril assumed to affect the
concern on the subject matter of insurance proved to affect the economic interest of an
insured. The insured should be benefited from the existence of a thing or an interest
insured or should be prejudiced by its destruction upon materialization of the risk.

6.2.3. Insurance Policy and Rights and Duties of Parties

Insurance policy is basically a contract, but a special contract. It is defined under Article
654(1) the of the Commercial Code as a contract whereby a person called the insurer,
undertakes against payment of one or more premiums to pay to a person, called the
beneficiary, a sum of money where a specified risk materializes. As a contract, an
insurance policy should satisfy all essential requirements of a valid contract. In addition,

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it must exhibit the special features attached to it by the provisions of the Ethiopian
Commercial Code.

Accordingly a contract of insurance must be made in writing. This is so because the law
says that the contract should be supported by a written document called an insurance
policy, which, as is mentioned in the definition is the contract itself (Art 657 (21). We can
say that the law has specifically imposed a writing requirement in the creation of an
insurance contract, and that must be observed. The insurance policy also is to contain the
facts stated in Article 658. These are:

- the place and date of the contract;

- the names and addresses of the parties;

- the items, liability or person insured;

- the nature of the risks insured;

- the amount of the guarantee;

- the amount of the premium; and

- the term for which the contract is made.

In insurance contracts, the person guaranteeing against a given risk is called the insurer.
In Ethiopia, only share companies can be insurers because financial activities, viz
banking and insurance, are run only in the form of share companies. The person seeking
an assurance against a definite risk is the insured, or the beneficiary to use the Code’s
terminology. The insured may subscribe insurance policy for his own benefit or for the
benefit of other person(s), i.e. the beneficiary of the policy may be the insured or a third
party.

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The insurance policy must specify the subject matter of the insurance that contains an
insurable interest. Insurable subject matter could be a property exposed to peril (such as
car, building, machinery), liability to third parties, persons themselves including their life
and illness or accidents.

The insurance of property refers to both corporeals and intangibles. Physical assets are
obviously proper subject matters for insurance policy. Equally, intangible claims such as
rights and credits (receivables) to be collected may be insured. Even though these do not
have a material existence, there is a risk that they may not be recovered or received and
thus they constitute insurable interest. A person may face a liability to third parties. He
may extra-contractually fall into a liability scenario and this is a risk. A person can cover
such risk with an insurance policy so that he normally undertakes his activities with out
much fear of liability.

Another subject matters of insurance are persons. Persons insure themselves for a variety
of reasons. For example, a person’s death may seriously affect his descendant’s or others
whom he supports. Life insurance policy provides such person to give financial security
in advance to persons he supports. The life of the insured is an insurable interest for
ultimate beneficiaries whose livelihood is dependent on the earnings of the insured.
Likewise, a person may insure himself against defined accidents or illnesses for his own
benefit or for the benefit of others. An accident may cause a serious and permanent
bodily injury and may thus reduce the working and earning potentials. Illness may cause
same. Insurance is a good security for such risks. The insurance of illnesses or/and
accidents usually includes their consequences including death.

The insurance policy contains certain basic rights and obligations from which parties can
not even contractually derogate. Both the insurer and the insured do bear some duties to
one another. The insurer guarantees the insured against the risks specified in the policy,
and he must pay the agreed amount within the time specified in the policy or when the
risk insured against occurs at the time specified in the policy. This duty of the insurer is
not affected even if the losses or damages insured occurred due to the fault of a person

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for whom the insured is responsible, and the obligation remains valid regardless of
establishing such link. But the insurer is automatically exempted from the duty if the
losses or damages covered by the policy are caused by the negligent or intentional fault
of the insured himself.

The main duties of the insured under an insurance policy are the payment of a fixed
premium and the disclosure of material facts. Insurance is not a gratuitous contract; it is a
contract made for consideration and each of the parties performs obligations. Thus, the
insured pays a fixed sum, called premium, which is usually paid on a time interval. The
insured is equally obliged to disclose exactly all the material facts within his knowledge.
This is an essence of an insurance policy and no contract continues without making exact
statements of all the facts. By material facts, we mean that the insurer appreciates the
risks based on them and consents to enter into the policy based on that. Thus, any
concealment or false statement made by the insured that make the insurer wrongly
appreciate risks, and that lead the latter to enter into the policy which otherwise he would
not have done, would nullify the policy.

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