UNIT 1: THE DEFINTION AND MEANING OF LAW

Contents
1.0 Aims and Objectives
1.1 Introduction
1.2 Theories of Law
1.2.1 The Natural Law Theory
1.2.2 The Positivist Theory
1.2.3 The Theory of Legal Realism
1.3 Essential Features of Law
1.4 Business Law
1.5 Summary
1.6 Answers to Check Your Progress Questions
1.7 Model Examination Questions
1.8 Glossary
1.9 Selected Readings

1.0 AIMS AND OBJECTIVES

Upon completing this Unit, students should be able to:

- understand the different schools of thought as to what law is
- identify the essential features of law
- provide working definition of the terms law and business law.

1.1 INTRODUCTION

There is no universally accepted definition of law. There are different theories as to what law
is. The following discussion considers some of these theories. Having considered the
definition of law from the perspective of these different theories, the Unit provides a working
definition of the terms law and business law for the purpose of this course. In addition, it
would identify some of the essential features of law.

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1.2 THEORIES OF LAW

The term law has different meanings and there is no universally accepted definition of law.
There are different schools of thought as to what law is. The following discussion focuses on
the natural law theory, the positive law theory and the theory of legal realism.

1.2.1 The Natural Law Theory

According to this theory, law is a set of rules, which are in accordance with nature and reason.
This theory further submits that the supernatural being that created man has also created law
for him. The natural law theory defines law as a set of objective moral principles, which
emanate from the very nature of the universe. The naturalists argue ordinary human law is
only true law in so far as it conforms to these objective moral principles. Ordinary human law
may be discovered by reference to legal sources such as constitution, codes, etc. However,
natural law may be discovered through natural reason. Human law that is contrary to natural
law is not really law. It is rather abuse or violation of law. Law should conform with morality
and justice. Thus, any law which does not conform with morality and justice is not law.

1.2.2 The Positivist Theory

According to this school of thought, law is the command of the sovereign. Law has three
characteristic features:
i) It is a type of command;
ii) It is laid down by a political sovereign; and
iii) It is enforceable by sanction.
Commands are expression of desire given by superiors to inferiors. A sovereign is a political
superior whom the bulk of the society obeys habitually, and who does himself habitually obey
some other person or persons. This theory stresses that law is only law if it is effective, and
this can only be by being generally obeyed. Without general obedience, the lawmaker's laws
are as empty as a language no longer spoken or as money longer in use. For this school of
thought, law is something for the citizen to obey not as he pleases but whether he likes it or
not. This is done through sanctions. Sanctions then are a logical part of the concept of law.
They consist of the penalties inflicted on the orders of the sovereign for the violation of the
law.

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1.2.3. The Theory of Legal Realism
It has been said positivism regards law as the expression of the will of the state through the
medium of the legislature or the lawmaker. Like the positivists, these theorists also consider
law as the command of the sovereign, but their sovereign is not parliament or legislature
instead the judge. In other words, for the realists the sovereign is the court. Law is
administered and applied by the courts. Thus, the realists define law as the actual practice of
the courts or what the judge decides in court. Law is the decision of the courts and not the
legislation that is considered. They argue what the courts will do in fact cannot be deduced
from the rules of law in the textbooks since it the courts to say what those words mean. The
courts put life into the dead words of the law.

1.3 ESSENTIAL FEATURES OF LAW

Law has the following essential features.

i) Generality. Rules of law are general statements on possible human behavior. This
means that rules of law do not expressly deal with any particular person. These
general statements abstract from the interactions of men as social beings, certain
common patterns and deal with a supposed group of human beings described on
the basis of the general criteria thereby established. Rules of law are general even
when they address a single person.

ii) Law is made up of rules of social behavior. The law is therefore not interested with
every kind of human behavior. It is only the social behavior of man i.e. human
conduct that has materialized itself in some form of social interaction that is of
interest to the law. Law essentially regulates relations between human beings as
social beings. This means outside of social relations there can be no law.

iii) Normativity. Rules are not concerned with what happens but with what ought to be
done. They are imperative or prescriptive, rather than indicative or descriptive. In
other words, compliance with rules of law is not optional rather mandatory.
Members of the society are bound to behave in accordance with the law. The law
imposes sanctions to force the addressee to follow the prescribed norms.

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1.4 BUSINESS LAW

It has been stated that there is no universally accepted definition of law. This being the case it
becomes necessary to set out a working definition of the term law. For the purpose of this
course, the term law can be understood as a set of rules and regulations issued by the
government, enforceable by penalties, to control the conduct of its people.

Business law does not refer to a single branch of the law; rather, it describes those parts of the
law most closely connected with typical business activities. Largely, business law deals with
branches of private law, which might be considered the foundations of business: contracts,
sales, agency, and business organizations. The general objective of this course is to help
students understand the legal aspects of common business activities.

Check Your Progress Questions

1. The natural law theory defines law in reference to its content, the positivist theory of law
defines law in reference to formal criteria; and the theory of legal realism defines law in
reference to actual practice. Explain.
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2. Explain the characteristic features of law.
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3. Provide a working definition of business law.
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1.5 SUMMARY

It has been stated that there is no universally accepted definition of law. This being the case
the present Unit focused on some of the theories of law, which try to explain different
understandings of the term. The natural law theory defines law as a set of objective moral
principles, which emanate from the essential nature of the universe. It describes law as
dictates of reason and nature, which can be discovered by logical reasoning. It goes on to state
that man-made law is law so far as it is in conformity with justice and morality. If human law
does not conform to morality and justice it is not law; it is rather abuse of law. The positivist
theory, however, states whether man-made law is a command given by the sovereign and
enforceable by sanctions, then it is law. For the positivist theory of law whether the rule is just
or unjust does not matter as long as it fulfills the said requirements. According to the theory of
legal realism law is the actual practice of the courts. It is the expression of the will of the state
through the medium of not the legislature but through the judge.

The theories considered show the different understandings as to what law is. However, it has
been stated for the purpose of this course law would be understood as a set of rules and
regulations issued by the government, enforceable by penalties, to control the conduct of its
people.

1.6 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

1. The natural law theory defines law in reference to its content. This is due to the fact that
according to this school of thought law must be just and moral. In order to determine
whether it is just or moral, one has to look in to its content. Thus, natural law theory
defines law in reference to its content. According to the positive law theory, law is defined
in reference to its formal criteria. The law can be just or immoral. However, according to
this school, it would still be law if it is a command of the sovereign enforceable by
sanctions. On the other hand, the theory of legal realism defines in reference to actual
practice. According to this school law is what the courts do in practice as opposed to what
is written in legal documents.

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2. Law has three distinguishing characteristic marks. Firstly, it is normative i.e. compliance
to the law is not optional. One has to obey the law whether he likes it or not. Law is
enforced under the pain of sanctions. Secondly, law regulates social behavior. It is
interested in regulating the conduct of individuals that has materialized itself in social
interaction. Thirdly, law is general in that it does not expressly deal with a particular
person.
3. Business law refers to those parts of the law most closely connected with typical business
activities. By and large, business law deals with branches of private law, which might be
considered the foundations of business: contracts, sales, agency, and business
organizations.

1.7 MODEL EXAMINATION QUESTION

1. Explain the meaning of law in light of the different theories of law and describe the
essential features of law.
2. Provide a working definition of business law.

1.8 GLOSSARY

Natural Law- body of moral principles, which emanate from the essential nature of the
universe
Positive law- the command of the sovereign

1.9 SELECTED READINGS

1. David Reitzel et al, Contemporary Business Law, McGraw Hill Publishing Company, 1990

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UNIT 2: LAW OF PERSONS

Contents

2.0 Aims and Objectives

2.1 Introduction
2.2 The Meaning of Person
2.3 Commencement of Personality in Natural Persons
2.4 Commencement of Personality Before Birth
2.5 Commencement of Personality in Artificial Persons
2.6 Attributes of Legal Personality
2.7 Summary
2.8 Answers to Check Your Progress Questions
2.9 Model Examination Question
2.10 Glossary
2.11 Selected Readings

2.0 AIMS AND OBJECTIVES

Up on completing this Unit, you should to be able to:

- define the term person
- understand the commencement of personality in both natural and artificial persons
- describe the attributes of legal or artificial persons

2.1 INTRODUCTION

This Unit concerns itself with the law of persons. It is only persons who can be parties to a
legal relationship. For instance, only persons can be parties to a contract. In later Units we
will be considering such legal relationships as contracts, sale, agency, etc. As a result it
becomes necessary to commence the discussion by considering rules concerning persons who
can be parties to such relations. With this objective in view, the Unit proceeds with a
definition of the term persons. It also deals with rules concerning commencement of

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personality in natural and artificial persons and also the attributes or characteristic features of
the latter.

2.2 THE MEANING OF PERSON

In ordinary language the term person refers to individual human being. However, in the field
of law, the term person refers to all beings capable of having rights and duties. Thus, the term
person encompasses all beings bearing rights and duties.

There can be human beings who are not considered as persons or holders of rights and there
can be persons or holders of rights and duties who are not human beings. Such was the case
for slaves in Roman law, monks during the Middle Ages, or people sentenced to civil death.
Though slaves and monks are human beings, they did not enjoy rights and were not bound
with duties. On the other hand, personality may be granted for an unborn child who is not yet
a full human being.

There are two kinds of persons: physical (natural) persons and legal (artificial) persons.
Physical person refers to human being. Legal persons include beings, which are given rights
and duties by the operation of the law. They include associations, share companies, private
limited companies, etc. Legal persons are also referred to as artificial, juristic, fictitious,
juristic and moral persons.

2.3 COMMENCEMENT OF PERSONALITY IN NATURAL PERSONS

Article 1 of the Civil Code provides that "The human person is a subject of rights from its
birth to its death." Thus, in the case of human beings, personality commences or starts at the
moment of birth. In other words, a human being becomes capable of having rights and duties
from the moment of birth. Birth refers to the separation of the child from his mother's womb.
This can be naturally or by operation like the caesarian section.

2.4 COMMENCEMENT OF PERSONALITY BEFORE BIRTH

In some cases, birth is not by itself a satisfactory criterion for determining the granting of
physical personality. A typical example is a father dying while his wife is expecting a child.

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The property of the deceased father opens for succession before birth and, the conceived
child, not being a person, as he is not yet born, is not taken in to account in the succession of
the property of his father. If we were to apply the principle that personality commences at the
moment of birth the unborn child is not a person. Thus, a conceived child whose father dies
before its birth would not be entitled to the property of his father as he was not yet born when
the succession of his father opened. This would mean that the child would be penalized twice:
by the death of his father and by preventing him to inherit the property of his father.

This shows the application of the rule that personality commences at the moment of birth does
not protect the interest of the unborn or the conceived child. Thus, this makes it necessary to
provide an exception to the general rule laid under Article 1. This exception provided under
Article 2 reads: " A child merely conceived shall be considered born whenever his interest so
demands provided he is born alive and viable." Therefore, personality is granted to an unborn
or merely conceived child up on the fulfillment of three conditions:

i) the interest of the child justifies the grant of personality;

ii) the child is born alive; and
iii) the child must be born viable.

The interest of the child is said to justify the grant of personality only where the advantages
outweigh the duties or the inconveniences. For instance, it would be in the interest of a
conceived child to be an heir to succession of which the assets would, by far, exceed the
liabilities. He would be a subject of both rights and duties. However, being considered as a
person would be beneficial for him.

Secondly, the child must also be born alive. A child dead in his mother's womb will never be
considered as having had personality. This condition has no importance because of the
existence of the viability condition, which will be considered below.

Lastly, the child must be born viable. Viability means the aptitude to live. A child who lives
for 48 hours is presumed to be a person from the moment of his conception.1 The unborn
child is considered as a person from the moment of his conception onwards. The exact
moment of conception cannot yet be determined by medical evidence. As a result, the law

1
Article 4 (1), Civil Code

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provides the moment of conception is the 300th day before his birth. This presumption is
irrebutable i.e. one cannot produce proof to the contrary.2

On the other hand, if a child dies before 48 hours after his birth, there is a presumption that he
is not viable and the first presumption that he was a person from the 300th day before his birth
onwards, cannot operate.3 Unlike the first presumption, the second presumption is rebutable
and can be challenged.4 The second presumption can be challenged by proving that the death
is not the result of a deficiency in the child's constitution.

What are or are not deficiencies, in the child's constitution is to be decided on the basis of
medical evidence. There are obvious circumstances where the death does not result from a
constitutional deficiency, e.g. if the child bumped and dies of fracture of the skull, if he is
killed in a car accident, etc. Once it is proved the death is caused as a result of something
different from the child's constitutional deficiency, then the child is considered as having been
viable even if he died before 48 hours after his birth.

2.5 COMMENCEMENT OF PERSONALITY IN ARTIFICIAL PERSONS

It has been stated that, as a rule, a human being becomes a person or capable of having rights
and duties at the moment of birth. An artificial person such as associations, share companies,
private limited companies become persons or beings capable of having rights and duties only
where they fulfill two conditions: publicity in a newspaper empowered to publish legal
notices and registration in the commercial register.5 It is only up on publicity and registration
that an artificial or legal entity would have legal existence and attains personality.

2.6 ATTRIBUTES OF LEGAL PERSONALITY

The following are some the most important features of artificial persons.
i) They can sue and be sued during their own name. Since artificial persons have
their own legal existence distinct from their associates, they can sue and be sued in
their own name. Thus, if some one claims money from a share company, he has to

2
Article 3, Civil Code
3
Article 4(2), Civil Code
4
Article 4(3), Civil Code
5
Article 223, Commercial Code

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 bring action against the partnership and not the individual shareholders. Like wise
if the share company claims debt from others, it has be bring the action in its own
name.
ii) Artificial persons can conclude certain juridical acts like contracts in their own
name.
iii) They pay tax in their own name as opposed to the names of their associates or
members.
iv) They can administer their property in their own name.

Check Your Progress Questions

1. W/o Almaz and Ato Birru, a successful businessman, have been married for six months.
When W/o Almaz was six months pregnant, her husband died in an accident in October
2002. The parents of Ato Birru demanded the handing over of the property belonging to
their deceased son arguing they are entitled to it, as he was not survived by children. On
January 2, 2003,W/o Almaz gave birth to a healthy boy who also died in a car accident a
day after he was born. His mother survived the accident. Who will be entitled to the
property of Ato Birru? Why or Why not?
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2. Would there be a difference in your analysis of the situation if the cause of death was HIV
he inherited from his mother?
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2.7 SUMMARY

In ordinary language, the term person refers to a human being. In its legal sense, however, a
person is any being or entity capable of having of rights and duties. Thus, it includes human
beings as well as artificial persons such as associations, share companies, private limited
companies, etc. In the case of human beings, personality, as a rule, commences at the moment

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of birth. However, under some exceptional circumstances personality may start at the moment
of conception as well provided certain conditions are fulfilled. Personality comes to an end at
the moment of death. Artificial persons acquire personality when they are registered and
publicized in an official newspaper. Once they acquire personality, artificial persons have
their own distinct legal existence. Therefore, they can conclude contracts in tier own name,
they can sue and be sued in their own name, they can own administer property in tier own
name, etc.

2.8 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

1. It has been stated that personality, in the case of natural persons, commences, as a rule, at
the moment of birth. However, in some exceptional cases personality may be granted for
an unborn child. In this hypothetical situation, the father died after the child is born. By
virtue of the law of succession, the property of the deceased person devolves up on his
parents if he is not survived by children. The parents of Ato Birru are also demanding the
handing over of the property pursuant to this rule. However, as an exception to the rule the
law grants personality for a merely conceived child commencing from his moment of
conception i.e. the 300th day before birth provided certain conditions are met. These
conditions are:
ii) the interest of the unborn child justifies the grant of personality
iii) he is born alive
iv) and he is born viable.
It has been provided that Ato Birru was a successful businessman. This indicates that it is in
the interest of the unborn child to be granted personality. Thus, the first condition is fulfilled.
The child is born alive the second condition is fulfilled. The child died a day after he was
born in a car accident i.e. before living for 48 hours after his birth. However, this does not
prevent him from being viable. Despite the fact that the child did not live for 48 hours after
his birth, the child is considered viable. This is due to the fact that the cause of death is not the
child's constitutional deficiency. The child was born healthy as provided and he died as a
result of a car accident. Therefore, the third condition has been fulfilled. Thus, the child is a
person commencing from his moment of conception. In other words, the child is a person
commencing from the 300th day before his birth. Therefore, he acquires the property

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belonging to his father, Ato Birru. The child died after acquiring personality, thus it would be
his mother who would be entitled to the child's property by the rule of succession which
provides it would be the parents of the deceased who be entitled to his property if he was not
survived by children and not the parents of Ato Birru.

2. If the child's death was caused by HIV, which he got from his mother, then the cause of the
death of the child becomes constitutional deficiency. The child died before 48 hours due
to constitutional deficiency. Thus, he was not viable. Then he will not be granted
personality. The child died before he was granted personality. The properties of Ato Birru
didnot devolve up on him. Thus, it would be the parents of Ato Birru who would be
entitled to these properties and not W/o Almaz.

2.9 MODEL EXAMINATION QUESTIONS

1. State and explain the two presumptions pertaining to viability.

2. State the conditions that must be fulfilled to grant personality to an artificial person and
attributes or characteristic features of legal or artificial personality.

2.10 GLOSSARY

Person - a subject of rights and duties

Viability- aptitude to live

2.11 SELECTED REFERENCES

1. Vanderlinden, The Law of Physical Persons,

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UNIT 3: FORMATION OF CONTRACTS

Contents
3.0Aims and Objectives
3.1 Introduction
3.2 Contract Defined
3.3 Requirements for a Contract
3.4 Summary
3.5 Answers to Check Your Progress Questions
3.6 Model Examination Questions
3.7 Glossary
3.8 Selected Readings

3.0 AIMS AND OBJECTIVES

Up on completing this Unit, students should be able to:

- define contract
- distinguish contracts from other agreements
- list the requirements for a contract

3.1 INTRODUCTION

This Unit is an introductory Unit to the law of contracts. It provides a definition for the term
contract. It distinguishes contracts from agreements, which are not contracts. It briefly touches
up on the requirements for a contract, which will be discussed in detail in the later Units. It
also dwells on the notion of obligations. It explains the notion of obligation and provides
different types of obligations.

3.2 CONTRACT DEFINED

Law of contract refers to the body of rules governing the formation, performance and
enforcement of contracts. Article 1675 of the Civil Code defines the term contract as an
agreement whereby two or more persons as between themselves create, vary or extinguish

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obligations of proprietary nature. It is also defined as a legally enforceable promise. A
contract as opposed to other agreements is an agreement, which is actionable or legally
enforceable.

The elements of the definitions provided above about the term contract imply that:
i) Contract emanates from the mutual consent or meeting of minds between persons called
„parties‟
ii) Contract requires at least two or more persons or plurality of parties.
iii) Contract is of proprietary nature. Every contract is an agreement but not all agreements
are contracts. There are two reasons for this. Firstly, there are agreements such as
marriage and adoption. These are not contracts in the legal sense of the term. They are not
contracts because they do not create obligations of proprietary, patrimonial or pecuniary
nature. They are referred to as contracts of status. Secondly, contract differs from other
agreements in that contract is legally binding.6 However, not all agreements are binding.
For instance, simulated contracts are agreements but they are not contracts. A simulated
contract is a pretended contract. It is pretended in the sense that it is not intended to bind.
There is a hidden agreement not to be bound by the agreement. Simulated contracts are
not contracts exactly because they lack the intention to be legally bound (intentio
obligandi). They are not meant to be carried out.

Likewise, social contracts are agreements but they are not contracts because they are not
legally binding. For instance, a farmer calls up on his neighbor to help him with
harvesting his crop. The neighbor failed to show up at the appointed time and place
though he agreed to come. His failure to come as agreed would not entail legal liability
since such agreements lack the intention to be legally bound. In a different example, a
father may promise his son that he will give a reward if he passes a certain examination.
These are illustrations of agreements, which are not, however, contracts within the
meaning of Article 1675 of the Civil Code.

iv) Contract is concluded to create, vary or extinguish obligations of proprietary nature. The
term obligation refers to the legal bond by which a person is constrained towards another

6
Article 1679, Civil Code

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 to do or not to do something. It is a legal bond between two persons in virtue of which one
of them is bound, in favor of the other, to do a certain act or to abstain from doing an act
so as to create a right over a thing or to transfer the ownership of a thing.

Obligations are divided as obligations to do, obligations to give and obligations not to do.
Obligations to do and to give are referred to as positive obligations whereas obligations
not to do are said to be negative obligations. Negative obligations are obligations to
refrain from doing some thing. Doing the act prohibited is a breach of such obligations.
Example: obligation not to block free passage through the debtor's compound. Positive
obligations on the other hand require the debtor to perform something.

Obligations to do are further divided as obligations of result and obligations of diligence.7

In the case of obligations of result, a specified and determined result is aimed at and is
normally attainable. Examples of obligations of result include obligations undertaken by a
painter, a sculptor, a builder, a publisher, etc. On the other hand, in the case of obligations
of diligence, one does not guarantee to bring about a determined result. Instead, one
undertakes to do his best to procure it. A physician does not guarantee saving the patients
life. Likewise, an advocate does not does not guarantee to win the suit. In such cases, the
physicians and advocates assume the obligation to do their best to procure the specified
and determined result.

Obligations may arise either from a contract or law. Obligations arising from contracts are
assumed by free will. However, obligations arising from law such as the obligation to pay
tax are mandatory.

3.3 REQUIREMENTS FOR A CONTRACT

Article 1678 of the Civil Code provides requirements that should be fulfilled to conclude a
contract validly:
1) The parties involved must have capacity to contract.
2) There must be an agreement, i.e. consent reached at by a process of offer and
acceptance.

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Article 1712, Civil Code

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 3) The agreement must have sufficiently defined, lawful and possible object.

For certain types of contracts, there is another requirement: that the contract must be
concluded in special form such as writing. Each of these requirements will be discussed in
detail in the Units to follow.

Check Your Progress Questions

1. Every contract is an agreement but not all agreements are contracts. Explain.
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2. What is the meaning of obligation?

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3.4 SUMMARY

The Civil Code defines the term contract as an agreement whereby two more persons as
between themselves create, vary or extinguish obligations of proprietary nature. This
definition implies that contract exists where there is agreement on all the terms of the
contract. This agreement is given with the intention to be legally bound (intentio obligandi).
Contract may be concluded between two or more persons. The contract is concluded with a
view to create, vary or extinguish obligations. The obligations must be of proprietary nature.
If the agreement does not create obligations of patrimonial nature, it is not said to be a
contract as it is the case in marriage and adoption.

3.5 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

1. Every contract is an agreement but not all agreements are contracts. There are two reasons
that justify this assertion. Firstly, there are agreements such as marriage and adoption.
These are not contracts in the legal sense of the term. They are not contracts because they
do not create obligations of proprietary, patrimonial or pecuniary nature. They are

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 referred to as contracts of status. Secondly, contract differs from other agreements in that
contract is a legally binding agreement or a legally enforceable promise. However, not all
agreements are binding or legally enforceable. For instance, simulated contracts are
agreements but they are not contracts. A simulated contract is a pretended contract. It is
pretended in the sense that it is not intended to bind. There is a hidden agreement not to be
bound by the agreement. Simulated contracts are not contracts exactly because they lack
the intention to be legally bound (intentio obligandi). They are not meant to be carried out.

2. The term obligation refers to the legal bond by which a person is constrained towards
another to do or not to do something. It is a legal bond between two persons in virtue of
which one of them is bound, in favor of the other, to do a certain act or to abstain from
doing an act so as to create a right over a thing or to transfer the ownership of a thing.

3.6 MODEL EXAMINATION QUESTIONS

1. What is the meaning of contract?

2. What makes contracts of status, social contracts and simulated contracts different from
contracts within the meaning of Article 1675 of the Civil Code?

3.7 GLOSSARY

Contract- a legally enforceable promise

intentio obligandi- the intention to be legally bound

3.8 SELECTED READINGS

George K., Formation and Effects of Contracts

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UNIT 4: CAPACITY

Content
4.0 Aims and Objectives
4.1 Introduction
4.2 Capacity
4.3 Contractual Capacity of Minors
4.3.1 Period of Minority
4.4 Contractual Capacity of Insane and Infirm Persons
4.4.1 Notorious and Non-notorious Insanity
4.4.2 Effect of Insanity on Contracts
4.5 Interdiction
4.6 Summary
4.7 Model Examination Questions
4.8 Glossary
4.9 Selected References

4.0 AIMS AND OBJECTIVES

Up on completing this unit, you should be able to:

- understand the requirement of capacity
- identify persons incapable to perform juridical acts
- grasp the protection the law provides for incapable persons

4.1 INTRODUCTION

This Unit discusses capacity as a requirement in the formation of a contract. It elaborates on

what is meant by capacity and deals with the rules concerning this requirement. It also
concerns itself with the persons incapable to enter in to contracts in brief. Parties to the
contract should be capable to conclude a contract. If the parties are not capable, the contract
may be invalidated or avoided at the request of the party who is incapable to perform the
contract.

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4.2 CAPACITY

Capacity refers to the ability to perform juridical acts. Juridical acts include all acts of civil
life such as concluding contracts, marriage, administering one‟s property, making a will, etc.
A person said to have contractual capacity if he or she is mentally able to understand the
nature and consequences of making a contract, physically able to manifest consent to a
bargain, and is permitted by law to make the contract in question. A person who lacks these
abilities is under incapacity. Most people are presumed to have total contractual capacity. 8
Thus they are capable of contracting on the full range of topics permitted by law to be the
subject of contracts. This means the law presumes both parties have full contractual capacity
when the contract was made. To rebut or counter this presumption, one of the parties must
allege that at the time of contracting he or she lacked contractual capacity.

A few don‟t have capacity to contract. Thus, under the Civil Code, capacity is the rule,
incapacity the exception.9 Incapacity may arise from age, mental illness or court decision. The
following discussion deals first with the contractual capacity of minors, and then with
contractual capacity of insane and infirm persons and judicially and legally interdicted
persons.

4.3 CONTRACTUAL CAPACITY OF MINORS

Under the Revised Family Code and the Civil Code, persons under the age of 18 are called
„minors‟.10 Both the Revised Family Code and the Civil Code deal with contractual capacity
of minors. However, the Revised Family Code is currently applicable in Addis Ababa and
Dire Dawa. The Civil Code is still applicable in states, which have not adopted their own laws
in connection with these matters. Thus, the discussion looks in to the rules concerning
contractual capacity of minors as provided in the Revised Family Code as well as the Civil
Code.

8
Article 192, Civil Code
9
Article 196, Civil Code
10
Article 215 of the Revised Family Code and Article 198 of the Civil Code

20
Contracts concluded by minors in excess of their power shall be of no effect and can be
invalidated by the minors or their legal representatives or heirs.11 This is due to the fact that
minors need protection from their immaturity and inexperience. They are likely to be the
victims of unscrupulous adults. In addition, young minors may not understand the nature and
consequences of their contracts. As a result, the law gives minors the one-sided right to
demand the invalidation or the avoidance of contracts performed in excess of their power
even if there is no bad faith on the part of the adult contracting party.

Even though minors are generally incapable to perform juridical acts, there are some juridical
acts, which minors may perform. For example, a minor may conclude acts of every day life.12
An act is deemed to be an act of every day life provided that the obligation or expense this act
entails does not exceed birr 300 birr and that the minor has authorization from his tutor to
perform it.13 This, the definition applies in states where the Revised Family Code applies.
However, the Civil Code considers an act as an act of every day life where the expense, which
it entails does not exceed 100 birr. In the Civil Code too, the minor may perform such acts if
he has authorization from his tutor.14 A tutor is a person who administers the pecuniary or
proprietary interest of the minor until the expiry of the period he remains a minor. The parents
are jointly the legal tutors of the minor. For example, Solomon, a 16-year-old boy, may
purchase a pair of shoes at a price of 300 birr from the shopkeeper provided that his tutor has
authorized him to do so.

Apart from acts of every day life, as of age of 1515 and as of age of 1416 the minor has the
power to receive the income from his work. In addition, the minor can make will by himself
as of 16.17

11
Article 299 of the Revised Family Code, Article 313 of the Civil Code and Article 1808(1), Civil Code
12
Article 305, Civil Code and Article 293, Revised Family Code
13
Article 292 cum Article 293 of the Revised Family Code
14
Article 305 and 306, Civil Code
15
Article 272, Civil Code
16
Article 263, Revised Family Code
17
Article 295, Revised Family Code

21
4.3.1 Period of Minority
As a rule, minority ends where the minor attains the age of majority and if he or she is
emancipated.18 Obviously, minority comes to an end when one attains the age of majority i.e.
18 years of age.

Emancipation refers to freeing a minor from legal restraints. A minor may be emancipated
from minority for two reasons. Firstly, if the minor gets married before the age of 18, he is
said to be emancipated. The marriageable age under the Revised Family Code is 18, which is
also the age of majority. However, in very exceptional cases a person may get married before
attaining the age of 18. This happens only where the Minister of Justice grants dispensation of
two years for good cause.19 If for instance, the girl gets pregnant before the age of 18. Once
the minor gets married before the age of 18 under this very exceptional circumstance, he or
she is emancipated or no longer considered a minor.

The other method of being freed from minority before the age of majority is judicial
emancipation. The court investigates the facts, and if it finds that removal of the disabilities is
in the best interests of the minor and the minor is capable of tending to his or her own affairs
or business, the court would give order of emancipation. The effect of judicial emancipation is
to enable the minor to enter in to contracts as if the minor were an adult.

As stated above, all contracts concluded by the minor in excess of his power shall be of no
effect. As a result, a minor has the right to demand the invalidation or avoidance of contracts
concluded in excess of his power. If the other party sues the minor or brings legal action
against him to perform the contract, the minor may demand the invalidation of the contract by
pleading minority as a defense. The law states that a minor who has misrepresented his or her
age is not thereby prevented from avoiding the contract. For example, Samson is a 17 year old
boy. He bought a desktop computer at the price of 5, 000 birr from Tithina. When Tithina
asked Samson how old he is, he misrepresented his age by saying 19. Tithina concluded the
contract believing this to be true. Later, Samson demanded the invalidation of the contract.
Tithina cannot prevent the invalidation of the contract, by arguing that Samson lied about his

18
Article 310, Revised Family Code
19
Article 7, Revised Family Code

22
age on the making of the contract. Even if Tithina can prove that Samson lied about his age on
the making of the contract, still this does not prevent Samson from avoiding the contract.

However, the law requires that the minor bring action for the invalidation of the contract
within two years from the ground of invalidation having disappeared. In other words, he has
to bring action for the invalidation of the contract within two years after attaining the age of
18. Otherwise, the action would be barred by lapse of period of limitation. This means the
court would dismiss the case without considering its merits.

4.4 CONTRACTUAL CAPACITY OF INSANE PERSONS

An insane person is one who cannot understand the importance of his actions because of
insufficient development of mind or because of mental disease.20 Feeble-minded, drunkards or
habitually intoxicated and prodigals may also be assimilated to insane persons.21 Deaf-mute,
blind, and other persons who cannot take care of themselves or administer their property as a
result of permanent disability may also demand the protection provided for those who are
insane.22

4.4.1 Notorious and Non-notorious Insanity

Insanity of an individual may be notorious or non-notorious. A person is said to be
notoriously insane under two distinct conditions.
i) where by reason of his mental condition, he is an inmate of a hospital or of an
institution for insane persons or of nursing home as long as he remains an
inmate23; or

ii) in communes of less than 2000 inhabitants, the individual is said to be

notoriously insane where his family or those with whom he lives keep over him a
watch required by his mental condition and where his liberty of moving about is
restricted for this reason by them.24

20
Article 339(1), Civil Code
21
Article 339(2), Civil Code
22
Article 340, Civil Code
23
Article 341, Civil Code
24
Article 342, Civil Code

23
In circumstances where the conditions stated under the two situations are not fulfilled, the
insanity of the person is non-notorious.

4.4.2 Effect of Insanity on Contracts

The outcome or effect of insanity on the contract concluded between the insane person and
the other contracting party depends on whether, at the time of contracting, the insanity
notorious or non-notorious. If the insanity of the party was notorious at the time the contract
was concluded, then the contract can be invalidated by the insane person gaining his mental
health, by his representatives or by his heirs.25

However, if the insanity was not notorious, the insane person may avoid the contract only if
he proves that at the time of the contract he cannot give consent free from defects.26 In other
words, he must prove that at the time he concluded the contract, his consent is not truly, freely
and consciously given.

4.5 INTERDICTION

Interdiction refers to the withdrawal of a person's capacity to perform juridical acts by court
decision. Interdiction can be judicial or legal. Judicial interdiction may be declared in respect
to an insane person where his health and interest so require.27 Interdiction may also be given
in the interest of the presumptive heirs of the insane person.28 Interdiction may also be
declared in respect of deaf-mute, blind, permanently disabled persons who cannot take care of
themselves and cannot administer their own property.29

Once a person has been judicially interdicted, the law provides the protection due for a
minor.30 For instance, the court appoints a guardian and a tutor who would handle his affairs.
Therefore, contracts concluded by the judicially interdicted person in excess of his power may
be invalidated by himself gaining his mental health or by his representatives.

25
Article 343, Civil Code
26
Article 347(2), Civil Code
27
Article 351, Civil Code
28
Article 351(2), Civil Code
29
Article 351(3), Civil Code
30
Article 358, Civil Code

24
Legal interdiction, on the other hand, is declared in respect of a person who is convicted of
criminal offence. The court may withdraw the capacity of the convict to administer his
property. The Court would appoint a tutor for the interdicted person. Juridical acts performed
by the legally interdicted person in excess of his power shall be void i.e. non-existent from the
beginning with no legal effects.

Check Your Progress Questions

1. Meseret and Wolde are newly married couple. Meseret is a 17-year-old girl. The Minister
of Justice granted permission for her to get married before she becomes 18, as she was
pregnant. Shortly, after the marriage, she sold her Carina E car, her personal property, for
Zenebe at the price of 100,000 birr. The contract was concluded in compliance with all the
formal requirements of the law. A year later, Mesert brought action against Zenebe
demanding the invalidation of the contract on the ground that at the time the contract was
concluded she was only 17. Do you think the contract would be invalidated? Why or why
not?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
………………………………………………………………………………………………….
2. Kebede, a 17-year-old boy, bought a bike from Admasu at the price of 1500 birr. On
the making of the contract, Kebede stated that he is over 18. After a while, Kebede's
tutor, Alemu, brought action for the invalidation of the contract on the ground of
incapacity. Admasu argued the contract couldn't be invalidated since at the time the
contract was concluded Kebede stated he is over 18 years and he concluded the
contract with the belief that Kebede is over 18. Do you think the contract would be
invalidated? Why or Why not?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
………………………………………………………………………………………………….

25
4.6 SUMMARY

Capacity, one of the requirements for a contract, refers to the ability to perform juridical acts
such as contracts. As a rule, every person is presumed to be capable. By way of exception, the
law declares certain groups of persons to be incapable. These include minors, insane persons
and interdicted persons. The law declares such persons incapable so as to protect their
interest. Thus, by and large, the contracts they conclude with other persons may be
invalidated at their request.

4.7 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

1. The contract will not be invalidated. Though the contract was concluded when she was at
the age of 17, she is no more incapable as she has already been emancipated from her
minority by reason of marriage. Under the Revised Family Code, the marriageable age is
18 for girls. She were able to get married sooner she was granted permission by the
Minster of Justice o account of her marriage.
2. In spite of the fact that Kebede stated falsely that he is over 18, he can still exercise his
right to demand the invalidation of the contract. Thus, Admasu's argument that the
contract cannot be invalidated is not acceptable before the law.

4.8 MODEL EXAMINATION QUESTIONS

1. Explain the meaning of emancipation.

2. What is the meaning of acts of everyday life?

4.9 GLOSSARY

Capacity- the ability to perform juridical acts

Juridical Acts- acts of civil life
Interdiction- withdrawal of one's capacity to perform juridical acts

4.10 SELECTED READINGS

George K., Formation and Effects of Contracts

26
UNIT 5: CONSENT: OFFER AND ACCEPTANCE

Content
5.0 Aims and Objectives
5.1 Introduction
5.2 Consent
5.3 Offer
5.3.1 Declaration of Intention
5.3.2 Sale by Auction
5.3.3 Public Promise of a Reward
5.4 Acceptance
5.5 Form of Offer and Acceptance
5.5.1 Duty to Accept
5.5.2 Pre-existing Business Relations
5.6 Duration of the Offer: Offer With Time Limit
5.7 Offer without Time Limit
5.8 Contract Between Absent Parties
5.9 Summary
5.10 Answers to Check Your Progress Questions
5.11 Model Examination Questions
5.12 Glossary
5.13 Selected Readings

5.0 AIMS AND OBJECTIVES

Up on completing this Unit, students should be able to:

- understand how consent is expressed
- distinguish offers from other proposals such as declaration of intention
- understand how offers come to an end

27
5.1 INTRODUCTION

For a contract to exist, there must be a declaration of consent. Consent, as will be considered
in this Unit, is expressed through offer and acceptance. If the offree accepts the offer, a
contract arises and both parties are bound by its terms. The process of reaching contractual
agreement varies significantly. Parties may negotiate face to face. Parties may also negotiate
over distance. This unit examines the process of offer and acceptance.

5.2 CONSENT

Consent refers to the willingness to enter in to a legally binding agreement. Consent or

contractual agreement is reached by a process of offer and acceptance. An offer is a proposal
to create a legally binding obligation. An „offeror‟ makes an offer to another person the
„offree‟. The offree may accept the offer as presented and thus make a contract. Or he or she
may reject the offer and thus terminate it. If the offree accepts the offer a contract arises and
both parties are bound by its terms.

5.3 OFFER

An offer is a proposal to enter in to a legally binding obligation. To begin with, offers must be
definite and certain. If Ato Abebe proposed to sell his car for Ato Belete „more or less‟ or
„about‟ 20,000 birr, it is not a definite offer.

An offer must be communicated to the beneficiary.31 Unless the offree, the person to whom
the offer is made, is aware of the offer he is unable to accept it. A person will not be
considered as making an offer where he or she declares his intention to give, to do or not to do
something without communicating this intention to the beneficiary of the declaration. This
means an offer necessarily indicates who is to be the offree. Ato Abebe‟s statement, „I will
sell my ox for 1000 birr‟ is not an offer. Ato Abebe‟s statement to Ato Belete, „I will sell my
ox to you for 1000 birr‟ is an offer because in addition to indicating the exchange he wants he
also identifies the offeree.

31
Article 1687(a), Civil Code

28
If Ato Abebe declares at a public meeting that he will give 100,000 birr for a charity, the
charity cannot accept such a declaration as long as it is not directly communicated to it. Ato
Abebe sends to Ato Belete an offer, which does not reach the latter; it is lost in the post. Ato
Belete accepts, producing, instead of the offer, witnesses to the effect that it was sent. Ato
Belete has no claim, as it is not Ato Abebe that informed him of the offer. There is no true
offer; Ato Abebe sent it, but did not make it known to Ato Belete. It is others who made it
known to Ato Belete.

5.3.1 Declaration of Intention

Likewise, a declaration of intention is not an offer. There is no contractual offer where a
person sends to another posts in a public place tariffs, price lists, catalogues, or displays goods
for sale to the public.32 Circulars, catalogues, and newspaper advertisements are not offers.
They are instead invitations to submit offers. Consider, for example the following
advertisement: “1996 Model Toyota car for only 110,000 birr” This ad is not an offer since it
not communicated to a specific person. It is instead an invitation to interested persons to make
an offer to the advertiser. In a different example, if Ethio Nippon Company circulates a
catalogue showing spare parts for Mitsubishi cars it is not making an offer. More importantly,
any one who orders a particular spare part from the catalog is an offereor. Ethio Nippon
Company being the offeree may accept or reject the offer.

A statement on a price tag at a display of goods in a store is not offer. Such statements on
price tags are not offers because they are not communicated to a specific person. They are
instead an invitation to interested persons to make an offer to the advertiser.

5.3.2 Sale by Auction

In the case of sale by auction, the auctioneer is not considered as making an offer.33 He is
instead an offree. He may accept or reject all the bids by the bidders. The intention of the
auctioneer when he puts the thing to a public auction is to get a high price. The auctioneer
may not be able to get the high price he hoped for either because of weak markets or because
of collusion between the bidders. The highest bid may still be below the expected level. Under
the Civil Code, if the highest bid is not satisfactory, the auctioneer is free to withdraw. For

32
Article 1687(b), Civil Code
33
Article 1688, Civil Code

29
instance, Ato Abebe auctions his house. Of all the bidders present, Ato Belete suggested the
highest bid i.e. 120,000 birr. Ato Abebe does not accept Ato Belete‟s highest bid of 120,000
birr. There is no contract of sale. At a public auction, auction proposal is not offer; instead
bids are offers. If bids are offers, the fall of the hammer marks acceptance of the last bid.

5.3.3 Public Promise of a Reward

Normally, a communication addressed to a group or the public at large is less likely to be an
offer. However, notices of a reward, addressed to the public at large and not a specific person
are offers.34 The notice may read “100 birr for a safe return of my wallet”. The notice may
also be by a newspaper ad to reward anyone who solves a crossword puzzle. Or a notice by a
Sporting Club to reward anyone who can beat the national record. In all the examples, the
notices lack an express commitment to pay a particular person. Yet, it is still considered as an
offer. Public promises of a reward are exceptions to the rule provided under Article 1687(a),
which provides there is no offer unless the proposal is communicated to a given beneficiary.

5.4 ACCEPTANCE

Acceptance refers to agreement to the terms of the offer. The acceptance must be in exact
conformity with the terms of the offer. If the offree changes any terms of the offer or adds
new terms, there is no acceptance. The addition of any qualification renders the acceptance
defective acceptance. A defective acceptance is a new offer or a counter-offer. And no
contract arises unless the original offerer accepts the counter-offer.35

5.5 FORM OF OFFER AND ACCEPTANCE

Offer and acceptance are commonly expressed orally and in written form. However, they may
also be expressed by signs normally in use and by conduct.36 For instance, a sign normally in
use at a public auction may be raising the hand by the bidder offering to buy, and the falling
of the hammer by the auctioneer accepting such offer. In village markets, a handshake
indicates acceptance. Offer and acceptance may also be made through conduct, which

34
Article 1689, Civil Code
35
Article 1694, Civil Code
36
Article 1681(1), Civil Code

30
indicates the unequivocal intention to contract. For instance, placing phones in public places
by telecommunication authority or coca-cola machines by Coca Cola Company are examples
of offer by conduct. Putting coins inside phones or the machine to make a call or to get a
drink implies acceptance by conduct.

However, the law also entitles the offeror to specify a special mode of acceptance by the other
party.37 Abebe orders some merchandise from Kebede stating that there shall be no contract
unless the goods are delivered at his residence at a particular time. Thus, in this case the mode
of acceptance would be delivery of the goods at Abebe's residence at the stated time.
Therefore, Kebede's letter stating his acceptance of the offer is not valid acceptance since it is
not made in the special form prescribed by Abebe.

As a rule, silence does not amount to acceptance.38 In this context, silence means not
answering the offer not only in written or spoken words, or by any sign or conduct amounting
to acceptance. However, there are some exceptions to the rule that silence does not amount to
acceptance.

5.5.1. Duty to Accept

No acceptance shall be required where a party is bound by law, to enter in to a contract on
terms stipulated in advance.39 For example, public utility undertakings are not expected to
answer offers by word, sign or conduct. Such undertakings include those rendering vital
services to the community, such as postal, telecommunication, public transport, etc. and those
engaged in providing vital supplies to the community, such as light, water, etc.

Such undertakings are extensively regulated by law for two reasons. First, the services and
supplies they render are vital. Secondly, they enjoy monopolistic situations. Thus, these
undertakings are obliged to enter in to contracts proposed by any member of the public on
terms stipulated in advance by law. They may not refuse to serve anyone as far as the
facilities are available. The law provides, in such cases, the receipt of the offer marks the
completion of the contract.40

37
Article 1681(2), Civil Code
38
Article 1682, Civil Code
39
Article 1683(1), Civil Code
40
Article 1683(2), Civil Code

31
5.5.2 Pre-existing Business Relations
The second situation which deviates from the rule silence does not amount to acceptance is
related to pre-existing business relations or prior business dealings. An offer to continue or
vary an existing contract or to enter into a subsidiary or complementary contract may be
accepted by silence.41 For instance, an insured person writes to the insurer requiring the
continuation of the insurance, change of premium, or coverage, etc. Your newspaper offers to
continue your subscription or change its terms. In such cases, offers to continue or vary an
existing contract may be accepted by silence. The justification for this rule is that by such
silence will normally be understood by the parties as expressing agreement. However, to have
this effect, the following requirements must be fulfilled.

i) The parties have concluded a prior contract. In other words, there must be a pre-
existing business relation between the parties.
ii) One of them proposes the renewal or modification of the contract or the conclusion
of a subsidiary or complementary contract.
iii) That one of them includes a warning clause in his offer i.e. if he does not receive
rejection within a certain reasonable time, offer will be considered accepted. This
is included with a view to inform the offree of the grave consequences of not
answering.
iv) This offer must be made in a special document. The document is said to be special
document where it exclusively deals with the offer to continue or vary the existing
contract and no other matter. If it deals with other matters as well, it is not a
special document. Such offers, which aren‟t proposed in a special document but in
documents bearing on other matters, where they may be overlooked, are of no
e ffe c t .

5.6 DURATION OF THE OFFER: OFFER WITH TIME LIMIT

An offer does not continue indefinitely. Once an offer has come to an end, it can no longer be
accepted. Offer can be made with time limit or without time limit. An offer may be made as to
terminate on specified date. For example, “This offer will remain open for acceptance until

41
Article 1684, Civil Code

32
October 7.” If the offer is made with time limit, the offeror will be bound by the offer until the
lapse of the time limit fixed. (Article 1690(1). This means offers made with time limit are
irrevocable. However, the offeror shall not be bound if the offer is rejected by the offree
within the time limit fixed.

Abebe made an offer to Belete to sell his Toyota car at a price of 70,000 birr. Abebe stated the
offer remains open for acceptance until October 7. In a letter received on 1st of October,
Belete replied the price is too high; I will buy your car for 60,000 birr only. In a different
letter received on 4th of October, Belete states, “Alright, I will pay 70,000 birr.” Abebe shall
not be bound by Belete‟s acceptance. This is due to the fact that the offer Abebe made
terminated when Belete rejected it first and suggested a different price. Even if Abebe
received a letter of acceptance before October 7, he will not be bound since his offer has come
to an end by virtue of the letter received on October 1st.

On the other hand, in the previous example, if Belete accepted the offer right away and sent it
immediately. The letter of acceptance reached Abebe‟s mailbox on October 6. However,
Abebe did not check his mailbox until October 9. In this case, the offeror cannot argue that
the acceptance is late. It is up to the offeror to check his mailbox in time.

5.7 OFFER WITHOUT TIME LIMIT

If the offer is made with time limit, the offeror would be bound by it until the lapse of the time
limit fixed. In other words, the offeror cannot revoke or withdraw the offer before the lapse of
the time limit fixed. On the other hand, if the offer is made without time limit, it remains open
for acceptance until the lapse of reasonable time. Moreover, if the offeror feels that the
acceptance was not made within a reasonable time, he must declare this to the offree
immediately. If he failed to do so, then he would be bound or a contract would arise even if
the acceptance is not made with in a reasonable time.

5.8 CONTRACT BETWEEN ABSENT PARTIES

Acceptance makes the contract. The question, however, is when and where the acceptance
makes the contract. If the parties are present parties who reached an agreement negotiating

33
face to face, this question does not arise. Both parties are at the same place and there is no
significant difference between the sending of the acceptance and the reaching the offeror.

However, the question where and when the contract is concluded would arise in cases where
the parties are negotiating over distance, for instance located in different states. If one
contracting party is in Addis Ababa and the other in Dire Dawa, where and when is the
contract made? Determining the place where the contract is concluded has practical
significance. For instance, the place where the contract is made determines which court has
jurisdiction or power to consider disputes arising between the parties.

There are two theories, which attempt to provide a solution to the question where and when
the contract concluded between absent parties. According to the theory of reception, it is the
reception of the acceptance through its reaching the offeror's postbox, residence or office that
completes the contract. The offeror may adopt this system if he wishes too, by conditioning
the completion of the contract on the reception of the acceptance.42 However, if the offerer
did not do so, the law provides theory of dispatch i.e. the contract is concluded at the time and
place where the acceptance is sent not at its reception.43

On the other hand, the contracting parties are negotiating over the telephone the law provides
the contract is concluded at the place where the party called.44 Parties negotiating over the
telephone are assimilated to present parties. Thus, acceptance must be made before the parties
end their conversation. If Abebe called Assefa and made an offer to him. An hour after they
end their telephonic conversation, Assefa called Abebe and told him he accepts the offer.
Acceptance is not made in a reasonable time. Assefa should have accepted the offer the two
persons departed i.e. before they end their telephone conversation.

Check Your Progress Questions

1. Almaz made an offer for Senait to sell her knitting machine at a price of 5,000 birr in a
letter dated October 6. However, the letter was lost in the post, for a while, and delayed

42
Article 1681(2), Civil Code
43
Article 1692(1), Civil Code
44
Article 1692(2), Civil Code

34
 and reaches Senait on January 2. Senait immediately accepts the offer by a letter dated
January 4. Almaz received Senait's letter of acceptance on January 6. Almaz sent a fax
letter for Senait on January 7 informing Senait that the acceptance is late and she does not
intend to be bound by it. Is there a contract?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
………………………………………………………………………………………………….
2. Melaku was strolling around Piazza, when he took a look at a pair of snicker shoes
displayed in a store window with the price tag 300 birr in a store window. Melaku went
inside the store and ordered the said pair of shoes. However, the shopkeeper stated he
would sell the pair of shoes for him at a price of 350 birr and not at the price shown on the
price tag. Is the shopkeeper within his rights? Why or why not?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
………………………………………………………………………………………………….
3. Mesfin distributed circulars in Addis Ababa announcing his house would be put to sale by
auction on a particular date. Among the participants in the auction, Almaz was the highest
bidder proposing to buy the house at a price of 100,000 birr. However, Mesfin refused to
sell his house for her. May he do so?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
………………………………………………………………………………………………….

5.9 SUMMARY

Consent is a permanent element of a contract. It implies agreement between the parties and is
expressed through offer and acceptance. Offer is a proposal to enter in to a legally binding
obligation. It has to be communicated to the beneficiary. It also differs from declarations of
intention such as newspaper ads, catalogues, circulars, tariffs, price lists, display of goods, etc.
These are said to be invitation of offers and not offers. Acceptance, on the other hand,
constitute assent to the terms of the offer. It has be in exact conformity with the terms of the
offer. Otherwise, it becomes a defective acceptance or a new-offer (counter-offer).

35
Acceptance and offer are usually made in written or oral form. However, they may be made
by signs and conduct. Offer may also be with time limit or without time limit, which entail
different results.

5.10 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

1. There is no contract. Almaz, the offerer, has the right to assume the letter of offer she sent
would reach Senait, the offree in the normal time required. However, it has been stated
that the letter took so long due to postal interruption. In addition, up on receiving the late
acceptance from Senait, Almaz immediately informed her that she does not intend to be
bound. Should Almaz fail to answer; up on receiving the acceptance, there would be a
contract even if the acceptance is late. In addition, should Almaz fail to respond
immediately that she does not intend to be bound; there would be a contract even if the
acceptance is late.
2. The shopkeeper is within his rights to refuse to sell the pair of shoes at the price stated.
This is due to the fact that display of goods and price tags are not offers, instead they are
invitation of offers. In this case, it is Melaku who is offering and not the shopkeeper.
Thus, the shopkeeper is within his rights to refuse to accept the offer made to him.
3. Mesfin can refuse to sell since auction proposal is not offer. Instead it is a declaration of
intention. In such cases, the bidder and not the auctioneer is the offerer. Thus, he may
accept or reject offers made to him by the bidders.

5.11 MODEL EXAMINATION QUESTIONS

1. Sema office furniture circulates a catalogue showing the different products on sale along
with their respective prices. Berhan wanted to buy a certain TV Stand displayed on the
catalogue with the price 999 birr. She went to the display shop and ordered the said TV
Stand. However, she was told she has to pay 1499 birr. She brought action against Sema
for breach of the contract. Is there a contract?

2. Alene sent an offer for Haile offering to sell his brand new Brasila coffee machine at a
price of 39,000 birr. Alene also made it clear that his offer remains good i.e. open for
acceptance until October 20. On October 10, Alene received a letter from Haile stating "I

36
 will buy the machine for 35,000 birr only." On October 15, Alene received another letter
from Haile stating, " Alright, I will buy the machine at the price you stated." However,
Alene refused to sell the machine at 39,000 birr. Alene demanded 40,000 birr for his
machine. May Alene do so?

3. Birtukan found a lost wallet and, knowing Zenebe as the owner, decided to return it to
him. Unknown to Birtukan, Zenebe had offered a reward of 1000 birr for the return of the
wallet and its contents. After Birtukan returned the wallet, she learned about the reward.
Later, she claimed the reward. May she do so?

5.12 GLOSSARY

Offer- a legally binding proposal to enter in to a contract

Acceptance- agreement conforming to the terms of the offer

5.13 SELECTED READINGS

George K., Formation and Effects of Contracts

37
UNIT 6: DEFECTS IN CONSENT

Contents
6.0 Aims and Objectives
6.1 Introduction
6.2 Mistake
6.2.1 Mistakes Relating to the Legal Nature of the Contract
6.2.2 Mistakes Relating to the Identity of the Object
6.2.3 Mistakes Relating to the Person
6.3 Mistakes Relating to Motives
6.4 Fraud
6.5 Duress
6.6 Lesion
6.7 Summary
6.8 Answer to Check Your Progress Exercise
6.9 Model Examination Questions
6.10 Glossary
6.11 Selected Readings

6.0 AIMS AND OBJECTIVES

Up on completing this Unit, the student should be able to:

- understand what happens to the contract if a party to a contract gave consent because
of mistake, fraud and duress
- identify mistakes sufficient for invalidation from those which are not
- understand what constitutes fraud and duress

6.1 INTRODUCTION

In discussing offer and acceptance, it was assumed, that the parties acted freely so that
genuine consent may be achieved. The law requires that consent needs to be true, conscious
and free. Though one gives his consent to a contract, it may be induced by mistake, fraud or
duress. In such cases, the consent is not true, conscious and free. It is rather vitiated or

38
defective consent. Therefore, the contract may be invalidated at the request of the party whose
consent is defective. The justification for this rule is that a party should not be tied to an
agreement he did not will. The following discussion focuses on the three recognized grounds
for invalidating or avoiding a contract: mistake, fraud and duress, each of which result in
defective consent.

6.2 MISTAKE

At times a contracting party may enter in to a contract, holding mistaken beliefs about
important facts. Mistake is a belief that is not in accord with the facts. A contracting party
may demand the invalidation of the contract on the basis of mistake only if the mistake is
decisive and fundamental.45 Mistake is said to be decisive where a party proves that he was
determined to contract because of his mistake. In other words, he has to prove that he would
not have concluded the contract had it not been for the mistake.46 However, mistake must be
not only decisive but also fundamental in order to be a sufficient ground for invalidation. A
mistake is said to be fundamental mistake if it relates to one of the normal elements or
requirements of a contract.47 The elements or requirements of a contract include:
i) the legal nature of the contract (negotium)
ii) capable consenting parties (persona)
iii) object or obligations to be performed (corpus)
Form is not stated here since it is not a normal or permanent requirement of a contract.

6.2.1 Mistakes Relating to the Legal Nature of the Contract (Negotium)

The legal nature of the contract means the legal transaction originated by it. E.g.sale,
donation, lease, deposit, loan, etc. In all cases where the mistake relates to the legal nature of
the contract, it is a sufficient ground for the invalidation of the contact.48 If Abebe, an old man
with a weak sight, signs a lease in the mistaken belief he is signing a contract to buy a house
commits a mistake relating to the legal nature of the contract. If one undertook to guarantee an
obligation when he only intended to attest as a witness, he has committed a mistake relating to

45
Articles 1697 and 1698, Civil Code
46
Article 1697, Civil Code
47
Article 1698, Civil Code
48
Article 1699(a), Civil Code

39
the negotium. If such mistakes occurred as a result of misleading by the other contracting
party, it becomes fraud, which would provide a better solution.

6.2.2 Mistakes Relating to the Identity of the Object

Object of a contract refers to the obligations to be performed. Mistakes relating to the object
of a contract may be divided in to two i.e. mistakes relating to the identity of the object or
mistakes relating to the qualities of the object. Mistakes relating to the identity of the object
are always sufficient grounds for the invalidation of contracts.49

Illustrations. A mutual mistake as to the identity of the object occurs where the parties,
unknown to each other, thinking about different things. Kebede offers to buy Abebe's horse
thinking it is the one he sees Abebe riding. It is another horse.

Ayele buys fertilizer sulphur thinking he is buying pharmacy sulphur. Or he sold his real
diamond, thinking he is selling his artificial diamond.

Mistakes relating to the qualities of the object would be sufficient ground for invalidation if
the lacking or missing quality is substantial. Abebe rents a house from Kebede in the belief
that the house has water supply, which it does not. This mistake relates to the quality and not
the identity of the object.

6.2.3 Mistakes Relating to the Person

Mistakes relating to the person can be sufficient grounds for the invalidation of the contract
only where the contracts are concluded in consideration of the person.50 In cash sale contracts,
the identity of the party is immaterial and such contracts are not concluded in consideration of
the person. Abebe hired Bekele as an accountant. At the time the contract was concluded,
Abebe didn't know that Kebede was convicted of forgery of accounts or breach of trust. This
mistake relates to the personal quality of accountants, which should be considered
fundamental. However, if Kebede was convicted of negligent homicide or of assault, Abebe's
ignorance of this fact does not relate to a fundamental quality of accountants and cannot be a
sufficient ground for invalidation.

49
Article 1699(b), Civil Code
50
Article 1700, Civil Code

40
6.3 MISTAKES RELATING TO MOTIVES

The discussion above makes it clear that a mistake would invalidate a contract only where it is
fundamental. The mistake would be fundamental where it relates to one of the elements or
requirements of a contract: negotium, corpus or persona. Mistakes, which do not relate to
one of these, are non-fundamental mistakes. They do not amount to sufficient grounds for the
invalidation of the contract.51 Mistakes, which relate to motives i.e. facts motivating the
conclusion of the contract, are not sufficient to invalidate the contract. Consent truly given
may be induced by untrue external points, which motivate the party‟s decision to contract.
Such mistakes, however, do not relate to the contract but to motives, which led to its
conclusion. Examples:

(1) Lemma bought a car on the news that his car is destroyed, which turns out to be
untrue. The supposed destruction of Lemma‟s car is an extra-contractual motive, thus
the contract of sale of a car is maintained.
(2) Kebede bought a wedding ring for his marriage. The planned marriage was cancelled.
The marriage is a mere motive, and the contract of sale of a wedding ring is
maintained.
(3) Alemu sold his house thinking that he will be going abroad for good. He was not
granted visa and was unable to go. The contract of sale of a house will be maintained.

Arithmetical mistakes in a contract shall not affect the validity of the contract and they shall
be corrected.52 In such cases, there is only an appearance of mistake, however, the contents of
the contract in fact are unmistakable. These are errors in addition which is to be corrected.
However, arithmetical or calculation mistakes should not be confused with such mistakes
outside the contract. Mistakes one makes in calculating one‟s costs before the contract may be
based on false motives deriving from an inaccurate computation of the costs of performance.

Examples:
(1) Semma buys one hundred T-shirts of a particular kind from Zenebe at a price of 50
birr per t-shirt. In the contract, price per T-shirt is stated, but the total is stated as 4,000

51
Article 1701(1), Civil Code
52
Article 1701(2), Civil Code

41
 birr. This is a simple arithmetical mistake. It is clear that the price was fixed on the
basis of a price per T-shirt. One should simply correct the total price in the contract.
(2) Assefa miscalculates the cost of production of his merchandise and for this reason
states the price as 5,000 birr instead of 15,000 birr. His mistake does not give him the
right to request the invalidation or correction of the contract. Assefa gets the amount
that he had in mind at the time he declared his intention. This is not an arithmetical
mistake since the mistake is not committed in the contract itself rather before the
contract.

The mistaken party cannot invoke his mistake in a manner contrary to good faith; he remains
bound by the contract that he intended to make if the other party declares his willingness to
perform the contract.53 For example, Ayalew owns two houses and rents the first of them to
Berhanu, thinking he is renting the second house. He demands the invalidation of the contract
on the basis of his mistake. Berahnu offers to substitute in the contract, the second house for
the first. Ayalew must accept the offer. Ayalew cannot say I don‟t want to rent either house
for you since this would be contrary to good faith.

It has been pointed out that due to the underlying premise that a person should not be tied to
an agreement which he did not intend or will, a mistaken party may demand the invalidation
of the contract. However, it would be unfair to make the other party bear the loss in all cases.
The other party considered the contract valid and may have incurred some expenses in relying
on it. Thus, the mistaken party must compensate the other party for the loss he incurred from
the invalidation of the contract.54 This obligation to compensate the other party disappears
only where it is proved the other party knew or should have known of the mistake. Example:
Alemu bought merchandise from Thomas for a price fixed in US Dollars, but Alemu thinks
that the price was fixed in Canadian Dollars. The contract can be invalidated because of the
mistake because Alemu performs substantially greater than he intended. However, Thomas
may have already sent the goods from Amsterdam, where they were stored, to Addis Ababa,
where the contract provided they were to be delivered. Alemu must compensate Thomas for
the damage that the invalidation of the contract causes him: shipment expenses, storage

53
Article 1702, Civil Code
54
Article 1703, Civil Code

42
expense at Djibouti port, and so on. However, Alemu will not be required to compensate
Thomas if it is proved that Thomas was aware of the mistake Alemu committed.
Nevertheless, Thomas let Alemu sign the contract without pointing out his error to him.

6.4 FRAUD

Fraud refers to deceitful practices. It is a ground of avoidance based on mistake induced by

cheating.55 A contract may be invalidated on the ground of fraud where a party resorts to
deceitful practices so that the other party would not have entered in to the contract had he not
been deceived. As opposed to many foreign legal systems, false statements are not fraud
under Ethiopian law. This is because the law defines fraud as deceitful practice. This means
mere intentional false statements do not amount to fraud as long as they are not accompanied
by “practices.” Examples of fraud:

(1) A man knowing he is sick obtains a life insurance by showing a health certificate.
(2) An employee obtains a high salary through altering and increasing his previous
earning history.
(3) Ayele overpays a house bought from Selamu, who deceived him in to believing that
Bekele offered a higher price.

In all the illustrations above, the false statements must be accompanied by “practices”. Fraud
may be of two types: decisive fraud and incidental fraud. Fraud is said to be decisive, where it
is proved that, with the fraud, the deceived party would not have thought of concluding the
contract. In the case of incidental fraud, the defrauded party, even knowing the truth, would
have thought of contracting but at less onerous terms. Incidental fraud is not sufficient for the
purpose of invalidating the contract though it may be relevant for action for damages in extra-
contractual liability. The defrauded party may renounce invalidation and still demand
damages in extra-contractual liability. Example: Awoke shows false documents to Betru and
deceived him in to believing that a road will soon be built that will increase the value of the
house he sold to him. Betru would have contracted even if the road is not going to be built but
would have offered a lesser price.

55
Article 1704, Civil Code

43
A party who has been deceived by a third party shall be bound by the contract unless the other
contracting party knew or should have known of the fraud on the making of the contract and
took advantage thereof.56 Example: A guarantor concluded a contract with the creditor
because the debtor showed him false documents in to believing that there are also other
securities to ensure the payment of the loan, which he took from the creditor. The guarantor
would be bound by the contract of guarantee and can not avoid it on the basis of fraud on the
part of the debtor who is a third party to this contract. In this illustration, the guarantor may
request the invalidation of the contract only where it is proved that the other party i.e. creditor
knew or should have known the fraud on the part of the debtor.

The term fraud has been defined as deceitful practices. In addition, it is pointed out that mere
false statements under Ethiopian law are not considered fraud. However, false statements not
accompanied by practices may be sufficient grounds for the invalidation of the contract if
there is a confidential relationship between the contracting parties.57 The term confidential
relation is widely interpreted as to include, for instance, the relationship between family
members, master and servant, members of close religious community, employer and
employee, client and advocate or other professional adviser. Example: Solomon is Hailu‟s
employer. Solomon sells to Hailu certain shares, commending them as profitable, while in
fact the concerned share company is already bankrupt. Hailu can invalidate the contract.

6.5 DURESS

Duress refers to compelling a party to give his consent to a contract by use of threat. The
threat must be serious and imminent harm to the party or to his ascendants, children or
spouse.58 The threat must be imminent or likely to happen soon. This, however, does not
mean that it has to be real. It is sufficient if it appears real. A person who gave his consent
because he has been threatened by use of an unloaded pistol can avoid the contract on the
basis of duress. The pistol might not have bullets but it is sufficient if appeared to the person
threatened that it was loaded.

56
Article 1704(2), Civil Code
57
Article 1705, Civil Code
58
Article 1706, Civil Code

44
The threat may relate to property or person. The danger to the person may relate to his life,
health, liberty, honor or morals. As opposed to third party fraud, third party duress would be
sufficient to invalidate a contract.59 Thus, if Alemu, threatened by Kassa, cocludes a contract
with Berahnu, may demand the invalidation of the contract though Berhanu, the contracting
party, did not exercise it. This is due to the fact that duress is dangerous for the social order.
In the exceptional case that Berhanu, may not know the duress exercised by Kassa, Alemu
would be required to pay damages arising out of the invalidation of the contract for him. If
third party duress were not a sufficient ground for invalidation, it would be tempting for some
persons to exercise duress through third persons and invoke in defence that he was not aware
of their acts of duress.

Threat to exercise a right is not a ground of invalidation of a contract unless the threat was
exercised with a view to obtain excessive advantage.60 Example: An employer caught red-
handed his employee stealing property from him. The employer threatened to bring a penal
charge against the employee and induced him to give up his employment. This does not
constitute a ground for the invalidation. Since the employer simply exercised his right. It
would be a ground for invalidation only where the employer tried to obtain excessive
advantage. Such is the case if, for instance, the employer demanded the employee to pay
money in addition to demanding him to give up his employment.

Likewise, reverential fear is not a ground for invalidation.61 Reverential fear refers to fear and
respect for the wishes and aspirations of an ascendant or a superior. Kebede sold some
merchandise for Zeleke because he was told to do so by his father confessor. Kebede cannot
demand the invalidation of the contract on the basis of reverential fear. Reverential fear may
be a ground for invalidation only if the contract is concluded with the person inspiring the
fear. Thus, in the above example Kebede may invalidate the contract provided the
merchandise was sold for his father confessor i.e. the father confessor himself was a party to
the contract and if it is proved that the father confessor has derived excessive advantage out of
it.

59
Article 1707, Civil Code
60
Article 1708, Civil Code
61
Article1709, Civil Code

45
6.6 LESION (UNCONSCIONABLE CONTRACT)

A lesionary contract is an unconscionable contract. In other words, it is a contract contrary to

conscience. An unconscionable contract is a contract such as no sensible man not under
delusion, duress or in distress would make. Such contracts may be invalidated by court if it is
shown that a contracting party took advantage of the want, simplicity of mind, senility or
business inexperience of the other contracting party.62 It is important to note that a substantial
disproportion in performances owed by the parties is not in itself sufficient to invalidate the
contract. In addition, one has to prove the contracting party knew and exploited the state of
want, simplicity of mind, senility and business inexperience of the other party. Examples of
unconscionable contracts: an old lady selling her valuable jewels at a manifestly low price
because of her senility or impairment of judgment due to old age, a country girl buying an
artificial glass necklace at exorbitantly high price due to her simplicity of mind and business
inexperience.

Check Your Progress Questions

1. Assefa who has made arrangements to go abroad sold his house to Kassa. After
concluding this contract, however he was unable to get the visa he applied for and unable
to go. Thus, he demanded the contract of sale of his house be invalidated on the basis of
mistake. He argued he would not have sold the house had it not been for his mistaken
belief that he would be granted visa. Should invalidation be granted?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
………………………………………………………………………………………………….

2. Belay, who owns a construction firm, caught red-handed his employee, Kassa, stealing
some property from his firm. He then demanded Kassa to quit his job; otherwise he would
bring a legal action against him. Kassa renounced the job, but he later claimed he quit his
job because of duress exercised on him by Belay and not of his own freewill. Kassa now
wants to be reinstated to his job. What would you advice Belay if you were his attorney?

62
Article 1710, Civil Code

46
…………………………………………………………………………………………………
…………………………………………………………………………………………………
………………………………………………………………………………………………….

6.7 SUMMARY

It has been stated that consent is one of the requirements of a contract. Consent needs to be
truly, consciously and freely give. If the consent of the party is vitiated with mistake, fraud or
duress the contract would be invalidated at the request of the party who gave defective
consent. So as to amount to a sufficient ground for the invalidation of the contract, the
mistake must be decisive and fundamental. Mistake is said to be decisive where a contracting
party proves that he would not have concluded the contract if he knew the truth. The mere fact
that the mistake is decisive does not mean that it is sufficient to warrant invalidation. The
mistake must also be fundamental where it relates to the requirements of the contract. In
addition, the contract may also be invalidated if it is proved that a party has been defrauded by
the other party. However, false statements are not fraud since they are not accompanied with
practices. Duress, compelling a party to give his consent by threat, is also a sufficient ground
for the invalidation of the contract.

6.8 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

1. The contract cannot be invalidated on the basis of this mistake. It only relates to the
motive, which led to contract and to an element of the contract.
2. There is no duress. Threat to exercise a right is not duress.

6.9 MODEL EXAMINATION QUESTION

1. Mahlet miscalculated her cost of production as 8,000 birr only and made an offer to
sell her merchandise to Asrat at a price of 9,000 birr. In actual fact, her cost of
production was 10,000 birr and not 8,000. Asrat accepted the offer. When Mahlet
realized her mistake concerning the miscalculation of her cost of production she
demanded either the mistake has to be corrected or the contract has to be invalidated.
Should the contract be invalidated or the mistake corrected? Why or why not?

47
6.10 GLOSSARY

Fundamental Mistake- mistake that relates to the normal requirements of a contract

Fraud- deceitful practice
Duress- compelling a party to give his consent by threat

6.11 SELECTED READINGS

George K., Formation and Effects of Contracts,

48
UNIT 7: OBJECT AND FORM OF CONTRACTS

Contents
7.0 Aims and Objectives
7.1 Introduction
7.2 Object
7.3 Form
7.3.1 Written Form
7.4 Invalidation of Contracts
7.4.1 Who Can Demand Invalidation?
7.4.2 Period of Limitation
7.5 Summary
7.6 Answer to Check Your Progress Exercise
7.7 Model Examination Questions
7.8 Selected Readings

7.0 AIMS AND OBJECTIVES

Up on completing this Unit, the student should be able to:

- understand what is meant by object and form of a contract
- the effect of insufficiently defined, unlawful and impossible obligations on the
contract
- identify who may demand invalidation of a contract and until when he may demand it

7.1 INTRODUCTION

The previous Units focused on capacity and consent as requirements of contracts. This Unit,
on the other hand, will be dealing the rest of requirements of a contract: object and form.
Thus, the Unit examines these two requirements of a contract and the legal rules concerning
them. Once a contract has been formed lawfully, it becomes law of the parties. It binds as
though it were law. However, if the contract is not lawfully formed it could be invalidated.
This Unit, therefore, considers questions related with invalidation such as who may demand
invalidation of the contract and until when can he demand invalidation.

49
7.2 OBJECT

The object of a contract refers to the obligations to perform something. Where a car is sold, it
is the seller‟s obligation to hand over or convey the car to the buyer. The buyer‟s obligation to
pay the price. That is an object of the contract. The contracting parties are free to determine
the contents of their contract.63 They can set aside permissive provisions of the law.
Permissive provisions of the law refer to those provisions the application of which the parties
may set aside or disregard. The parties would be required to observe mandatory provisions of
the law. Mandatory provisions of the law are provisions, which cannot be set aside or
disregarded.

The object of the contract must be sufficiently defined, legal and moral and possible. A
contract whose object is not sufficiently defined, illegal or impossible are of no effect or void
i.e. non-existent from the very inception and creates no legal rights whatsoever. Abebe
assumed an obligation „to be of assistance‟ to Bekele. The object of the contract in this case is
utterly vague since it is not clear what kind of assistance is intended. Thus, the contract cannot
be enforced since it is void.64

If the obligations assumed by the parties is impossible the contract becomes void. If Abebe
assumed obligation to swim across the Atlantic, the contract is void since this is humanly
impossible to perform.65

Similarly, the object of the contract must also be legal and moral.66 The contract is illegal if it
is made in violation of mandatory rules of the law. The court will not enforce illegal
agreements in any way. Contracts relating to things, which are extra commercium or non-
transferable are illegal. Examples: contracts relating to sale of man or body parts, contracts
relating to sale of poisonous or narcotic drugs, contracts of sale relating to things that belong
to public domain such as land. An individual cannot sell a plot of land to another since land is
owned by the state. Likewise, an agreement between two persons to rob a bank is void. An
agreement to obtain money from the prostitution of others is also immoral.

63
Article 1711, Civil Code
64
Article 1714, Civil Code
65
Article 1716, Civil Code
66
Article 1716, Civil Code

50
However, the law states that a legal contract, which is motivated by illegal motives, is not
subject to invalidation. Such illegal purposes are not stated explicitly in the contract, but they
are rather in the motives, which led to it. As a result, the contractual obligations are not
67
illegal in themselves. For example, Abebe lent some money for Bekele so that the latter may
use the money for his contraband business. In a different example, if one sells a knife to a
man whose purchase is motivated by an extra-contractual intention to murder somebody with
it, the contract is valid. Here, the use of the knife is not a term of the contract. Since the
motive is not stated in the contract, the contract remains valid. The court may invalidate such
contracts only where the illegal purpose is shown by the contract itself or another document
such as correspondence between the parties.68

7.3 FORM

From, as mentioned above, is not a normal or permanent requirement for contracts. As a rule,
the law does not stipulate a special form to be observed in the conclusion of contracts. The
law provides the principle that there are no formal requirements for the conclusion of
contracts.69 The principle is freedom of form. The agreement of the parties is sufficient to
form a contract. Thus, a contract exists by mere agreement when the parties express their
consent to it. In other words, except in cases where the law requires a special form to be
observed in the conclusion of certain contracts, the contracting parties are free to determine
the form of their contract i.e. whether it should be in written form or not.

However, there are two exceptions to the rule. First, form becomes a requirement where the
law provides a special form to be observed in the conclusion of certain contracts.70 Second,
form becomes a requirement where the contracting parties themselves stipulate a special form
for the conclusion of their contract.71 In cases where the law or the agreement between the
parties provides for a special form, failure to observe that form results in the nullity of the
agreement. Thus, in such cases form is a not a requirement for proof (ad probationem) but a
requirement for validity (ad validitatem). Form gives existence to such transactions. That

67
Article 1717, Civil Code
68
Article 1718, Civil Code
69
Article 1719(1), Civil Code
70
Article 1719(2), Civil Code
71
Article 1719(3), Civil Code

51
means the agreement is void i.e. non-existent if it does not comply with formal requirements
required by the law.

The law, for instance, requires writing for the following contracts.
ii) Contracts relating to immovables.72
iii) Contracts made with public administration73
iv) Contracts of guarantee74
v) Contracts of insurance75
vi) Contracts of loan where the amount lent exceeds birr five hundred.76

In addition, if such contracts required to be in writing are varied or modified by a subsequent

agreement, the variation or modification must also be made in the same form set forth for the
preliminary contract.77 Such contracts need to be in writing because they are believed to
affect a vital interest of the parties (e.g. immovable) and also due to the fact that some of the
contracts are long-term contracts (e.g. insurance, guarantee) and details may be forgotten
unless reduced in to writing.

7.3.1 Written Form

The contract is said to be made in a written form when it meets certain requirements. To begin
with, the contract must be in a special document.78 Thus, producing letters or correspondence
the parties exchanged and that indicate their agreement does not fulfill this requirement of
written form. The law requires a special instrument, which expresses the agreement between
the parties and their irrevocable intention to be obligated, and that the instrument is signed by
them. In addition, the contract is not said to comply with the formal requirement of written
form unless it is attested by at least two witnesses. The witnesses must also be capable.

72
Article 1723, Civil Code
73
Article 1724, Civil Code
74
Article 1725, Civil Code
75
Article, 1725, Civil Code
76
Article 2472, Civil Code
77
Article 1722, Civil Code
78
Article 1727, Civil Code

52
The signature of the parties needs to be handwritten.79 In other words, signature by
mechanical means or seals is not allowed. If one of the parties does not know how to write or
is unable to write, he may affix his fingerprints instead of putting his signature.80 In addition,
the signature or thumb-mark of a blind or illiterate person shall not bind him unless it is
authenticated or certified by a judge or, court registrar or notary.81 The law extends this
protection to the blind or illiterate person only and not the other party. The contract must also
be attested by at least two capable witnesses.

7.4 INVALIDATION OF CONTRACTS

7.4.1 Who Can Demand Invalidation?

If the contract is lawfully formed, it becomes law of the parties. The contract is said to be
lawfully formed if is concluded in line with the rules discussed thus far. In other words, the
contract is lawfully formed if there is consent effectively expressed, towards a lawful, moral,
possible and sufficiently defined object, in the form prescribed by law, if any. However, the
contract may be invalidated if one of the parties was incapable at the time of the making of
the contract, if he gave consent vitiated by defects i.e. mistake, fraud or duress. The contract
would also be void if the object is illegal, immoral, impossible or insufficiently defined or if it
is not concluded in the form prescribed by law, if any. In cases where the ground for
invalidation is incapacity or defective consent, the right to demand invalidation is one-sided.
Such grounds of invalidation bring about relative nullity. This means only the incapable party
or the party who gave defective consent may demand invalidation.82 Thus, the incapable party
or the victim of the defect may choose to enforce the contract instead of invalidating it. In
other words, the other party cannot demand the invalidation of the contract on the basis of
such grounds.

However, if the ground for invalidation of the contract is defects in the object of the contract
i.e. if the object is unlawful, immoral, impossible or vague, then both the parties to the
contract and a third person may demand the invalidation of the contract. Such grounds of

79
Article 1728(1), Civil Code
80
Article 1728, Civil Code
81
Article 1728(3), Civil Code
82
Article 1808(1), Civil Code

53
invalidation bring about absolute nullity.83 Asefa lent 10,000 birr for Brook for the purpose of
undertaking contraband activities. This illegal purpose to which the money lent would be
devoted is also stated in the contract. In this case, both Brook and Asefa and even a third
person can demand the invalidation of the contract, as the object is illegal.

7.4.2 Period of Limitation

Though a party has the right to demand invalidation, this does not mean that this right
continues indefinitely. If a party wants to bring action for the invalidation of the contract, he
has to do so within two years from the ground for invalidation having disappeared.84
Otherwise, his action for invalidation would be barred by lapse of period of limitation.

The period of limitation starts running two years from the ground for invalidation having
disappeared not from the day of the making of the contract. Thus, in case of incapacity period
of limitation runs from the day the incapable party becomes capable. In case of defects of
consent such as mistake and fraud, action for the invalidation of the contract must be brought
within two years from the day the mistaken or defrauded party comes to know about the
mistake or fraud.

Check Your Progress Questions

1. Lakew lent 10,000 birr for Ali so that the latter can conduct contraband activities with the
money. The purpose to which the money will be lent is not stated in the contract.
According to the contract, the money is supposed to be returned on August 15, 2003.
However, Ali failed to repay the money lent. Thus, Lakew brought a legal action against
Ali. Ali argued the contract of loan is void or non-existent since the purpose to which the
money was lent is illegal. How would you advice Lakew?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
………………………………………………………………………………………………….

2. Ayele, a 17 year old, bought a TV set from Zenebe in a contract concluded on 15 July
2000. After having sold the TV set Zenebe realized that Ayele was 17 years old when he

83
Article 1808(2), Civil Code
84
Article 1810, Civil Code

54
 concluded the contract with him. Can Zenebe demand the invalidation of the contract on
the ground of incapacity of Ayele?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
………………………………………………………………………………………………….

3. "Form gives existence to the transaction." Do you agree with this statement? Why or
why not?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
………………………………………………………………………………………………….

7.5 SUMMARY

Object is a permanent element of a contract. Consent has to be given towards an effective

object i.e. lawful, moral, sufficiently defined and possible object. Obligations which are
against public policy are null and void. So far as form is concerned, it is not a permanent
requirement for the conclusion of the contract. Form becomes a requirement only in cases
provided by law. However, the parties, in other cases, have freedom to determine the form of
their contract. In cases where the law provides special form to be observed in the conclusion
of the contract, failure to comply with such a requirement entails the nullity of the contract.
Concerning invalidation, the law entitles the contracting parties even an interested third party
to demand the invalidation of the contract in cases where the object is not effective or in cases
where the contract is not concluded in the form prescribed by the law. This is different when
compared with defects in consent or incapacity where the right to demand invalidation is one-
sided.

7.6 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

1. The contract of loan remains valid irrespective of the fact that the money was devoted to
illegal purpose since the purpose is not stated in the contract or a supporting document.
2. The contract may only be invalidated at the request of the minor.

55
3. The statement holds true in cases where the law requires a special form to conclude
certain kinds of contracts, in which case the contract will not exist as long as it does not
comply with this formal requirement.

7.7 MODEL EXAMINATION QUESTIONS

1. Belete, an illiterate businessman, sold his car in a contract concluded on July 8, 2003 at a
price of 95,000 birr for Melaku. The contract was concluded in the house of Belete. Later
on, when Melaku required Belete to perform the contract the latter argued he is not going
to perform and is not bound by the contract since he is an illiterate person. Is this
argument acceptable?
2. On June 10,2000, Kebede, a 16 year old, concluded a contract of loan with Bekele. On
June 12, 2003 Kebede brought action for the invalidation of the contract on the basis of
incapacity. Bekele argued the action for invalidation is barred by lapse of period of
limitation since it is now three years from the making of the contract. He argued Kebede
should have brought action for invalidation two years from the day the contract was
concluded i.e. until June 11, 2002. Is this argument acceptable?

7.8 SELECTED READINGS

George K., Formation and Effects of Contracts,

56
UNIT 8: PERFORMANCE OF CONTRACTS

Contents
8.0 Aims and Objectives
8.1 Introduction
8.2 Who Shall Perform?
8.3 Who Shall Receive Performance?
8.4 What Should be Performed?
8.5 Place of Performance
8.6 Time of Performance
8.6.1 Anticipatory Breach
8.7 Transfer of Risk
8.8 Summary
8.9 Answers to Check Your Progress Questions
8.10 Model Examination Questions
8.11 Glossary
8.12 Selected Readings

8.0 AIMS AND OBJECTIVES

Up on completing this Unit, the student should be able to:

- understand who can carry out contractual obligations
- identify to whom performance should be made
- grasp what should be performed
- explain the place and time of performance
- identify the party who bears the risk of loss or deterioration of the object of the
contract

8.1 INTRODUCTION

The previous Units have primarily focused on rules concerning formation of contracts. Once a
contract has been lawfully formed, it becomes law of the parties. It binds the parties as though
it were law. The parties would be expected to perform their contractual obligations in

57
accordance with the contract. Thus, this Unit examines such other questions like who should
perform, to whom should performance be made, what should be performed, where and when
it should be performed. It also considers the question who bears the risk of loss or
deterioration of the object of the contract.

8.2 WHO SHALL PERFORM?

Performance is the carrying out of the obligations imposed by a contract. The obligations
under the contract may be carried out by the debtor, by a person authorized by the debtor, by
law or by court.85 Thus, as a rule, the debtor is not required to perform the obligations
personally himself. The person authorized to pay on behalf of the debtor usually has interest
in the performance of the obligation. He may be bound with the debtor (co-debtor) or he may
be bound for the debtor (guarantor).

In some exceptional cases, however, the debtor must carry out the obligations himself.86
Performance must be personal where there is express agreement to this effect and where the
creditor shows that this is essential to him. The first circumstance where performance is
expressly agreed to be personal does not need clarification. Personal performance is essential
to the creditor where the circumstances support such an assertion. For example, a painter
cannot be released from his obligations through another painter, or a depositary may not
transfer the things deposited with him. The creditor ordered the portrait considering the
personal skills of the painter. Thus, the painter cannot authorize another person to do the job.
The creditor deposited the things with the depositary considering his carefulness and honesty.
As a result, it is essential to the creditor that the debtor himself carries out the obligation
personally.

8.3 WHO SHALL RECEIVE PERFORMANCE?

The person qualified to receive performance is only the creditor, or somebody authorized by
the creditor or by the court or law.87 However, there is an exception to this rule. This rule
does not apply to incapable creditors. A creditor incapable to receive performance is, for

85
Article 1740(2), Civil Code
86
Article, 1740(1), Civil Code
87
Article 1741, Civil Code

58
instance, a minor, or a person incapacitated because of insanity or judicial interdiction.
Performance made to an incapable creditor is invalid unless it has benefited or enriched the
incapable creditor.88 For instance, Beyene paid 2,000 birr for Fekadu, who is a minor.
Consider the following scenarios. Fekadu returned the money for his tutor, Sinedu. If
Fekadu‟s tutor demands second payment from Beyene, the debtor, she will not succeed since
the money reached the person authorized by law to receive it.

In a different scenario, Fekadu spent the money on necessaries such as clothing, shelter and
basic education. By so doing, he preserved his health and increases his earning power. In this
case, too, Beyene‟s payment would be valid since Fekadu has been enriched. However, if
Fekadu spent the money on gambling and drinks, Beyene would be obliged to make second
payment.

Performance made to a person unqualified to receive it is invalid unless the creditor confirms
it or such performance benefited him.89 A person unqualified to receive performance is one
who is not authorized by the creditor, by court or law to do so. The performance can become
valid though it has been made to a person unqualified to receive it if the creditor confirmed it
later. On the other hand, if an employee or relative of the creditor received payment due to the
creditor and invested the money in the creditor‟s property and if the investment turned to the
advantage of the creditor, such payment would be valid in spite of the fact that the payment
was made to a person unqualified to receive it.

Performance made to a person who appears to be the creditor without doubt is valid.90
Example: Kebede was believed to be the heir of deceased Teka because the latter made a will
dated 3rd of October. Teka lent 10,000 birr for Tesfu while he was alive. In his testament,
Teka inherited the 10,000 birr to Kebede. Accordingly, Tesfu made the payment to Kebede.
On December 9, it was found out Teka revoked or cancelled the will he made and bequeathed
the 10, 000 birr to Kassa instead of Kebede. Does this mean that Tesfu‟s payment to Kebede
was invalid? Tesfu‟s payment to Kebede remains valid and Kassa cannot demand second
payment from him. Kassa, however, can demand the payment from Kebede.

88
Article 1742, Civil Code
89
Article 1743(1), Civil Code
90
Article 1743(2), Civil Code

59
8.4 WHAT SHOULD BE PERFORMED?

The debtor performs his obligations under the contract by tendering the thing due. In other
words, the debtor would be released by performing exactly what was promised.91 For
example, if Gojjam honey is agreed up on by tendering Gojjam honey. The creditor may
refuse to accept a thing other than the one agreed upon even if the thing offered is of equal or
higher value. If the thing agreed up on is Gojjam honey, the creditor may not accept Adigrat
honey. If the thing agreed up on is Axumit vine, the debtor may refuse to accept Guder vine
even if Guder vine is of equal or higher value than Axumit vine. This rule flows from the
principle that contracts are the law of the parties.

If the performance of the debtor is not in conformity with what was exactly promised, the law
entitles the creditor to refuse performance, to suspend his performance and also exercise
remedies of non-performance.

However, the creditor may not refuse the delivery of fungible things due to small deficiencies
in the quality and quantity unless this has been expressly agreed up on or this is essential to
him.92 Fungible things are things, which are interchangeable by weight and measure. They
include teff, corn, oil, alcohol, etc. If Abebe agreed to deliver 100 liters of alcohol of 90%
concentration, but delivered 99 liters of alcohol of 89% concentration, the creditor, Kebede,
may not refuse the delivery saying it does not exactly conform to the terms of the contract.
This is due to the fact that small deficiencies in the quality and quantity in the case of fungible
things are sometimes unavoidable or inevitable due to evaporation, transportation, etc.
However, Kebede may refuse delivery in such cases only where there is express agreement or
contractual specification to this effect, or he establishes that this is essential to him. For
instance, Kebede might have needed the alcohol for medical or chemical use. In this case, the
lack of 1% concentration may render the entire delivery unfit for the purpose Kebede has in
view. Thus, he may refuse the entire delivery since exact conformity is essential to him.
Though the creditor cannot refuse delivery, as a rule, he may reduce his own performance
proportionately.

91
Article 1745, Civil Code
92
Article 1748, Civil Code

60
8.5 PLACE OF PERFORMANCE

The parties are free to agree as to where performance should be made. In such cases, place of
performance is the agreed place.93 If there is no agreed place, place of performance is the
place where the debtor had his normal residence at the time of the contract.94 This is the
application of the rule in case of doubt interpretation in favor of the debtor. The rule that
performance is to be made at the place where the debtor had his normal residence at the time
of the contract is beneficial to the debtor in that it preserves him from bearing transportation
or forwarding costs. Thus, payments are fetchable by the creditor from the debtor and not
portable by the debtor to the creditor. However, if the debtor changes his normal residence
after the conclusion of the contract, he would be required to perform at the place where he had
residence originally. In case where the subject matter of the contract is a definite thing, the
place of performance would be the place where the definite thing was located.95

8.6 TIME OF PERFORMANCE

Contractual obligations shall be carried out at the agreed time i.e. within the time established
by the contract.96 If the contract does not specify a time for performance, the obligations shall
be carried out by the debtor when he is required by the creditor to do so.97 However, as an
exception to this rule, the law provides that a non-performing contracting party who has no
benefit of time may not require the other to carry out his obligations.98 For example, one
cannot demand the handing over of the jewel he bought, before paying the price or offering to
pay by materially showing the price. If the buyer demanded the delivery of the jewel before
paying the price or offering to pay the price, the seller may suspend his obligations i.e.
provisionally refuse to hand over until the buyer performs his obligations. The buyer may
demand the delivery of the jewel before paying only where he has benefit of time or if the
purchase is post-payable purchase or credit.

93
Article 1755(1), Civil Code
94
Article 1755(2), Civil Code
95
Article 1755(3), Civil Code
96
Article 1756(1), Civil Code
97
Article 1756(2) &(3), Civil Code
98
Article 1757(1), Civil Code

61
8.6.1 Anticipatory Breach
The law permits a party to suspend the performance of his obligations, if the other party
clearly shows that he will not perform when the time for performance arrives.99 For instance,
Alemu concluded a contract dated 1st of September to serve as a teacher at a certain school.
According to the contract, his job starts two months from the day of the making of the
contract i.e. 1st of November. The school is supposed to make advance payment for Alemu.
However, Alemu declared at a certain public meeting that he has changed his mind and that
he is not going to work at this school. Or Alemu concluded a contract with another school to
work full time as a teacher as of 1st of November. In the event of such cases, the law permits
the first school to suspend its obligation i.e. paying the advance payment for Alemu as was
required by the contract. Suspensions of obligations (i.e. temporary refusal to carry out
obligations) is justified in light of the fact that Alemu, the other party, has clearly shown that
he is not going to perform.

8.7 TRANSFER OF RISK

The theory of transfer of risk deals with the question whether it is the creditor or the debtor
who stands to lose by the unpreventable loss or deterioration of the object of the contract.
Risk is prima facie with the property. Save some exceptions, the risk is with the person who is
in actual control of the object.100 Abebe sold a coffee machine set for Alemu. Until delivery of
the coffee machine set to Alemu, the seller shall bear the risk. This is in line with the rule that
the risk of loss remains with the debtor until delivery. Consequently, after delivery it would
be the creditor who would bear the risk of loss. If the coffee machine set was damaged, as a
result of sudden fire accident before it was delivered to the buyer, the seller shall not be paid.
However, in cases where the creditor was placed in default for not taking over the thing, then
he would bear the risk in spite of the fact that he will not be entitled to the thing.101 In the
example above, Abebe might have already reminded Alemu to take delivery of the coffee
machine set, and Alemu failed to do so. Thus, in this case if the coffee machine was damaged
as a result of sudden fire accident before Alemu took delivery, Alemu would bear the risk for

99
Article 1757(2), Civil Code
100
Article 1758(1), Civil Code
101
Article 1758(2), Civil Code

62
the loss since he has already been placed in default. Thus, he shall pay the price to the seller
debtor.

Check Your Progress Questions

1. Bahiru entrusted his merchandise to the care of Taye who owns a warehouse in a contract
of deposit conclude between them. After taking delivery of the merchandise, Taye decided
to authorize another person, Seyoum who also owns a warehouse and did so. When
Bahiru learned about this, he brought action alleging breach of contract by Taye. Taye
argued he is entitled to authorize another person to carry out the obligation instead of
carrying it out himself. Is the defence invoked by Taye acceptable?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
………………………………………………………………………………………………….

2. " Payments are fetchable by the creditor from the debtor and not portable by the debtor to
the creditor." Do you agree with this statement? Why or why not?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
………………………………………………………………………………………………….

3. " A non-performing party who has no benefit of time can not require the other party to
perform his." Explain.
…………………………………………………………………………………………………
…………………………………………………………………………………………………
………………………………………………………………………………………………….

8.8 SUMMARY

In this Unit, many questions related with the carrying out of contractual obligations have been
dealt with. It has been stated that, as a rule, the obligations may be performed by the debtor
himself, or a person authorized by the debtor, by the law or the court. In some exceptional
cases, however, performance should be made by the debtor himself. This is the case where
there is express agreement to that effect or this is essential for the creditor. Performance, as a

63
rule, can be made to the creditor, a person authorized by the creditor by law or by court.
However, performance made to an incapable creditor would be invalid unless it is shown that
the creditor has been benefited by it. In the same vein, performance made to an unqualified
person would be invalid unless the creditor has confirmed it or he has been benefited by it.
The debtor must perform what is exactly promised. However, the creditor cannot refuse
delivery of fungible things on account of slight deficiencies in the quality or quantity. The law
upholds the principle of freedom of contract by providing that the place and time of
performance is the agreed place.

8.9 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

1. He cannot transfer his obligation of keeping the thing since performance personally by the
debtor is essential to the creditor in this case.
2. Payments are fetchable by the creditor from the debtor and not portable by the debtor to
the creditor. This applies in cases where there is no agreed place of payment in the
contract. It is up to the creditor to collect payment by going to the debtor's normal
residence at the time of the contract. This relives the debtor from incurring expenses
related with transportation.
3. As a rule, a party must perform his obligations immediately when required by the other
party. However, if the parties have agreed on simultaneous performance of their
contractual obligations, a party cannot demand the other to perform his obligations
without performing his obligations himself.

8.10 MODEL EXAMINATION QUESTIONS

1. On August 1, 2003, Kedir concluded a contract to sell a vacuum cleaner for Meaza at a
price of 5,000 birr. Though she paid the price, she did not take delivery of the vacuum
cleaner. On August 7, 2003, Kedir sent a notice for Meaza to come and take delivery.
However, she was unable to come and take delivery for the following few days. On
August 9, 2003, Kedir's store was destroyed in an unfortunate and sudden fire accident.
The vacuum cleaner was also destroyed in this accident. Few days later, Meaza demanded

64
 Kedir to return the price of the vacuum cleaner. Is Kedir required by the law to hand over
the price? Why or why not?
2. Risk prima facie is with the property. Explain.

8.11 GLOSSARY

Fungible things- things interchangeable by weight and measure

8.12SELECTED READINGS

George K., Formation and Effects of Contracts

65
UNIT 9: NON-PERFORMANCE OF CONTRACTUAL OBLIGATIONS

Contents
9.0 Aims and Objectives
9.1 Introduction
9.2 Default Notice
9.3 Remedies of Non-Performance
9.3.1 Forced Performance
9.3.2 Cancellation
9.4 Compensation for Damage
9.5 Summary
9.6 Answer to Check Your Progress Exercise
9.7 Model Examination Questions
9.8 Glossary
9.9 Selected Readings

9.0 AIMS AND OBJECTIVES

Up on completing this Unit, the student should be able to:

- understand the distinction between invalidation and cancellation
- understand what is meant by default notice
- identify exceptional cases where the giving of default notice is not necessary
- comprehend the remedies of non-performance and under what circumstances forced
performance may be sought as a remedy
- identify the conditions the creditor must prove to demand compensation for damage
- understand the conditions the debtor must prove to avoid liability for damage

9.1 INTRODUCTION

The previous Unit focused on rules concerning performance. This Unit would be dealing with
the rules applicable in the event of non-performance of contractual obligations. Non-
performance refers to failure to carry out contractual obligations. If a party failed to perform
his contractual obligations, the performing party may apply for remedies of non-performance

66
i.e. forced performance or cancellation. In addition, whichever of these remedies he applies
for he may also demand compensation for damage as well.

9.2 DEFAULT NOTICE

It has been stated that in cases where a party fails to perform his contractual obligations, the
other may seek remedies of non-performance: forced performance or cancellations along
with claiming compensation for damage.102 However, as a rule, the giving of default notice is
a necessary prerequisite or precondition for seeking remedies of non-performance.103 Default
notice is demanding the debtor to perform his obligations. Default notice may be given in
written form or orally or by any other act denoting the creditor's intention to obtain
performance. In the default notice the creditor sets a time limit after which he will no longer
accept performance of the contract.104 The period fixed must be reasonable. The reasonability
of the time limit is determined considering the circumstances of the case.105

However, the giving of default notice is not always necessary. The giving of default notice is
not necessary in the following four circumstances.
i) When the obligation is that of not to do type.106 It has been stated that obligations may
be to do something or not to do something. In the case of obligations not to do
something, the giving of default notice is not necessary. Example: Abebe sold his
grocery business to Kebede. In this contract, Abebe undertook the obligation not to re-
open another grocery business in the same street. If Abebe re-opened another grocery
business in the same street, this implies that the obligation not to do has already been
breached. Thus, once the obligation is breached, it would be pointless to give default
notice.
ii) The giving of default notice will not be necessary if the debtor has declared in writing
that he will not perform his obligation.107

102
Article 1771, Civil Code
103
Article 1772, Civil Code
104
Article 1774(1), Civil Code
105
Article 1774(2), Civil Code
106
Article 1775(a), Civil Code
107
Article 1775(c), Civil Code

67
iii) If the contract states that the debtor would be in default up on lapse of the time fixed
in the contract with out the need to give default notice.108 Since the parties are free to
set aside the application of the rule, which requires the giving of default notice before
seeking remedies of non-performance, so doing will not be necessary.
iv) The giving of default notice will not be necessary if the obligation the debtor assumed
may only be performed only within a fixed period of time but the debtor allowed it to
lapse.109 If there are such compelling expressions in the contract such as delivery must
occur October 4 at the latest, default notice will not be necessary. Likewise, if Almaz
orders delivery of cakes and drinks for her birthday, this excludes performance after
the lapse of her birthday by necessary implication. Thus, she does not need to give any
default notice.

9.3 REMEDIES OF NON-PERFORMANCE

As mentioned above, the aggrieved party may seek remedies of non-performance after having
placed the non-performing party in default. These remedies are forced performance and
cancellation. In addition, he may apply for compensation for damages. Each of these remedies
will be considered in turn.

9.3.1 Forced-Performance
Two conditions must be satisfied before forced performance is ordered110:
i) the creditor must have special interest in the forced performance of the obligations. This
special interest, for instance, exists where a party is served with vital goods (e.g. water, or
electricity) or vital services (e.g. postal or telecommunication services) by monopolistic
bodies. It is of special interest to the creditor since, such bodies being monopolistic, there is
no possibility of getting the services elsewhere. If electricity authority cuts off its supply in
breach of the contract, the court may order forced performance of the contract.
ii) the forced performance must not affect the personal liberty of the debtor. For example, an
artist. A painter, a writer may not be demanded to perform his obligations forcibly without
affecting his liberty.

108
Article 1775(d), Civil Code
109
Article 1775(b), Civil Code
110
Article 1776, Civil Code

68
On the other hand, in cases where the obligation the debtor assumed is of not to do type, the
creditor may be authorized to destroy what the debtor has done in violation of his contractual
obligations. Similarly if the debtor assumed the obligation to deliver fungible things (i.e.
things interchangeable by weight and measure) such as coffee, teff, oil, etc, but failed to
deliver, the creditor may be authorized by a court of law to buy the fungible thing at the
expense of the debtor.

9.3.2 Cancellation
In situations where forced performance is not available or, for some other reason, a party may
resort to cancellation. Cancellation differs from invalidation both in its causes and effects. A
contract is invalidated when it is not lawfully formed. However, a contract is cancelled not
because it was not lawfully formed but due to failure on the part of one of the party to carry
out his obligation. The effect of invalidating a contract is restoration of the parties to the
position where they would be had the contract not been made. However, the effect of
canceling a contract would be restoration of the parties to the position they would be had the
contract been performed.

Cancellation could be unilateral or judicial. Judicial cancellation is cancellation by a court of

law. Cancellation, as a rule, is judicial. Judicial cancellation may be ordered only where there
is a fundamental breach.111 The breach is said to be fundamental when it affects the very basis
of the contract. The breach is said to be fundamental, where non-performance is total and
irreversible. Example: Abebe has destroyed the camera sold for Kebede or if he has sold the
same camera for Bekele after its sale for Kebede. In this case, non-performance is total and
cannot be reversed. Thus, judicial cancellation will be ordered. Cancellation may not be
ordered when the part which the debtor has failed to perform is of little importance in
comparison with the obligation in its entirety.

As mentioned earlier, cancellation, as a rule, is judicial. However, in four exceptional cases a

party may unilaterally cancel the contract. Unilateral cancellation of the contract is
cancellation by the contracting party. Unilateral cancellation is possible only in the following
four circumstances.
111
Article 1784, Civil Code and Article 1785, Civil Code

69
i) If there is cancellation clause in the contract itself entitling a party to cancel the contract
unilaterally in the event of certain conditions and that these conditions are fulfilled. 112
ii) A contracting party may cancel the contract unilaterally where the period of grace, the
reasonable time and the fixed -time for the performance of the obligation lapses.113 Period
of grace is time, which is granted by the court for the performance of his obligations. The
court may extend the time for performance if it is convinced that the debtor in good faith
or honest but unfortunate.114 The aggrieved party may also cancel the contract, where the
reasonable time, which he indicated in the default notice for the debtor to perform his
obligations, lapsed with the debtor performing.115 Likewise, if the debtor cannot deliver
the drinks ordered for wedding before the lapse of the ceremony, the party who ordered
such drinks may cancel the contract without even the need to give default notice.116
iii) A party may also cancel the contract unilaterally where the debtor performance becomes
impossible. If the horse Abebe sold for Kebede died after the conclusion of the contract,
but before it was delivered for Kebede, Kebede may cancel the contract unilaterally.117
iv) A party may also cancel the contract unilaterally without the need to give default notice,
where the other party informed him in writing that he is not going to perform his
obligations.118 Therefore, the school may cancel the contract of employment with the
teacher unilaterally with out the need to go to court, if the teacher informed the school in
writing that he is not going to perform his obligations.

9.4 COMPENSATION FOR DAMAGE

In addition to cancellation and forced performance, a party may apply for compensation for
damage. Compensation for damage is available regardless of which of the two remedies is
applied. The plaintiff will be awarded compensation for damage only where he proves:
i) he suffered damage

112
Article 1786, Civil Code
113
Article 1787, Civil Code
114
Article 1770, Civil Code
115
Article 1774, Civil Code
116
Article 1775(b), Civil Code
117
Article 1788, Civil Code
118
Article 1789, Civil Code

70
 ii) the damage was caused by the defendant‟s non-performance of a contractual
obligation.
The defendant, on the other hand may avoid liability to pay damage only where he
establishes:
i) the precise cause of his non-performance
ii) that the cause was a force majeure.

Force majeure is an event making performance impossible. An event is said to amount to a

force majeure where it is:
i) Unforeseeable (i.e. a reasonable person would not have normally foreseen the
event)
ii) Insurmountable (i.e. it prevents the defendant absolutely from performing
impossible his obligation)

As a result, an event that makes performance absolutely impossible but should normally have
been foreseen, is not force majeure. Likewise, an event that is unforeseeable but only
increases the difficulties and costs of the performance without making it impossible is not
force majeure. Depending on the circumstances, the following can be considered as force
majeure events.119
(i ) Unforeseeable act of a third party for whom the debtor is not responsible
(i i ) Governmental prohibition preventing the performance of the contract
(i i i ) A natural catastrophe such as earthquake, lightening or flood
(iv) International or civil war
(v) The death or unexpected grave accident or illness of the debtor.

9.5 CHECK YOUR PROGRESS QUESTIONS

1. Mitku, a professional athlete, concludes a contract to advertise a new sporting product for
Asrat sporting goods store. In this contract, Mitiku assumed the obligation not to advertise
any sporting product for another similar firm. However, Mitiku found a better deal with
another dealer by the name Shemsu sporting goods and concluded another contract to
advertise sporting goods for the new firm. Asrat sporting goods brought action against

119
Article 1793, Civil Code

71
 Mitiku for breach of contract. Mitiku argued that the action is not legal, as he was not
given with default notice. Is this argument in keeping with the law? Why or why not?
2. Explain the distinction between invalidation and cancellation of contracts.

9.6 SUMMARY

If a contracting party failed to carry out his obligations, this gives the other party the right to
demand either the forced performance of the contract or its cancellation. In addition to these
remedies, he can also apply for the payment of compensation for damage. In order to seek
these remedies, the giving of default notice is a pre-requisite. Default notice is any act
denoting the creditor's intention to obtain performance. It provides the period of time after the
expiry of which the creditor shall not accept actual performance. The time must be
reasonable. Forced performance may be required as a remedy provided that the creditor has
special interest in the performance of the contract and the performance would not affect the
personal liberty of the debtor. If one of the conditions is not met, cancellation of the contract
would be the other remedy. The debtor, may only avoid liability for damage if he can prove
that he was prevented from performing due to a force majuere event.

9.7 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

1. Mitiku's argument that he was not given a default notice is not acceptable. In the first
place, the law does not require the giving of default notice in this case since the obligation
assumed by Mitiku is that of obligation not to do something i.e. not to advertise for
another firm.
2. Invalidation and cancellation differ in respect to their cause and effect. A contract is
invalidated when there is a defect in its formation. In the case of cancellation, however,
the contract is lawfully formed. The contract is cancelled because of non-performance. On
the other hand, the effect of invalidating a contract is restoration of the parties to the
position where they would be had the contract not been made. However, the effect of
canceling a contract would be restoration of the parties to the position they would be had
the contract been performed.

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9.8 MODEL EXAMINATION QUESTION

1. Marta, an eminent musician concluded a contract to perform at a big band concert.

However, she failed to appear at the concert due to heavy flu. When she was sued and
required to pay compensation for damage she argued she couldn't be required to pay since
she failed to perform as a result of the flu she had which she says is force majeure. Is this
argument tenable?

2. Mikias ordered drinks and cakes to be delivered at his residence for his birthday party on
July 7. On July 7, the delivery van of the pastry had a flat tire while it was on its way to
Mikias's residence. On the morrow, furious Mikias brought action against the pastry
demanding cancellation of the contract and compensation for damage. The pastry argued
the lawsuit should be dismissed as Mikias did not give it a default notice before instituting
the lawsuit and it should not be required to pay compensation for damage as failure to
perform was due to a force majeure event. Identify the issues and state how they should be
resolved.

9.8 GLOSSARY

Force majeure- an event that is unforeseeable and insurmountable

Default Notice- any act denting the creditor's intention to receive performance

9.9 SELECTED READINGS

George K., Formation and Effects of Contracts

73
UNIT 10: LAW OF SALES

Contents
10.0 Aims and Objectives
10.1 Introduction
10.2 Contract of Sale
10.3 Object of Contract of Sale
10.4 Obligations of the Seller
10.4.1 Obligation to Deliver
10.4.1.1 Modes of Delivery
10.4.1.2 Time and Place of Delivery
10.4.2 Obligation to Transfer Ownership
10.4.3 Obligation of Warranty
10.4.3.1 Express Warranty
10.4.3.2 Implied Warranty
10.5 Obligations of the Buyer
10.5.1 Obligation to Pay
10.5.2 Obligation to Take Delivery
10.6 Summary
10.7 Answers to Check Your Progress Questions
10.8 Model Examination Questions
10.9 Glossary
10.10 Selected Readings

10.0 AIMS AND OBJECTIVES

Up on completing this Unit, you should be able to:

- define contracts
- identify the object of contract of sale
- understand the obligations of the seller and the buyer in a sale contract

74
10.1 INTRODUCTION

This Unit focuses on a specific contract: contract of sale. It provides definition of sale and
deals with the subject matter of sale contracts. It dwells on the respective obligations of the
seller and the buyer as well.

10.2 CONTRACT OF SALE

A contract of sale is a contract whereby one of the parties, the seller, undertakes to deliver a
thing and transfer its ownership to another party, a buyer, in consideration of a price
expressed in money which the buyer undertakes to pay him.120 As a contract, sale must fulfill
the permanent requirements of a valid contract: capacity, consent and object. The vast
majority of cash sales are made orally. There must be consent freely, truly and consciously
given. The buyer and the seller must be capable to conclude the contract. The object of the
contract of sale must be sufficiently defined, lawful and moral and possible.

Price or consideration is another requirement of contracts of sale. The price must be stated in
money. The requirement of consideration or price distinguishes contract of sale from barter
because there is no price in money. It also distinguishes contract of sale from donation, as
there is no consideration in the latter.

10.3 OBJECT OF CONTRACT OF SALES

The object of contract of sale includes corporeal chattels121, movables, and intrinsic parts or
elements of immovables122, which can be separated and transferred as corporeal movable.
Corporeal chattel are things which have material existence and can move themselves or be
moved by man without losing their individual character. Things which are part of the
immovable that can be separated therefore are considered as movables, and are the intrinsic
elements of an immovable such as trees, crops on the land, and materials of building under
demolition or products of quarry. Unless provided otherwise, the term corporeal movable also
includes claim and other incorporeal rights embodied in securities to bearer and natural forces

120
Article 2266, Civil Code
121
Article 226(1), Civil Code
122
Article 2268(1), Civil Code

75
of an economic value such as electricity. Thus, they are also considered as corporeal
movables. Thus, sale relates to corporeal movables, intrinsic elements of immovables, claims
and other incorporeal rights embodied in securities to bearer and natural forces of economic
value. As a result, the law of sales does not apply to the following.

i) Money – Money cannot be sold or brought but is exchanged.

ii) Choses in action- these are intangible things such as credit accounts and cannot be
the subject matter of sales since they are assigned or negotiated rather than sold.
They are governed by contracts in general.
iii) Immovables. – Immovable things such as land and buildings are not the subject
matter of sales contract. Sales relates only to movables and intrinsic parts of
immovables.
The thing may be an existing thing or a future thing, or a thing belonging to a third party.123
Existing things refer to things, which are already in existence. Future things refer to things,
which are not yet in existence and existing things not yet acquired by the seller.

10.4 OBLIGATIONS OF THE SELLER

10.4.1 Obligation to deliver

The seller assumes the obligation to deliver the thing in accordance with the provisions of the
contract and also the Civil Code.124 Delivery refers to the voluntary transfer of possession
from one person to another. In other words, it is the handing over of the thing and its
accessories in accordance with the contract. Accessories refers to “anything which the
possessor or owner of a thing has permanently destined for the use of such a thing.”125

10.4.1.1 Modes of Delivery

Delivery may be actual or constructive. There will be actual delivery where the possession of
goods is transferred from the seller to the buyer, or to a carrier (e.g. airliner, shipper, etc) for
the purpose of transmission to the buyer. Delivery is constructive when it is effected without
any change in the actual possession of the thing delivered. For instance, the seller may agree

123
Article 2270, Civil Code
124
Article 2273(1), Civil Code
125
Article 1136, Civil Code

76
to hold the thing on behalf of the buyer. The thing must be certain and the thing pertaining to
a generic species which has been individualized.

10.4.1.2 Time and Place of Delivery

The contracting parties are free to fix the time of delivery in their contract. Where the parties
have agreed that delivery shall take place within a certain period of time, it shall be the seller
to fix the exact date of delivery unless it appears from the circumstances of the case that it
shall be the buyer who can do so. If no time is fixed in the contract as to the time where
delivery is to take place, the seller shall deliver the thing as soon as the buyer requires him to
do so. In addition, unless provided otherwise, delivery of the thing shall be simultaneous with
the payment of the price.

The parties are free to fix the place where delivery of the thing is to take place. If the contract
did not stipulate a place where delivery is to take place, it takes place at the place where at the
time of the contract the seller had his place of business or, if there is no such place, at his
residence. On the other hand, if the object of the contract of sale relates to a specific thing, the
place of delivery would be the place where this thing was located at the time of the contract
provided the parties know this place.

10.4.2 Obligation to Transfer Ownership

The seller must also transfer the ownership of the thing to the buyer.126 The ownership of a
corporeal thing is transferred to the buyer at the time it is delivered to him.127 The delivery
could be actual or constructive. Thus, the mere conclusion of the contract is not in itself
sufficient to transfer ownership. In addition to the conclusion of the contract, the thing sold
must be handed over to the buyer directly or constructively.

Transfer of the ownership over the thing presupposes that whosoever sells a thing has a valid
title to transfer ownership to another. If the title of the transferor‟s title is defective the
transferee‟s title also becomes defective. This is due to the rule that no one can transfer what
he does not own. (Nemo dat quod non habet.) In other words, no one can transfer a better title
than he himself possesses. Where goods are sold by a person who is not their owner and who

126
Article 2273(2), Civil Code
127
Article 1186, Civil Code

77
does not sell them under the authority or with the consent of the owner, the buyer acquires no
better title to the goods than the seller had.

Commercial convenience has, however, called for the recognition of certain exceptions to the
nemo dat rule. This exception is ownership by acquisition. A party who concludes a contract
and consequently comes in to possession of the thing sold to him in good faith is deemed to
have acquired ownership title by virtue of the law.128 In such cases, it is not necessary that the
seller have ownership titile. The conditions that must be fulfilled for the buyer to acquire
ownership by law are:

i) Contract for consideration; as a result gift is not protected.

ii) Intent to acquire ownership
iii) Good faith on the part of the buyer
iv) Possession.

Example: Abebe deposited his knitting machine with Bekele. Bekele, the depositary sold the
knitting machine, which he was given to keep to Fetene at a price of 10,000 birr. Fetene
bought the machine believing that he is contracting with a person entitled to transfer the thing
to him. In this case, Fetene would be entitled to ownership over the thing despite the fact that
the seller himself is not the owner of the machine and that he is not authorized to sell. The
rationale for this is that if the original owner, Abebe, has mistakenly placed his trust in Bekele
and delivered possession of the machine to him, the third party who acquired ownership in
good faith, Fetene should not suffer for Abebe's misplaced confidence.

A buyer who acquires a corporeal movable is considered to be in good faith where he believes
that he is contracting with a person entitled to transfer the thing to him. Good faith of the
buyer is presumed. This presumption may be rebutted by producing proof to the contrary.
Good faith must exist at the time of entry in to possession. Discovery by the possessor that he
acquired a thing from a person who is not entitled to transfer the ownership shall be of no
effect where such discovery occurs after he entered in to possession.

128
Article 1161 & 1184, Civil Code

78
However, ownership does not transfer by acquisition in good faith in the case of certain
special movables such as motor vehicles, ships, airplanes, etc since such things require
registration. Thus, the buyer is expected to ensure whether then seller has valid title (i.e.
ownership) before concluding the contract.

10.4.3 Obligation of Warranty

The obligation of warranty refers to promise that a proposition of fact is true. Warranty is an
assurance by one party to agreement of existence of fact up on which other party may rely. It
includes the obligation of the seller to guarantee that the thing sold to the buyer conforms to
the contract and is free from defects. It is a guarantee by sellers with respect to the goods they
sell. The main function of warranty is to establish the characteristics of a thing (the kind of
ownership or the level of quality) to which a person is entitled as a result of the existence of
the warranty. Warranty can be express or implied.

10.4.3.1 Express Warranty

An express warranty is a promise, in sales agreement, which is included in written or oral
terms of sales contract under which the seller assures the quality, description or performance
of goods. It is an affirmation of a fact or a promise made by the seller to the buyer concerning
the nature of the goods. This promise becomes a basis of the contract. In other words, the
buyer buys the goods on a reasonable assumption that the goods are as described by the seller.
As stated above, express warranty usually is either written or oral; however, it may as well be
expressed by conduct. The seller may not necessarily use the formal term warranty or
guarantee for the promise to be considered as warranty. Express warranty may be expressed in
three different ways.
i) Any affirmation of a fact or a promise that relates to the goods creates an express
warranty that the goods will match the fact or promise.
ii) Any description of the goods creates an express warranty that the goods will match
the description.
iii) Any sample or model of the goods creates an express warranty that the goods will
conform to the sample or the model.

79
Ads that describe a product as having certain characteristics may be considered as express
warranty if they amount to affirmation of a fact. However, puffs and statements of opinion are
not warranties. A puff is an obvious exaggeration about the virtues of goods, which by virtue
of its vagueness would not be expected to ground any form of liability. Statements of opinion
about the value of goods too, do not generally give rise to liability. Such statements such as
"this is the finest coffee machine in the market" “superb quality”, “ you cannot buy a better
beer”, “most beautiful”, etc illustrate what is meant by puffing. Buyers are not justified in
relying on such personal opinions of value judgments. However, puffs and statements of
opinion may be viewed as warranties where they are made by skilled persons.

10.4.3.2 Implied Warranty

Implied warranty is warranty imposed by the operation of the law. In many cases, the law
requires that the seller provide certain minimum standard of quality and performance even if
no explicit promises or representations are made. The thing sold must be in conformity with
the terms of the contract and it must be free from defects.129 Firstly, the thing delivered must
be in conformity with the terms of the contract. Difference in quantity, greater or smaller, and
that of type of species than agreed under the contract constitutes absence of conformity.
Example: If the seller undertook to deliver high quality coffee but instead delivered coffee
below average quality to the buyer, there is breach of this implied warranty that the thing sold
will conform to the terms of the contract.130 Secondly, the thing delivered should be free from
defects. This warranty becomes operative where the thing delivered does not possess the
quality required for its normal use. In other words, the goods must be suitable for the purpose
for which they are normally used.

The seller warrants that the thing sold is not affected by defects. This warranty is clearly
broken where the thing sold does not possess the quality required for its normal use or
commercial exploitation. The warranty is broken if the food cannot be eaten or if the bike
does not ride.

The following are some of the types of implied warranties.

129
Article 2287, Civil Code
130
Article 2288, Civil Code

80
Warranty of Title: This warranty implies that the seller has the right to sell the goods and the
title (i.e. ownership) transferred is good. This warranty is breached if the goods belong to a
third party and the seller has at the relevant moment no power to transfer the property in them
to the buyer.

Warranty of Merchantability: Warranty that the goods sold are merchantable i.e. they are
marketable or usable as such goods normally are. The buyer may be buying to resell or buying
to use.

Warranty of Fitness for a particular Purpose: This is warranty that the goods delivered to the
buyer are reasonably fit for the purpose they are required. If the goods are not fit for this
purpose, the buyer has a right of action for breach of warranty. B to S supplied coal for a
specified ship as a propeller. The coal was unsuitable for that particular ship though it was
suitable it was suitable for other ships. As a result, there is breach of warranty. The coal has
to be suitable for that particular ship. Where a coal merchant undertakes to supply coal for a
particular and specified ship he must supply coal suitable for that particular ship.

Warranty against Infringement: Warranty that the goods sold will be delivered free from a
rightful claim of any third party. Thus, the seller warrants that there is no third party having a
copy right, patent or similar legal protection on the goods unless prior permission to use has
been obtained.

10.5 OBLIGATIONS OF THE BUYER

10.5.1 Obligation to Pay

The most evident obligation of the buyer is the obligation to pay.131 The amount of the price is
normally fixed by the contract. The price may also be left to be fixed by a third party valuer or
referee. The time of payment is on delivery of goods unless agreed otherwise. In other
words, unless agreed otherwise, the payment should be simultaneous with delivery.

131
Article 2304, Civil Code

81
10.5.2 Obligation to Take Delivery
The buyer has the obligation to take delivery of the thing sold to him at the agreed place and
at the agreed time.132 If he fails to do so the risk of loss or deterioration transfers to him. A
buyer who ordered goods breaks his contract if he refuses to take delivery. He may also be
required to bear the expenses incurred by the seller to preserve the thing. Pursuant to the law
it would be the buyer who bears forwarding or transport expenses, if any. However, it would
be the seller who would bear expenses of counting, measuring, weighing, etc. The debtor also
assumes the obligation to examine the thing and notify immediately for the buyer of any non-
conformity in terms of quality and quantity and also of defects in the thing, if any.

Check Your Progress Questions

1. If you contract to buy goods, when do you receive ownership?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………

2. Explain the distinction between actual and constructive delivery?

…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………

10.6 SUMMARY

Attempt has been made concerning the peculiar features of contract of sale. The subject
matter of sale contracts relates only to corporeal chattels i.e. corporeal chattel are things
which have material existence and can move themselves or be moved by man without losing
their individual character. However, special movables such as cars are not covered since
ownership does not transfer upon delivery. Other additional formalities need to be complied
with so as to transfer ownership in the case of such special movables. Attempt has also been
made to distinguish contracts of sale from other kinds of contracts such as barter and
donation. It has been stated that the seller assumes the obligation to deliver the thing he sold,

132
Article 2313, Civil Code

82
to transfer ownership and to warrant that the thing he sold conforms to the contract and is free
from defects. The buyer, on the other hand, undertakes to pay and also to take delivery.

10.7 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

1. In such cases, ownership is transferred up on delivery.

2. Delivery may be actual or constructive. There will be actual delivery where the possession
of goods is transferred from the seller to the buyer, or to a carrier (e.g. airliner, shipper,
etc) for the purpose of transmission to the buyer. Delivery is constructive when it is
effected without any change in the actual possession of the thing delivered. For instance,
the seller may agree to hold the thing on behalf of the buyer. The thing must be certain
and the thing pertaining to a generic species which has been individualized.

10.8 MODEL EXAMINATION QUESTIONS

1. Zeleke deposited his brand new vacuum cleaner with Belay. Belay, the depositary sold the
vacuum cleaner, which he was given to keep to Belete at a price of 10,000 birr. Belete
bought the machine believing that he is contracting with a person entitled to transfer the
thing to him. Later Zeleke came to know that the vacuum clear has been sold by Belay to
Belete. He demanded Belete to return the vacuum clear for him. What advice would you
give for Belete?
2. Compare the warranty of merchantability with the warranty of fitness for a particular
purpose or use.
3. What is meant by acquisition in good faith?

10.9 GLOSSARY
Warranty -guarantee in respect of goods sold.
Delivery - handing over of the thing

10.10 SELECTED READINGS

1. The Ethiopian Civil Code

83
UNIT 11: LAW OF AGENCY

Contents
11.0 Aims and Objectives
11.1 Introduction
11.2 Agency Defined
11.3 Unauthorized Agency
11.4 Duties of the Agent
11.4.1 Duty to Be Loyal
11.4.2 Duty to Keep and Render Accounts
11.4.3 Duty to Use Care and Skill
11.4.4 Duty to Perform Service Personally
11.5 Duties of the Principal
11.5.1 Duty to Pay Remuneration
11.5.2 Duty to Reimburse
11.5.3 Duty to Indemnify
11.6 Liabilities of the Principal
11.7 Liabilities of the Agent
11.7.1 Agent Acting Outside the Scope of His Authority
11.7.2 Liability of the Agent for Torts
11.8 Joint Liability of the Principal and the Agent
11.9 Termination of Agency
11.10 Summary
11.11 Answers to Check Your Progress Questions
11.12 Model Examination Questions
11.13 Glossary
11.14 Selected Readings

84
11.0 AIMS AND OBJECTIVES

Up on completing this Unit, you should be able to:

- define agency
- identify the respective duties and liabilities of the agent and the principal
- grasp the notion of unauthorized agency and ratification

11.1 INTRODUCTION

This Unit focuses on the relationship existing between an agent and a principal. It explains the
notion of agency and how it is constituted. It dwells on the respective obligations undertaken
by the agent and the principal. It also provides the liabilities in relation to both. The notion of
unauthorized agency and ratification are also dealt with here. The discussion culminates by
considering the reasons that bring a relationship of agency to an end.

11.2 AGENCY DEFINED

An agent is a person authorized or empowered by another (the „principal‟) to bring the

principal into legal relations with a third party. Agency is a relationship based upon an
express or implied agreement by which one person, the agent, agrees to act for another
person, the principal, in negotiating and making contracts with third parties. It is also defined
as a contract whereby a person, the agent, agrees with another person, the principal, to
represent him and to perform one or several legally binding acts.133 The principal must have
the capacity to perform juridical acts. For instance, a travel agent brings about contractual
relations between the principal and the airline. A company director may have authority to
make contracts on behalf of the company.

The relationship of principal and agent is created by an express or implied agreement.134

Express agreement arises from the written or spoken instructions given by the principal. An
agent may be appointed in formal words or a specific letter of appointment. An agent may in
general be appointed orally. There are some exceptions. If the principal authorizes an agent to
enter into a written contract on behalf of the principal, the agent‟s authority to do so must also
133
Article 2199, Civil Code
134
Article 2200, Civil Code

85
be in writing. An agent is impliedly authorized to do such things as are incidental to carrying
out his express instructions. Thus, he may impliedly be authorized to incur postal, telephone
and traveling expenses.

11.3 UNAUTHORIZED AGENCY

Unauthorized agency occurs when a person who has no authority to do so undertakes with full
knowledge of the facts to manage another person‟s affairs with out having been appointed as
an agent.135 If the management of the property is undertaken against the will of the principal
not in the interest of the principal, the unauthorized agent will be held liable under unlawful
enrichment and extra-contractual liability. An act done for another by a person not assuming
to act for himself, but for such other person, though without any prior authority, may become
the act of the principal if subsequently ratified by him. Once the act has been ratified, the
principal would be required to indemnify the agent for his costs and expenses, compensate
him for any damage he sustained in connection with the management.

11.4 DUTIES OF THE AGENT

11.4.1 Duty to Be Loyal

A principal places trust and confidence in his agent and relies on the agent to act solely for the
principal‟s benefit in all matters connected with the agency. At the same time, the agent
should refrain from placing himself in a position that would encourage a conflict between the
agent‟s own interest and that of the principal. The agent must act with the strictest good faith
towards the principal.136 . Since the agent acts in the name of the principal in business
transactions, greater trust and honesty is required from him. As a result, he must not use or
reveal the principal‟s confidential information. He must not act adversely to the principal‟s
interests. He must not personally sell or buy to himself with out the approval of the
principal.137 He must not receive any secret benefit in connection with a transaction the agent
undertakes for the principal. The taking of bribes or secret discounts or commission, or the
entering into agreements on the understanding that such payments will be forthcoming from

135
Article 2257, Civil Code
136
Article 2208, Civil Code
137
Article 2209, Civil Code

86
the party negotiated with is a breach of these duties which will justify dismissal of the agent
and negative any right to remuneration. For example: Abebe authorizes Seyfu to sell Abebe‟s
desktop computer for 5,000 birr, telling Seyfu that he would give him 500 birr. Seyfu sells the
computer for 5,500 and gives Abebe only 4,500 birr (Abebe‟s asking price minus the 500 birr
commission). Seyfu has made a secret personal profit out of the transaction. He must turn
over the extra 500 birr to Abebe and he must turn back his commission because he violated
his duty of good faith to Abebe.

11.4.2 Duty to Keep and Render Accounts

If an agent‟s duties require him to receive any money or other property for the principal, the
agent is obligated to keep accurate records of those receipts. The agent must account to the
principal for all the sums received by him and all the profits accruing to him in the course of
his employment.138 An agent must account for the principal for all money and property of
the principal that come in to the agent‟s possession. All such money or property must be
turned over to the principal in accordance with the agency agreement or, if the agreement
does not so specify, then within a reasonable time.

11.4.3 Duty to Use Care and Skill

The agent must exercise utmost care and skill in carrying out the agency as long as he is
entrusted therewith.139 He is required to exercise the degree of care and skill that a reasonably
prudent person would use in a similar situation. He must exhibit a degree of skill and
diligence as is appropriate to the performance.

11.4.4 Duty to Perform Service Personally

As a rule, the agent is required to perform the agency himself unless he is authorized by the
principal to appoint a substitute. A delegate cannot delegate. However, the agent may appoint
a substitute where the interest of the principal so requires, where unforeseen circumstances
prevent him from carrying out his agency and where he is unable to inform the principal of
these circumstances.140

138
Article 2210, Civil Code
139
Article 2211(1), Civil Code
140
Article 2215, Civil Code

87
The relationship between the principal and the substituted agent shall be as if the substituted
agent received authority to act as an agent directly from the principal, where the substituted
agent had reasons to believe that the agent was authorized to appoint a substitute. On the
contrary, if the substitute agent did not have such reasons, then rules concerning unauthorized
agency shall apply.141

The agent shall be liable for the acts of any person whom he appointed without authorization
as his substitute as if they were his own. On the other hand, where the agent has been
authorized to appoint a substitute, he shall be liable only for the care with which he selected
his substitute and gave him instructions.142

11.5 DUTIES OF THE PRINCIPAL

Just as agents owe duties to and obligations to their principals, principals have parallel
obligations to their agents. The agency agreement may spell out some of those obligations,
other are implied. The obligation to compensate the agent for the work or service performed is
among the obligations of the principal.

11.5.1 Duty to Pay Remuneration

It is the duty of the principal to pay his agent any commission or other remuneration agreed
up on. When there is an express term as to payment and the amount will depend on that term.
The agent is entitled to the remuneration fixed in the contract.143 In the absence of express
term in the contract, the court, in accordance custom and usage, will fix the amount of
remuneration.

11.5.2 Duty to Reimburse

The principal is obligated to advance sums necessary for carrying out the agency. Where the
principal has not advanced to the agent any money, and the agent incurs expenses, the
principal shall reimburse outlays and expenses incurred by the agent in the proper carrying
out of the agency.144 The principal is under duty to reimburse or repay the agent for any

141
Article 2217, Civil Code
142
Article 2216, Civil Code
143
Article 2219, Civil Code
144
Article 2221, Civil Code

88
disbursement and expenses necessary for the proper discharge of assigned duties. However,
the agent may not recover disbursements made for illegal purposes or for expenses incurred
through the agent‟s negligence or fault.

11.5.3 Duty to Indemnify

A principal is also obligated to compensate or indemnify an agent for any costs or expenses
the agent incurs on the principal‟s behalf in accordance with the terms of the agency. An
agent is entitled to indemnity from the principal for any losses or damage sustained in
executing any authorized lawful act, that is, the agent is entitled to have the damage made
good. However, the loss must result directly from the execution of an authority granted.145 To
exercise this right, the law entitles the agent to a lien right on the object entrusted to him by
the principal for the carrying out of the agency.146

11.6 LIABILITIES OF THE PRINCIPAL

So far as the agent acts within the scope of the authority given by the principal, the principal
would be liable to third parties for performance of any contract made in his name. When the
agent, acting for the principal, enters in to a contract, it is a contract of the principal just as
though the principal himself or herself personally concluded the contract. The contract is as
much a contract of the principal as it would have been had the principal personally entered
into it. The principal, not the agent, is the contracting party, is entitled to the benefits of the
contract, and may enforce its performance. Similarly, it is the principal who must perform in
accordance with the contract terms.147 The agent is a go-between and, not being a party to the
contract, he is not liable to the third party. Acts performed by the agent in the name of the
principal in excess of his power or authority would not bind the principal unless he ratifies it.
If the principal ratifies the act or the contract, the agent will be released.

The principal will be liable for any fraudulent acts committed by an agent acting within the
scope of his authority. For example, if the agent acting within his power deceived a customer
while selling merchandise, the principal is liable for any damages that may result. The

145
Article 2224(1), Civil Code
146
Article 2224, Civil Code
147
Article 2189, Civil Code

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principal, however, may seek the invalidation of the contract by invoking defects in the
consent of the agent. In other words, the principal may avoid the contract if his agent gave
consent because of mistake, fraud or duress.148

11.7 LIABILITIES OF THE AGENT

The principal will be liable to third parties for the performance of the contract if the agent acts
within his power. On the other hand, the agent will be liable to third parties in the two
circumstances.

11.7.1 Agent Acting Outside the Scope of His Authority

If an agent acts without authority from the principal, the agent becomes personally liable to
third parties. This usually takes place when an agent exceeds the authority given by the
principal. The principal may rarify or repudiate the act of the agent performed beyond the
scope of authority given by the principal. Ratification and repudiation produce two different
effects. Where the contract of the agent is ratified the agent shall be considered to have acted
within the scope of his authority.149 If the principal repudiates the act of the agent, the agent
is personally held liable towards the third party with whom he contracted.150

11.7.2 Liability of the Agent for Torts

An agent is liable for torts committed by him whether he was acting within his power or not.
A tort is any civil wrong other than breach of contract, for which the court will provide a
remedy in the form of an action for damages. Liability for tort is based on conduct that is
socially unreasonable. The same act may be both crime and tort. However, tort differs from
crime in that crime is an offense against the state, whereas tort is a civil wrong – an
unreasonable interference with private rights. In the case of tort, suit is brought by the injured
and not by the state.

148
Article 2189(2), Civil Code
149
Article 2192, Civil Code
150
Article 2193, Civil Code

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11.8 JOINT LIABILITY OF THE PRINCIPAL AND THE AGENT

When an agency is terminated by the principal or by the agent or both, the principal should
give prompt notice of the termination to all persons who did business with the agent or who
may have known of the agency. The principal would be liable if informed a third party of the
existence of the power of agency but failed to inform him of the partial or total revocation of
such power. The principal must also ask the agent to return the document evidencing the
power of agency and seek a judicial decision to the effect that such document was revoked.
In addition, the principal must not cause, 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. Failure to do so would make the principal liable with the agent.151

11.9 TERMINATION OF AGENCY

Agency may terminate by revocation, renunciation and up on incapacity of one of the parties.
The principal may at any time revoke or terminate the authority that he gave for the agent.
Where the agency is revoked, the agent must return to the principal documents evidencing his
power. If the agent incurred losses as a result of the revocation before the agreed time or
under detrimental conditions, the principal shall indemnify him. On the other hand, the agent
may renounce or give up his agency by giving prompt notice to the principal of his
renunciation. If the principal has incurred losses as a result of such renunciation, the agent
shall indemnify him. Agency is also terminated where either the principal or the agent dies,
becomes incapable or declared absent or bankrupt.

Check Your Progress Questions

1. What is the meaning of unauthorized agency?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………

151
Article 2195, Civil Code

91
2. What is meant by ratification and what is its consequence?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………

11.10 SUMMARY

It has been stated that agency may be constituted expressly and impliedly. Once the agent has
agreed to represent his principal in contractual dealings, he is required by law to perform his
duties loyally, by keeping and rendering accounts in due course. The agent is also expected to
use all the care and diligence required of him as an agent. The principal on the other also
assumes certain obligations towards the agent including the obligation to pay remuneration
and indemnity. Agency terminates as a result of revocation, renunciation and incapacity of
either the agent or the principal.

11.11 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

1. Unauthorized agency occurs when a person who has no authority to do so undertakes with
full knowledge of the facts to manage another person‟s affairs with out having been
appointed as an agent. If the management of the property is undertaken against the will of
the principal not in the interest of the principal, the unauthorized agent will be held liable
under unlawful enrichment and extra-contractual liability.
2. An act done for another by a person not assuming to act for himself, but for such other
person, though without any prior authority, may become the act of the principal if
subsequently ratified by him. Once the act has been ratified, the principal would be
required to indemnify the agent for his costs and expenses, compensate him for any
damage he sustained in connection with the management.

11.12 MODEL EXAMINATION QUESTIONS

1. Goshu authorizes Maru to sell Goshu's coffee machine at a price of 35,000 birr, telling
Maru that he would give him 500 birr. Maru sells the computer for 40,000 and gives
Goshu only 35,000 birr. Later, Goshu realized that the machine was sold at a price of

92
 40,000 birr and not only 35,000 birr. Can Goshu demand the payment of the difference
from Maru i.e. 5,000 birr? Why or why not?

2. In the above case, is there a reason to conclude that Maru will not be entitled to his
commission or remuneration?

11.13 GLOSSARY

Unauthorized agent- a person who has no authority to do so undertaking with full

knowledge of the facts to manage another person‟s affairs with out having been appointed as
an agent.

Good faith - honesty

11.14 SELECTED READINGS

The Ethiopian Civil Code

93
UNIT 12: LAW OF BUSINESS ORGANIZATIONS

Contents
12.0 Aims and Objectives
12.1 Introduction
12.2 Business Organization
12.3 Types of Business Organizations
12.3.1 General Partnership
12.3.2 Limited Partnership
12.3.3 Share Company
12.3.4 Private Limited Company
12.4 Summary
12.5 Answers to Check Your Progress Questions
12.6 Model Examination Questions
12.7 Glossary
12.8 Selected Readings

12.0 AIMS AND OBJECTIVES

Up on completing this Unit, you should be able to:

- identify the types of business organizations
- grasp their major similarities and distinctions
- understand their formation formalities, the extent of the liability of the members

12.1 INTRODUCTION

This Unit deals with some types of business organizations. It provides a definition as to what
a business organization is and how it comes in to existence. It considers the rules, which are
applicable to most of the business organizations. It dwells with some types of business
organizations and tries to look in to their distinctive features.

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12.2 BUSINESS ORGANIZATIONS

A business organization is any association arising out of a partnership agreement. A

partnership agreement is a contract whereby two or more persons who intend to join together
and to cooperate undertake to bring together contributions for the purpose of carrying out
activities of an economic nature and of participating in the profits and losses arising out
thereof, if any. As a contract, it needs to fulfill the requirements for a contract considered
earlier. The contract relates to carrying out activities of economic nature with a view to share
in the profits and losses. Thus, any provision giving all the profits shall be void. In addition,
reliving one partner from his share in the losses shall also be void.152 However, by way of
exception a partner who contributes skill may be entitled to shares in the profits only and not
in the losses.153

There are six different kinds of business structures: ordinary partnership, joint venture,
general partnership, limited partnership, share company and private limited company. With
the only exception of ordinary partnership, all the other business structures are considered to
be commercial business organizations i.e. organizations engaged in trading activities. A
business organization has a completely different personality from the individual members.
Except joint ventures, all the others are considered legal persons. Such organizations are
granted legal personality where they meet two requirements i.e. publicity and registration in
the commercial register. The formation of a business organization except that of a joint
venture shall be of no effect unless it is made in writing. Thus, the partnership agreement
must be in writing. It is a requirement of validity and not only that of proof.

A business organization can be dissolved for a variety of reasons. It can be dissolved where its
purpose has been achieved or cannot be achieved, where the partners agree to dissolution
prior to the expiry of the term for which the business organization was formed and in cases
where the term for which the business organization was formed expires, unless the partners
agree to continue the business organization. In addition, the organization can be dissolved by
the court for good cause. There is good cause to dissolve the business organization where a

152
Article 215, Commercial Code
153
Article 254, Commercial Code

95
partner seriously fails in his duties or becomes incapable of carrying out his duties or in the
event of serious disagreement between the partners. Once dissolved, the business organization
will be cancelled and is no longer a legal person before the eyes of the law.

12.3 TYPES OF BUSINESS ORGANIZATIONS

12.3.1 General Partnership

A general partnership consists of partners who are personally, jointly, severally and fully
liable as between themselves and to the partnership for the firms undertaking.154 When a
partnership is created, the parties often draw up a memorandum of association which covers
such matters as the business purpose of the firm, the contributions of each partner, their value,
the services required of persons contributing skill, the share of each partner in the profits and
in the losses, the period of time for which the partnership has been established.155 A partner
in a commercial partnership is considered as a trader.156 The general partnership needs to have
a firm name consisting of the names of at least two of its partners and followed by the words
'General Partnership'.157 He can assign or transfer his share in the partnership on condition
that all the partners agree.158 However, the partnership agreement can provide that the
approval of the majority of the partners shall be sufficient.159

General partners do not have limited liability. They are instead, as stated above, jointly and
severally liable for the partnership's debts and liabilities. Creditors can sue the partnership in
its name160, but then can enforce the full judgment against any one of the partners.161 This
means, if the partnership owes 100,000 birr to Abebe, then Abebe can sue the partnership in
its name. Once judgment is given in his favor, he can enforce the full amount against any one
of the partners or from all the partners.162

154
Article 280, Commercial Code
155
Article 284, Commercial Code
156
Article 280(2), Commercial Code
157
Article 281(1), Commercial Code
158
Article 282(1), Commercial Code
159
Article 282(2), Commercial Code
160
Article 294, Commercial Code
161
Article 280, Commercial Code
162
Article 280(1), Commercial Code

96
The partnership may is administered by one or managers who may or may not be partners. If
no manager has been appointed each of the partners are considered as managers. In cases
where all the partners are managers they may carry out only acts of management.163 Acts of
management refer to such acts such as for the preservation or maintenance of property, leases
for terms not exceeding three years, the collection of debts, the investment of income and the
discharge of debts.164 The managers can act on behalf of the partnership and bind the firm.165
Where the manager acts in the firm's name for his own profit, the partnership shall be liable
for third parties in good faith. Thus, the partnership will not be bound only where the third
knows that the manager was acting for his own profit. It would be only the manager who will
be liable.166 The manager appointed in the memorandum of association may be dismissed by
court for good cause. However, if he is not appointed in the memorandum he may be
dismissed by the partners with out the need to go to court.167

General partnership is dissolved where its purpose has been achieved or cannot be achieved,
where the partners agree to the dissolution prior to the expiry of the term for which it was
established, or the term for which it was established expires unless the partners agree to
continue the partnership.168

12.3.2 Limited Partnership

Limited partnership differs from general partnership in that it comprises two types of partners
i.e. general partners who are fully, jointly and severally liable and limited partners who are
only liable to the extent of their contributions only. Unlike general partnership, some
members can have limited liability. As a result, the limited partners are not liable for the debts
169
of the partnership beyond the funds they contributed. The limited partnership needs to
have a name consisting of the general partners and followed by the words 'Limited
Partnership'. The limited and general partners draw up a memorandum of association covering
such matters as the business purpose of the firm, the contributions of each partner, the

163
Article 287, Commercial Code
164
Article 2204, Civil Code
165
Article 289, Commercial Code
166
Article 290(1), Commercial Code
167
Article 293, Commercial Code
168
Article 217, Commercial Code
169
Article 296, Commercial Code

97
services required from those partners contributing skill, the managers and agents of the firm,
the period of time for which the partnership is established, etc. The limited partnership is
granted personality where it fulfills the requirements of publicity and registration.

In limited partnership, only the general partners can be appointed as managers. A limited
partner takes no part in the management. If they do then they will be considered as general
managers and become jointly and severally liable for the firm's debts. But merely consulting
with other partners, dealing with the firm, investigating managerial acts, giving advice and
counsel to the firm giving permission to do acts outside the manager's power does not amount
to acting as a manager.170

12.3.3 Share Company

In share companies one holds shares issued by the company in return for payment. The
liability of the shareholders is limited to their share holding. Those who form the company are
called founders. They must not be less than five in number.171 They initiate the plans and
facilitate the formation of the company. The main tasks of the founders include to prepare
various documents and to submit them to the relevant government authorities. The
memorandum of association covers such matters as the company's name, the objects for
which the company is formed, the par value of the shares, the amount of the capital
subscribed and paid up, the period of time for which the company is to be established, etc.
The articles of association, on the other hand, regulates the internal management, the rights
and duties of the shareholders vis a vis the company, etc.

It takes money to set up a business. In share companies, the money is raised by issuing shares
in the company. A share is a part of the total ownership interest of the company. A
shareholder must pay the company for each share allotted to him. The memorandum of
association must state the capital. The capital shall not be less than 50,000 birr. The amount of
the nominal value (par value) of the shares cannot be less than 10 birr. The share company is
formed where the capital has been fully subscribed. Subscription refers to offers to purchase
shares of the prospective company at an agreed price payable in the future. In addition, at

170
Article 301(1), Commercial Code
171
Article 307, Commercial Code

98
least one fourth of the par value of the shares must be paid up and deposited in a bank.
Requirements of registration and publicity must also be satisfied.

Once the capital has been fully subscribed and at least one fourth of the capital paid up, the
articles of association and memorandum of association drawn up and filed, the shareholders
come together in an organizational meeting. The purpose of the meeting is to ensure whether
the requirements for the formation are complied with, to draw up the final text of the
memorandum of association and articles of association, to approve contributions in kind and
to make appointments required under the memorandum of association.

12.3.4 Private Limited Company

In private limited companies the members are liable only to the extent of their contribution.172
It needs to have a firm name followed by the words 'Private Limited Companies'. The
membership cannot be less than 10 and more than 50 persons.173 As opposed to share
companies, the securities issued by private limited companies are not freely transferable to
outsiders who are not associates in the company.174 The capital of a private limited company
cannot be less than 15,000 birr. The amount of the share, on the other hand, cannot be less
than 10 birr. A private limited company cannot engage in banking and insurance activities.
However, such business activities may be undertaken by share companies only.

Drawing a memorandum of association and articles of association is a formation formality. It

must also satisfy requirements of publicity and registration so as become a legal person. There
are three characteristics, which distinguish private limited companies from share companies.
They are easier to organize. They can be managed more informally and they readily permit
the exclusion of an unwanted owner by the current owners.

172
Article 510(1), Commercial Code
173
Article 510(2), Commercial Code
174
Article 510(3), Commercial Code

99
Check Your Progress Questions
1. What is the meaning of a partnership agreement?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………

2. Explain the major distinction between limited partnership and general partnership.
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………

12.4 SUMMARY

It has been stated that a business organization arises from a partnership agreement. This
partnership agreement must be made in writing except in case of a joint venture. The law
provides six types of business organizations. Except joint venture, the rest have legal
personality. This means they have legal existence distinct from their members. In general
partnerships, the partners are liable to the debts and undertakings the partnership jointly and
severally. Their liability is not limited to their contribution in the partnership but extends
beyond their contributions. In addition, in such partnerships a partner may transfer his share
provided that all the other partners agree. On the other hand, in the case of limited
partnerships, there are both limited and general partners. The general partners are liable to the
debts and undertakings of the partnership jointly, severally and personally. However, the
limited partners are liable only to their contribution and no more. Unless otherwise agreed, a
shareholder can freely transfer his share to a third person or outsider freely. However, in
private limited companies, shareholder may transfer his share only where the other associates
are agreed.

12.5 ANSWERS TO CHECK YOUR PROGRESS QUESTIONS

1. A partnership agreement is a contract whereby two or more persons who intend to join
together and to cooperate undertake to bring together contributions for the purpose of
carrying out activities of an economic nature and of participating in the profits and losses

100
 arising out thereof, if any. As a contract, it needs to fulfill the requirements for a contract
considered earlier.

2. The major distinction between limited partnership and general partnership lies in that in
general partnership all the partners are jointly and severally liable to the debts and
undertakings of the partnership, whereas in limited partnership, not all the partners are
general. There are some partners whose liability is limited to their contribution only.

12.6 MODEL EXAMINATION QUESTIONS

1. What are the advantages of a private limited company?

2. Explain the causes of dissolution of business organizations.

12.7 GLOSSARY

Partnership agreement - a contract whereby two or more persons who intend to join
together and to cooperate undertake to bring together contributions for the purpose of carrying
out activities of an economic nature and of participating in the profits and losses arising out
thereof, if any. As a contract, it needs to fulfill the requirements for a contract considered
earlier.

12.8 SELECTED READINGS

The Ethiopian Commercial Code

101