Short note on sales and securities

By Ezra d.

Instructor yazachew b.

Sales and securities is a course dealing with two different types of courses. The first part of the
course on contract of sales mainly deals with the nature of special contracts governing sales and
its distinguishing features from other contracts. In this part, we will go through the definition i.e.
the elements forming contract of sales. Accordingly, we will be dwelling on the obligations of
both parties i.e. the seller and the buyer, communality of obligations and contractual and legal
remedies in breach of the contract by either party. On the other hand the second part focuses on
the creation of contracts governing securities and devices. Under this topic we will be dwelling
on the creation, enforcement and transfer of securities interests the jurisprudence of which is not
developed pretty much in Ethiopia though it is claimed to be the most important pressing area of
law as a country badly urging for attraction of foreign investment. In this area of civil law, it is
hard to come across with helping materials or with any jurisprudence of courts for it is poorly
theorized and practiced. Thus, the second part will be covered by forming various questions and
finding answers. On account of this, the following questions will be addressed turn by turn. 1.
What is security interest? How can we form security interest? What is the subject matter of
security and what features characterize it? How can we enforce security interests against the
debtor or against third parties? How can we transfer our security interests?

PART ONE

CONTRACT OF SALES

A contract of sale is a contract whereby one of the parties, the seller, undertakes deliver a thing
and transfer its ownership to another party, the buyer, in consideration of a price expressed in
money which the buyer undertakes to pay him.1 From this provision we simply understand that a
contract of sale is a contract to which the general principles of contract are applicable. It is to
mean that the validity requirement expressed in terms of capacity, consent, object and form if

1
The civil code of the empire decree no. 65 1960 art. 2266 (1)
any serves as basis for creating contract of sale. It is the structure of the civil code to primarily
define contract of sale as any contract which is then followed by its own special features.
Accordingly, the civil code provides two basic obligations, delivery of a thing and payment of
price qualifying a contract as contract of sale. There are two parties i.e. the seller who delivers
the thing and the buyer who pays price for the delivery. If one delivers a thing to another and if
the one pays the price for the delivered thing, then, a contract of sale is deemed to exist. We can
thus define contract as any contract which is however expressed by delivery of a thing and
payment of price by the contracting parties. If we single out a delivery of a thing and payment of
price as core elements of contract of sale, it will be our next task to examine as to what do we
mean by these elements in the following sections.

SECTION ONE

Elements of contract of sale

1.1 Thing: Delivery of a thing by the seller

What do we mean by a thing? As we have said earlier, the general principles of contract are
applicable to contract of sales. In order for us to determine what is to be sold, it would also be
important to make reference to the part of the civil code dealing with property. The civil code of
the empire defines a thing in contract of sale as a good which is movable and immovable. See
art. 1126, art. 2267 of the same code provides that the application of the chapter on contract of
sales shall be to sale of corporeal chattel. We have however an exception that when special law
of sale on contract of sale for certain goods provide otherwise, things remains to stand in a rival
position of this chapter. It is obvious that the law categorizes a corporeal chattel which is a thing
in contract of sale as ordinary and special corporeal chattels for policy reasons. Therefore, if a
law of sale on aircraft appears to deviate from the principles of contract of sale, it will remain
unaffected. For a contract of sale on special corporeal chattel, we can say that a due reference is
deemed to be made to three categories of laws: the law on contracts in general, the law on the
general contract of sale and the law on the special contract of sales. Thus, it would be our
prime observation to the contract of the parties the special law governing the sale of a particular
property, if not adequate to the general contract of sale and if this no adequate too, to the general
principles of contract this will be approach we employ to deal with disputes involving sales. The
general contract of sale also applies to sale of immovables if no provision is otherwise set. See
art. 2275. It applies to transfer of usufruct rights and other incorporeal rights. See art. 2408 and
the following. Generally, the reading of articles 2267, 2275, 2410 and 2411 distributes the
application of the general contract of sales on corporeal chattels which are ordinary and special,
immovables and incorporeal chattels which are referred to be goods under part of the civil code
dealing with property and things in the language of art. 2266 of the same code. With regard to
intrinsic elements forming part of the immovable, the law on sale of movables shall apply. See
art. 2268(1). This will be however if the contract of the parties specifically treats the intrinsic
elements as separate from the principal. The civil code under sub art. 2 of the same art. Gives
emphasis that the sale on crops trees on farm materials for demolished building and products of
quarry shall be the sale of movables. Please think of this if it is either the principle of the law or
the mercy of the contract to determine the fate of the sale on list of things under this provision?
The instructor believes that the provision provides for the sale of movables by anticipation.
Again is it still the blessing of the contract or the law giving the status of intrinsic elements
including movables by anticipation to be governed separate from the sale of immovable? If the
contract or if the law prescribes nothing about the intrinsic element in the general or special
contract of sale, the law presumes it to be part of the principal. See art. 1131. Does the same
apply to accessories?

How do we understand the language of art 1135 of the civil code. Before dealing with the fate of
accessories, we need to establish the existence of accessory principal relationship on the property
which is the subject of sale. Permanent destination to increase the economic utility of the
principal by the seller obviously proves the existence of such relationship. See art. 1136. After
establishing this relationship, we go against the infringement of our rights during the sale as far
as our rights to the accessory are concerned. In this regard, there are two arguments. Some
including the instructor argue that the fate of intrinsic elements under art. 1131 shall also apply
to accessories. They substantiate their argument by creating the following scenarios. If the
contract isolates the accessory from the sale of the principal, no doubt will be in place in respect
of the accessory. If there is also clear agreement for inclusion of the accessory in the sale the
principal, we still never face doubt on the dealing. If not the law or the contract says any about
the accessory in the sale of the principal, then we say that doubt is in place. Therefore, there will
be no distinction on provisions dealing with intrinsic and accessories of the principal. The
instructor further argues that the doubt could even be attributable to the failure to establish the
existence of accessory/principal relationship. Do you agree? Others argue that it is the rule to
presume to encounter the existence of separate contracts for the sale of the accessory and the
principal and hence is the doubtful case under art. 1135 exception. Thus, it is only in doubtful
cases that the dealing on the principal shall also be the dealing on the accessory. Accordingly, it
differs from the provision governing the sale of intrinsic elements for the latter remains to be rule
while the former is an exception to the rule. Do you agree? Does the silence of the contract on
the exclusion or inclusion of the accessory amount to doubtful cases? Based on this hypothesis,
the instructor summarizes the arguments as follows. 1. Since the owner creates the
accessory/principal relationship, he has the privilege to terminate the relationship prior to the
sale of the principal and the intention of the seller should be interpreted to include the accessory.

2. if the contract says no any on the accessory, then we should resort to doubtful case under art.
1135 and hence should the accessory follow the principal. For this category of argument, silence
of the contract amounts to doubt.

Once we determine that it is a thing in the language of the civil code as to what is to be sold, the
next issue will be on how to deliver the thing element. A sale may relate to an existing thing
belonging to the seller.2 A sale may also relate to a future thing which the seller undertakes to
make for delivery to the buyer.3 A contract of sale may be concluded regardless of the existence
or non existence of a thing. By this, we mean that a subject of sale could be an existing thing at
the time of the conclusion of the contract or a future thing. Particularly, in relation to delivery of
a future thing we have another provision to be reread in to the language of art. 2270/2 of the civil
code. A contract for the delivery of corporeal chattels to be manufactured or produced shall be
deemed to be a sale where the party who undertakes delivery is to provide the main materials
necessary for the manufacture or production.4 Here it is crucial to distinguish between contract of
sale and contract of service through close look at the respective provisions, 2269 and 2610 of the
same code. A contract of work and labor is a contract whereby one party, the contractor,
undertakes to produce a given result, under his own responsibility, in consideration of a

2
Ibid, art. 2270(1)
3
Id, art. 2270(2)
4
Ibid, art. 2269
remuneration that the other party, the client, undertakes to pay him. 5 In contract of service, the
materials could be provided by either parties (see art. 2614 and 2615). Even though we cannot
connote a clear distinction between contract of sale and contract of service by of sole comparison
to the above provisions 2610 and 2269 of the civil code, reading of the latter provision together
with the provisions 2614 up to 15 unequivocally distinguishes contract of service from contract
of sale. By sale on delivery of future corporeal chattels, it is the burden of the party undertaking
the delivery to provide for the production of the future thing. If it is however the party providing
the main materials to produce the future thing, it will be regulated by the contract of services
(SEE art. 2615.(. but, it is still difficult to resolve cases in grey areas. Assume that dispute arises
over a certain item. Abebe, a contractor invokes 2610 in conjunction with 2614 to support his
claim for contract of service while abebech, a seller invokes art. 2269 to buttress her argument
claiming for contract of sale in a given transaction. How do we go about resolving such dispute?
Whenever we encounter confusion on the nature of a given transaction, we should pick the
disputed item and characterize it based on the law governing the transaction through close
reading of the provisions that overlap. We put the transaction on one basket and test it by the
laws which are in place to contest with one another. For instance, in our case, we put the
disputed item and test art. 2269 if it fits and art. 2610 cum 2614 another time if the first test fails
to work. Under contract of service, there is a possibility by both parties to provide the main
materials for the production of the future thing. On the other hand, it is only the seller providing
the materials for the production of the good for the transaction to qualify as contract of sale. In
this case the instructor argues that the latter is a bit special over the former. Hence, whenever
there is a dispute over a certain transaction that involves provision of the main materials and the
production thereof, it would be the presumption for the transaction to be a contract of sale. This
will be so in interpreting the rules for canon of interpretation. We can also resort to another
approach. We can easily look in to the definitional elements of each contract and determine the
nature of the transaction as contract of service or as contract of sale. As sale involves transfer of
ownership, it is natural for the seller to own the property which is subject of sale. It is not
however the validity requirement to own property to effect sale for the law under art. 2270(3)
clearly allow a seller to sell a thing belonging to a third party. This can be done through
representation or through possession in good faith.

5
Supra note 1 art. 2610 p. 389
1.2 Payment of price by the buyer

It is obvious that parties are expected to reciprocate while entering in to a given contract. In
contract of sale, we consider transfer of ownership over a certain property when the delivery is
accompanied by payment of price expressed in money. If the price element does not exist in a
transaction involving transfer of ownership, the transaction will change in to contract of
donation. In other words, as a contract of sale is a synalagamatic contract, we cannot talk of a
contract of sale unless the price element exists. The price is expressed only in terms of money.
Other means of exchanges like barter are excluded as price element completing a valid
conclusion of contract of sale. In fact, by price element expressed in money, it does imply that it
should always be in money for cash. Any equivalent price for the delivery of the thing
calculated in money qualifies the price element for the Ethiopian contract of sale. Though the
price element in a contract of sale is always unavoidable, the fact that the parties do not fix the
price element in their contract does not make the contract of sale invalid. For instance, we can
have the following provision to better substantiate this notion. The price may be referred to the
arbitration of a third party.6 There shall be no sale where such third party refuses or is unable to
make an estimate.7 Parties can refer estimation of the price to a third party. When the third party
refuses or fails to determine the price based on the reference, there will be no contract of sale for
the price element is lacking. However, the language of the above provision confuses arbitration
estimation in determination of the price element by the third party. We know that classic
arbitration involves filing to arbitration by the parties, appointment arbitrators, paying arbitration
fees, hearing of each party and rendering a final award to the satisfaction of either parties. For
instance, think of that a contract of sale for the building of beherawi bête mingist is referred to
arbitration by third for the determination of its price. If the third party calculates the too
depreciated book value of the building and makes estimation for value of 10 birr by of setting
aside the market value of the buildingcan we think of that the estimation remains binding on the
parties? The controversy extends to estimation of quotation by the third party. What happens if
the one or both of parties are unwilling to accept the quotation? What will be the consequence on
the parties when disagreement to the award or quotation appears to exist? Theoretically, two
contending and strong arguments are forwarded in respect of this issue. Some argue that if the

6
Supra note 1 art. 2271(1) p. 335
7
Id, art. 2271(2)
parties have already agreed on the price in reference to a third party either through arbitration or
simple quotation, they are duty bound to respect the terms of the arbitration or the quotation.
However, others argue that for a term of arbitration in its loser sense or a term of simple
estimation to be binding, it must be agreeable for both parties. If there is no agreement in the
price fixed by the third party by arbitration or estimation, a validity issue comes to picture. Since
it affects the freewill of the contracting parties, the contract of sale shall not be as valid as it has
to be when the parties fix price by themselves. Particularly, with regard to the reference of the
price for determination by arbitration, the instructor believes that it is enforcement of the contract
other than determination of price. Thus, we can conclude that 1. The law does not seem in saying
so to contemplate arbitration for practical reasons and theoretical debates as is hereinabove. 2.
Even if we resort to estimation or simple quotation of price by third parties by the intention of
the legislature, it should not remain binding regardless of the parties’ resentment to the
estimation. It should be a term of consensus calling estimation since it is a contract of parties’
freewill.

SECTION TWO: PERFORMANCE OF CONTRACT OF SALE

2.1 obligations of the seller

We can divide obligations of the seller into two main categories. They are express obligations of
the seller and implied obligations. Implied obligations of the seller may be inferred from
permissive or gap filling provisions of the law, implied terms of the contract and other customs
and usages in transactions involving contract of sale. We find the implication of these obligations
of the seller under art. 2273/3 of the civil code. the same code under sub articles 1 and 2 of the
same provision provides for express obligations of a seller.

2.1.1 EXPRESS OBLIGATIONS of the seller

We can categorize these obligations into three categories.

1. The delivery of a thing by the seller

Delivery consists in the handing over of a thing and its accessories in accordance with the
contract.8 Delivery in a contract of sale transfers possession of a certain corporeal chattel by the
seller to the buyer. Particularly, as far as ordinary corporeal chattels are concerned, delivery has
an effect of transferring ownership since the law in such cases presumes the possessor of a thing
to be the owner there of. It also serves as a center from which multifaceted analysis with respect
to transfer of risks can be made. Delivery in contract of sale is an indispensable machine of the
agreement between the parties in that it distributes losses or risks. By the language of art. 2274 of
the civil code, the handing over of a thing and its accessories implies actual or physical delivery.
However we can complete this gap by reference to another provision of the same code.
Possession may be transferred to a new possessor by the delivery of the documents representing
the thing and enabling him to dispose thereof9. Thus, delivery take effect through transfer of
documents representing a thing. Title deeds or documents of title, warehouses receipts and other
documents best exemplify an alternative mode of delivery to actual delivery of the thing. We
have also another mode of delivery if the seller is in fact unable to satisfy his obligation of
delivery through above modes. The possession of things which are certain and things pertaining
to a generic species which have been individualized shall be deemed to be transferred to the new
possessor where the person who exercises actual control over the thing declares that he shall
henceforth detain it on behalf of the new possessor10. This is known as constructive delivery. In
this mode of delivery, the seller assumes physical control over a thing for legal and contractual
purposes. In situations where the intention of the buyer remains to have bought a certain thing
pertaining to generic species, the law presumes satisfaction of the seller’s obligation to deliver
and hence is the seller the mere holder. See art. 1145 of the civil code. for instance, haftamu
may individualize hundred kuntal of selit in dilamu’s warehouse and reserve them earmarked to
come another time for the transportation. In this case, haftamu remains the mere holder of the
specified kuntals of selit to the satisfaction of his obligation to deliver. However, we should take
note that segregation of certain property does not suffice for the seller to call for constructive
delivery of the property to the buyer. He must also declare his intention not to possess the
property in consideration for his own benefit onwards from the time of the segregation. It still

8
Ibid, art. 2274
9
Supra note 1 art. 1144 (1) p. 167

10
Ibid, art. 1145 (1)
begs a question as to how we can establish the intention of the seller. Assume that constructive
delivery of a certain property becomes an issue of dispute. Can intention in such cases be
presumed to relieve of either parties from production of additional evidence or be proved with
evidence? There are two arguments to the effect. Some argue that declaration of intention must
be expressed in terms of physical evidence. Since it is impossible to assume constructive
delivery without intention, it should specifically be proved for the benefit of either parties. They
insist on the argument based on the language of art 1145/1 and say by declaration of intention,
we understand that the law requires production of evidence proving the existence of intention.
On the other hand, some include the instructor defend such an argument that the law makes clear
that intention is presumption. They further argue that even though the law lacks clarity, if we
prove the basic facts around the disputes it is not as such important to prove subsidiary facts. As
any civil case, if we prove the existence of contract of sale and the segregation of the property in
dispute then it is adequate to presume that intention exists. As far as effecting delivery through
handing over of documents is concerned, we also experience a kind of different arrangement by
which delivery take effect through handing over documents. Where it is customary for the seller
to hand over to the buyer document concerning thing sold, the seller shall, in addition to
delivery, hand such documents over11. The documents shall be handed over as carefully and
quickly as possible at the place fixed in the contract or provided by custom.12 The buyer shall not
be bound to accept the documents unless they conform to the contract.13 Here, we can bring the
issue of title documents for transfer of vehicles. If the seller does not deliver the car with the
relevant documents such as the title certificate, the declaration and other necessary booklets, we
cannot think of full transfer of ownership by way of delivery. In other words, delivery is not
deemed to be complete unless the relevant documents with the thing to be delivered are not
accompanied by the delivery of the seller to the buyer. By time of delivery, we can reread art.
2276 of the civil code into the general principles of contract and the seller is required to deliver
as soon as the buyer requires so unless there is an otherwise agreement for different effect.
Parties can also agree to effect delivery during a given period. Where the parties have agreed
that delivery shall take place during a given period it shall be for the seller to fix the exact date of

11
Supra note 1 art. 2301 (1) page 345
12
Id, art. 2301 (2)
13
Id, art. 2301 (3)
delivery unless it appears from the circumstances that it is for the buyer to do so. 14 Provisions,
art. 2278, 2279 and 2280 h are also restatements of the general contract principles. However, we
should make emphasis on the exceptions and accord due care while drafting contract of sale.
Moreover, if we have any that does not fall under otherwise stipulation in the contract but lacks
clarity, we need to make sure that we are too clear with contents of the contract.

2. Obligation of the seller to transfer ownership

Transfer of ownership is a fundamental principle in contract of sale. We cannot talk more about
sale without transfer of ownership. It is natural consequence for the seller to transfer ownership
to the buyer which is after all the ultimate effect of sale. The seller shall take the necessary steps
for transferring to the buyer unassailable rights over the thing. 15 The law does not only require
the mere transfer of ownership right/title . it also requires the nature of ownership right or title to
be unassailable. In other words it implies the title must be free from defect and should not
involve third parties with better claim than the original seller. In fact, this is not always the case
for we might experience a situation where the seller transfers better title than he exercises. Please
think of these situations. In any case, this directly takes us to the third obligation of the seller.

3. Warrant obligation by the seller

We can also divide warranty obligation into two categories these are warranty against
dispossession and warranty against defects in the thing.

A. Warranty against dispossession or defective title

For a seller to make sure that he transfers unassailable ownership right, the law requires him to
secure warranty obligation. this is an obligation of a seller which can be in place to protect the
transferred unassailable title to the buyer against dispossession by third parties. The seller shall
warrant the buyer against any total or partial dispossession which he might suffer in consequence
of a third party exercising a right he enjoyed at the time of the contract. 16 When a seller
guarantees a buyer a peaceful enjoyment of the transferred property, the warranty obligation
does not shelter any trespass. It is however limited to dispossession by third parties with better

14
Supra note art. 2277 page 336
15
Ibid, art. 2281
16
Ibid, art. 2282
title. With respect to the nature of the dispossession, it must be both actual or physical and
constructive dispossession. See art.2285. it is not however always the case for the seller to
prevent dispossession. There are situations where he can be released from warranty of obligation.
Where, at the time of the contract, the buyer knows that he risks dispossession, the seller shall
not warrant the thing unless he has expressly undertaken to do so. 17 It is obvious that this
provision provides for the knowledge of the buyer to the risk of dispossession at the time of the
contract can be a ground for release of warranty obligation by the seller where there is no an
otherwise agreement. Nevertheless, it is the question as to how can the seller establish the
knowledge of the buyer. For the purpose of simplification, we can divide the pattern of
knowledge of the buyer to the risk of dispossession into actual or direct knowledge and
constructive knowledge. As regards the actual knowledge of the buyer, witnesses might prove.
There might also be an express clause not to guarantee the buyer in the very contract during
dispossession. The complication however goes to constructive knowledge of the buyer as to
whether it has an equal effect of the actual knowledge by the buyer to the risk of dispossession.
Do you think constructive knowledge is relevant to make a seller free of warranty of obligation?
the law puts mere knowledge as a parameter for the buyer to take risk of dispossession in his
hands. This also brings about a debatable issue as far as constructive knowledge is concerned.
Can we come up with a sort of strong indirect knowledge which is equivalent to actual
knowledge? Particularly, for movables by which transfer of possession is soon accompanied by
presumption of ownership, it is not as such logical to follow constructive knowledge for
exclusion of warranty. In fact it could to some extent make sense if the transaction involves
items requiring registration. If this is not so the case, the law would be of less or no purpose to
come after such a constructive knowledge for plenty of policy reasons and economic rationales.
Warranty shall however be due where dispossession is due to the falling in of a pledge made by
the seller.18 The full knowledge of the buyer that the subject of sale is in pledge by third party
does not deprive of him warranty by the seller. The Ethiopian law does not in such cases exclude
warranty obligation for obvious reason that a seller cannot benefit from his failure to pay back
his debts. Since this is a triangular protection of the seller the buyer and third parties, the law
comprises the rights of each in the transactions through different mechanisms. We all know that

17
Ibid, art. 2283 (1)
18
Ibid, art. 2283 (2)
warranty is an implied obligation of a seller by operation of the law and hence restriction or
exclusion to this effect be construed narrowly. See art. 2284/1. In fact, it is possible to prepare a
neat draft for contract of sale whose scope of warranty is restricted in terms of time, damage, and
liability and other related issues. Nonetheless, since warranties are principles, restrictions to that
effect should be interpreted in a way buyers are better favored. When we say that warranties are
principles the absence of which should be seen doubtfully, it does not imply that no mutual
agreement of parties can totally exclude warranty obligation. we mean however that the burden
of showing the existence of such an agreement lies in the seller. In other cases, this may not work
if the exemption or limitation of warranty obligation is provided in the contractual clause in bad
faith of the seller. To this effect, the clear language of the law provides that A provision
excluding or restricting the warranty shall be of no effect where the seller has intentionally
concealed that a third party had a right on the thing or dispossession is due to the act of the
seller.19 The law tries to strike balance between the buyer and the seller. It is logical to assume
that a buyer knows more about third claims on the subject of the sale than seller. In doing so, the
law seems to impose the obligation of disclosure any contending interest over the subject of the
sale and hence will not be failure of further investigation by the buyer as to the existence of the
such an interest a defense for the seller to contest otherwise. Do you agree? Why the law under
art. 2284/3 qualifies the act of concealment to be intentional? Can we say that negligence is
segregated and hence does not the proposition hereinabove hold water?

It is obvious that legally or contractually warranted dispossession after sale drags the seller in
a litigation between the buyer and third parties. In effect, we can read art. 2285/1 of the CC
together with provisions, 43 and 76 of the CPC to bring the seller as impleader by way of joinder
device. We can also allow intervention of the seller in the suit between a buyer and third party.
See art. 2285/2 of the CC together with art. 41 of the CPC. We know that procedural laws protect
substantive interests provided in substantive provisions. thus, we can understand that buyers,
sellers and third parties are protected under the law of sales. These interests can therefore, be
implemented the way provided here in above. Nevertheless, the buyer can not benefit from
warranty obligation of the seller if the seller is able to meet the requirements under art. 2285/3
of the civil code. in the place, there should exist the failure of the buyer to implead in due time.

19
Ibid, art. 2283 (3)
Since it is the obligation of the buyer to give opportunity for the seller to fight against the
dispossession, the law considers the failure of the buyer no fault at the seller’s mind. In the
second place, the seller must be able to show the change that can be brought about had he been
joined in due time. It does not stop at the failure of the buyer to inform of the suit while filing
his statement of defense which must have been so. The seller is also expected to go further and
show that the time element has in fact affected the favorable environment that he would have
had. In other scenarios, Where the buyer acknowledges the right of a third party outside judicial
proceedings or he has entered into a compromise with such third party, he may not avail himself
of the warranty given by the seller unless he can show that the latter could not have prevented
dispossession.20 In order for us to have a complete image of what issues conclude our discussion
on transfer of valid title or perfect ownership and dispossession, we need to reread the following
statements into these provisions. The contract may be cancelled where, as a result of a defect
affecting his title, the seller has not procured for the buyer the thing free from all the rights
belonging to third parties.21 The contract may however not be cancelled where the buyer, on
buying the thing, knew of the encumbrance.22 The contract may not be cancelled where the right
with which the thing is encumbered is of small importance and it appears that the buyer would
have bought the thing, had he known of the encumbrance.23 At the same time, the contract shall
be cancelled as of right where the buyer is totally ousted from the thing and the seller is bound to
warrant the buyer against dispossession.24 The contract may be cancelled where the buyer is
partially ousted from the thing.25 The contract may however not be cancelled where
dispossession only affects a part of the thing of minor importance and it appears that the buyer
would have bought the thing, had he known that he would be dispossessed of such part.26
Generally, we understand from all these provisions that the law somewhat tries to maintain
security of transactions by of setting up regulatory rules against defective title and dispossession.
On one corner of the edge, it limits the right of byres to come after the seller for whatever reason

20
Ibid, art. 2286
21
Supra note, 1 art. 2341 (1)
22
Id, art. 2341, (2), page 347
23
Id, art. 2341 (3)
24
Ibid, art. 2342, (1)
25
Id, art. 2342, (2)
26
Id, art. 2342, (3)
and, imposes obligation on sellers not to adversely abuse the rights of buyers through warranty
against dispossession on the other.

B. warranty against defects in the thing

It is obvious that we buy certain property for a purpose of satisfying our needs. If the property
we buy to this effect is defective, nothing is served as far as the utility of the property goes. Thus,
the law puts warranty against such defect in place with ultimate goal of satisfying the interest of
the buyer and making the seller responsible for his knowledge of the thing to be free from defect.
Accordingly, The seller shall guarantee to the buyer that the thing sold conforms the contract and
is not affected by defects.27 The subsequent provision, 2288 provides that a thing does not
conform to the contract where it depicts lesser or greater value in quantity, or is proved to be
different from what is provided in the original contract of sale. On the other hand, by defect in
the thing, we refer to the imperfection in the quality of a thing measured in terms normal use and
commercial exploitation i.e. ordinary and special purpose and specification impliedly or
expressly in the contract. See art. 2289. If there is no express or implied agreement as to the
particular use of the thing, the law considers that the buyer purchases the thing for its ordinary
purpose. Here, the law provides for commercial exploitation and specification of products as
parameters measuring quality. By commercial exploitation, we refer to resale purpose of some
products while specification could mean a given design of a product for example. Finally, we
need to take note that all these standards measuring quality stand independent of each other to
adequately pronounce defects in the thing.

PART TWO: SECURITY DEVICES

In this part, we will touch upon issues of security rights and security devices by way of general
and specific issues under pain.

General issues pertaining to security rights

We will be acquainted with what is the role of security in market economy. We will identify the
major securities rights in Ethiopia and the sources of such securities rights. We will closely
examine the legal instruments creating securities rights and the way how they are created. We all

27
Ibid, art. 2287,
know that security rights are created over property. Thus we will be dealing with what types of
properties or things are the properties upon which security rights are created. We will also be
aware of a kind of obligation which is capable of being secured.

Specific issues pertaining to security rights

We will indentify pledge as a kind of security device. Accordingly, we will be assessing the
nature of pledge and the property subject to pledge. We will find out a scenario by which we can
create pledge on account receivables and other intangible assets. We will be testing the law if
account receivables and other intangible assets are separately subject to pledge. if we say that
account receivables and other intangible assets are subject to security in general and pledge in
particular, we will be tackling with issues as to how we can create pledge over these properties
and as to what kind of security is created upon these assets. We will also look in to how security
rights are enforced. An particularly we will be dealing with what substantive and procedural
safeguards are in place for the pledgor to realize his or her security over the property when the
debtor is in default. Is it market sale that enforces the security right or court? If we say is the
court, can we raise jurisdiction issues? How can we establish priority right over the pledged
property against third parties? When do we think security rights are effected? What are the
principles for perfection of security rights in general and principles of perfection in pledge. Is
transfer of pledge to third party possible under Ethiopian law? If so, what will be the rules
governing transfer of security right in general and pledge in particular? All these issues will be
duly assessed .we will also raise the same issues with respect to mortgage.

General overview

Security ensures trust between the creditor and the debtor. This trust stands in between the debtor
and the creditor for the purpose of mediating transactions. It increases the power of the debtor’s
capability of paying back the credit to the creditor. On the other hand it serves as tear drying
consuationary for the creditor when the debtor is insolvent and is unable to pay back. It is
because security enables creditors recover part or whole of their money from what is secured.

Security is important in that it reduces risks. But we cannot totally avoid risks for obvious
reasons of market flexibility. In order for us to better understand the importance of security, it
would be of great help to say a little bit on credit transaction or credit sale and show the capacity
of security in creating long stay in the heart of transactions. In fact, it is to be naïve not to
imagine credit transaction or credit sale which is in absence of security. However, credit
transactions are comparably near to assumption of risks than security transaction. It is obvious
that credit transactions may not be there for long terms. The cost of borrowing, the amount of
loan and the interest rate involved and other terms of credit transaction are not arranged
comparatively in the best interest of creditors. This is because the level of risks in absence of
security is more optimal to easily materialize. Thus, since security that stands in a rival position
of credit transaction, it is more favorable and is always in the best interest of the whole
transaction. This implies that both the creditor and the debtor are faithful to the transaction.
Security reduces risk and cost of transaction and increases the power of the debtor’s access to
finance. At the same time, security reduces the level of the risk that can be borne by the creditor
in default of the debtor to pay back. If we state the importance this way, it will be the task of this
notebook to look in to the types of security devices that coexist under the Ethiopian law.
Securities interests can be created contractually or by operation of the law. By operation might
have plenty of security interests? Contract of agency is one example. The whole portion of this
notebook will however be devoted to security interests that are contractually created. Particularly
emphasis will be made on two kinds of security devices which are pledge and mortgage. In doing
so, we will be encountering with issues as to the creation, enforcement and transfer of security
interests. With respect to enforcement, we will talk on the role of the Ethiopian security devices
law in securing the creditors’ right before court or in consultation of the debtor or through
unilateral enforcement against the secured property. Which approach the Ethiopian law adopts.
On the same token, we understand that security interests are property rights. We will look in the
law if the Ethiopian security device law allows inter-creditor arrangement for the transfer of the
security right which is of economic value. We will see as to how the Ethiopian law regulates
such transactions.

SECTION ONE

Pledge

1.1 Creation of contract of pledge

Validity principles of the general contract still go with contract of pledge. However, contract of
pledge owes its own validity requirements that the security devices law specifically regulates
here in under. To begin with, a contract of pledge is a contract whereby a debtor undertakes to
deliver a thing, called the pledge, to his creditor as security for the performance of an
obligation.28 A contract of pledge may be made between the creditor and a third party to secure
the debt of another person.29 A pledge is a thing that can be delivered by a debtor to creditor as
an obligation with the debtor’s intention of complying with another obligation at a later stage.
This can be made either by the debtor or by third parties. It is obvious that no contractor of
pledge exists independent of another obligation called principal obligation and hence the
obligation in contract of pledge remains to be secondary. A contract of pledge may be made in
order to guarantee a future or conditional debt.30 The nature of the obligation is attributable to
obligations in present, in future, conditional and contingent obligations. It is clear that we cannot
assume contract of pledge in situation where the principal obligations are secured by secondary
obligations. Similarly we cannot think of contractor pledge, the maximum amount of which is
not specified. This is a special form which is required to be followed by contract of pledge.
Accordingly, the maximum amount of the debt guaranteed shall in all cases be specified in the
contract of pledge or the contract shall be void.31Here we understand that the need for the law to
require the maximum amount to be specified for obvious policy reason of capturing certainty of
obligations. It raises an argument as to how should specification of the maximum amount be
reregulated. Assume nepaw pledges his property of five hundred thousand ETB to get credit of
one hundred thousand ETB from tujaru kewte. Can we say that the contract reveals certainty of
nepaw’s obligation to secure his debt of one hundred thousand ETB? How do we interpret such a
contract? In any case, being this subject of indefinite argument, whenever we encounter with
drafting a contract of pledge, we need to clearly specify the exact amount guaranteed with a view
to avoiding controversy of this kind. The law under art. 2828/2 requires a written form for
contract of pledge involving more than five hundred ETB to be valid. It also puts another validity
requirement. Pledge is all about security of possession. We remember that delivery of a thing
which is the pledge forms one of the components defining contract of pledge. Since it is delivery

28
Supra note 1, art. 2825, page 423
29
Id, art. 2826
30
Id, art. 2827
31
Id, art. 2828, (1)
of a thing that transfers possession, the pledge should remain in the possession of creditors.
See Art.2830/1 cum 2825 of the civil code. In fact, physical delivery may not be the only means
of proving creditors’ possession. It could also be created through constructive delivery see
art.2831 of the civil code. So long as the pledge is in possession of the creditor in whatever form
provided by law, we can still maintain the contract of pledge as valid. In all other cases, the
contract shall be of no effect where it stipulates that the pledge shall remain with the debtor.32
Thus, dispossession of the debtor in the interest of a creditor’s possession completes valid
conclusion of contract of pledge. It is however the issue as if written form for pledge of five
hundred ETB and dispossession are cumulative validity requirements. What do you think? In
common law countries non possessory pledge is possible. This is also provided under art.
2832/1 of the civil code. The instructor confides in that no practical case or express legal
provision to that effect can be provided. But, the language of art.2828/2 of the civil code remains
to be controversial. It is because some argue the evidentiary value of the written form for the
contractor pledge while others argue the language in favor of both validity and probatory issues
in contract of pledge. THE VALIDITY Requirement as to the existence of contractual
relationship between pledger and pledgee where the amount of the contract involves more than 5
hundred ETB, requires further look in to other laws. Where the sum lent exceeds five hundred
Ethiopian dollars, the contract of loan may only be proved in writing or by a confession made or
oath taken in court.33 From reading of this provision, we understand that a contract of pledge
involving more than five hundred ETB should be made in writing. Additionally, possessory
security is always a validity issue with contract of pledge. Associated with this is however that
the Ethiopian law recognizes non-possessory security of pledge under art. 2832/1 of the civil
code. The furnishing of a pledge without dispossession of the debtor may be made in such cases
only as are expressly provided by law. In other literatures this kind of security which is neither
pledge nor mortgage is referred to as charge by which a valid security interest can be created
over a movable property without dispossession. In any case, it is the misfortune of this provision
to land in to practice for we have a kind of law expressly giving effect to non-possessory security
of pledge or charge. If we conclude validity issues associated with creation of contract of pledge,

32
Ibid, art. 2832, (2)
33
Supra note, art. 2472
it will be the next issue 34 to identify as to which properties are subject to pledge. Accordingly,
the pledge may consist of a chattel, a totality of effects, a claim or another right relating to
movable property.35 It must be capable of being sold separately by public auction. 36 Reading of
these sub provisions makes it clear that pledge is subject to movable properties and claims
relating to movables and hence are both corporeal and incorporeal chattels subject to pledge
under Ethiopian law of security devices. Particularly, the Ethiopian civil code has interesting
special provisions (art. 2863 to 2874) on claims and rights relating to movable property.

What do we mean by a totality of effects under art. 2829/ 1 of the civil code.

By totality of effects, we refer to the collection of movables that a person possesses. The
Ethiopian law thus allows creation of security interest over such collection of household items or
goods or movables in general without segregation to individual items. It could be over the
inventory or any other document showing the totality of effect over which the security interest
can be created. Short of express law on the concept of charge, it is however the problem that
creation of pledge over totality of effects cause dispossession of the debtor either physically or
constructively. But, as we have seen here in above, for movables or claims or rights relating to
movables or totality of effects to be validly subject of pledge, there should be considered the
market value of the movables or rights relating movables the disposal of the item(s) by public
auction separate from other properties. It is not however to mean that other enforcement
mechanisms are excluded. Nevertheless, we need to mention that no every movable property
can be subject to pledge. There are certain movables over which non-possessory security is
created. Aircrafts, ships, businesses and others that we shall see in detail while discussing
mortgage vividly form this category. Coming back to what property can be subject to pledge, the
civil code under art. 2833 indicates the existence of extra civil code rules governing contract of
pledge. In effect, the commercial code under art’s 950 to 968 regulates securities such as shares
or share certificate that can be subject to pledge. Assume that beltishachew has 25 percent share
in Babobabo PLC. Now, she found it important to secure her share in the PLC by way of pledge
and make loan agreement with barta financial institution. Can she show a document representing
her shares and issue it for transfer. In fact, it is impossible for biltishachew to issue a transferable

34
Supra note, art. 2832(1)
35
Ibid, art. 2829 (1)
36
Ibid, art. 2829 (2)
document with respect to her share. But, it does not imply that she cannot secure her share by
way of pledge so long as no exclusion to that effect is specifically made by law. Thus, we can
safely argue that the Ethiopian law allows creation of security over frictional ownership either in
the context of joint ownership or in the context of shareholding to which a transferable security
cannot be issued.

1.2 Rights and duties of the parties

1.2.1 A pledger
With respect to ownership of the pledge, the pledger shall retain his rights on the pledge, save
for the restrictions arising out of the contract of pledge.37 A pledger has the widest right to
dispose of, to alienate, to use and collect fruits from the pledge as an owner. This is for obvious
reason that pledge does not transfer ownership title. Owing to this fact, a pledger is always in a
better position that he may dispose freely of his rights and may in particular alienate the pledge
or re-pledge it subsequently.38 This may not be however without limitation for the buyer to
conclude transaction of sale on encumbered property either through pledge or mortgage. We
remember that a seller warrants dispossession against third parties in part one of this book notes.
A warranty of this kind is also in falling off due pledge. Therefore, if a buyer confides in
rescuing dispossession by any means, an encumbered property of a pledger by of pledge remains
to be subject of any transaction unless restriction to that effect is made by law. Moreover, a
pledger can create multiple securities over a single property. In other words, plenty of creditors
can take a property of a pledger by way of security through pledge for the category of which the
law may create hierarchy in case of seniority issues even as between secured creditors. Assume
that gimbineh tilahun imports a machine of exacavatory purpose for 20 million US dollars. But
he is unable to recover what he intended to at the time of importing the machine. Now, he wants
to launch another project which is estimated to cost fifty million ETB. In effect, 15 creditors
show their willingness to make loan agreement with him by taking the machine as security
through pledge. At the same time, there is no doubt as to the pecuniary value of the machine to
secure all these multiple debts. Again assume that law requires all of the creditors to be the
possessor of the same pledge. What would your advice be in resolution of such issues if one of

37
Ibid, art. 2834, (1)
38
Ibid, art. 2834, (2)
the creditors come to you and seek your advice? In this respect, the common law has a special
regime of regulating such issues. When multiple creditors agree to jointly finance on a project
of big deal for single security, the possession of the pledge in case the machine will be
transferred to what they call security trust. The security trust is an independent body
administering a single pledge over which multiple debts are secured. We do not have this
arrangement in Ethiopia. Trustees in our system only appear in cases of bankruptcy or in issues
of succession. Different from security trustee, we have this concept which is known as parallel
debt structure under civil law countries. By this arrangement, one of the creditors will be in
possession of the pledge for his own benefit and for the benefit of other Coe-creditors. In fact,
the parallel debt structure is yet in test. Limited to the reading of the instructor, finding a civil
law country that has the parallel debt structure through legal instruments is beyond the reach of
this notebook. But, some judicial practices scattered here and there show the appearance of this
concept for resolution of such disputes. As a civil law country, Ethiopia does not have a law
regulating a kind of such arrangement. The banking law has however a provision for loans
syndication to which multiple creditors contribute to a single loan of pledger or mortgager.
It is still hardly to say that the loans syndication fits the parallel debt structure. Be that as it may,
if there is no express prohibition on the role of third parties in pledge, we can resolve the issue
by entrusting the property to a third party upon agreement of the creditors. What happens if the
creditors appear to disagree on the third party?
Even in such cases, the Ethiopian law allows assignment of claims. Thus an aggrieved creditor
can assign his claim over the pledge and can relieve him of this disagreement. To sum up, the
Ethiopian law of pledge vividly recognizes creation of multiple securities over a single property.
However, the practice in Ethiopia goes in contrary to what the law provides. Particularly the
commercial bank of Ethiopia which considers itself to be the big brother of the financial market
in the country happens to endanger the rights of both pledger and other potential creditors. Other
creditors cannot take security over a property pledged by the bank unless the latter permits to do
so. Since it is a commercial risk that can be taken in hand of the dealer, it makes no sense for
the bank to remain noble over other finical institutions. If we take property out of the market
like what the bank does against the pledge or mortgage in its possession, it is to be mere naïve to
think of market economy and smooth operation of commerce. Though mindful they are
considered to be in understanding the law and implementing it, courts simply reject attachment
of property pledged by banks at time of judgment execution. This is even in violation of the
civil procedure code which provides attachment of property under security. Art. 420 of this code
clearly authorize the court to attach a property of this kind, if the claims to that effect are not
due. Generally, though the Ethiopian law of security is designed not to take encumbered
property out of the market; it remains paper tiger for practical reasons.
By other rights and duties of the pledger and pledge the pledger is duty bound to incur cost and
expenses of preserving the property while the pledgee keeps on preserving the property.
Nevertheless, if the creditor happens to abuse against the preservation and other doings with
respect to the property, a trustee, third party will be in place to dispossess the creditor and keep
on possessing without terminating the contract. See art. 2835 to 36. On the other hand, the
pledger may at any time demand the return of the pledge by paying the debt secured by it. 39
Despite no clear and developed jurisprudence in the Ethiopian financial market, payment of
premature debt by the pledger is not without limitation in contract loans of other countries. If a
pledger concludes loan agreement by securing his property for the next 3 years and pays the
whole debt within the following three days, the lending institution may allow the pledger to
retake his property without paying extra sum. Since it is presumed that payment of premature
debt causes loss in commercial gain of the lending institutions while making the loan agreement
by way of interest rates and other transactions, the pledger is duty bound to pay additional sum
of x amount. But, this still does not prevent discharge of the property for it is after all the
purpose of security to guarantee payment of debts. Finally, a pledger can take the property of
third part for the purpose of securing debts. See art. 2838 of the civil code.
1.2.2 Rights and duties of pledgees

The pledgee shall have on his debtor's property the rights of a creditor.40 He shall in addition
have on the pledge the particular rights deriving from the law41 as a creditor, the pledgee has an
ordinary rank against the general property of the debtor. The pledge however remains senior in
the property pledged and will have better position against other creditors who subordinate claims
against the property. The law confers upon the creditor special rights in respect of such property.
Uses of the pledge necessary for the preservation of the pledge and collection of fruits from the

39
Ibid, art. 2837, (1)
40
Ibid, art. 2839, (1)
41
Id, art. 2839 (2)
pledge are some of these rights that a pledgee can enjoy. See art. 2840 to 41 of the civil code.
Particularly, in respect of collection of fruits, it is fictitious for the pledgee to be beneficiary of
the fruit in that the collected is paid to costs expenses for preservation and payment of the capital
and interest of the principal debt.

We have seen that possession is of paramount importance in contract of pledge to create the
pledge itself and to serve as perfection mechanism that establishes the right of the pledgee over
the pledge. In order for the pledgee to effectively secure his or her possessory either physically
or constructively, the pledgee may thus bring actions for possession in respect of the pledge.42
The custodian of the pledge shall also inform the pledgee and the pledger without delay of
circumstances requiring the institution of such actions.43 It is obvious that the custodian of the
pledge who is a third party that takes care of the pledge does not have vested interest for
institution of actions against dispossession. In such cases, this third party should promptly inform
of the pledge and the pledger so that he can take action to that effect. Action of possession thus
remains to be one of the mechanisms by which the pledgee protects his or her interest. On the
other hand, the pledgee may exercise the rights deriving from the contract of pledge
notwithstanding that the pledge has been delivered to him by a person who was not authorized to
dispose of it.44 In our earlier discussions, we clearly delineated the boundary between the rights
of the pledger, the pledgee and third parties over a property which is subject of pledge. In effect
we said that a pledge can be given by the debtor or a third party to a pledge. We also qualified
the nature of a pledge as a property capable of being disposed of at public auction. Now, it is the
issue as to whether this third party has the right of pledging a property lacking these qualities to
gurantee the obligation of the debtor. Does validity of the contract of pledge lie in issues of
ownership? Assume that abraraw has entered in contract of pledge with asefaw. The pledge is
delivered to asefaw by kebede, a third party pledger to secure the obligation of abraraw.
However, the pledged property belongs to gidyelesh, the sister of kebede. Again assume that
abraraw has defaulted to perform his obligation. Can asefaw, the creditor sell the property to
enforce his right over the pledge? A creditor who sells a thing belonging to a third party which
has been duly pledged shall not be liable unless he knew or should have known, on the making

42
Ibid, art. 2842 (1)
43
Id, art. 2842 (2)
44
Ibid, art. 2843,
of the contract, that it belonged to the third party.45 From the spirit of this provision, we
understand that a pledge can be created over a property which does not belong to the
debtor nor to third party pledger warranting the obligation of the debtor. The fact that the
debtor and third party pledger do not own a pledged property, does not affect the rights of the
creditor, the pledgee. We are well aware of that the law presumes the possessor of a corporeal
chattel to be the owner there of. Therefore, the creditor, asefaw in the above case takes
presumption of kebede’s ownership due to the very reason that he possesses the property.
Hence, he will be rewarded of this presumption against other claims. However, this is not
without any limitation. The owner of the pledge may take it back where he shows that the
pledgee knew or should have known, on the making of the contract that the other party was not
authorised to pledge the thing.46 In the situation where the owner of a pledge fails to show the
bad faith of the pledgee, He may also take the pledge back by discharging the debt secured by
it.47

Contract of pledge is said to have an accessory nature in that it does not stand independent of
the principal contract. The extinction of the principal obligation extinguishes the contract of
pledge. see art’s 2845 (1) and 2849 of the civil code. art. 2720 (1) of the same code provides
where one is authorised to make use of it or he in any way derives profit from it, the holder shall
be liable where the chattel is lost or deteriorates after he has received it. The same goes to a
pledge until return of the pledge. see art. 2845 (2). Under art. 2846 of the civil code also confers
upon the pledgee the right of retention over the pledge until full payment is effected. It is because
return of the pledge gives rise to presumption of payment by the pledger. Assume that
mazengiya temporarily lends a machine of key erection to tenkolu who has pledged the same
item to mazengiya for loan of five thousand ETB. Tenkolu did not pay his debt. Does temporary
loss of possession by mazengiya over the pledge cause presumption of payment of the debt by
tenkolu? How can mazengiya challenge the possession of tenkolu. Please consult your law of
possession and take your own solution. Owing the nature of the duty to preserve, where the
pledge has been entrusted to his keeping, the pledgee shall be liable for its loss or deterioration as

45
Supra note, art. 2862, page 426
46
Ibid, art. 2844, (1)
47
Id, art. 2844, (2),
provided in Art. 2720 and 2721 of the civil Code.48 The fact that a pledged property no longer
exists physically for various reasons, does not affect the right of the creditor, the pledgee. See art.
2848 of the civil code. If a pledged property loses its existence due to expropriation, damage and
other natural calamities, compensation from insurance company or expropriating agent will due
in place. It is obvious that such compensation cannot be paid to the pledgee for a simple reason
that the pledger is the owner. Thus, the compensation made to the pledger remains to be the
collateral of the pledge. It is to mean that the physical property which is in effect changed in to
cash would be subject of pledge. It is however the issue as to how we can establish possession of
the pledge over the cash. Can she possess the money? OR does the damage upon the pledge and
the compensation shorten the due date? Or can we create security over money which is
intangible? What is the implication of recreating a new pledge over the intangible asset, money
to replace the tangible corporeal chattel? What about claims of third parties over the same
property. It is obvious that if the pledger upon payment of compensation provides the pledgee
with a sum of different from the damage, the pledgee will be in a position to ask compensation
against the pledger. Provided that this conflict does not occur, we can accord the custody of the
money to third party if both parties agree. What happens if they do not agree on the third party to
potentially possess the money?

The security interest over a pledge is always indivisible. See art. 2850. We cannot return part of
the pledge for the discharge debt to that part in that it is indivisible. Even if the pledge naturally
appears to be divisible, the very character of the security interest in it declares it to be indivisible
by law.

On the other hand, one of the mechanisms by which a pledge can be enforced is sale of pledge.
Accordingly, any agreement, even subsequent to the furnishing of the pledge, authorizing the
creditor, in the event of non-payment on the due date, to take possession of the pledge or to sell it
without complying with the formalities required by law shall be of no effect. 49 No self
attribution or appropriation by the creditor can take effect even in a situation where there is an
agreement to that effect. It is obvious that this arrangement is debtor-oriented arrangement. This
is also the basic distinguishing feature of security under civil law system. It is not however the

48
Ibid, art. 2847
49
Ibid, art. 2851, (1)
case under common law system. By this system, as it is creditor oriented arrangement, the
creditor can take any measure of getting his debt repaid back. The civil law in this respect strives
for striking balance between the interests of the creditors and debtors by way of due process.
That is why the Ethiopian law avoids self attribution including penalty clauses to that effect. It
may however be agreed, after the debt has become due, that the debtor shall make over the
pledge to the creditor in settlement of the debt.50 After the due date, since the debtor could
presumably be in a comparable bargaining position with the creditor, it will be up to the
agreement of both parties to settle the issue handing over the pledge to the creditor or by another
means of settling the debt.

The foreclosure proclamation under art.3 also provides that banks have the right to sell a
property of mortgage in default of the debtor. No Courts do intervene in the sale process.
However, the banks while selling the property are required to comply with execution provisions
of the civil procedure code. Besides, non pursuance of the provisions in the code and damage
against the debtor’s interest in the process causes liability upon the banks. Private contracts other
than bank contracts are however required to strictly follow 2851 (1) of the civil code. Courts also
in such cases appear the lion of the game with a view to monitoring such relationships.

With respect to its effect on third parties,51 the contract of pledge shall not affect third parties
unless the pledge is in the possession of the pledgee, or the person designated for the purpose by
the parties, at the time when the pledgee invokes the contract.52 For a certain pledgee to perfect
against third parties, the pledgee must be in his or her possession either physically or
constructively. The contract of pledge shall be of no effect where at that time the pledge is still
in the debtor's possession or it has returned to his possession with the pledgee's consent or it is in
the possession of a third party from which the creditor cannot demand its return.53 This occurs in
a senario where temporary loss of possession has an adverse consequence upon the pledge.
Please reconsider the hypothetical case here in above in light of this provision. As we have tried
to indicate some elsewhere of this material, the pledgee is duty bound to go through some
procedural stapes to enforce his right upon the pledge by way of sale in case of default by the

50
Id, art. 2851, (2),
51
Ibid, art. 2852
52
Ibid, art. 2852, (1)
53
Ibid, art. 2852, (2)
debtor. Before causing the pledge to be sold, the pledgee shall call upon the pledger to discharge
his obligation and give him due notice that, upon default, he will cause the pledge to be sold. 54
Similar notice shall be given to the third party who has furnished the pledge. 55 After all these
procedures, the pledge would cause the pledge to be sold. Does this provision clearly show that
the Ethiopian law does not allow self appropriation or self attribution? In relation to sale of
pledge,56 we have also another ambiguity in the law here in under. Where, within eight days
from the notice provided in Art. 2853, no objection has been raised or the objection is dismissed,
the pledgee may cause the pledge to be sold by public auction. In this respect, the master copy,
the French law which is purported to be the model of the empire of the civil code makes
distinction as between commercial creditors and simple or noncommercial creditors. This right is
accorded to only commercial creditors by the French code. The Ethiopian civil code does not
however differentiate between these categories of commercial creditors and simple creditors as
to whom should the provision be applicable. It is the general creditors benefiting from this
formulation of the law. Be that as it may, in Ethiopia, the creditor informs the debtor of his
obligation to pay the debt. If the debtor fails to object the claim, public auction will be organized
to sell the pledge to the satisfaction of the pledgee. As far as the understanding of the instructor
goes, there is no institution or anybody of such business caretaking apart from federal courts
department office of public auction or execution. If we do not have a business firm which
organizes public auction in the market, it begs a question as to who should be in position to
realize this burden of selling the pledge. In fact we have this provision which reads where the
pledge is quoted on the market or has a current price, the pledgee may cause it to be sold by
private contract through the intermediary of a person authorized to make such sales.57 However,
the application of this provision is far away from practical reality. Many scholars project the
ineffectiveness of the enforcement mechanism in respect of the Ethiopian security law to the
immature nature of the debt market or less developed finance market. Nowadays, things however
are changing and people have come to show an immense interest in debt market. Thus, it is
inevitable for this provision to come in front for some help with a view to saving transaction.
Assume that our debt market has got matured. Now, we need to apply sub art. 2 of art. 2854 in

54
Ibid, art. 2853, (1)
55
Id, art. 2853, (2),
56
Ibid, art. 2854
57
Iid, art. 284 (2)
the civil code. Whom do you think organizes the public auction? Is the pledge him-self? Should
a pledge go to court to request them to cause organization of the public auction? Or can the
pledge benefit from self attribution in the situation where the law bans commissoria lex which is
of self appropriation procedure? Please reflect on all these issues. Can we anticipate some
amendments into this provision? Being these issues subject to subsequent personal reflections,
mention should be mad on the existing security law of Ethiopia that it comprises of enforcement
mechanism, one of which is sale through auction. Auction is the principle of the civil law system
to which our legal system is roughly projected. This is so in consideration that private sale has a
future effect of harming the debtor. We remember that under art. 2851 (1) of the civil code
avoids an agreement which can be proposed in favor of private sale in the event of default by the
debtor. The debtor is by law assumed to be economically in need at the time of the conclusion of
the contract. Thus, in order strike balance between the debtor and the interest of the creditor who
might potentially abuse a needy debtor, the civil law system including the Ethiopian legal regime
puts private sale or commissoria lex out of picture. Assignment of pledge to the pledge is also
another enforcement mechanism under the Ethiopian security law. The pledgee may apply to the
court to order that the pledge be given to him in payment, to the extent of the amount due to him,
according to an expert valuation or the current price of the pledge, where it is quoted on the
market.58

58
Ibid, art. 2856