Business Law Module

Business Law Module-------------------------------------------------Leadstar University College
Table of Contents
Title Page
Chapter One: General Introduction to Law …………………………………………………....…4
1.1. Definition …………………………………………………………….……….…….……....4
1.2. Features of law …………………………………………………………………..….…..…..5
1.3. Functions of law …………………………………………………………………………….6
1.4. Classifications of law …………………………………………………………………….....7
Chapter Two: Law of Person/Law of Personality ……………………………………..…..…….10
2.1. Introduction …………………………………………………………………………….......10
2.2. The concept of personality ………………………………………………………….….......10
2.3. The nature of legal personality .............................................................................................11
2.4. Attributes of legal personality ………………………………………………………..…....12
2.5. Natural persons ……………………………………………………………………….…....12
2.6. End of physical (natural) personality …………………………………….…………..…….15
Chapter Three: Law of Contract (Law of Obligations)……………………………………........18
3.1. Definition of Contract ……………………………………………………..……………..19
3.2. Sources of obligations of contract ………………………………………………..………19
3.3. Formation of contract ………………………………………………………….…………20
3.4. Effect of contract …………………………………………………………………………25
3.5. Interpretation of contracts ………………………………………………………………..26
3.6. Performance of contract ………………………………………………………..…..…….27
3.7. Non-performance of contract ………………………………………………………..…...29
3.8. Variation of contract ………………………………………………………………..……31
Chapter Four: Contract of Sales (Law of Sales) …………………………………………………34
4.1. Introduction ………………………………………………………………………...…….34
4.2. Definition of contract of sale …………………………………………………...………..35
4.3. Performance of sales contract ……………………………………………………………36
4.4. Various forms of sales contract …………………………………………………………..45
4.5. Contracts allied to sale ……………………………………………………………..……46
Chapter Five: Law of Agency ………………………………………………………,…….….......50
5.1. Contract of agency …………………………………………………………………….….51
5.2. Parties to contract of agency ……………………………………………………………...51
5.3. Scope of agency ………………………………………………………………………….52
5.4. Unauthorized agency ……………………………………………………………...…..….53
5.5. Duties of the agent ………………………………………………………………………..54
5.6. Duties of the principal ……………………………………………………………………54
Chapter Six: Law of Trade and Business Organizations ………………………………..……...60
6.1. Law of trade ……………………………………….……………………………………..61
6.2. Business and unfair competition………………………………………………………….62
6.3. Law of business organizations ………………………………………………………...…63
Chapter Seven: Negotiable Instruments ……………………………………………………….…71
7.1. Definition ……………………………………………………………………………..…72
7.2. Forms of negotiable instruments ………………………………………………………...73
7.3. Commercial instruments …………………………………………………………………74
Chapter Eight: Law of Insurance ……………………………………………….……………..…79
8.1. Introduction to insurance ………………………………………………………………..79
8.2. Insurance Policy ……………………………………………………………….………...80
--------------------------------------------------------------------------------------------------------------------------------
Page 1 of 105
Undergraduate Departments of Management and Leadership Studies
COURSE INTRODUCTION
Dear distance learner! Welcome to the course ‘Business Law.’ This is a semester course
work of three (3) credit hours. The course should equip you with an in depth knowledge and
appreciation of the importance of law in business and legal management in any of your
work activities.
Business Law is a subject matter that is associated with our daily business and
organizational dealings in one way or the other. Our activities and behaviors should be
always shaped in line with the global, national, regional and local regulations, laws,
proclamations, etc. to be successful in which understanding and practicing business law as a
manager or leader is very crucial.
The purpose of this course is to provide an introduction to the concept of law, functions and
classifications of law, legal personality, contracts, contracts of sale, agency, and business
organizations. Besides, the concepts revolving around negotiable instruments and law of
insurance shall be the target of the course.
This course module is divided into eight chapters. The first chapter introduces the concept
of law in general. The second chapter deals with law of person and legal personality
differentiating natural persons from legal persons. Chapter three discusses the law of
contract or law of obligations in detail with a lot of elaborations. The fourth chapter explains
the law of sales or contract of sales with details of performance of sales contract, obligations
in sales contract, forms of sales contract, and contracts allied to sales contract. The fifth
chapter describes contracts of agency. This chapter (law of agency) discusses parties to
contract of agency, scope of agency, unauthorized agency, and duties and liabilities of
parties to contract of agency. The six chapter deals with law of trade and business
organizations with special emphasis on contextual Ethiopian business organizations. The
seventh chapter is concerned with negotiable instruments. The last chapter examines brief
--------------------------------------------------------------------------------------------------------------------------------
Page 2 of 105
concepts of law of insurance focusing on insurance policy, insurable interest and insurance
of object.
Each study chapter contains an introduction, objectives, the main content, summary, self-
test exercise, checklist and answer key for self-test exercises. You are expected to study the
materials carefully, reflect on them and do the tasks and exercises.
We wish you success in this course and hope you will find it interesting and useful. Enjoy
your study. Good luck!
Course Objectives:
By the end of this course, you will be able to:
 Explain the nature and concept of law, natural and legal person, and legal personality
 Examine contracts in general, sources of obligation in contract, forms and effects of
contract
 Describe law of sale, its performance and forms of sales contract
 Discuss the agency, parties to the contract, scope of agency and unauthorized agency
 Identify law of trade and business organizations and general features of business
organization in Ethiopia
 Describe the negotiable instruments, its forms and commercial instruments
 Explore the concept of law of insurance, insurance policy and insurable interest
--------------------------------------------------------------------------------------------------------------------------------
Page 3 of 105
CHAPTER ONE
GENERAL INTRODUCTION TO LAW
Introduction
Dear distance learners, before coming to discuss and understand business law it is logical to
know the basic concepts of law and things revolving around law. Then after, it will be easy
to understand business law and how it is differentiated and related to other laws. Therefore,
this chapter of the module describes what law is, its functions, features and classifications in
brief.
Chapter Objectives:
The objectives of this chapter are:
 To create understanding of the meaning of law and business law
 To describe the features of law
 To elucidate the functions law plays in the society
 To show the general classifications of law
1.1. Definition of Law
? Dear learner, what do you understand by the term law when you hear it in your daily life?
____________________________________________________________________
_________________________________________________________________.
There is no consensus as to the definition of law as different scholars define it in a different

ways. From among the others, the following definitions can be described.
1. Plato: Considered law as a form of social control.

2. Aristotle: Defined law as a rule of conduct.
--------------------------------------------------------------------------------------------------------------------------------
Page 4 of 105
3. Cicero: Described law as an agreement of reason and nature or the distinction

between just and unjust.
4. Sir William Blackstone: Described law as “a rule of civil conduct prescribed by the
supreme power in a state, commending what is right and prohibiting what is wrong.”
5. Holmes: Asserted law as a set of rule that allowed one to predict how a court would
resolve a particular dispute.
Probably the first written law in Ethiopia is a Fetha Negast, but people had been guided by
some kind of customary practices even before the coming into effect of the Fetha Negast.
Article 3347 of the Civil Code states:
“Unless otherwise expressly provided, all rules whether written or customary previously in
force concerning matters provided for in this code shall be replaced by this code and are
hereby repealed.”
Therefore, we can understand both the law made by lawmaker/parliament (statute law) and
customary practices put some kind of sanction on those who act contrary to it.
Dear learner, how could you generally define law on the basis of the above definitions?
? __________________________________________________________________________
__________________________________________________________________.
Generally, law is the body of official rules and regulations generally found in
constitutions and the like that is used to govern a society and control the behavior of its
members. Thus, it is backed by the coercive power of the state, which enforces the law by
means of appropriate penalties or remedies.
Business Law simply defined, on the other hand, is a law that administers certain business
relationships and transactions.
--------------------------------------------------------------------------------------------------------------------------------
Page 5 of 105
1.2. Features of Law
Dear learner, what do you think is features of law irrespective of their types?
? __________________________________________________________________________
___________________________________________________________.
The following features of make law different from some other forms of social control:
1. Law is Obligatory: Law has to be obeyed by everyone/binds everyone unless otherwise

made for special category of people.
2. Law has to be made by a competent authority/parliament: An organ making law
must be empowered with legislative power.
3. Every law is backed by sanction or has organized enforcement mechanism: There
should be a body that can enforce the laws made accordingly.
Sanction: Is punishments or fine that the law imposes if subjects of law fail to obey the
law.
4. Law is established in permanence: Laws are enacted for indefinite period of time.
5. Law has to be applicable to the people in the same situation
6. Law has to be specific, i.e. expectations of law shall be specifically shown
Example: “Every one has to do good things.” This is not specific law.
7. There shall be law enforcement institution
1.3. Functions of Law
? Dear learner, what functions do you think law serves?

__________________________________________________________________________
___________________________________________________________.
Imagine how life is difficult without law. Rights and freedoms are violated while duties and
responsibilities are not performed without law.
The functions of law to mention few include:
a. Law guide show individuals and groups should act

b. It identifies what may or may not be done, i.e. law is permissive
c. It smoothens social relationship
d. It facilitates social and business relationships
e. It enables smooth functioning of modern society
--------------------------------------------------------------------------------------------------------------------------------
Page 6 of 105
1.4. Classification of Law
Dear learner, what kinds of differentiation of law are there? Explain them on the basis of
? some criterion from your own understanding in your daily life.
__________________________________________________________________________
___________________________________________________________.
Law is classified as substantive and procedural law which can be further divided into
different areas as follows for detailed understandings.
Law
Substantive Law Procedural La w
Public Law Private Law Criminal Procedure Civil Procedure
o Constitutional law - Law of persons - Law of Evidence

o Administrative law - Law of family
o Criminal law - Law of successions
o Public International law - Law of property
o Public finance - Law of contract
- Law of Non-Contractual Liability (Tort)
- Law of agency
- Law of sales
- Law of business organizations
- Law of insurance
--------------------------------------------------------------------------------------------------------------------------------
Page 7 of 105
Checklist
Dear distance learner, some of the most important points of this chapter are given in the
table below. If you can do the task described, put a tick () mark in the box in front of the
task. If you can’t do the described task, go back and read again that section in your module
until you will be able to do.
I Can: Yes No
 Define and explain the term law
 Identify the terms law and business law
 Describe the features of law
 Explain the functions of law
 Identify and classify law
--------------------------------------------------------------------------------------------------------------------------------
Page 8 of 105
Self Check Exercise-1

Part I- Choose the best answer from the given alternatives.
1. Identify an odd statement regarding features of law.
A. Law is established in permanence
B. Law has to be applicable to the people in the same situation
C. Expectations of law should be general
D. There shall be law enforcement institution
2. Which of the following is not a function of law?

A. It is permissive
B. It smoothens social relationship
C. It facilitates social and business relationships
D. It disturbs smooth functioning of modern society
3. One of the following is correct concerning definition of law in light of different scholars
view.
A. Aristotle defined law as a rule of conduct.
B. Cicero described law as an agreement of reason and nature or the distinction
between just and unjust.
C. Sir William Blackstone described law as “a rule of civil conduct prescribed by the
supreme power in a state, commending what is right and prohibiting what is wrong.”
D. Holmes asserted law as a set of rule that allowed one to predict how a court would
resolve a particular dispute.
E. All of the above
Part II – Write Short Answers to the Following Questions.

1. Write down the features of law.
2. Define business law.
3. Describe functions of law taking practical examples in Ethiopia.
4. Discuss classifications of law, locate the position of business law in the classification
and elaborate the reason.
--------------------------------------------------------------------------------------------------------------------------------
Page 9 of 105
CHAPTER TWO
LAW OF PERSON/LEGAL PERSONALITY

2.1. Introduction
Law of person or legal personality is a law that deals with laws governing human and legal
persons. In this chapter we are going to differentiate natural persons/human beings from
legal persons or entities and how they are treated under law.
Chapter Objectives:
 To introduce concept of person and personality
 To describe attributes of legal personality
 To differentiate physical and legal person
 To elucidate the beginning and end of personality of natural/physical persons.
2.2. The Concept of Personality
? Dear learner, what is the difference between person and personality?

__________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
Persons: Are those beings capable of having right and duties/obligations.
Personality: Is the capacity to have or to hold or to enjoy (not necessarily to exercise) rights
and duties under the law.
All human beings are not capable of having rights and duties/obligations, while other non-
humans can be persons having capability of exercising rights and duties. It is only those
beings that are recognized as persons that can be parties to a legal relationship under the
--------------------------------------------------------------------------------------------------------------------------------
Page 10 of 105
Ethiopian Civil Code (hereafter called C.C.). Besides, these beings should be capable
persons to engage in exercising the legal relationships.
2.3. The Nature of Legal Personality

? Dear learner, differentiate legal person and legal personality?
__________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
Legal Persons: Are all entities capable of being right and duty bearing beings. All entities
recognized by law as capable of being parties to a legal relationship are legal persons.
Legal Personality: Is a particular device by which the law creates or recognizes units to
which it ascribes certain powers and capabilities. Such units shall possess capacities of
being parties to a legal relationship.
Legal personality is an artificial creation of law.
Any entity that is so capable is a person, whether a human being, or not, and no being that is
not capable, is a person, though he/she may be a man. Thus, a person can be a man, an
association, organization, company, corporation, cooperatives, etc.
? Dear learner, what is the difference between physical and legal person?
__________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
There are two types of persons in general. These are physical/natural persons and
moral/legal/artificial/juridical persons.
1. Physical Persons: Consists of human beings.

2. Moral/Legal/Juridical/Artificial Persons: Entities of all kinds which are recognized as
holding rights and duties in the same way as human beings granted personality.
--------------------------------------------------------------------------------------------------------------------------------
Page 11 of 105
Though slaves were regarded as mere chattels in the ancient times, it is normal to grant
personality to all human beings living within the territory of the state in modern times.
Once organizations, companies, etc are recognized by law as such, they are persons and
possess all the attributes of personality. The fact that they are considered as persons does not
exclude the fact that they act through a human agent (representative). The act of such agent,
however, is imputed to a legal person, and is not a jurisdic act of a human agent him/herself.
2.4. Attributes of Legal Personality
Dear distance learner, what do you think are attributes of legal personality?
?
__________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
Legal personality is characterized by the following attributes:
1. A legal person may sue or be sued in its own name, not in its owners for entities
2. A legal person can own and administer its own property. Property belonging to a legal person is
different from that of individual owners.
3. A legal person can enter into contracts in its own name. It is the company that is either
creditor or debtor of a third party with whom a contract is made.
4. A legal person has an obligation to pay taxes on its property and any other income. In the
same way as physical persons pay tax on his income, a legal person is also required to pay
tax on any income it derives.
2.5. Natural Persons
? Dear distance learner, what is natural persons and how do you differentiate it from legal
persons?
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
____________________________________________________.
--------------------------------------------------------------------------------------------------------------------------------
Page 12 of 105
Natural person represents human beings. In ancient time, not all human beings were
granted personality, for example, slaves were not granted personality. Today, however, all
legal systems grant personality to all human beings.
2.5.1. Beginning of Personality of Natural Persons
? Dear distance learner, when do you think personality of natural persons begin?
__________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
Article 1 of the Ethiopian Civil Code provides, “A human person is the subject of rights
from its birth to death.” Birth means a complete extrusion of the child from its mother’s
womb, whether in a natural way or by an operation.
For physical persons the beginning of legal and natural existence is simultaneous. Regarding
legal persons, however, the mere fact of birth (establishment or formation) of an association
does not accord it legal personality. Requirements like registration and publicity must be
satisfied first.
A child in the womb is not a person and can have no rights. But for some purposes, a merely
conceived baby is considered as a person. It is thought reasonable that a child who lost his
father should not be further penalized by losing any interest which he would have secured
had he been born before his father’s death.
According to Article 2 of the Ethiopian Civil Code (C.C.), “A child merely conceived is
considered as though born where its interest so requires provided it is born alive and
viable.”
--------------------------------------------------------------------------------------------------------------------------------
Page 13 of 105
This type of right is granted in the following three cumulative conditions:
1. The interest of a child must justify the grant of personality. Example; a father dies
before the birth of a child leaving behind property.
2. The child must be born alive
3. The child must be born viable.
This type of fictitious personality is granted because of the fact that inheritance devolves to
the second group in line (parents of the deceased) affecting the interest of the child in the
womb.
Besides the interest of the child, there remain two conditions: live birth and viability. In
order to be considered as a person, the baby must be born alive. As regards to viability, a
child who lives for the next fourty eight (48) hours after birth is presumed to be a person
from the moment of conception onwards.
However, the child is not viable if it encountered death before fourty eight hours, provided
that the death is encountered by the internal constitution of he child, not intentionally
made by external body. If the child encountered death intentionally by external body the
child is yet presumed viable.
2.5.1.1. Holding of Rights and Duties by Physical Persons
Unless the law declares incapable, all physical persons are capable of exercising all acts of
civil life (hold the rights and duties of personality). The principle governing the holding of
rights and duties by physical person is that, as soon as personality begins all rights and
duties under the civil law are held by an individual although the exercise of such rights can
be entrusted to other persons because of some incapacity which affects the holder.
--------------------------------------------------------------------------------------------------------------------------------
Page 14 of 105
2.6. End of Physical (Natural) Personality
Dear distance learner, when do you think personality of natural persons end and how?
? __________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
Death is the only way through which personality can be completely brought to an end (apart
from the case where death is established by the court or law as a result of procedure declared
absence, insanity, incapable, etc.)
--------------------------------------------------------------------------------------------------------------------------------
Page 15 of 105
Checklist
I Can: Yes No
 Define and explain person and personality
 Identify and differentiate natural and legal person
 Describe the attributes of legal personality
 Explain the beginning and end of personality of natural persons
 Differentiate natural and legal person
--------------------------------------------------------------------------------------------------------------------------------
Page 16 of 105
Part I – Write Short Answers to the Following Questions.
1. Differentiate person and personality.

2. Write down attributes of legal personality.
3. Differentiate natural and legal persons.
4. When is the beginning and end of personality of natural persons? Explain.
--------------------------------------------------------------------------------------------------------------------------------
Page 17 of 105
CHAPTER THREE
LAW OF CONTRACT (LAW OF OBLIGATIONS)
Introduction
Law of contract binds parties to a contract agreed up on as per the legal regulations of a
country existing at different levels; local, regional and federal regulations of a country.
Contract is an agreement made between the parties coming to into the contact which shall
only be effective if and only if it fulfills the legal requirements of a country whether the
requirement is made at local, state of federal levels. This part of this module deals with
definition of contract, sources of obligation in the law of contract, requirements to be
fulfilled in contract/law of contract, effect of law of contract, interpretation of law of
contract, performance and non-performance of laws of contract. Therefore, students are
required to understand and act in accordance with the topics covered in this chapter as
business law student.
Chapter Objectives:
 To introduce concept of legal obligations/law of contract
 To describe sources of obligation of law of contract
 To elaborate formation of contact or requirements of acceptable contract
 To elucidate effect of contract
 To elaborate interpretation, performance and non-performance of contract
--------------------------------------------------------------------------------------------------------------------------------
Page 18 of 105
3.1. Definition of Contract
Dear distance learner, define contract?

?
__________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
Contract: Is a binding agreement; it is a promise or set of promises for the breach of which
the law gives a remedy, or the performance of which the law in some way recognizes as a
duty.
Under the Ethiopian Civil Code, a contract is an agreement whereby two or more persons
as between themselves create, vary or extinguish obligations of a proprietary nature. The
substance of the definition is mutual agreement or assent, the parties create legally binding
obligations that had not existed before, or vary the existing contract or void the previous
ones. Each party to a contract is legally obliged to observe the terms of the agreement.
One is free to enter into or to refrain from entering into a contract. But, once entered into, it
is enforceable under the law.
3.2. Sources of Obligations of Contract
? Dear learner, from where do you think obligation of contract comes from?
__________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
There are the following two sources of obligation in contract; the law and the contract itself.
a. Law (Legal Obligations)
Some obligations result from the direct operation of law, that is, the law itself sometimes
imposes obligations on persons.
Example: 1. People are required by law to pay taxes on the incomes they earn.
--------------------------------------------------------------------------------------------------------------------------------
Page 19 of 105
2. There is a legal obligation of supplying maintenance to relatives by consanguinity or

affinity in the direct line or to brothers, and sisters born of the same parents.
b. Contract
In contractual obligation, it is the will of the parties that is the source of obligation. The law
only gives a sanction to the consent of the parties. The law declares that the agreement shall
be enforceable by the authority of the court, if they are of the nature that is not prohibited
and are intended to produce legal effect.
Example: Gutama sells an automobile to Kitessa. Here, Kitessa is liable to pay the price,
while Gutama is liable to deliver the car.
3.3. Formation of Contract
? Dear distance learner, what requirements do you think a valid contact should fulfill?
__________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
According to Article 1678 of the Civil Code (C.C.), no valid contract exists unless:
a. The parties are capable of contracting and give their consent sustainable at law
b. The object of a contract is sufficiently defined, and is possible and lawful
c. The contract is made in the form prescribed by law, if any
Therefore, the formation of a valid contract requires the existence of certain essential
elements. These essential elements of valid contract are:
o Consent
o Capacity
o Object, and
o Form of a contract
--------------------------------------------------------------------------------------------------------------------------------
Page 20 of 105
A. Consent
Consent: Is an agreement that is free from any defect. The freedom of a contract is
expressed in consent. It deals with the willingness of each party and their
agreement on each detail of a contract.
Consent is expressed (declared) through offer and acceptance.
Offer
Offer expresses the willingness of the offeror to enter into a contractual agreement
regarding a particular thing (subject). It may be declared in writing, orally or by using sign
(physical movement). To constitute an offer, the offeror must intend to create a legally
binding obligation.
An offer and the resulting contract must be definite and certain/should not be vague. If an
offer is indefinite or vague or if an essential provision is lacking, no contract arise from an
attempt to accept it.
An offer should be communicated verbally or in action to the offeree. If the offeree learns
the offeror’s intentions from some other source, no offer results because no offer has been
communicated.
Acceptance
Acceptance refers to the assent of the offeree to the terms of the offer. It is an evidence of
the offeree’s consent to the terms of the offer and of his/her willingness to be bound by
them. To accept an offer, the offeree must make some promise or statement or perform some
act that shows he/she agrees to the terms of the offer and is willing to enter into a contract
with the offeror.
Acceptance must be absolute and unconditional. One must accept just what is offered.
Acceptance must agree unequivocally to the terms of the offer. If the offeree changes any
terms of the offer or adds new terms, there is no acceptance because the offeree does not
agree to what was offered. This change in terms of the offer by the offeree is said to be
counter offer and thus, no contract is made unless the original offeror agrees to the terms of
counter offer made by offeree.
--------------------------------------------------------------------------------------------------------------------------------
Page 21 of 105
An offer may be accepted only by the person to whom it is directed. If anyone else attempts
to accept it, no contract with such a person arises. The acceptance must conform to any
condition expressed in the offer concerning the manner of acceptance. When the offeror
specifies that there must be a written acceptance, no contract arises when the offeree makes
an oral acceptance.
In most cases, the silence of the offeree and failure to act cannot be regarded as an
acceptance. The offeror is not permitted to frame an offer in such a way as to make the
silence and inaction of the offeree operate as an acceptance. However, an exception to
accept silence or inaction as acceptance exists in the following two conditions;
o Where there is a duty to accept, and
o Where the parties have pre-existing business relation
Termination of an Offer
Dear distance learner, how do you think an offer terminates.

? __________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
An offer may come to an end by:

 Revocation
 Lapse of time
 Rejection
 Death, disability or declaration of
 Counter offer
absence of either party
1. Revocation: An offer may be revoked (withdrawn) at any time before it is
accepted even though the offeror had expressly promised that the offer shall remain in
force for a stated period of time and that time has not yet expired, and the offeror
promised it cannot be revoked before. This revocation can be effective either when the
letter of revocation is dispatched (mailed) or the letter is received by the offeree on the
basis of the theories of dispatch and theory of reception.
--------------------------------------------------------------------------------------------------------------------------------
Page 22 of 105
The Ethiopian Civil Code Article 1692(1) supports the theory of dispatch for revocation to
be effective.
2. Lapse of Time: The offer remains active until the time limit expires if stated in the
offer. If the offer does not specify a time limit for acceptance, it will lapse after a
reasonable period of time. This reasonable period depends upon the circumstances of
each case; the nature of the subject and market.
3. Counter Offer: Any departure from, subtraction from or addition to the original
offer is counter offer and brings an end to the original offer. (Art. 1694 of C.C.)
4. Rejection: If the offeree rejects the offer and communicates his/her rejection to the
offeror the offer comes to an end though the time of offer has not expired. (Art. 1694(2) of
C.C.)
5. Death, Disability or Declaration of Absence: If either the offeror or the
offeree dies or become incapable/ insane or declared absent, the offer is automatically
terminated.
Defects in Consent (Vices of Consent)
Dear distance learner, mention defects of contract.

? __________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
In order to create a binding obligation, the consent of the contracting party must be free from
defect; otherwise it shall be invalidated. The major defects in consent are mistake, fraud and
duress (compelling force).
a. Mistake: A contract may be invalidated where a party gave his consent by mistake,
but the mistake must be decisive. (Art. 1696 of C.C). It must relate to some fundamental
elements of the contract like:
 Nature of contract or object of consent. Example: Mistake made as to contract of
sale for contract of donation which is absolutely different.
 Identity or qualification of a contracting party.
Example: If ‘A’ hires ‘B’ as his accountant for one year and ‘A’ does not know that
‘B’ had previously been convicted of breach of trust.
--------------------------------------------------------------------------------------------------------------------------------
Page 23 of 105
b. Fraud: A contract may be invalidated on the ground of fraud where a party resorts to
a deceitful practice so that the other party would not have entered into a contract had he
been deceived. Mere false statement does not result in invalidation, but false statement
can invalidate where there is a special relationship of confidence between the parties.
c. Duress: Force applied by one party or third party on another with the intention of
compelling him/her to conclude a contract.
B. Capacity
Capacity: Is concerned with possessing the faculty of giving consent. It deals with capacity
to exercise rights, not capacity to own property. Capacity is presumed; every party to a
contract is presumed to have a contractual capacity until the contrary is shown. Article 192
of the Ethiopian C.C states, “Every physical person is capable of performing acts of civil life
unless he is declared incapable by law.”
Incapacity may either be general or special.

General Incapacity: Depends on the age (minority), mental condition (insanity) or sentence
passed on persons (legal interdiction).
Special Incapacity: Results from the nationality of persons or from functions exercised by
them.
Minority
Minority refers to a person of either sex who has not attained the full age of eighteen (18)
years. Juridical acts performed by a minor in excess of his powers shall be of no effect. A
contract made by a minor can be applied for avoidance only by a minor, his representative
or heirs. A minor’s contract can be avoided by the minor at any time during minority or
within a reasonable time after becoming majority.
Avoidance of a contract only avoids a contract. On avoiding a contract, a minor must return
to the other party what he had received; return what remains if spent part of it.
However, there are certain situations where the contract of the minor is valid; these are:
1. Where the other contracting party is in good faith, and
2. Where the minor concludes a contract for his necessities
--------------------------------------------------------------------------------------------------------------------------------
Page 24 of 105
Judicial Interdiction/Insanity
This refers to the withdrawal of a person’s legal incapacity by the order of the court to
protect his interest or the interest of his presumptive heirs.
Legal Interdiction
According to Article 380 of C.C, a person interdicted by law is one from whom the law
withdraws the administration of his property as a consequence of a criminal sentence
passed on a person.
C. Object
Object refers to the obligation undertaken by the contracting parties. Contracting parties are
free to determine their obligations but their freedom is not an absolute one, i.e. it is
subjected to such restrictions and prohibitions as are provided by law.
D. Form
Contracting parties have a freedom of choosing the form of their contract unless the law
specifies a special form for certain contracts. Where a special form is expressly prescribed
by law such form shall be observed. Where a special form is prescribed by law and not
observed, there shall be no contract, but a mere draft of a contract. (Art. 1719-1720 of C.C)
There are certain contracts that always require a written form (document). These are:
Contracts relating to immovable
Contracts made with a public administration
Contracts for a long period of time (contract of guarantee and insurance)
3.4. Effect of Contract
? Dear distance learner, discuss effects of contract.

__________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
Contract is nothing, but a law for the contracting parties. Art. 1731 of the C.C. dictates,
“The provisions of a contract lawfully formed shall be binding on the parties as though they
were law.” Once determined, the obligations created by contracts are binding on the parties
as though they are legal obligations.
--------------------------------------------------------------------------------------------------------------------------------
Page 25 of 105
3.5. Interpretation of Contracts
? Dear distance learner, discuss effects of contract.

__________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
A contract is interpreted only when the provisions of the contract are not clear. According
to Article 1733 of the C.C, where the provisions of thee contract are clear, the court may not
depart from them and determine by way of interpretation the intention of the parties.
The court may not make a contract for the contracting parties under the guise of
interpretation. When the contracting parties differently interpret terms o a contract, and the
issue is brought into the court, certain principles of interpretation and contraction are
applied. These principles include the following:
1. Interpretation in accordance with good faith (Article 1732 of C.C)
Contracts shall be interpreted having regard to the loyalty and confidence which should
exist between the parties.
2. Common intention of the parties (Article 1734 of C.C)
The general conduct of the parties before and after the making of a contract shall be taken
into consideration to that effect. Secret intention that is not expressed in the contract has
no effect. The true intention of the parties is the guiding principle.
3. General terms are ignored ( Article 1735 of C.C)
If general terms are used or are included in the contract, the general terms are ignored and
effect is given to specific/limited object where it is clear to detect which the parties had in
mind.
4. Interpretation in accordance with the context (Article 1736 of C.C)
The provisions of a contract shall be interpreted through one another and each provision
shall be given the meaning required by the whole contract.
5. Positive interpretation (Article 1737 of C.C)
Provisions capable of two meanings shall be given a meaning to render them effective rather
than the meaning which would render them ineffective.
--------------------------------------------------------------------------------------------------------------------------------
Page 26 of 105
6. Interpretation in favor of the debtor (Article 1738 of C.C)

In cases of doubt, a contract shall be interpreted against the party who stipulates an
obligation and in favor of the party who assumes it.
7. Gratuitous contract (contract of donation) (Article 1739 of C.C)

The obligation assumed by a party who derives no benefit from the contract shall be
construed (interpreted) more narrowly.
3.6. Performance of Contract
? Dear distance learner, what is performance of contract and when is contract said to be
performed?
__________________________________________________________________________
__________________________________________________________________________
_______________________________________________.
Performance of contract refers to the fulfillment of the obligations undertaken by the

parties/the debtor. Performance can either be personally made by the debtor or by a third
party on behalf of the debtor. The debtor must personally perform under the following two
conditions:
1. Where a particular skill of the debtor is involved and this is essential to the creditor
2. Where it is expressly agreed by the contracting parties
In all other cases, the obligations may be carried out by a third party authorized by the
debtor, the court or the law.
Performance is made to the creditor or third party authorized by the creditor, the court or
law. But, legally incapable creditor cannot receive payment personally. Such payment shall
be not valid unless the debtor can show that the payment has benefited the creditor.
Payment made to a person unqualified (unauthorized) to receive on behalf of the creditor

shall not be valid. It only becomes valid if:
o The creditor confirms/approves it
o It has benefited the creditor
--------------------------------------------------------------------------------------------------------------------------------
Page 27 of 105
o It is made in good faith to a person who appears without doubt to be the

creditor/authorized, i.e. heir, guard.
Where there is a doubt as to who the true creditor is, the debtor may refuse to pay and
release himself by depositing the amount with the court. (Article 1744 of C.C)
The things to be delivered should be what they have agreed to give. The debtor cannot
deliver something else, something of greater or lesser value than the thing promised. The
creditor is entitled to refuse partial performance/payment. Where the obligation is to deliver
fungible things, the debtor should deliver the thing of an average quality, if not specified in
contract. If a thing of lesser quantity is delivered, the creditor must accept, and
compensated for the difference.
If the creditor assumes the thing is not of a quality provided in the contract, he/she must
show his/her interest in exactly receiving quality and quantity specified. However, if the
quality of the thing is described in advance in contract, the creditor can reject the thing
without showing special interest.
1.2.1. Place of Performance
If determined by the parties in contract, their agreement is respected. Where no place has
been agreed, performance shall take place at the place where the debtor had his normal
residence at the time of contract. Exceptionally, but, performance in respect of a definite
thing shall be made at the place where such thing was at the time of contract, if not
agreed.
1.2.2. Time of Performance

Where no agreement is made, performance shall be made forthwith (immediately). It can
also be made as soon as the other party required (upon demand).
There are, however, two situations where the debtor or creditor can refuse to perform:
1. Where the party has clearly shown that he will not perform/anticipatory breach of
contract
2. Where the insolvency of the other party has been established by court. (Article 1775)
Unless otherwise agreed, the cost of non-performance is to be met by the debtor.
--------------------------------------------------------------------------------------------------------------------------------
Page 28 of 105
1.2.3. Transfer of Risk

The debtor bound to deliver a thing shall bear a risk of loss/damage to the thing until
delivery is made as per the contract. But, where the creditor is in default for not taking over
the thing the risk transfers to the creditor though the thing may not have been delivered.
3.7. Non- Performance of Contract
? Dear distance learner, what is non-performance of contract and when is it said to be

contract is not performed?
__________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
Non-performance is failure to carryout obligations as agreed. This includes partial or total

failure or improper performance. When non-performance occurs the creditor is given legal
remedies.
Under the Ethiopian law, the other party (creditor) may according to the circumstances:
 Demand specific performance

 Require the cancellation of a contract
 Cancel the contract unilaterally
 Require damages caused to him by non-performance be made good
Before asserting his rights arising from non-performance, the creditor must put the debtor
in default by giving him notice (call attention to the fact that the obligations are due).
Notification of default has four functions:
1. In obligations to give, it puts the risk of loss/damage to a thing on the debtor

2. In obligations to pay money, it begins the calculation of interest for delay
3. It transfers the risk related to force majeure to the debtor, which could make it
partially liable in normal condition
4. It begins calculation of damages for delay, which is not possible without notice
According to Article 1775 of the C.C, the creditor can exercise his right without giving
notice where:
o The obligation to refrain from certain acts

o There has been a time stipulated for performance and such time is expired
--------------------------------------------------------------------------------------------------------------------------------
Page 29 of 105
o The debtor has declared in writing that he/she would not perform his/her obligations/
anticipatory breach of contract
o There has been an agreement to the effect that there will not be any notice
3.7.1. Remedies for Breach of Contract
1. Specific (Forced) Performance (Article 1776 of C.C)
This is a legal remedy whereby a creditor requests a court to force the debtor to perform.
Article 1776 of C.C states, specific performance of a contract shall be ordered unless it is of
a special interest to the creditor and the contract can be enforced without affecting the
personal liberty of the debtor.
The creditor is authorized to have the obligation performed at the expense of the debtor or to
have destroyed the thing that the debtor has contracted in violation of their agreement. In
relation to obligation of fungible things, the creditor may be authorized to purchase at the
debtor’s expense the things from a market.
2. Cancellation of Contract (Article 1784 of C.C)
This may be made by the decision of the court or unilaterally. The non-performance,
however, must be of some importance before it should result in cancellation of a contract.
3. Damages (Monetary Compensation)
This is meant to re-establish the equilibrium that was upset by non-performance to bring
the parties to the positions where they would have been had the contract been performed.
Monitory compensation is only awarded where non-performance has caused the debtor to
suffer some economic loss. Damages are always equal to the loss suffered, not greater than
the loss. It may be awarded independently of other remedies or together with.
3.8. Variation of Contract
? Dear learner, who varies contract and in what conditions?

__________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
--------------------------------------------------------------------------------------------------------------------------------
Page 30 of 105
A court may not vary a contract or alter its terms on the grounds of equity except in such
cases as are expressly provided by law. (Article 1763 of C.C) However, there may be cases
where the court may be entitled to alter the terms of the contract. Example; Article 2219 of
C.C states a court may reduce the remuneration fixed in the contract where it appears
excessive and out of proportion.
A contract shall remain in force even if the conditions of its performance have changed and
the obligations assumed by a party have become onerous/difficult than he foresaw. (Article
1764 of C.C) The effect of such changes may be regulated by the parties, not by the court.
The parties may provide for such possible changes, in the contract, or in a new agreement; if
not, the court may not vary a contract. There is another condition where the matter may be
referred to arbitration by a third party.
Besides the provisions of Article 2219 and 2635, there are other two conditions where the
court can vary a contract:
a) Special relationship exists between the contracting parties (Article 1766)
The court may vary a contract where parties of special relation like family and friends do
not agree in relationship giving rise to special confidence exist. The concern of court is
family cohesion or interest of friendship.
b) Contract with a public administration (Article 1767)
This occurs where the circumstances in which the contract was made have changed through
an official decision/government decision by which the obligations assumed become
onerous/ difficult/ impossible.
--------------------------------------------------------------------------------------------------------------------------------
Page 31 of 105
Checklist
I Can: Yes No
 Define and explain concept of contract and sources of

obligation in the law of contract
 Identify and explain requirements of formation of contract
 Describe the effect of contract
 Elucidate interpretation of contract
 Explain performance and non-performance of contract
--------------------------------------------------------------------------------------------------------------------------------
Page 32 of 105
1. Define contract.
2. Write down sources of obligations in law of contract.
3. Mention requirements of valid contract.
4. Discuss effect of contract.
5. Elaborate performance and non-performance of contract.
--------------------------------------------------------------------------------------------------------------------------------
Page 33 of 105
CHAPTER FOUR
CONTRACT OF SALES (LAW OF SALES)
4.1. Introduction
Law of sales or contract of sales deals with contracts made between buyer and seller in
which the seller undertakes to provide a thing to the buyer, who pays a sum amount of
money for the thing provided to him/her. Chapter four of this module covers definition of
sales contract, performance of sales contract, obligations of sales contracting parties, forms
of sales contract and contracts allied to sales.
Chapter Objectives:
 To define sales contract
 To describe performance of sales contract
 To elaborate obligations of sales contracting parties
 To elucidate forms of sales contract
 To elaborate contracts allied to sales
--------------------------------------------------------------------------------------------------------------------------------
Page 34 of 105
4.2. Definition of Contract of Sale
? Dear distance learner, what do you think is sales contract and how is it related to general
contract?
__________________________________________________________________________
__________________________________________________________________________
_____________________________________________________________________.
Contract of sale: Is a contract whereby one of the parties, the seller, undertakes to deliver a
thing and transfer its ownership to another party, a buyer in consideration of a price
expressed in money which the buyer undertakes to pay him (Article 2266 of C.C).
Essential requirements/elements of a valid contract must be met in sales contract.
The basic elements of this definition include:
1. Parties: In contract of sale there must at least be two parties (physical or juridical
persons).
2. Consideration: A significant determinant is price expressed in money. Price

distinguishes contract of sale from barter.
3. Things (Goods): Is a subject matter of sales contract. It includes corporeal chattels or

incorporeal movables and the intrinsic/basic parts of immovable which can be
separated from corporeal immovable.
Corporeal chattels: Thins with material existence and can be moved by man without
loosing their individual character.
Parts of immovable: Intrinsic elements of immovable such as trees, crops on land,

materials of buildings, spare parts of buildings, etc.
Claims and other incorporeal rights embodied in securities to bearer and natural forces of
economic value like electricity are included under corporeal movable.
--------------------------------------------------------------------------------------------------------------------------------
Page 35 of 105
The provisions of sales contract do not govern the transfer of the following:
a) Money: Money cannot be sold or bought for money, but is exchanged.

b) Chose in Action: Are intangible things (a right of legal action against another), are
subject of contracts in general, not sales contract.
c) Immovable Things: Includes land and buildings. Sales relates only to movables and
intrinsic parts of immovable.
Kinds of Things
Things /subjects of sales contract may be:
 An existing thing
 A future thing, i.e. to be manufactured in the future, and
 A thing belonging to a third party, i.e. sale by authorized third person, not by owner.
A distinction is made between sale on delivery and contract of service.
Example: The Ministry of National Defense concludes two contracts with ABC Shoe
Manufacturing Company. In the first contract, the company undertakes to
provide itself with leather for manufacture and deliver the required pairs of
shoes. (this is sales contract). In the second contract, it is the Ministry of
National Defense that provides leather and ABC Shoe Manufacturing Company
delivers a pairs of shoes from the leather provided by Ministry of National
Defense. (this is contract for service in which ABC Company is paid only for the
service)
4.3. Performance of Sales Contract
? Dear distance learner, 1. How do you think is sales contract performed?

__________________________________________________________________________
_______________________________________________________________________.
2. List the obligations of seller and buyer and contract of sales.
__________________________________________________________________________
_________________________________________________________________.
--------------------------------------------------------------------------------------------------------------------------------
Page 36 of 105
4.3.1. Obligations of the Seller
1. Obligation to deliver the thing
Delivery: Consists of the handling over a thing and its accessories in accordance with a
contract.
Accessories: Anything which the possessor or owner of a thing has permanently
destined/meant for the use of such thing.
The seller shall deliver the thing to the buyer in accordance with the provisions of the
contract and of the Civil Code. If the parties agreed the mode of delivery, then it is carried
out accordingly. If there is any mandatory provision of the Civil Code relating to delivery
that should be complied with.
Modes of Delivery
a) Direct delivery: Where the thing is directly handed over to the buyer. The thing will be
under the physical control of the buyer.
b) Delivery of a document representing the thing: Once the buyer or his agent is in
possession of the document representing the thing he can sell it as though it were the
thing itself.
c) Constructive possession: Is when the seller may agree to hold the thing on behalf of the
buyer after delivery. It takes place after the thing has been delivered to the buyer, because
of storage problem, etc, but considered as delivered.
d) Delivery to a third party or an agent: Is where delivery is made to a third party
authorized by the creditor or court or law.
e) Delivery to a carrier: Is delivery to a carrier like airline, shipping line, railway and truck
of a thing under voyage is considered to be livery to the buyer.
2. Obligation to transfer ownership
Ownership may be transferred by virtue of law or in pursuance of agreement entered in to

by the parties. There are two ways of transferring ownership: the law and the contract
according to the Ethiopian Civil Code.
--------------------------------------------------------------------------------------------------------------------------------
Page 37 of 105
 The case where ownership is transferred by the operation of law is succession in which
the rights and obligations of the deceased/died shall pass to the heirs.
 The cases where ownership may be transferred by the agreement of the parties are the
contract of sale (Article 2266) and the contract of donation (Article 2427).
The ownership of corporeal movable is transferred to the purchaser or legatee at the time
when he takes the possession of the thing. Not only conclusion of a contract required, but
also the thing must be handed over to the purchaser for corporeal movables. Some
special corporeal chattels like motor vehicles, airplanes, ships, TV sets, etc, however,
require registration.
Ownership of immovable by contract or will also requires entry in the registers of

immovable property (Article 1185 of C.C). One who does not have a vital title over a thing
cannot transfer it to another person. If the title of the transferor is defective, the title of the
transferee also becomes defective.
However, a party who enters into a contract and consequently comes into possession of a
thing sold to him in good faith is deemed to have acquired ownership title by virtue of a
law (Article 1161 and 1184). His rights shall not be affected by the fact that the person with
whom he contracted had no valid title.
The elements indicated under Article 1161 should be met in order to recognize that the
buyer has acquired ownership title by law. These elements are:
o Contract for consideration
o Intent to acquire ownership
o Good faith on the part of the buyer (without knowing the fact that the seller is not the
owner)
o Possession
But, discovery of the fact that, the possessor knowingly acquired the thing from a person
who was not entitled to transfer the ownership shall be of no effect where such discovery
occurs after he entered into possession.
--------------------------------------------------------------------------------------------------------------------------------
Page 38 of 105
Cases Where Good Faith Cannot Serve as Defense

? Dear learner, in what conditions does good faith cannot serve as defense?
__________________________________________________________________________
__________________________________________________________________________
_________________________________________________________________.
There are certain cases where good faith cannot serve as a defense. These include:
1. Certain movable things like motor vehicles, airplanes, ships, TV sets, etc are subject
to registration. The buyer is required to check by law that the person with whom he
contracts has a valid title by going to the appropriate registry.
2. Public domain (property): Property forming part of public domain may not be
acquired by possession in good faith.
Example: A book borrowed from Ambo University by Mr. Sandaba and sold to Mr.
Kuma in good faith.
3. Stolen property: A person who has bought a stolen thing in good faith cannot
acquire the ownership of thing (Article 1165of C.C). Here, the right owner (original
legal owner) can reclaim his/her stolen thing within three years from the time when
the theft occurred. Likewise, the law grants the buyer a right to be reimbursed with
the price he paid for the thing in market overt or at public auction/sale.
Warranty
Warranty: Is a guaranty made by the seller with respect to the goods they sell. Guarantee
is categorized as express and implied guarantee.
1. Express Warranty
This type of warranty refers to an affirmation of a fact or a promise made by the seller to
the buyer concerning the nature of goods sold. A promise of this sort becomes the basis for
the contract; i.e. the buyer has purchased the goods on a reasonable assumption that the
goods were as stated by the seller. It usually takes place in the form of a written or oral
statement but may sometimes result from the seller’s conduct. No particular language or
conduct is required as long as the seller represents facts to the buyer to induce him/her to
buy the goods. It is even not necessary to use the term ‘warranty.’
--------------------------------------------------------------------------------------------------------------------------------
Page 39 of 105
Section 2-313 of the Uniform Commercial Code (UCC) mentions three different ways in
which the seller creates an express warranty:
a) Any affirmation of a fact/promise that relates to the goods creates that the goods will
match the fact or promise
b) Any description of the goods creates the fact that the goods will match the
description
c) Any sample or model of the goods creates the fact that it will conform to the sample
or model
The seller also needs to be careful in advertising. Advertisements that depict a product as
having certain characteristics may very well be treated as an affirmation of a fact and thus,
it is an express warranty. However, exaggeration made by the seller which is obvious to the
buyer shall not form warranty, but a mere opinion.
2. Implied Warranty in General

This type of warranty is imposed by the operation of the law, not from the seller’s promise.
The law requires that the seller provides certain minimum standard of quality and
performance even if there made no explicit promises.
Implied warranty includes:
1. Warranty of title: Ensures the seller has the right to sell and is the owner and the
ownership transferred is good.
2. Warranty against encumbrances: Expresses every seller normally warrants that the
goods shall be delivered free of liens (legal claim by others). This is not a warranty that
the goods are free of encumbrances at the time of sale, but that they shall be free at the
time of delivery or then after.
3. Warranty of fitness for a particular purpose: If the buyer relies on the skill and
judgment of the seller in selecting the goods, the seller impliedly warrants that the goods
delivered fits reasonably for the indicated purpose.
4. Warranty against infringement: There should be no third party who has a copy right,
patent or similar legal protection on the item, unless of course, prior permission to use
has been obtained.
--------------------------------------------------------------------------------------------------------------------------------
Page 40 of 105
5. Warranty of merchantability: When a merchant makes a sale of a good customarily dealt

with, the implied warranty is that the goods are merchantable, i.e. as marketable or
usable as such goods normally are.
Implied Warranty under the Ethiopian Law
Article 22 82 of the C.C of Ethiopia, makes it clear that the seller warrants the buyer against
any total or partial dispossession of the thing sold and delivered. Besides, the seller shall
warranty the buyer that the thing sold conforms to the contract and is not affected by
defects.
Under Article 2282 of the same code, it is provided that the non-conformity to contract
exists, when the seller:
a) Delivers to the buyer only part of the thing sold or greater or lesser quantity than he
had undertaken in the contract to deliver.
b) Delivers a different thing from what is provided in the contract or a thing of a
different species
When the seller delivers a greater quantity, the buyer may refuse taking delivery of a thing
in excess or may take the whole thing delivered thereby assuming additional price. The
warranty against defect in the thing becomes effective where the thing does not possess a
quality for its normal use or quality required for a commercial exploitation.
Duties of the Buyer with Respect to Warranty
1. Duty to examine the thing
According to Article 2324 of C.C, the risk of loss or damage to the thing is transferred to the
buyer from the day when the thing has been delivered to him in accordance with the
provisions of the contract. So, the buyer must examine the thing at the time of delivery. Not
only examining, the examination has to be made in the presence of the seller or
representative of the seller.
2. The buyer must notify any defect discovered to the seller
--------------------------------------------------------------------------------------------------------------------------------
Page 41 of 105
Remedies for Defects and Non-Conformity
? Dear learner, what are the remedies of defects and non-conformity?

__________________________________________________________________________
__________________________________________________________________________
_________________________________________________________________.
Period for Suing on a Warranty

The buyer shall, under the pain of losing his right, bring proceedings on a warranty against
a defect within one year from having given notice to the seller, unless the seller intentionally
misled him (Article 2298(1) of C.C). But, the buyer has to put the seller in default before
exercising this right.
The buyer can confine himself to pay a price proportionate to the value of a thing partially
delivered. If the seller delivered a different thing (whether a specific thing or fungible), the
buyer may:
a) Demand specific performance (Article 2329 of C.C)
b) Require the cancellation of a contract (Article 1698, 1699 and 1745 of C.C)
c) Cancel the contract unilaterally
d) Demand damages be made good (Article 2360)
Reasons for Cancellation of Contracts

? Dear distance learner, mention and describe reasons of cancellation of contracts of
sales from the part of the buyer and seller.
__________________________________________________________________________
____________________________________________________________.
Reasons for Cancellation by the Buyer

A buyer may require a court to cancel a contract or may unilaterally cancel it. A contract is
cancelled by the order of the court if:
a) The compulsory date for delivery had expired
--------------------------------------------------------------------------------------------------------------------------------
Page 42 of 105
b) The whole ownership is not transferred to the buyer because of the exercise of right
on the thing by a third party, and
c) The thing is affected by a defect against which the seller warranted the buyer
Reasons for Cancellation by the Seller

The seller can require canceling the contract where:
a) Failures to pay the purchase price by the buyer occurs
b) The buyer fails to take delivery of the thing as per the contract and default given
Reasons for Cancellation by Both Parties

Occurs when:
a) Impossibility of performance occurs by the other party
b) Anticipatory breach of contract occurs
c) Non-performance in successive deliveries occurs, i.e. if previous delivery is
defective there is a justification that the future delivery will also be defective
Effects of Cancellation of Contract of Sale
Effects of cancellation of contract of sells include:

1. The parties are released from their obligations under the contract
2. Claim for restitution (restore) where obligation in whole or part is performed for
what is supplied including the expenses incurred by the seller
3. The buyer loses his right if he is unable to restitute the thing because he has
damaged the thing or it has perished because of the act of the buyer
4. Expenses; the person required to make restitution of the thing shall be entitled to
reimbursement of expenses he has incurred in preventing deterioration of the thing
(Article 2171 of C.C)
Other Obligations of the Seller

In addition to the above obligations, the seller has the following obligations of:
a) Handing over the documents to the buyer where it is customary to hand over it (Article
2301)
b) Giving information regarding insurance of the thing sold (Article 2303)
--------------------------------------------------------------------------------------------------------------------------------
Page 43 of 105
4.2.2. Obligations of the Buyer

1. Obligation to pay the price
Consideration in sales contract is expressed in terms of money. There are the following ways of
ascertaining prices:
a. Price fixed by the contract d. Current price of the market
b. Price valued by a third party e. Price at which the seller normally sales
c. Price fixed by weight
The obligation of a buyer to pay a price includes the obligation to take any step provided by the
contract or by custom to arrange for or guarantee the payment of the price. The buyer may be
compelled to accept a bill of exchange to open a credit account, to provide a bank security or
otherwise.
2. Obligation to take delivery
The buyer is required to take such steps as are necessary to enable the seller to carry out his
obligation to deliver the thing. Besides, the buyer is bound by any other obligation imposed upon him
by the contract of sale and law (Article 2303(2)).
4.2.3. Common Obligations of the Buyer and Seller

1. Covering Expenses
Expense of a contract and payment are borne by the buyer (Articles 2314 and 2315 respectively).
However, if the seller has changed his address or place of business after making the contract, the
seller bears the expense.
Expense of delivery is borne by the seller (Article 2316). Expenses of delivery include the cost of
counting, measuring and weighing the thing. Any expense after delivery is borne by the buyer (Article
2317).
2. Obligation to preserve the thing
The seller must preserve the thing where the buyer is late in taking delivery. Here, the cost of
preservation is borne by the buyer. Besides, the buyer bears the risk of loss or damage after being put
in default. The buyer is required to preserve the thing when he intends to return the thing (after
delivery) on the ground of non-conformity or defect (Article 2321).
--------------------------------------------------------------------------------------------------------------------------------
Page 44 of 105
3. Obligation of bearing risk

The seller bears the risk of loss or damage before delivery is made as per a contract. The risk transfers
to the buyer after the thing is delivered to him or when the buyer fails to take delivery and put in
default.
4.3. Various Forms of Sales Contract
Dear learner, elucidate the various forms of sales contract.

? 5. ________________________________________________________________________
________________________________________________________________________
____________________.
1. Sale of Cattle and Other Living Animals

The seller of cattle and other living animal guarantees to the buyer that the animal sold is free
from any contagious disease. The guarantee becomes effective on delivery of the animal sold.
2. Sale by Sample or Model
If goods are purchased by description or by sample, there is an implied warranty that the goods
will correspond to the description or to the sample.
3. Sale on Trial or on Approval
Title in a sale “on trial” or “on approval” does not pass to the buyer until the buyer has actually
signified his approval by his words or conduct and has kept the thing beyond the time fixed, or if
no time was fixed, beyond a reasonable time.
4. Sale by Installments
When goods are sold on installment basis, possession of the thing is transferred to the buyer, but
title remains with the seller as security until full purchase price has been paid. Title does not pass
to the purchaser until the last installment is paid.
5. Sale With Right of Redemption
The seller may reserve to himself the right to redeem within a given period of time the thing
which he has sold to the buyer. The period for exercising the right of redemption may not exceed
two years. If a shorter period has been fixed in the contract, the shorter period becomes operative
(Article 2391 of C.C).
--------------------------------------------------------------------------------------------------------------------------------
Page 45 of 105
Sale of Redemption: Is a sale when the buyer receives the goods, the title and risk of loss pass to
the buyer, as do all incidents of ownership. Here, the buyer has the option of returning the thing
instead of paying the price. If this is done, the returned thing again becomes the property of the
seller.
6. Sale with Ownership Reserved
The seller may reserve to himself the ownership of the thing until the payment of the price. Here,
possession may pass but ownership is reserved by the seller. The risk shall be born by the buyer
from the time when the thing is delivered to him.
7. Cash Sale
In cash on sale, the ownership as well as the goods sold is exchanged for a payment made at the
same time. No portion of the deal is left to be completed later on.
8. Cash on Delivery (C.O.D) Sales
The uniform sales act provides that the title to the goods in C.O.D. sales passes to the buyer
when the goods are delivered to a common carrier.
9. Free on Board Shipping (F.O.B) Sales
When goods are sold in F.O.B, title passes to the buyer when the goods are delivered to the
common carrier at the shipping point.
10. Sale by Auction
Auction: Is a sale to the highest bidder. Auction sale are “with reserve” unless explicitly
announced in advance to be without reserve.
11. Sale on Credit
Sale on credit refers to a sale where payment for goods is to be made at a later date. The fact that
a sale is made on credit does not affect the passing of the title or risk of loss.
4.4. Contracts Allied to Sale
? Dear learner, what are contracts allied to sales contract and attempt to describe them as
much as you can?
______________________________________________________________________________
_____________________________________________________.
--------------------------------------------------------------------------------------------------------------------------------
Page 46 of 105
1. Barter Contract
When title to a corporeal movable is given in return for another movable, a transaction called
“barter” results. Consideration of a price is paid in goods instead of money. Title to the goods
passes to the other party when the goods are delivered.
2. Transfer of Incorporeal Rights
Incorporeal Rights: Are intangible property like stocks, bonds, copy rights, patents, trade marks,
accounts receivables, etc.
Article 2411 provides that the provisions applicable to sales apply where a person transfers for
consideration an incorporeal right. But, this does not affect the rules of special law providing to
the contrary.
3. Hiring Sale
Hire sale: Is a contract whereby the parties agree that the tenant of the thing will become the
owner after payment of a given number of installments. Thus, provisions of sales contract apply
where the parties have described their contract as one of hiring a thing (Article 2412 of C.C.).
Here, the risk of loss is borne by the tenant from the time when the thing has been delivered to
him.
4. Contract of Supplies
Contract of supplies refers to a contract whereby a party undertakes for a price to make in favor
of the other party periodical or continuous deliveries of a thing (Article 2416 of C.C.). Where
the supplies are to be made periodically, the price for each delivery shall be fixed in accordance
with the provisions of sales contract.
--------------------------------------------------------------------------------------------------------------------------------
Page 47 of 105
Checklist
Dear distance learner, some of the most important points of this chapter are given in the table
below. If you can do the task described, put a tick () mark in the box in front of the task. If you
can’t do the described task, go back and read again that section in your module until you will be
able to do.
I Can: Yes No
 Define and explain sales contract
 Identify and explain performances of sales contract
 Describe obligations of seller, buyer and common obligations

of both in performance of sales contract
 Elucidate reasons for cancellation of contracts of sales
 Explain various forms of sales contract
 Describe contracts allied to sale
--------------------------------------------------------------------------------------------------------------------------------
Page 48 of 105
1. Define contract of sale.

2. Describe common obligations of buyer and seller in performance of sales contract.
3. Write down and explain various forms of sales contract.
4. Mention and brief contracts allied to sale.
--------------------------------------------------------------------------------------------------------------------------------
Page 49 of 105
CHAPTER FIVE
THE LAW OF AGENCY
Introduction
Agency is the way a person does legally binding act by the instrumentality of another person.
There are two sources of agency: the law and contract (Art 2179 of C.C). The law authorizes
parents to represent their manor children. The power of parents to represent their minor children
is the result of the operation of law. On the other hand, the relationship of agency may be created
by contracting parties through contract.
The theme of this chapter is to discuss the definition of agency, parties to contracts of agency,
scope of agency, unauthorized agency, and duties of agent, principal, and liabilities of the agent,
principal and joint liabilities of both agent and principal. Last, this chapter of the module
discusses termination of agency.
Chapter Objectives:
 To define and describe contract of agency
 To describe parties to contract of agency
 To elaborate scope of agency
 To elucidate concept of unauthorized agency
 To elaborate duties and liabilities of agents and principals
 To describe termination of contract of agency
--------------------------------------------------------------------------------------------------------------------------------
Page 50 of 105
5.1. Contract of Agency
? Dear learner, define contract of agency?

______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
A relationship of agency is created by a contract when a principal and an agent that such
relationship shall exist between them.
Article 2199 C.C, defines agency as a contact whereby a person, the agent, agrees with another
person, the principal to represent him and to perform one or several legally binding acts.
As agency is a contract, the essential elements of valid contract like consent, capacity, object and
form must be there.
5.2. Parties to the Contract of Agency
? Dear learner, who are the parties to contract of agency?

______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
Three persons are involved in the contract of agency. These are:
1. Agent: A person who makes contracts for and on behalf of another person.
2. Principal: Is a person who authorizes the agent to represent him and to act in his name.
3. Third party: A person who enters into a contract with the agent.
Thought three persons are involved, only two of them are contracting parties. The agent is not a
contracting party because he simply serves as a connecting link without assuming any obligation
--------------------------------------------------------------------------------------------------------------------------------
Page 51 of 105
personally. It is the principal who is liable to third party for the acts of the agent when such
agent is acting within the authority conferred.
5.3. Scope of Agency
? Dear distance learner, what do you think is scope of contract of agency?

______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
Scope of agency may be expressly fixed in the contract. Where not expressly fixed, the scope
shall be determined according to the nature of transaction to which it relates (Article 2202(1)).
The scope of agency is either special or general.
5.3.1. General Agent
General agent is authorized to transact all of the principal’s business of a particular kind or all
of the principal’s business at a given place.
According to Article 2203 of the C.C, agency expressed in general terms shall only confer upon
the agent authority to perform acts of management. Article 2204 defines acts of management as
acts done for the preservation or maintenance of property, leases for terms not exceeding three
years, the collection of debts, the investment of income, and the discharging of debts.
Moreover, the sale of crops, goods intended to be sold, or the sale of perishable commodities
shall be deemed as acts of management (Article 2204 (2)) of C.C).
5.3.2. Special Agent
Special agent is appointed to do some specific act or acts or to transact certain business affairs.
The authority of special agent is much narrower in scope than general agent. It required where
the agent is called upon to perform acts other than acts of management.
--------------------------------------------------------------------------------------------------------------------------------
Page 52 of 105
An act performed by an agent outside the scope of his authority shall not bind the principal
unless he ratifies it, or in accordance with the principle governing unauthorized agency (Article
2206 of C.C).
5.4. Unauthorized Agency
? Dear distance learner, define unauthorized agency and its relation to contract of agency?
______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
Unauthorized agency occurs when a person who has no authority to do so undertakes with full
knowledge of the facts to manage another person’s affairs without having been appointed an
agent (Article 2257 of C.C).
Though, one may manage another person’s affairs without being authorized, the management
cannot be undertaken against the will of the principal. If the act is found to be against the will
of the principal, provisions relating to unlawful enrichment and those applying to extra-
contractual liability shall apply (Article 2258 of C.C).
Where the principal’s interest required that the management be undertaken, the principal shall:
o Ratify the acts done by the acting person in his name

o Indemnify the acting person for all liabilities he personally undertook
o Reimburse him the expenses incurred in his interest
o Compensate him for any damage he suffered in connection with the management and not
due to his fault (Article 2264 of C.C).
Expenses incurred by the acting person shall produce interest as from the day they were made.
Where the principal is bound by law to ratify the transaction or he in fact ratifies it, the
provisions governing agency shall apply (Article 2265 of C.C).
--------------------------------------------------------------------------------------------------------------------------------
Page 53 of 105
5.5. Duties of the Agent
? Dear learner, what are the duties of agent in contract of agency?

______________________________________________________________________________
_____________________________________________________________.
The agent has the following duties:
1. The agent shall act with the strictest good faith towards the principal
2. The agent shall act in the exclusive interest of the principal, and may not, without the
knowledge of the principal, derive any benefit from any transaction into which he enters in
pursuance of his authority
3. The agent must promptly notify the principal of the receipt of the money and must make an
accounting
4. The agent is required to exercise the degree of care and skill that reasonably prudent person
would use in a similar situation
5. The agent shall carry out the agency in person unless he was authorized by the principal or
when unforeseen circumstance prevent him from carrying out agency and he is unable to
inform the principal of these circumstances (Article 2215 of C.C).
The relationship between the principal and substituted agent shall be as though the substituted
agent had received authority to act as an agent directly from the principal.
The agent shall be liable for the acts of any person whom he appointed without authorization as
his substitute as if they were his own.
5.6. Duties of the Principal
? Dear learner, what are the duties of the principal in contract of agency?
______________________________________________________________________________
_____________________________________________________________.
--------------------------------------------------------------------------------------------------------------------------------
Page 54 of 105
Include:
1. The principal has to make contractual remuneration fixed in the contract, or remuneration
fixed by the court, if not stated in contract
2. The principal shall reimburse the expenses incurred by the agent (Article 2221 of C.C)
3. The principal shall indemnify the agent any losses or damages sustained in executing any authorized
lawful act, i.e. the agent is entitled to have the loss made good
However, the loss must result directly from the execution of an authority granted (Article 2222 (2)).
5.7. The Liabilities of the Principal
? Dear learner, what are the liabilities of principal in contract of agency?

______________________________________________________________________________
_____________________________________________________________.
As long as the agent acts within the scope of the authority given to him, the principal is liable to
third parties for performance of any contract made in the name of the principal (Article 2189 of
C.C).
An act performed by an agent outside the scope of his authority shall not bind the principal
unless he ratifies it.
If fraudulent acts are committed by an agent who is acting within the scope of the authority
granted, the principal is liable to a third party.
5.8. The Liabilities of the Agent
? Dear learner, what are the liabilities of agent in contract of agency?

______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________.
--------------------------------------------------------------------------------------------------------------------------------
Page 55 of 105
The agent may be personally liable to third parties:
1. If he acts without authority granted, and the principal repudiate than ratifying the acts
performed by the agent
2. For committing wrong acts whether or not within the scope of employment
5.9. Joint Liabilities of Both the Principal and the Agent
? Dear learner, describe the common liabilities of both principal and agent in contract of
agency?
______________________________________________________________________________
_____________________________________________________________.
The principal shall be jointly liable with the agent:
1. Where he informed a third party of the existence of the power of agency but failed to
inform him of the partial or total revocation of such power
2. When he failed to ask the agent to return the document evidencing the power of agency
and failed to seek a judicial decision to the effect that such document was revoked
3. Where he caused in any other manner, in particular by his statements, behavior or failure
to act, a third party to believe that the person with whom he was dealing was authorized
to act on behalf of the principal (Article 2195 of C.C)
5.10. Termination of Agency
? Dear learner, in what conditions contract of agency terminates? Discuss.

______________________________________________________________________________
_____________________________________________________________.
1. Agency may be terminated by revocation
2.The principal may at any time restrict or revoke the authority he had given to the agent (Article
2226 of C.C). If the revocation causes any loss to the agent, the principal shall indemnify the
agent.
--------------------------------------------------------------------------------------------------------------------------------
Page 56 of 105
3. Agency may be terminated through renunciation
The agent may renounce the agency by giving notice to the principal of his renunciation. If the
renunciation is detrimental to the principal, he shall be indemnified by the agent (Article 2229 of
C.C).
4. An agency may also be terminated upon death, insanity or declaration of absence of either
party and as a result of declaration of bankruptcy (Article 2182 of C.C).
--------------------------------------------------------------------------------------------------------------------------------
Page 57 of 105
Checklist
able to do.
I Can: Yes No
 Define and explain contract of agency
 Identify and explain parties to contract of agency
 Describe scope of agency
 Elucidate unauthorized agency
 Explain duties and liabilities of agent and principal
 Describe conditions leading to termination of contract of agency
--------------------------------------------------------------------------------------------------------------------------------
Page 58 of 105
1. What is agency?
2. Who are parties to contract of agency? Explain.
3. Write down scope of agency.
4. Mention common liabilities of real parties to contract of agency.
5. In what conditions contract of agency terminates?
--------------------------------------------------------------------------------------------------------------------------------
Page 59 of 105
CHAPTER SIX
THE LAW OF TRADE AND BUSINESS

ORGANIZATIONS
Introduction
All persons who operate a given task for profit may not necessarily be regarded as a trader.
Persons who operate agriculture, cattle breeding maintaining pasture land, fisheries, and
handcraft working without any affiliation to any one cannot be taken as traders. In this chapter
law of trade, business and unfair competition, and features of business organizations in Ethiopia
are covered.
Chapter Objectives:
 To define and describe law of trade and business organizations
 To describe business and unfair competition
 To elaborate general features of business organizations in Ethiopia
 To elucidate legal forms of ownership of businesses in Ethiopia
--------------------------------------------------------------------------------------------------------------------------------
Page 60 of 105
6.1. Law of Trade
? Dear distance learner, describe persons regarded as traders in Ethiopia?

______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
Article 5 of the Commercial Code of Ethiopia identifies the persons regarded as traders.
Persons who professionally and for gain carry on any of the following activities shall be deemed
to be traders:
(1) Purchase of movables or immovable with a view to re-selling them either as they are or
after alteration or adaptation
(2) Purchase of movables with a view to letting them for hire
(3) Warehousing activities as defined in Article 2806 of Civil Code
(4) Exploitation of mines, including prospecting for and working of mineral oil
(5) Exploitation of quarries not by handicraftsmen
(6) Exploitation of salt pans
(7) Conversion or adaptation of chattels such as foodstuffs, raw materials or semi-finished
products not by handicraftsmen
(8) Building, repairing, maintaining, cleaning, paining or dyeing movables not by
handicraftsmen
(9) Embarking, leveling, trenching or draining carried out for a third party not by
handicraftsmen
(10) Carriage of goods or persons not by handicraftsmen
(11) Printing and engraving and works connected with photography or cinematography not
by handicraftsmen
(12) Capturing, distributing and supplying water
(13) Producing, distributing and supplying electricity, gas, compressed air including heating
and cooling
(14) Operating places of entertainment or radio or television stations
(15) Operating hotels, restaurants, bars, cafes, inns, hairdressing establishments not operated
by handicraftsmen and public baths
(16) Publishing in whatever form, and in particular by means of printing, engraving,
photogramy or recording
(17) Operating news and information services
(18) Operating travel and publicity agencies
--------------------------------------------------------------------------------------------------------------------------------
Page 61 of 105
(19) Operating business as an agent, broker, stock broker or commercial agent

(20) Operating a banking and money changing business
(21) Operating an insurance business
6.1.1. The Right to Operate Business in Ethiopia
Everyone is free to engage in any kind of activity of any place within the territory of Ethiopia.
Article 41 of the FDRE constitution spells out the freedom of trade. The constitution amplifies a
person to engage in a trade of his choice. As all freedoms are not absolute, freedoms to operate
business is subject to certain restrictions.
6.1.2. Obligation of Traders
The obligations imposed by law on traders include:
o The obligation to keep books and accounts

o The obligation to be registered
o The obligation to obtain business license
6.2. Business and Unfair Competition
? Dear distance learner, what is business and unfair competition?

______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
Article 124 of the Commercial Code defines business as an intangible property that emerges out
because of the activity of trade. The main component part of business is goodwill. Business also
includes tangible movable properties like furniture and other movable properties of trader.
Goodwill is an important value of the trader. It cannot be used by third parties without
permission of the trader. If a person uses goodwill of another person, without authorization, it is
illegal and termed as unfair competition. Example using the name and trade mark of
Commercial Bank of Ethiopia (CBE) to your newly established bank.
--------------------------------------------------------------------------------------------------------------------------------
Page 62 of 105
6.3. The Law of Business Organizations
? Dear learner, describe law of business organizations?

______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
There are various ways of operating business activity. A person may operate an activity of trade
either individually or in a group with similar people. Business activity may also be conducted
by public enterprises or cooperatives. Each scheme of operating business has its own advantages
and disadvantages. If a trader opted for business organizations he/she can choose any one or
more of the business organizations. It may be formed to operate commercial activity.
Business organizations are organizations that may be formed to operate commercial activity.
Article 212 of the Commercial Code of Ethiopia recognizes the following six kinds of business
organizations:
1. Ordinary partnership
2. Joint venture
3. General partnership
4. Limited partnership
5. Share company, and
6. Private limited company
Article 210 of the Commercial Code defines business organization as “Any association arising
out of a partnership agreement.” Here, association represents ‘grouping of people.’ Therefore,
a business organization is a grouping of business persons that comes out of the partnership
agreement.
Article 211 of the Commercial Code states, “A partnership agreement is a contact whereby two
or more persons who intend to join together and to cooperate to undertake to bring together
--------------------------------------------------------------------------------------------------------------------------------
Page 63 of 105
contributions for the purpose of carrying out activities of an economic nature and of
participating in the profit and losses arising there of, if any.”
6.4. General Features of Business Organizations in

Ethiopia
?
Dear distance learner, mention general features of business organizations in Ethiopia?
______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
Business organizations are groupings of business people that are formed for the purpose of
operating profit-making activity. People prefer to work business together for the following
reasons:
o To resist market competition
o To be engaged in huge business through accumulated capital
o To be engaged in huge business through combined managerial skill
o To work together for common benefit
As per Article 212 of the Commercial Code, group trading that is recognized by the law may be
operated through any one of the business organizations, i.e. three forms of partnerships, two
companies and a joint venture.
Business persons may choose anyone of these to operate a business activity. The option may
depend upon a particular form of business organization or the type of the activity to be carried
on.
6.4.1. Classification of Business Organizations
1. Classification According to the Nature of the Business
Depending on their nature business organizations recognized under the Ethiopian Commercial
Code may be divided in to three as:
 Partnerships
 Joint venture, and
 Companies
--------------------------------------------------------------------------------------------------------------------------------
Page 64 of 105
a. Partnership
The Ethiopian Commercial Code recognizes three kinds of partnerships each with its own
distinctive qualities.
i. Ordinary Partnership
Article 227-270 of the Commercials Code contain rule regulating ordinary partnerships. Rules
meant to regulate ordinary partnership are very flexible and give wider option to the partners.
Exclusionary provisions may affect the rights of third parties where the agreements are known by
the third parties. Ordinary partnership is always a non-commercial business organization. You
cannot operate a commercial activity by forming an ordinary partnership. Where an ordinary
partnership is formed to operate, anyone of the activities enumerated in Article 5 of the
Commercial Code by virtue of Article 213 of the same code, the nature of the partnership
changes to general partnership.
All partners of ordinary partnership hold the same position, have same rights and obligations,
and are jointly and severally liable to creditors where the partnership’s assets are not sufficient
to meet the demand unless exclusionary agreement is stipulated.
ii. General Partnership
Article 280-295 of the Commercial Code contain rules regulating general partnership. General
partnership is partnership in which all the partners occupy the same position.
Partners cannot avoid the joint and several obligations by a contrary agreement. An agreement
excluding joint and liabilities cannot affect the rights of third parties (Article 280 of
Commercial Code).
Article 280(1) of the Commercial Code states a general partnership consists of partners who are
personally, jointly, severally and fully liable as between themselves and to the partnership form’s
undertaking. Any provision to the contrary in the partnership agreement shall be of no effect
with regard to third parties.
iii. Limited Partnership
Rules regulating limited partnership are described from Article 296-303 of the Commercial
Code.
--------------------------------------------------------------------------------------------------------------------------------
Page 65 of 105
According to Article 296 of the Commercial Code limited partnership comprises two categories
of partners: general and limited partners. Accordingly:
 General partners of limited partnership are jointly and severally liable for the debts and
commitments of the partnership where the assets of the partnership firm cannot cover the
debts and commitments.
 Partners can manage the affairs of the partnership (Article 300 of the Com. Code)
 Limited partners cannot be responsible for the debts and commitments of the partnership.
Their liability is also limited to the extent of the contribution made to the partnership.
b. Joint Venture
Article 270-279 of the Commercial Code regulates the process of operating business activity by
the instrumentality of joint venture. Joint venture is a secret business organization. The
existence of a joint venture business organization cannot be disclosed to third parties. The
organization is known only to the venturers.
An agreement forming a joint venture need not be made in writing. A joint venture need not be
registered and publicized by any way. Thus, it cannot acquire separate legal existence. It cannot
be a legal person, i.e. cannot sue or be sued.
Third parties know the manager of the joint venture, and the manager is responsible for all
faults and liabilities that may emerge because of the business. The powers of the manager and
liability of the other partner will be determined in their mutual agreement.
c. Companies
Companies are very popular in Ethiopia. The Ethiopian Commercial Code recognizes both
Share Company (Article 304-305) and Private Limited Company (510-543). But, most of the
provisions meant to regulate share companies are referred to be applicable to private limited
companies too.
--------------------------------------------------------------------------------------------------------------------------------
Page 66 of 105
Similarities of Share and Private Limited Companies
1. Liabilities of all the members is limited to the extent of initial contribution

2. Companies issue shares
3. Partnership agreement is expressed in the memorandum and articles of association
4. Both are always commercial business organizations
Distinctions of Share and Private Limited Companies
1. Minimum and maximum number of members forming the companies is not identical
 Minimum number of members for Share Company (S.C) is 5, while it is 2 for Private Limited
Company (PLC)
 Maximum number for PLC is 50, while it is not limited in Share Company
2. The minimum amount of capital of both is not identical.
 Minimum capital for PLC is birr 15,000 or equivalent value, while it is birr 50,000 for S.C.
3. Share Company can issue different kinds of shares but shares of PLC is always registered.
 Share Company can issue both registered and bearer shares, while PLC can only issue registered
shares
4. Shares of a Share Company may be offered for public subscription, while that of PLC cannot.
5. While Share Company can issue debentures, PLC is not permitted to issue transferable securities
6. Certain fields of activities like banking and insurance are only reserved to Share Companies,
PLC are prohibited to engage in these activities
7. Personality of members in PLC is important, whereas personality of members of Share

Company is not important
2. Classification on the Basis of the Nature of an Activity
Depending upon the nature of an activity carried out business organizations may be classified as
commercial and non-commercial.
--------------------------------------------------------------------------------------------------------------------------------
Page 67 of 105
Article 10(1) of the Commercial Code states “Business organizations shall be deemed to be a
commercial nature where their objects under the memorandum of association or in fact are to
carry on any of the activities specified in Article 5 of this code.”
Share companies, private limited companies and ordinary partnerships cannot occupy double
position as commercial and non-commercial. The rest three business organizations (general
partnership, limited partnership and joint venture) can be regarded as commercial and non-
commercial depending on the activities carried out or planned to be operated.
6.4.2. Dissolution of Business Organizations
Business organizations do not exist forever. Different contingencies may take them away.
Article 217 and 218 of the Commercial Code identify the following as causes of dissolution:
o Agreements to dissolve by the persons who formed the business

o Dissolution by operation of law, and
o Dissolution by court
But, before dissolution of the business organization:
The liquidators have to finish businesses at hand

They should pay all the debts of the business organization
They must distribute the remaining property among the members
They have to cancel the business organization from the registration kept in the office of
the registrar of the companies
--------------------------------------------------------------------------------------------------------------------------------
Page 68 of 105
Checklist
able to do.
I Can: Yes No
 Define and explain law of trade
 Identify and explain business and unfair competition
 Describe law of business organizations
 Elucidate general features of business organizations in Ethiopia
 Explain classifications of business organizations
 Describe dissolution of business organizations
--------------------------------------------------------------------------------------------------------------------------------
Page 69 of 105
1. Explain business and unfair competition.

2. Discuss law of business organizations.
3. Write down the general features of because of organizations in Ethiopia.
4. Describe dissolution of business organizations.
--------------------------------------------------------------------------------------------------------------------------------
Page 70 of 105
CHAPTER SEVEN
NEGOTIABLE INSTRUMENTS
Introduction
Any document incorporating a right to an entitlement in such a manner that it be not possible to
enforce/transfer a right separately from the instrument is referred to as negotiable instrument. It
involves commercial instruments; bills of exchange, promissory note and cheques, transferable
securities; securities like treasury bill (if made negotiable), life insurance policy, debentures and
shares, and documents of title to goods; include bill of lading (document representing goods on
sea) in which the document may be negotiated until the goods are actually received.
Concepts and definition of negotiable instruments, forms of negotiable instruments, and

commercial instruments like bills of exchange, promissory note and cheque are covered in this
chapter of the module.
Chapter Objectives:
 To define the concept negotiable instruments
 To describe forms of negotiable instruments
 To express commercial instruments like bills of exchange, promissory notes and cheque
--------------------------------------------------------------------------------------------------------------------------------
Page 71 of 105
7.1. Definition
? Dear distance learner, define negotiable instrument?

______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
Negotiable Instrument: Is any document incorporating a right to an entitlement in such a

manner that it be not possible to enforce/transfer a right separately from the instrument (Article
715 (1) of the Ethiopian Commercial Code).
The following documents are categorized as negotiable documents in Ethiopia:
1. Commercial Instruments: Are documents specifying of a sum of money mentioned in the

document like bills of exchange, promissory note and cheques.
2. Transferable Securities: Are securities that may be transferred from one person to another
person like Treasury bill (if made negotiable), life insurance policy, debentures and shares.
3. Documents of Title to Goods: Include bill of lading (document representing goods on sea).
Until the goods are actually received, the document may be negotiated.
The process of negotiation, the rights of transferor and transferee of negotiable instruments is
same.
Article 715 (2) of this Commercial Code recognized negotiable instruments as including:
o Bills of exchange (draft)

o Promissory notes
o Cheques
o Traveler’s cheques
o Transferable securities, and
o Documents of title to goods
--------------------------------------------------------------------------------------------------------------------------------
Page 72 of 105
The document is said to be negotiable because it can be transferred from one person to the other
by mere delivery of the document or by endorsement. The possessor of a negotiable instrument
has a right to entitlement as expressed in the instrument against presentment of the instrument to
the debtor (Article 716 of Commercial Code).
To be entitled with the document:
 The possessor must show that he is the lawful possessor

 The debtor pays only against the delivery of the instrument
 Except in cases of fraud and gross negligence on his part, the debtor is released by
payment at maturity to the person to whom the instrument gives the capacity of creditor
Defenses: The debtor may only set up against the holder of the instrument defenses based on
their personal relations, i.e. failure of consideration, defect in consent, etc, defense form like
type of negotiable instrument, and defenses of text like changes in date, time, place of payment
and falsification of signatures.
7.2. Forms of Negotiable Instruments
Dear distance learner, what do you think are the forms of negotiable instrument?
?
______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
According to forms provided for their transfer, negotiable instruments may be to the bearer,
specified name or to the order.
1. Payable to the Bearer: May be negotiated by delivery alone; the bearer simply hands to
another party.
2. Payable to Specified Name: Made as expressed in the instrument by the fact of his
designation as beneficiary there in.
3. Payable to Order: May be transferred by endorsement, followed by delivery of the
instrument to the beneficiary.
--------------------------------------------------------------------------------------------------------------------------------
Page 73 of 105
7.3. Commercial Instruments
? Dear distance learner, describe commercial instruments.

______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
Commercial Instruments: Are instruments setting out an entitlement consisting in the payment
of money (Article 732 of Commercial Code).
They are contracts. As a result, any person binding himself by a commercial instrument must be
a capable person.
The most popular commercial instruments include:
1. Bills of exchange
2. Promissory note, and
3. Cheque
7.3.1. Bills of Exchange (Draft)
Bill of exchange refers to a written order by which one party directs a second party to pay a
certain sum of money to the order of a third person or to a bearer at a definite period.
Bill of exchange involves three parties:
1. The Drawer: Is the one who executes or draws the bill and orders that payment be made.
2. The Drawee: Is the party directed to pay.
3. The Payee: Is the party to whose order the bill is made payable.
A bill of exchange shall contain:
o A term “bill of exchange” inserted in the body of the instrument

o Unconditional order to pay a sum certain in money
o The name of the person who has to pay (drawee)
o The name of the person to whom the order payment is to be made (drawer)
o Time and place of payment
o The date when and the place where the bill is issued
o The signature of the person who issued the bill (drawer)
--------------------------------------------------------------------------------------------------------------------------------
Page 74 of 105
7.3.2. Promissory Note
Promissory note is a written promise by one person to pay to order or to bearer a certain sum of
money at a definite time. It only involves two parties; the maker and the payee.
1. The Maker: Is one who executes or makes a promissory note and promises to pay.
2. The Payee: Is the one to whose order the promissory note is payable.
A promissory note shall contain:

o The term “promissory note” inserted in the body of the instrument
o An unconditional promise to pay a sum certain in money
o The name of the person to whom payment is to be made
o The place and time of payment
o The date when and the place where the note is issued
o The signature of the person who issued the instrument (the maker)
7.3.3. Cheques
Cheque is a bill of exchange drawn on a banker payable on demand. It is unconditional order

in writing drawn on a banker, requiring the banker to pay on demand a sum certain in money to
or to the order of a specified person or bearer, and which does not order any act to be done in
addition to the payment of money.
There are primarily three parties to a cheque:
1. Drawer: The party by whom or by whose authority the cheque is signed.

2. Drawee (the Banker): The party authorized to pay out money.
3. Payee: The party to whom or to whose order the money id to be paid.
The following requirements have to be fulfilled to a valid cheque:
 The order to pay must be unconditional so far as the banker is concerned

 A cheque must be in writing
 The order to pay must be addressed by one person to another, and that other person must
be a banker
 The sum certain named in the cheque must be payable on demand
 A cheque must be payable to or to the order of specified person or bearer
--------------------------------------------------------------------------------------------------------------------------------
Page 75 of 105
The issue of cheque means its first delivery complete in form to a person who takes it as a holder.
It is issued when the drawer parts with it to another person with the intention that the proceeds of
the cheque shall be paid to that person.
A valid cheque must either bear the signature of the drawer or a signature put on by the authority
of the drawer. A cheque is not invalidated by reason of that it is not dated.
If stale cheque/overdue is negotiated, it can only be negotiated subject to any defect of title
affecting it when it was due. All material alterations in a cheque must be made with the assent of
the drawer evidenced by his signature or initials. Material alterations include all those of date,
crossing, place of payment, amount and name of payee.
If a drawer tears a cheque across in such a way that its condition affords sufficient evidence that
he intended to cancel it, the banker must suffer any loss that may be incurred by his paying it
to a person who has pasted the pieces together and presented the cheque.
If the payee accidentally tears it into two before presentation, he must get the drawer’s
confirmation, or collecting the banker’s guarantee before payment. Here, the general form is
“Accidentally torn by us” followed by a banker’s signature.
Payment of Cheques
It is the duty of the banker to honor his customer’s cheques provided that;
o The balance standing to the creditor of his customer is sufficient to pay

o The cheques are drawn in the proper form
o There is no legal bar prohibiting payment
The following are sufficient causes to justify the banker in not paying a cheque:
Notice from the customer to stop payment

Knowledge of any defect in the title of the person presenting the cheque
Notice of presentation of a bankruptcy petition by or against his customer
Notice of the commencement of winding up
Knowledge that the customer contemplates a reach of trust in case the fund is trust funds
--------------------------------------------------------------------------------------------------------------------------------
Page 76 of 105
Checklist
able to do.
I Can: Yes No
 Define and express concept of negotiable instrument
 Identify and explain forms of negotiable instruments
 Describe commercial instruments
 Explain concepts of bills of exchange, promissory notes and

cheque
--------------------------------------------------------------------------------------------------------------------------------
Page 77 of 105
1. Define negotiable instrument.

2. Describe forms of negotiable instruments.
3. Write down and explain commercial instruments in negotiable instruments.
--------------------------------------------------------------------------------------------------------------------------------
Page 78 of 105
CHAPTER EIGHT
LAW OF INSURANCE
8.1. Introduction to Insurance
Insurance is a device that protects people from the financial costs that result from loss of life,
loss of health or property damage.
Peril (risk) and loss that result from the peril is unavoidable: people may become ill, die,
accident may happen on people or their property or suffer from other damage or theft. Insurance
provides a means for individuals and societies to escape with some of the risks. The uncertainty
surrounding potential losses is known as risk.
The following are some of the advantages enjoyed by insured persons:
a. Increases production, as a person works without fear of loss

b. Helps to budget money for unknown loss
c. Pools (distributes) risks among different people under uncertain risk
d. Facilitates bank loan, as bankers feel secured for the collateral
e. It has become a significant force in most industrialized country, i.e. covers workers
against work related hazards, guarantees property against theft, etc.
f. Gigantic insurance companies create employment opportunity
Chapter Objectives:
 To define and explain insurance policy and insurable interest
 To describe rights and duties of parties in the contract of insurance
 To explain classification of contract of insurance
 To describe insurance of object, insurance of liability for damages, and insurance of

persons
--------------------------------------------------------------------------------------------------------------------------------
Page 79 of 105
8.2. Insurance Policy
? Dear distance learner, what is insurable policy?

______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
8.2.1. Insurance Contractual Requirements
An insurance agreement is a special contract. An insurance policy is a contract whereby a

person called the insurer, undertakes against payment of one or more premium pay to a person,
called the beneficiary, a sum of money where a specified risk materializes.
Parties to a contract of insurance are the insured (the purchaser of insurance) and the insurer
(the insurance company). The insured person pays a premium (periodical specified sum), and
the insurer ascertains compensation for risk.
The contract of insurance shall contain all the facts that are stated in Article 658 of the
Commercial Code. These are:
 The place and date of contract

 The names and addresses of the parties
 The item, liability or person insured
 The nature of the risk insured
 The amount of the guarantee
 The amount of the premium, and
 The term for which the contract is made
8.2.2. The Subject Matter of Insurance
Generally the subject matter of insurance includes:
o Physical object, i.e. the thing you see and touch that has material existence
o Intangible property, i.e. merely right, e.g. receivables
o Liability, i.e. insurance against happening of a given liability to third parties

--------------------------------------------------------------------------------------------------------------------------------
Page 80 of 105
The insurer cannot insure against happening of an accident, but the effects of the accident, i.e.
monetary compensation.
8.3. Insurable Interest
? Dear distance learner, what is insurable interest?

______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
A person is said to have insurable interest where he/she has interest in the subject matter of
insurance to whom the advantage may arise or prejudice may happen. A person to insure a given
property shall be an owner or any person whose property or other interest may be affected by
the loss or destruction of property. An insurer is not obliged to insure property of an enemy.
8.4. Rights and Duties of Parties in the Contract of

Insurance
? Dear distance learner, list the rights and duties of parties in the contract of insurance.
______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
8.4.1. Duties of an Insurer
o The insurer has to indemnify the insured where a risk upon which they agreed occurs.
8.4.2. Duties of an Insured
o Payment of premium
o Disclose materials information
o Notify the occurrence of the risk insured
--------------------------------------------------------------------------------------------------------------------------------
Page 81 of 105
8.5. Classification of Contract of Insurance
? Dear learner, what are the types of contract of insurance?

______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
8.5.1. Classification on the Basis of the Nature of the Event
Depending on this criterion insurance is classified as:
Marine insurance
Fire insurance
Life insurance
8.5.2. Classification on the Basis of the Nature of Interest Affected
Based upon this criterion insurance can be:
 Personal insurance
 Property insurance
 Liability insurance
8.6. Insurance of Object
? Dear distance learner, what is insurable of object?

______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
Any person having interest on the property may insure it. This concept refers to the requirement
of insurable interest. A person to insure a given property shall be an owner or any person whose
property or other interest may be affected by the loss or destruction of the property. Thus, a joint
owner, a mere possessor, and a pledge/promise have insurable interest on the property he/she
hold, uses, possesses, or owns.
--------------------------------------------------------------------------------------------------------------------------------
Page 82 of 105
8.6.1. The Concept of Proximate Cause
The insurer may be liable to compensate the loss if and only if the cause resulted in the peril is
upon which the insured is guaranteed. To be compensated, the cause should have immediate
link with the loss happened, i.e. an immediate cause.
Case Study
Assume a certain horse is insured against theft. Once upon a time, the horse was stolen by a thief
and was taken to a remote area where it was infected by disease. After sometimes, the owner of
the horse found the horse. The health condition of the horse was found to be deteriorating from
time to time. The horse owner took the horse to a nearby clinic. It was said that the horse was
caught by an acute cold. The doctor gave a medicine which caused death of the horse. The
owner claimed compensation from insurance company claiming the death of the horse was due
to the act of the thief. Would he succeed?
In order to answer this question, you have to evaluate the effect of causes rendered death of the
horse, i.e. the act of the thief, the disease, and the negligence/fault of the doctor. The initial cause
was guaranteed by the insurer. The disease and negligence of the doctor were not insured. The
rule is that an insurer may be liable only to compensate losses caused by immediate or
proximate cause. The immediate cause is negligence of the doctor treating the horse. This cause
resulted in death of the horse. Had the horse been lost by the initial cause (theft) the insurer
would have been compelled to compensate the horse owner.
Thus, the horse owner will not succeed.
8.6.2. Making Claim for Compensation
Where the subject matter is lost, the insured to collect compensation has to:
o Notify the insurer on or within five days

o Indicate how the risk happened caused loss
o Prove the loss
8.6.3. Subrogation
The insurer after compensating the insured may step at his/her shoes and demand indemnity
from the third party who caused loss on the property. This is called subrogation.
--------------------------------------------------------------------------------------------------------------------------------
Page 83 of 105
8.7. Insurance of Liability for Damages

? Dear distance learner, what is insurance of liability for damages?
______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
In this type of insurance the insurer promises to compensate the insured if he/she has to
compensate a third party. Claims of third party may be insured by an insurer.
8.8. Insurance of Persons

? Dear distance learner, what is insurance of persons?
______________________________________________________________________________
______________________________________________________________________________
_________________________________________________________.
This type of insurance may either the life insurance or insurance against accident or illness.
There are cases in which benefits of life insurance may not be enjoyed. These are:
 Suicide, i.e. where the insured intentionally kills him/herself
 Murder of the beneficiary, i.e. where the beneficiary killed the insured, and this fact is
proved by court of law, the beneficiary cannot collect the compensation.
--------------------------------------------------------------------------------------------------------------------------------
Page 84 of 105
Checklist
able to do.
I Can: Yes No
 Explain insurance policy
 Identify and explain insurable interest
 Describe rights and duties of parties in the contract of insurance
 Elucidate classification of contract of insurance
 Explain insurance of object, insurance of liability for damages,

and insurance of persons
--------------------------------------------------------------------------------------------------------------------------------
Page 85 of 105
1. Explain insurance policy.

2. Discuss insurable interest.
3. Write down rights and duties of parties in the contract of insurance.
4. Describe classification of contract of insurance.
--------------------------------------------------------------------------------------------------------------------------------
Page 86 of 105
Answer Key for Self Check Exercises

Part-I: Choice
1. C 2. D 3. E
Part-II: Short Answer Writing
4. Write down the features of law.

The following features of make law different from some other forms of social control:
 Law is Obligatory: Law has to be obeyed by everyone/binds everyone unless otherwise

made for special category of people.
 Law has to be made by a competent authority/parliament: An organ making law must be
empowered with legislative power.
 Every law is backed by sanction or has organized enforcement mechanism: There should
be a body that can enforce the laws made accordingly.
 Sanction: Is punishments or fine that the law imposes if subjects of law fail to obey the
law.
 Law is established in permanence: Laws are enacted for indefinite period of time.
 Law has to be applicable to the people in the same situation
 Law has to be specific, i.e. expectations of law shall be specifically shown
 Example: “Every one has to do good things.” This is not specific law.
 There shall be law enforcement institution
5. Define business law.

Business Law simply defined, on the other hand, is a law that administers certain business
relationships and transactions.
6. Describe functions of law taking practical examples in Ethiopia.

Imagine how life is difficult without law. Rights and freedoms are violated while duties and
responsibilities are not performed without law.
The functions of law to mention few include:
--------------------------------------------------------------------------------------------------------------------------------
Page 87 of 105
 Law guide show individuals and groups should act

 It identifies what may or may not be done, i.e. law is permissive
 It smoothens social relationship
 It facilitates social and business relationships
 It enables smooth functioning of modern society
7. Discuss classifications of law, locate the position of business law in the classification and
elaborate the reason.
Law is generally classified as follows:
Law
Substantive Law Procedural La w
Public Law Private Law Criminal Procedure Civil Procedure
o Constitutional law - Law of persons - Law of Evidence

o Administrative law - Law of family
o Criminal law - Law of successions
o Public International law - Law of property
o Public finance - Law of contract
- Law of Non-Contractual Liability (Tort)
- Law of agency
- Law of sales
- Law of business organizations
- Law of insurance
In this classification business law falls under substantive private law because it addresses all laws revolving
around law of persons, law of contract, law of agency, law of sales, business organizations and insurance
law.
--------------------------------------------------------------------------------------------------------------------------------
Page 88 of 105

Part I: Write Short Answer
1. Differentiate person and personality.
Legal Persons: Are all entities capable of being right and duty bearing beings. All entities
recognized by law as capable of being parties to a legal relationship are legal persons.
Legal Personality: Is a particular device by which the law creates or recognizes units to
which it ascribes certain powers and capabilities. Such units shall possess capacities of
being parties to a legal relationship.
2. Write down attributes of legal personality.

Legal personality is characterized by the following attributes:
A legal person may sue or be sued in its own name, not in its owners for entities
A legal person can own and administer its own property. Property belonging to a legal person is
different from that of individual owners.
A legal person can enter into contracts in its own name. It is the company that is either
creditor or debtor of a third party with whom a contract is made.
A legal person has an obligation to pay taxes on its property and any other income. In the
same way as physical persons pay tax on his income, a legal person is also required to pay tax
on any income it derives.
3. Differentiate natural and legal persons.

Physical/natural Persons: Consists of human beings.
Moral/Legal/Juridical/Artificial Persons: Entities of all kinds which are recognized as

holding rights and duties in the same way as human beings granted personality.
--------------------------------------------------------------------------------------------------------------------------------
Page 89 of 105
4. When is the beginning and end of personality of natural persons? Explain.

As per Article 1 of the Ethiopian Civil Code provides, “A human person is the subject of
rights from its birth to death.” Birth means a complete extrusion of the child from its
mother’s womb, whether in a natural way or by an operation.
Death is the only way through which personality can be completely brought to an end (apart
from the case where death is established by the court or law as a result of procedure declared
absence, insanity, incapable, etc.)

Part I: Write Short Answer
1. Define contract.
Contract is a binding agreement; it is a promise or set of promises for the breach of which
the law gives a remedy, or the performance of which the law in some way recognizes as a
duty. As per the Ethiopian Civil Code, a contract is an agreement whereby two or more
persons as between themselves create, vary or extinguish obligations of a proprietary nature.
The substance of the definition is mutual agreement or assent, the parties create legally
binding obligations that had not existed before, or vary the existing contract or void the
previous ones. Each party to a contract is legally obliged to observe the terms of the
agreement.
2. Write down sources of obligations in law of contract.

There are the following two sources of obligation in contract; the law and the contract itself.
a. Law (Legal Obligations)
Some obligations result from the direct operation of law, that is, the law itself sometimes
imposes obligations on persons.
Example: 1. People are required by law to pay taxes on the incomes they earn.
There is a legal obligation of supplying maintenance to relatives by consanguinity or affinity

in the direct line or to brothers, and sisters born of the same parents.
--------------------------------------------------------------------------------------------------------------------------------
Page 90 of 105
b. Contract
In contractual obligation, it is the will of the parties that is the source of obligation. The law
only gives a sanction to the consent of the parties. The law declares that the agreement shall
be enforceable by the authority of the court, if they are of the nature that is not prohibited
and are intended to produce legal effect.
3. Mention requirements of valid contract.
According to Article 1678 of the Civil Code (C.C.), no valid contract exists unless:
a. The parties are capable of contracting and give their consent sustainable at law
b.The object of a contract is sufficiently defined, and is possible and lawful
c. The contract is made in the form prescribed by law, if any

Therefore, the formation of a valid contract requires the existence of certain essential
elements. These essential elements of valid contract are:
o Consent
o Capacity
o Object, and
o Form of a contract
4. Discuss effect of contract.
Contract is nothing, but a law for the contracting parties. Art. 1731 of the C.C. dictates,
“The provisions of a contract lawfully formed shall be binding on the parties as though they
were law.” Once determined, the obligations created by contracts are binding on the parties
as though they are legal obligations.
--------------------------------------------------------------------------------------------------------------------------------
Page 91 of 105
5. Elaborate performance and non-performance of contract.
Performance of contract refers to the fulfillment of the obligations undertaken by the

parties/the debtor. Performance can either be personally made by the debtor or by a third
party on behalf of the debtor. The debtor must personally perform under the following two
conditions:
 Where a particular skill of the debtor is involved and this is essential to the creditor
 Where it is expressly agreed by the contracting parties
On the other hand, Non-performance is failure to carryout obligations as agreed. This

includes partial or total failure or improper performance. When non-performance occurs the
creditor is given legal remedies.
Under the Ethiopian law, the other party (creditor) may according to the circumstances:
 Demand specific performance

 Require the cancellation of a contract
 Cancel the contract unilaterally
 Require damages caused to him by non-performance be made good

Part I: Write Short Answer.
1. Define contract of sale.
Contract of sale as per (Article 2266 of C.C) is a contract whereby one of the parties, the
seller, undertakes to deliver a thing and transfer its ownership to another party, a buyer in
consideration of a price expressed in money which the buyer undertakes to pay him.
2. Describe common obligations of buyer and seller in performance of sales contract.

The Common Obligations of the Buyer and Seller involves the following three:
--------------------------------------------------------------------------------------------------------------------------------
Page 92 of 105
a. Covering Expenses
Expense of a contract and payment are borne by the buyer (Articles 2314 and 2315
respectively). However, if the seller has changed his address or place of business after making
the contract, the seller bears the expense.
Expense of delivery is borne by the seller (Article 2316). Expenses of delivery include the cost
of counting, measuring and weighing the thing. Any expense after delivery is borne by the buyer
(Article 2317).
b. Obligation to preserve the thing
The seller must preserve the thing where the buyer is late in taking delivery. Here, the cost of
preservation is borne by the buyer. Besides, the buyer bears the risk of loss or damage after being
put in default. The buyer is required to preserve the thing when he intends to return the thing
(after delivery) on the ground of non-conformity or defect (Article 2321).
c. Obligation of bearing risk
The seller bears the risk of loss or damage before delivery is made as per a contract. The risk
transfers to the buyer after the thing is delivered to him or when the buyer fails to take delivery
and put in default.
3. Write down and explain various forms of sales contract.

The various forms of sales contract are the following:
a. Sale of Cattle and Other Living Animals
The seller of cattle and other living animal guarantees to the buyer that the animal sold is
free from any contagious disease. The guarantee becomes effective on delivery of the
animal sold.
b. Sale by Sample or Model
If goods are purchased by description or by sample, there is an implied warranty that the
goods will correspond to the description or to the sample.
--------------------------------------------------------------------------------------------------------------------------------
Page 93 of 105
d. Sale on Trial or on Approval

Title in a sale “on trial” or “on approval” does not pass to the buyer until the buyer has
actually signified his approval by his words or conduct and has kept the thing beyond the
time fixed, or if no time was fixed, beyond a reasonable time.
f. Sale by Installments
When goods are sold on installment basis, possession of the thing is transferred to the buyer,
but title remains with the seller as security until full purchase price has been paid. Title does
not pass to the purchaser until the last installment is paid.
g. Sale With Right of Redemption
The seller may reserve to himself the right to redeem within a given period of time the thing
which he has sold to the buyer. The period for exercising the right of redemption may not
exceed two years. If a shorter period has been fixed in the contract, the shorter period
becomes operative (Article 2391 of C.C).
Sale of Redemption: Is a sale when the buyer receives the goods, the title and risk of loss
pass to the buyer, as do all incidents of ownership. Here, the buyer has the option of
returning the thing instead of paying the price. If this is done, the returned thing again
becomes the property of the seller.
h. Sale with Ownership Reserved
The seller may reserve to himself the ownership of the thing until the payment of the price.
Here, possession may pass but ownership is reserved by the seller. The risk shall be born by
the buyer from the time when the thing is delivered to him.
i. Cash Sale
In cash on sale, the ownership as well as the goods sold is exchanged for a payment made at
the same time. No portion of the deal is left to be completed later on.
j. Cash on Delivery (C.O.D) Sales
The uniform sales act provides that the title to the goods in C.O.D. sales passes to the buyer
when the goods are delivered to a common carrier.
k. Free on Board Shipping (F.O.B) Sales
When goods are sold in F.O.B, title passes to the buyer when the goods are delivered to the
common carrier at the shipping point.
--------------------------------------------------------------------------------------------------------------------------------
Page 94 of 105
l. Sale by Auction
Auction: Is a sale to the highest bidder. Auction sale are “with reserve” unless explicitly
announced in advance to be without reserve.
m. Sale on Credit
Sale on credit refers to a sale where payment for goods is to be made at a later date. The
fact that a sale is made on credit does not affect the passing of the title or risk of loss.
4. Mention and brief contracts allied to sale.
The following contracts are allied to sales:

a. Barter Contract
When title to a corporeal movable is given in return for another movable, a transaction
called “barter” results. Consideration of a price is paid in goods instead of money. Title to
the goods passes to the other party when the goods are delivered.
b. Transfer of Incorporeal Rights
Incorporeal Rights: Are intangible property like stocks, bonds, copy rights, patents,
trademarks, accounts receivables, etc.
Article 2411 provides that the provisions applicable to sales apply where a person transfers
for consideration an incorporeal right. But, this does not affect the rules of special law
providing to the contrary.
c. Hiring Sale
Hire sale: Is a contract whereby the parties agree that the tenant of the thing will become
the owner after payment of a given number of installments. Thus, provisions of sales
contract apply where the parties have described their contract as one of hiring a thing
(Article 2412 of C.C.). Here, the risk of loss is borne by the tenant from the time when the
thing has been delivered to him.
d. Contract of Supplies
Contract of supplies refers to a contract whereby a party undertakes for a price to make in
favor of the other party periodical or continuous deliveries of a thing (Article 2416 of C.C.).
--------------------------------------------------------------------------------------------------------------------------------
Page 95 of 105
Where the supplies are to be made periodically, the price for each delivery shall be fixed in
accordance with the provisions of sales contract.
1. What is agency?
According to Article 2199 C.C, defines agency as a contact whereby a person, the agent,
agrees with another person, the principal to represent him and to perform one or several
legally binding acts. As agency is a contract, the essential elements of valid contract like
consent, capacity, object and form must be there.
2. Who are parties to contract of agency? Explain.

Three persons are involved in the contract of agency. These are:
 Agent: A person who makes contracts for and on behalf of another person.
 Principal: Is a person who authorizes the agent to represent him and to act in his name.
 Third party: A person who enters into a contract with the agent.
Thought three persons are involved, only two of them are contracting parties. The agent
is not a contracting party because he simply serves as a connecting link without assuming
any obligation personally. It is the principal who is liable to third party for the acts of the
agent when such agent is acting within the authority conferred.
3. Write down scope of agency.

Scope of agency may be expressly fixed in the contract. Where not expressly fixed, the
scope shall be determined according to the nature of transaction to which it relates (Article
2202(1)).
--------------------------------------------------------------------------------------------------------------------------------
Page 96 of 105
The scope of agency is either special or general.
a. General Agent
General agent is authorized to transact all of the principal’s business of a particular kind or
all of the principal’s business at a given place.
According to Article 2203 of the C.C, agency expressed in general terms shall only confer
upon the agent authority to perform acts of management. Article 2204 defines acts of
management as acts done for the preservation or maintenance of property, leases for terms
not exceeding three years, the collection of debts, the investment of income, and the
discharging of debts.
Moreover, the sale of crops, goods intended to be sold, or the sale of perishable
commodities shall be deemed as acts of management (Article 2204 (2)) of C.C).
b. Special Agent
Special agent is appointed to do some specific act or acts or to transact certain business
affairs. The authority of special agent is much narrower in scope than general agent. It
required where the agent is called upon to perform acts other than acts of management.
4. Mention common liabilities of real parties to contract of agency.

The principal shall be jointly liable with the agent:
 Where he informed a third party of the existence of the power of agency but failed to
inform him of the partial or total revocation of such power
 When he failed to ask the agent to return the document evidencing the power of
agency and failed to seek a judicial decision to the effect that such document was
revoked
 Where he caused in any other manner, in particular by his statements, behavior or

failure to act, a third party to believe that the person with whom he was dealing was
authorized to act on behalf of the principal (Article 2195 of C.C)
--------------------------------------------------------------------------------------------------------------------------------
Page 97 of 105
5. In what conditions contract of agency terminates?

Contract of agency terminates in the following conditions:
a. Agency may be terminated by revocation
b.The principal may at any time restrict or revoke the authority he had given to the agent
(Article 2226 of C.C). If the revocation causes any loss to the agent, the principal shall
indemnify the agent.
c. Agency may be terminated through renunciation
d.The agent may renounce the agency by giving notice to the principal of his renunciation.
If the renunciation is detrimental to the principal, he shall be indemnified by the agent
(Article 2229 of C.C).
e. An agency may also be terminated upon death, insanity or declaration of absence of either
party and as a result of declaration of bankruptcy (Article 2182 of C.C).
1. Explain business and unfair competition.
Article 124 of the Commercial Code defines business as an intangible property that emerges
out because of the activity of trade. The main component part of business is goodwill.
Business also includes tangible movable properties like furniture and other movable
properties of trader.
Goodwill is an important value of the trader. It cannot be used by third parties without
permission of the trader. If a person uses goodwill of another person, without authorization,
--------------------------------------------------------------------------------------------------------------------------------
Page 98 of 105
it is illegal and termed as unfair competition. Example using the name and trade mark of
Commercial Bank of Ethiopia (CBE) to your newly established bank.
2. Discuss law of business organizations.

Business organizations are organizations that may be formed to operate commercial activity.
Article 212 of the Commercial Code of Ethiopia recognizes the following six kinds of
business organizations:
 Ordinary partnership
 Joint venture
 General partnership
 Limited partnership
 Share company, and
 Private limited company
3. Write down the general features of because of organizations in Ethiopia.
Business organizations are groupings of business people that are formed for the purpose of
operating profit-making activity. People prefer to work business together for the following
reasons:
o To resist market competition
o To be engaged in huge business through accumulated capital
o To be engaged in huge business through combined managerial skill
o To work together for common benefit
As per Article 212 of the Commercial Code, group trading that is recognized by the law
may be operated through any one of the business organizations, i.e. three forms of
partnerships, two companies and a joint venture.
Business persons may choose anyone of these to operate a business activity. The option may
depend upon a particular form of business organization or the type of the activity to be
carried on.
--------------------------------------------------------------------------------------------------------------------------------
Page 99 of 105
4. Describe dissolution of business organizations.

Business organizations do not exist forever. Different contingencies may take them away.
Article 217 and 218 of the Commercial Code identify the following as causes of dissolution:
o Agreements to dissolve by the persons who formed the business

o Dissolution by operation of law, and
o Dissolution by court
But, before dissolution of the business organization:
The liquidators have to finish businesses at hand

They should pay all the debts of the business organization
They must distribute the remaining property among the members
They have to cancel the business organization from the registration kept in the office
of the registrar of the companies
1. Define negotiable instrument.
According to Article 715 (1) of the Ethiopian Commercial Code negotiable instrument is
any document incorporating a right to an entitlement in such a manner that it be not possible
to enforce/transfer a right separately from the instrument.
2. Describe forms of negotiable instruments.
According to forms provided for their transfer, negotiable instruments may be to the bearer,
specified name or to the order and explained as follows.
--------------------------------------------------------------------------------------------------------------------------------
Page 100 of 105
 Payable to the Bearer: May be negotiated by delivery alone; the bearer simply hands
to another party.
 Payable to Specified Name: Made as expressed in the instrument by the fact of his
designation as beneficiary there in.
 Payable to Order: May be transferred by endorsement, followed by delivery of the
instrument to the beneficiary.
3. Write down and explain commercial instruments in negotiable instruments.
Commercial Instruments are instruments setting out an entitlement consisting in the

payment of money (Article 732 of Commercial Code). They are contracts. As a result, any
person binding himself by a commercial instrument must be a capable person.
The most popular commercial instruments include:
 Bills of exchange
 Promissory note, and
 Cheque
a. Bills of Exchange (Draft)
Bill of exchange refers to a written order by which one party directs a second party to pay a
certain sum of money to the order of a third person or to a bearer at a definite period.
Bill of exchange involves three parties:
The Drawer: Is the one who executes or draws the bill and orders that payment be made.
The Drawee: Is the party directed to pay.
The Payee: Is the party to whose order the bill is made payable.
A bill of exchange shall contain:
o A term “bill of exchange” inserted in the body of the instrument

o Unconditional order to pay a sum certain in money
o The name of the person who has to pay (drawee)
o The name of the person to whom the order payment is to be made (drawer)
o Time and place of payment
o The date when and the place where the bill is issued
o The signature of the person who issued the bill (drawer)
--------------------------------------------------------------------------------------------------------------------------------
Page 101 of 105
b. Promissory Note
Promissory note is a written promise by one person to pay to order or to bearer a certain sum
of money at a definite time. It only involves two parties; the maker and the payee.
 The Maker: Is one who executes or makes a promissory note and promises to pay.
 The Payee: Is the one to whose order the promissory note is payable.
A promissory note shall contain:

o The term “promissory note” inserted in the body of the instrument
o An unconditional promise to pay a sum certain in money
o The name of the person to whom payment is to be made
o The place and time of payment
o The date when and the place where the note is issued
o The signature of the person who issued the instrument (the maker)
c. Cheques
Cheque is a bill of exchange drawn on a banker payable on demand. It is unconditional

order in writing drawn on a banker, requiring the banker to pay on demand a sum certain in
money to or to the order of a specified person or bearer, and which does not order any act to
be done in addition to the payment of money.
There are primarily three parties to a cheque:
4. Drawer: The party by whom or by whose authority the cheque is signed.

5. Drawee (the Banker): The party authorized to pay out money.
6. Payee: The party to whom or to whose order the money id to be paid.
1. Explain insurance policy.

Insurance Contractual Requirements
An insurance agreement is a special contract. An insurance policy is a contract whereby a

person called the insurer, undertakes against payment of one or more premium pay to a
person, called the beneficiary, a sum of money where a specified risk materializes.
--------------------------------------------------------------------------------------------------------------------------------
Page 102 of 105
Parties to a contract of insurance are the insured (the purchaser of insurance) and the insurer
(the insurance company). The insured person pays a premium (periodical specified sum),
and the insurer ascertains compensation for risk.
The contract of insurance shall contain all the facts that are stated in Article 658 of the
Commercial Code. These are:
 The place and date of contract

 The names and addresses of the parties
 The item, liability or person insured
 The nature of the risk insured
 The amount of the guarantee
 The amount of the premium, and
 The term for which the contract is made
The Subject Matter of Insurance
Generally the subject matter of insurance includes:
o Physical object, i.e. the thing you see and touch that has material existence
o Intangible property, i.e. merely right, e.g. receivables

o Liability, i.e. insurance against happening of a given liability to third parties
The insurer cannot insure against happening of an accident, but the effects of the accident,
i.e. monetary compensation.
2. Discuss insurable interest.
A person is said to have insurable interest where he/she has interest in the subject matter of
insurance to whom the advantage may arise or prejudice may happen. A person to insure a
given property shall be an owner or any person whose property or other interest may be
affected by the loss or destruction of property. An insurer is not obliged to insure property
of an enemy.
--------------------------------------------------------------------------------------------------------------------------------
Page 103 of 105
3. Write down duties of parties in the contract of insurance.
The following are the duties of parties to contract of insurance:
Duties of an Insurer
o The insurer has to indemnify the insured where a risk upon which they agreed occurs.
Duties of an Insured
o Payment of premium
o Disclose materials information
o Notify the occurrence of the risk insured
4. Describe classification of contract of insurance.

Classification on the Basis of the Nature of the Event
Depending on this criterion insurance is classified as:
Marine insurance
Fire insurance
Life insurance
Classification on the Basis of the Nature of Interest Affected
Based upon this criterion insurance can be:
 Personal insurance
 Property insurance
 Liability insurance
--------------------------------------------------------------------------------------------------------------------------------
Page 104 of 105
Leadstar University College

Departments of Management and Leadership Studies
Tutor Marked Assignment
Course Title: Business Law
Total weight: 50 % Submission Deadline: Final exam date
Name: ______________________________________________________________
ID Number: ____________________________
Department: _________________________
Center: _________________________Year of Study:
______________________________
Instruction: Read your whole module and answer the following questions on separate
sheet of paper accordingly.
Part-I: Write Short Answer. (35 %)
1. Differentiate concepts of contract, law of obligations, sales contract and law of

agency. (6 pts)
2. Discuss the differences and similarities of person, personality, physical person, and
legal persons. (8 pts)
3. Mention and explain attributes of legal personality. (5 pts)
4. Elaborate formation of contract; requirements of valid contract in details. (10 pts)
5. Describe negotiable and commercial instruments. (6 pts)
Part-II: Case Study Analysis. (15 %)
Read the following case carefully and answer the questions that follow the case.
Assume that Haaloobaas Company and Kenya Enterprise have signed a contractual
agreement as between themselves in which the former has agreed to deliver a Sino Truck
for the latter for the price of one million birr on December 10, 2014. The date of
performance of the contract was decided to be 16 December, 2014 at 9:00 am undertaken at
Leadstar University College premises.
a. Elucidate the essential elements this contract has to fulfill to be valid. (3 pts)
b. Mention the separate and common obligations of Haaloobaas Company and Kenya
Enterprise. (2 pts)
c. Describe the defects that may occur in the consent of the contracting parties. (2 pts)
d. In what circumstances do Haaloobaas Company is forced to perform in person? (3 pts)
e. Identify and write the time and place of performance of the contract. (2 pts)
f. Write the remedies the law provides to Kenya Enterprise for Haaloobaas Company fails
to perform. (3 pts)
--------------------------------------------------------------------------------------------------------------------------------
Page 105 of 105

Business Law Module

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Business Law Module

Uploaded by

Copyright:

Available Formats

Business Law Module-------------------------------------------------Leadstar University College

GENERAL INTRODUCTION TO LAW

The objectives of this chapter are:

 To create understanding of the meaning of law and business law

 To describe the features of law

 To elucidate the functions law plays in the society

 To show the general classifications of law

1.1. Definition of Law

There is no consensus as to the definition of law as different scholars define it in a different

1. Plato: Considered law as a form of social control.

3. Cicero: Described law as an agreement of reason and nature or the distinction

Article 3347 of the Civil Code states:

1.2. Features of Law

1. Law is Obligatory: Law has to be obeyed by everyone/binds everyone unless otherwise

1.3. Functions of Law

? Dear learner, what functions do you think law serves?

The functions of law to mention few include:

a. Law guide show individuals and groups should act

1.4. Classification of Law

Substantive Law Procedural La w

Public Law Private Law Criminal Procedure Civil Procedure

o Constitutional law - Law of persons - Law of Evidence

 Define and explain the term law

 Identify the terms law and business law

 Describe the features of law

 Explain the functions of law

 Identify and classify law

Self Check Exercise-1

2. Which of the following is not a function of law?

Part II – Write Short Answers to the Following Questions.

LAW OF PERSON/LEGAL PERSONALITY

The objectives of this chapter are:

 To introduce concept of person and personality

 To describe attributes of legal personality

 To differentiate physical and legal person

 To elucidate the beginning and end of personality of natural/physical persons.

2.2. The Concept of Personality

? Dear learner, what is the difference between person and personality?

Persons: Are those beings capable of having right and duties/obligations.

2.3. The Nature of Legal Personality

Legal personality is an artificial creation of law.

1. Physical Persons: Consists of human beings.

2.4. Attributes of Legal Personality

Legal personality is characterized by the following attributes:

2.5. Natural Persons

2.5.1. Beginning of Personality of Natural Persons

This type of right is granted in the following three cumulative conditions:

2.5.1.1. Holding of Rights and Duties by Physical Persons

2.6. End of Physical (Natural) Personality

 Define and explain person and personality

 Identify and differentiate natural and legal person

 Describe the attributes of legal personality

 Explain the beginning and end of personality of natural persons

 Differentiate natural and legal person

Self Check Exercise-2

Part I – Write Short Answers to the Following Questions.

1. Differentiate person and personality.

LAW OF CONTRACT (LAW OF OBLIGATIONS)

The objectives of this chapter are:

 To introduce concept of legal obligations/law of contract

 To describe sources of obligation of law of contract

 To elaborate formation of contact or requirements of acceptable contract

 To elucidate effect of contract