Business Law, Short NOTE

Business law
UNIT ONE
INTRODUCTION TO LAW
1.1. Definition of Law
Defining the term ‘law’ is not an easy task because the term changes from time to time and different
scholars define the term variously. Definition of the term may vary due to the different types of
purposes sought to be achieved. Definitions given to the term law are as many as legal theories.
According to Black’s Law Dictionary law consists of rules of action or conduct. These rules are issued
by an authority. In addition, these rules have binding force and are obeyed and followed by citizens.
Sanction or other legal consequence may help the law to be abided by citizens.
1.2. Basic features of law
I) GENERALITY
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.
1. “Every one has the right to life, liberty and the security of a person.” [Art 3, UNDHR; 1948].
- This law is made to be applicable to every person on this world. Therefore, it is universal.
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].
- This constitutional provision is made to be applicable to every person in Ethiopia. so, the extent
of its generality is national. This is less general than the first illustration.
3. “Every Ethiopian national, without any discrimination based on colour, race, nation,
nationality, sex, status, has the following rights…
(b) On attainment of 18 years of age, to vote in accordance with the law.” [Article 38(1)(b)
of the 1995 Constitution of the Federal Democratic Republic of Ethiopia.].
- This law is made to be applicable only to Ethiopian nationals who attain 18 years of age.
Therefore, it is even less general than the second illustration.
4. “Whoever intentionally spreads or transmits a communicable human disease is punishable with

rigorous imprisonment not exceeding ten years.” [Article 514 (1) of the 2004 Criminal Code of
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the Federal Democratic Republic of Ethiopia].
- This law is made to be applicable only on a person who commits the crime.
Therefore, it is even less general than the third illustration.
5. “The term of office of the presidents shall be six years. No person shall be selected president
for more than two terms” [Article 70(4) of the 1995 Constitution of the Federal Democratic
Republic of Ethiopia].
- This law is made to be applicable only to a person who becomes a president in Ethiopia.
Therefore, it is even less general than the fourth illustration.
Under all these 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.
II) NORMATIVITY
Law does not simply describe or explain the human conduct it is made to control. It is created with the
intention to create some norms in the society. Law creates norms by allowing, ordering or prohibiting
the social behaviour. This shows the normative feature of the law. Based on this feature, law can be
classified as permissive, directive or prohibitive.
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A) Permissive Law
Permissive laws allow or permit their subjects to do the act they provide. They give right or option to
their subjects whether to act or not to act. Most of the time such laws use phrases like:
- has/ have the right to
- is/are permitted/allowed to
- shall have the right
- shall be entitled to
- may
- is/are free to
Illustrations:
1. “Every person is free to think and to express his idea.” [Article 14 of The 1960 Civil Code of
Ethiopia].
- The human conduct to think and to express ideas is permitted by this law. Therefore, it is a
permissive law.
2. “Accused persons have the right to be informed with sufficient particulars of charge brought against
them and to be given the charge in writing.” [Article 20(2) of the 1995 Constitution of the Federal
Democratic Republic of Ethiopia]
- “have the right to” in this law shows that the subject is given the right or permitted to get the charge
in writing and to be informed its particulars. Therefore, it is permissive law.
B) Directive law
Directive law orders, directs or commands the subject to do the act provided in the law. It is not
optional. Therefore, the subject has legal duty to do it whether s/he likes it or not, otherwise, there is
an evil consequence that s/he incurs unless s/he does it as directed by the law. Directive law usually
uses phrases like:
- must
- shall
- has/have the obligation

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- is/are obliged to
- is/are ordered to
- shall have the obligation/duty
Illustrations:
1. “The debtor shall personally carry out his obligations under the contract where this is essential
to the creditor or has been expressly agreed.” [Civ. C. Art. 1740(1)]. “Shall…. carryout” in this
law shows that the contracting party, the debtor, is directed, ordered or commanded by the
law as it is provided. Therefore, this law is directive law.
2. “Every worker shall have the following obligations to perform in person the work specified in
the contract of employment.” ( emphasis added) [Article 13(1) of the 2003 Labour Code
Proclamation No. 377/2003].
”Shall have the … obligations to” in this law shows that the worker is directed by the law as it is
provided in the law. Therefore, it is directive law.
In general, directive laws are mandatory provisions of laws. They oblige the subject to act, as they
require him/her to act.
C) Prohibitive law
Prohibitive law discourages the subject from doing the act required not to be done. If the subject does
the act against the prohibition, an evil follows as the consequence of the violation. All criminal code
provisions are prohibitive laws. Prohibitive laws usually use phrases like:
- must not;
- shall not;
- should not;
- no one shall/should;
- no person shall/should;
- may not;
- is/are not permitted/allowed;
- is/are prohibited;
- is/are punishable; and
- is a crime.
Illustrations:
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1. “Any unmarried person who marries another he knows to be tied by the bond of an existing
marriage is punishable with simple imprisonment.” [Article 650(2) of the 2004 Criminal Code
of Ethiopia]
”is punishable” in this law, indicates that the law discourages such act. Therefore, it is prohibitive
law.
2. “No one may enter the domicile of another against the will of such person; neither may a
search be effected there in, except in the case provided by law.”[Civ. C. Art 13].
“No one may” shows that any one is discouraged from acting as provided by the law and so it is
a prohibitive law.
III) Sanction
Each and every member of a society is required to follow the law. Where there is violation the law
sanction would follow. Sanction according to Black’s Law Dictionary, is a penalty or coercive
measure that results from failure to comply a law. The main purpose of sanction is to prompt a party (a
wrong doer) to respond. In other words, sanction will make the wrong doer to think that s/he made a
fault and s/he should correct it. Sanction may be criminal. Criminal sanction is a sanction attached to
criminal liability .If the fault committed is defined by criminal law the person will be liable to a
sanction provided under the criminal law.
1.3. Function of law
The object of law is to ensure justice. The justice may be either distributive or corrective. Distributive
justice seeks to ensure fair distribution of social benefits and burden among the members of the
community. Corrective justice, on the other hand, seeks to remedy the wrong. Thus if a person
wrongfully takes possession of another’s property, the court shall direct the former to restore it to the
latter. This is corrective justice. Rule of law is sine qua non for even-handed dispensation of justice. It
implies that everyone is equal before law and law extends equal protection to everyone; judges should
impart justice without fear or favour and like cases should be treated alike.
It must, however, be stated that justice alone is not the only goal of law. The notion of law represents a
basic conflict between two different needs, namely, the need for uniformity and the need for
flexibility. Uniformity is needed to provide certainty and predictability. That is, where laws are fixed
and generalized, the citizen can plan his/her activities with a measure of certainty and predict the legal
consequence of his/her conducts. This is even more necessary in case of certain laws, notably, the law
of contract or property. Uniformity and certainty of rules of law also bring stability and security in the
social order.
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Today the following are taken as important functions of law.

A) Social control – members of the society may have different social values, various behaviours
and interests. It is important to control those behaviours and to inculcate socially acceptable
social norms among the members of the society. There are informal and formal social controls.
Law is one of the forms of formal social controls. As to Roscoe Pound, law is a highly
specialized form of social control in developed politically organized society. Lawrence M.
Freedman explains the following two ways in which law plays important role in social control:
first, law clearly specifies rules and norms that are essential for the society and punishes
deviant behaviour. “Secondly, the legal system carries out many rules of social control. Police
arrest burglars, prosecutors prosecute them, courts sentence them, prison guards watch them,
and parole broads release them.
B) Dispute settlement
Disputes are unavoidable in the life of society and it is the role of the law to settle disputes. Thus,
disagreements that are justifiable will be resolved by law in court or out of court using alternative
dispute settlement mechanisms.
C) Social change
A number of scholars agree about the role of law in modern society as instrument to social change.
Law enables us to have purposive, planned, and directed social change .Flexibility of law provides
some measure of discretion in law to make it adaptable to social conditions. If law is rigid and
unalterable, it may not respond to changes spontaneously which may lead to resentment and
dissatisfaction among the subjects and may even result into violence or revolution. Therefore, some
amount of flexibility is inevitable in law.
1.4. Classification of law
1. Public Vs Private law
2. International and National law
3. Substantive and Procedural law
4. Civil and Criminal law
1.5. Hierarchy of Laws
Constitution

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Proclamations
Regulations
Directives
CHAPTER TWO
LAW OF PERSON
2.1. Definition of person
Those beings capable of having rights and obligations are called “persons.”
 Two kinds of persons Distinguished
Person
Natural/Physical Moral/Legal/ Artifi
Humanbeings Entities that are conf
 The characteristics of personality is the capacity to have or to hold or to enjoy (not necessarily
to exercise) rights and duties under the law.
2.2. Attributes of personality

 Sue or be sued by his own name
 Own property
 Conclude a contract by his own name
2.3. Origin of personality
The origin of personality of physical persons and the origin of personality of juridical persons is not
identical.
The origin of juridical persons is related to the fulfillment of the preconditions that are necessary for
the establishment of the entities.

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Physical personality, in principle, begins from birth and lasts until death. The origin of physical
personality by birth is dealt with in Article 1 of the Civil Code of Ethiopia.
But exceptionally physical personality will begin at conception. The benefit of personality will granted
to a conceived child on the fulfillment of the following three cumulative conditions.
1. The interest of the child must justify the grant of personality

2. The child must be born alive
3. The child must be born viable.
A child merely conceived shall be considered born whenever his interest so demands provided
that he is born alive and viable (Article 2 of Ethiopian civil code).
When does a child conceived?
 Article 3 of the Ethiopian civil code fixed the date of conception at the 300th day before birth.
2.4. Individualizing and locating physical person
1. Name
Names have the purpose of identifying individual physical persons. They are among the
attributes of physical personality. The Constitution of the Federal Democratic Ethiopia
considers name as the right of every child. Article 36/1(b) of the Constitution provides that
“Every child has the right to a name and nationality.” The particular laws that deal with name of
physical persons are Articles 32 to 46 and Articles 3358 to 3360 of the Civil Code.
a) Principle:
According to Article 32, every individual has a family name, one or more first names and a
patronymic; and they are written in that order in administrative documents.
b) Current practice:
Family names indicate members of a common male-line descent, thereby reducing identity of names.
However, family names haven’t yet been introduced decades after the promulgation of the Civil Code.
Certain laws are meant to induce prospective changes in custom. However, the role of law in social
engineering requires pragmatism and synchrony with objective realities. The provisions of the Civil
Code on family name haven’t been able to alter the Ethiopian tradition of using first names followed
by the father’s first name (patronymic), a practice that is apparently susceptible to identity of names
particularly in view of the current trend of population growth.

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2. Residence and Domicile

In addition to identifying persons by name, persons should also be individually located. Citizenship,
domicile and residence identify the location of persons for the purpose of legal transactions.
Citizenship denotes the moral, social and political tie of a person to a State.
Domicile defines a person’s legal tie to a place that has its systems of law. A person can have only one
domicile at a time.
a) Definition
Article 183 of Ethiopian Civil code (ECC) defines domicile as “the place where such
person has established the principal seat of his business and of his interest, with the
intention of living there permanently”. Principal seat of business refers to the place where
occupational activities are carried out; and a person’s seat of social and family life is
considered as the principal seat of his interest. Permanent intention to reside in a certain
place is presumed “where a person has his normal residence in such place”. (Article 184/1
of ECC) Unlike residence, one can’t have more than one domicile. A person can have only
one domicile at a time (186).
b) Rationale
The domicile of a person is important for different legal issues e.g. to grant nationality to a foreigner
(Article 5 of proclamation number 378/2003), registration of vital events etc.
Residence is more specific and links a person to the particular place where he normally resides.
a) Definition
“The residence of a person is the place where he normally resides” (Article 174 of the
Ethiopian civil code).
 A person may have several residences (Article 177 of ECC), and in such cases one of them
shall be considered as “principal residence” owing to the criteria of normality, frequency and
the length of time that a person relatively stays in one of the residences.
b) Rationale
The determination of residence is essential for the purposes of marriage (597 ECC., Art. 22 of
the Revised Family Code), successions (826), contracts (1755/2) and summons (Art.106 of

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the Civil Procedure Code). It is also essential during elections, for taxation and other
purposes.
c) Residence –versus- mere sojourn

Residence is different from a mere sojourn in a certain place for some days or weeks. Thus mere
sojourn in a place doesn’t constitute residence (175/1). Yet, residence is acquired if a person’s
sojourn is to last or actually lasts for the period stated under Article 175. If a person:
• intends to stay at a place (i.e.- at a sojourn) for more than three months, or,
• Actually stays in such sojourn for more than three months without a prior intention of staying that
long, he acquires residence (175/2) in such place.
It should be noted that a sojourn which is intended to last for more than three months is considered as
residence from the moment the person starts living in the sojourn provided that he intends to stay there
beyond three months.
Illustration:
A person has a villa at the seaside and goes there regularly during his vacation, for a month or so. Such
place could be considered a residence for the period, while this would not be true if each period of
vacation was spent in a villa rented in a different place.
d) Principal and secondary residence
A person may have several residences (177), and in such cases one of them shall be considered as
“principal residence” owing to the criteria of normality, frequency and the length of time that a
person relatively stays in one of the residences. The issue whether a person’s presence in a
particular residence is normally more predictable than that of other residence(s), and how frequently
and how long he lives in that particular place are the factors we may consider when two or more
residences seem to have the characteristics of principal residence.
e) Stipulated residence
Residence may be stipulated for the purpose of a specific relationship, business or activity (181).
Agreement of the person in whose favor the stipulation is made is mandatory (182).
f) Residence determined by law
Persons without proved residence:
“The place where such person is shall be deemed to be his residence unless it is proved that such
person has his residence in another place.” Article 176 of the Ethiopian civil code
Married couple, minors and judicially interdicted persons:

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Married couple shall live together in their conjugal residence (Article 640/1 of the Civil Code and
Articles 53 and 54 of the Revised Family Code). In addition to the conjugal residence, a married
woman may have her own residence (178/1). Minors and interdicted persons may have residence of
their own other than the one (178/2) determined by the guardian for the minor (265) or the
interdicted person (Art.362).
Public officials and traders

The place where a public official exercises his functions is considered as his residence (179), and the
place where a person carries on trade shall be deemed to be the residence of the trader (180).
g) Special rules of residence
Although a person acquires residence if s/he stays in a place for three months (Art. 175), there are
special rules that require longer periods. For the purpose of marriage, elections and taxation, the law
requires longer periods of residence owing to the fact that a minimum of six months have been
considered to be necessary. It is to be noted that a spouse need not be resident of the place where
his/her marriage is to be registered if his/her parents or close relatives are residents of the place for
over six months.
2.5. The Exercise of Rights and duties by Physical Person
2.5.1. Capacity to exercise rights and duties
2.5.1.1. General principles
a) Capacity is the rule and incapacity the exception
Article 192 provides that “Every physical person is capable of performing all acts of civil life
unless he is declared incapable by the law”. In other words, everyone has the capacity to
exercise the rights he holds unless he is within the group of persons whom the law declares
incapable of performing juridical acts on their own, i.e.- without being represented by a
guardian or a tutor.
b) Capacity is presumed unless proved otherwise
A person’s capacity to exercise juridical acts is presumed (196/1), and anyone who invokes the issue
of incapacity bears the burden of proof (196/2). In our day-to-day transaction we don’t usually
consider the condition of “capacity” in every interpersonal relationship and upon each juridical act
unless it is apparent as in the case of most minors. Capacity is thus presumed unless proved otherwise.
2.5.1.2- Categories of lessened capacity

Due to age: Minority (Arts.198-338 C.C; Arts 215-318 RFC)
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General Notorious insanity and

Due to mental or physical condition: apparent infirmity (Arts.
incapacity
(Art. 193) 339-350)
Due to penal sentences: Legal interdiction
Arts 380-388 (E.g. Art 123, Criminal Code, Judicial interdiction
2004) (351-379)
Due to foreign nationality (Arts. 389-393)

Special
incapacity Due to special functions, e.g. Article. 302
(Art. 194)
2.6. - Purposes of lessened capacity

Rights are held by every person from the moment of birth, and these rights, according to Article 8, are
enjoyed by everyone regardless of race, color, religion or gender. But the direct exercise of certain
juridical acts (such as legally binding contracts) requires a certain level of maturity, mental condition
and the like. The law duly lessens such rights of certain groups of persons on the basis of their status
of minority, notorious insanity, apparent infirmity, judicial interdiction and legal interdiction for the
following reasons:
a) To protect incapacitated persons from others who may take advantage of their inexperience,
inferior judgment, etc.; and to protect these persons of lessened capacity from their own
erroneous decisions and acts that could be detrimental to their interests.
b) In the case of legal interdiction, the incapacity has the purpose of protecting society from
offenders.
2.7. Organs of protection
No Minors Judicial interdicted Legal interdicted person
person
1 Guardian  
2 Tutor   
2.8. End of personality

2.8.1. Absent
2.8.2. Death

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CHAPTER THREE
BUSINESS AND BUSINESS ORGANIZATIONS
3.1. Business
3.1.1. Definition
Article 124 of the Commercial Code defines business as “an incorporeal movable consisting of all
movable property brought together and organised for the purpose of carrying out any of the
commercial activities specified in Art.5 of this Code.”
 Incorporeal movable.... Incorporeal things are things that do not have a material or physical
existence, that cannot occupy space and hence that cannot be perceived by the senses.
 Consisting of all movable property.... Movable things are things which can move by
themselves or be moved by man without losing their individual character.
 For the purpose of carrying out any of the commercial activities specified in Art.5 of this
Code.”
3.1.2. Elements of business (Article 127-149 of the commercial code)
Business has both incorporeal and corporeal elements.
3.1.2.1. Incorporeal elements of Business (127)
(1) A business consists mainly of goodwill.

The goodwill results from the creation and operation of a business and is of a value which
may vary according to the probable or possible relations between a trader and third parties
who may require from him goods or services.
(2) A business may consist of other incorporeal elements such as:
(a) the trade-name; (135 and the following)

A trade-name is the name under which a person operates his business and which clearly
designates the business.
(b) the special designation under which the trade is carried on;
 A distinguishing mark is the name, designation, sign or emblem affixed on the
premises where the trade is carried on and which clearly designates the business.
 The use of distinguishing mark is not mandatory.
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(c) the right to lease the premises in which the trade is carried on;
(d) patents or copyrights;
A business may consist of patents relating to registered inventions, trade-marks, designs
and models.
3.1.2.2. Corporeal elements of business (128)
According to Article 128 of the commercial code of Ethiopia, the corporeal elements that make
up a business include equipments and goods.
3.1.3. Operators of business
Businesses are operated by persons, whether physical or juridical. A person who operated a business is
called TRADER (as per the commercial code—article 5) and BUSINESS PERSON ( as per
proclamation no 686/2010)
“Business Person” means any person who professionally and for gain carries on any of the activities
specified under Article 5 of the Commercial Code, or who dispenses services, or who carries on those
commercial activities designated as such by law;
"ነጋዴ" ማለት የሙያ ሥራው አድርጎ ጥቅም ለማግኘት ሲል በንግድ ሕጉ አንቀፅ 5 የተዘረዘሩትን ሥራዎች የሚሠራ
ወይም አገልግሎት የሚሰጥ ወይም የንግድ ሥራ ነው ተብሎ በሕግ የሚወሰነውን ሥራ የሚሠራ ማንኛውም ሰው
ነው
In order to be a business person the following preconditions should be fulfilled:-

1. Requirement of registration
No person shall engage in any commercial activity which requires business license without
being registered in the commercial register.
ማንኛውም ሰው በንግድ መዝገብ ሳይመዘገብ ማናቸውም የንግድ ፈቃድ የሚያስፈልገውን የንግድ ሥራ መሥራት
አይችልም፡፡
2. Registration of Trade Name

Any person desiring to engage in a commercial activity shall register his trade name at the
place where he is registering in the commercial register.

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ማንኛውም በንግድ ሥራ ሊሰማራ የሚፈልግ ሰው በንግድ መዝገብ በሚመዘገብበት ቦታ የንግድ ስሙን ማስመዝገብ
አለበት፡፡
3. Obtaining Business License

No person shall carry on a commercial activity without obtaining a valid business license.
ማንኛውም ሰው የፀና የንግድ ስራ ፈቃድ ሳይኖረው የንግድ ስራ መስራት አይችልም፡፡
 A business could be operated by a single person or group of persons.
When a business is run by a single individual it is called sole proprietorship and when group of
persons want to engage in business they form business organization.
3.2. Types of Business Organization

Definition
Article 210 of the Commercial Code defines a business organization as “any association arising out
of a partnership agreement.”
A partnership agreement, pursuant to Article 211 of the Code, is “a contract whereby two or more
persons 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.”
The Commercial Code of Ethiopia defines a business organization as follows: “A Business
organization is any association arising out of a partnership agreement.” According to this definition
there are eight forms of business organizations:
 Ordinary partnership;
 Joint venture;
 General partnership;
 Limited partnership;
 Share company;
 Private limited company;
 Sole proprietorship;
 Co-operative.
Partnership: is where two or more persons who intend to join together make 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. According to the Commercial Code of Ethiopia, contributions in partnership
are possible in the following conditions.
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Each person shall make a contribution, which may be in money, debts, other property or skill;
Property or the use of property may form a contribution;
Unless otherwise agreed, contributions shall be equal and of the nature and extent required for
carrying out the purposes of the partnership.
Joint venture: is an agreement between partners on terms mutually agreed and is subject to the
general principles of law relating to partnerships stated above.
General partnership: consists of partners who are personally, jointly, severally and fully liable
between themselves and to the partnership firm’s undertakings. This means that each partner is
responsible for and must assume the consequences of the actions of the other partner(s). All members
share the management of the business. The death or withdrawal of a general partner, or the expiration
of the term of the general partnership, will dissolve the partnership. Continuation of the partnership
following such events may be dealt with, however, in the partnership agreement. Since a partnership is
generally a “voluntary” association, any general partner who no longer desires to be associated with
the partnership may withdraw and force dissolution. Dissolution of a partnership, as a general rule,
requires the winding up of its affairs and a liquidation of the partnership’s assets.
Limited partnership: Some members are general partners who· control and manage the business and
may be entitled to a greater share of the profits, while other partners are limited and contribute only
capital. Limited partners take no part in control or management and are liable for debts to a specified
extent only. A Legal document, outlining specific requirements, must be drawn up for a limited
partnership.
Company limited: by share is a company whose capital is fixed in advance and divided into share and
whose liabilities are met only by the assets of the company. The members shall be liable only to the
extent of their share holding. Formation of a share company shall be by a public memorandum –
memorandum of association, which consists of:
 Names, nationality and address of the members, the number of shares which they have
subscribed, provided that a member may not subscribe to less than one share;
 Name of the company;
 Head office and the branches, if any;
 Business purpose of the company;

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 Amount of capital subscribed and paid up;

 Par value, number, form and classes of shares;
 Value of contributions in kind, their objects, the price at which they are accepted, the
designation of the shareholder and the number of shares allocated to him by way of exchange;
 Manner of distributing profits;
 Number of directors and their power.
Sole proprietorship: This is the simplest way to set up a business. A sole proprietor is fully
responsible for all debts and obligations related to his or her business. A creditor with a claim against a
sole proprietor has a right against all of his or her assets, whether business or personal. This is known
as unlimited liability. If the proprietor chooses to carryon a business under a name other than his/her
own, he/she must register with the concerned local authorities. Your business name registration, or
renewal of registration, will be valid for a certain period of time. A sole proprietorship is the cheapest
and easiest form 0f business where most 0f the MSEs prefer to register their business in. Under a sole
proprietorship, the entrepreneur is the owner as well as the manager of the business.
The sole proprietorship terminates by law upon the death of\the sole proprietor, with very few
exceptions. Estate planning documents for the sole proprietor may grant the others of the sole
proprietor the right to continue the business.
Co-operatives: This is where people associate on a voluntary basis to promote their economic
interests, whereby resources are pooled together and used. People with financial constraints,
especially, tend to form co-operatives to benefit from joint efforts and external support facilities.
A co-operative business structure provides:

 Democratic control based on one member one vote;
 Open and voluntary membership;
 Patronage dividends.
Each form of business stated above has its own advantages and disadvantages. You can make your
choice based on the following factors:
 Ease of registration;
 Number of owners;
 Financial responsibility of owners;

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 Degree of freedom in decision making; and

 Mode of tax payment.
A comparison between different business organizations that are recognized in Ethiopia
Base for Ordinary General Limited Joint venture Private Share

comparison partnership partnership partnership limited company
company
Formation. By partnership By partnership By By partnership By By
210+214 agreement agreement partnership agreement(no partnershi partnership
( written form) ( written form) agreement need to be made p agreement
( written in writing) agreement ( written
form) 272(2) ( written form)
form)
Minimum two two two two two Five..307
number of
persons
required
Maximum Unlimited Unlimited Unlimited Unlimited fifty Unlimited
number of
persons
required
Personality    Does not have  
(Article 210) legal personality
Transfer of Not easy due to Not easy due to Not easy Not easy due to Shares are Shares are
share personality of personality of due to personality of freely freely
the share holders the share holders personality the share holders transferabl transferable
is important. … is important… of the share is important. e ..
250 282 holders is except..333
important…
302
Contribution Money, debts, Money, debts, Money, In cash or in In cash or
other properties other properties debts, other kind in kind
or skill…. 229 or skill…. properties or
skill….
Publicity… It should be It should be It should be Publication is It should It should be
article publicized publicized publicized not a be publicized
219CC + 9 requirement publicized
of proc. no.
686/2010
Liability Unlimited…255 Unlimited..294 1. Unli Only to the Limited limited…
mite amount fixed in 304
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d:- the
gene memorandum of
ral association…276
partn
ers
2. Limi
ted:-
limit
ed
partn
ers.
311
Management One or more One or more One or more One or more One or Directors..3
managers managers managers managers more -
managers 12….347(2)
Minimum There is no There is no There is no There is no 15000 50,000…
amount of minimum minimum minimum minimum 306
capital requirement..80 requirement.. requirement requirement..80
80 ..80

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CHAPTER FOUR
LAW OF CONTRACT
4.1. Definition of contract

‘Contract’ is defined in Article 1675 of the Civil Code as an ‘agreement whereby two or
more persons as between themselves create, vary or extinguish obligations of a proprietary
nature’.
A. Contract is an agreement: - there must be meeting of mind (declaration) between the parties.
Sometimes, it may be difficult to determine whether or not there is an agreement in a particular
situation. This is particularly true when there is no meeting of minds between the two persons.
In such cases, the law presumes the existence of an agreement so long as there is meeting
between the expressions(Article 1680civ.code)
B. For a contract to exist there must be a minimum of two or more persons: - This must be
taken as a general principle, as there is an exceptional situation where a person could create a
valid contract by him-or herself. This is so when an agent concludes a contract on the one hand
representing him- or herself and on the other hand acting on behalf of the principal.(Article
2188 and 2248 of the civil code)
C. As between themselves: - parties to a contract could not create obligations on other persons.
The effect of contract is only between the parties. A contract produces effect only among the
contracting parties.
D. Create, vary or extinguish obligations:- the purpose of the agreement should be to create
new obligations, or vary or extinguish existing obligations. Hence, agreements to terminate an
obligation, to replace an existing obligation by a new obligation different on account of its
nature or object, and to remit another from existing obligations are contracts.
E. Proprietary nature: - the obligations that are created, varied, or modified should be of
proprietary nature. This excludes marriage, betrothal, and adoption from the domain of
contracts, not because such acts do not create obligations but because the obligations are of a
primarily non-patrimonial nature.
 All contracts are agreements but not all agreements are contracts.

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 For an agreement to constitute a contract, it must satisfy all of the requirements provided by
the law of contracts.
 Generally, the mere existence of agreement to be bound by defined obligation does not
necessary make Contract. It is necessary to identify whether the parties intended only moral
obligation or legal obligation, if parties agree to be bound morally only, the agreement is not a
contract since it cannot be enforced by state backing. For a contract to exist parties must agree
that any violation of the obligation would be punished by using state machinery. Therefore; the
phrase “…agrees to be bound thereby…” in Art. 1679 implies the parties’ intention to take
any controversies in relation to obligation to court thereby allowing the court to interfere in
their relation.
4.2. Classification of Contracts
There are different classifications of contracts based on different grounds. Some of the
classifications are:-
4.2.1. Consensual and Solemn Contracts
Are those for which no special form of validity Are those for which a special form of
validity is
is prescribed by law. Prescribed by law.
4.2.2. Bilateral and Unilateral Contracts
the respective parties assume only one of the parties has an obligation and the other has a
right.
both rights and obligations.
4.2.3. Principal and Subsidiary Contracts
are contracts that stand by themselves. Their existence is based on the existence of
principal
contracts.
4.3. Formation and Elements of Contract

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4.3.1. Formation of Contract

 Offer and Acceptance
It is very common in most national as well as international instruments of law to use the model of
offer and acceptance to address problems of formation of contracts. The Ethiopian law of contracts
is no exception. The model of offer and acceptance is a simplified representation of negotiation.
The statement ‘contract exists when an offer is accepted’ generally constitutes the core of the
model. The classic rules of offer and acceptance are ‘seductive rules that proceed on a simple
premise: two parties exchange proposals until an “offer” by one party is “accepted” by the other
forming a contract’. On this simple and general statement, no significant difference is observed
among legal systems. The devil is in the details. A sufficiently built model of offer and acceptance
addresses the following issues, among others: What kind of statement or action is considered an
offer? Can the offeror(The person making the offer) change his or her mind? How about the
offeree(the person to whom an offer is made)? Is silence considered acceptance? Legal systems of
the world manifest diversity in the answers they provide to the above questions.
 Forms of offer and acceptance (Article 1681 of the civil code)

 Offer and acceptance may be made in writing, orally, or by signs or conduct
 The offeror may stipulate a special form of acceptance
 In principle, an offer is binding on the offeror only if it is addressed to a specified person
(Art 1687- 1688).
 The reason why the offeror is expected to know the offeree and address his offer to
him may be to make sure that the offeror has intended to be bound by his offer and
to avoid the possibility of multiple acceptances for a single contract
The following facts does not constitute an offer
1. Declaration of intention … (1687)
2. Sending price lists or tariffs (Art 1687 (b)
3. Sale by Auction (Art.1688)
 Public Promise of Reward (Art 1689)
As stated above, a declaration of intention to be bound by specified obligation becomes an
offer only if it is addressed to an identified person. An exception to this principle is public
promise of reward.
 Withdrawal of offer and acceptance (1693)

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Change or withdrawal of an offer is not a fault when it is withdrawn or changed.
a. before the offeree knows the offer or

b. at the time the offeree know the offer or
c. at any time before acceptance for justified reason
 Effects of offer
 Binding…….. Article 1690 and 1691
 Extra-contractual liability….. 2055
 Silence (1682)
 In principle silence where an offer is made shall not amount to acceptance.
Exceptions:- In the following cases silence may amount to acceptance based on the fulfillment
of the preconditions
 Duty to accept(1683)
 Preexisting business relation(1684)
4.3.2. Elements of a valid contract (1678)

The following elements shall exist in order to have a valid contact.
1. Capacity
2. Consent
3. Object
4. Form, if any
1. Capacity:-
 It is the ability(capacity) to
enter(conclude) a certain contract
2. Consent (1679-1710)
 Is the willingness - to enter into the
contact
- on the content of the contact
- to be bound by the contract
2.1. Defect in consent

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 there are three kinds of defects that make

consent not sustainable . Article 1696
provides, ‘a contract may be invalidated
where a party gave his consent by mistake
or under deceit or duress’.
2.1.1. Mistake
Mistake is one of the defects of consent recognized under Ethiopian law. However, the Civil Code
does not define the term ‘mistake’. It only provides some positive and negative requirements,
which are useful to determine the kind of mistake that affects the validity of contracts.
One can invalidate or avoid his obligation on the basis of mistake if the following two conditions are
cumulatively fulfilled (Art 1997, 1998).
A/ mistake must be fundamental (Art 1998)
B/ the mistake must be decisive: in the sense that ‘the party who invokes his mistake shall
establish that he would not have entered into the contract, had he known the truth’ (Article
1697). This is a subjective requirement.
Good Faith of Mistaken Party (Art.1702) The party mistaken must be ready to be bound by the
contract if the other party agrees to be bound as per the intention of the mistaken party. He should not
use his mistake as a pretext to be out of the contract.
Reparation (Art.1703) a mistaken party is not without liability. He is accountable for any damage
that may be caused to the other party (Art 1703).
2.1.2. Fraud (Art 1704)

 is an intentional act of preparing false
information or changing or modifying the
content of the subject matter of the
contract in a manner that cannot be
noticeable by ordinary observation.
 A defrauded party can demand
invalidation of contract where:

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A/ the fraud led him to commit decisive error (Art 1704(1).
B/ the fraud was committed by the party to the contract or if the fraud is
committed by 3rd party, the contracting party shall know or should
have known the fraud and derived undue benefit.
2.1.3. Duress (Art.1706 1707)

 Duress is warning the party that unless he enters into a certain contract certain harm
will be done to him. One can raise duress as a cause of invalidation of contract if
the following conditions are cumulatively fulfilled.
a/ There is a threat or warning to cause harm.
b/ The harm is on the person himself, spouses or his ascendant or descendants.
C/The harm is on person, life, property, and honor.
d/ The party believes that the harm will happen if he does not consent to the
contract.
e/ The threat should be serious
f/ The harm is imminent
g/ The threat must impress a reasonable person.
3. Objects of Contracts (Art 1711-1718)
 Object of a contract is what parties have actually agreed to undertake. It is the
obligation of both parties to the contract
 Objects of Contracts could be:-
- To do
- Not to do
- To give
 Based on the object of the contract, contracts could be classified into
- Obligation of result :- when a certain result is required from the party and
failure to achieve it amounts to non performance of the contract
- Obligation of means:- when the party is required to do his best in order to
achieve the intended result
 In order to have a valid contract the object should be:-
- sufficiently defined (1714)
- possible(1715)

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- lawful and moral

4. Form of Contracts (Art 1719 – 1730)
 It is the way in which the content of the contract exists or appears to others.
4.1. Freedom of Form (Art 1719)
Most non-lawyers believe that for a contract to be legally binding, it must be made in writing and
signed at least by the parties to contract. But these people forget that they have entered into so
many contracts in their life without following written forms. However, the law gives freedom to
the parties to choose either written or form. So contract can be valid if consent, object and capacity
requirements are fulfilled.
4.2. Limitation on Freedom of Form Art.1719 (2, 3)
Freedom of form is not absolute. The freedom may be limited by law or the offeror. An offerer has
a freedom to determine the form of acceptance (Art 1681 (2). Similarly he can propose written
form. If the written form is accepted then parties agree to limit their freedom of form (Art.
1719(3). If the written form is rejected then the offer itself is rejected (Art 1694). Limitation of
freedom of form means denying the parties the option to make their contract orally.
 Effects of lack of the elements of a valid contract

 Invalidation of contract
4.3.3. Effects of contract (1731

 The two major principles of contract are freedom of contract and sanctity of contract.
Sanctity of contract indicates that parities are bound by their agreement. To make a serious
promise certainly involves a moral duty to keep it. There is Latin saying “pacta sunt
servanda’ which means that a person is bound by his words. There is also an equivalent
Ethiopian proverb, ‘failure to keep a word is worse than losing a descendant’. However,
contract is binding not only morally but also legally. Any agreement which parties did not
intend to create legally binding obligation is not a contact (Art 1679). Therefore, once a
contract fulfills the requirement of Art 1678, it becomes a law.
4.3.4. Effects of non performance of a valid contract (1771)
 Non performance of contract

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 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.
 Remedies of non-performance
 Specific performance
 Cancelation
 Damage
4.3.5. Extinction of obligation
Grounds for extinction of obligations (1806-1807)
 Performance of the contract
 Invalidation or cancellation
 Termination of contract
 Novation
 Set off
 Merger
 Period of limitation
4.2. The Law of Agency

4.2.1. The Need for Agency
From this logic a question should emanate that, so far as every person is capable of personally
exercising his or her own affairs in everyday life (which is the most preferable), why should there be a
need for representation or agency by another person (who is even presumed to have his own personal
engagements)?
The practical experience (legal or otherwise) in Ethiopia or elsewhere reveals that the following are
the major rationales that triggered the need for representation by another person:
a. It helps to overcome limitation (constraints) of time and place: imagine that you are a
prosperous business person running your business throughout the country and it is also in the nature of
the businesses you are running that they require your immediate attention or else the consequence will
be unbearable. On the other hand, nevertheless the modern commercial world is too complex, you are
just a human person that can only be at a place at a given time or do a thing at a time. In such

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situations, the basic way out to escape bankruptcy would be hiring an agent who act on your behalf
and help you to overcome such inherent limitation.
b. It helps to overcome lack of business knowledge or experience: it is an open secret that

knowledge and experience are not the only inputs to start a business. However, with them added to the
menu of a trader, the business venture can get more attractive. In this regard, hiring an agent (a
professional) enables one to perform certain tasks which s/he has neither the required knowledge nor
experience to perform by themselves.
c. It is a tool to overcome the pitfalls of incapacity: as mentioned above, for various reasons the law
has precluded some groups of persons from personally exercising their rights and duties. [8] However, it
is not fair that they should remain remedy-less for they are at least possessors of rights and duties as a
person. Here emerges the necessity of agency that these groups of persons can be capable of safely
exercising their rights and duties (take care of their interests) via means of representation by other
capable individuals.
d. The very nature of artificial persons: it is a clear fact that such persons are endowed with legal
personality artificially (as opposed to naturally) for the sake of convenience in control and other
rationalities. Otherwise, they are non-living things (associations of capital) that lack the necessary
mental capability to analyze the cost and benefit of their transaction. Hence, it is inherent in their very
nature that they need to be represented by physical persons who will act on their behalf and deal with
third parties. For instance, the founders, managers, directors, and secretaries, of all business
organizations are natural persons who are authorized to act on their behalf.
4.2.2. Sources of Agency
The representative capacity (power of attorney) to act on behalf of another person (artificial or natural)
may emanate from the following basic sources:
4.2.2.1 The Law
It is obvious from the reading of Art. 2179 of the civil code of Ethiopia that, the authority to act on
behalf of another person may derive from the law. This is the case where the law appoints an agent to
act on behalf of another person for reasons like the protection of the principal that may otherwise be at
stake if s/he acts by himself or herself. This become crucial in case the principal is declared incapable
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by law.[11] The other situation where the law appoints an agent is the case of agency of necessity or
unauthorized agency.[12] In this regard the very nature of artificial persons that necessarily dictate their
representation by natural persons to perform their day to day activities is typical.[13]
4.2.2.2. Contract
The basic source of agency is a contract. As different from the first, this is a relationship created
between the agent and the principal based on their genuine contractual engagement. The contract
should, among other things, define the scope of the representative capacity of the agent and its
duration.[14]
4.2.2.3 Decision of the Court
This is a situation where the authority to do an act or acts of a certain kind on behalf of another
emanates from the decision of a court. Such types of agents are known as curators.
4.3. Definition of Contract of Agency
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.
Agency is a contract. It is actually a special type of contract which expressly deals with the
relationship between the agent and the principal. For contracts are the cornerstones of the economy the
law has stipulated stringent requirements of validity. Hence, agency as a contract is expected to fulfill
the essential validity requirements for the existence of a valid contract mentioned under article 1678 of
the civil code in relation to capacity, consent, object and form.
The other point to discern here is, this contract refers only to the internal contract concluded as
between the agent and the principal and it basically governs their bilateral relationship. However, this
contract is the main input for the conclusion of another contract, called external contract, as between
the agent and another third party. It is understandable that the purpose of appointing an agent is to deal
with third parties via means of an intermediary.

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The other point of emphasis should be how many parties are there in a certain agency relationship?
Before one dares to answer this question, as mentioned above, s/he should be aware of the fact that
there are two types of contracts under a certain agency relationship. Having this in mind the following
are the parties to a certain agency relationship:
- The person represented- the principal.

- The representative- the agent.
- The person with whom the agent concludes the external contract- the third party.
Technically however, one should raise a question as to whether the agent is really a party to the
external contract concluded between the agent and the third party? And the answer is obvious, i.e., the
agent is not presumed to be a party to a certain agency relationship for s/he is a mere facilitator or
mediator as between the principal and the third party with whom the contract is concluded. Otherwise
stipulated, the agent does not assume any personal liability or benefit from the transaction as far as
s/he is representing the best interest of the principal or act on behalf, in the name of and the exclusive
interest of the principal.
Finally, we should understand that the acts which the agent undertakes to perform on behalf of the
principal are juridical acts- acts that are legally binding or otherwise constitute a fault and entail legal
liability. However, in the normal course of events (without personal fault on his part), the agent is not
liable to the performance of the contract contracted with the third party.
4.4. Scope of Representation
By scope of representation we are indirectly referring to the ‘object’ of the internal contract. The main
object of the internal contract is not different from defining the depth and nature of the power of
attorney vested on the agent. That means, the agent can act and bind the principal if and only if he
performed those powers vested in him by the contract of agency. Though the scope of agency shall be
expressly stipulated in the contract, which may not be always the case. In such cases, the scope shall
be determined or fixed according to the nature of the transaction to which it relates. The non-
fulfillment of this obligation would be against the interest of the principal for it will encourage
unauthorized agency.
4.5 Types of Agency

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According to Article 2202 of the civil code, there are two types of agency. These are General and
Special types of agency. Now let’s discuss them as follows:
a. General Agency
Is a situation where the agent is vested with the power to deal with all the affairs of the principal of a
particular type or in a particular place. Such agents are agents who are in general authorized to
represent the principal. One could say they are trustworthy persons to the principal in that the principal
authorizes them to entirely represent his interest. As a result, such agents are only authorized to
perform acts called ACTS OF MANAGEMENT on behalf of the principal.[23]
What kind of acts do you think are acts of management? The following are some examples of acts of
management:
 Acts done for the maintenance or preservation of property;

 Lease for terms not exceeding three years;
 The collection of debts that are matured or exigible;
 The discharge of debts;
 The investment of income; and
 The sale of crops or goods intended to be sold or perishable commodities
b. Special Agency
It is an agency whereby the agent is authorized to transact or deal with specific business affairs of the
principal. Such agents are mostly professional agents who expertise in cutting a deal for a specific
transaction. As a result most of the acts done by such agents are ACTS OF LIQUIDATION or
DISPOSAL. Such agents are prohibited from performing acts called acts of management. Besides,
their service as an agent is deemed to be of a short term (until disposal). The other thing one should be
aware is special agency shall confer on the agent authority only to conduct the affairs specified in the
contract and their natural consequence according to the nature and usage therein.
What kinds of acts, do you think are acts of disposal? An agent may not deal with the following acts
without a special power of agency:
 Alienation or mortgage of immovable property;

 The investment of capital
 Sign bill of exchange

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 Make donation
 Effect a settlement; and
 Defend an action on behalf of the principal.
Special Types of Agents
a. Commission Agents: is an agent (natural or juristic person), who independently, professionally and
for gain, undertakes to buy or to sell in his name, but on behalf of the principal, goods, movables or
any other thing of a similar nature (securities or other fungible things).
b. Forwarding Agents: are agents, which may be a carrier or a shipper who undertakes to act on his
own name but on behalf of another person, called the principal, into a contract for the forwarding of
goods.
c. Curator Agents: this are agents appointed by a court to represent and perform legally binding acts
on behalf of another person up on application to that effect by the relatives or the spouse of the
principal.
d. Commercial Agents (brokers): is an agent (a natural or artificial person) who independently,

professionally and for a gain, brings parties together for the purpose of their entering into an
agreement such as contract of sale, lease, insurance or carriage.
4.6. Duties and Liabilities of the Parties to the Contract of Agency
It is obvious that agency is a contract in which at least two parties bilaterally counter oblige
themselves to perform certain obligation towards each other. Hence, both the agent and the principal
in a certain agency relationship have their own respective duties in need to be discharged according to
their agreement in particular and the law in general. i.e., failure to discharge by either party, if any,
entails liability.
4.6.1 Duties and Liabilities of the Agent
The following are the main duties of the agent in a certain agency relationship:

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a. The duty of strict good faith: the agent shall act with strict good faith towards his principal. This
duty, among other things, requires the agent to disclose to his principal any circumstance which would
justify the revocation of the agency or the variation of its terms.
b. The duty to act in the exclusive interest of the principal: as mentioned earlier the agent is a mere
facilitator. S/he shall not claim to have any personal benefit in their engagement with a third party on
behalf of the principal. As a result the agent is required to act in the exclusive interest of the principal
and s/he may not, without the latter’s knowledge, derive any benefit from any transaction in to which
s/he enters in pursuance of his or her authority. Moreover, the agent may not make use to the
detriment of the principal of any information obtained by him in the performance of his duties as an
agent. The thing is, though it is normal that in due course of his activities the agent may face a conflict
of interest, however, s/he should refer it to the ultimate decision of the principal.
c. The duty of accounting: this is the other vital duty of the agent for mostly the activity of agents is
related to the finance of the principal. Hence, it is the duty of the agent to account to the principal for
all sums received by him and all profits accruing to him in due course of his employment,
notwithstanding that the sums he received were not owed to the principal or there being existed an
adverse claim to the monies collected. Besides, where the agent converted to his own use monies he
owed to the principal, he shall be liable for the payment of interest as from the day of such use,
without it being necessary that notice be given to him. Finally, this duty is deemed to be discharged
when the accounts of the agent are duly approved by the principal.
d. The duty of diligence: the office of the agent, though voluntary in nature, creates a fiduciary
relationship with the principal. Hence, the agent is expected to show the qualities of care, interest and
fitness in his activities. Two folds of diligence may be expected from the agent. Firstly, the agent shall
exercise the same diligence as a bonus pater familias in carrying out the agency as long as he is
entrusted therewith. This is called the objective standard of duty expected from a paid or professional
agent. Secondly, the agent is required to show the same degree of diligence or care as to his own or
that he show in due course of taking care of his own personal affairs. This is called the subjective
standard of care mostly expected from a gratuitous agent. Finally, the agent shall be liable for fraud
and for defaults in the performance of his duties.
e. The duty of ‘no delegation’ of authority: it is inherent in the nature of the obligation of the agent
that s/he should perform his activities personally. As a result, the rule is the agent shall carry out the
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agency in person unless he is authorized by the principal to appoint a substitute or a delegate.

However, such delegation may be impliedly accepted where from usage it appears a matter of
indifference whether the agent acts personally or by the deputy or where the interest of the principal so
requires or when unforeseen circumstances prevent the agent from carrying out the agency and he is
unable to inform the principal of these circumstances.
Liabilities of the Agent
On the other hand, in the following circumstances the agent shall be personally liable towards the third
party he is dealing with and/or the principal:
a. In case of undisclosed or partially disclosed principal: this is a situation where the agent acts on
his own behalf with third parties, notwithstanding the fact that such thirds parties know that he is an
agent of somebody else or not. Such an agent shall personally enjoy the rights or incurs the liabilities
deriving from the contracts he makes with third parties and his acts whatsoever may not bind the
principal.
b. In case the agent abuses his authority: this is against the essence of fixing the representative
capacity of the agent by the internal contract of agency concluded between the agent and the principal.
Accordingly, the agent shall be liable to contracts made by him in the name of the principal outside the
scope of his authority. However, it is up to the discretion of the principal to either opt to ratify or
repudiate such ultra vires acts of the agent.
c. In case the agent acts on a lapsed authority: sometimes the parties to the relationship may
determine the duration of the viability of their relationship by fixing a period of time to that effect.
That means the agent can legally represent the interest of the principal only and until the lapse or
expiry of such period. Otherwise, if the agent acts on behalf of the principal after the expiry of the
duration of his power of representation, s/he shall be personally liable.
d. In case of unauthorized agency: an agent who undertakes, with full knowledge of the acts, to do
or manage the affairs of another person without having been appointed as an agent shall be personally
liable towards the third party to the performance of the obligation he undertake to discharge. In a
nutshell, the acts of such an agent shall not bid the person whose affairs have been taken care of.

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However, the principal may exercise either of the following options towards such acts of the agent and
thereby bind himself or not for the deeds of the agent towards the third party:
Ratification: this is the situation where the principal approves or ratifies the acts of the agent,
nevertheless they are unauthorized. This happens, mostly, in cases where the interest of the principal
required that the management be undertaken as a necessity. Ratification has a legal effect of making
the unauthorized acts of the agent binding against the principal.
Repudiation: this is a situation where the principal rejects or disapproves the unauthorized acts of the
agent. This automatically entails the personal liability of the agent towards the third party. The more
the acts of the agent put the interest of the principal at stake, the more the principal tends to repudiate
them.
e. The agent shall be generally liable towards the principal for his failure to discharge his obligation
according to the contract of agency. i.e., failure to discharge all the duties of an agent mentioned above
makes the agent personally liable to the principal. For instance, bad faith in due course of discharging
the activities; in case of conflict of interest with the principal (in case the agents acts on behalf of
multiple principals other than the one or the agent contracts with himself on behalf of the principal);
failure to disclose important information; failure to account his activities or to submit report of the
management of his affairs up on demand or periodically; fraud and defaults in his work; the agent
shall be liable for the acts of the person whom he appointed or delegated without authorization as his
substitute as if they were his own; the agent is also liable for the care with which he selected his
substitute and gave him instructions, even with authorization of the principal to appoint a delegate.
4.5.3 The Duties and Liabilities of the Principal
Most of the duties of the principal towards the agent are related to the fulfillment of various types of
payments and security of resources of the agent who is acting on his behalf. On the other hand, the
basic duty of the principal towards the third party is performance of the obligation undertaken by the
agent towards the principal.
The following are the main duties of the principal towards the agent:
a. The duty of remuneration: remuneration is a commission paid to the agent for the activities
exercised by him. The problem is, due to either the voluntary nature of the office or the fiduciary
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nature of the relationship per se, the agent cannot claim remuneration as of right unless, such payment
is contractually agreed upon or the acts are performed on a professional level (all cases of special
agency) or it is customary to do so in the nature of the activities done by the agent. Moreover, though
such payment may be contractually agreed upon, it is subjected to the full discretion of courts to either
reduce or increase it, if it appears to be excessive or out of proportion to the services rendered by the
agent.
b. The duty of Reimbursement: it is the main duty of the principal to advance to the agent the sums
necessary or entirely the resources needed for the proper performance of his activities. Otherwise, if
the acts of the agent are left behind due to the non-resourcefulness of the principal the latter shall be
liable to the third party. This being the case however, if the agent happens to have covered such
outlays or expenses by himself, then it is the duty of the principal to reimburse to the agent such costs
incurred in the proper carrying out of the agency. The duty of reimbursement also includes the
payment of interests by the principal, which are due from the day when they were incurred.
c. The duty of Indemnification: this is also another type of payment, but for a different reason. This
duty obliges the principal to make good (compensate) any damage of the agent sustained in the course
of carrying out of the agency and which was not due to his own default. So the only Burdon of proof
required from the agent would be to prove that the damage was sustained while practicing his agency.
It is similar for all the above types of payments required from the principal that, first; they are not
subjected to off-set by the principal under the pretext that the transaction was unsuccessful and
second, until the payment of the sums due to him by reason of the agency, the agent shall have a lien
on the objects entrusted to him by the principal for the carrying out of the agency.
On the other hand, the following are the main liabilities of the principal
 During ratification;
 In case he informed a third party of the existence of the power of attorney but failed to inform
him of the partial or total revocation of such power;
 He failed to ask the agent to return the document evidencing the power of attorney and failed
to seek a judicial decision to the effect that such document was revoked

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 He caused in any other manner, in particular by his statements, behavior or failure to act, a
third party to believe that the person with whom he was dealing was authorized to act on behalf
of the principal.
 He is liable for the performance of the obligation to
 In case of plurality of principals, the principals shall be jointly liable to the agent for all the
consequences of the contract.
4.7. Grounds for the Termination of Agency Relationship
It is a universally known fact that everything that has a beginning has an end and agency relationship
is not an exception to it. The following are the main grounds of termination of a certain agency
relationship:
a. Revocation of agency by the principal: it is within the full discretion of the principal to restrict or
revoke the representative capacity (the authority he gave to the agent to make contract in his name) of
the agent at any time and to force the agent to restore to him the written instruments evidencing his
authority. However, unless otherwise where the date was agreed upon in the principal’s interest, the he
is at duty to indemnify the agent for any damage caused to him by the revocation where such
revocation occurs prior to the agreed date or under conditions detrimental to the agent. If the principals
are plural, the revocation of the agent may be affected only by the agreement of all the principals.
b. Renunciation by the agent: this is the action of the agent where he renounces or resigns his office
voluntarily. In this case however, the agent is at duty to give notice of his resignation to the principal.
This is due to a legal presumption that the agent is deemed to properly resign from his duties if and
only if he is replaced by another. In a similar fashion, if such renunciation is detrimental to the interest
of the principal, it is the duty of the agent to indemnify the principal unless the latter cannot continue
the performance of his obligation without himself suffering a considerable loss.
c. Death or incapacity of the agent: in the absence of an otherwise agreement a contract of agency
shall terminate by the death, declaration of absence, bankruptcy or incapacity of the agent. In such
case the principal has a right to information about the happening by the heirs or representatives of such
agent and the latter are at duty to take all the necessary steps to protect the interest of the principal.

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d. Death or incapacity of the principal: in a similar fashion the death, absence, bankruptcy or
incapacity of the agent terminates the agency relationship. In this case however, for the agent is still
alive he has a duty of serving as a care-taker until the legal representatives of the principal take over
the activity.
e. Expiry of the duration of agency: if the contract was made for a defined period of time, the
relationship terminates with the lapse of the period of time mentioned in the contract.
f. Achievement of Object: if both parties perform properly and achieved the very purpose of their
relationship there will be no reason for the continuation of their relationship.
4.3. LAW OF SALES

4.1. Definition
According to article 2266 of the civil code sale is a contract whereby one of the parties, called the
seller, undertakes to deliver a thing and to transfer its ownership to another party, the buyer, in
consideration of a price expressed in money which the buyer undertakes to pay him.
Try to discuss and respond to the following introductory questions regarding law of sales:
Whether sale is a mechanism of assignment of rights? Yes it is for consideration (price)

Who is the seller (vendor)?
Who is the buyer?
What are the obligations of the seller? Obligation to deliver the thing; obligation to transfer
ownership of the thing; obligation to provide warranty (against dispossession, defect and non-
conformity); other related obligations
What are the obligations of the buyer? Obligation to pay the price (consideration); obligation
to take delivery of the thing (is this really an obligation?) and other related obligations
Which obligations of the seller and the buyer are fundamental or determinative or
consequential obligations?
The duty of Delivery; transfer of ownership; payment of the price and taking delivery of the thing:
 What are the attributes of being a fundamental obligation? It affects the very existence of the
contract; the parties should at least agree up such obligations; non-performance of a

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fundamental obligation is a good cause for cancellation of sales contract; non-performance of a

fundamental obligation results in transfer of risk.
 Which obligations of the seller and the buyer are non-determinative or incidental obligations?
Their non-fulfillment does not affect the existence of the contract; if the parties do not agree on
them the law fills the gap to the parties; their non-performance does not entail cancellation or
transfer of risk?
 Whether sale is a special contract or not? Yes sale is a special type of contract which
exclusively deals with the sale of corporeal chattels (movables) up on the payment of a ‘price.
General provisions of contract law become applicable if and only if: the special provisions of
sales contract refer to such general provisions or do not expressly exclude general provisions
or the provisions of sales law remain silent to alleviate their own problems.
As far as the provisions of law of sales are considered one can identify three different degrees of
specialty or applicable laws:
1. General provisions of contract law

2. Law of contract of sales and
3. Contracts for the sale of cattle and other living animals.
4.2. Peculiar Features or characteristics of contract of sales
1. Sale is a contract. So, all the essential elements for the existence of a valid contract shall be
fulfilled (Capacity, Consent, Object and Form).
2. There should at least be two or more parties in certain sales contract. No one can validly or
safely sale or buy his own property to his self. Why not? E.g. 2188 of the Civil Code
3. Mere delivery of the thing without the transfer of its ownership does not amount to sale.
Hence, the seller should transfer unassailable right of ownership to the buyer. An ownership
right with no risk of dispossession by third party or defect or non-conformity shall be
transferred. To that effect the law imposes the duty of implied warranty on the seller against
risk of non-dispossession. This requirement distinguishes sale from Bailment or Custody
4. Consideration of contract of sales is always a price expressed in terms of ‘money’. The duty of
the buyer is always to pay the price expressed in terms of money. This identifies ‘sale
contracts’ from Barter in which things are offered for other things. Barter was an earlier stage
in the evolution of contract of sale or it is a contract allied to sale.
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5. Subject Matter of Sale is always a thing or goods. A thing may include the following:
- Movables (corporeal chattels): are things which have a material existence and can move
themselves or be moved by man without losing their individual character. (Art. 1127)
- Accessories of a thing: an accessory is a thing which is permanently destined for the use of another
thing. (Art. 1135 of C.C)
- Intrinsic Elements of an Immovable Property (Immovable by Destination): these are parts of an
immovable property that can be severed or separated and sold without damaging the main element. An
intrinsic element of a thing is anything which is materially united to a thing and which cannot be
detached there from without destroying or damaging such thing. (1132)
Examples: Trees, Crops and Quarries are intrinsic elements of the land until separated from it.
- Natural Forces of an Economic Value such as electricity, wind and geothermal energy, shall be
deemed to be corporeal chattels where they have been mastered by man and put to use.
- Securities to Bearers, claims and other incorporeal rights embodied in securities to bearer shall be
deemed to be corporeal chattels. (Lottery, shares, Bonds and stocks)
- Intellectual Property Rights such as copy right, patent, good will, trade mark, Trade Secrets
- Business
6. The following are non-subject matters of sale contracts:
 Immovable Property such as land and building

 Actionable Claims or a right of Legal Action against another are to be assigned to a 3rd person
 Money: Money is a price unit by which things get sold. It is a medium of exchange by which
things get sold. The possessor of money is presumed to be its owner. Currency may in no case
be claimed from a person who acquired it in good faith.
 All things that are not mastered by man and Put to use such as Celestial bodies are not subject
matters of sale contracts.
4.3 Performance of Sale Contracts
As we have discussed in chapter three, performance is the carrying out of the obligations assumed by
the parties according to the law and the contract. It is the duty of both the seller and the buyer to
perform or discharge their respective obligations. The obligations incorporated under law of sales are

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divided in to three. These are: Obligations of the Seller, Obligations of the Buyer and Common
Obligations of the Seller and the Buyer. Let us deal with them one by one as follows:
1. Obligation of the Seller:
The seller has the following three basic obligations:
a. Obligation to Deliver the Thing: Delivery is the handing over or conveyance of the thing and its
accessories in accordance with the law and contract. An accessory is a thing permanently destined for
the use of another thing.
Modes of Delivery: the following can be considered as the major modes of delivery:
 Actual Delivery: the physical handing over of the thing and its accessories directly to the
buyer or its representative. The most frequent and recommended mode of delivery.
 Constructive Delivery: this does not result in physical delivery of the thing to the buyer but
the seller will keep possession of the thing on behalf of the buyer. (Art. 1145 C. Code)
 Symbolic Delivery: the delivery of a symbol representing the thing amounts to the delivery of
a thing. E.g. Delivery of a key of a car or a Bill of Lading for things under voyage.
 Delivery via a Carrier: this is a delivery via the instrumentality of a carrier such as an airline
or a shipping line or railway line.
The obligation to deliver the thing includes the obligation to deliver the agreed thing, quantity and
quality of a thing and at the time and place of delivery agreed on the contract or fixed by law.
The principle of Time and Place of Delivery under general provisions of contract law is Mutatis
Mutandis applicable to law of sales. (Refer to articles 2276 and 2277 of the civil code).
b. Obligation to Transfer Ownership of the Thing
 Per the dictation of Article 1204 of the civil code, Ownership is the widest right that may be
had on a corporeal thing.
 It is only an owner of a thing that can exercise all the rights associated with the thing. These
include the right to use the thing or use the fruit of the thing or dispose or sell the thing.

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 Ownership can be transferred either by law (succession) or by contract (sale). Ownership

transfers up on transfer of possession and possession transfers up on delivery. However, mere
delivery does not transfer ownership.
 In order to transfer a good title of ownership, the seller must be the real owner of the thing
sold. There is a maxim which narrates “no one can transfer a greater right in property (title)
than he himself has” or “nemo dat quod non habet” the seller can only transfer a title on the
thing, to the buyer, as good as his own over the thing sold.
 The seller is at duty to take all the necessary steps for transferring to the buyer unassailable
rights of ownership over the thing to the buyer. Accordingly, the seller shall transfer an
encumbrance (disturbance/dispossession) free (total or partial) right of ownership to the buyer.
C. Obligation to Provide Warranty against Dispossession (title), Defect and Non-conformity
Warranty is a mechanism devised by law and imposed on the seller to transfer unassailable right of
ownership to the buyer. Warranty is a legal (implied) or contractual promise made by the seller
regarding the quality, character, title or suitability of the goods he has sold. There are two types of
Warranty. These are:
 Express Warranty: is created where the seller makes a statement of facts or a promise to the
buyer concerning the goods that become part of the bargain. However, mere opinion or
recommendation made by the seller may not amount to warranty.
 Implied Warranty: are responsibilities imposed by law on the seller for the good quality of
goods he sold. It does not matter whether or not the seller has made express promises as to the
quality of the goods.
Implied warranties are imposed on the seller in the interest of promoting higher standards in the
market place and due to the following points:
 The buyer commonly has little or no opportunity to examine the goods carefully before making
a decision to buy them. (information asymmetry)
 The complexity and technicality of some goods made it difficult to buyers to inspect or test the
things before purchasing them.
 The seller has every opportunity and position to inspect and know the thing.

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 The principle of “Caveat Venditor” or ‘Beware the Seller’ of the duties of implied warranty on
the thing.
Warranty against dispossession is an implied warranty that will be effective if and only if the buyer is
not aware of the threat of dispossession or defect in the thing.
If the buyer is aware of such defect or risk of dispossession by a third party and purchased the thing
s/he may not invoke the duty of the seller to provide warranty.
It is also the counter duty of the buyer to examine the thing when s/he gets the opportunity and notify
any defect to the seller in due time if the buyer wants to cause use of the implied warranty against the
seller.
Otherwise if the buyer knowingly buys a defective thing from the seller, the seller shall not be forced
to make good the warranty. This principle is called “Caveat Empitor” or “Beware the Buyer of the
duty to examine the thing and notify the seller”
2. Obligations of the Buyer
The two fundamental obligations of the buyer are the obligation to pay the price and take delivery of
the thing. Now let us deal with them one by one:
a. Obligation to Pay the Price
Price is the amount of money that the buyer undertakes to pay to the seller in consideration of a thing.
You need also to bear in mind that, the obligation to pay the price of the thing includes the obligation
to take every step necessary provided by law, custom, to arrange for or guaranty the payment of the
price. For example, it may be opening an account or deposit money in a bank or issue a check, or
surrender collateral if necessary. Also beware that each type of sale may pursue its own customary
requirement.
The other issue we need to ascertain is as to how do the parties determine price of the thing.
Accordingly, price of the thing can be determined by:
1. Agreement of the parties: this is the appropriate way to determine price

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2. Weight: in this case the parties should consider using the ‘net weight of the thing’ or the
weight of the thing minus the weight of the container.
3. Things at current price: the parties may also use the market price of the thing if the thing is
quoted in the market.
4. Price at which the seller normally sells in the normal circumstance of a market
5. Price determined by third party.
The provisions we have discussed in relation to the time and place of payment of the price are also
mutatis mutandis applicable to contract of sales.
b. Obligation to take delivery of the thing
The buyer is at duty, after delivery, to take such steps as may be necessary for completing the delivery
of the thing. This may include the obligation to go to the place of business of the seller or opening of
his store or be present at the time and place of delivery or to tell the seller to keep it on himself. The
other question we need to answer is whether the obligation to take delivery of the thing is really an
obligation or not? Considering the selfish nature of the human person it is presumed that once the
buyer has paid the price s/he will for sure take the delivery of the thing. It should however, be noted
that what makes it an obligation is the fact that failure to take delivery of the thing has a legal
consequence to be borne by the buyer. For example, if the buyer has failed to take delivery of the thing
at the agreed time and place of delivery risk to the thing, if any, transfers to him, the seller can
consider the failure of the buyer as a ground to claim the cancellation of the contract and also the
buyer is at duty to cover cost of preservation of the thing, if any, incurred by the seller for the care and
preservation of the thing under his custody.
3. Common Obligation of the Seller and the Buyer
These are common obligations in the sense that they are obligations imposed on both the seller and the
buyer but each party discharges his or her obligations independently. Accordingly, the following are
the common obligations of the seller and the buyer:
a. Obligation to Pay or Cover Expenses
First of all, understand that the parties incur no expenses at all if the sale is an instant type of sale.
However, one should also presume the fact that the expense of the parties would increase with the

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increase of the amount of money involved in their contract. Not let us deal with the expenses of the
buyer and the seller turn by turn:
I. Expenses of the Buyer: the buyer should cover the following expenses:
- The expenses of payment

- The expense of the contract
- Forwarding transport cost if the thing is to be taken to other place after the place of delivery
- Any expense arising after the place of delivery
ii. Expenses of the Seller: the seller, on his part, should cover the following expenses:
- The expenses of delivery of the thing. Such as expenses related to counting, measuring,
weighing of the thing to be delivered.
- Various expenses until place of delivery
- Expense of transport until place of delivery unless the transport arrangement of the parties is
‘Carriage Free’. If their agreement is carriage free then it will be the exclusive duty of the
seller to cover the cost of transport all the way to its final place of destination.
- The seller also covers additional expenses incurred by the buyer as a result of changing of
residence by the seller.
The other important issue we need to ascertain is who covers the price increase or decrease related to
the thing caused due to an increase or a decrease in customs duties after the time of the making of the
contract but before the time of payment of the price. It is an obvious fact that, the amount of customs
duty imposed on a thing at the time of import has an obvious implication on the fixing of the price of
the thing.
The rule is, where import customs duties or other duties charging the imported thing are to be paid by
the seller and such duties increase after the contract is made, such an increase or decrease shall be
added to the price.
b. Obligation to Preserve the Thing
Beware that preservation of the thing made by one party (seller/buyer) is always made on behalf and at
the expense of the other party to the contract. The other requirement to preserve a thing is possession

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of the thing that it is only the possessor of a thing that has the opportunity (duty) to preserve the thing.
In addition preservation of the thing is to be made if and only if the cost of preservation is not greater
than the actual value of the thing to be preserved. If cost of preservation is greater than the actual
value of the thing to be preserved, the party who is at duty to preserve the thing can sale the thing.
The SELLER shall preserve the thing (on behalf and at the expense of the buyer) in case the buyer is
late to take delivery of the thing and in case of constitutum Possesserium or the thing has continued
under the possession of the seller up on the agreement of the parties.
In due course of preservation of the thing, the seller may incur various expenses related to hiring a
guard, renting a ware house or maintenance of the thing and such expenses shall be refunded by the
buyer or otherwise the seller may refuse to deliver the thing to the buyer or exercises his ‘lien-right’
You should also be aware that the seller is liable to any damage to the thing due to lack of
preservation.
Finally, it should be understood that the seller and the buyer or the party who has the duty to preserve
the thing has the right to relieve itself from the duty of preserving the thing by consigning the thing to
a third party according to the provisions of the Civil Code (Arts. 1779 - 1783).
c. The obligation to shoulder unpreventable Risk related to the thing
 First of all, risk is the liability of a party that arise due to loss (stolen), deterioration (degrading
of quality) or damage (destroyed) of the thing.
 Risk follows Ownership or Possession- ‘ res peri demino ’. It is the person who is in the
possession of the thing that has the duty to preserve the thing.
 Risk shall be borne by the party who is in a better position to avoid or avert the risk.
 Risk shall also be shared by both parties if none of the parties are in a better position to
avert/avoid the risk.
 The main motive behind the rules on ‘transfer of risk’ is to cause the efficient allocation of risk
among the parties.
 The effect of shouldering a risk by a party is that the person who bears the risk is to cover the
value of the thing which has been damaged or lost.

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 Risk refers only to corporeal chattel or movable property where the duty to transfer ownership
is imposed on the seller. Or for instance, risk does not concern (relate to) money.
 Risk always begins from the possessor (seller) and up on the factors/grounds it transfers to the
buyer:
 After actual delivery (physical handing over) of the thing to the buyer.
 After the date of delivery (lapse of the date) and even if delivery is yet to be made due to the
default of the buyer. In such case the buyer not only loses the thing but also pays the price of
the thing.
 If the buyer fails to pay the price and payment has been a condition for delivery of the thing
 If fungible things has been identified/isolated and allocated by the seller and their placement is
notified to the buyer.
 If the things are under voyage, risk transfers when the thing is handed over to the carrier by the
seller.
However, remember that, risk is not transferred in a situation where at the time of the making of the
contract, the seller knew or should have known that the thing has perished or was damaged.
Insurance
Personal property rights are often fragile. Because personal property is moveable, it is often difficult to
locate goods that have gone missing. As well, personal property is subject to damage either innocently
or in a way that does not make it worthwhile to take action against the offending party under either tort
or contract law. Therefore, property owners are wise to purchase property insurance, whereby, in
exchange for a premium, an insurance company promises to pay money if property is lost, stolen,
damaged, or destroyed.
A person cannot buy property insurance unless he or she has an insurable interest, that is, “if a person
benefits from the existence of the property and would be worse off if it were damaged”.204 Property
insurance should, of course, be purchased for real property (i.e., buildings) as well as personal
property housed in those buildings and used elsewhere in the business.
All provinces have passed legislation to require certain mandatory terms in an insurance policy as well
as to suggest terms that may be included at the option of the parties. Although insurance policies are
based on the ordinary law of contracts, they have certain unique features:

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1. An offer is made by the proposed insured in his application. Acceptance is made by the insurer
upon issuing the policy, unless interim arrangements are agreed upon between the parties to
effect their earlier coverage.
2. A policy of insurance ends upon the expiry of its term unless renewed specifically or in
accordance with the intentions and past dealings of the parties. Thus, a mere renewal notice
does not extend insurance contracts.
3. For reasons of public policy, claims arising out of criminal or tortious acts (except claims
arising under negligence insurance) will generally not be enforced.
4. Ambiguous standard form provisions will be interpreted strictly against an insurer because it is
the insurer who drafted the clauses in question.
5. An insured owes a duty of utmost good faithto provide full, true, and complete disclosure of all
material facts affecting the risk, failing which the insurance contract is voidable by the insurer.
Virtually all insurance policies contain strict notice provisions by which the insured must
immediately notify the insurer in the event of a loss.
6. Where an insured is reimbursed for a claim by the insurance company, the insurer steps into
the shoes of the insured (subrogation) and has the right to sue any third party.
UNIT FIVE
LAW OF NEGOTIABLE INSTRUMENTS
5.1. Definition:
The definition of negotiable instruments varies from jurisdiction to jurisdiction.
For instance: According to the Negotiable Instruments Act, 1881 of India there are just three types
of negotiable instruments i.e., promissory note, bill of exchange and cheque, while the Ethiopian
commercial code defines negotiable instruments define negotiable instruments as follows:-
“A negotiable instrument is any document incorporating a right to an entitlement

in such manner that it be not possible to enforce or transfer the right separately
from the instrument.”
“The law recognizes in particular as negotiable instruments commercial instruments,

transferable securities, documents of title to goods.”

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When we compare the definitions of negotiable instruments by Indian law and Ethiopian law the
definition by Ethiopian law is much wider than the definition by Indian law. The Indian law
considered only bill of exchange, promissory note and cheque as negotiable instruments while the
Ethiopian law in addition to the three types of negotiable instruments, recognized by Indian law,
recognized transferable securities and documents of title to goods as negotiable instruments.
Let us discuss the definition of negotiable instruments as provided under article 715 of the Ethiopian
commercial code in detail.
According to the Ethiopian law negotiable instruments are:-
 Document: - this shows that negotiable instruments are written instruments.

 Incorporating a right:- the sources of the rights might vary based on the type of the
negotiable instruments.
 The rights cannot be enforced/transferred separately from the instrument.
 Commercial instruments, transferable securities, documents of title to goods.
5.2. NATURE AND PURPOSE OF COMMERCIAL INSTRUMENTS

5.1.1. NATURE
 NEGOTIABLE INSTRUMENTS ARE :-
 Property rights
 Represent one form of contracts
 Negotiability and transfer of right
5.1.2. PURPOSE
 The main purpose of negotiable instrument is facilitating commercial activities. But
the purpose of negotiable instruments may vary from one kind of negotiable
instrument to the other form of negotiable instruments.
 Promissory note:- means of borrowing money , buying goods and services
on credit
 Bill of exchanges :- collecting accounts financing, the movement of goods,
and transfer of funds
 Check: - vehicle for transfer of money.
5.3. Types of negotiable instruments

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Under Ethiopian law the following documents are identified as negotiable instruments:-
5.3.1. Commercial instruments
5.3.2. Transferable securities
5.3.3. Documents of title to goods
Negotiable instruments could also be classified:
 Based on time of payment:-

1. Instrument on demand/payable at sight: - it is subject to payment immediately upon being
presented to the payer or drawee.
2. Time instrument:- a negotiable instrument that is payable at a definite specified time
 Based on to whom payment is made
1. Order instrument:- A negotiable instrument that is payable “to the order of” an identified
person or “to” an identifiable person “or order.”
2. Bearer instrument:- A negotiable instrument payable “to bearer” or to “cash,” rather than
to an identifiable payee.
5.4. Commercial instruments
Under Ethiopian law commercial instruments are defined as follows under article 723/1/ of the
commercial code.
“Commercial instruments are negotiable instruments setting out an
entitlement consisting in the payment of a sum of money.”
Article 723/2/ of the commercial code provides as follows,
“Bills of exchange, promissory notes, cheques, travellers cheques and
warehouse goods deposit certificates shall be deemed to be commeroial
instruments under this Code.”
From the above mentioned provisions we can understand that commercial instruments are:-
 Are negotiable instruments
 Consists rights in the form of payment of money
 The following documents are commercial instruments
 Bill of exchange ,
 promissory notes,
 cheques,
 travelers cheques and

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 warehouse goods deposit certificates

5.5. Bill of exchanges
The Ethiopian law does not define bill of exchange.
Section 5 of the Negotiable Instruments Act, 1881 of India defines a bill of exchange as ‘an
instrument in writing containing an unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to or to the order of a certain person, or to
the bearer of the instrument’.
From the definition of the Indian law we can understand that bill of exchange is:-
 An instrument in writing
 Unconditional order to pay a certain sum of money
 Sign by the maker
 To a person or to the order of a certain person or to the bearer of the instrument.
Thought the Ethiopian law does not define bill of exchange article 735 of the commercial code of
Ethiopia enumerates the requirements to be fulfilled for drawing a valid bill of exchange. The
requirements are :-
 The term “bill of exchange”
 An unconditional order to pay a certain sum in money
 The name of the person who is to pay ( the drawee)
 The time of payment
 The place of payment
 The name of the person to whom or to whose order payment is made or an indication that
it shall be payable to bearer
 The date when and the place where the bill is issued.
 The signature of the person who issues the bill (drawer)
Parties to a Bill of Exchange
There are three parties involved in a bill of exchange. They are:-
i. The Drawer – The person who makes the order for making payment. In the above specimen,
Rajiv is the drawer.
ii. The Drawee – The person to whom the order to pay is made. He is generally a debtor of the
drawer.

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iii. The Payee – The person to whom the payment is to be made.
5.6. Pro
missory Note
Thought the Ethiopian law does not define promissory note article 823 of the commercial code
of Ethiopia enumerates the requirements to be fulfilled for drawing a valid promissory note. The
requirements are:-
 The term “promissory note”
 An unconditional promise to pay a sum certain in money
 The time of payment
 The place of payment
 The name of the person to whom or to whose order payment is to be made or a
statement that the note is payable to bearer
 The date when and the place where the note is issued
 The signature of the person who issues the instrument
Parties to promissory note
There are primarily two parties involved in a promissory note. They are.
The Maker or Drawer – the person who makes the note and promises to pay the amount stated
therein.
ii. The Payee – the person to whom the amount is payable.
In course of transfer of a promissory note by payee and others, the parties involved may be –
a. The Endorser – the person who endorses the note in favour of another person.
b. The Endorsee – the person in whose favor the note is negotiated by endorsement.
5.7. Che
que
The check is an unconditional order in writing, addressed by one person, the drawer, to a banker,
signed by the drawer, requiring the bank to pay, on demand, a sum certain in money to or to the order
of specified person or to bearer.
Comparison between bill of exchange and promissory note

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promissory note bill of exchange

It contains an unconditional promise. It contains an unconditional order.
There are two parties – the maker and the There are three parties – the drawer, the drawee
payee. and the payee.
It is made by the debtor. It is made by the creditor.
Acceptance is not required. Acceptance by the drawee is a must.
The liability of the maker/drawer is primary and The liability of the maker/drawer is secondary
absolute. and conditional upon non-payment by the
drawee.
Comparison between bill of exchange and chaque
chaque bill of exchange

It is drawn only on a banker. It can be drawn on anybody including a banker.
The amount is always payable on demand. The amount is payable on demand or after a
specified period.
It can be crossed to end its negotiability. It cannot be crossed.
Acceptance is not required. Acceptance is a must.
UNIT SIX
LAW OF BANKING TRANSACTION
Law of banking transaction is a branch of business law that deals with banking transactions.
6.1. Definition of Bank
Banking Business Proclamation No. 592/2008 of Ethiopia under article 2 sub article 1 defines bank as
follows:
“Bank means a company licensed by the National Bank to undertake
banking business or a bank owned by the Government”
From the above definition we can understand that a bank is:

1. A company :- under article 2 sub article 5 of proclamation number 592/2008 company is
defined as follows
 “Company means a share company as defined under the Commercial Code of Ethiopia, in
which the capital is wholly owned by Ethiopian nationals and organizations wholly owned by
Ethiopian nationals and registered under the laws of, and having its head office in, Ethiopia”
Therefore from the cumulative reading of article 2(1) and article 2(5) of the proclamation in order to
be established as a bank it is necessary be established by the form of a share company.

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2. Licensed by National bank :- article 3 sub article 1 of proclamation number 592/2008 reads
as follows
“It is prohibited to transact banking business in Ethiopia
without obtaining a banking business license from the National
Bank.”
3. To undertake a banking business:- article 2 sub article 2 of the proclamation defines banking
business as follows :-
“Banking business” means any business that consists of the following activities:
a) Receiving funds from the public through means that the National Bank has declared to be an
authorized manner of receiving funds;
b) Using the funds referred to under paragraph (a) of this sub-article, in whole or in part, for the
account and at the risk of the person undertaking banking business, for loans or investments in
a manner acceptable by the National Bank;
c) The buying and selling of gold and silver bullion and foreign exchange;
d) The transfer of funds to other local and foreign persons on behalf of the banks themselves or
their customers
e) The discounting and negotiation of promissory notes, drafts, bills of exchange and other
evidence of debt;
f) Any other activity recognized as customary banking business, which a bank engaged in the
activities described from paragraph (a) to (e) of this sub-article may be authorized to undertake
by the National Bank;
OR
4. A bank owned by a government
6.2. Major banking transactions
6.2.1. Deposit of Fund
A deposit of funds is a contract whereby a person agrees to deliver and transfer the
ownership of specified amount of money to a bank which agrees to repay them under the
conditions agreed up-on in the contract or on the demand of the depositor.

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The bank, as the owner of money deposited, has right to use it in respect of its
professional activities, i.e. the bank may lend it to its customers or invest it in areas
which are allowed by the national bank
However, where the deposit relates to “coins and other individual monetary tokens” and
where there has been an agreement that they shall be refunded to the depositor in kind,
the bank does not acquire the right of ownership and hence cannot dispose of such
items.
The contract of deposit of funds results in the opening of an account in the name of the
depositor by the bank in which the latter enters all transactions made with the depositor.
The type of account opened may either be:-
1. Current account
2. Saving account
1. Current account
 The depositor has the right to dispose of the deposit at sight or on
demand.
 This type of account also is a check operated account, i.e., the holder may
demand repayment of part or the whole of the deposit by drawing a check
on the bank payable to himself or a third party.
 As the repayment may be demanded at any time, this type of deposit
does not bear interest.
2. Saving account
 Is interest bearing and the right of the depositor to demand repayment
may be limited.
 The depositor may be prevented from withdrawing an amount which is
greater than a certain amount of money within a certain period or to give
notice of withdrawal.
 It may also be a time deposit or account in which the depositor can not
demand repayment or withdrawal before the lapse of the agreed period of
time.
6.2.2. Bank transfer

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This transaction represents one mode of transferring money from one account to another upon the
written and signed order of the transferor, and a means of performing money obligations. As a result,
it is always a secondary transaction by which the debtor performs his obligations by payment of
money.
Bank transfer as defined by Art 903(1) of the commercial code may be internal where the accounts of
the transfer and the transferee are opened within the same branch or external where the accounts of the
transfer and the transferee are opened at two different branches of the same bank Art 904 of the
commercial code.
This type of transfer, which requires the existence of two separate accounts, has to be distinguished
from international transfers and local transfers that do not require accounts by the transfer and the
transferee and hence are commonly used modes of transfer.
6.2.3. Hiring of safes
Banks take charge of their customers’ valuables like jewelry, negotiable securities, and documents of
title to properties, will, and deposit them, as they can be conveniently stored. Such deposits are special
in nature and thus do not fall under the general category of banks’ deposit.
The acceptance of valuables for safekeeping from their customers is one of the essential, though
subsidiary, services of banks. The right of a bank to render this service is recognized as a legitimate
banking transaction. Though deposit or storage companies can render the service as well, the fact that
the modern bank, for its own protection, is well equipped with safes and strong rooms it particularly
suitable for rendering this service.
Banks deposit their customer’s values in either of the following two ways:
1. By accepting the valuables for safe-custody or
2. By hiring out safe deposit boxes to their customers.
6.2.4. Discount
Discount is a contract whereby a bank agrees to pay to a holder of a commercial instrument or security
having a future date of payment an amount which is lesser than its actual value, against the surrender

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of the instrument and the undertaking to repay the value of the instrument by the holder where
payment is not made at the maturity of the instrument.
UNIT SEVEN-LABOUR LAW
7.1. CONTRACT OF EMPLOYMENT

A contract of employment shall be deemed formed where a natural person agrees directly or indirectly
to perform work for and under the authority of an employer for a definite or indefinite period or piece
of work in consideration for wage; art. 4÷1
A contract of employment shall be stipulated clearly and in such manner that the parties are left with
no uncertainty as to their respective right and obligation under the terms thereof; 4÷2
A contract of employment shall specify the type of employment and place of work, the rate of wages,
method of calculation thereof, manner and interval of payment and duration of the contract; 4÷3
A contract of employment shall not be concluded for the performance of unlawful or immoral acts;
4÷4
The contract of employment shall not lay down less favorable conditions forth employee than those
provided for by law, collective agreement or work rules. 4÷5
7.2. Formation and terms of the employment contract

1. A contract of employment shall be deemed formed where a natural person agrees directly or indirectly
to perform work for and under the authority of an employer for a definite or indefinite period or piece
of work in consideration for wage;
2. A contract of employment shall be stipulated clearly and in such manner that the parties are left with no
uncertainty as to their respective right and obligation under the terms thereof;
3. A contract of employment shall specify the type of employment and place of work, the rate of wages,
method of calculation thereof, manner and interval of payment and duration of the contract;
4. A contract of employment shall not be concluded for the performance of unlawful or immoral acts;
5. The contract of employment shall not lay down less favorable conditions forth employee than those
provided for by law, collective agreement or work rules.
Form

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Unless otherwise provided by law, a contract of employment shall not be subject to any special form.
Form
Unless otherwise provided by law, a contract of employment shall not be subject to any special form.
Contract of Employment made in Writing
Subject to the provisions of the relevant law, a written contract of employment shall specify thefollowing:
1. The name and address of the employer;
2. The name, age, addresses and work card number, if any, of the worker;
3. the agreement of the contracting parties made in accordance with Article 4 (3) of this Proclamation;
and
4. The signature of the contracting parties.
Contract of Employment not made in Writing
1/ Where a contract of employment is not made in writing, the employer shall, within 15 days from the
conclusion of the contract, give the worker a written and signed letter containing thee l e m e n t s specified
under Article 6 of this Proclamation.
2/ if the letter referred to in sub-article (1) of this Article is not wholly or partly objected by the worker within
15 days from the date of receipt, it shall be deemed a contract of employment concluded between the worker
and the employer.
Failure to comply with the requirements of the provisions of Article 6 or7ofthisProclamation shall not deprive
the worker of his right sunder this Proclamation.
7.3. Wages and working conditions to employee

Payment
The period of sick leave provided for in Article 85 shall be granted to a worker in the following
manner:
1. For the first one month, with payment of100% of his wages;
2. For the next two months, with payment of 50% of his wage;
3. For the next three months, without pay.
WORKING CONDITIONS OF WOMEN
1. Women shall not be discriminated against in all respects on the basis of their sex.

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2. With out prejudice to the generality of Sub-Article (1) of this Article, priority shall be given to
women if they get equal result with men when competing for employment, promotion or any
other benefit.
3. It is prohibited to assign women on works that may be listed by the Ministry to be particularly
dangerous to women or hazardous to their health.
4. No pregnant woman shall be assigned to night work between 10 p.m. and 6 a.m. or be assigned
on overtime work.
5. She shall be transferred to another place of work if her job is hazardous to her health or to the
fetus as ascertained by a physician
6. An employer shall not terminate the contract of employment of women during her pregnancy
and until four months after her confinement.
7. Notwithstanding the provisions of Sub-Article (6) of this Article, contract of employment may
be terminated for reasons stipulated under Article 27 (b-k) and Article 29 (3)but not related
pregnancy and delivery.
WORKING CONDITIONS OF YOUNG WORKERS

1/ For the purpose of this Proclamation, “young worker” means a natural person who has attained the
age of 15 but is below the age of 18years.
2/ It is prohibited to employ a person less than 15 years of age.
3/ It is prohibited to assign young workers on work, which on account of its nature or due to the
condition in which it is carried out endangers their lives or health.
4/ The Ministry may prescribe the list of activities prohibited for young workers which shall include in
particular:
a)Work in the transport of passengers and goods by road, railway, air and internal water ways, dock
sides and ware houses involving heavy weight lifting, pulling or pushing or any other related type of
labor;

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b) Work connected with electric power generation plants, transformers or transmission lines;
c) Under ground work such as mines and quarries;
d) Work in sewers and tunnel excavation.
5/ The provision of Sub-Article (4) of this Article shall not apply to work performed by young workers
in fulfillment of course requirements in vocational schools that are approvedand inspected by the
Competent Authority.
7.5. Employee duties-health, safety and welfare
Obligations of an Employer
An employer shall take the necessary measure to safe guard adequately the health and safety of
workers; it shall in particular:
1/ Comply with the occupational health and safety requirements provided for in this Proclamation.
2/ Take appropriate steps to ensure that workers are properly instructed and notified concerning the
hazards of their respective occupations; and assign safety officer; and establish an occupational health
and safety committee.
3/ Provide workers with protective equipment, clothing and other materials and instruct them of their
use.
4/ Register employment accidents and occupational diseases and report same to the labor inspection
service.
5/ Arrange, according to the nature of the work, at his own expense for the medical examination of
newly employed workers and for those workers engaged in hazardous work, as may be necessary with
the exception of HIV/AIDS Unless and otherwise the country has obligation of international treaty to
do so.
6/Ensure that the work place and premises of the undertaking do not pose threats to the health and
safety of workers.
7/Take appropriate precautions to ensure that all the processes of work in the undertaking shall not be
a source or cause of physical, chemical, biological, ergonomic and psychological hazards to the health
and safety of the workers.
8/implement the instructions given by the Competent Authority in accordance with this Proclamation;
7.6. Termination of employment contract

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TERMINATION OF CONTRACT OF EMPLOYMENT BY THE OPERATIONS OF THE

LAW OR BY AGREEMENT
Termination of contract of Employment by the Operations of the Law

A contract of employment shall terminate on the following grounds:
1. on the completion of the work where the contract of employment is for a specified work;
2. up on the death of the worker;
3. up on the retirement of the worker in accordance with the relevant law;
4. when the undertaking ceases operation permanently due to bankruptcy or for any other cause;
5. when the worker is unable to work due to partial or total permanent in capacity.
Termination of Contract of Employment by Agreement
1/ the parties may terminate their contract of employment by agreement; provided, however, that
waiver by the worker of any of his right under the law shall have no legal effect.
2/ termination of employment by agreement shall be effective and binding on the worker only where it
is made in writing.
TERMINATION OF CONTRACT OF EMPLOYEMENT BY THE EMPLOYER
1/A contract of employment may only be terminated where there are grounds attributed to the
worker’s conductor with objective circumstances a rising from his ability to do his work or the
organizational or operational requirements of the undertaking.
2/The following shall not be deemed to constitute legitimate grounds for the termination of a contract
of employment:
a) Member ship of the worker in a trade union or his participation in its lawful
activities;
b) Seeking or holding office as workers’ representative;

c) Submission of grievance by the worker against the employer or his
participation in judicial or other proceedings;

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d) The worker’s Nation, Sex, Religion, Political outlook, Marital status, Race,
Color, Family responsibility, Pregnancy, Disablement or Social status.

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Business law

1.2. Basic features of law

4. “Whoever intentionally spreads or transmits a communicable human disease is punishable with

the Federal Democratic Republic of Ethiopia].

3 BUSINESS LAW COMPILED BY TSEGAYE

Today the following are taken as important functions of law.

6 BUSINESS LAW COMPILED BY TSEGAYE

 Two kinds of persons Distinguished

Natural/Physical Moral/Legal/ Artifi

Humanbeings Entities that are conf

2.2. Attributes of personality

7 BUSINESS LAW COMPILED BY TSEGAYE

1. The interest of the child must justify the grant of personality

8 BUSINESS LAW COMPILED BY TSEGAYE

2. Residence and Domicile

9 BUSINESS LAW COMPILED BY TSEGAYE

c) Residence –versus- mere sojourn

Married couple, minors and judicially interdicted persons:

10 BUSINESS LAW COMPILED BY TSEGAYE

Public officials and traders

2.5.1.2- Categories of lessened capacity

General Notorious insanity and

Due to foreign nationality (Arts. 389-393)

2.6. - Purposes of lessened capacity

2.8. End of personality

12 BUSINESS LAW COMPILED BY TSEGAYE

3.1.2. Elements of business (Article 127-149 of the commercial code)

Business has both incorporeal and corporeal elements.

3.1.2.1. Incorporeal elements of Business (127)

(1) A business consists mainly of goodwill.

(2) A business may consist of other incorporeal elements such as:

(a) the trade-name; (135 and the following)

3.1.3. Operators of business

In order to be a business person the following preconditions should be fulfilled:-

2. Registration of Trade Name

14 BUSINESS LAW COMPILED BY TSEGAYE

3. Obtaining Business License

 A business could be operated by a single person or group of persons.

3.2. Types of Business Organization

16 BUSINESS LAW COMPILED BY TSEGAYE

 Amount of capital subscribed and paid up;

A co-operative business structure provides:

17 BUSINESS LAW COMPILED BY TSEGAYE

 Degree of freedom in decision making; and

A comparison between different business organizations that are recognized in Ethiopia

Base for Ordinary General Limited Joint venture Private Share

19 BUSINESS LAW COMPILED BY TSEGAYE

4.1. Definition of contract

20 BUSINESS LAW COMPILED BY TSEGAYE

4.2. Classification of Contracts

4.2.1. Consensual and Solemn Contracts

4.2.2. Bilateral and Unilateral Contracts

4.2.3. Principal and Subsidiary Contracts

4.3. Formation and Elements of Contract

21 BUSINESS LAW COMPILED BY TSEGAYE

4.3.1. Formation of Contract

 Forms of offer and acceptance (Article 1681 of the civil code)

22 BUSINESS LAW COMPILED BY TSEGAYE

Change or withdrawal of an offer is not a fault when it is withdrawn or changed.

a. before the offeree knows the offer or

4.3.2. Elements of a valid contract (1678)

23 BUSINESS LAW COMPILED BY TSEGAYE

 there are three kinds of defects that make

2.1.2. Fraud (Art 1704)