HARAMAYA UNIVERSITY

College of Continuing and Distance Education

Business Law Short Notes
Programe : CEP

Prepared by :- Ahmed Kemal

 Chapter One: Introduction to Law

What is Business Law? Before defining business law it is better to define business and law.

What is Business? What are the main elements that constitute a Business?

Business can be defined from different perspectives; from accounting and legal perspectives.
From Accounting perspective Business may be defined as a process of producing goods and
rendering of services in return for profit.

The legal definition of a business is more or less provided under Article 124 of the Commercial
Code. Under this Article Business is defined as an incorporeal movable which is consists of
movable and immovable things.

Here what we understand from both definitions is that business is a concept which is intangible
and movable thing. As a result business is different from the movable and immovable things
which are part of the business. Rather business is mainly consists of intangible things such as
good will, trade name, trade mark and intellectual property rights such as patent rights, copy
rights and industrial design.

Now let’s define law. So far there is no single definition of law agreed up on. However, we can
have the following comprehensive and conventional definition: Law is the generally accepted
norm; principle or rules of conduct enacted by the sovereign body which regulates social
interaction and is backed by sanction or punishment. In Black’s Law Dictionary law is defined as
follows:

Law is the regime that orders human activities and relations through systematic application of the
force of politically organized society, or through social pressure, or normative sanctions.

In general, from the above definition we can deduce that law is a body of rules of action or
conduct that determines what is right and what is wrong. What ought to be done and what should
not. The mere fact that the people obey certain rule doesn’t justify that rule as a law. In order for
a certain rule to be a law, it should emanate from a legitimate authority i.e. a state.

Business Law,therefore, is a Legal regime which regulates Traders, business person, business
organizations and business transaction.

Nature of Law

What we mean by nature of law is those characteristics and features of law which differentiate
law from other rules of conduct such as customs, moral rules and standards, societal values and
habits. Law is different from socially non-binding soft rules by the following basic natures.

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1.Generality

Generality nature of Law connotes two meanings. The first meaning indicates that law is stated
in a general terms or languages in which details are left for enforcement organs. While the
second meaning of generality implies that law is enacted to govern or bind all members who
belong to the group without distinction. When it is said that the law is general one have to note
that law does not invariably apply to the people of the world. It only applies to those who fall
within its jurisdiction. For instance the law which applies to Traders may not apply to Non-
Traders; it applies to traders equally, though. Everyone who belongs to the group is presumed to
be equal and treated equally. The law has no regard to individual status, economic or social
positions and any other ground of discrimination. The law is equally binding on all persons who
belong to the group in case of violation.

2. Normativity

Normativity of law is all about the binding nature of law. The law is binding on its subjects
whether one wants or not. Law is the mandatory rule of conduct which is mainly respected for
fear of sanction or punishment. It is this nature of law which mainly differentiates law from other
non-binding social norms.

If the law is violated, there is an Organ responsible for its enforcement; the Executive organ is
responsible for the enforcement of laws. The law is binding on every member of the society
because law is superior to human conduct. Normative nature of law presupposes supremacy and
prevalence of rule of law.

Functions of Law

Law has different functions and plays many pivotal roles in society. Without comprehensive and
efficient legal regime, it is hardly possible to imagine orderly social existence. In the absence of
law the tread which serves as a social cohesion would easily torn apart. Social interaction
without law is nothing more than chaos and turmoil. Thus, law is quintessential for the very
existence of peaceful and orderly social interaction and sustainable development. In the absence
of law the society lives in the’ state of nature’ which means a social condition which is
characterized by no systematic social interaction, no individual property, civil war, use of force,
no orderly change, etc. Generally, the following are some of the main functions of law:

 Keeping peace and order within a society

 Shaping moral standards
 Promoting social justice
 Maintaining the statusquo-maintaining social peace and order
 Facilitating orderly planning and change

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 Providing basis for compromise
 Maximizing individual freedom

Sources of Law
Sources of law mean tracing where the law drives its validity and origin or content. In
broad terms there are two main categories of sources of law namely: material and formal
source.
1. Material sources of Law
Material sources of indicates the origin or contents of the law. Among the material
sources of law the most common and important are custom and religion. Most of the time
custom and religion are used as the primary material source of law. Law is, at least
theoretically expected to reflect custom, religion, values and morality of the society. We
have noted above that law is a generally accepted norm of the society which implies the
primary material sources of law is the custom and religion of the society. Though most of
Ethiopian laws were copied from foreign sources, custom and religion are being used as a
material source.
Even custom and religion are recognized as material sources of law under the Ethiopian
Constitution. Hence, we can say that custom and religion are the common material
sources of law. However, there are times where custom and religion are totally rejected in
order to bring new behavioral change in the society. For instance, in case the custom and
religion are against the universally accepted principles and when they are considered to
teach and maintain harmful and traditional practices, they are totally rejected from being
sources of law.
2. Forma sources of Law
Formal sources of law deal with the validity claim of the law. It traces the Authority or
Organ which enacted the law. Based on the Organ which enacted the law we have the
following formal sources of law: The Constitution, International Agreements,
Proclamations and Court Decisions. Constitution is the Supreme law of the land which is
above every other law because it is the parent of all other laws. International Treaties and
Parliamentary laws or proclamations are ranked in the 2 nd place next to the Constitution
while other laws such as regulations, directives and notices are ranked 3rd, 4th and 5th,
respectively.Regulations are enacted by Council of minister, Directives by Ministries and
notice is enacted by each departmental Bureaus.

Classification of Laws
Based on different factors, laws are classified into different categories. The main reasons
for and purposes of classifying laws are for easily management and administration,
efficient study and convenience. Generally, based on the following four factors, we may
have the following classifications of laws.

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 Geography-based on geographical location and scopes of application of the Laws we
have International and National laws and Federal and State Laws.
Function of Laws-Based on the specific functions of laws, we can classify laws into:
Substantive and Procedural; Public and Private and Civil and Criminal laws. Substantive
laws are those group of laws which lay down the rights and duties of the citizen, while
procedural laws are laws which serve for the enforcement of the substantive rights. Public
laws regulate the relationship between the Government and the public or the people
whereas private laws regulate the relationship between the individuals. Civil laws are
laws which states civil rights and duties while criminal laws formulate crimes and their
punishment.
Authority-based on the authority or organ that enacted the law we have primary and
secondary laws. Primary laws are all laws which are enacted by the parliament while
secondary laws are all other laws which are enacted by other subsidiary organs through
delegation.
Convenience-based on convenience of administration and study of the law we may have
procedural law and evidence law; civil law and commercial law.

Chapter Two: Law of Persons

Who is person? What are the attributes of personality? How personality is acquired, exercised
and extinguished? These and related issues are the subject of discussion of this chapter.

Who is (are) a person? There are two categories of person: Natural or physical person and legal
person. Natural person encompasses all human being which are born alive and viable for more
than 48 hours. Hence, personality of a physical ornatural person is acquired through birth and
staying for the period of more than 48hours. However, monsters cannot be considered as a
natural person for they are not human being. For example a creature with four eyes and tails is
not a natural person no matter how it resembles a human being.

Legal persons are all fictitious entities which are considered as a person by virtue of a law. Legal
persons are also known by names such as fictitious, artificial or juridical person. Legal persons
are business organizations, Institutions and Associations.

Why does the law concerned with persons? In other words, what are the legal attributes of being
a person? Personality confers some attributes on the person. The attributes of personality are:
Name, Nationality, Domicile and Residence and exercise of rights and duties.

What is the function of name? Is there any direct relationship between a name and a person? The
basic use of name is for the purpose of identity. There is no direct relationship created between
the person and his/her/its name. But there may be a relationship between the name and a legal
person as most of the time legal persons use names which indicate their purpose and objectives.

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All natural people shall have one or more first name, Patronymic(father) name and
Family(Grandfather) name. The order of writing the name of natural person is: Family name,
first name and father’s name. For instance, the student with the name HagosDestaGemechu
should write his/her name as follows: GemechuHagosDesta. However, this form of writing name
has never been practiced in Ethiopia except on the official International documents.

A person may have more than one first name but one of such names should be primary and
official name. The name of a person should not impugn the morality or law of the land.
Furthermore, it is not legally possible to assume the name of one’s father, mother, brother and
sister. Particularly, abuse and usurpation of name bears civil and criminal liabilities. Abuse of
name is using one’s own name in bad faith and to the prejudice of other person with the same
name. It is illegal to use your name in a confusing and misleading manner to use the good will or
reputation of others. Usurpation is assuming the name of other person for personal gain and by
causing damage to the holder of that name. A common instance is when an amateur singer uses
the name of well-known singers to get undue acceptance from the crowd.

Any one is free to change his/her name at any time so long as doing so brings no damage to
others. Nonetheless, you cannot change your father’s name at will.

The first name is given to the child by the father and mother can give one in the absence of father
or additional name. A child whose father is unknown shall have a patronymic name of his/her
maternal grandfather.

Legal persons shall also have a name which does not contravene the public morality and public
morality. All business organizations have a trade name. All institutions and associations also
have a name.

The second attribute of name is nationality. All physical personal acquire a nationality of the
country where they are born or of their family. Legal persons have a nationality of a country
where they are seated or incorporated.

Residence and domicile are also one of the attributes of personality. All persons have one or
more residence and only one domicile. Residence is defined under article 174 of the civil code as
a place where a person normally resides. According to Article 180 of the code a trader or
business organizations have a residence of a place where they carry out their business.

Domicile is an extension of residence for it incorporates residence as one of its elements.

Domicile is defined under article 183 of the Civil Code as: as a place where a person has
established his principal seat of his business and of his interests, with the intention of living there
permanently. Anyone who lives in a particular area for a period of more than 3 months is a
resident while he has to establish some business and personal attachment with such place and
must show an interest to live there for indefinite period to a become a domiciliary.

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The last attribute of personality is exercise of rights and shouldering of duties. All people
regardless of their economic, social and political status acquire “Patrimony” up on acquiring
personality. Patrimony is the state of having some rights and duties towards or against this world
or specific person. It is clearly stated under article 1 of the civil code that all persons are the
subjects of rights and duties from their birth to their death. Though this article seems to apply
only to physical person, it is equally applicable to Legal persons too. The fact that all people are
subject of rights and duties from their birth to death does not necessarily mean that they can
exercise such right and bear duties automatically and without any condition. Incapable person
cannot personally exercise their rights but through their representatives. For instance, Minors can
acquire rights and incur liability by acting through their Guardian or Tutor. Legal persons such a
business Organizations shall act through their Agent or Manager. But it is a Person that can sue
or be sued, not the Representative or the Agent.

Personality that is acquired by nature or by the operation of the Law can be extinguished due to
various reasons. The common grounds of extinction of personality are: Death and Absence of
Natural Person and Dissolution and Bankruptcy of Legal persons. Loss of Nationality may not be
taken as loss of personality. With Extinction of Personality comes the termination of rights and
duties and Patrimony in general.

Chapter Three: Law of General Contracts

This chapter covers the answer for the following questions in short and brief manner. Thus, do
not worry when the chapter begins withs question and when you see articles.

What does contract mean? What are the sources of Contract? Why do we need a Contract in
General and the Law of Contract in particular? What are the Legal elements of a contract? What
are the distinctive natures or features of a Contract? What are defects in contract and their
consequential effects? What are the effects of a valid contract? What constitutes performance or
non-performance and the legal remedies for non-performance? What are the various grounds of
extinction of contract and their effect on the contract? Up on the completion of this chapter you
will able to answer these and related questions.

The Concept of Obligation

Definition of Obligations- Many scholars defined obligation in different ways based on their
own observations and understanding. There has never been a single definition of contract under
the international legal parlance. However, the common definition of obligation is that it is the
relationship between two or more person whereby the parties are bound to do, not to do or to
give something towards each other. Contract is an agreement of proprietary nature (1675) as
defined in the civil code. According to Article 1675 of the Civil Code, Contract is defined as an
Agreement whereby two or more persons as between themselves create, vary or extinguish
an obligation of proprietary nature.

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Sources of Obligations

obligations can arise from different sources due to the diversity of human relationship. They
are:contractual, non-contractual and legal sources. Contractual obligation transpires from
agreements concluded between parties which are sustainable at law. Extra-contractual source of
obligation is all about the civil liabilities that arise from different non-contractual transactions or
relations. It is governed by the law of extra-contractual liabilities and unlawful enrichments.
Legal obligations are those obligations imposed up on a person through the instrumentality of
different laws for various policy reasons. The examples are family obligations, tax liabilities,
maintenance claims, fees, government levies, fines, etc.
Types of Obligation
1-Unilateral obligation arises from contract in which two parties are participate.
However, only one of the parties is legally bound by the contract for the benefit of the
other contracting party. Example, donations
2 -Bilateral obligation arises from a contract entered into by two parties in which these
contracting parties are bound legally to each other on equal terms. Accordingly, there are
two promisors and two promises.
3-Multilateral obligation. This is a case where more than two persons undertake to
perform an obligation. Such obligations can be classified into three:
1) Simple joint obligation
2) Joint obligations
3) Several and joint obligations

1) Simple joint obligation.

In this type’s obligation, parties who are bound by such obligation are not jointly liable for the
total debts, but each debtor is liable for its own share with the exception of Art.1917 of the
Ethiopian civil code

2) Joint obligations
It arises from the contractual obligation in which more than two parties participate and debtors
are jointly liable for the debt secured as a result of the obligation entered into with the creditor or
creditors.

3) Several and joint obligations.

In this kinds obligations the co-debtors shall be jointly and severally liable unlike joint
obligation where the debtors are jointly obliged to undertake a given obligation, in the several
and joint obligation, the creditor may require all the debtors or one of them to discharge the
obligation in whole or in part.

The Purpose and Scope of Contract Law

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 The purposes of contracts law are multi-faceted. Nonetheless, the basic purpose of the laws
of contract is to govern and facilitate the healthy contractual transactions among the people
by putting some basic legal principles to be adhered to by the contracting parties.
The scope of general contract is basically cross-cutting. It governs ordinary contracts mainly
and other special contracts as a gap filling. What are special contracts under the Ethiopian
laws? Does it also apply to extra-contractual obligations? If applicable, under what
circumstances? Generally see articles 1776 and 1777 of the code.

Formation of Contracts

Basic (requirements ) elements for the formation of contract (Article 1678)

For the valid formation of contract the following requirements are essential.
1. Capacity-generally speaking, the capacity of a person is presumed. However, there are
instances in which the capacity of the party in the contract is contested so that the law
steps in.In such cases, the law stipulates the minimum conditions of capacity to undertake
juridical acts.
2. Consent- it is one of the basic elements of formation of contract. Consent should be free,
volitional, non-vitiated, intended and with the purposes to be bound. What makes
consent sustainable at law?
Communication of Consent-for the contract to be formed the consent of one partyshould
reach the other contracting party. The mode of communication of consent can be writing,
orally, through conduct or conventional signs. Bu it should not be ambiguous or unclear.
The communication should convey the intention of the party.
Offer and Acceptance (Articles 1681-1695)
Offer expresses the willingness of the offeror to enter into contractual agreement
regarding a particular thing. It is a promise which is conditional upon an obligation (to
give something or to do something), a forbearance (to refrain from doing something) or
return a promise that is given in exchange for the promise or its performance.
Offer and acceptance are the two to and fro communication of consent to conclude a
contract. Aparty who intends to conclude a contract with a targeted party should
communicate his/her intention by offering some object of contract. The offered once the
offer has reached him/her may express his/her acceptance of the offer.
Offer and acceptance are usually a process which may take long time.
Counter-offer- is a modified or conditional acceptance.
Does silence amount to acceptance? If so, under what instances?
Time of acceptance and withdrawal of offer- unreasonably delayed acceptance is
considered as declining offer. Withdrawal of offer should be before or simultaneously
with the acceptance (Articles1690-1693). The opposite is also true for withdrawal of
acceptance.
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 What are the possible places of formation of contract?
Place of formation of contract-It can be at any place which is convenient for the party.
What about contract concluded on phones, Air, Sea, via e-mail?
Defects in Consent (articles 1696-1710)
What makes consent defective? Defect in consent can be due to the status of the party
(1700, 1702, 1708, 1709, 1710), means through which it is secured (1704, 1706, 1707),
type and nature of the object of the contract (1696, 1705).What should be the standard to
be applied to measure the existence or otherwise of defects in contact? May be reasonable
person standard or the subjective standard?. Thus, defect in consent includes mistakes,
frauds, duress, and other lawful grounds.
3. Object of Contracts (Articles 1711-1718)-what are the possible objects of contract?
Who may define it? The objects of the contract can be everything which is legal, moral,
and possible to perform.
Freedom of Contract- parties are in principle at liberty to define the content of their
contract. Object of contract is the main area where freedom of contract is manifested.
Need the party expected to define each and every terms of contract? What if they fail to
indicate some terms in the contract? Article1695 is one of the possible ways out. What
do imagine are the other possible ways out?
4. Form of Contract-it is one of the elements of contract where it is provided by the law.
Thus, contracting parties have a great freedom with regard to formality requirement.
What do you understand about special form?
Contracts made in Written Form –should be attested at least by two witnesses. Articles
1720-1729 of the code are relevant provisions.
Effects of Form-Voidable contact for civil contracts but valid for commercial contracts,
argued the Federal Cassation Bench. But what is/are/ the justifications for their
argument?
Effects of Elements of Contracts-among the four elements of contract object and
consent are the two basic elements which fundamentally affects the validity of the
contract. The other two elements have relative effect on the validity of contract.

Effect of Contracts (1731)

What do Effects of Contract Mean?

Binding nature of contract-the first and basic effects of contract is its binding nature. A
validly made contract is a law as between the parties. ‘Man’s word is his bond’. What is
the status of memorandum of understanding and pre-contractual relationship under the
Ethiopian Contract law? Both are not considered as contract in principle but in case of
contract made between parties who have had a continuous business relationship, it may
be considered as a valid contract.
Interpretation of Contract-basically a contract need not be interpreted as it is believed
that the parties have reduced into agreement what they have already agreed. Where the
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terms of the contract are clear there is no need of interpretation as it amounts to creating a
new contract to the parties.
Why interpretation? Interpretation is needed just to uncover the intention of the party
when it is impossible to depict from the contract. Generally, theories of interpretation of
law are also applicable to contract though differently applied.
What interpretation theories are as applied to contract?
Variation of contract (1763-1770)-Variation of contact is all about the modification of
the terms of the contract by the parties, the court, and some intervening events.

Performance of Contracts (1740-1762)

What constitutes performance?

Performance constitutes complying with all terms of the contract. But should non-
compliance with any minor non-compliance constitute non-performance? It should be
fundamental and importantto the creditor. Size, place, quality, quantities, mode of
delivery, time of delivery are some of terms of contract which are fundamentally affect
the expectation of the party.

Who Performs Contracts? (1740)

-The principle is that the debtor should perform the contract personally when the personal
qualification of the debtor is paramount to the creditor. In other cases personal
performance is not mandatory.
To whom performance made? (1741-1744)
-Performance should be made to the right creditor-to the creditor designated in the
contract. In principle, performance made to incapable performance results in double
payment. The exceptions are where the right creditor has benefited from the payment and
the paymen7t is made in sincere good faith.
What to Perform? (1745-1748)
-Delivering non-defective goods and giving appropriate services. The qualities, quantities
and nature of the thing to be performed should be those stated in the contract.
How to Perform? (1749-1754)
-According to the means and modes stipulated in the contract.
When to Perform? (1756-1759)
-On or before the due-date. What are the effects of failure to comply with the due date?
Non-performance, period of grace, default notice. Exceptions for default notice (art.1775)

Payment schemes- in cash, in terms equivalents, by commercial documents

Appropriation of Payment-Cost-interest-principal
Remedies for non-performance (Articles 1771 cum with Articles 17761784, 1785,
1786-1789, 1790, 1994, 1795)

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 The creditor has one of the following remedies either alone or cumulatively.Specific
performance, compensation for damage, cancellation, specific performance +
compensation, cancellation+compensation.
1. Specific performance-where forced performance is the fundamental basis of the
contract and it does not interfere with the freedom of the debtor. If substituted
performance is possible, specific performance should not be ordered by the court.
Specific performance is highly tenable for service contract.
2. Cancellation-both judicial and unilateral cancellation. Unilateral cancellation is
possible when the same is stated in the contact, the performance of the contract became
impossible and there is a high probability that the debtor is unable or unwilling to
perform the contract.
3. Compensation for Damages-Damages could be loss incurred or profit lost or
both.What does greater damage implies?
Defenses for non-performance
Force majeure (1792-1793), fault requirement, absence of loss,
What is the basis for the contractual liabilities? Fault-based, strict or vicarious?
Contractual liabilities are based on strict liability, what is provided under article 1895
being the only exception.

Extinction of Contract

An extinction of contract is all about the death of a validly made contract. Any validly
made contract has life span-birth, growth and death intervals. A contract’s life comes to
an end due to different grounds and uncertainties. Under this section the common
grounds for the extinction of contract will be discussed briefly.

According to Article 1806 of the civil code(C.C), there are different grounds which cause
extinction of obligation (contract). Cumulative reading of Articles 1806 and 1807 of the
C.C takes performance, invalidation, cancellation, termination, novation, set off, period
of limitation of a contract, and merger as grounds of extinction of contract.

A. Performance of Contract

Performance of obligation is not only an effect of contract but also a ground of extinction
of obligation. Performance of the contract shall, however, be made according to the terms
of the contract and mandatory provisions of the law, if it shall extinguish contractual
obligation. It shall be performed according to the agreement without discrepancy if it
shall bring the contractual obligation to an end.
Performance of contract made according to the terms of the contract validly brings the
contractual relationship to an end; however some minor non-fundamental terms are not
discharged.

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B. Invalidation and cancellation of a contract.
Invalidation of contract is one means by which contractual obligations are extinguished.
Invalidation of a contract happens when there is defect in the formation of the contract. If
a party that is incapable concludes a contract or if one of the parties concludes the
contract without having the legally required consent, the contract is subjected to
rescission. Hence, what do you think the difference in grounds and effect of invalidation
and cancellation of contracts?
The communality between invalidation is that both are grounds disabling a contract and
they may result in compensation. However, their differences lie in their ground and
effects. The ground for the invalidation of a contract is the result of vitiated consent and
lack of capacity; whilst that of cancellation is non-performance. The conditions for
cancellation whether unilateral or judicial has been discussed in the preceding
section.With regard to their effect, invalidation is purported to reinstatement of the parties
to the position they would have had the contract not made whereas cancellation has an
effect of reinstating the parties to the position they would have been had the contract
performed, to the best possible.This could be done through the instrumentality of
compensation.
The term invalidation is used for both void and voidable contract. The contract is
said to be void owing to its object and formality defect. If the object of the
contract is not properly defined, impossible to perform, illegal or immoral, it is a
void contract and hence, any interested third party can pray the court to get the
contract invalidated. For voidable contract, it is only the party with vested interest
that can invalidate it. Generally see article 1808 of the C.C.The right to invalidate
a contract is, however, limited by lapse of a certain period of time. Article 1810
connotes that a contract shall not be invalidated unless an action to this effect is
brought within two years from disappearance of the ground for invalidation. This
provision seems to be prohibiting invalidation even if the period of limitation is
not raised, as it says, “… no contract shall be invalidated.”
The time from which two years is counted starts from the disappearance of the
ground for invalidation excepting unconscionable contract for which the starting
point is the formation of the contract.
Even though invalidation or cancellation is ordered, the rights of third parties in
good faith may not be affected.
What do understand from Article 1815(1) & (2) of the code? Do you think this provision
apply to both invalidation and cancellation?What are the possible Remedies in case
reinstatement is impossible?

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C. Termination of contract
In addition to invalidation and cancellation, termination is also one way by which
obligation is extinguished. Termination of contract is making the contract ineffective
starting from the time of termination of the contract.
What do you think the possible reasons are for the parties to terminate the contract
they have effectively concluded?
Termination of contract is most widely used in employment contract in particular and
service contracts in general.The grounds for termination are attributable neither to the
defects in its formation or non-performance. Virtually, termination is done up on the
agreement of the contracting parties except for judicial termination. The effects of
termination of contract cease to exist as between the parties as from the day of
termination. All acts that are done before termination are not affected.

Termination refers to the stoppage of obligations created by the contract. It ceases the
existence of the obligations as of the time the contract is terminated. Termination of
contract can be either, bilateral (by the agreement of both the contracting parties),
unilateral by one party, or judicial (by court order).

Unilateral termination is possible if that prerogative is provided in the termination clause

of the contract. Bilateral termination is usually tenable during the currency of the contract
as the contracting parties usually may not incorporate bilateral termination in the
termination clause. In addition to unilateral and bilateral termination , termination can
also be made when one of the parties requires to that effect. Court termination is the
principle and termination by the parties is an exception as parties shall not be judges on
their own case.For grounds of termination by the court refer to Articles 1823 and 1824 of
the code. The two articles are reproduced as follows respectively.

Article 1823_ Special relation between the parties

A party may apply to the court to order the termination for a contract, which requires a
special confidence, cooperation, or community of views between the parties and where
such requirements are no longer present.

Art. 1824_Gratuitous contracts.

The court may order the termination of a contract made for the exclusive advantage of
one party where the other party for good causes so requires.

D. Remission of debt
Along with termination, remission of debt is also one way of extinction of obligation.
Remission of debt is voluntary release of debtor of his obligation by the creditor. Article
1825 is testament for the extinction of obligation by remission of debt under the Civil
Code.

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 1825- Remission of debt.

Where the creditor informs the debtor that he regards him as released, the obligation shall
be extinguished unless the debtor forthwith informs the creditor that he refused his debt
to be remitted.

What are the legal elements that need to be fulfilled for remission to be made?

D. Novation

Novation is nowhere expressly defined in the code. However, the general principle
provided under the following article gives some clue as to what constitutes Novation.

Article 1826_ principle.

An obligation shall be extinguished where the parties agree to substitute therefore a new
obligation which differs from the original one on account of its object or nature.

Consistent with this provision, novation is substitution of an existing obligation by new

obligation in its nature or object. The new obligation shall be different from the
substituted obligation either by its object or nature. Mere difference without substantial
change either in the object or in the nature does not amount to novation; rather it is
variation in fact.

Does substitution of place, time and mode of performance of a contract result in

novation? If not what is it so? What is changed if the contract of sale is substituted by
loan contract; delivery of teff is substituted by delivery of Sorghum?

Novation is required to be intentional so that it can have the desired consequence in

accordance with Article 1828.

Article 1828_ intention to extinguish the original obligation.

Novation shall not occur unless the parties show the unequivocal intention to extinguish
the original obligation.

Though it may be difficult to depict the intention of the party, unintentional novation is
not legally recognized. Here the law is trying to reiterate the principle that that the parties
may not be bound by what he does not purposely consented with the aim to be bound
by .Can we consider novation of contract as a new contract so that intentional
willful consent is necessary for novation to be made?The negative meaning of
novation in Article 1829 helps to explain it by providing cases; novation may not occur
as stated below.

Article 1829 _Absence of novation.

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 Unless otherwise agreed, novation shall not occur where;

a) a new document is prepared to support an existing debt; or

b) the debtor signs a promissory note or bill of exchange in respect of an existing
debtor
1830- Current account.

(1) Novation shall not result from entry of credit and debit items in a current account.

(2) Novation shall occur where the balance of an account is finalized and admitted.

(3) Unless otherwise agreed, the creditor shall retain such securities as may attach to one
of the items entered in a current account not with standing that the balance of the account
has been finalized and admitted.
What is(are) the justification(s) for excluding the above mentioned acts from being a
novation?

There might be ambiguity as to whether the lists of 1829 are exhaustive or not. In relation
to this, whether signing a promissory note or bill of exchange excludes signing other
negotiable instruments might create perplexity. Albeit the presence of such ambiguity,
Article 1829 is on illustrative list by which other acts, which are not novation, are
included. Had the negative definition under article 1829 been exhaustive, there is no any
need of any further under article 1830 of the code.

What are effects of novation on securities and collateral obligations?

1827- Effect of novation

(1) Unless otherwise expressly provided, securities or privileges attaching to the original
obligation shall not be transferred to the new obligation.

(2) Unless otherwise expressly provided interest due prior to novation may not be
recovered thereafter.

E. Set off

Setoff is fairly defined under article 1831 of the code.

Article 1831- principle

Where two persons owe debts to one another, set off shall occur and the obligation of
both persons shall be extinguished in accordance with the provisions of the following
Article.

From the definition under the preceding article and other provisions that follow, one may
conclude the following: Setoff presupposes the existence of two independent contractual

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 obligation, the two obligation must be liquidated, setoff is not possible for those
obligations legally excepted and the setoff should be made to the maximum of the
smaller debt when the two debts are not equal.

The positive conditions that are provided in Article 1832 are.

(a) The debts shall be money debt or fungible things of the same species.

(b) The debts shall be liquidated.

(c) The debts shall be due.

1833 Negative conditions

Set –off shall occur regardless of the cause of either obligation except where

a. the special nature of the obligation requires that the creditor be actually paid , as in the
case of maintenance or wages necessary for the livelihood of the creditor and his family;
or
b. the obligation is owing to state or municipality ; or
c. The obligation is to restore a thing of which the owner has been unjustly deprived ;or
d. The obligation is to return a thing deposited.

F. Merger
Merger is another method by which obligation extinguishes. Merger happens when the
position of creditor and debtor becomes one and the same. There are different reasons for
merger between debtor and creditor. Successions, formation of partnership are among the
juridical acts which result in merger. Merger makes the debtor and creditor the same
person.

If we see Article 1842 of the Ethiopian civil code the principle of merger in extinction of
obligation has been put verbally as:

Art.1842__ Principle

Merger shall occur and the obligation shall be extinguished where the position of creditor
and debtor are merged in the same person.

Performance of obligation after merger is not actually realistic once the creditor and
debtor become the same since performing certain obligation towards oneself is actually
absurd.

What instances brings merger to an end? What are the effects of merger on
guarantors?

G. Limitation of actions

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Limitation of actions is one of the most notable forms of grounds for the extinction of a
contract. Every human action has one or more of period of limitations so that transactions
are done in an orderly way. Likewise, any contract is bounded by a legal or contractual
deadline within which bringing any that may arise from or in relation to a contract.
Contractual period of limitation is a time period within which a creditor demands his or
her claim from the debtor in courts o f law.

The main purpose of providing a contractual period of limitation by law is to maintain

security of transaction, to release the debtor from future uncertain claims of the creditor
and to make the creditor alert enough not to sleep on his or her rights.

There are two types of limitations of actions: Prescriptive and Limitative period of
limitations. Prescriptive period of limitation confers up on the person some sort of rights
after its expiry. Limitative period of limitation, on the other hand, bars claims up on its
expiry. Contractual period of limitation is prescriptive for the debtor and limitative for the
creditor. In principle, contractual period of limitation is 10 years. However, the
contracting parties can agree for shorter or longer period of limitations. Generally see
Article 1845 and the subsequent provisions as to the nature of period of limitations under
the civil code.

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Chapter Four: Sale Contract
What is sale contract? What nature differentiate sale contract from other forms of
Contracts? Sale contract is one form of special contracts with its distinctive features. Sale
contract creates a seller-buyer relationship whereby both of the parties have a reciprocal
rights and duties against each other. Though the object and scope of sale contract is both
sale of goods and services, we will only discuss sale of goods in this chapter as it appears
in the Civil Code.

Contract of sale is defined under Article 2266 of the Civil Code as follows: “Contract of
sale is a contract whereby one of the parties, the seller, undertakes to deliver a thing and
transfer its ownership to another person called the, Buyer, in consideration of a price
expressed in money which the buyer undertakes to pay.”

From the above definition we can deduce the following basic elements for sale contract to
exist: There should be a Seller-Buyer relationship, there must be delivery of specified
thing(s), Ownership has to be transferred from the seller to the buyer, the price should be
paid in money. According to the wording of the above article, delivery of the thing or
payment of price at a spot is not a prerequisite for a sale contract but the obligation to
undertake it once the contract is formed. Payment of price in terms of money is what
distinguishes sale contract from Barter transaction where goods are exchanged for other
goods. Without transfer of full ownership from the seller to the buyer, there is no contract
of sale formed. The seller cannot sale the thing by retaining its ownership title with
himself.

The Scope of sale contract is sale of the principal thing with its intrinsic elements and
accessories thereto. Unless there exist is a prior agreement otherwise, sale of a thing
includes intrinsic elements and accessories (Article 2268 and 1133-1139 of the Civil
Code). Sale Contract under this chapter does not apply to sale of special movables such
as car, machines, TV, Motor Vehicles, Air Crafts, Ships, etc (Article 2267 C.C). Sale
contract on future things to be supplied or produced is possible. In such cases, substantial
part of the thing should be supplied by the seller. If substantial proportion of the thing is
supplied by the buyer the contract is a contract is a contact of service not a sale contract.
For example, if you provide a suit garment to the tailor to make a suit for you, then the
tailor is only providing you a tailoring service not selling a good to you.

Formation of Sale Contract- Sale contract has no special process of formation different
from other contracts as such. All rules and principles of contract in general are equally
applicable to sale contract. All fundamental elements for the formation of a valid contract

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such as capacity, object, consent and form should be complied with to form a sale
contract.

The rights and Duties of the parties to sale contract (Performance of the Contract)

The rights and duties of the parties are simply to mean performance of the contract. So,
questions such as who, what, where, when, and how to perform are pertinent to determine
the rights and duties of the buyer and the seller.

Who perform a sale contract?

-Both the seller and the buyer perform their part

What to perform?

-The seller has to deliver a thing its intrinsic elements and accessories which are free
from defect, non-conformity, and transfer full ownership free from any encumbrances.
The seller should deliver the thing of the same quality,quantity and species (see Article
2288-2290 of the C.C). The seller should a warranty against defect or dispossession and
Bear some costs and expenses and cooperate in good faith.

Delivery of the thing is very important to determine with whom risk lies. Up on deliver or
after delivery date lapsed, risk is transferred from the seller to the buyer!

-The buyer has an obligation to pay price on the fixed date or up on demand. The
payment of price should be as agreed in the contract. Of course, the primary obligation of
the buyer is to effect payment on time (Article 2303 of C.C). Payment of some expenses
and costs and showing cooperation is also the duty of the buyer.

Where to perform?

The ordinary place of performance is the place fixed by the parties in their contract. In
the absence of contrary stipulation, the seller has to deliver the thing at his normal
residence or place of business. The buyer should also make payment at the same place
(see Articles 2287 and 2309 0f the C.C).

When to perform?

-In most cases, performance is made simultaneously. The buyer should pay at sight when
s/he takes delivery of the thing or when demanded by the seller. However, the parties can
agree otherwise.

How to perform?

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 The mode of performance of a sale contract is as agreed by the parties in the terms of
their contract. For instance, the parties may agree for successive delivery of the thing or
installment payment.

What constitutes non-performance of sale Contract?

Failure to perform according to the terms of the contract constitutes non-performance.

Delivering defective or non-conforming thing, transfer of non-pure ownership, partial
delivery, failure to pay price or performing to a wrong person, at a wrong time and place
and in a different mode constitutes non-performance.

Remedies for Non-performance

The legal remedies for non-performance of a sale contract are: Cancellation of the
contract by giving a default notice to the defaulting party (Mutual, Unilateral, and Legal
or default and judicial as may be appropriate), Compensation and Specific or forced
performance. The least availed remedy for non-performance of sale contract is forced
performance. Because there is no freedom of the seller at stake and substituted
performance is easily possible in most of the cases. Personal service of the seller is not
required; rather it is delivery of the thing.

Different Forms of Sales

There are different forms of sale contract owing to their particular nature.The following are the
main forms of sale contract stipulated under the Civil Code.

A. Sale of Cattles- Sale of cattle is mainly different from other forms of sales due to the reason
that living animals needs special care for the protection of the buyer and the public at large.
Animals need vaccination before being delivered to the buyer and they have to be properly
handled during transportation and should fit for the specific purpose they are destined for (See
Articles 2368 and ff).

B. Sale by Sample-the unique feature of sale by sample is that the final thing to be delivered by
the seller should exactly conform to the sample given (Article 2377 of C.C).

C. Sale on Trial- it is a sale which is effective after the buyer tested the thing by using it for
some time and agrees with its quality. The contract is not concluded even though the thing is
delivered to the buyer for trial. So, in case of sale on trial, delivery precedes the sale proper and
the risk remains with the seller (article 2380 and ff).

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D. Sale by Installments-it is sale contract in which delivery of the thing or payment of the price
is at different interval.

E.Sale with Ownership Reserved-it is a sale contract whereby the seller delivers the thing to
the buyer but reserves ownership right until the buyer pays the price. The risk is transferred to
the buyer up on delivery of the thing (article2387 and ff of the C.C).

Sale with right of Redemption-it is a form of sale which gives a seller a prerogative to reclaim
the thing s/he sold if s/he demands it within specific period of time (2390 of the C.C).

Sale with the Obligation to forward the thing-In this kind of sale the seller has the obligation
to forward or transport the thing to the buyer (Article 2394 and ff of the C.C).

Sale by Auction- it applies to sale made through tender or bid process. Contract is concluded
when the final hammer is knocked down (Article 2403 and ff of the C.C).

Chapter Five- Law of Agency

Agency is an indispensable part of the existing social order. It fulfills the most diverse functions
in public and private law of today. Agency is a fiduciary relationship which results from the
manifestation of consent by one person to another that the other shall act in his behalf subjected
to his control and consent.

Why do we need agency? The followings are some of the reasons for that necessitated agency:

 Division of Labor
 Lack of expertise on specific areas
 Physical absence or geographical location of the principal
 Facilitation of business
 The motive to transact through the agent

Agency is defined under the Civil Code in terms of contract. Accordingly, Agency is defined
as:”A Contract whereby a person, the agent, agrees with another person, the principal, to
represent him and to perform on his behalf one or several legally binding activities” (Article
2199 of C.C). The parties to Agency contract are the Principal and the Agent. The Principal
is a person who gives Agency while the Agent is the person who accepts Agency and act on
behalf of the Principal.

Source of Agency

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Agency may arise from the Law or Contract as it is provided under Article 2179 of the C.C.
The primary source of Agency is a contract. However, Agency shall also arise from the
operation of the Law. Agency which arises from contract is the one which arise from the
agreement of the Principal and the Agent. Agencies which are resulted from the Law are
Guardianship or Tutor, Curator, Managers, and unauthorized agent.

Nature of Agency

The basic natures of Agency relationship are:

 It is a special Contract
 It creates fiduciary relationship between the Principal and the Agent
 Power of Agency is derivative and should be exercised strictly
 The must render a personal service-delegation of Agency power is not allowed in
principle

Scope of Agency

The scope of Agency is the limitation on the power of the Agent. The Agent may not do
whatever he wants in whatever forms but as determined in the Contract or the Law. Article
2181 of the C.C states that the scope of Agency is determined by the contract. The scope of
Agency can be general or Special based on the activities that the Agent can undertake.

1. General Agency: It is a form of Agency which is expressed in general terms and which
confers up on the Agent the power to do ‘acts of management’. Acts of management includes
acts done for the preservation or maintenance of property, leases for terms not exceeding 3
years, the collection of debts, the investment of income and the discharge of debits and the
sale of crops, goods intended to be sold or perishable commodities (See Article 2204 of the
Civil Code).

2. Special Agency-is a contract whereby the Agent is authorized to perform a particular act
only. Special Agency is always required for sale, alienation or mortgage of immovable,
investment of capitals, sign bill of exchange, effect settlement, Arbitration of claims, make
donation or bring or defend an action.(Article 2205 of C.C).

Agency can be given expressly or impliedly. The Agent may not act beyond the power which
is expressly given but implied power of Agencyis determined based on the nature of the
work, the words or phrases in the contract, circumstances of a particular cases, or intention of
the Principal. Implied Agency is usually the results in unauthorized Agency which a common
ground of contention between the Principal and the Agent.

Types of Agency

a. Based on the source, scope and nature of Agency is classified as follows:

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 b. Based on source-Contractual VS Legal Agency

c. Based on Scope of Agency-General VS Implied

d. Based on mode of giving agency power-Express VS Impliedor Original Vs Ratified

Agency

e. Based on its Nature- Commission Agency, Unauthorized, Agency, Forwarding Agency

Rights and Duties of the Agent and the Principal

The Rights of the Principal(Duties of the Agent):

 Personal service
 Fiduciary duty
 Confidentiality
 Duty of diligence
 Acting on behalf and for the benefit of the Principal
 Duty to account
 Prior Notification for unauthorized works
 Avoiding conflict of interests
 Good faith

The Rights of the Agent (Duties of the Principal):

 Payment of Fair Remuneration

 Duty to approve the works up on completion
 Duty to ratify necessary works done in excess of scope of Agency
 Duty to Provide Necessary work tools and means and cover outlays and expenses
 Cooperation
 Refrain from untimely termination of Agency

Termination of Agency

Agency relation may come to an end due to one or more of the following reasons:

 Completion of the work

 Death ,Absence, Incapacity or Bankruptcy of the Principal or the Agent
 Revocation by the Principal
 Renunciation by the Agent

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Chapter Six- Law of Traders and Business Organizations
Who is a Trader? A trader can be defined as any person who is engaged in trading activities. But
the legal definition of a trader is which follows. A Trader is a person (physical person) who
undertakes commercial activities professionally and for gain (Article 5 of the Commercial Code).
Commercial activities are those which are listed under Article 6 of the Commercial Code and
considered as such by other relevant Laws. All Traders do a business for gain not for free.
Professional engagement refers to some basic training in specific field or knowledge acquired
through experience and working on a regular basis for a livelihood. Part-time works are usually
considered as one indication for absence of profession.

What are the rights and duties of A Trader?

A Trader has a right to do a business in any area of business of his choice and make a profit from
his transaction. He has also a right to get a license from the relevant authority and claim all other
privileges that are available for the traders.

The primary legal duties of a Trader are the duty of registration, keeping books and account and
paying taxes. No Trader may do a business without a registration (Article 100 of the Commercial
Code). A Trader shall also have a duty to keep book and Accounts for 10 Years. The legal
importance of Books and Accounts is for evidentiary value, payment of Taxation and protection
of 3rd parties (Read Article 70 and ff of the Commercial Code

Attributes of a Trader-.A trader can make a profit or incur loss, enter into a juridical acts, sue
or be sued and may be declared bankrupt.

Business Organizations

What area business Organizations and why do we need them?

A Business Organization is a legal person established by an association of person or

accumulation of capital to do a business. There are six types of Business Organizations in
Ethiopia. Among them, four are business Organization constituted in the form of Partnership
while two of them are Companies limited by shares. The four Partnerships are: Ordinary
Partnership, Joint Venture, General partnership and Limited Partnership. The two Companies
limited by shares are Shared Companies and Private Limited Companies. A Business
Organization can be formed either by a partnership Agreement or Memorandum of Association
drafted by the founding members.

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A Partnership Agreement is a contract whereby two or more persons who intend to join together
and to cooperate undertake to bring together contributions for the purpose of carrying out
activities of an economic nature and of participating in the profit and losses arising out thereof(if
any)(Article 211 of Commercial Code).

From the above definition, we can deduce the following elements:

 Partnership Agreement is a contract concluded between the partners who agreed freely
 The partners agree to cooperate in good faith for the achievement of the business purpose
 Partners make some contributions to carry out a business-the nature of a contribution can
be in the form of cash, in kind or service
 Members shall participate in the profit and loss of the business
Companies limited by shares are established by a memorandum association. To a full
understanding of the form and content of memorandum of association read articles 312
and 313 of the commercial code.
All Business Organizations except for case of Joint Venture shall be registered before
commencing any business activity as provided under article 100 of the commercial code.
The legal significance and effect of registration are acquisition of legal personality and
License to undertake business activities.

Partnership and Companies compared

Partnership
 Is an association of person
 No minimum capital is required
 Capital is undivided
 Members have unlimited liability
 Invariably managed by members
 Has non-perpetual existence
 Easily formed and dissolved
 Share are not easily transferable
Companies
An aggregate of capital
Minimum initial capital is required
capital is divided into shares
All members have limited liability
Managed by an independent body
Has a perpetual existence
Complex to form and difficult to dissolved
Shares are easily transferable

More or less the above points are the basic elements of comparison of partnership and
companies. Can you find some more points of comparison?

Partnerships

1. Ordinary Partnership

 It is a non-commercial business organization

 Formed by two or more partners
 Contribution could be in cash, in kind or service

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  Members have unlimited liability with a benefit of discussion(Article 235 of the
commercial Code)
 It is managed by members

2. General Partnership

 Partners have full, joint and several liability with no benefit of discussion
 All members are traders
 Managed by members
 Highly preferred by creditors due to the existence of a high protection scheme

3. Limited Partnership

 It is a combination of Ordinary Partnership and General Partnership

 It has two categories of partners: General Partner and Limited Partner-General
Partner has unlimited liability whilst Limited Partner has a limited liability
 It is managed by a General Partner. Limited Partner may not manage the Partnership
 It is preferred by both the partners and the creditors for it accommodates the interest
of both parties.
Joint Venture
 It has no legal personality
 It is a secret or clandestine Business Organization
 Has two types of partner: Active and passive member
 It is managed by a passive member
 It usually formed for a short term project work
 Members own their own share or contribution
It can easily be terminated since it does not have a legal personality

companies Limited by Shares

1. Share Companies

 It is formed by a minimum of five members either among the founders themselves or

through a public subscription
 Its capital is divided into small pieces of shares with different par value
 Share holders own their respective shares
 There are Ordinary share and Preference share, but there is no share without a voting
right
 Shares are either registered or bearer share
 Capital is highly protected by the law from being decreased to protect creditors

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  It has a perpetual existence which is independent of its members
 All share holders have a limited liability limited to their contribution
 Shares are easily transferable
 Financed through equity or debt financing
 Is managed by three Organs: Share holders, Board of Directors and Managers. Share
holders manage the company through different ordinary or extra-ordinary meetings,
Board of Directors are group of people with 5-12 members to decide on policy matters
and general issues and managers manage every daily activities of the Company. Even
Auditors have the power to interfere in the management of the Company by preparing
audit report and calling general meeting of share holders.
 It has a minimum of two Auditors
 It can also issue debentures shares

2. Private Limited Company

 Formed by two or more members

 Has a minimum Capital of 15,000 ETB
 Members are called partners
 It is an association of persons and collection of capital
 Members have a limited liability
 Capital is divided into shares
 Has no board of Directors
 Can be managed by the members
 Has a relative perpetual existence
 Cannot issue debentures
 May not do Banking or Insurance business
 Shares are easily transferable as between the members but requires majority vote to
transfer to the non-members

It is often said that a Private Limited Company is a mixture of Partnership and Company, do
you support this assertion?

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Chapter Seven: Law of Insurance, Negotiable Instruments and Banking

Law of Insurance
What is insurance? What are the significances of Insurance? What are the principles of
Insurance? What are the general categories of Insurance? What are the relevant laws that
regulate insurance Business in Ethiopia?

Insurance policy is defined as a contract whereby the Insurer insures the insured against a
risk against the payment of one or more premiums and pays a sum of money when the risk
materializes (Article 654 of the Commercial Code).

Thus, Insurance is:

A contract-Conditional contract in which the obligation of the insurer is contingent up on the

occurrence of a specified risk. Insurance contract is always in a written and special form

Creates the insurer-insured contractual relationship

The insured pays premiums and the insurer pays a fixed amount of money and sometimes
maintains or replaces the thing

Insurance is against pure future risk not for speculative risk

The main functions of Insurance are: to distribute loss, management of risk, to have a peace
of mind, for investment, for social security, to pool resource together, etc.

Fundamental Principles of Insurance are:

 Principle of Insurable Interest-the insured has to show some rights or interests over
the thing he wants to insure at the time of the contract, on the day when risk
materializes or both;
 Principles of utmost good faith-both parties need to cooperate in a good faith to
mitigate risk. The insured has to reveal all material facts that affect the risk
management and mitigate the risk or loss from being materialize, while the Insure has
to give a genuine guarantee of the risk
 Principle of Indemnity- Insurance is to compensate the insured or the beneficiary not
for profit
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  Principle of contribution-the amount of the compensation should be assessed based
on the extent of contribution of each parties to the risk
 Principle of Subrogation-the insurer has the right to claim what he paid from the
person caused a damage by representing the insured or the beneficiary

Classification of Insurance
General ClassificationUnder the Ethiopian Law
 Marine Insurance-insurance for marine Property Insurance
Navigation
 Fire Insurance Liability Insurance
 Liability Insurance-Insurance for the liability Illness and Accident Insurance
Towards 3rd party

 Life Insurance-death, Illness, accident and old age Life Insurance

Marine Insurance

When do you think Insurance contract is formed? What does Insurance through Syndicate mean?
What are the basic contents of Insurance Policy? Hint: Please refer to your class note to answer
these questions.

The Rights and Duties of the Party

Of the Insurer-to give full coverage or guarantee of the risk, pay the fixed amount of
compensation and cooperate in ut most good faith

Of the Insurer-to reveal all material facts, mitigate risk or loss and to exert ut most good faith

Negotiable Instruments

What are negotiable Instruments?

Negotiable Instruments are documents which embody enforceable right stated in terms of money
and which cannot be enforced or be transferred separately from the document itself (See Article
715 of the Commercial code).

Nature of Negotiable Instruments

-They are document which substitutes liquidated money

-Serve as a credit device

-Easily transferable or can be negotiated with

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The main purposes of negotiable instruments are for security of transaction, to facilitate trade, for
easy portability, to negotiate rights through easy transfer, to evidence claims, etc.

There are 3 main categories of Negotiable Instruments in Ethiopia (Article 715(2) of the
Commercial Code): Commercial Documents, Transferrable Securities and Documents of title to
good.

Commercial Documents are: Check, bill of exchange and Promissory Note.

Check- is the most prominent form of commercial document. There are 3 parties in check-the
drawer (the person who prepared the check), the drawee (the Bank) and the payee (the
beneficiary).Check can only be issued by the Bank. It can be transferred through mere delivery
for Bearer Check and endorsement in case of to order or specific person Check. Endorsement is
signing on the back side of the Check.

Bill of exchange is a document which is drawn by the creditor to evidence his claim. This
document should be presented to the drawee so that he can get paid. It is Transferable through
endorsement as there is no bearer bill of exchange.

Promissory Note is a document which is prepared by the debtor and given to the creditor as an
evidence of outstanding claim. There are only two parties in promissory Note, the Drawer and
the Payee. It is always paid on Maturity date not at sight or on demand.

Commercial Documents are paid at sight, on demand or on maturity date.

Transferable Securities are Negotiable Documents which bear some enforceable rights. They are
not prepared as a commercial Document. They are Shares, Insurance Policy, Bond, etc. They can
also be transferred or negotiated just like other Negotiable Instruments.

Documents of Title to Good-they are documents which show that goods are shipped or
received. Bill of Lading, Air Ticket and Warehouse Vouchers are considered as a document of
title to good.

Defenses in regard to Negotiable Instruments are: Defect in form, falsification of signature,

forgery, fraud, fundamental error and stoppage order.

Law of Banking

Banks are those financial institutions which provide banking services.

The banking services in Ethiopia are(See Article 2 of proclamation No 592/2008):

Deposit of money, transfer of money, granting of loan, issuing some Commercial Documents,
hiring of safe, depositing of transferable securities and documents, buying transferable securities
at discount, collection of debt , providing financial guarantee.

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Contracts for Banking Service are formed up on opening an account or agreeing to get other
banking services. There are two types of accounts: Saving Account and checking Account.
Saving Account always presupposes payment of interest unless agreed otherwise. Interest is not
paid on checking Account. Checking Account is opened by two or more business persons jointly
to easily transfer money between or amongst them.

Deposit can be demand or time deposit. Demand deposit allows the account holder to withdraw
money on demand while time deposit limits withdrawal to the lapse of some fixed period of
time.

Withdrawal in excess of the deposited amount is not possible in principle. But the Bank on its
own discretion may allow its outstanding and trustworthy customer to withdraw in excess as a
credit. Bank may refuse payment when it finds error, mistake or inconsistency, irregularities and
it receives as an order of bankruptcy of the account holder.

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 CHAPTER EIGHT
Employment and Labour law 
Introduction
Employment and Labour law is the body of laws which address the legal rights of, and
restrictions on, workers and their employers. As such, it mediates many aspects of the
relationship between trade unions, employers and employees. There are two broad categories of
labour law. First, collective labour law relates to the tripartite relationship between employee,
employer and union. Second, individual labour law concerns employees' rights at work and
through the contract for work. This chapter tries to give students a general insight of individual
labour relation from its formation to termination.

Sources of regulation
There are three types of legal regimes regulating employment relation in Ethiopia. These are:

1. Employment relations in private organizations and public enterprises.

2. Civil servants who are working in federal and government agencies.
3. The other covers a wide range of employees who are not covered by the above two legal
regimes and governed by independent legislations. These include military, police force,
judges, public prosecutors, higher government officials, etc.

As a matter of business law, this chapter is limited to the first group of employment relations.
The central statute regulating employment relation in the private sector in Ethiopia is the Labour
Proclamation, adopted in 2003 (Labour Proclamation No. 377/2003) and most recently amended
in 2006 (Labour (Amendment) Proclamation No. 494/2006).

Scope of legislation

The Labour Proclamation is generally applicable to employment relations based on a contract of

employment between a worker and an employer. However, it does not apply to the following
employment relations arising out of a contract of employment.1

 Upbringing, treatment, care or rehabilitation;

 Educating or training, other than as an apprentice;
 Persons holding managerial posts who are directly engaged in major managerial
functions and who give decisions within the power delegated to him/her by law or the
employer;
1
Arts.3(2) of Labour Proclamation No. 377/2003

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 Personal service for non-profit-making purposes;
 Persons such as members of the armed forces, members of the police force, workers of
state administration, judges of courts of law, prosecutors and others whose employment
relationship is governed by special laws; or
 Persons who perform an act, for consideration of payment, at his/her own business or
professional responsibility under a contract of service

Contracts of employment

Employment relation is established through a contract of employment and it shall be

deemed formed where a person (the employee) agrees, directly or indirectly, to perform
work for and under the authority of another (the employer) for a definite or indefinite
period or piece work in return for wages.

According to this article, there are four basic elements of employment relation. Let us try
to examine these elements of the definition.

1. Agreement: agreement is the basis for employment relation and this automatically
excludes forced labor from the ambit of employment relations. Hence a person cannot be
compelled to enter into an employment relation.
2. Personal performance of work: the employee is committing him/her/self to render
personal service for the benefit of the employer. The employee, as of right, cannot
delegate third parties to perform the job in his/her behalf.
3. Duration of employment:  a contract of employment could be entered into either for
definite period (for six months, for one year etc), or for indefinite period (i.e. for the life
of the company), or for a specific assignment (to unload sacks of grain from a truck).
4. Wage: The employer will be expected and required to pay wage to the employee. Hence
employment relation is not a pro bono service. On the contrary, it is a service in return for
wages. The mode of payment for wage could be in cash or in kind though ordinarily
payment is effected through cash. As regards to the interval of payment, it could be in
daily, weekly, bi-monthly, monthly etc.

Form of contract of Employment

The labour law regime in principle does not require any special form for contractual
validity. This means employment relation may be formed in many ways. It may result
from a simple oral agreement between two individuals, or it may be created by a detailed
written contract. What matters is the existence of agreement between the employer and
employee and fulfillment of other elements discussed above. A contract of employment

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 shall specify the type of employment and place of work the rate of wages, method of
calculation thereof, manner and interval of payment and duration of the contract.

If the contract is concluded in writing, according to article 6 of the labour proclamation, it shall
specify the following:

1) the name and address of the employer;

2) the name, age, address and work card number, if any, of the worker;
3) the agreement of the contracting parties; and the signature of the contracting parties

Length of employment

As regards to duration, as mentioned above in the definition, a contract of employment could be

entered into either for definite period, for indefinite period, or for a specific assignment. Unlike
marriage, which is, in principle, is a lifelong engagement; there is no as such lifelong contract of
employment. However, the Ethiopian Labor law clearly stipulates, in article 9 of the
proclamation, any contract of employment shall be deemed to have been concluded for an
indefinite period (permanently) except for the cases   provided under Article 10 of the
proclamation. The cases where contract of employment for definite period (temporary) or a
specific work is allowed are the following:

 the performance of specified piece work for which the employee is employed;
 the replacement of a worker who is temporarily absent due to leave or sickness or other
causes;
 the performance of work in the event of abnormal pressure of work;
 the performance of urgent work to prevent damage or disaster to life or property, to repair
defects or break downs in works, materials, buildings or plant of the undertaking;
 an irregular work which relates to permanent part of the work of an employer but
performed on irregular intervals;
 seasonal works which relate to the permanent part of the works of an employer but
performed only for a specified period of the year but which are regularly repeated in the
course of the years;
 an occasional work which does not form part of the permanent activity of the employer
but which is done intermittently;
 the temporary placement of a worker who has suddenly and permanently vacated from a
post having a contract of an indefinite period;

the temporary placement of a worker to fill a vacant position in the period between the study of
the A person may be employed for a probation period for the purpose of testing his suitablity to a
post in which he is expected to be assigned. When the employer and employee agree to have a
probation period, the agreement shall be made in writing and cannot exceed forty five (45)

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consecutive days (not working days). What makes probationary employment different is, during
the agreed time of probation both the employer and employee are legally entitled to terminate the
contract of employment without good cause.

Minimum working conditions

Unlike most contractual engagements where the parties to the contact are left alone to determine
the terms of their contractual relation, employment relation has its bench marks (the so called
minimum working conditions) below which the terms of the contract may not stipulate.

I. Working time

Hours of work :- Article 61 provides that normal working hours shall not exceed 8 hours a day
or 48 hours a week (Article 61). Workers are entitled to a weekly rest period of 24 non-
interrupted hours in a period of 7 days. Unless otherwise agreed, according to article 70 of the
proclamation the weekly rest should be on Sunday, but another day may be chosen for certain
services.

Any work exceeding the normal working time of 8 hours a day or 48 hours a week is overtime.
Overtime work is in principle prohibited. Overtime is only permissible for up to 2 hours a day, or
20 hours a month, or 100 hours a year, and only in the following exceptional circumstances listed
in Article 67:

 Accident, actual or threatened

 Force-majeure
 Urgent work
 Substitution of absent workers assigned on work that runs continuously without
interruption

The rate of payment for overtime work is more than the rate in the normal working hour.
The proclamation defines the overtime payment in Article 68 (1). The overtime payment
ranges from a rate of one and one quarter (1 ¼) of the ordinary hourly rate (from 6 a.m. to
10 p.m.) to two and one half (2 ½) on public holidays.

II. Paid leaves

Any worker is entitled to uninterrupted annual leave with pay. As per Article 77, the
annual leave in no case be less than14 ‘working days’, plus one working day for every
additional year of service. Article 76 forbidden to pay wages in lieu of the annual leave.

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 Sick leaves and public holidays are also items of minimum working conditions. Where a
worker is rendered incapable of work owing to sickness he shall be entitled to a sick
leave of up to six months per year. The payment for the period of sick leave is:

1) For the first one month with 100% of his wages;

2) For the next two months with 50% of his wage;

3) For the next three months without pay.

Public holidays observed under the relevant law are also non working days and at the same time
paid holidays. An employee who works on a public holiday is entitled to the double of his or her
ordinary hourly wages.

III. Maternity leave and maternity protection

Article 35 of the Constitution of Ethiopia grants the right to maternity leave with full pay. A
pregnant employee is not permitted to perform where it could be hazardous to her or the
child's health. Night work is not generally prohibited, nor shall she be assigned to overtime-
work.

Moreover she shall not be given an assignment outside her permanent place of work and
be granted time off for medical examinations.

Female employees are entitled to maternity leave, which is to start from 30 days prior to
due date of birth (pre natal), and end not less than 60 days after birth of the child (post
natal). Maternity leave is classified as paid leave. A nursing employee does not enjoy
special legal protection.

IV. Safe and Healthy working conditions

An employer shall take the necessary measure to safeguard adequately the health and
safety of the workers. (Article 92) Corresponding to the obligation of the employer a
worker is also duty bound to make proper use of all safeguards, safety devices and other
appliance furnished for the protection of his health or safety and for the protection of the
health and safety of others.

Termination of contract of employment

In Ethiopia there are three ways to terminate a contract of employment.

1) By the operation of the law,

2) Agreement between both parties

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 3) Unilateral termination or termination by either the employer or employee

Termination by the operation of the law

In some instances specifically prescribed by the law, contract of employment will be

automatically terminated. According to article 24 of the labour proclamation, a contract of
employment may be terminated by law on the following grounds:

A Expiry of the period or on the completion of the work where the contract of employment
is for a definite period or piece work;
B Death of the worker;
C Retirement of the worker in accordance with the relevant law;
D When the enterprise ceases operation permanently or due to bankruptcy or for any other
cause; or
E Where the worker is unable to work due to partial or permanent incapacity.

Termination by the agreement of both parties

The parties (employer and employee) may terminate their contract of employment by agreement.
Yet, a waiver by the worker of any of his/her rights under the law has no legal effect. In addition,
the termination by agreement is effective and binding on the worker only where it is made in
writing.

Unilateral termination

This is the case where either the employer or the employee unilaterally calls for the termination
of contract of employment. These take two forms.

1. Termination of contract of employment by the initiation of the worker (resignation)

2. Termination of contract of employment by the initiation of the employer (dismissal)

Resignation

Generally a worker can terminate the contract of employment (resign) giving prior notice of
fifteen days. The worker may also terminate his/her contract without notice for good cause
(constructive dismissal) such as in the following cases:

 Where the employer has committed against him/her any act contrary to his/her human
dignity and morals or other acts punishable under the Penal Code;
 In the case of imminent danger threatening the worker’s safety or health, the employer,
having been made aware of such danger, failed to act within the time-limit in accordance

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 with an early warning given by the competent authority or appropriate trade union or the
worker him/herself to avert the danger;
 If the employer has repeatedly failed to fulfil his/her basic obligations towards the worker
as prescribed under the LP, collective agreements, work rules or other relevant laws.

Where a worker terminates his/her contract of employment for the above reasons, he/she must
inform the employer, in writing, of the reasons for termination and the date on which the
termination is to take effect. However, the worker’s right to terminate such contract lapses after
fifteen working days from the date on which the act occurred or ceased to exist.

Dismissal

A contract of employment may only be terminated, at the employer’s initiative, where there are
grounds connected with the worker’s conduct or with objective circumstances arising out of the
worker’s ability to do his/her work or the organizational or operational requirements of the
enterprise. In this case, the dismissal may be summary dismissal (without notice) or ordinary
dismissal (with notice).

Termination of the contract of employment without notice (summary dismissal)

A contract of employment shall be terminated without notice on the following grounds only. If
any of the following things happen the employer is entitled to terminate the employment of a
worker without being required to give the employee a notice period (i.e. from one to three
months period based on the workers service period).

1. Repeated and unjustified tardiness despite warming to that effect,

2. Absence from the work without good cause for a period of five consecutive working days
or ten working days in any period of one month or 30 working days in a year,
3. Deceitful or fraudulent conduct in carrying out his duties having regard to the gracing of
the case,
4. Misappropriation of property or fund of the employer,
5. Producing a work output below the qualities and quantities agreed which, despite the
potential of the worker is persistently,
6. Responsibility for brawls or quarrels at the work place,
7. Conviction for an offence where such conviction renders him incapable for the post
which he holds,
8. Responsibility for causing damage intentionally or through gross negligence to any
property of the employer or to another property which is directly connected with the work
of the undertaking;
9. Intentionally commit in the place of   work any act which is endangers life and property

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 10. Take away property from the work place without the express authorization of the
employer
11. Report for work in a state of intoxication
12. Except for HIV/AIDS/ test, refuse to submit himself for medical examination when
required by law or by the employer for good causes.
13. Refuse to observe safety and accident prevention rules and to take the necessary safety
precautions
14. Commission of other offences stipulated in a collective agreement as grounds for
terminating a contract of employment without notice.
15. Absence from work due to a sentence of imprisonment passed against the worker for
more than 30 days;

Where an employer terminates a contract of employment because of the above reasons, he shall
give written notice specifying the reasons for and the date of termination within 30 days. The
right of the employer to terminate the contract due to the above provisions lapses after 30
working days from the date that the employer has knowledge of the ground for the termination.

B. Termination Of Contract Of Employment With Notice (ordinary dismissal)

The following are sufficient grounds for the termination of a contract of employment with notice.

1. The worker’s manifested loss of capacity to perform the work to which he has been assigned
or his lack of skill to continue his work,
2. If the worker, for reasons of health or disability, permanently, is unable to carry out his
obligations under the contract of employment,
3. The worker’s unwillingness to move to a locality to which the undertaking moves,
4. When the post of the worker is cancelled for good cause and the worker cannot be transferred
to another post.

The notice of termination by the employer shall be handed to the worker in person.  Where it is
not possible to find the worker or he refuses to receive the notice, it shall be affixed on the notice
board in the work place of the worker for ten consecutive days.

Period of Notice

Period of notice means the number of days the employer should give for the worker before the
termination of the contract. This Period of notice ranges from one to three months based on the
period of service of the worker.

1. One month in the case of a worker who has completed his probation and has a period of
service not exceeding one year,

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 2. Two months in the case of  a worker who has a period of service a above one year to nine
years,
3. Three months in the case of a worker who has a period of service of more than nine
years,
4. To months in the case of a worker who completed his probation and whose contract of
employment is terminated due to reduction of work force.

Reduction of workers

The other ground of dismissal in Ethiopia is Reduction of Workers. Reduction of workers can be
made when the following requirements are fulfilled.

1. Fall in demand for the products or services of the employment resulting in the reduction
of the volume of the work and profit of the undertaking & there by resulting in the
necessity of the reduction of the work force,
2. A decision to alter work methods or introduce new technology with a view to raise
productivity resulting in the reduction of the work force,
3. Any event which entails direct and permanent cessation of the worker’s activities in part
or in whole resulting in the necessity of a reduction of the work force.

Reduction of workforce is said to occur when the above grounds occur, and affect a number of
workers representing at least ten percent of the number of workers employed or, in the case of an
undertaking where the number of employees is 20-50 a reduction of workers affecting at least 5
employees over a continuous period of not less than 10 days can be made. In this case, the
employer in consultation with the trade union or its representative shall give priority of being
staying in job, for those workers having higher rate of productivity and best skills. In the case of
equal skill and rate of productivity, the workers to be affected first by the reduction shall be in
the following order.

 Those  having  the shortest term of service in the undertaking,

 Those who have fewer dependants,
 Those who are disabled due to an employment related injury in undertaking,
 Workers’ representatives,
 Expectant mothers

Remedies in case of unjustified dismissal

A worker who intends to challenge the validity of his or her termination must file a submission
before a regional first instance court. If the termination proves to be unlawful, the proclamation
gives the choice of remedies.  The court may:

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  Order the employer to reinstate the employee from any date not earlier than the date of
dismissal.
 Order the employer to pay compensation to the employee.

The primary remedy in respect of an unlawful termination is to order reinstatement or re-

employment. In the event that the employee does not wish to be reinstated or re-employed or the
circumstances are such that a continued employment would be either intolerable or no longer
reasonably practical and would give rise to serious difficulties, the court may award
compensation rather than reinstatement/re-employment, even in cases the worker wishes to be
reinstated.

The compensation will be paid in addition to the severance payment. There are, however, certain
limits on compensation. The compensation will be hundred and eighty times the average daily
wages and a sum equal to the remuneration for the appropriate notice period in the case of an
unlawful termination of permanent worker, and a sum equal to the wages that the worker would
have obtained until the lawful end of his contract. Compensation to be paid by the worker who
has terminated his or her contract contrary to the provisions of the Proclamation shall not exceed
fifteen days wages of the worker.

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