CHAPTER THREE

THE PRACTICE OF CONTRACTING

Background
In any economy, a contract is an
indispensable instrument for exchange of
goods, services and money between persons-
both in the physical term or corporate form.

Prepared and compiled by: Ayele B.

 Forms of legal systems
• Code system
 Duties, rights,
responsibilities etc are
clearly articulated in the
system
 „Wrong‟ acts are only those
specified to be so at the
time of „wrong‟ doing
 Punishments are only to the
limit that the law specifies
at the time of wrong doing
• Non-code system
 The system is open ended
 Cases are decided by juries
 Reference is made to
pervious similar cases in
jurisdiction process
 The law is what the higher
court in the country decided
to be a law
 The common wealth
countries follow this
system.
Prepared and compiled by: Ayele B.
 Types of law
• Substantive laws • Procedural laws
 Stipulate the  Concerned with
mechanism that is used
rights and not to enforce the
rights of a substantive laws
citizen  Stipulate what needs to
 Are concerned be satisfied and how not
in articulating compliance with the
substantive laws is to be
the „dos‟ and the punished
„don‟t dos‟  Civil procedural codes
 Civil codes  Criminal procedural
 Criminal codes codes

Prepared and compiled by: Ayele B.

 Types of law
• Civil laws • Criminal laws
 Deals with the rights of  Protects citizens from
people crime being committed
 concentrates in on them
establishing rights of  States the „don‟t do‟s‟
people (statue,
proprietary). and must „do‟s‟ and
penalizes those who
 Ends at compensating
violates the rule.
the injured party
 Criminal code
 Civil codes

Prepared and compiled by: Ayele B.

 The legal system in Ethiopia

• The constitution
• Is the supreme law of the country
• Establishes that the parliament would act on other
laws (proclamations) but not on the constitution
itself
• It is not interpreted by the judiciary organ; it is
rather interpreted by the House of Federation.

Prepared and compiled by: Ayele B.

 The legal system
The legal system in
Ethiopia

The law interpreters The law enforcers

The lawmakers (legislative)
(Judiciary) (Executive) Division of power in
the Constitution)

Legislative Interpretation
Constitutional laws (The House of Federation, The executives
the Parliament)

The parliament
Statutory laws Judiciary Interpretation
Citizens
(proclamations) (The Courts)

Bodies designated by the

Doctrinal Interpretation
parliament
(Legal scholars in critical
Non statutory (subsidiary)
analysis)
laws (regulations)

Prepared and compiled by: Ayele B.

 Hierarchy of laws
• Constitutional Laws (The Constitution)
– Is the supreme law of the land from which other laws
emanate
• Statutory Laws (Proclamations, Decrees &
Orders)
– Example proclamation /2005
• Non-statutory Laws (Regulations & Legal notice)
– Meant to further elaborate and enact up on the statutory
laws;
Directives; Guidelines; By-laws; Technical Standards, etc don‟t
enjoy the status of law but can be used as supportive legal
frameworks. Prepared and compiled by: Ayele B.
Key Laws relevant to Construction
• The Civil Code;
– Especially Contract and Obligation related
• The Commercial Code
– Law of Traders and Businesses
– Law of Business Organizations;
– Law of Bankruptcy & Scheme of Arrangement;
– Law of Carriage & Insurance
• Civil Procedural Code
• Criminal Code
• Law of Finance
• Law of Taxation
• Environmental Impact Assessment Proclamation.
• Labor Law
• Procurement Laws; etc

Prepared and compiled by: Ayele B.

 The law of contract
(Books IV & V of the Civil Code)

Prepared and compiled by: Ayele B.

 The Civil Code
• Was effective since 1960 and frequently
being amended
• Drafted by consulting major continental
Europe codes (France, Swiss, Greece, Italy)
Egypt, and to some extent practices of
common laws

Prepared and compiled by: Ayele B.

 The Civil Code
• Has five books
 Book I : deals with “persons”
 Book II: deals with “family succession” (replaced by a
new version)
 Book III: Deals with “goods”
 Book IV: Deals with “obligations”
 Book V: deals with “special contracts”

Prepared and compiled by: Ayele B.

 A contract
• Importance:
– Is an indispensable instrument for exchange of
goods, services, works and money between
persons
– Non-recognition and/or non-enforcement of
contracts leads to anarchy and failure of
transactions

Prepared and compiled by: Ayele B.

 Contract:
• Is ‘an agreement between two or more
persons as between themselves to create,
vary or extinguish obligations of a
proprietary nature’ (art. 1675 of CVC
1960)

Prepared and compiled by: Ayele B.

 Nature of contract
• Contracts can be of:( civil, commercial,
industrial (labour relation), economic (
construction contract) or otherwise);
• May not involve Extra contractual
liability

Prepared and compiled by: Ayele B.

 Terms of Contract
• Conditions are terms which are fundamental to
the contract and may lead to breach and/or damage
• Warranties are terms which are subsidiary to the
contract. Can normally lead only to damages
under tort
• Expressed terms are terms clearly stated in the
contract.
• Implied terms are not specifically written into the
contract but are considered by the courts to be part
of the contract
• Exclusion clauses: These are clauses (terms) that
seek to deny liability or limit liability
Prepared and compiled by: Ayele B.
 Formation of a contract
• What should a contract satisfy to be
enforceable in front of law?
 Offer and acceptance (Agreement)
 Competent parties (Legal capacity)
 Consent to be bound
 Consideration
 Legality of the object
 Formalities

Prepared and compiled by: Ayele B.

 Offer and acceptance
• Offer: An offer is an expression that one
party is willing to be bound by specific
terms which are setout in the contract.
• According to the Civil Code, an offer or
acceptance can be made:
 In writing or orally
 By signs normally in use
 By conduct of the parties

Prepared and compiled by: Ayele B.

 Offer and acceptance
• A contract is complete when an offer by one
party is accepted without condition by the
other party
• No contractual offer in the case that a party
declares to be obliged but without
communicating this intention to the
beneficiary of the declaration

Prepared and compiled by: Ayele B.

 Offer and acceptance
• Termination of offer:
 Through refusal (rejection) or counter offers
but not just a request for further information
Death of offeror or offeree
None acceptance within the offer time or after
reasonable length of time
Failure of a condition subject to which the offer
was made
Revocation of the offer (withdrawal of offer)

Prepared and compiled by: Ayele B.

 Offer and acceptance
• Acceptance:
 Absolute - i.e. accepting all the terms of the offer
 There must be an indication of consent - i.e. silence
does not indicate acceptance
 The acceptance must be communicated to the offeror
(but doesn‟t need to reach offeror) except in some
special cases:
 Party is bound by law
 An offer is to continue or vary an existing contract or enter into a
subsidiary one
 When offerer clearly stipulated that an acceptance is deemed to
have been made unless rejected
 It must be the offeree or his agent which communicates
the acceptance
Offer and acceptance in construction: Offer by contractor to do a
job; acceptance by client to the terms of the offer. The issues in
negotiation should be included as offer by contractor!Prepared and compiled by: Ayele
 Consent and capability
• Capability of parties
• No agreement is deemed an enforceable
contract if any of the parties is incapable of
contracting
Minor
Considered mentally incompetent or ill
Under the influence of alcohol and other drugs
Inexperience in business (if the other party tried to
exploit the inexperience)
Construction works: Check capability of the legal attorney!
Prepared and compiled by: Ayele B.
 Consent and capability
• Consents sustainable at law
Parties should be willing to be bound by the
terms of the contract

Declare that you have read all the incorporated documents and
are willingly bound by the terms!

Prepared and compiled by: Ayele B.

 Consideration
• Consideration involves a benefit moving
from the offeree to the offeror in exchange
for the promise
• Consideration should be:
Of some value, but not necessarily adequate
Additional to the duty in the law
Additional to previous contract agreements
For a future act

Prepared and compiled by: Ayele B.

 Objects of the contract
• The object of the contract is the obligation
to perform something
• Should be:
Defined,
Possible,
Lawful and
Freely determined by the parties

Prepared and compiled by: Ayele B.

 Form of contract:
• If no form is provided by law, contracts can be in
any form the parties agreed
• Otherwise, the contract agreement should be
presented in the form provided by law
• For example,
 A contract involving an immovable object should be in
a written form and needs to be registered by the
authorities
 Long term contracts, such as guarantees insurance etc,
and those entered with public organization should be in
writing

Prepared and compiled by: Ayele B.

 Form of contract
• Written contract:
According to the Civil Code of Ethiopia 1960,
Art.1727
Any Contact required in writing shall be supported
by a special document signed by all the parties
bound by the contract
 It shall be of no effect unless it is attested by two
witnesses

Prepared and compiled by: Ayele B.

 Invalidation of contracts
• Void and voidable contracts
• Reasons to invalidate contract.
 Mistake
 Needs to be fundamental that the plaintiff wouldn‟t have
entered the contract had it not been for the mistake
 Not mistakes to the motives that led to the contract
 Not calculation/arithmetic mistakes
 Mistake may have two aspects
 A tort aspect of compensation of the injured party.
 A contract aspect of invalidation

Prepared and compiled by: Ayele B.

 Invalidation of contracts
 Fraud (Deception)
 Principal or decisive fraud Vs Incidental fraud (could have
contracted but at a higher cost)
 Only principal frauds can lead to invalidation of contract,
incidental fraud can only lead to compensation
 Deceit by a third party is no ground to invalidate a contract
unless the contracting party knew the fraud and took advantage
of it.
 May have a three fold effect
 Invalidation of contract
 Compensation of injured party
 Penalty under penal code

Prepared and compiled by: Ayele B.

 Invalidation of contracts
 Duress
 „Duress‟ is the compelling of a party to consent to a contract
by threats of grave imminent harm to such party or his
ascendants, descendents or spouse
 Impending danger may relate to life, person, honor or property
 Duress by a third party is ground to invalidate but plaintiff may
have to pay for damage
 Duress can have threefold aspect
 A contract aspect leading to invalidation
 A tort aspect leading to compensation for damages
 A penal aspect leading to punishment under the Penal Code

Prepared and compiled by: Ayele B.

Invalidation of contracts
False statement
– false information to another where he knows that the latter
acts upon the information
– Can be caused by silence
Unconscionable contracts
– If made by taking advantage of his want, simplicity of
mind, senility or manifest business inexperience
– Can‟t be claimed on the sole reason that it favors one
party.

Prepared and compiled by: Ayele B.

 Discharge of Contracts
• Performance
– Contract should be substantially completed unless
specially required
– Eg. Construction contracts are said to be complete at
Substantial Completion with provisions for defect
correction within the liability period.
– Meaning of „substantial completion‟ may be defined in
the Contract (for example completion of all the terms of
the contract to the required standard)

Prepared and compiled by: Ayele B.

 Discharge of Contracts
• Agreement
• Mutual agreement (agree to cancel the contract)
• By Novation (to vary the contract)
• By accord and satisfaction (even though there is
variation to performance required)

Prepared and compiled by: Ayele B.

 Discharge of Contracts
• Frustration (contract was executable at the
time of agreement but subsequent events
(out of control of both parties) made it
impossible (not harder or more expensive))
• Force majeure (war, earth quake, natural hazard)

Prepared and compiled by: Ayele B.

 Discharge of Contracts
• Breach (failure to carry fundamental
obligations under the contract)
– Leads to compensation and/or termination
– Famous in construction as liquidated damage

Prepared and compiled by: Ayele B.

 Limitation period
• All claims must be demanded within the
period the law provides: 10 years!

Prepared and compiled by: Ayele B.

 Special Contracts
(Administrative Contract)

Prepared and compiled by: Ayele B.

 Administrative Contracts
• Is a contract to be signed between a public
(government) authority & a private party;
– Not all such contracts qualify to be administrative,
though
• Major types of such contracts of interest to
construction are:
– Contract of Public Works; (Article 3244-Article
3296)
– Contract of Supplies; (Article 3297-Article 3206)

Prepared and compiled by: Ayele B.

 Administrative Contracts
• By nature, in Administrative Contracts, the balance of
the said contract is tilted towards the public authority;
for public interest
• Fore example:
– Termination of contract by public authorities for convenience;
(see Article 3180 of the Civil Code)
– the non-performance by the public authorities of their
obligations shall not entitle the other (private contracting
)party to fail to perform its obligations; (see Article 3177(1) of
the Civil Code)
– the administrative authorities may…unilaterally
impose…certain modifications of the contract…(see Article
3179 & Article 3283 of the Civil Code);
– the court may not order the administrative authorities to
perform their obligation; (see Article 3194(1) of the Civil Code)
– etc
Prepared and compiled by: Ayele B.