Infolink University College

Business Law

Cr. Hour: 3(Three)

Business law is a very broad subject that covers so many numbers of jurisprudence and credit
hours in the typical legal education. However, when we come to the school of business, it is only
the highlight version of the major areas of the Ethiopian business laws that will be covered with
in the given time frame. The general purpose of the course is to introduce students with the major
legal principles of business that are applicable in the everyday transactions.
Based on this rational, in this Course, you are expected to cover these five chapters of the law
that are identified based on their merit and relevance on your future career.
Unit One: Introduction to Business Law
1.1 Meaning, feature and function of law
1.2 Definition of Business law
Unit Two: The Law of persons
2.1. Concept of personality
2.2. Types of persons
2.2.1. Natural person
2.2.2. Legal person
2.3. Attributes of personality
2.4. Personality of physical persons
2.5. Capacity of physical persons
2.6. End of physical personality
Unit Three: The law of Contracts
3.1. Definition of contract
3.2. Formation of contracts
3.3. Effects of contracts
3.4. Performance of contracts
3.5. Non-performance and its remedies
3.6. Extinction of obligations (contracts)

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Unit Four: Law of Agency
4.1. Sources of Agency
4.2. Kinds of Authority of an agent
4.3. Effects of agency
4.3.1. Rights and duties of Parties
4.4. Termination of Agency
Unit Five: The Law of Traders and Business Organizations
5.1. The law of traders
5.2. The Law of Business Organizations (BOs)
5.3. Types of Business organizations
5.3.1. Ordinary partnership (O/P/P)
5.3.2. General partnership (G/P/P)
5.3.3. Limited partnership (L/P/P)
5.3.4. Joint Venture
5.3.5. Share Company
5.3.6. Private limited company (PLC)
5.4. Dissolution of business organizations
References
1. The Ehiopian Civil Code
2. The Ethiopian Commercial Code
3. George K., Formation and Effects of Contracts
4. Vanderlinden, The Law of Physical Persons
5. Various Modules, Teaching materials, Notes…

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 Unit One
1. Introduction to Business Law
As you can see from the title, Business Law has comprised of two distinct terms: business and
law.
Business:- The term business is assigned to designate activities connected with trade, industry
and commerce.
Law:- The term ‘Law’ is one of the controversial points among legal scholars. There is no a
universally accepted definition of law. But for the purpose of this subject we can define law as:-
… a set of normative rules and principles made by a competent organ of the state and
of binding nature /legal force/.
According to this definition law has many features, these are:-
I. Generality- Law is a general rule of human conduct. Rules and regulations that
constitute the law of a country are general statements of possible human behavior. Laws
do not deal with a particular person or they are not meant to regulate the behavior of a
particular person.
II. Law is obligatory - means it creates a duty to obey and hence can’t be escaped easily.
To be governed by law or not is not left to the individual discretion /choice/. Failure to
comply with the law results in the infliction of sanction (penalty or coercive measure) .
III. Law is made by public authority – This relates to the formality of enactment that legal
rule has a determinate source. This source should be a competent public authority e.g. in
our case House of Peoples Representatives
IV. Normativity – Legal rules are nothing but setting or describing standards of behavior of
persons. It is an instrument regulating social behavior as to what to do or not to do. It is
interested in stating what ought to be done or what must not be done.
Functions of Law
In the modern organized and interactive community, law is required to achieve various
objectives. The ultimate end of law will and should be to attain justice in its various versions as
social, economic, political, etc. However, when we come to specific purposes of the law, the
following are some of the functional reasons for the existence of law:-
i) Maintaining peace, order and stability-

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 It is generally recognized that legal rules serve to ensure peaceful, orderly and stable
existence of the state and its inhabitants. This ultimately guarantees the protection of
citizen’s core right- the right to life, the right to liberty and the right to property.
ii) Regulating social behavior –
Legal rules serve as means of controlling social behavior by forbidding or commanding
the doing of certain acts. Fear of penalties will avoid or mitigate unwanted or unapproved
behaviors of persons.
iii) Means of dispute resolution–
In the face of multiple interests of persons, dispute is inevitable. Such disputes are usually
settled either judicial or extra judicially by applying the law.
iv) Protecting citizens from excessive and abuse of government powers –
Law can serve as a check to the governmental power not to violate the right of its citizens.
To this end, constitutional and administrative law can be best examples. Constitutions in
most countries set out basic rights and freedoms of citizens and also put limitations on
government powers. Example, rule of law, due process of law, accountability, etc
v) Promoting developmental activities –
Legal rules can serve as important mechanisms for the growth and change of a nation state
and its citizens. Conductive environments and new technologies can be created and
introduced through the enactment of laws. Examples – investment law, patent and transfer
of technology law, tax law /VAT/, etc

In sum, many of the laws that deal with trade, industry and commerce are discussed in this
course. Hence, business law is nothing but a collection of different rules and principles
governing the conducts and relationships of persons as affecting their economic and commercial
activities. It is generally understood to include laws relating to persons, contracts, sales, agency,
partnerships, companies, insurance and etc.

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 Unit Two
Law of persons
2.1. The concept of legal personality

Personality is about the capacity to have or to enjoy rights & duties, which will be enforceable by
the legal machinery. It is the legal status of one regarded by the law as a person: i.e. the attribute
feature of being the subject of rights and duties before the eyes of the law.

2.2. Types of Persons

In ordinary parlance the term person(s) refers to individual human being(s). However, in the
legal context the term person is not restricted to refer only to natural persons. The law also
personifies entities like organizations and associations. Accordingly, there are two types of
persons recognized by the law; these are: physical /natural persons and juridical /legal/artificial
persons.

2.2.1. Physical /Natural persons

A natural person is a human being, as distinguished from an artificial person created by law. It
exclusively includes human beings. All human beings are considered as persons under the law by
the mere fact they are born human. There is no other formality than birth to acquire the status
under the law. That is why they are termed as natural persons.

Human beings are thus recognized as persons under the law to have rights from birth. The law
however does not specify only rights, but also corollary duties. When it confers rights, it also
imposes the duty to respect the right of others.

2.2.2. Juridical Persons

These types of persons are entities such as organizations, association's, partnerships to which
personality is conferred by the operation of the law. They are termed as juridicial or artificial
persons, as their personality are not natural.

Legal personality is given to them by law, artificially, for the sake of convenience in control up
on the fulfillment of certain requirements, such as application to the required office, registration,
publications, legality of object of incorporation and so on.

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Juridical persons are thus capable of holding rights and duties consistent with their nature. Some
examples of artificial persons are:
- The state & its administrative organs (ministries, agencies, etc)
- Public enterprises (e.g. Tele, Ethiopian Airlines,
- Religious institutions
- Business organizations, civil or humanitarian associations (e.g. NGOs,
professional associations, companies etc,)

2.3. Attributes of legal personality

Attributes of personality are qualities or features of personality. And most importantly it refers to
what a person may do/ exercise as a result of having legal existence (personality). These are
those that cannot be exercised or done for example by animals, entities or things that have no
legal existence.

The attributes of personality are discussed in brief as follow.

a) The right to have name (to be named) to be identified by it.
b) Capacity to sue & be sued by its own name. –
legal persons have the capacity to bring legal action demanding remedy or can be
subjected to legal action demanding remedy against them.
c) Ability to own and administer property – Both natural and artificial persons can own
property in their own name and administer it, which cannot be done by non-personified
entities.
d) Can perform acts of legal nature
Persons can enter in to juridical acts that have legal effects like entering in to contracts,
making donations, etc.
e) Capacity to acquire rights & duties
It is generally said that personality is about capacity to hold or enjoy rights & duties. The
law confers rights and imposes duties only to and on the subjects of the law, i.e. persons.
Non-persons have no rights & duties. Things or entities that don’t acquire personality
have no capacity to hold rights & duties even if in certain cases the law gives protection
to them. Therefore only physical and artificial persons can acquire rights& duties
consistent with their nature

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2.4. Personality of physical persons
2.4.1. The Beginning of Personality
“The human person is subject of rights from its birth to its death”
(Article 1 of the 1960 Civil Code)

Basically personality begins with birth i.e. the beginning of physical existence and of legal
existence commences at the same time. The question here may be what does birth mean?

Birth simply mean physical extrusion or complete separation of a child from his mother's womb
either naturally or through operation. However, the mere physical fact of delivery is not
sufficient to acquire personality. The child whatever long it might be conceived must be born
alive. This means, if the child is born dead or dies during birth due to constitutional deficiency, it
will not acquire personality.

Therefore personality of physical persons starts with birth.

However, there are instances where the interest of a conceived child is put at stake if personality
is attributed only after birth. This is the case of a fetus. e.g. an eight and half months fetus but not
yet born?
The law in this case provides exceptions.
A child merely conceived shall be considered born whenever his interest so demands
provided that he is born alive and viable (Article 2).
A conceived child may acquire personality while he is still in his mother’s womb provided that:
a) his interest so requires,
b) he is born alive, and,
c) he is viable (i.e.- capable of living for at least forty-eight hours after birth). This is in
order to protect his interest in the future. For example, when the father of a fetus dies before it is
born, it could have lost the right to inherit had the law hasn’t considered him as born and enable
it to participate in the inheritance.
2.5. Capacity of persons
Individual human beings need to have capacity in order to exercise their rights and duties. Mere
holding of rights and duties do not suffice. Capacity is the ability to exercise rights and duties. So
it is the legal competence to do one or more legally binding acts.

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In order exercise rights and duties, persons need to have the required capacity. Obviously there
are some members of society that do not have the capacity. In fact the rule regarding capacity is
that “everyone is presumed to be capable”.

This presumption of the law has a number of consequences. In the first place, persons in
principle are entitled to enter into juridical acts with others as the law presumes them capable.
Secondly, when there is question on capacity, the person denying another’s capacity must prove
the same.

The rule on capacity is, of course, a general rule. As such it admits exceptions. The exception is
incapacity to exercise rights and duties. Therefore exceptionally the law declares some categories
of persons as incapable of fully exercising their rights and duties i.e. concluding various juridical
acts.
2.6. Incapacity
Incapacity is lack of ability or legal competence to exercise rights and duties under the law.
Incapacity, as an exception, need to be stated by an express provision of the law. The law
classifies incapacity into two major groups: - General incapacity and Special incapacity.
General incapacity is based on age (minority), mental condition and consequences of criminal
sentences. Special incapacity is based on nationality

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 A) Minority-

Is the incapacity that emanates from the young age. The law makes children below the full age of
18 years incapable. These people are termed as minors. The rational for making minors incapable
is to protect them from harassment and problems from their own acts and the acts of others.
Hence minors cannot perform valid juridical acts unless expressly permitted by the law to do so.
So any unauthorized act of minor is subject to invalidation.

They can however be represented by matured persons to perform juridical acts. Such
representatives of incapables in general and minors in particular are organs of protection which
are known as guardian and tutor. The guardian represents the minor in respect to his personal
care (interest) such as upbringing, education, medication, marriage or any other act or contacts
other than economic interest. The tutor, on the other hand, represents the child in relation to
economic or financial interests.

The question now, is who may be a guardian or tutor? Parents are natural guardian and tutors of
a child as there is no one closer to the causes of a child. If either of the parents die or become
incapable, the other will be guardian & tutor. When there is no natural guardian/tutor, the court
will appoint as guardian or tutor from the blood or marriage relatives taking in to a account the
interest of the child.

B) Insanity or infirmity –

A person’s mental faculty or understanding may be affected due to various causes like mental
disease, illness, old age, accident or disability. As a result, the person may lack capacity of
understanding the nature and consequences of his act. Accordingly, “an insane person is one who
as a consequence of his being insufficiently developed or as a consequence of a mental disease or
of senility is not capable to understand the importance of his action”.

Here insanity refers notorious insanity. Persons who are inmate of medical institutions or for
whom a watch over is kept in rural areas are considered to be notoriously insane. The law
extends full protection to the interest of such persons and their heirs by making their acts invalid.

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Infirm person on the other hand are persons like deaf-mute who as a consequence of permanent
infirmity are not capable of taking care of themselves or to administer their property. The law
also makes juridical acts of permanent infirm persons invalid as the acts are not made with
consent free from defects.

C) Judicial Interdiction-

Judicial interdiction refers to court declaration that restricts the capacity of a person. Persons
with mental or physical problem may come under full protection by being judicially declared as
incapable of concluding valid juridical acts. In effect, judicially interdicted persons will not be
allowed to enter into juridical acts. Instead, his personal and economic affairs will be taken care
by organs of protection to be appointed by the court i.e. guardians and tutors

The cause for incapacity is similar with that of infirmity and insanity. The difference is with the
extent of protection and the effect of acts done by both groups.

D. Legal Interdiction

Legal interdiction is a process where certain rights of a person may be withdrawn as a result of
criminal conviction passed on him. Hence, unlike the above three groups of persons, these are
declared incapable not for their own protection from third parties but as a punishment against
crimes committed by them.

The interdiction concerns his right to administer his property so that he cannot exercise the right
of an owner. For e.g. He cannot enter in to contractual relations nor operate business; hence, as
far as his property is concerned, the rules regarding judicially interdicted person are applicable
i.e., a tutor will be appointed by the court to take care of his property.

F) Foreign Nationality –

The disability imposed by law on foreigners living in Ethiopia is special in that it pertains to the
fact that they are not citizens of the country.

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Although foreigners are as a matter of principle fully assimilated to Ethiopian subjects as regards
the enjoyment and exercise of civil rights, they are specifically incapable to participate in the
government or the administration of the country i.e., they cannot elect & be elected for political
power. Sometimes such restriction extends to certain economic activities and procedural barriers.
For example; in Ethiopia foreigners can not engage in financial sector (banking and insurance).

Generally however, the various incapacities imposed on foreigners (for instance inability to own
an immovable property in Ethiopia) can be lifted via the instrumentality of a work permit
(license) or an order issued by the government to that effect.

2.7. End of physical personality

Under the law personality may come to an end in two ways-
a) by death and
b) by declaration of absence.
A dead body cannot be considered as a person. A person may also lose personality when absence
is declared by court of law. Where a person has disappeared and has given no news of himself
for two years, any interested person may apply to the court to declare his absence. In this case the
court assumes the person dead for all legal purpose and his rights will terminates from that
onwards.

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 Unit Three
The Law of Contracts
3.1. Definition of contract
“A contract is an agreement whereby two or more persons as between themselves create,
vary or extinguish obligations of proprietary nature” (Civil Code Art.1675)
In order to have meaningful understanding of the above provision, we need to dissect each
element of the provision as follows:
i) Contract is an agreement; it is consensual, not imposed.
ii) Contract presupposes the existence of at least two persons, for one cannot contract with
himself.
iii) It only binds the parties to it and do not affect the right of third parties (outsiders).
iv) The parties can agree on any subject matter of their choice in creating new obligations, or
varying/modifying the already existing or even extinguishing them.
v) Ordinary contract creates obligations of patrimonial (economic) nature, that is, which can
be expressed & valued in economic or money terms. Hence it excludes agreements of
status such as marriage, betrothal, adoption, etc.
3.2. Formation of contracts
Formation of a valid (legally acceptable) contract requires the fulfillment of four essential
elements. These are: capacity, consent, object and form.
3.2.1. Capacity: -

Capacity can be defined as the legal ability to exercise (practically) the attribute features of legal
personality or to perform juridical acts. As we have discussed earlier, the human person is the
subject (possessor) of rights and duties from its birth to its death.

This, however, by no means implies that s/he begins to exercise their capacity from the moment
of birth onwards. Hence, contracting parties should be capable of doing juridical act i.e. the
parties should not be minors, insane, judicially interdicted person, legally interdicted person etc.
unless the law expressly permits.

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3.2.2. Consent: -

It is the basis for any contractual relationships. Any contract depends on the freely given consent
of the parties. Ones willingness & desire to enter in to and bound by the effects of such contract
is expressed through consent. There is no contract legally imposed. The consent to enter in to a
contract should be given by the parties to the contract freely, voluntarily and genuinely.

We have two important channels- offer and acceptance. These are the mechanisms though which
ones consent and intention to be bound is expressed. Offer means a person’s expression of
intention to enter in to a contract. It is the proposal of one’s willingness to enter in to and to be
bound by the contract. The person initiating contractual formation by offer is known as offeror.
The response given to or ones assent to the terms of offer is known as acceptance. Contractual
negotiation will be completed & lead to the creation of binding contract when accepted by the
other party called an offeree.

The important requirement in both cases is that both offer & acceptance has to be specifically
communicated to the other.

Under Ethiopian Law silence after offer is not sufficient to create contract. But the law also
recognizes certain exceptions which after offer silence amounts to acceptance. These include:-
- When there is duty to accept, for eg. an offer made to public utility undertaking to get vital
goods & services as to Tele, Water, ELPA, etc
- When there is a pre-existing business relationships b/n the parties & when a proposal for
variation or renewal is demanded by the other party.
3.2.2.1. Defects in consent
The importance of consent to the making of contract is unquestionable. However the mere giving
of consent is not sufficient to create a legally valid and sustainable contract. There are certain
factors which may affect or vitiate the giving of free & full consent.
Commonly the known grounds for defect in consent under Ethiopian law are:-
- Mistake/ error
- Fraud /deceit
- Duress/ violence
i) Mistake

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 Mistake is when one of the parties concludes a contract with some wrong or erroneous belief.
Misunderstanding or misconception of certain factual or legal situation leads to a mistake.
However the law does not recognize every mistake as grounds for vitiating consent. The two
important tests should be proved:-
- Mistake must be decisive and
- Mistake must be fundamental.
It is decisive when it is capable of convincing the other party to enter into contract. In other
words, had it not been for erroneous belief, the other party would not have concluded such
contract. Fundamentality requirement relates to the elements of the contract. This is when the
mistake is committed on the person (identity or qualification) of contracting parties, the
nature (type) of contract or the subject matter of contract, or obligation assumed by the other
party.
ii) Fraud
Fraud is when the deceitful practice of the other party erroneously leads to the making of the
contract. In both mistake & fraud, there is misunderstanding of the real situation. But in the
later case, erroneous belief is created by the fraudulent act or deeds of the other party or third
party.
iii) Duress
Duress is when the consent of the other party is obtained by violence. Here consent is
secured by coercive acts depriving ones freedom to make a choice. Such coercive act may be
committed against the life, person or property of the party himself or to his close relatives
(spouse, ascendants, descendants, etc). However such act of violence should be reasonable
i.e. serious & imminent (about to happen)
3.2.3. Object
It is another essential precondition for the formation of valid contract. Object refers to the
respective obligations of the parties. Any obligation assumed by the parties under the contract
constitutes an object.
Example, take simple case of contract of sale. Here we have two parties - the seller & the buyer.
The seller’s obligation is mainly to deliver the thing sold & transfer its full ownership. The
buyer’s obligation is mainly to pay the price of the thing. Hence the respective obligation of both
parties constitutes an object of contract of sale.

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For the validity of contract, there are essential elements of object.
i) Object of the contract must be defined sufficiently.
Parties to a contract must clearly state the object of their contract If the object of contract
is not sufficiently defined or vague or ambiguous, it renders the contract void &
unenforceable.
ii) Object must be possible
This means that the performance of the obligation of the parties must be humanly possible.
It should not be beyond the capacity or power of human beings.
iii) Object must be lawful & of good moral.
The obligation of the parties must be to perform something lawful and moral. The object
of the contract should not contravene legal provisions and go against the generally
accepted moral standards.
3.2.4. Form
Form is the last exceptional requirement for the validity of contract. This is because parties can
affect their contract in any form, that is, there is freedom of form.
However sometimes special form is necessary. Mandatory or special formality comes by way of
exception when:-
- The law expressly prescribes, or
- When agreed by the parties.
Owing to their nature, importance and the value involved, certain transactions may be required to
be completed in special forms. The following are among the categories of contracts required to
be made in writing:-
- Contracts relating to immoveable properties
- Contracts with public administration
- Contracts for longer period of time.
- Contract of certain type like contract of insurance, guarantee, loan exceeding 500 birr,
etc.
Hence, when a special formality is prescribed by the law or agreed by the parties, it has to be
seriously complied with otherwise it remains void. Contracts of special form will be binding only
if it is signed by the contracting parties & attested by at least two witnesses.

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3.3. Performance of contracts
Performance means the process by which one or both parties carry out his/their obligation under
the law and the contract; i.e. carrying out the obligation under the contract fully, properly and on
time.
For example:- In a contract of sale it is the duty of both the seller and the buyer to discharge their
respective obligations. The obligations related to performance incorporated under law of
sales are divided in to three. These are: obligations of the seller, obligations of the buyer and
common obligations of the seller and the buyer.
1. Obligations of the seller
The seller has the following three basic obligations:
a. Obligation to deliver the thing:
Delivery is the handing over or conveyance of the thing and its accessories in accordance with
the law and contract.
b. Obligation to transfer ownership of the thing
The seller is at duty to take all the necessary steps for transferring to the buyer unassailable
(disturbance/dispossession free) rights of ownership over the thing. In order to transfer a good
title of ownership, the seller must be the real owner of the thing sold in the first place.
c. Obligation to provide warranty against dispossession (title), defect and non-
conformity
Warranty is a legal (implied) or contractual promise made by the seller regarding the quality,
character, title or suitability of the goods he has sold. There are two types of Warranty. These
are:
i. Express Warranty: it is created where the seller makes a statement of facts or a promise to
the buyer concerning the goods that become part of the bargain. However, mere opinion or
recommendation made by the seller to this effect may not amount to warranty.
ii. Implied Warranty: these are responsibilities imposed by law on the seller for the good
quality of goods he sold. It does not matter whether or not the seller has made express

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 promises as to the quality of the goods. Implied warranties are imposed on the seller in the
interest of promoting higher standards in the market place.
2. Obligations of the Buyer
The two fundamental obligations of the buyer are the obligation to pay the price and take
delivery of the thing. This may include the obligation to go to the place of business of the seller
or opening of his store or be present at the time and place of delivery etc.
3. Common Obligation of the Seller and the Buyer

These are common obligations in the sense that they are obligations imposed on both the seller
and the buyer but each party discharges his or her obligations independently. These obligations
are obligation to cover expenses and the obligation to preserve the thing on behalf and at the
expense of the other party to the contract.

The seller shall preserve the thing in case the buyer is late to take delivery of the thing. The
buyer should also preserve the thing, if s/he intends to refuse the thing either owing to defect in
the thing delivered or non-conformity.

3.4. Non-performance and its remedies

A contract lawfully formed should be properly discharged. Failure to do so entails certain

liabilities. Non-Performance of a contract occurs when the other party (debtor) fails to carry out
his obligations under the contract. It is breach of one’s contractual commitments. This may
include total or partial failure (inadequate performance) or delayed performance.

When the fact of non- performance is proved, the aggrieved party can invoke one of the remedies
for breach. However, before involving such remedies, giving default notice is an important
precondition. Default notice is a notice (reminding) by which the creditor indicates that he wants
to obtain performance of the contract. It means a warning which brings the maturity of the debt
and possible measures to follow to the attention of the debtor.

However, there are some instances where the creditor may not be required to give notice. For
example:-
- Where the obligation is to refrain from doing something & when already breached.
- Where the debtor has declared in writing that he will not perform.

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 - Where the parties have agreed in the contract that notice will not be given.
- When performance is expected on a particular date or occasion & when such time is
expired.
Requiring Remedies for non-performance
The law has devised some remedies to which the creditor may resort. These remedies are:-
- Forced performance (specific performance)
- Cancellation (Judicial or Unilateral)
- Payment of damages/compensation
A). Forced performance: -
As its name explains, forced performance is a remedy where the debtor is forced (compelled) to
execute his contractual commitments. It is an exceptional remedy in that it requires court order
and proof of two stringent conditions.
The two cumulative conditions to obtain forced performance are: -
a) Proof of special interest of the creditor,
Special interest of the creditor relates to the essentiality of performance by the debtor,
that is, if there is no possibility for the creditor to obtain a similar performance from other
sources or even if there are other sources where it entails the creditor considerable
expenses.
b) Consideration of the liberty of the debtor.
In this case the court should not violate the personal liberty of the debtor. This is because
contractual obligation does not result in loss of personal liberty.
B).Cancellation of contract
If non-performance occurs & when forced performance has not or cannot be sought, the next
common remedy is cancellation. Cancellation is the mechanism of avoiding or bringing to an end
a contractual relationship due to reasons of non-performance. This can be achieved either
through the order of the court (judicial cancellation) or by unilateral decision of one of the parties
(unilateral cancellation).
i). Judicial cancellation
This is when contractual relationship is avoided through the mediurn of the court. A party
aggrieved by non-performance can initiate cancellation action and the court can declare
cancellation upon finding justifiable grounds.

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ii). Unilateral Cancellation
This is also another mode of cancellation where one of the parties unilaterally cancels
without going to the court. It is an exceptional right or power derived either from the
contract itself or the law.
Ethiopian law recognizes certain limited & exceptional grounds for unilateral cancellation. These
are:-
- Cancellation clause- this arises from the express stipulation in the contract. It suffices
when the conditions are satisfied.
- Expiry of time limit in the contract or upon giving notice-
- When performance becomes impossible.
- Anticipatory breach- this is when the debtor informs the creditor of his refusal to perform
in writing before the due date.
C). Payment of Damage

Damage is a payment made to the creditor by the debtor to make good what the creditor has lost
due to the debtor’s failure to perform his obligations. It is a form of monetary reparation
(compensation) paid for economic losses due to non-performance.

Damage can always be claimed by proving the fact of non-performance & resulting losses even
in the absence of fault. The debtor is liable to pay damage except when his failure is due to force
majeure.

‘Force majeure’ means an occurrence (event) that the debtor could not have normally foreseen
and prevents him absolutely from performing his obligations. Hence any foreseeable occurrences
or those only rendering the obligation more onerous are not considered as force majeure.

The following are some of the cases of force majeure:-

- Unforeseeable act of persons outside the contract
- Prohibition of the performance of the obligation by a newly enacted law.
- Natural catastrophes such as earthquake, lightening, floods, etc.
- International or civil war
- Death or serious accident or unexpected serious illness of the debtor himself.

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Unless one or more of the above grounds are proved, payment of damage is mandatory
irrespective of fault.
3. Extinction of Contracts (obligations)
Contracts are not lifetime commitments. They are made by people for a certain period of time for
some specific purpose. Hence such contractual relationship may extinguish due to various
causes. The following are common ground extinguishing contractual relations under Ethiopian
Law: -
- Where they are properly and adequately performed by the parties;
- Where the contract is invalidated for problems at formation stage or
- Cancelled due to problems of performance;
- When a new obligation is substituted for the original obligation by the agreement of the
parties called novation;
- When the debtor’s obligation is set off by an obligation owing from the creditor to the
debtor;
- When the positions of creditor and debtor are merged in the same person;
- When the creditor has not demanded performance of the obligation within the period
fixed by law called period of limitation. (ይርጋ)

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 Unit Four
The Law of agency
Agency definition
Agency is in most cases defined as the relationship between two persons, where one (the
agent) may act on behalf of the other (principal) and bind the principal by words and actions. It is
also defined as the relationship in which one person acts for or represents another by the latter’s
authority.
The law of agency deals with the ways in which one person, physical or juridical, deals
with another through the medium of intermediary. Of course one person may deal with another
directly, without any assistance. However a person can perform only one thing and be only in
one place at one time.
Purpose of Agency
An agent is appointed when an individual is unable to act himself on account of his
manifold occupations, absence, illness, advanced age, etc. But generally the following points can
best elaborate the need for having an agent acting on behalf of someone.
1. The need to overcome time and space limitation: One person may wish to perform several
transactions at the same time. However, he could be in a position where he is unable to run
these several activities by himself at one instance, for he is at one specific place (space) at
one time. He cannot be at different places (spaces) at one instance (time); for this reason,
he/she may want another individual to act on his behalf. In this case the concept of
representation comes into view.
2. The need to overcome limitations of knowledge and skill

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 Performing one or more activities may demand certain skills or knowledge. Hence one may
lack the required knowledge in performing a certain activity. Hence, another individual who
has the required skill may act on behalf of the person who has no such expertise in
performing the duty.
3. The need to represent legal persons
Legal personality is endowed to non-living entities. Thus, after acquiring the legal
personality these entities will have the right to exercise all activities that a legal person can
do. For instance, they can sue and be sued, administer property etc, to conclude a valid
contract and to transact with 3rd parties etc. However, these entities don’t have mental
capabilities to analyze the cost and benefit of their transaction because they don’t have minds
like human beings. Hence, they need an agent to act on behalf of them. The manger of a
business organization, for example, is considered as an agent through which any dealings
with a third party is concluded.
Sources of authority
Obviously, an agent is a person who has the authority to act in the name and on behalf of
another person called the principal. In other words, it is an authority given to the agent to
perform juridical acts as a medium of an intermediary with another person called the third party.
By juridical act, we mean acts having effects before the law. These acts performed within
the scope of the authority granted, will bind the principal directly. That means the rights and
obligations of the contract are that of the principal and the third party. The agent is there only to
facilitate the formation of the contract and hence cannot be held liable for the non-performance
by both the principal and the third party.
The authority of an agent is the power of agency which the agent acquires by the
operation of the law or by a contract concluded between the agent and the principal. Agency
which is derived from a contractual relationship is the most usual kind of agency. Accordingly,
consent is the basis of the law of agency and it explains why the agent can represent the
principal.
It must be noted that agency is one of the special types of contract and thus, the rules
applicable to the formation of a valid contract, are of necessity, applicable to the agency
relationship. Accordingly, the elements required under the law for the formation of a valid
contract are required in agency contract as well. These elements are

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 A. The parties must be capable of contracting and give their consent sustainable at law.
B. The object of the contract must be sufficiently defined, possible, and lawful.
C. The contract must be made in the form prescribed by the law, if any.
Scope of Authority
The scope of the power assumed by the agent is determined by the contract-giving rise to
agency. The scope of agency conferred on the agent may either be special or general
a) General Agency
General agency is conferred in general terms. Usually, it is expressed in terms like: all
my affairs, anything related to my property, any affairs which I am called to perform etc. The
scope of such authorities conferred in general terms is limited only to the management of the said
affairs.
General agency relates to preservation/maintenance of those affairs/ rights of the
principal. A general agent is given the power to do a number of transactions involving a
continuity of service.
A person, conferred with agency in general terms is only empowered to sustain the rights
of the principal and is not empowered to perform acts of disposing the rights of the principals.
These acts of the agent are said to be acts of management.
b) Special Agency
Special agency is an authority different from general agency in that it empowers the agent
to dispose the rights of the person represented. Sometimes, this authority is named as act of
disposal. A special agent is a person who is given power by the principal to act in a particular
transaction. Usually, it does not involve continuity of services unlike general agency. In the case
of special agency the act to be performed by the agent is specifically provided, like: sale of a
house, lease of a land etc.
The acts to be performed by the special agent have to be specified in such a way that the
agent and the principal have previously agreed on what acts are to be performed.
Special agency confers upon the agent authority only to conduct the affairs specified by the
agreement and their natural consequences according to the nature of the affair and usage.
Examples of activities that need special authority are:

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 i) Effect settlement, consent to arbitration. These acts require a special authorization
from the principal. This is because effecting settlement or that of arbitration requires
disposition of rights of the principal.
ii) Make donations: A person only authorized in general terms, cannot make a donation
which requires a special authorization.
iii) Bring or defend an action: Once again an individual cannot bring an action or defend
a case until he secures a special authority from the principal.
Effects of agency
A contract of agency creates relationship /obligations among three parties i.e the principal
and the third party; the principal and the agent; the agent and the third party. The effect of
agency is to develop an obligation between the principal and third party as though the contract
was conducted between the principal and the third party. This happens without the principal
forming the contract with the third party himself in person. However this effect of agency shall
come out upon fulfillment of two conditions:
1. The agent must act in the name of the principal.
2. The agent must act within the scope of the power granted.
These two elements are cumulative. The non-fulfillment of either or both is a barrier to
establish the link between the principal and the third party. The scope of power of authority
shows the extent/limits of the power of the agent. For the establishment of effect of agency
linking the principal with the third party as if the relationship was concluded between these two
(the principal and the third party) the agent must act within the scope provided.
The result of the agent acting beyond the scope of the power granted is that the principal has
no liability towards the third party. However the principal is at option either to ratify or repudiate
the acts done outside the scope of power. If the principal has ratified it, the agent shall be deemed
to have acted within the scope of his power; if not, the agent can be liable.
Obligations / Duties of the Parties
1/ Duties of the Agent
A) Good Faith required of the Agent
The agent shall act with the strictest good faith towards his principal because the agent is
working without procedural control from the principal; “good faith” is a means to control the
procedures to be employed towards the interest of the principal.

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 Good faith is acting towards the best interest of the principal. In good faith the agent shall
perform his activity by respecting the followings:
- Secret profit: An agent may not make a secret profit out of the performance of his duties
as an agent. Secret profit refers to any financial advantage which the agent receives over
and above what he is entitled to receive from his principal by way of remuneration.
- Confidentiality: The agent need not employ the information he obtains in the exercise of
his duty to the detriment of the principal. The nature of this obligation goes to be
respected even after the termination of the agency relationship between the agent and the
principal. Making use of information acquired in the course of carrying out of his duties
by an agent for his own personal benefit is prohibited. The agent is not allowed to make
use of confidential (secret) information to engage in completion with the principal.
D. Avoid conflicting interest: Where the agent is in a position in which his own interest may
affect the performance of his duties to the principal, the agent is obliged to make a full
disclosure of all material circumstances so that the principal with such full knowledge can
choose whether to consent to the agents acting.
E.
C) Diligence Required from an Agent
This obligation of the agent is related to the care and skill the agent is expected to show
towards the affairs of the principal. Not only must the agent act in accordance with his authority,
he must also perform the undertaking with due care and skill.
D) Duty to Account
The agent is bound to account for money and activities to the principal. This means that
the agent must pay over to his principal all money received to the use of his principal. The agent
is obliged to keep the principal’s property and money separate from his own and from other
people’s property and money to keep proper accounts, and to be ready to produce them on
demand to the principal or a person appointed.

2/ Duties of the Principal

The principal like the agent has some contravening duties towards the agent. These are:
A. Remuneration

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 The most important duty of the principal is to remunerate the agent for services rendered.
The obligation to pay such remuneration exists only where it has been created by an express or
implied contract between the principal and the agent.
B. Duty to Advance Money
The agent may need money to run the representation of the principal thus the principal
shall advance to the agent the sums necessary for carrying out the agency. These may include for
example transportation and similar costs.
C. Duty to reimburse outlays and Expenses
The money advanced by the principal may not be sufficient to run the affairs of the
principal, or the principal might not have advanced money for the agent. In such cases the agent
may employ his own money or money from other persons. These outlays/expenses incurred by
the agent need to be repaid. In short the principal needs to pay back the expenses the agent has
incurred.

Extinction of Agency Relationship

i) Agreement:
Contracts are not only entered into to create obligation but also to extinguish obligations
as well. The principal and the agent may agree to terminate a relationship that exists among
them.
ii) Revocation of Agency (Authority of the Agent)
Revocation is a term linked to the principal. It is a unilateral declaration on the part of the
principal to terminate the exiting agency-principal relationship. It occurs when the principal
gives notice of termination of the authority to the agent.
iii) Renunciation
A counter right granted to the agent is the right to renounce the authority he had acquired.
This is termed as renunciation. Renunciation as you can grasp from the above provision is a
declaration made by the agent to terminate agency relationship that existed with the principal.
Similar to revocation, it is a unilateral declaration.
Iv). Death or incapacity.
The death or incapacity of either or both of the parties has its own specific effects. The
main point behind the special effect upon death of the parties is that the agency relationship is

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confidential and personal: hence the individual identity and existence of either of the parties is
very essential. Thus without the need to take any further step, the death or incapacity of the
principal or the agent automatically results in the termination of agency relationship between the
agent and the principal.

Unit Five
Law of Traders and Business Organizations
5.1. Who are traders?
Traders are persons who perform activities professionally and for gain. All persons who operate
a given task for profit may not necessarily be considered as a trader. Persons who undertake
agriculture, forestry, fishery, cattle breeding, etc. in a craftsman level are not considered traders.
If a farmer sells his sheep breed mainly from the resources of the land while he uses, he cannot
be deemed as a trader; so when a person engage in any activity beyond the usual practice of their
business at a commercial level, they will be considered as trader.
The right to operate business
In principle every person is free to engage in any type of activity. Nonetheless, freedom to
operate business activity is not absolutely free. There are certain restrictions imposed by the law.
a) Incapable persons
As you well remember the discussion on incapacity, incapable persons cannot perform juridical
acts. As trade activities are juridical acts, minors and interdicted persons are not free to carry on
commercial activities.
b) Married persons

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Though it seems simple case of restriction, married persons are not as free as bachelors. S/he has
to obtain the consent of the other spouse in order to carry on trade. Failure to secure consent will
not impede the trading activity of the spouse. The effect is that when the objection is registered,
debts contracted by the trading spouse will not be considered as common debt of spouses and
cannot be recovered from the common property of same or personal property of the objecting
spouse.
c) Foreigners
Foreigners are not free to venture trade in Ethiopia. Before they operate trade, they need to
obtain residence permit, work permit, investment permit and so on. Certain fields of trade are
entirely reserved for nationals and non-nationals cannot at all engage on them. E.g. insurance
and banking business.
d) Associations
Associations are organizations established to carry on non-profit making activities. Some
examples of associations are religious organizations, political associations, civic /professional
associations, NGOs, social associations, etc.
Obligation of traders
Traders have certain obligations imposed by the law.
These are: -
 The obligation to keep books and accounts
 The obligation to be registered
 The obligation to obtain business license
a) Obligation to keep books and accounts
Commercial business organizations and traders have to keep books and accounts in accordance
with the business practice, regulations and importance and nature of trade carried on.

b) Obligation to be registered
All commercial business organizations and traders have duty to be registered in the commercial
register before commencement of their activity.
c) The obligation to have business license
Business license is an authorization / permission given by an appropriate authority to carry out a
certain commercial activity. It is a mandatory requirement for traders to have permission before

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they venture in to the business. The purpose is to check the respect of laws, enacted to safeguard
the interest of the public, by the trader in his activity.
5.2. The Law of Business Organizations (BOs)
A person may carry out business or trade activity individually or in group with similar people.
When a person opts for the latter scenario, they should establish business organizations.
"business organization" is…any association arising out of a partnership agreement. Association
here refers to grouping of business persons and it doesn't refer to non-profit making activities.
Thus business organization is grouping of business persons arising out of partnership agreement.

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"A partnership agreement” is a contract where by two or more persons who intend to join
together and to cooperate undertake to bring together contributions for the purpose of carrying
out activities of an economic nature and of participating in the profits and losses arising out here
of, if any

The agreement for the formation of the business organization should also follow certain
formality requirements. The agreement must be entered in to in writing for it to be legally
recognized as business organization. The other formality requirement is registration in the office
of registration. In order to be registered, there must be drawn memorandum of association and
articles of association that contains the agreement of the partners and the specific rules governing
the operation of the organization. Then after the business organization will acquire legal
personality.

The parties to the partnership agreement should be willing to work together for common goal.
They must also be willing to make contribution to the business organization. The contribution
may be in form of cash, skill (e.g. to work for the business organization in consideration of being
a partner) or in kind (e.g. giving house). Contribution in skill is allowed only for partnerships.
Parties to companies must contribute either in cash or in kind.

Lastly, the parties must join together in order to carry out activities of economic nature.
Business organizations are established in order to carry on activities profit-making activities. It
cannot be established for non-profit making activity. Hence all the parties are entitled to
participate in the profit gained and are duty bound to share the losses incurred from the operation
of business. Any agreement to give all the profits to one partner or to relieve one or more partner
from losses is of no effect.
5.2.1. Types of Business organizations

The Ethiopian law recognizes six types of business organizations. These are ordinary
partnerships, joint venture, general partnership, limited partnership, Share Company and private
limited company. Broadly they can be categorized in to partnerships and companies.

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a) Ordinary partnership

A business organization that does not possess the features of any other business organization is
deemed as ordinary partnership. This is its unique feature that O/P/P is always non-commercial.
All members of ordinary partnership hold the same position:- the same rights and obligations.
Unless there is contrary agreement, the partners are jointly and severally liable for all debts and
responsibilities of the partnership where the partnership’s assets are not sufficient to settle the
demands of creditors.
Creditors can demand payment of all or parts of their claim from personal property
of one or more of other partners. Such a partner can then proceed against other
partners to share the burden. This is the concept of joint and several liability.

b) General partnership (G/P/P)

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General partnership is a commercial business organization, unlike ordinary partnership, where all
the partners occupy the same status as a trader. Partners of general partnership cannot exclude by
agreement joint and several liabilities or such exclusionary provision cannot affect the rights of
third parties. The creditors however can demand payment from personal property of partners
only after the partnership asset is exhausted except for payment of fictious dividends- sharing of
the capital even where there is no profit.

c) Limited partnership (L/P/P)

Limited partnership has two categories of partners- general and limited partners with different
rights and responsibility. General partners have the same rights and obligations like partners in
general partnership. They have joint and several liability to the creditors of the partnership where
the latter’s asset are insufficient to pay the debts of the partnership. They are also the one to
serve as manager.

Limited partners, on the other hand, have no such liability. Their liability is limited to the extent
of their contribution to the partnership. Creditors cannot proceed against their personal property
unless they did not fully subscribe their contribution. They cannot also participate in the
management of the affairs of the partnership even under the power of attorney i.e. they cannot be
appointed as manager. If one acts as a manager, he shall be fully, jointly and severally liable for
any liabilities arising out of his activities and in some cases to some or all the firm’s
undertakings.
d) Joint Venture
Joint venture is formed by partnership agreement that is not required to be in writing. The
formalities of registration and publicity are not also required. The effect is that the organization
will be kept secret and does not have legal personality. What is known or disclosed to third
parties is its manager who is responsible for all faults and commitments arising out of the
business. In fact the liability of other members will be determined in the mutual agreement

e) Share Company

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A share company is a company whose capital is fixed in advance and divided in to shares and
whose liabilities are met only by the assets of the company.

The members shall be liable only to the extent of their share holding. Those who are responsible
for the formation of the company are called founders. They prepare various documents (the
memorandum and article of association etc)

Share companies can be formed in two ways: -

- formation as between founders and formation by public subscription.

When companies are to be formed by public subscription, an offer for subscription shall be made
by a prospectus signed by all founders. In case of formation as between founders, share will not
be offered for public subscription. Rather all shares will be allocated as between founders.
Some important aspects of share companies
i) Limited liability- unlike partners in partnership, members in a share company as
well as private limited company have limited liability. The concept of limited
liability is that partners’ liability is limited only to the extent to their contribution
made to the company. Partners cannot be personally liable for the debts of the
company i.e. creditors of the company cannot proceed against personal property
of share holders when the company’s asset are insufficient to pay of its debts.
Hence, company debts can be paid only from the company’s asset and if it is
insolvent, creditors will be losers.
ii) Issue shares- the other important features of share companies is that their capital
is divided in to shares. Unlike partnerships share companies and of course private
limited companies issue shares to their members. The partners in Share Company
are called share holders. Shares are simply small units in to which the capital is
divided into equal parts. Share companies issue share certificates that evidence the
person is share holder and the number of shares he holds.
iii) Minimum number of members and amount of capital- in order to form all
other types of business organizations, the existence of at least two persons is sufficient. This is
not however possible in case of share companies. At least five persons are required to form Share
Company.

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f) Private limited company (PLC)

Private Limited Company can be formed by issue of shares. However, all the shares must be
shared among the persons forming the company. That means, it cannot subscribe shares to the
public to raise fund. This is principally because the individual personality of members is more
important in cases of private limited company than share companies.

Usually such kind of company is formed as between family members, relatives and friends who
know each other very well.

In order to form PLC, there must be at least two persons. The law however limits the maximum
number of members not to be more than 50.
Important aspects of PLC

Generally, PLCs, as they are companies, have similarity with share companies in many respects.

i) Members of PLC have limited liability- only to extent of their initial contributions.

ii) PLC can also issue shares to their members. However the nature and class of shares in PLC
are different from that of shares. PLC can only issue registered shares i.e. shares registered in
the name of the member while share companies can issue both registered and bearer shares.
PLC cannot also issue different classes of shares i.e. shares with different par value and
preferential rights.

iii) Finally, PLCs cannot venture into financial activities such as banking and insurance. The
restriction is made to safeguard the interest of the public taking in to account the nature of the
business itself.
5.3. Dissolution of business organizations

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Business organization may be dissolved due to various causes. They may be dissolved by
operation of the law, by agreement or by court order.

- Partners may dissolve the business organization by agreement when the purpose of the
business is achieved or cannot be achieved;

- Business organizations shall also be dissolved when there is death, incapacity or

withdrawal of partner or bankruptcy of the business or when the term has expired and so
on;

- Business organizations can be dissolved by court order when there is serous disagreement
between partners or serious breach of duty.

When business organizations are dissolved, they have no more legal existence /personality and
cannot perform any act of legal nature.

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