Table of Contents

Chapter One............................................................................................................................................8
Introduction to Law................................................................................................................................8
1.1. Definition of Law......................................................................................................................9
1.2. Basic Features of Law.............................................................................................................10
I. Generality..............................................................................................................................11
II. Normativity............................................................................................................................12
III. Publicly Promulgated.........................................................................................................13
1.3. FUNCTIONS OF LAW...............................................................................................................13
1.4. Classification of Laws.............................................................................................................14
1.4.1. Public and Private Law...................................................................................................14
1.4.2. International and National Law......................................................................................15
1.4.3. Substantive and Procedural Law....................................................................................15
1.5. Hierarchy of Laws...................................................................................................................15
1.5.1. The FDRE Constitution...................................................................................................16
1.5.2. Federal Legislation.........................................................................................................16
1.6. Definition of Business Law.....................................................................................................17
Summary of the chapter....................................................................................................................17
Activities of the Chapter....................................................................................................................18
Chapter Two..........................................................................................................................................20
Law of persons......................................................................................................................................20
2.1. Definition and concept of personality....................................................................................21
2.2. Types of Persons....................................................................................................................22
A) Natural persons.........................................................................................................................22
B) Juridical persons........................................................................................................................22
2.3. Commencement and end of personality................................................................................23
2.4. Attributes of Personality........................................................................................................27
I. Name.....................................................................................................................................27
II. Residence...............................................................................................................................28
III. Domicile.............................................................................................................................28
IV. Rights and Liabilities...........................................................................................................29
2.5. Incapacity...............................................................................................................................30
Chapter Summary..............................................................................................................................30

1
 Activities of the chapter.....................................................................................................................31
Chapter Three.......................................................................................................................................33
Law of Contract.....................................................................................................................................33
CHAPTER OBJECTIVES:................................................................................................................34
At the end of the chapter business law students should be able to:........................................................34
 Explain the basic principles of law of contracts.............................................................................34
 Clarify the civil code provisions dealing with formation and effects of contract,..........................34
 Appreciate the strength and recommend solution for the weaknesses............................................34
 Explain and comment recent Ethiopian Court cases......................................................................34
3.1. Definition and Nature of Contract.........................................................................................34
3.2. Essential Elements for the Formation of Valid Contract.......................................................37
3.2.1. Capacity.........................................................................................................................37
3.2.2. Consent..........................................................................................................................38
3.2.3. Objects of Contracts.............................................................................................................43
3.2.4. Form of Contracts..........................................................................................................44
3.3. Effect of Contract...................................................................................................................45
3.4. Performances of Contracts....................................................................................................46
i. By Whom the Performance of the Contract is made.............................................................46
ii. Who May Receive Payment...................................................................................................46
iii. What to Perform....................................................................................................................47
iv. Place of performance.............................................................................................................47
v. Time of performance.............................................................................................................48
3.5. Non-Performance of Contract & Its Remedies.......................................................................48
3.5.1. Forced performance.......................................................................................................48
3.5.2. Cancellation...................................................................................................................49
3.5.3. Damages (Compensation)..............................................................................................49
3.6. Extinction of Obligations........................................................................................................50
i. Invalidation and cancellation of a contract............................................................................50
ii. Termination of contract.........................................................................................................50
iii. Remission of debt..................................................................................................................50
iv. Novation................................................................................................................................50
v. set-off.....................................................................................................................................51
vi. Merger...................................................................................................................................51
vii. Limitation of action............................................................................................................51

2
 Chapter summary..............................................................................................................................51
Activities of the chapter.....................................................................................................................52
1. Civil Code of the Empire of Ethiopia,1960.....................................................................................56
3. Tilahun Teshome, Basic Principles of Ethiopian Contract Law (in Ahmaric),Federal Supreme
Court,Addis Ababa, 1989.......................................................................................................................56
4. George Krzeczunowicz, Formation and Effect of Contracts in Ethiopian Law, Addis Ababa
University,1983......................................................................................................................................56
5. Rene David Commentary on Contracts in Ethiopia ,Hailesellasie I University, 1973......................56
6. Girma Gizaw Ethiopian Contract Law , General Provisions Commercial Printing Press,Addis
Ababa,2002............................................................................................................................................56
Chapter Four.........................................................................................................................................58
Special contracts...................................................................................................................................58
4.1. Law of Agency........................................................................................................................58
4.1.1. Definition and purpose of agency..................................................................................59
4.1.2. Sources of agency..........................................................................................................60
4.1.3. Scope of Authority.........................................................................................................61
4.1.4. Modes of Representation..............................................................................................62
4.1.5. Obligations of parties in agency contract.......................................................................63
4.1.6. Extinction Of Agency Relationship.................................................................................66
Chapter summary..............................................................................................................................67
Activities of the unit...........................................................................................................................68
2. Civil Code of the Empire of Ethiopia,1960.....................................................................................69
4.2. Law of Sale.............................................................................................................................70
4.2.1. General definition of contract of sales...........................................................................70
4.2.2. Formation of contract of sales.......................................................................................71
4.2.3. Obligations of buyer and seller......................................................................................73
Unit Summary....................................................................................................................................87
Activities of the unit...........................................................................................................................88
4.3. The Law of Insurance.............................................................................................................89
4.3.1. Nature of the Contract of Insurance..............................................................................90
4.3.2. Significance of Insurance................................................................................................92
4.3.3. The Rights and Duties of the Insured and the Insurer....................................................94
4.3.4. Basic principles of insurance..........................................................................................95
4.3.5. Types of Insurance Policies............................................................................................99
Summary..........................................................................................................................................102

3
 Activities of the unit.........................................................................................................................103
Chapter Five........................................................................................................................................105
Business and Business Entities............................................................................................................105
5.1. Business...............................................................................................................................105
5.1.1. Definition of Business...................................................................................................105
5.1.2. Elements of Business...................................................................................................107
5.2. Business Organizations........................................................................................................110
5.2.1. Definition.....................................................................................................................111
5.2.2. Classification of Business Organization........................................................................113
5.2.3. Legal Forms of Business Organizations........................................................................116
Summary..........................................................................................................................................122
Activities of the Chapter..................................................................................................................123
Chapter Six..........................................................................................................................................125
Law of banking....................................................................................................................................125
6.1. Definition.............................................................................................................................126
6.2. Economic significances of banks..........................................................................................127
6.3. Banking and Banking Transactions in Ethiopia.....................................................................128
6.4. Major Banking Transactions.................................................................................................130
6.4.1. Deposit of funds...........................................................................................................130
6.4.2. Bank transfers..............................................................................................................131
6.4.3. Deposit of securities.....................................................................................................133
6.4.4. Hiring of safes..............................................................................................................135
6.4.5. Discounts.....................................................................................................................138
6.4.6. Bank lending.................................................................................................................139
6.4.7. Documentary credits....................................................................................................140
Summary..........................................................................................................................................141
Activities of the chapter...................................................................................................................142
Chapter Seven.....................................................................................................................................144
The Law of Negotiable instruments....................................................................................................144
7.1. Definition and Characteristics of Negotiable Instruments...................................................145
A. Transferability......................................................................................................................145
B. Inseparability of the Document and the Rights therein.......................................................145
C. Better Protection for Holder in Due Course.........................................................................146
7.2. Types of Negotiable Instruments.........................................................................................146

4
 7.2.1. Commercial Instruments..............................................................................................146
7.2.2. Commercial Instruments..............................................................................................147
7.3. Negotiation of Negotiable Instruments...............................................................................150
i. Negotiation of Bearer Instrument........................................................................................150
ii. Negotiation of Instrument to Order.....................................................................................150
Summary..........................................................................................................................................152
Activities of the Chapter..................................................................................................................153
Chapter Eight
Law of Insurance
Nature of Insurance
Rights and obligation of the parties
BASIC PRINCIPLES OF INSURANCE.......................................................................................................157
A. Principle of Utmost Good Faith...........................................................................................157
B. Principle of Indemnity.........................................................................................................158
C. Insurable Interest..................................................................................................................159
D. Doctrine of Subrogation.......................................................................................................159
E. Doctrine of Contribution......................................................................................................160
Chapter Nine.......................................................................................................................................161
Labor Law............................................................................................................................................161
9.1. Definition of contract of employment.................................................................................162
9.2. Individual Employment Relation..........................................................................................163
9.2.1. Formation....................................................................................................................163
9.2.2. obligations of employee and employer........................................................................164
9.3. Termination.........................................................................................................................165
9.3.1. Effects of lawful termination........................................................................................166
9.3.2. Unlawful termination and its effects............................................................................166
9.4. Minimum working conditions..............................................................................................167
9.4.1. Minimum Wage...........................................................................................................167
9.4.2. Normal Working hours.................................................................................................168
9.4.3. Safe and Healthy working conditions...........................................................................170
Summary..........................................................................................................................................174
Chapter activity................................................................................................................................174
Bibliography........................................................................................................................................176
4. George Krzeczunowicz, Formation and Effect of Contracts in Ethiopian Law, Addis Ababa
University,1983....................................................................................................................................177

5
5. Rene David Commentary on Contracts in Ethiopia ,Hailesellasie I University, 1973..................177
6. Girma Gizaw Ethiopian Contract Law , General Provisions Commercial Printing Press,Addis
Ababa,2002..........................................................................................................................................177
7. Willaim L.Church, A commentary on the law of agency representation in Ethiopia Journal Of
Ethiopian law, Vol.3.............................................................................................................................177

Module Introduction
There is a well-known legal maximum which states that “ignorance of law is no excuse.” Here,
the assumption behind this maxim is that all laws of the land are made available to the public
and every member of the society is supposed to know them .As a legal ramification to this,
ignorance of law cannot be pleased for defense in a case before the court of law. Thus, you as
Wolkite University business law students and also as citizens of the country and members of
the society at large, supposed to know all laws of the country in general and business laws in
particular.

The knowledge of basic concepts of business laws is a matter of the greatest importance to
you for the fact that you will inevitably encounter with them on your day to day professional
6
career as well as in your private dealings. Although there is no an independent legal regime
referred to as business law, it can be understood to mean any laws that have been passed to
regulate commercial activities, the status of traders and business organizations engage in
commercial activities. Business law, thus, encompasses the law of traders, business
organizations, banking, insurance, sale, negotiable instruments, pledge, mortgage, lease etc. It
is obvious that these laws, in one ways or in another, affect the decisions of any business
organizations, traders, and the business activities in the country in general. It is by taking
account of this fact that business law course is offered to you.

This module is designed to enable business field students get familiarized with the basic
concepts of business laws. It is divided in to eight Chapters. Each of the unit is further divided
in to different topics. The first chapter of the module gives highlight on the definition of law,
purpose of law, classification of laws and hierarchy of laws with purpose of introducing
students’ with concept of business law. The second chapter is an extension of the first chapter
i.e. pre-requistory for other chapters which introduces the definition of person, types of
persons and attributes of personality. The third chapter encompasses a major area of business
law i.e. law of contract. Under this chapter, law which regulates contracts in general is
addressed. As an extension to this, law of agency, law of sale and law of insurance are
included under chapter of the module with the purpose of introducing students’ examples of
special contracts. The fifth chapter is all about business and business entities. Under this
chapter students will equipped with the concept of business and business organization from the
legal perspective. Particularly, students will analyze the advantage/disadvantage of each
business organizations. The sixth and seventh chapter focuses on banking transactions and
negotiable instruments respectively. The Last, but not least, chapter, chapter eight, introduce
labor law to business law students.

At the end of each chapter, there are activities and you are expected to do all of them and
thereby assess your own achievement. Besides, under each chapter, materials used for the
preparation of are cited as references.

While preparing this module, we tried our best to present complex legal concepts, theories,
rules and principles in a simple way so as to be understood easily, and also avoid unnecessary

7
legal jargons. Finally, we have listed down the specific objectives of each unit at the beginning
of each unit so as to serve you as guidelines while you are studying the material

Chapter One
Introduction to Law

Introduction

Most scholars agreed that there is no universally agreed definition of what law is. The main
difficulty in defining law is there is a difference in legal structures in different legal system.
But it is presumed all laws have similar features like the generality, normativity and
promulgation. This chapter tries to address definition of law, purpose of law, classification of
law and hierarchy of law and it mainly focuses on general introduction of law from the
Ethiopian legal system perspective. Thus, definition of law/business law, features of law,
function of law, hierarchy of laws and classification of laws will be covered by this chapter. In
addition, students will be introduced to the concept of business law and what business law
consists of.

8
Chapter Objectives

After the completion of this chapter, business law students will be able to:

 Explain the nature of law;

 Define business law

 Identify methods of classification of laws;

 Categorize laws in their hierarchical order;

 State the functions of law ;

1.1. Definition of Law

? What is Law? Can you guess what essential points should be taken into account to define law?

There is no agreement amongst philosophers and legal writers as to what should be an

acceptable definition of law. All definitions and characterizations thread along two extremes.
One extreme emphasizes its coercive character. While the other stresses the social acceptance
or actual observance of law by the community to which it is addressed. However, many legal
scholars and philosophers strongly argue for the necessity of law considering the nature of
human being as inherently evil or at best the amalgam of good and bad impulses which are
always in conflict, with the bad tending repeatedly to prevail over the good. To these
philosophers, it seems evident that there are dark and dangerous forces implanted in humans
very nature which need to be curtailed and the absence of which there will be anarchy which
will bring the human’s state no higher than animal. Law then, in their view, is the
indispensable restraint upon the forces of evil and anarchy. Without law, government, and
coercion, human society could not exist, and as such, law was a natural necessity for human
being. This argument necessarily and naturally triggers one most important question as to what
should be or is an acceptable definition of law.

The definition and characteristics of law depends on the different legal structure and
institutions of a country. Please read the following different definitions of law by different
scholars and then answer the question that follow.

9
“Law is an ordinance of reason for the common good, promulgated by him who has the care of
the community.” St. Thomas Aquinas

“Law is the standard of what is just and unjust.” Justinian

“Law is the art or science of what is equitable and good.” Ulpian

“Law is the highest reason implanted in nature. “ Cicero

“Law is a rule of civil conduct, prescribed by the supreme power of state, commanding what is
right and prohibiting what is wrong.” Blackstone

“Law is the body of principles recognized and applied by the state

in the administration of justice.” Salmond

“Law is uniform rules backed by the authority and power of Government.” Woodraw
Wilson

“Law is the aggregate of rules set by men as politically superior, or sovereign, to men as
politically subject.” Austin

Question: Why do you think that there is no universally accepted definition of and can you
sort out common characteristics of law bearing the above definitions in mind?

1.2. Basic Features of Law

Even if there is no universally accepted definition of law, analysing the features and nature
common to all laws would help us to understand the concept of law. Among these features and
natures, the ones considered as essential include generality, normativity , sanction and public
promulgation

I. Generality

Law is a general rule of human conduct. It does not specify the names of specific persons or
behaviours. Hence, its generality is both in terms of the individuals governed and in terms of
the social behaviour controlled.

10
The extent of its generality depends on-on whom the law is made to be applicable. Consider
the following illustrations.

1. “Every person has the inviolable and inalienable right to life, the security of person
and liberty.” [Article 14 of the 1995 Constitution of the Federal Democratic Republic
of Ethiopia]. This constitutional provision is made to be applicable to every person in
Ethiopia. so, the extent of its generality is national. This is less general than the first
illustration.

2. “The term of office of the presidents shall be six years. No person shall be selected
president for more than two terms” [Article 70(4) of the 1995 Constitution of the
Federal Democratic Republic of Ethiopia]. This law is made to be applicable only to a
person who becomes a president in Ethiopia. Therefore, it is less general than the first
illustration.

Under all these illustrations, the subjects of laws are given in general terms. However, the
extents of the generalities decrease from universality to an individual person. Generality of the
subject of the law may serve two purposes. Firstly, it promotes uniformity and equality before
the law because any person falling under the group governed by the law will be equally treated
under the same law. Secondly, it gives relative permanence to the law. Since it does not
specify the names of the persons governed, the same law governs any person that falls in the
subject on whom the law is made to be applicable. There is no need to change the law when
individuals leave the group. This is what can clearly be seen from the second illustration. Even
if the former president’s term of office has lapsed, the same law governs the present and future
presidents without any need to change the law. The permanence of law is indicated as relative
for there is no law made by person, which can be expected to be applicable eternally.

II. Normativity

Law does not simply describe or explain the human conduct it is made to control. It is created with
the intention to create some norms in the society. Based on this feature, law can be classified as
permissive, directive or prohibitive.

 Permissive Law
11
Permissive laws allow or permit their subjects to do the act they provide. They give right or option to
their subjects whether to act or not to act. Most of the time such laws use phrases like: has/ have the
right to, shall have the right, is/are free to. The provision “ Any married person may carry on a trade

as though he were unmarried unless his spouse objects thereto as provided in Art. 645 of the
Civil Code.(article 16 of the commercial code) can be taken as an example of permissive law.

 Directive law

Directive law orders, directs or commands the subject to do the act provided in the law. It is not
optional. Therefore, the subject has legal duty to do it whether s/he likes it or not, otherwise, there is
an evil consequence that s/he incurs unless s/he does it as directed by the law. Directive law usually
uses phrases like: must, shall, has/have the obligation. Look at the following example; "any contract
bidding the government or a public administration shall be in writing and registered with a court,
public administration or notary." Article 1725 of the civil code.

 Prohibitive law

Prohibitive law discourages the subject from doing the act required not to be done. If the subject does
the act against the prohibition, an evil follows as the consequence of the violation. All criminal code
provisions are prohibitive laws. Prohibitive laws usually use phrases like may not, shall not, should
not, no one shall/should, no person shall/should; the following article is a typical example of
prohibitive law.

“a contract shall be of no effect where the obligation of the parties or one of them cannot be
ascertained with sufficient precision.” Article 1714 of the civil code.

III. Publicly Promulgated

There is a well know legal maxim which says that “Ignorantie juris non- excusat” (ignorance
of law is no excuse).1 This very principle presupposes the fact that the law is made available to
the knowledge of the citizen in common language and means. A law has to appear to be public
and effective. The language of the law ought generally to be simple to convey reasonable

1
This legal maxim is incorporated in article 2035, " ignorance of the law is no excuse"

12
meaning to an average citizen. If the law lacks this feature, then it obviously defeats the
purpose and meaning the afore-cited legal maxim.

For instance, the laws of the Federal Government of Ethiopia are required to be made public
by the Federal Negarit Gazeta.2

1.3. FUNCTIONS OF LAW

Why we need law? What functions does law have in your localities? The object of law is to
ensure justice. The justice may be either distributive or corrective. Distributive justice seeks
to ensure fair distribution of social benefits and burden among the members of the community.
Corrective justice, on the other hand, seeks to remedy the wrong. Thus if a person wrongfully
takes possession of another’s property, the court shall direct the former to restore it to the
latter. This is corrective justice. It must, however, be stated that justice alone is not the only
goal of law.

Professor Cheeseman described the following points as primary functions served by the law:

 Keeping the peace

 Shaping moral standards

 Promoting social justice

 Maintaining the status quo

 Facilitating orderly change

 Facilitating planning

 Providing a basis for compromise

 Maximizing individual freedom

The above functions of law can be summarized as follows.

A) Social control – members of the society may have different social values, various behaviours and

2
Negarit Gazetta establishment Proclamation No.2, 1995

13
 interests. There are informal and formal social controls. Law is one of the forms of formal social
controls.

B) Dispute settlement

Disputes are un avoidable in the life of society and it is the role of the law to settle disputes. Thus,
disagreements that are justiciable will be resolved by law in court or out of court using alternative
dispute settlement mechanisms

C) Social change

A number of scholars agree about the role of law in modern society as instrument to social change.
Law enables us to have purposive, planned, and directed social change.

1.4. Classification of Laws

Classification is a shaping and developing of traditional systematic conceptions and traditional
systematic categories in order to organize the body of legal precepts. Laws can be classified as public
and private, international and national, substantive and procedural.

1.4.1. Public and Private Law

 Public law regulates the acts of persons who act in the general interest, in virtue of a
direct or mediate delegation emanating from the sovereign Private law is thus the
residue of the law after we subtract public law.

 Private law regulates the acts, which individuals do in their own names for their own
individual interest.

1.4.2. International and National Law

 International law –It consists of rules which regulate relations between State inter se.
Oppenheim has defined international law as “the body of customary and conventional
rules which are considered legally binding by civilised States in their intercourse with
each other.”

14
 International law includes (a) the rules of law relating to functioning of international
institutions and organisations, their relations with each other and their relations with
States and individuals; and (b) certain rules of law relating to individuals so far as the
rights and duties of such individuals are the concern of the international community

 National law- law that pertains to a particular nation (as opposed to international law).
It is a law of a nation, say the law of Ethiopia. Such law is applicable all over a
country in question. It is also known as law of the land.

1.4.3. Substantive and Procedural Law

Procedural law is nothing but a detached part of the civil law governing the manner of asserting and
defending rights before courts.

Substantive law is that which defines a right while procedural law determined the remedies.
Procedural law is also called ‘law in action’ as it governs the process of litigation. Substantive law is
concerned with the administration of justice seeks to achieve while procedural law deals with the
means by which those ends can be achieved. For example, law of contract and law of business and
business organizations are examples of substantive laws whereas the law of civil procedure is an
example of procedural laws.

1.5. Hierarchy of Laws

The term “hierarchy” expresses the “ascending series ranks or degrees of power and authority with
the correlative subjection, each to the one next above” Therefore, hierarchy of laws is “a chain of
subordination” between laws. The hierarchy of laws within the present legal structure of Ethiopia can
be ordered as follows.

1.5.1. The FDRE Constitution

The 1994 FDRE Constitution in its Art 9(1) states that the Constitution is the supreme law of the land.
It reads as “any law, customary practice, and act of an agency of government or official act that
contravenes the Constitution is invalid.” In this Article, the phrase “any law” is used to cover all laws,
which are now in force both at the central and at the regional levels.. Therefore, the Constitution of
the FDRE is superior to all federal and state laws including the state constitutions. This Constitution is

15
binding on all the authorities of both the federal and of the regional states [Art 9(3) of the
Constitution].

Pursuant to Art. 9(4) of the Constitution, all international agreements ratified by Ethiopia are integral
parts of the laws of the country. According to this sub-Article, since international treaties
(agreements) are part of the laws of Ethiopia, they should be included under the phrase “any law” in
sub-Article one of the present Article. Thus, it would be fair to conclude that international treaties,
being part of those laws, are lower in hierarchy than the Constitution.

1.5.2. Federal Legislation

 Proclamations: the position of federal legislation on the ladder of hierarchy is below

the federal Constitution. Federal legislations includes proclamations, regulations and
directives. Federal proclamations enacted by the House of Peoples’ Representatives,
which is the supreme legislative organ of the federal government fall under second
ladder of the hierarchy. As said shortly before, the House of Peoples’ Representatives
is the supreme authority of the federal government. As a result, the federal
proclamations enacted by it are superior to all other laws made by the federal
authorities.
 Regulations: The Council of Minister is authorized to issue this legislation. In this case,
the Council of Ministers derives its power to make the regulations from the supreme
legislator i.e. the House of Peoples’ Representatives through the primary legislation.
Consequently, the position of the regulations on the ladder of hierarchy is below the
proclamations. However, in so far as the regulations are passed by the Council of
Ministers, they are higher in hierarchy than the directives passed by each ministry.
 Directives: each ministries, agencies or authorities may be authorized to issue
directives. Each Ministers, agencies or other equivalent organ derives its power to
make the regulations from council of ministries. Consequently, the position of the
directives on the ladder of hierarchy is below the regulations.

1.6. Definition of Business Law

Business law is a body of law which regulates commercial transactions. There is no an

independent branch of law or legal regime referred to as business law or commercial law
16
because business law is collection of laws related to business. Business law is part of private
law. It refers to domestic or international private laws which regulate business activities.

In Ethiopia, the commercial code of 1960 is directly linked to business law. This code covers,
among others, the law of traders, business organizations, insurance, negotiable instruments and
banking transaction. However, this doesn't mean that the commercial code is the only business
law. There are also several legislations enacted to govern commercial activities. The
commercial code itself has made a cross-reference as to the application of the provisions of the
Civil Code to the status and activities of persons and business organizations carrying on a
trade. As such the provisions of the civil code relating to contract in general, sale, agency,
suretyship, pledge, mortgage etc are inevitably applicable to regulate commercial activities.
Besides, different proclamations and regulations which regulates businesses are considered as
part business law. For instance, tax laws, commercial registration and business licensing
proclamation and trade practice and consumer protection proclamations and labor law and so
on.

Summary of the chapter

Law is the formal regime that orders human activities and relations through systematic
application of force by a governing body and the society it rules. It requires or prescribes or
even restricts given actions as well as empowers citizens to engage in certain activities.

Law is not a set of institutions using arbitrary force. It has essential characteristics. Generality,
publication, prospective operation and flexibility are some of the chief characteristics of laws
in civilized nations.

To maximize the fulfillment of the interests of the community and its members and to promote
the smooth running of the machinery of society can be regarded as functions of law.
Reconciliation of conflicts between competing interests is also achieved through the
instrumentality of law.

There is no an independent legal regime called business law or commercial law. Business law
is part and parcel of domestic private law. It refers to all laws which regulate business

17
activities and the status of traders and business organizations carrying on a trade. In Ethiopia,
there is one codified business law referred to as the Commercial Code of Ethiopia of 1960.
This code deals with business laws, such as the law of traders, business organizations,
insurance, banking and negotiable instruments. There are also legislations that deal particularly
with business transactions .Laws, such as contract in general, and special contracts like sale,
agency, surety ship, pledge, mortgage etc. have paramount importance in regulating
commercial transactions.

Activities of the Chapter

Based on your reading to the first unit, attempt the following questions.

1. A law that contains the phrases like ‘shall not’, ‘is punishable’, and ‘should not’ is?
A. permissive B. prohibitive C. directive D. all
2. Which of the following is the function of law?

A. Law is required to adjust human relations in accordance with the ideal of

justice.
B. Law should determine which of the claims or interests of individuals and
groups are reasonable and should be protected.
C. Both
D. none
3. Which one of the following could be the correct hierarchy of Ethiopian laws?
A. Constitution ~ regulation ~ proclamation
B. Proclamation ~ regulation ~ directive
C. Regulation ~ proclamation ~constitution
D. B and c

4. Identify whether business law is private law, public law, national law, international
law, procedural law or substantive law?

5. Law is general, Explain

6. One of the natures of law is normativity. Analyse the concept of normative.

7. Define law in your own words.

18
 8. “Ignorance of law is no excuse” Elucidate this statement and elaborate the salient
features of law.

9. Discuss the principal functions of law as espoused by an American writer, Roscoe

Pound.

10. Define business law. Is there a distinct body of business law? State your reasons and
list possible laws that can be considered as business laws.

11. Business law refers to all laws that regulate traders and business organizations carrying
on trade. Do you agree or disagree? Why?

References
1. Civil Code of the Empire of Ethiopia, Proclamation No. 1 of 1960

2. Tesfaye Abate, Materials on Introduction to Law & Ethiopian Legal System

3. David Kelly et al, Business law, 4th ed., 2002

4. Miller and Jentz, Business law today,9th ed. 2011

19
 Chapter Two
Law of persons

General Introduction

Law of Persons is a branch of private law and serves as a foundation for many branches of the
law such as contracts, business originations law and others. This chapter a foundation for all
private laws because law commonly regulates persons.This chapter introduces the concept of
personality which is a requirement for entry into and/or the performance of juridical acts. This
chapter is, inter alia, concerned with the definition of natural (physical) persons and juridical
persons, commencement and end of physical and juridical personality, attributes of personality
including name, residence and domicile and capacity to hold and to exercise rights.

Specific Learning Outcomes:

At the end of this chapter students are expected to be able to:

 define physical and juridical persons;

 explain juridical personality;

20
  explain the beginning and end of physical and juridical personality;

 explain and contrast residence and domicile;

 clarify attributes of personality

 distinguish between the concepts of holding and exercising rights; .

2.1. Definition and concept of personality

The concept of personality is fundamental concept under the law. Under any modern legal
systems, it is only person that are the subjects of rights and duties. Only persons enjoy rights,
only persons are bound by law. The concept is thus important as it provides for the definition
of those beings or entities that can be bound by the law. Thus, the first question to answer is
quite natural: what is meant by the word “person”?

Those beings capable of having rights and obligations are called “persons.” The word
“person” has a wider meaning than the word “human being”. A person is anything recognized
by law as capable of bearing rights and duties. According to Planiol 3 the word “person” is a
metaphor borrowed by the ancients from the language of the theatre. Persona designates,
in Latin: the mask which covers the figure of the actor. It had an open mouth, containing
a metallic thin plate, so adjusted that it gave greater resonance to the actor’s voice. … As
there were invariable types for each part in the play, the audience recognized the
character as soon as it saw the mask. Persona served in this way to designate what
moderns call a role or part. And the word passed into current speech.

2.2. Types of Persons

Contemporary legal literature recognizes two categories of persons. They are

real/natural/ persons who are living beings or human biengs and
fictitious/juridical/legal/ persons who have only an imaginary existence.

3
M.Planiol, treatises on civil law, volume 1, part 1, Louisiana state law institute, 1959, pp. 243-244

21
A) Natural persons.

These are human beings who are referred to as natural persons. Non-human creatures are
not legal persons and do not have the full range of rights and duties which a human
being acquires at birth. Yet animals may (as objects of the law) be protected by the law for
certain purposes, e.g. Conservation but they are not persons who can perform juridical
acts.

B) Juridical persons

Legal personality is not restricted to human beings. In fact various bodies and
associations of persons can, by forming a corporation to carry out their functions, create
an organization with a range of rights and duties not dissimilar to many of those
possessed by human beings. The law for different justifications entrusted artificial
persons to perform juridical acts. The law and registrations are source of artificial
persons. Legal personality granted to Wolkite university based on regulation number...... 4
is an example of the former. Whereas personality acquired by share company after
registration in trade registry is an example of the later. Different nongovernmental
organizations(NGOs) have also personality by registration. We can take the Guragie
development association as an example. The state is recognized by law as person. Organs of
the state such as Ministries, Authorities, and Agencies, and Commissions, Public enterprises of
the Federal Government and various bureaus of the Regional States are persons under the law.
Religious institutions are also recognized as a person on registration. All these entities are
persons and can have legal relations with other persons.

2.3. Commencement and end of personality

According to article of the 1960 Ethiopian civil code "The human person is subject of
rights from its birth to its death”

For physical (natural) persons, the beginning of legal and natural existence is simultaneous.
Personality normally begins with birth. This rule applies to all human beings without

4
Wolkite university establishment regulation No.

22
distinction. Here, the question is that what requirements should a human being satisfy to
acquire personality?

In the Ethiopian legal system, birth is sufficient in itself to confer personality. No conditions
are laid down in this respect. Once a human body is born, it is a person. The code does not
provide a definition for the word birth. Hence, the term “birth” may create some problems
of interpretation. Black’s law dictionary defines birth as “the act of being wholly
brought to separate existence.” Then the question when is a child considered to have a
separate existence follows. “In this respect one tends to make a distinction between the
complete extrusion of the child from his mother’s womb and the cutting of the
umbilical cord. At any rate from that moment on, the child becomes a person in the
legal sense of the word and, in the ultimate instance; birth will be established through
medical evidence.”5

The birth of juridical persons seems to apply at the time the law which gives
personality publicized or the time of registration in association or business
organizations. Wolkite university acquired personality at the time the regulation
publicized through the Negarit Gazette. 6

It is the principle that birth is the beginning of personality. However, if the law only assumes
personality after the date of birth, there are instances where the interest of a conceived child is
put at stake. A case in point is the inheritance right of a child whose father has died before he
is born. In such case the law puts an exceptions in the following wordings.

Art. 2. principle

A child merely conceived shall be considered born whenever his interest so demands provided
that he is born alive and viable.

Art. 4. - Viable or not viable child.

5
Vandelinden p.10
6
Regulation cited above at note

23
 (1) A child shall be deemed to be viable where he lives for forty-eight hours after
his birth, notwithstanding any proof to the contrary.

(2) A child shall be deemed to be not viable where he dies less than forty-eight
hours after his birth.

(3) The presumption laid down in sub-art. (2) may be rebutted by providing that the
death of the child is due to a cause other than a deficiency in his constitution.

Therefore, a conceived child may acquire personality while he is still in his mother’s womb provided
that:

A) his interest so requires, particularly where the interest of a conceived child

requires that he be called for succession (Article 834),

B) he is born alive, and,

C) he is viable

Please read the following Extracts from Vanderlinden and answer the questions there after

“1. The child must have some interest in the extension

A problem can arise here if one assimilates the word interest to the word

rights, as some scholars do. Restricting personality to the possession of rights

without duties would first of all be in contradiction with the notion of

personality as being composed of rights and duties. Then, there are cases

where the fact of holding rights is bound to that of having simultaneous

duties, the balance between the two being highly favorable to the conceived

child. This would be the case for instance in matters of succession, where the

heir to an estate is bound to pay heavy succession taxes at the same time

that he acquires the rights which are part of the estate; without paying these

24
taxes he will not be able to enjoy the rights he could acquire. Thus the

acquisition of rights is clearly connected with corresponding duties. By

preventing him from being bound by duties, one would at the same time

prevent him from taking advantage of the connected rights. This does not

seem to be the purpose of the legislator who used a general word like

interest in order precisely to convey a general idea containing the sum of

both rights and duties which could be attributed to the conceived child. Thus,

to take but one more example, it would be in the interest of a conceived

child to be an heir to a succession of which the assets would, by far, exceed

the liabilities; in such case he would, at the same time, have rights and

duties, but the fact of being considered as a person would be in his interest.

Finally one must insist upon a peculiarity of the personality granted to the

conceived child. Such personality is only granted to him in particular

situations where his interest so requires. Thus it is not because one decides

to consider the conceived child as a person for, let us say, the sake of

accepting a donation that it automatically becomes a person until his birth.

He is only considered a person for the purpose of accepting the donation

and nothing else. As a result, if a succession devolves upon him later on, of

which the debts exceed the assets, it can very well be that his personality will

not be invoked in connection with that succession while it has been invoked

earlier in the case of the donation. Thus, to some extent, he may be

considered as a human being but this life lasts only the time needed to

assess his rights when his interest so requires.

2. The child must be born alive

25
Not much needs to be said on this condition. This will essentially be a

question to be determined by medical evidence. As already mentioned, a test

consists in establishing the existence of respiration by checking the entry of

air into the lungs; another one refers to independent circulation. Let us only

mention that the condition of being born alive is as essential as the previous

one. A child, dead in his mother’s womb, will never be considered as having

had personality. But it is also true that this condition has no importance as

such because of the existence of the viability condition. Obviously if the child

has to live for forty-eight hours in order to be considered a person, he must

necessarily be born alive. If he is born dead, he will certainly not prove viable.

3. The child must be born viable

Under Article 4 of the Civil Code, the Ethiopian legislator has opted for a

solution in which some presumptions are constituted enabling one to

determine (in some cases without any possible contestation) if a child is or is

not viable.

First, a child who lives for 48 hours is presumed to be a person from the

moment of his conception onwards.

Second, if a child dies before the expiry of the 48 hour limit, there is a

presumption that he is not viable and the first presumption, that he was a

th
person from the 300 day before his birth onwards, cannot operate. But

contrary to the first case, this second presumption is not irrebuttable and can

be challenged in court. Again medical evidence will be essential as the party

challenging this presumption will have to prove that death is not the result of

a deficiency in the child’s constitution. These last six words are fundamental
26
for the application of this section of Article 4. They cannot be interpreted at

the moment as it will be for the courts, on the basis of medical evidence, to

decide progressively what are or are not deficiencies in a child’s constitution.

Still there are obvious cases where the death does not result from a

constitutional deficiency, e.g., if the child is dropped by someone and dies of

a fracture of the skull, if he is killed in an automobile accident, etc. If it is

proved that death came as a result of something other than a deficiency,

then the child can be considered as having been viable."

Questions: 1. what is the purpose of 'born alive' requirement of the civil code?

2. if someone throw a stone intentionally in a pregnant women and then killed the
conceived child, do you think this is considered as murder of a person
and then punishable?

2.4. Attributes of Personality

I. Name

Names have the purpose of identifying individual physical persons. They are among the
attributes of physical personality. A legal person usually has a name. The name of a business
organization is chosen by the members, subject to any legal requirements. There are no
specific requirements for the name of an ordinary partnership. The name of any of the other
types of business organization must contain the type of organization it is –“General
Partnership,” “Share Company,” etc. In addition, the name of a general partnership must
consist of the names of at least two partners and the name of a limited partnership may only
consist of the names of general partners. The names of a share company and private limited
company may be freely chosen; for example, with the names of one or more members, or a
term of fantasy, an indication of the purpose of the business, or a combination of these.

Article 305 of the Commercial code prohibits the choice of a share company name which
offends public policy or the rights of third parties. This is the only place a specific requirement

27
of this nature is established, but the principle would seem applicable to every business
organization. Dear students please read article 20 of the commercial registration and business
licensing proclamation which provides the principles of trade names in the Ethiopian
commercial world.

II. Residence

In addition to identifying persons by name, persons should also be individually located.

Domicile and residence identify the location of persons for the purpose of legal transactions.
Residence is more specific and links a person to the particular place where he normally
resides. “The residence of a person is the place where he normally resides”

The determination of residence is essential for the purposes of marriage, successions, contracts
and summons. It is also essential during elections, for taxation and other purposes.

A person may have several residences and in such cases one of them shall be considered as
“principal residence” owing to the criteria of normality, frequency and the length of time that a
person relatively stays in one of the residences. The issue whether a person’s presence in a
particular residence is normally more predictable than that of other residence(s), and how
frequently and how long he lives in that particular place are the factors we may consider when
two or more residences seem to have the characteristics of principal residence.

III. Domicile

Domicile defines a person’s legal tie to a place that has its systems of law. A person can have
only one domicile at a time. New domicile is acquired where a person establishes his residence
in a new country with the intention to live there . Such a person may acquire new domicile
without changing his citizenship. A person may be an Ethiopian or a foreigner with regard to
nationality or citizenship, and can have Addis Ababa as his domicile.

Article 183 defines domicile as “the place where such person has established the principal
seat of his business and of his interest, with the intention of living there permanently”.
Principal seat of business and Permanent intention to reside in a certain place are the two

28
necessary requirements in domicile. The issue of domicile arises when conflict of laws require
the determination of the legal system that must be applicable.7

Domicile differs from residence in two respects. First, domicile is a unitary concept; a person
may have several residences but only one domicile at a given time. The latter statement must
be taken to mean that he may only have one domicile at a time under the law of particular
state. Secondly, domicile denotes an element of permanency; it is the place where a person
resides and has established his interests with the intention of living there “permanently” a term
which also has different meaning. But we may say as a general proposition that domicile
requires residence in a particular place coupled with the intention to live there “permanently”.

IV. Rights and Liabilities

Many attributes are directly connected with the capacity of a legal person to enjoy rights.
These include, particularly with regard to business organizations, the following:

A) the organization may sue or be sued.

B) The property of the organization is not available to satisfy judgments against its
members on their personal debts. A personal creditor of a member who obtains a
judgment against (the latter) may not have it executed on the property belonging to the
organization even if the property was contributed to the organization by that member.
The member is not the owner of such property, either alone or jointly. On the other
hand, the personal creditor may proceed against the membership interest of the
member.

C) A business organization may be put into bankruptcy or employ a scheme or

arrangement.

D) The business organization is primarily liable to pay the taxes of its property, income
and taxable activities

7
read R. Sedler, Nationality, Domicile and the Personal Law in Ethiopia, Journal of Ethiopian Law, Vol. II, No.1,
Summer 1965 for further understandings.

29
 2.5. Incapacity

In principle, every person without distinction holds rights of personality. However,

there are restrictions in the exercise of these rights by minors, insane persons, etc. Even
if they hold all civil rights from the moment of birth. We should thus make a distinction
between holding rights and exercising them. A person who holds rights and exercises
them is said to have the capacity to enter into legal relations, while a person who holds
rights, but exercises them through a guardian or tutor is referred to as incapable
person. There are two kinds of incapacity: general and special incapacity. general
incapacity relates to age, mental status and crime whereas special incapacity rules on
citizenship. A person who didn't attain the age of 18 is called a minor. mental status
incapacity relates to notorious and judicial interdicted persons. A person who is
incapable because of crime is called legally interdicted person. According to article 390
of the civil code " no foreigner may own immovable property situated in Ethiopia
except in accordance [the law]."This is called special incapacity. These persons capable
of performing other juridical acts and they have full capacity of performing all juridical
acts except ownership of immovable property. It seems however that this rule is not
applying to Eritrean's and Djiboutian.

Chapter Summary

The concept o personality is fundamental concept under the law. Under any legal system, it is
only persons that are subjects of rights and duties. Only persons may enjoy rights. The word
person refers to both human beings and other entities recognized by law as persons. The law
may accord personality to any things or beings. The state is recognized by law as person.
Organs of the state such as ministries, authorities, agencies, commissions, public enterprises of
the Federal Government and various bureaus of the Regional States are persons under the law.
These entities are persons and can have legal relations with another person. Associations,
business organizations such as companies, etc. are given personality by law. These entities are
persons and can have legal relations with each other. They acquire all the attributes of
personality.

30
For legal persons, enjoyment of rights begins after the fulfillment of formation, registration &
publicity requirements. But regarding physical personality, the enjoyment o frights begins with
birth. The human person is subject of rights from its birth to its death. Even though, in
principle, a human person is the subject of rights from its birth, a baby not yet born may be
considered as a subject of rights for the purpose of protecting its interest. Enjoyment of rights
is different from exercise of rights. All physical persons enjoy rights without exception. But all
physical persons do not have the same capacity of exercising rights. The termination or end of
personality for physical and legal persons is death and dissolution respectively.

Activities of the chapter

Based on your reading to the second unit, attempt the following questions.

1. What are the requirements for giving personality to a conceived child?

A. Viability C. Born alive E. All
B. Interest of child D. Consent F. All except d

2. The place where a person normally resides is called

A. Domicile

B. Residence

C. Liability

D. contract

3. Which one of the following is true?

A. birth is the beginning of personality and death is the end of personality
B. payment of price is obligation of a seller
C. all payments are performances but all performances are not payments
D. all

31
1. What is “person” in a legal use of the term?

2. What are attributes of personality?

3. Distinguish between physical person and juridical person.

4. Mrs. Almaz and mr. Mekuria began to live as a husband and wife since a long
time go. However, their marriage was not joyful to the level of their expectation
due to their liability to see the fruits of their marriage i.e. Child. After such long
time, almaz go to clinic to check whether she is pregnant and the result of the
examination shows that almaz is three months pregnant. When she goes back to
her house to tell her husband about her pregnancy, she heard a bad news as to
the death of her husband due to car accident. She gave birth to a child six
months after the death of her husband but the child dies before attaining forty
eight hours due to the failure of the hospital to give necessary care.

Question: Is the child viable and capable of succeeding his father?

References

1. The Civil Code of Ethiopia, 1960

2. The Constitution of the Federal Democratic Republic of Ethiopia, 1995
3. E. Stebek, Ethiopian Law of Persons: Notes and Materials (Justice and Legal System
Research Institute), 2007
4. Jacques Vanderlinden, Commentaries Upon (Ethiopian) Law of Physical Persons
(HSIU, 1969)
5. Robert Allen Sedler, Nationality, Domicile and the Personal Law in Ethiopia, Journal
of Ethiopian Law, Vol. II, No.1, Summer 1965

32
 Chapter Three
Law of Contract

Introduction

Contract is an institution whereby people voluntarily assume proprietary obligation, and is

basically premised upon principles of freedom of contract, equality of bargaining power, and
sanctity of contract The purpose of the chapter is to study and assess the extent to which the
law enforces these principles vis-à-vis other legitimate interests.

The chapter will begin with discussions about the meaning, in general. It shall also deal with
the meaning of contract as one source of obligation and assess the purposes & scope of
contract law as well as the economic analysis of contract law. It shall then discuss the
formation of contracts, the similarity and difference between void and void able contracts, the
effects of contracts including interpretation, variation and performance, non-performance and
its remedies. Finally the modes of extinction of obligation will also be touched upon although
the detail shall be covered under Law of Contract II. The study shall, in general, be made in a
comparative discussion about theoretical foundations, legal principles and rules and cases. An
emphasis shall be made on contemporary issues emerging within the Ethiopian legal system.

CHAPTER OBJECTIVES:

33
At the end of the chapter business law students should be able to:

 Explain the basic principles of law of contracts

 Clarify the civil code provisions dealing with formation and effects of contract,

 Appreciate the strength and recommend solution for the weaknesses.

 Explain and comment recent Ethiopian Court cases.

3.1. Definition and Nature of Contract

A contract has been defined by different scholars in various ways. For Salmond, a contract is
an agreement, creating and defining the obligation between parties. Sir William Anson defines
a contract as an agreement enforceable at law made between two or more persons by which
rights are acquired by one or more to acts or forbearances on the part of others. Another
scholar called G.H, Treitel defines a contract as an agreement giving rise to legally enforceable
obligations binding the parties to it. For Sir Fredrick Pollock, every agreement and promise
enforceable at law is a contract. A contract is, as defined by Halsbury, an agreement between
two or more persons which is intended to be enforceable at law and is constituted by the
acceptance by one party of an offer made to him by the other party to do or to obtain from
doing some act.

A contract is an agreement between two or more persons to do or to abstain from doing a

particular act. A contract invariably creates a contractual obligation between the parties by
which certain rights are given to one party and some corresponding duties are imposed on the
other party. Thus the result of a contract is a contractual obligation by virtue of which the
contract is enforceable at law. The main factor which distinguishes contractual obligations
from other legal obligation is that they are based on the agreement of contracting parties. The
term obligation includes every duty enforceable by law. An obligation emanates from various
sources such as contacts, law and tort. It refers to tie or bond which constrains a person to do
or suffer something; it implies a right in another person to which it is correlated and it restricts
the freedom of the obligee with reference to definite acts and forbearances, but to be enforce
able at law, it must be a legal obligation at the exclusion of merely moral, social or religious

34
one. It is also noting worth that when we talk about contract we are referring to obligation that
emanates from the very consent of the contracting parties

Coming to our legal system, contract is clearly defined as on agreement whereby two or more
persons as between themselves create, vary or extinguish obligations of proprietary nature. In
every contract, therefore, there should be at least two contracting parties. No one can enter in
to a legally binding contract with oneself. One incidental question may be raised here in
relation to the definition of contract. Is that: what does agreement mean? Or when do parties
said to be agreed?

In this regard there are two theories. That is the theory of intention and the theory of
declaration. According to the theory of intention, two or more persons are said to be agreed if
there is meeting of mind or intention. But the advocates of the other theory (declaration theory)
argued that parties are said to be agreed if only there is meeting of declarations. According to
this theory the internal reservation of the contracting parties is not legally significant. The
intention (internal thought) of contracting parties is not necessarily expected to be the same.
What is legally significant is their external manifestation or declaration or conduct.

Assume your business law instructor gives you a paper to sign showing that each of you have
borrowed one hundred birr from the instructor. And you sign on the paper without reading
thinking that it is attendance. Is there any agreement?

Here, the intention of the instructor and you is not the same. That means there is no meeting
of intention. But, there is meeting of declaration because you expressed your agreement by
your signature. Which theory do you think is applicable in the Ethiopian legal system? Read
Article1680 of the Civil Code.

Art. 1680. – Agreement of the parties.

1) A contract shall be completed where the parties have expressed their agreement
thereto.

2) Reserves or restrictions by one party shall not affect his agreement as expressed where
the other party was not informed of such reserves or restrictions.
35
As per this provision, a contract is completed where the parties have expressed their
agreement.

The provision also went on to say internal reservations are not legally significant. One of the
reasons that our legal system has adopted the theory of declaration is that intention of
contracting parties is difficult to prove.

Therefore, the answer to the above example depends on the kind of theory we adopt. Based on
the theory of intention, there is no agreement between the instructor and his students. Because
there is no meeting of mind (intention). But, according to the theory of declaration there is an
agreement because the expression (declaration) of the parties is the same regardless of their
intention. And, since our legal system adopts the theory of declaration, there is agreement or
the instructor and his students are said to be agreed& this agreement may lead to a legally
binding contract save for other grounds of invalidation .

The other element incorporated in the definition of contract is the privity nature of the
agreement. This element is derived from the term “--- as between themselves—”. This donates
that contract binds only parties who give their consent. Third parties who are not consented are
not bound by the contract.

The last but probably the most important element of the definition of contract as provided
under Art. 1675 Civil Code is the “proprietary nature” of obligations. A contract should be
capable of being assessed in terms of money. Any agreement which does not have monetary
value cannot be contract. For instance, the human body or part thereof cannot be subject to
contract because it cannot be assessed in terms of money (it does not have proprietary nature).
Form this analysis one can conclude that all contracts are agreements but not the vice versa. In
order for an agreement to be a contract, it should fulfill the elements analyzed here in above.

3.2. Essential Elements for the Formation of Valid Contract

Formation of contact involves the criteria that the state uses in order to determine whether or
not it has to execute agreements of persons between themselves. In other words, the state uses
the following yardsticks to check whether or not persons have made a law that binds them.

36
 A) Capacity

B) Consent

C) Object,

D) Form, if any

All contract involve the element of capacity, consent and object i.e. Contract cannot be
imagined without capacity, consent, and object. However form is required for few contracts
only.

3.2.1. Capacity

Although human beings are subject to rights and duties from the moment of birth, to death
some may not be entitled to exercise such rights and duties. Still others may exercise only
some of their rights. Minors and judicially interdicted persons cannot enter into a contract.
However; when a legally interdicted person enters into a contract which he was prohibited
from such is not limited to incapacity but also extends to illegality as per Art 1716. The same
holds true for special incapacities indicated under Art. 194.

Capacity, in order conversation, is an ability to do something. Capacity to contract means

competence to enter into a legally binding agreement. In order to have competence to enter
into legally binding agreement, one must be a subject of law. i.e. he must be legally declared
that he is capable to enter into a legally binding agreement (he can acquire rights and incur
liabilities), he must be recognized by law he can independently realize his subjective rights, he
is capable to independently administer his own affairs, he is able to independently be
discharged from obligations imposed on him by state (e.g., Obligation to pay taxes).

It is universally recognized that the capacity of natural person begins with birth and ends with
death. But the capacity of legal person begins after its registration with the appropriate state
authority and ends with its liquidation or other circumstances fixed in its memorandum.

It will be worthy to note who is not legally capable (incapable) to enter in to a legally binding
relations. In accordance with Article192 of the Ethiopian Civil Code, every physical person is
capable of performing all acts of civil life unless he is declared incapable by the law. The main
37
categories of persons are declared incapable by the law are minors, mentally disordered
(insane) persons, judicially indicated persons, and legally interdicted persons.

The detail of incapacity has already been discussed under law of person.

3.2.2. Consent

i. Communication of Consent

Consent is expressed either in the form of offer or acceptance. Offer and acceptance are ways
of communicating one’s own intention to be bound by an obligation. Therefore; offer or
acceptance is declared to another person by ordinary ways of communication .These ways of
communication are oral, written, signal and conduct.

A. Offer

Offer is laying down contents of would be contract i.e. Indicating the respective obligation of
each would be parties to the contract and informing the same to them with the expectation of
response from them. Moreover, offer contains the intention of the person making it to be
bound by the content of the offer. In short offer contains three important elements, the content
of the contract, the agreement of an offeror to be bound and request of the offeror to the
offeree to be bound by the offer. The person making the offer is called offeror. The offeror has
autonomy to choose any of the four ways of communication (Oral, written, signal and
conduct). A declaration of intention to be bound by specified obligation becomes an offer only
if it is addressed to an identified person. An exception to this principle is public promise of
reward. Public promise of reward is notifying the public that whosoever performs a certain act
indicated in the notice will be given benefit of proprietary nature by the promisor. It is a
reward that is promised to be given for an extra ordinary performance or coming across an
object lost or person hidden .The promise is public because it addresses to all which performs
the required act. No discrimination is made on those who may benefit from the promise

B. Acceptance

Acceptance is a positive response to an offer i.e. it is a declaration of intention to be bound by

each and every contents of an offer. In short acceptance is a “Yes” answer to all the contents of

38
the offer. Any slightest modification made to the content of the offer is considered as rejecting
the offer and making, an alternative offer (Art.1694). So the offeree must take care in giving
response to an offer. He has three alternative answers to an offer, the “yes” answer which
means accepting the offer as it was made; the “No” answer which means totally rejecting the
offer or “acceptance with reservation” which means having reservation or alternative proposals
for some of the contents of the offer. So “where acceptance is made with reservation or does
not exactly conform to the terms of the offer” the offeree must remind himself that he is taking
the position of the offeror and the offeror then becomes an offeree

The offeree does not have a duty to give response to the proposal of the offeror. He can
respond negatively or positively only if he wants to respond otherwise he may for example
read an offer and simply throw it in a dust basket or tear it off by reading only the address of
the letter. That means the offeree has the right to remain silent; Moreover; if the offeree
remains silent there is no assurance that the offer was brought to his attention; he might have
not known the existence of offer. Therefore silence shall not amount to acceptance . It should
not be taken as a signal indication of acceptance.

Sometimes a law or contract may impose on the offeree the obligation to accept offers made to
it. This is mainly when the offeree is a monopoly supplier of goods or provider of services.
Some public enterprises are established by law to provide goods and services to the public,
hence they are duty bound to accept an offer from the public. For example, Ethiopian Electric
Power Corporation, Ethiopian Telecommunication, Water & Sewerage Authorities are
expected to accept offer for electric use, telephone line and pipe line. If they do not want to be
bound by the offer they have to notify with in time specified in the offer. Otherwise their
silence is considered as an acceptance.

Silence may also amount to acceptance where The content of the offer is to vary, supplement
or complement preexisting contractual relation (Art. 1684 (1). Variation of a contract means
changing, modifying or avoiding some of the provisions of the contract. Variation of contract
itself is a contract and hence needs consent of parties. So, one of the parties may offer such
variation. For example, in a sale contract, the buyer may offer to change the delivery date.

39
Supplementary or subsidiary contract is a contract that may exist independently but that help to
facilitate the implementation of preexisting contract.

ii. Defect in Consent

If the consent expressed in the form of offer and acceptance does not indicate what the offeree
or the offeror really intended then there exists defect in consent. The cause of defect in consent
is either wrong information (mistake, false statement, fraud) or threat (duress, reverential fear,
threat to exercise rights) or lesion.

a. Mistake

Mistake, in ordinary sense, is misunderstanding of the meaning or implication of something. In

the legal material mistake is defined as misunderstanding or erroneous belief about a mater of
fact (mistake of fact) or a matter of law (mistake of law). As we have seen above, the first
essential element of a contract is free consent, which means, both the parties shall understand
the same thing in the same sense. If there is misunderstanding there cannot be consent.
Therefore, mistake can give rise to the invalidation of contract. In other words, contract can be
invalidated on the ground of mistake. It is logical to raise one question here i.e. can all kinds of
mistake be grounds for invalidation of a contract?

The answer is absolutely not. One can invalidate or avoid his obligation on the basis of
mistake if the following two conditions are cumulatively fulfilled.

 Mistake must be fundamental: A mistake is fundamental when a person

misunderstands the object of the contract or the person with whom he has entered into
the contract. Art 1698 defines “fundamental mistake” in a very vague manner there by
inviting interpretation. The clue for such interpretation is the clause “elements of the
contract which the parties deem to be fundamental” found in the same article. The
phrase element of contract under Article 1678 indicates consent, capacity object and
form of contract but such meaning does not apply to Art 1698. Paragraph 1 of title 12
(Art 1979 -1695) also talks about elements of consent to indicate offer and acceptance
so from the above two we can understand that “elements” indicates requirements, parts

40
 or contents of something. So elements of a contract should mean “content or object of a
contract”.

 The mistake must be decisive: the mistake is decisive when the mistaken party proves
that a rational person in his position would not have entered into such contract had it
not been for the mistake.

b. Fraud:

Fraud is an intentional act of preparing false information or changing or modifying the

content of the subject matter of the contract in a manner that cannot be noticeable by
ordinary observation. Fraud does not mean telling untruth or for bearing from telling the
truth it rather mean making things or document to give wrong information. Such act is
done in order to obtain consent of a person to a contract. The practice of mixing up
banana with butter, red ash with pepper, milk with water, are fraudulent act.

The defrauded party should also prove that the party himself commits the fraud or knew or
should have known the existence of the fraud or he derived undue benefit. E.g. Ethiopian
National Bank was once defrauded by gold suppliers.

c. Duress:

Duress is warning the party that unless he enters into a certain contract certain harm will
be done to him. One can raise duress as a cause of invalidation of contract if the following
conditions are cumulatively fulfilled.

 There is a threat or warning to cause harm. The person must be told expressly
that he has to choose either suffering the certain harm or entering into a contract.
He should not infer the threat of harm from the behavior or identity of the parties.
For example, if three shifta or gangsters come at a home of certain rich man and
remained in seat for an hour without giving any instruction to him he cannot claim
duress if he writes them a check of 500,000 birr and made them to leave his house.

 The harm is on the person himself, spouses or his ascendant or descendants. The
existence of threat cannot be a ground of invalidation of a contract unless it is
41
 directed on the party himself or his spouse or his ascendants and descendant. If the
threat is on collaterals such as brothers, sisters, it cannot be a cause of invalidation.

 The harm is on person, life, property, and honor. Harm on person is when the
threat is to cause bodily damage to any of the above stated person. For example, a
gangster come to A’s house and made the following statement. “Mr. A, you shall
either sign me a check of birr 200,000 or I am going to cut the breast of your
daughter”. Harm to a life is when the threat is to kill any of the above persons.
Harm to honor is when the threat is to commit a certain act that negatively affects
the reputation or public image of any of the above person i.e. threatening to release
information which the threatened person wants to keep secret.

 The threat should be serious:- the threat is said to be serious when the harm to be
caused is greater than the obligation that a party enters into. For example, a simple
kissing on a lip or slap on a face are not serious harms.

 The harm is imminent:- that is the harm is going to happen soon and a party does
not have time to think of another option to avoid the happening of the harm except
by consenting to the contract. For example, if a lady receives a letter that warns her
to sign a contract or face rape. Such threat is not imminent. The person or property
threatened should be under the control of the threatening party and the threatening
party will cause the damage at the moment a party refuses to consent.

The above lists are the main ground of defect in consent but dear students please read other
ground of invalidation under the Ethiopian civil code including reverential fear,
unconscionable contract, threat to exercise right and the like.

3.2.3. Objects of Contracts

III.2.3.1. Object Defined

Object of a contract is what parties have actually agreed to undertake. It is the obligation of
both parties to the contract. The obligation may be to do something or to refrain from doing
something or to give something to someone. So, object of a contract is the agreement of the

42
parties to act, not to act, or to give. The object of employment contract, for example, is the
employers’ agreement to pay wage and employees’ agreement to do certain thing. In contract
of sale of house; the obligation of the seller is to transfer ownership and possession to the
buyer and the obligation of the buyer is to pay price. Object of contract differs from subject
matter of contract. For example, in the above case, the work and the house are subjects of the
contract.

Generally, under Ethiopian law; freedom of contract is limited by the following:

a) Clarity of objects: as stated in our earlier discussion; the object of a contract should be
sufficiently clear; otherwise the court concludes as though parties did not exercise freedom
of contract

b) Possibility of object: Parties’ freedom does not allow them to bind themselves to perform
humanly impossible things. The law wants to protect the public from superstitious believe.
For example, if a person agrees to raise a dead body; to duplicate money by mystery, to
bring audio visual image of dead body; to make a person very rich etc the object of the
contract is impossible. Impossible obligation is the obligation whose performance is
beyond the nature of human being

c) Lawfulness of the object: no person can be bound by contract to violate any law of the
country since such is contradiction in terms. For example, if a person is forbidden to
commit abduction, it is illogical to allow a person to bind himself by a contract to abduct
someone or help another person in committing abduction.

d) Morality of Object: Law is the part of morality that is entrusted by the society for its
enforcement. The remaining part of morality is to be enforced by the society itself by
means of public opinion. However; even though the state does not have a duty to enforce
such morality it should refrain from indirectly assisting the violation of morality. Therefore
any immoral obligation cannot be enforced by court or executive

43
 III.2.4. Form of Contracts

Most non-lawyers believe that for a contract to be legally binding, it must be made in writing
and signed at least by the parties to contract. But these people forget that they have entered
into so many contracts in their life without following written forms. However, the law gives
freedom to the parties to choose either written or form. So contract can be valid if consent,
object and capacity requirements are fulfilled. However, written form is mandatory
requirement in two cases.

a. contracts required by the law to be made in writing

 Contract relating to immovable

 Contract with public administration

 Contract of guarantee

 Contract of insurance

 Contract of marriage

 Partnership contract

 Sale and mortgage of business

 Promise of sale and preemptions

 Agreement prohibiting assignment or attachment of a certain rights

b. contracts required to be made in writing by the parties

Even if the law has not expressly provided written form as a mandatory requirement for
validity of contract, parties may themselves provide written form. Once the parties agree to
make their contract in writing, then contract will not be completed until such form is fulfilled.

c. Preliminary contract

A contract that intends to lead to another contract shall be made in writing if the contract to
which it leads is required to be made in writing either by the law or the parties. The best

44
example is agency contract. If the agent’s power is to enter into a contract in writing he should
be conferred with such power in writing.

III.3. Effect of Contract

The two major principles of contract are freedom of contract and sanctity of contract. Sanctity
of contract indicates that parities are bound by their agreement. To make a serious promise
certainly involves a moral duty to keep it. There is Latin saying “pacta sunt servanda’ which
means that a person is bound by his words. There is also an equivalent Ethiopian proverb,
‘failure to keep a word is worse than losing a descendant’ /የተናገሩት ከሚጠፋ የወለዱት ይጥፋ/.
However, contract is binding not only morally but also legally. Any agreement which parties
did not intend to create legally binding obligation is not a contact. Therefore, once a contract
fulfills the requirement of Art 1678, it becomes a law. Law is enforced by executive and
interpreted by the judiciary. For a contact, the law makers are mainly parties but the executive
is always the state and the judiciary is also normally a state that provides about enforcement of
arbitral awards). As law makers, parties to the contract, can repeal or amend the contract law
must be implemented i.e. contract should be performed, violating a law entails punishment i.e.
non- performance of contract leads to payment of damages.

So, effect of a contract implies that it becomes the law of the nation in the sense that the
executive has a constitutional duty to implement it and the judiciary has a constitutional duty
to interpret it. Moreover, since it is a law it is modified (amended) by the law marker only
(either the parties themselves or the legislative). So, effects of contract are interpretation,
performance, court’s inability to vary contract and effects of non-performance.

III.4. Performances of Contracts

Performance of contract means fulfilling one’s own obligation as agreed. If the obligation is to
“do”, doing what was provided in the contract exactly in the same way as provided, if the
obligation is “not to do” forbearing from doing what is forbidden by contract and if the
obligation is to “give” delivering the thing with its accessories on the agreed date and place is
called performance of a contract.

45
So the major questions during performance are ‘Who performs contract’? To whom should
contract be performed? What should be performed, When and where should it be performed?
are the performance part of the civil code.

i. By Whom the Performance of the Contract is made

The contract can be performed by the debtor, his agent or by person authorized by court or
law. The persons authorized by law are tutors, liquidators, trustees and person authorized by
court is either a curator or an interested creditor who wants to save the rights of the debtor by
performing his obligation. However; the law never mention about performance of a contract by
a third party not authorized by debtor, court or law.

However; we can easily argue that if the creditor accepts the payment, the debtor has no right
to stop third party from performing the obligation since the creditor has a right to assign his
right to a third party without the consent of a debtor (Art. 1962). In such case, if the debtor
insists on paying the debt, he can pay it to the person who paid the creditor. However; the
creditor may sometimes insist that debtor himself should perform the obligation. This is when
the contract or law expressly provides that the debtor shall perform the contract personally. For
example, Ethiopian labor law provides that the employee should perform the contract
personally. Moreover, the second case where personal performance becomes necessary is
when the creditor proves that personal performance is essential to him.

ii. Who May Receive Payment

Payment should normally be made to the creditor or his agent (Art. 1741). However; payment
may be made to a tutor, liquidator, or trusted (Art. 1741). Failure to perform contract to a
liquidator or trustee is non-performance

iii. What to Perform

What to pay (perform) answers the question relating to identify, quality or quality of the thing
to be delivered. To properly answer such question we will classify things into definite thing,
fungible things and money debts.

46
In case of definite thing (Definite thing is a thing that can easily be identified from similar
things of the same species), the debtor shall deliver the thing agreed. The creditor may
however, accept things of different identity if he wants. If the creditor accepts the new thing
offered to him by the debtor, it means that they agreed to vary or modify contract. Such
variation may need to be made in a special form when necessary.

In case of fungible things (Fungible goods are goods that are indicated in the contract by using
generic terms such as pasta, teff, wheat, barely) since the thing is not expressly indicated in the
contract, the contract is interpreted in favorer of the debtor and the debtor can freely determine
its quality. However, the quality should not be less than the average.

Regarding money debts, payment should be made in local currency of place of payment. If
payment is in a local currency, the issue that comes to our mind is the exchange rate. For
example, if contract provides that the debtor pays birr 200,000 on April 29 in USA, the birr
should be converted into Dollar.

iv. Place of performance

The civil code provides three alternatives; agreed place, residence of the debtor and place
where the thing situates. Here we can notice that the law tries to determine place of
performance by giving much emphasis to the intention of the parties. The law encourages the
parties to determine place of performance in their contract. Contractually agreed place should
include places that can be determined by reference to usage; equity and good faith. But if they
fail to mention place of performance the law then resorts to search the possible intention of the
parties (implied agreement of the parties). By so doing it reached at the conclusion that in case
of definite thing the parties should be presumed to have agreed to perform the contract at the
place where such definite thing situate at the time of conclusion of contract.

v. Time of performance

Like in place of performance, parties are advised to determine time of performance. So

performance should be made at agreed time. However the law still plays the gap filling role.
As indicated under Art. 1695(1) the law remedies the deficiency of the agreement of the
parties. Therefore; where there is no contractually agreed time, contract should be performed

47
when either the debtor or the creditor demand performance. This means, once the contract is
concluded, time of performance can be determined either by the debtor or creditor. If both of
them determine date of performance the earliest date is performance date. The debtor demands
earliest performance either to avoid cost of maintenance and preservation or to transfer risk or
to relieve himself from psychological burden of debt.

III.5. Non-Performance of Contract & Its Remedies

Non-performance refers to parties’ failure to perform contractual obligations in conformity

with the terms of the contract and the law. It is also called breach of contract. In this regard the
Ethiopian civil code holds three remedies of non-performance. These are force/ specific
performance, cancelation and damages/compensation/. This subtitle will discuss these
remedies subsequently.

3.5.1. Forced performance

The word ‘forced performance’ implies the compelling of the debtor to discharge his
obligation. It refers to performance directly imposed on the debtor through the execution
process. However, it is important to note that the court may not order forced performance
merely because the creditor has requested. Article 1776 provides the conditions for ordering
forced performance or otherwise. It reads as follows;

Specific performance of a contract shall not be ordered unless it is of special interest to

the party requiring it and the contract can be enforced without affecting the personal
liberty of the debtor.

Pursuant to this provision the requirements for the application of forced performance are (1)
the creditor’s special interest, and (2) the preservation of the debtor’s personal liberty. These
requirements are cumulative not alternative.

3.5.2. Cancellation
Cancellation is another remedy for non-performance. Cancellation brings an already existing
contract to an end. The law classifies cancelation in to two: Judicial cancelation and unilateral
cancelation. Judicial Cancellation refers to the case in which the court orders cancelation.

48
Whereas unilateral cancellation connotes cancellation of a contract by one party without going
to court of law. The circumstances under which a party affected by non-performance can
unilaterally cancel a contract are:

a. Where there is a cancellation clause in the contract

b. the second cases relate to cases where the debtor has failed to honor
certain time limits

c. the third case is where performance becomes impossible.

d. The last case where unilateral cancellation can be invoked is When one of
the parties an unambiguously communicates his refusal to
perform.

3.5.3. Damages (Compensation)

Damages/Compensation is another remedy for a party affected by non-performance. The

purpose of compensation for non-performance is to put the victim party in a position he would
have been had the contract been performed. A party who has incurred loss or damage as a
result of non-performance may claim compensation by showing his loss/damage and that this
is the result of non-performance. The purpose of such damage is to put the victim party in a
position would have been had the contract been performed. Normally, the creditor is not
expected to proof that the debtor was at fault. The crucial defense for the debtor is force
majeure; however, force majeure occurring after being in default is no defense. In addition, the
debtor may contest the amount of damages awarded.

Once, the liability of the debtor for damage is determined, the next question is to assess the
amount of compensation (damages) to be paid to the creditor.. The basic principle is that
compensation shall be equal to the damage/loss which non-performance would normally cause
to the creditor in the eyes of a reasonable person.

3.6. Extinction of Obligations

Having appreciated the formation and effect of contract, it is worth discussing extinction of
obligation. Extinction of obligation connotes the stoppage of already existing obligation

49
There are different grounds which cause extinction of obligation. The law takes performance,
invalidation, cancellation, termination, novation, set off, period of limitation of a contract, and
merger as grounds of extinction of obligation. Each way of extinction of obligation has been,
accordingly, discussed in different sections.

i. Invalidation and cancellation of a contract

Invalidation of contract is one means by which contractual obligations are extinguished.

Invalidation of a contract happens when there is defect in the formation of the contract.

Cancellation on the other hand is making a contract ineffective when there is non-performance.
Cancellation of a contract is one effect of contract in that the contract is formed within the
legally provided requirements.

ii. Termination of contract

In addition to invalidation and cancellation, termination is also one way by which obligation is
extinguished. Termination of contract is making the contract ineffective starting from the time
of termination of the contract

iii. Remission of debt

Along with termination, remission of debt is also one way of extinction of obligation.
Remission of debt is voluntary release of debtor of his obligation by the creditor.

iv. Novation

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

When original obligation is different from the substituted obligation in its cause it is also
considered to be novation. Illustrative example has been provided by Rene David:

50
 v. set-off

As of this provision, two parties in which one is a debtor in respect of one obligation while a
creditor with respect of another obligation to other party may extinguish the obligation by set-
off.

vi. Merger

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

vii. Limitation of action

Under the Ethiopian law of contract limitation of action has been put as one way of extinction
of obligation. Making period of limitation a means of extinction of obligation creates security
of business transaction eroding uncertainty among contractants. Period of limitation also
avoids bafflement which might be created owing to loss of evidence when time lapses.

Art.1845__ Period of limitation

Unless provided by law, action for performance of a contract, action based on non-
performance of a contract and action for invalidation of a contract shall be barred if not
brought within ten years.

Chapter summary

A contract is an agreement between two or more persons to do or to abstain from doing a

particular act. A contract invariably creates a contractual obligation between the parties by
which certain rights are given to one party and some corresponding duties are imposed on the
other party. Thus the result of a contract is a contractual obligation by virtue of which the
contract is enforceable at law.

Formation of contact involves the criteria that the state uses in order to determine whether or
not it has to execute agreements of persons between themselves. These are Capacity, Consent,

51
Object and Form, if any. Capacity is an ability to do something. Capacity to contract means
competence to enter into a legally binding agreement. Consent is expressed either in the form
of offer or acceptance. Offer is laying down contents of would be contract i.e. Indicating the
respective obligation of each would be parties to the contract and informing the same to them
with the expectation of response from them. Whereas acceptance is a positive response to an
offer. If the consent expressed in the form of offer and acceptance does not indicate what the
offeree or the offeror really intended then there exists defect in consent. The cause of defect in
consent is either wrong information (mistake, false statement, fraud) or threat (duress,
reverential fear, threat to exercise rights) or lesion.

Object of a contract is the agreement of the parties to act, not to act, or to give. Object of
contract should be clear, Possible, Lawful and Moral. If these elements are not fulfilled the
contract is considered as null and void.

Concerning form, the law provides that law is not a mandatory element of contract unless
otherwise the law so provides or the parties so agree. The law mandatorily bind parties to have
a written form in some agreements.

The law provides that if a party failed to perform a contract, the other contracting party may
claim forced performance, cancelation or/and damages/compensation as the case may be.

The law lists down ground of ending contractual relationships. These are invalidation and
cancelation of contract, remission of debt, novation, merger and limitation of actions.

Activities of the chapter

1. Which one of the following ground of extinction of contract will arise from
defect in formation of contract?
A. Cancellation
B. Termination
C. Invalidation
D. Merger

52
 2. One of the following agreements is not a contract under the Ethiopian law of
contract.
A. B agreed to serve c for 6 months as a guard in his company for free.
B. A agreed to sell his personal car which is worth of 1,000,000 birr to t only
for 100,000 birr.
C. A concluded an agreement with g, the guardian of an orphan child called m,
in which m is given in adoption to a who on his part undertaken to treat the
former as his own child.
D. None
3. Which one of the following is a ground of unilateral cancellation of contract?
A. Agreement of the parties
B. Impossibility
C. Refusal of the debtor to perform his obligation

All

4. Write the grounds of termination of contract

5. What are the remedies of non-performance of contract?

6. Read the following contract and then discuss how the four elements of contract are
reflected in the contract.

የቤት ኪራይ ውል

አከራይ፡- አቶ ከበደ ከረዩ

አድራሻ፡- የካ...

ተከራይ፡-በኢፌዲሪ መንግስት ትምህርት ሚኒስቴር ታርማ ዩኒቨርሲቲ

አድራሻ፡-ታርማ

አከራይና ተከራይ ዝርዝሩ ከዚህ በታች የተመለከቱትን ለቢሮ አገልግሎት የሚውል የቤት(ህንጻ) ኪራይ ውል
ወደንና ፈቅደን ተስማምተናል፡፡

አንቀጽ አንድ

የውሉ አላማ

53
አከራይ ዝርዝሩና ልዩ መግለጫው በዚህ ውል አንቀጽ ሁለት የተመለከተውን ለቢሮ አገልግሎት የሚውል
ህንጻ ቤት በዚህ ውል አንቀጽ ሦስት ለተመለከተው ጊዜ፣በዚህ አንቀጽ አራት በተመለከተው ዋጋ ለተከራይ
ለማከራየት ተስማምቷል፡፡

አንቀጽ ሁለት

የሚከራየው ህንጻ ቤት ዝርዝር መግለጫ

የሚከራየው ቤት ባለ አራት ፎቅ ህንጻ ሲሆን የህንጻውም ባለቤትና ባለሙሉ መብት አከራይ ነው፡፡ይህ ህንጻ
ቤት የሚገኝበትም ቦታ በኮልፌ ክፍለ ከተማ ጦርኃይሎች አካባቢ ወረዳ 3 ቀበሌ 02 የቤትቁጥር 12 ነው፡፡
የዚህን ህጋዊ ባለቤትነት ካርታ የሚያሳይ ሰርተፊኬት ኮፒውን(ቅጂ) ከዚህ ውል ጋር ተያይዟል፡፡አከራይ
ለተከራይ ያከራየው የምድርና የመጀመሪያውን ህንጻ ባጠቃላይ 14 ክፍሎችን ብቻ ነው፡፡

አንቀጽ ሦስት

ውሉ የሚቆይበት ጊዜ

1.1. አከራይ ዝረዘሩ ከላይ በአንቀጽ ሁለት የተመለከተውን ለቢሮ አገልግሎት የሚውል ህንጻ ቤት ከዛሬ
ቀን 10/08/2007 እስከ 10/08/2008 ቀን በዚህ ውል አማካኝነት ለተከራይ አከራይቻለሁ፡፡
1.2. ከላይ በአንቀጽ 3.1 የተመለከተው የህንጻ ቤት ኪራይ የውል ጊዜ በተዋዋዮች ስምምነት ሊራዘም
ይችላል፡፡

አንቀጽ አራት

የህንጻ ቤቱ ኪራይ ዋጋ

ተከራይ በዚህ ውል አንቀጽ ሁለት ለተመለከተው የህንጻ ቤት ኪራይ በወር ብር 5000/አምስት ሺህ ብር/
ይከፍላል፡፡

አንቀጽ አምስት

የአከራይ ግዴታ

1.1. አከራይ ይህ ውል ከተፈጸመበት ቀን ጀምሮ ህንጻ ቤቱን ዝግጁ በማድረግ ለተከራይ

ማስረከብ ይኖርበታል፡፡
1.2. ተከራይ ለተከራየበት አላማ ተጻራሪ በሆነና በሚያውክ መልኩ ቀሪውን የህንጻ ክፍል
ሊጠቀምበት አይችልም፡፡
1.3. ከተከራይ ጥፋት ውጪ በሆነ መልኩ የህንጻ ቤቱ ለቢሮ ስራ አመቺ በማይሆንበት ጊዜ
አከራይ የማደስና ለስራ ምቹ የማድረግ ግዴታ አለበት፡፡
1.4. የመብራትና የውሀ ክፍያ የመክፈል ግዴታ የአከራይ ይሆናል፡፡

አንቀጽ ስድስት

54
 የተከራይ ግዴታ

6.1. ተከራይ በዚህ ውል አንቀጽ አራት በተጠቀሰው የኪራይ ዋጋ መሰረት የ 6(ስድስት) ወር ቅድመ
ክፍያ ብር 30000/ ሰላሳ ሺህ/ ለአከራይ ይከፍላል፡፡የቀሪው የስድስት ወር ክፍያ እንዲሁ በቅድሚያ
የሚከፈል ይሆናል፡፡

6.2. በዚህ አንቀጽ ንዑስ አንቀጽ አንድ የተጠቀሰውን የህንጻ ቤት ኪራይ ዋጋ በወቅቱ የመክፈል
ግዴታ አለበት፡፡

6.3. ተከራይ የተከራየውን ቤት በአግባቡ የመጠቀምና የመጠበቅ ግዴታ አለበት፡፡

6.4. በተከራይ ጥፋት ምክንያት በተከራየው ህንጻ ቤት ላይ ጉዳት ቢደርስ የማስጠገን ግዴታ አለበት፡፡

አንቀጽ ሰባት

ውል ስለማቋረጥ

7.1. ይህ ውል በአከራይና ተከራይ ስምምነት ሊቋረጥ ይችላል፡፡

7.2. አከራይም ሆነ ተከራይ ይህን ውል ማቋረጥ ሲፈልጉ የ 3(ሦስት) ወር ቅድመ ማስጠንቀቂያ

የመስጠት ግዴታ አለባቸው፡፡

አንቀጽ ስምንት

የዳኝነት ሁኔታ

በአከራይና ተከራይ መካከል አለመግባባት ሲኖር በመደበኛ ፍርድ ቤት የሚዳኝ ሲሆን፣ ይህ ውል

በፍትሐብሔር ህግ ቁ.2945፣ 1731፣ 2005 እና ስለ ውል በጠቅላላው በተደነገገው መሰረት
በተዋዋዮች መካከል ከ 10/08/2007 እስከ 10/08/2008 ድረስ የጸና ይሆናል፡፡

አከራይ ስለ ተከራይ

ስም አቶ ከበደ ከረዩ ስም ታርማ ዩኒቨርሲቲ

ፊርማ Mihretab Mekonen ፊርማ -awet halefom

ቀን 10/10/2015 ቀን 10/10/2015

References
1. Civil Code of the Empire of Ethiopia,1960

2. Mesganaw Kifelew and Demelash Shiferaw, Law of Contract I, Teaching Material,

2005

55
3. Tilahun Teshome, Basic Principles of Ethiopian Contract Law (in
Ahmaric),Federal Supreme Court,Addis Ababa, 1989

4. George Krzeczunowicz, Formation and Effect of Contracts in Ethiopian Law,

Addis Ababa University,1983

5. Rene David Commentary on Contracts in Ethiopia ,Hailesellasie I University, 1973

6. Girma Gizaw Ethiopian Contract Law , General Provisions Commercial Printing

Press,Addis Ababa,2002

7. David Kelly et al, Business law, 4th ed., 2002

8. Miller and Jentz, Business law today,9th ed. 2011

56
57
 Chapter Four
Special contracts

General Introduction
Contracts in general part of the previous chapter addresses laws which regulate every
contractual and non-contractual but obligation in Ethiopia. There are different contracts which
are regulated in special part of the law. Law of agency, as an example, is a contract and hence
the laws provided in the agency part of the civil code will regulate agency relationship but if
there is a gap in the law of agency, the general part of the previous chapter will apply. With
similar scenario we have the law of sale, law insurance, law of pledge and mortgage and other
laws which regulate special contracts. For purpose of this chapter and the course of business
law, law which regulates agency, sale and insurance will be addressed in this chapter.

4.1. Law of Agency

Introduction

Law of agency deals with rules that are applicable while one acts through another. There are
many reasons why people/persons like to act through others. One could be because they like to
employ the expertise of others and because they cannot act themselves. For differing causes
they may prefer to use others. Still legal persons are with no choice except to act through
others as their inherent characteristics forces them. In doing so there are several transactions
and several persons involved in these type of relationship: the relationship that gives rise to the
power of acting on behalf of another; and the relationship that the representative would create
with the third parties on behalf of the owner of the affair.

The law of agency is interested in addressing what the rules applicable in the formation of the
internal relationship between the acting person/ the agent and the person on whose interest the
latter is working/ the principal look like. And similarly, it tries to address the external
relationship, i.e. the relationship the representative would create with other persons/third
parties on behalf and to the benefit of the Principal. And also the law of Agency is interested to
see the relationship between the principal and the third party. The nature of the transaction to

58
be established between the parties; the rights, and duties of the parties involved takes the lion
share of the discussions on the law of agency.

With the view of assessing these points under the law of agency, business law students will be
introduced to the concept of agency and its distinguishing features; sources of agency; scope of
agency, rights and duties of the parties and extinction of agency relationship.

Objectives of the unit

At the end of this chapter, students will be able to:

 understand the nature, characteristics of Agency;

 appreciate the scope of a power conferred on the agent;

 explain the causes and effects of extinction of agency relationship; and

 identify the parties and relationships involved in agency relationship;

 appreciate the sources of agency;

 explain duties of the principal and the agent

4.1.1. Definition and purpose of agency

The Law of agency is in most cases defined as the relationship between two persons, where
one (the agent) may act on behalf of the other (principal) and bind the principal by words and
actions .It is also defined as the relationship in which one person acts for or represents another
by the latter’s authority, either in the relationship of principal and agent, master and servant,
employer or proprietor and independent contractor.

The following points can bestly elaborate the need for having an agent acting on behalf of
someone.

 The need to overcome time and space limitation: one person may wish to perform several
transactions at the same time. However, he could be in a position where he is unable to run

59
 these several activities by himself at one instance, for he is at one specific place (space) at
one time..

 The need to overcome limitations of knowledge and skill

Performing one or more activities may demand certain skills or knowledge. Hence one
may lack the required knowledge in performing a certain activity. Hence, another
individual who has the required skill may act on behalf of the person who has no such
expertise in performing the duty.

 The need to represent legal persons

As we have discussed in the first chapter, Legal personality is endowed to non-living

entities. Thus, after acquiring the legal personality these entities will have the right to
exercise all activities that a legal person can do. However, these entities don’t have mental
capabilities to analyze the cost and benefit of their transaction because they don’t have
minds like human beings. Hence, they need an agent to act on behalf of them.

 The Need to overcome incapacities

under the contract capacity is one element of a contract. Incapable persons, hence, need to
have a representative to carryout juridical acts.

4.1.2. Sources of agency

The authority to act on behalf of another may derive from law or contract. Accordingly, the
authority of an agent is the power of agency which the agent acquires by the operation of the
law or by a contract concluded between the agent and the principal to this end.

Agency which is derived from a contractual relationship is the most usual kind of agency.
Accordingly, for many authors consent is the basis of the law of agency and it explains why
the agent can represent the principal.It must be noted that agency is one of the special types of
contract and thus, the rules applicable to the formation of a valid contract, are of necessity,
applicable to the agency relationship. Accordingly, the elements required under the law for the
formation of a valid contract as enumerated under art. 1678 of the civil code are required in
agency contract as well.

60
As a general rule, for the formation of an agency contract no special form is required unless
the law provides that the contract of agency be made in a specified form or the parties stipulate
that their contract be made in a special form . But if the law for the contract that the agent
concludes in the name of the principal prescribes a special form, the authority to make such a
contract should be given in the same form.

4.1.3. Scope of Authority

The scope of the power assumed by the agent is determined by the contract-giving rise to
agency. Yet, the scope of the agency assumed by the agent might not be expressly determined
by the contract. In the latter case it is determined by the nature of the transaction to which the
agency relates.

The scope of agency conferred on the agent may either be special or general. A power
conferred to an agent is either special “for a particular affair or certain affairs only, or general
for all the affairs of the principal.”

i. General Agency

Depending on the scope of the power conferred on the agent the authority one has received
may be general agency. Such type of agency is conferred in general terms. Usually, it is
expressed in terms like: all my affairs, anything related to my property, any affairs which I am
called to perform etc.

The scope of such authorities conferred in general terms is limited only to the management of
the said affairs. These acts of the agent are said to be acts of management. Please read the
following article. Act of management incorporates the following lists.

 Acts done for the preservation of maintenance of property;

 Leases for terms not exceeding three years
 The collection of debts
 The investment of income;
 Discharge of debts

61
 ii. Special Agency
Special agency is an authority different from general agency in that it empowers the agent to
dispose the rights of the person represented. Sometimes, this authority is named as act of
disposition. A special agent is a person who is given power by the principal to act in a
particular transaction. According to article 2205 of the civil code acts which requires special
authority are:

i) Alienate or mortgage real estate; to alienate a real estate (big interest for the
principal) requires the principal to decide on it with the knowledge of its
consequences

ii) To invest capital:

iii) To sign bills of exchange: This is purely empowering a third party to draw money
belonging to principal.

iv) Effect settlement, consent to arbitration.

v) Make donations:

vi) Bring or defend an action: Once again an individual cannot bring an action or
defend a case until he secures a special authority from the principal.

4.1.4. Modes of Representation

There are various ways by which the agent may represent (act for the principal) the principal.
The Ethiopian law has acknowledged two modes by which the agent may represent the
principal. These modes of representation are: Disclosed agency and undisclosed agency

i. Disclosed Agency
As the name shows disclosed agency is the mode of representation in which the agent reveals
the name of the principal to the third parties with which he/she is interacting (on behalf of the
principal). Disclosed agency is recognized under Art 2189(1) of the civil code in such a way
that the representation of the principal by the agent shall have the effect of affecting the
principal when the agent discloses the name of the principal. Here is the article.

Art. 2189. - Complete agency.

62
(1) Contracts made by an agent in the name of another within the scope of his power shall he
deemed to have been made directly by the principal

ii. Undisclosed Agency

Undisclosed agency is the mode of representation in which there is no disclosure of the fact
that the front person is acting on behalf of another person. That is neither the fact that he is not
acting on behalf of another person nor the name of another person is made known to the third
party contracting. Therefore, the agent acts on his own name and he is acting on his own
behalf. The latter is inferred from the situation where the third party is not aware of the fact
that the agent is acting to the benefit and on behalf of another.

4.1.5. Obligations of parties in agency contract

In this section of the chapter we will see obligations that parties to the contract of agency owe
to each other. The agent has to discharge certain duties to the principal. On the other hand, the
principal also owes certain obligations to the agent unless the agency is one of gratuitous.

4.1.5.1. Obligation of the agent

a. Duty to Protect the Rights of the Principal from Conflicting Interests.

What is the interest of the principal? How is it to conflict with the interest of the agent? The
interest of the principal is the material interest valued in terms of his benefit. He should
represent his/her principal solely for his benefit. The agent should not expect benefit of any
kind from the transaction he/she executes without the knowledge of the principal. If the agent
is going to benefit out of the transaction he/she makes on behalf of the principal without the
knowledge of the principal that may result in a conflicting interest. Conflict of interest may be
expressed in three forms. These are:

 when the agent contracts with third parties;

 when the agent contracts with another principal; and

 when the agent contracts with himself.

63
 b. Good Faith required of the Agent

The civil code obliges the agent to act with the strictest good faith towards his principal. Good
faith is a requirement attached to the fiduciary nature of agency relationship. Good faith is
acting towards the best interest of the principal because the agent is working without
procedural control from the principal. Duty of good faith implies three things:

First, Where the agent is in a position in which his own interest may affect the performance of
his duties to the principal, the agent is obliged to make a full disclosure of all material
circumstances so that the principal with such full knowledge can choose whether to consent to
the agents acting.

Second, an agent may not make a secret profit out of the performance of his duties as an agent.

Lastly, good faith implies that the agent need not employ the information he obtains in the
exercise of his duty as an agent to the detriment of the principal. The nature of this obligation
goes to be respected even after the termination of the agency relationship between the agent
and the principal.

c. Diligence Required from an Agent

This obligation of the agent is related to the care and skill the agent is expected to show
towards the affairs of the principal. All agents own this duty of care to their principals, whether
for consideration or gratuitous. A distinction is made however between the standard of care to
be observed by a gratuitous agent and that to be observed by one who acts under contract for
reward. In the case of agency with consideration the standard of diligence to be observed by the agent
is put in terms of an objective standard “as a bonus pater familias which implies the agent needs to
show a reasonable care towards the affairs of the principal like a good father would show towards his
family. On the other hand, when the agency is gratuitous contract, the agent is required to act with the
care that he would exercise in respect of his own affairs.

d. Duty to Account

An obligation of account can be seen from two perspectives. The first is related to duty to
account for money and activities/ management of the affairs to the interest of the principal.

64
Read the following provision of law. This duty requires that the agent should be in a position
to know what he must pay to the principal, and that the principal should be able to see whether
the agent has fulfilled his duty. Hence the agent is obliged to keep the principal’s property and
money separate from his own and from other people’s property and money to keep proper
accounts, and to be ready to produce them on demand to the principal or a person appointed.
Secondly, the agent is bound to account to his management of affairs as requested by the
principal. This obligation envisages he/she is obliged to report to the principal the
accomplishments of the affairs upon the request of the latter.

e. Duty of Non- delegation

The general rule is that the agent must perform his undertaking personally. The relationship of
the principal and agent is a confidential one: the principal imposes trust in the agent of his
choice. Hence, there are two exceptions to the principle of non-delegation. These are:

a. When the principal authorizes the agent to appoint a sub agent

b. Authorized by law

4.1.5.2. Duties of the Principal

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

a. Remuneration

The most important duty of the principal is to remunerate the agent for services rendered. The
obligation to pay such remuneration exists only where it has been created by an express or
implied contract between the principal and the agent.

b. Duty to Advance Money

The agent may need money to run the representation of the principal. These may include
for example transportation and similar costs Perhaps when the agent has failed to carry out
his obligation for causes of non-advancement of money by the principal, the principal, not
the agent, shall be liable.

65
 c. Duty to reimburse outlays and Experts

The money advanced by the principal may not be sufficient to run the affairs of the principal.
Or the principal might not have advanced money for the agent. In such cases the agent may
employ his own money or money from other persons. These outlays/expenses incurred by the
agent need to be reimbursed.

d. Duty to release the Agent from Liabilities and Damages

The principal’s duty to indemnify his agent’s losses, liabilities and expenses incurred in the
performance of the undertaking may be expressly stated in the contract of agency. But it is
more usually implied.

4.1.6. Extinction Of Agency Relationship

Termination of agency is possible to arise from two sources: by the act of the parties and the
law. Act of the parties could mean either agreement by the two parties or by unilateral
declaration from one of the parties.

4.1.6.1. Agreement:

Agreements/contracts are not only entered into to create obligation but also to extinguish
obligations as well.

a. Unilateral Declaration by the Parties:

Agency principal relationship is not a slave-master relationship. It shall terminate, when both
parties are willing, upon agreement. But if one is not willing to do so upon a unilateral
declaration, it shall survive only upon the will of the two parties.

There are specialized terminologies employed to unilateral declarations to terminate agency

relationship. The declaration to terminate by the principal is called revocation. And the
declaration by the agent is termed as renunciation

b. Termination by Operation of the Law

 Performance: The execution of his authority by the agent brings that authority to an
end.

66
  Death, incapacity or bankruptcy of the principal.

When it comes to agency; the death, incapacity or bankruptcy of either or both of the parties
has its own specific effects. The main point behind the special effect upon death of the parties
is that the agency relationship is confidential and personal: hence the individual identity and
existence of either of the parties is very essential.

 Death, Incapacity, Absence or Bankruptcy of the Agent

Similarly the death of the agent for stronger reason takes the agency to an end. When the agent
dies, becomes incapable or adjudicated bankrupt, the relationship comes to an end. Look at
this provision:

Chapter summary

Law of agency deals with rules that are applicable while one acts through another. There are
many reasons why people/persons like to act through others. One could be because they like to
employ the expertise of others and because they cannot act themselves. For differing causes
they may prefer to use others. Still legal persons are with no choice except to act through
others as their inherent characteristics forces them. In doing so there are several transactions
and several persons involved in these type of relationship: the relationship that gives rise to the
power of acting on behalf of another; and the relationship that the representative would create
with the third parties on behalf of the owner of the affair. The Law of agency is in most cases
defined as the relationship between two persons, where one (the agent) may act on behalf of
the other (principal) and bind the principal by words and actions.

The scope of the power assumed by the agent is determined by the contract-giving rise to
agency. Yet, the scope of the agency assumed by the agent might not be expressly determined
by the contract. In the latter case it is determined by the nature of the transaction to which the
agency relates. The scope of agency conferred on the agent may either be special or general. A
power conferred to an agent is either special “for a particular affair or certain affairs only, or
general for all the affairs of the principal.”

67
In addition to the respective obligation in their contract, the agent and the principal have the
following duties to follow. Duty to Protect the Rights of the Principal from Conflicting
Interests, duty to act in good faith, duty to perform his activity diligently, Duty to Account
and Duty of Non- delegation. Whereas, Remuneration for services of the agent, Duty to
Advance Money , duty to reimburse outlays and Experts Duty to release the Agent from
Liabilities and damages, Extinction of Agency Relationship

As a contract, agency relationship can be terminated by agreement of the parties. However the
law also lists down ground of termination of agency contract. Execution of his authority
(performance of contract), death, incapacity or bankruptcy of the principal; Death, Incapacity,
Absence or Bankruptcy of the Agent are some of the grounds.

Activities of the unit

1. Which of the following activities are acts of management?

a) An individual bought woods to repair a store.

a) Ato Medu, manager of a wood working workshop has bought timber.

b) Ato Medu, manager of the above workshop has concluded a contract of loan with a
bank to run the business of the workshop.

c) Ato Medu has concluded a contract on the maintenance of the building of the
workshop with an engineer.

2. Which one of the following is absolutely true

A. Contracts made by an agent in the name of another within the scope of his
power shall he deemed to have been made directly by the principal
B. all juridical acts are subject to agency
C. an agent may not without special authority alienate or mortgage real estate,
make donations or bring or defend an action.
D. all except B
3. A and B have a law firm. They have concluded a contract of agency and hence A is the
agent and B is the principal. The agent agreed to perform the following acts on behalf of

68
 the principal: preservation of property, lease for terms less than 3 year, collection and
discharge debts. This agency is called:
A. special agency C. unauthorized agency
B. general agency D. commission agency

4. What causes extinction of obligations of agency-principal relationship?

5. How is agency-principal relationship terminated?

6. List down the obligations of the agent.

7. How is conflicting interest explained?

8. How do you explain the degree of diligence required from the agent?

9. Can an agent delegate a sub agent for the affairs of the agent? Explain

10. List down the obligations of the principal towards the agent?

References

1. Awet Hailezgi and Addisu Damtie, Ethiopian law of agency, teaching material, 2005
2. Civil Code of the Empire of Ethiopia,1960

3. Willaim L.Church, A commentary on the law of agency representation in Ethiopia Journal

Of Ethiopian law, Vol.3

4. David Kelly et al, Business law, 4th ed., 2002

5. Miller and Jentz, Business law today,9 th ed. 2011

69
4.2. Law of Sale
Introduction

The ‘Law of Sales’ is one of the chapters which are designed to deal with laws (rules and
principles) formulated to foster and regulate or generally assist the smooth running of various
business transactions. The business transactions regulated by this law are highly important in
the creation of single economic community. Therefore, the discussion in this special law will
be in light of/ within the framework of the general law of contracts as the general rules and
principles under general contracts cannot be disregarded in special contracts as far as they are
relevant.

Section Objectives

Upon the completion of this chapter, students will be expected to:

 . Identify the essential obligations of the parties to the contract for the sale of movables;

 Explain, among others, the basic principles applicable in the delivery of the thing ,
transfer of ownership and transfer of risk;

 Discuss the corollary obligations of the seller like warranty against dispossession,
defects in the thing, non-conformity to the contract and other accessory obligations;

 Discuss the principal obligations of the buyer like paying price, taking delivery,
examination of the thing and others;

 Explain the basic reasons for and the principal cases of non-performance of contractual
obligations;

4.2.1. General definition of contract of sales

A 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, the buyer, in consideration of price expressed
in money which the buyer undertakes to pay him.
As you have seen from the definition, there are two parties to the contract of sale, namely the
buyer and the seller. Buyer means a person who buys or agrees to buy goods. Seller is a person

70
who sales or undertakes to sell goods. The two terms "buyer" and "seller" are complementary
to each other and form the two parties to a contract of sale.

Sale is special contract to transfer ownership in goods (movable property) for price. It always
involves transfer of ownership over the goods sold. The very purpose of sale contracts is to
transfer ownership right and, as such, the seller has the duty of transferring title (ownership) to
the buyer and the later to pay the agreed price. Sale contract always involves consideration
element which must be expressed in terms of money (price). Exchange of goods for other
goods rather than for money can never be taken as a sale contract. Rather, it is barter. Money
refers to the legal tender or currency of country and it does not include old coin. Consideration
is essential elements of sale contract. If a person transfers a thing to another and thereby
assigns ownership right over a thing without consideration (for free), the transaction is a
donation and not sale.

4.2.2. Formation of contract of sales

Contract of sale is, like any other contract, formed when the parties express their agreement on
the subject matter of the contract and its price. That is to say, the contract of sale is completed
when the parties have expressed their consent to the terms of the contract. Thus, to say there is
consent an offer made by one of the parties must be accepted by the other in a way that fulfills
the requirements provided under general contract provisions. The parties must define the
subject of their dealing with precision and their agreement shall be in special form when such
form is necessary.

As a contract, a sales contract is regulated by general contract provisions. The requirements for
the formation of contract should be complied with. Generally for the formation of contract
offer and acceptance are indispensably required. Either the buyer or the seller shall propose to
enter into a contract with specified terms if accepted by the offeree. The buyer or seller to
which proposal to enter into a contract has been made should also express his assent without
reservation.

Even though contracting parties might make invitation to treat, no contract of sale can be
formed by mere invitation to treat in the absence of offer and acceptance by which the consent

71
of the buyer and seller is expressed. The presence of the parties is not again a sufficient
formation of the contract of sale. The consent shall be free from defect and the parties shall
have an intention to be bound.
To say that a contract of sale is formed the party must specify the price in their contract or
refer to the arbitration of the third party. And the price referred to the arbitration of the third
party must be determined as agreed. Otherwise, there would not be formation of the contract of
sale.

For example, Aden agreed to buy a used computer from Bushra. But they could not determine
the price of the computer. Thus, Aden agreed to pay the price determined by Guled who is a
mechanic. Aden has taken delivery of the computer. Unfortunately, Guled died in car accident
before he determined the price. Thus, there is no contract of sale in this hypothetical example
as the arbitrator is unable to determine the price of the used computer.

? Can the parties refer the determination of the price to the market force? For example,
can the party agree that the price would be the market price to be determined at
some future date?

Regarding things which are subject to law of sale, goods should be either existing or future or
contingent goods. Existing goods are goods which are physically in existence and which are in
the seller’s ownership at the time of making the contact of sale. They can be specific goods or
unascertained goods. Specific goods are those goods which are identified and agreed upon at
the time the making of the contact of sale. The thing is individualized or is clearly designated
for the performance of contract of sale.

Unascertained goods, on the other hand, refer to those goods which are not separately
identified or ascertained at the time of conclusion of the contract. Their existence is certain but
is of generic species and not individualized or clearly designated for the performance of the
sale contract. Put differently, they are defined only by description and may form part of a lot
(the whole number or quantity)

Future goods are those goods which may be produced or harvested or acquired by the seller in
whatever form in the future, that is, after the making of sale contract. Contingent goods are

72
goods the acquisition of which by seller depends on uncertain event. They are a variety of
future goods. Contract of sale of contingent goods is enforceable only if the event on the
happening of which the performance is dependent happens.

4.2.3. Obligations of buyer and seller

Dear students, you are familiar with the concept of performance of contract. This title
addresses issues related to contract of sale particularly obligations assumed by the contracting
parties, analyzing the obligations of the seller, obligations of the buyer and common
obligations of the seller and buyer imposed on the parties by the custom, good faith.

4.2.3.1. Obligations of the seller

The seller has certain obligations which shall be performed. The seller assumes certain
obligations under the contract of sales. These obligations are the obligation to deliver, the
obligation to transfer ownership, the obligation to warrant the buyer against dispossession
defects and non-conformity to the contract and other obligations. Failure to perform these
obligation amounts to non-performance.

a. Obligation to deliver

The seller assumes certain obligations under the contract of sale. These obligations are the
obligation to deliver, the obligation to transfer ownership, the obligation to warrant the buyer
against defects and non-conformity to the contract and other obligations imposed on him by
the contract of sale.

The characteristic obligation of the seller is to deliver the thing sold. Delivery generally refers
to transfers of possession willingly. Delivery takes place in accordance with the contract and
the default rules of the law. It consists of handing over in not only the principal subject of the
contract but also its accessories. The thing to be delivered shall, however, be the agreed thing
in quantity and type.

The obligation of the seller to deliver the thing includes the obligation to deliver the agreed
amount as well as the obligation to deliver the thing at an agreed time and place. Regarding
quantity of delivery, the seller has to deliver the agreed quantity of things. If the seller delivers

73
in excess or in short of the agreed amount, there is non-performance of contract. The buyer
may accept or reject the things delivered at his discretion. If the buyer accepts the quantity that
is less than the agreed amount, he has to pay the agreed price for quantity delivered but he
cannot require additional delivery. In cases of excess quantity, the buyer has to pay a
contractual price of the quantity delivered.

The parties to the contract of sale, according to Article 2275, may agree on delivery of “about
certain quantity” of specified goods. In such case there is a possibility of delivery of a thing,
which is determined by gap filling provisions, where the seller has the discretion to decide the
exact quantity to be delivered. However, the seller has no duty to determine the exact quantity
if the stipulation about certain quantity was made for the sole interest of the buyer.
Accordingly, this benefit might be given to the buyer where ‘it appears from the circumstances
that such stipulation has been included in the contract in the sole interest of the buyer’. For
instance, imagine that Fitsume is celebrating a graduation ceremony. He invited 50 persons to
the ceremony. Since Fitsume was not sure about the number of persons who would show up,
he ordered around 60 bottles of soft drink from Lelisa. In this case, we understand from the
circumstance that Fitsume should determine the exact quantity.

? The parties to the contract of sale agreed to deliver “about certain quantity” of
specified goods. Can the seller deliver the quantity as large as he wishes or as small
as he wishes?

Concerning time and place of delivery, the seller cannot deliver the thing whenever and
wherever he likes. He must observe the provisions of the law and that of the contract. The
seller should deliver the thing sold at agreed time. Failure to deliver at such time amounts to
non-performance of the contract. However, the parties may fail to specify the time of delivery
or the date of delivery cannot be inferred from the will of the parties, the seller shall deliver the
thing as soon as the buyer requires him to do so.

Where the parties have agreed that delivery shall take place during a given period, it shall be
for the seller to fix the exact date of delivery unless it appears from the circumstances that it is
for the buyer to do so. For example, if the seller agreed to deliver the thing sold between

74
July14 and August 16, he has to make delivery during this period. However, the buyer
determines the exact date where circumstances may give such power to determine the exact
date of delivery to the buyer. For example, if Y agrees to deliver a wedding cake between June
6 and 19 to X, it is clear from circumstances that X needed the cake on the day of his wedding.
Thus, it is X who should decide the exact date because Y has no interest in the date of delivery
and for that matter Y does not know the date of wedding.

As far as place of delivery is concerned, unless otherwise agreed, the seller shall deliver the
thing at the place where, at the time of the contract, he has his place of business or, failing
such, his normal residence.

b. Obligation to Transfer ownership

The seller shall take the necessary steps for transferring to the buyer unassailable rights of
ownership over the thing. However, delivery alone does not transfer ownership. The seller
must be the owner of the thing sold. For example, if Kebede steals a watch from Degu and
sells it to Boron, Boron has no greater title to the watch than Kebede possessed. Thus a non-
owner cannot transfer ownership.

c. Obligation to warranty title, defects, and non – conformity

The obligation of the seller to warrant is extended to warranty of dispossession, defect, and
non-conformity. Warranty is a contractual promise by the seller regarding the quality,
character, or suitability of the goods he has sold.

 Warranty of dispossession: Warranty against dispossession has been provided as an

obligation of the seller in the law. The seller shall warrant the buyer against any total or
partial dispossession, which he might suffer in consequence of a third party exercising a
right he enjoyed at the time of the contract. However this right of the buyer can be limted
in three cases.

First, awareness of the buyer about the threat of dispossession is among the limits of
warranty of dispossession. The buyer may sometimes know that there is a possibility that
a third party would dispossess him. This means where, at the time of the contract, the

75
 buyer knows that he risks dispossession, the seller shall not warrant the thing unless he
has expressly undertaken to do so.

Second, exclusion or restriction of warranty against dispossession is also another limit of

warranty of dispossession. The parties exclude the warranty against dispossession when
they agree that the seller would not be responsible if the third party dispossesses the
buyer. In addition to the aforementioned grounds, the failure of the buyer to join the
seller in the proceeding against him is also another limit of implied warranty of
dispossession. Third parties may sue the buyer. In such case, the buyer must inform the
seller that he had been sued. The seller may raise objections in the court and may win the
case. He shall, therefore, join the seller as a party to the proceedings instituted against
him in due time. However, if the seller is not joined in the proceedings without any fault
on his part, he shall be released from his warranty where he can show that the
proceedings might have had more favorable issue, had he been joined in due time.

Third, when dispossession is due to the act or contribution of the buyer, dispossession of
warranty is limited. If the dispossession is due to the buyer, for example, the thing is
attached by the creditor of the buyer and sold by auction according to the order of the
court. The seller will not warrant such dispossession. When the dispossession is also due
to the act of the buyer, the seller is released from his warranty.

 Warranty against defects in the thing: The seller shall guarantee to the buyer that the
thing sold conforms to the contract and is not affected by defects in addition to the
warranty of dispossession. There are circumstances where the seller gives an express
warrant against defect. When a seller uses descriptive terms and the buyer takes them
into consideration while making the purchase, the seller has expressly warranted that the
goods he delivers will meet that description. Express warranty can be given in a limited
manner. Where the seller has warranted during a specified period, certain qualities or the
good working condition of the thing, it shall be sufficient for the buyer to inform the
seller of the defect before the expiry of such period.

Dear students you should bear in mind that all defects are not warrantable. Defects are
warrantable where the thing:

76
  Does not possess the quality required for its normal use or commercial
exploitation;

 Does not possess the quality required for its particular use as provided expressly or
impliedly in the contract; (warranty of fitness for particular use)or;

 Does not possess the quality or specifications provided expressly or impliedly in the
contract (warranty of fitness specified in the contract)

Warranty of fitness for normal use obliges the seller to deliver goods that are fit for the
ordinary purpose. For example, a person of normal weight who buys a chair should be able to
sit on it without it collapsing. The chair should also withstand other things people commonly
do with chairs, such as occasionally standing on them or dragging them across the floor. If the
chair fails to have such qualities, it is believed not to have the quality required for normal use.

Warranty for commercial exploitation exists when the goods are of such quality and in such
condition that a reasonable man would accept them under the circumstances of the case in
performance of his offer to buy those goods. Thus, to be fit for commercial exploitation the
goods must be such as are reasonably saleable under the description by which they are known
in the market. For example, Becky bought a tape recorder from Natoly. If Natoly could not
resell the tape recorder to another seller, the tape recorder is not fit for commercial
exploitation. If Ato Dawit agrees to sell four cans of Nido milk and if it is unsealed, it is not
possible to resell. Therefore it does not possess the quality required for commercial use.

Warranty of fitness for particular purpose is made to the seller when the seller knows the
particular purpose for which the buyer needs the goods and knows that the buyer is relying on
the seller to select goods sailable for that purpose. For instance, a person goes to the shop and
tells the shop owner that he needs a scissors that will cut cloth. If the shopkeeper knows the
buyer is depending on him to pick a suitable pair of scissors, there is warranty that the scissors
selected are fit for the buyer’s need.

77
  Warranty against non-conformity: A seller, in addition to warranty against
dispossession and defect, has the obligation to warrant against non-conformity of the
thing. Non-conformity can be warranted as of article 2287 if it is warrantable non-
conformity and Article 2288 has given positive meaning of warrantable non-
conformity.

d. Other obligations of the seller:

The seller does have other accessory obligations as provided in the gap filling provisions.
Other obligations of the seller relate to handing over of documents and insurance. If it is
customary for the seller to hand over to the buyer documents concerning the thing sold, the
seller shall, in addition to delivery, hand over such documents. The documents shall be handed
over as carefully and quickly as possible at the place fixed in the contract or provided by
custom. The buyer shall not be bound to accept the documents unless they conform to the
contract. Where the seller must know from the circumstances that carriage insurance is the
custom and where the seller is not bound to contract such insurance himself, he shall provide
the buyer with the necessary information to enable him to contract insurance, where the buyer
requires such information from him.

4.2.3.2. Obligation of the Buyer

The main obligations of the buyer under the contract of sale are the obligation to pay price and
the obligation to take delivery of the thing sold. These are the conditions of contract of sale
with the exclusion of which no contract of sale can be made.

a. Obligation to pay price

The buyer has the obligation to pay the price and take delivery of the thing. The price is the
amount of money that the buyer undertakes to pay to the seller in consideration of a thing. It is
the cost at which a thing is bought

The obligation of the buyer to pay price includes the obligation to take any steps provided by
the contract or by the custom to arrange for or guarantee the payment of price, according to Art
2304. For example, the contract of sale may provide that the buyer should pay the price in
check. In this case the buyer must open account in bank and deposit money in the bank from
78
which he orders payment to the seller. Thus, the buyer fails in his obligation to pay price if he
does not open an account in a bank. The parties to the contract may agree that the buyer would
pay the price after delivery of the thing provided the buyer gives security to the seller. In such
case, the buyer’s obligation to pay price includes the obligation, for example, to give surety.

In many kinds of business, there are customs and practices of the trade that are known by
people in the business. Applying these customs and practices in light with providing gap filling
rules considering hypothetical contract that is the contracting parties would assume these
customs and practices had they been cognizant of the gap. The buyer has, accordingly, the
obligation to pay in accordance with the custom and arrange for or guarantee the payment of
the price. For example, assume that the custom in purchase of pharmaceutical products the
buyer has to transfer the purchase price through the bank to the seller. In such case, the buyer
should take step to transfer the money through the bank. The obligation of the buyer to pay
price also includes the obligation to accept bills of exchange, to open credit account and to
provide bank security.

Parties to sales contracts frequently fail to regulate price or leave gaps which might result in
unresolved dispute. In such cases, the provision of the Civil Code determines the price in some
instances by its gap filling provisions. Such circumstances relate to the absence of fixed price
while the price is based on weight of the thing when the thing; has market price, when the
buyer accepts excess quantity, when the time and place of payment is not agreed.

 Price determined by weight: if the parties determined the price based on the weight
of the thing, the price should be based on net weight rather than gross weight and the
new weight is taken into account in the event of doubt. For example, if the seller agrees
to deliver 20 quintals at 520 Birr per quintals, he has to deliver a quintal containing 100
Kilograms excluding the weight of the container.

 Things at current price: If the thing sold has a market price and the parties did not
agree on the price of the thing, the buyer should pay the market price. If the seller
normally sells the thing and there is no agreement on the price of the thing, the buyer
should pay the price normally charged by the seller. In both cases, the place and time of

79
 delivery should be considered. For example, if the place of delivery causes the buyer to
incur extra expenses, that expense should be included in the price. Likewise, the price
should be increased in proportion to the duration of delay in paying price, when the
sale is on credit.

 Quantity greater than agreed: The seller should deliver the quantity of the thing
agreed upon in the contract. Where the seller delivers a quantity greater than that
provided in the contract, the buyer may accept or reject the excess quantity as he
pleases. If the buyer, on the other hand, accepts the quantity in excess, he should pay a
price increased in proportion to the quantity delivered to him. For example, A agreed to
deliver 10 quintals of sugar to B at 500 Birr per quintal. Instead A delivered 15
quintals. B has an option to accept or reject the additional 5 quintal. If he accepts, he
should pay 500 Birr for each additional quintal.

 Place of payment: If no place is fixed in the contract, the buyer should pay the price at
the address of the seller. However, if the contract provides that the price is paid when
the thing or documents are handed over, when the price is paid at the place where,
under the contract, such thing or documents are to be handed over.

b. Obligation to take delivery of the thing

The buyer must take necessary steps to complete the delivery. These necessary steps include
the obligation to go to the place of the business of the seller and physically receive the thing
from the seller or to keep the buyer’s store opened if delivery is to be made at the buyer’s
place. It also includes the duty to accept the thing when the place of delivery is at the residence
of the buyer when the thing does not suffer from any defects. The buyer may take deliver by
only telling the seller to keep the thing on his behalf. This is the case where the buyer takes
delivery through constructive mode of delivery. The buyer’s failure to pay the price might be
equated to failure to take delivery when payment of the price is a precondition for delivery.

4.2.3.3. Common Obligations of the Seller and the Buyer

In the preceding discussions, we have discussed the respective obligations of seller and buyer.
The obligations of the contracting parties are not limited to these obligations. They have some

80
obligations in common like obligation to pay expenses, obligation to preserve the thing and
obligation to bear unpreventable risk of loss and deterioration. The common obligation of the
parties will accordingly be deal with.

a. Obligation to pay expenses

The contract of sale may not involve expense when it is an instance sale. For example, when
you buy a jacket, you pay the price and take the jacket. You have concluded a contract of sale
but you did not incur expenses. However, when contract of sale involves a lot of money, the
parties usually make their contract in writing. In such case the conclusion of contract involves
certain expenses like advocate’s fee for drafting the document incorporating the agreement,
expenses for typing, printing and photocopying the document.

The obligation of the buyer to pay price sometimes involves expenses like charges by the bank
when the money is to be sent to the seller through the bank according to the contract. The
obligation to pay price like obligation to open credit account and the obligation to provide
bank security are always accompanied by expenses. In addition to expenses of payment and
expenses of contract the buyer bears the expenses of transportation when the goods sold is to
be taken to other places than place of delivery. It can be safely concluded that the buyer bears
the following expenses: Expenses of a contract of sale, Expenses of payment, Any expense
arising after delivery and Expenses of transport where the thing sold has to be sent to another
place than the place of delivery and if the delivery is not to be carriage free. However the seller
also bears some expenses related with above expenses.

For example, the seller shall pay such transportation expenses when the delivery of the thing is
carriage-free. Where transport of the thing is interrupted by an event beyond the control of
either party, the additional transport expenses shall be borne by the party who bears the risks.
The seller should also bear the expenses of delivery where delivery involves expenses. The
expenses of delivery including the expenses incurred for counting, measuring and weighing of
the thing sold.

Where import customs duties or other duties charging the imported thing are to be paid by the
seller and such duties increase after the contract is made, such increase shall be added to the

81
price. Where, however, a delivery bearing such duties has been delayed by the act of the seller
or of a person for whom the seller is liable, the additional duties shall be paid by the seller
whenever the buyer can show that the increase would not have been due, had the delivery been
made at the time fixed in the contract or provided by law. Whenever there is a decrease in
customs duties, the price shall be reduced accordingly.

b. Obligation to preserve the thing

In addition to bearing expenses, both the buyer and the seller should preserve the thing which
has been sold. After delivery of the thing, the ownership transfers to the buyer. Sometimes the,
the thing belonging to the buyer may remain in possession of the seller. The same is true when
the buyer is late in taking delivery or in paying the price. In these circumstances, the seller
should preserve the thing belonging to the buyer. The seller should not neglect the goods. The
seller’s duty to ensure the preservation of the thing is at the buyer’s expense. In preserving the
goods the seller may incur expenses as when the seller hires a guard for the purpose of keeping
buyer’s goods or when the seller keeps the buyer’s good in warehouses at his own cost.
Besides, although risk might be transferred to the buyer, the seller has the obligation to
preserve the thing and if the thing is damaged for lack of preservation, the seller will be liable
for the damage.

Preservation is not only obligation of the seller. The buyer has also the obligation to preserve
the thing at the seller’s expense where the thing sold has been received by him and he intends
to refuse it either owing to defect or non-conformity. We can infer from this that if the thing
which is in the actual control of the buyer is lost or damaged, it is the seller not the buyer who
shall cover the price of the thing.

However, the seller and the buyer may relieve themselves of the obligation to preserve the
thing by consigning or selling it. If for example Ato Yehiya sold 100 kilos of bananas to Ato
Waq jira and the buyer died before accepting delivery, Ato Yehiya may be authorized to sell
bananas and deposit the money if the person who shall receive performance is not known or
refuse to accept.

82
 c. Transfer of risk under contract of sales of movables

Risk is the liability of loss or deteriorations of a thing sold. The thing sold may be damaged,
destroyed or lost during transportation. Floods, tornadoes or other natural catastrophes may
destroy it. As a result allocating risk sometimes requires transfer of risk from the seller to the
buyer. General principle of economic analysis of contract tells us that risk shall be borne by
the person who is in a better position of avoiding the risk or shared when none of the parties is
in a batter position of avoiding the risk. Therefore the laws dealing with risk transfer are
normatively required to take into consideration the efficient risk allocation.

The effect of risk allocation is that the person who bears the risk is to cover the value of the
thing which has been damaged or lost. Thus, the basic principle, which is provided regarding
transfer of risks in the sale of goods, is that, the buyer shall pay the price notwithstanding that
the thing is lost or its value altered where the risks are transferred to him.

The risks shall be transferred to the buyer from the day when the thing has been delivered to
him in accordance with the provisions of the contract or of this code. The risk is transferred
upon delivery notwithstanding that the thing delivered does not conform to the contract, where
the buyer has not cancelled or required the cancellation of the contract or required that the
thing be replaced. Risk transfers from the seller to the buyer in the following three cases.

 Delivery

The risk transfers to the buyer when the seller delivers the thing to the buyer in any of the
modes of delivery. The debtor bears the risk till delivery is made according to the contract.
This way of risk transfer seems to be based on the assumption that when the thing is delivered
the person to whom the thing is delivered is in a better position of avoiding the risk and shall
accordingly bear the risk.

Be that as it may, there are circumstances where the risk is not transferred upon delivery. The
buyer must accept the thing to assume its risk of loss or deterioration. The buyer usually
accepts when the thing conforms to the contract or when the thing suffers from no defects. The
buyer rejects the thing if it does not confirm to the contract or if it is defective when he

83
required the seller to replace the non-conforming things or defective things. Therefore,
delivery transfers risk to the buyer only when the thing conforms to the contract. If the thing
does not conform to the contract, there must be failure to reject the thing or acceptance of the
thing so that delivery transfers risk.

 Delay of buyer

Sales contract provisions have also provided, in addition to delivery, failure of the buyer to
take delivery of goods transfers risk from the seller to the buyer even in the absence of
delivery. The risks shall also be transferred to the buyer from the day he is late in paying the
price although being late in paying the price might result in delay to take delivery. This is an
exception to the principle which declares that risk perishes to the owner and in light with risk
follows hands.

In addition to delay certain additional conditions are attached when it involves fungible things.
Where the sale relates to fungible things, the delay of the buyer shall not transfer the risks to
him unless the thing, clearly designated for the performance of the contract, has been
especially allocated to the buyer and the seller has sent notice to the buyer to that effect. Where
fungible things are of such a nature that the seller cannot set aside part of them until the buyer
takes delivery, it shall be sufficient for the seller to have performed all the acts necessary to
enable the buyer to take immediate delivery. Therefore, the general conditions upon the
fulfillment of which risk transfers to the buyer owing to delay in taking delivery of fungible
things are; the thing must be designated for the purpose of delivery that is the thing must be
identified from other things, The thing must be allocated to the buyer, that is, identification
alone is not enough and the notice of designation and allocation must be given to the buyer.

 Handing over to carriage

In addition to delivery and delay of the buyer, handing over of the thing to the carriage also
transfers risk in the case of a thing under voyage. Where the sale relates to a thing under
voyage, the risks shall be transferred to the buyer from the day when delivery has taken place
by the thing having been handed over to the carrier. This is special arrangement where the
thing is delivered before the conclusion of the contract. Such transfer of risk allows transfer of
84
risk before the conclusion of the contract. The civil code states that where the subject of sale in
under voyage (being transported) the risk shall be transferred to the buyer upon delivery by
handing over to the carrier. Delivery or handing over of a thing which is under voyage is
effected before the conclusion of the contract because it is after delivery the thing can be called
things under voyage. Effected deliver transfers risk and delivery is before the conclusion of the
contract means risk is transferred retroactively.

Hence, it is not illogical inference to say the effect of contract of sale comes before the
conclusion of contract. However, it is the effect which follows the cause not the cause which
comes after effect. In addition to this mistake as to existence of a thing impossibility delivery
before the conclusion of contract can also be a challenge for such transfer of risk as risk
depends on validly formed contract.

For example some number of mobile apparatus was handed over to a carriage on September 7
and a contract of sales for the things under voyage was concluded on September 20. At the
conclusion of the contract, however, the things under voyage was destroyed. In this case the
risk is transferred to the buyer as of September 7 that it is when the things were handed over.

In this case leave alone risk transfer, the formation of valid contract is at issue for the buyer
may invoke mistake as to the existence of the contract. It might also be said that there is no
contract since the object of the contract relates to impossible object because non-existing
object before the conclusion of contract is said to be impossible object.

Risk is not transferred in a situation where at the time of the making of the contract the seller
knew or should have known that the thing had perished or was damaged. This seems to get it
justification from allocating risk to the person who is in a better position of avoiding the risk
and the seller who has knowledge or is reasonably expected to know is in a better position to
avoid the risk by not entering the contract.

However, even though the seller does not know or should not have know, there seems not
tenable justification to make the buyer bear a risk for a thing which did not exist at the time of
the conclusion of the contract or was perished before the conclusion of the contract.

85
Special consideration is made when there are provisions relating to expenses and the goods are
shipped in common. As far as a provision relating to expenses is concerned, any provision
relating to expenses stipulated by the parties, especially a provision whereby expenses are to
be borne by the seller does not in itself transfer the risks.

As far as goods shipped in common is concerned, the risks shall be allocated to each of the
buyer in proportion to his share from the day when delivery has taken place by the goods after
being handed over to the carrier, where the seller has sent to the buyer the bill of exchange or
other document showing that the shipment has taken place.

Unit Summary

A 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, the buyer, in consideration of price expressed
in money which the buyer undertakes to pay him. This definition implies that the buyer and the
seller have their own obligations.

The main obligation of the seller under contract of sale is obligation to deliver the thing and
obligation to transfer ownership. The characteristic obligation of the seller is to deliver the
thing sold. Delivery generally refers to transfers of possession willingly. The obligation of the
seller to deliver the thing includes the obligation to deliver the agreed amount as well as the
obligation to deliver the thing at an agreed time and place. Besides, the seller shall take the
necessary steps for transferring to the buyer unassailable rights of ownership over the thing.

86
However, delivery alone does not transfer ownership. The seller must be the owner of the
thing sold. Obligation to transfer ownership also implies that the seller has the obligation to
warrant against dispossession, against defect and nonconformity. Handing over of relevant
documents and insurance coverage, if any, are also other obligations of the seller. An
obligation of the buyer relates an obligation to pay price and the obligation to take delivery of
the thing sold.

As part of common obligation of the buyer and the seller, the law of sale provides that both the
seller and the buyer have obligations to pay expenses, an obligation to preserve the thing and
an obligation to bear risks. Payment of expenses refers expenses incurred because of the
contract, transport, delivery and other expenses. In case of preservation, the law imposes an
obligation on each parties to preserve things under their possession. The buyer should preserve
the thing sols under his possession even if he wants to return the thing and then claim
cancelation of the contract. Similarly, the seller has an obligation to[reserve the thing sold even
if the buyer delayed or failed to take delivery. But this doesn’t mean that they will cover costs
of preservation. Risk transfers from the seller to the buyer in three cases. These are: when the
seller delivers the thing to the buyer in any of the modes of delivery, failure of the buyer to
take delivery of goods and things under voyage from the day of handing of goods to the
carrier.

Activities of the unit

1. Which one of the following is not true statement?

A. Buyer bears expenses of contract
B. Buyer bears expenses of payment
C. Seller bears expenses of delivery
D. Buyer bears Expenses of transport
2. One of the true about delivering of the thing which is subject matter of sale contract?
A. It can only be validly discharged by actual delivery
B. Handing over of lesser quality is non-conformity
C. The place of delivery should always be the seller’s place of business
D. All

87
 E. none
3. Identify true statement from the following alternatives.
A. Delivery always transfers risk.
B. Delivery only refers to actual delivery.
C. The seller always warrants defects.
D. all
4. Write all obligations of a buyer and obligations of a seller.

5. Identify warrantable and non-warrantable defects.

References

1. Civil code of the empire of Ethiopia, 1960

2. David Kelly et al, Business law, 4th ed., 2002

3. Miller and Jentz, Business law today, 9th ed. 2011

4. Gadissa Tesfaye and Mebrathom Fetewi, Law of Sales and Security Devices, Teaching
Material, 2005

4.3. The Law of Insurance

Introduction

Insurance may be defined in various ways. Firstly, from the point view of an individual it may
be defined as a risk transfer mechanism or an economic device whereby a person, called the
insured/assured transfers a risk of a possible financial loss resulting from unforeseeable events
affecting property, life or body to a person called the insurer for consideration. For instance, let
us take a case of an owner of a motor vehicle, who always runs the risk of suffering a financial
loss resulting from the loss or destruction of his property because of unforeseeable events such
as fire, collision, overturning or even theft. Therefore, if the person purchases a motor

88
insurance policy covering these risks from an insurer, it means that he transferred this possible
financial loss to the insurer.

Secondly, from the point of view of the insurer, insurance may be defined as a mechanism
through which a risk is distributed among the group of persons who are exposed to the same
type of risk, i.e., persons who bear the risk of suffering a financial loss as a result of events
affecting property, life or body. This topic focus on the concept of insurance, obligation of
parties in insurance and types of insurance.

Unit Objectives

After successful completion of the chapter, students are expected to discuss:

 what insurance law is and its significance;

 the concept and requisites of insurable interest;

 the concept of indemnity;

 what utmost good faith is;

 the meaning of indemnity, and the need for indemnity;

 explain the different types of insurances

4.3.1. Nature of the Contract of Insurance

Under the Commercial Code Ethiopia contract of insurance is defined as “a contract whereby a
person, called the insurer, undertakes against payment of one or more premiums to pay to a
person, called the beneficiary, a sum of money where a specified risk materializes”

Contract of insurance is special type of contract whose performance depends on the occurrence
of uncertain event. The uncertainty may be whether or not the event will happen. In a case
where it is certain that the event will happen, the uncertainty will be as to the time when it will
happen. For instance in life insurance policy against death, it is not the death of the person that
the uncertainty element relates. Rather, it is the time when the death will happen.

89
It is also important to note here that contract of insurance as special contract is subjected to the
principles of contract in general. As such it must fulfill the essential elements of valid contract
relating to capacity and consent of the contracting parties, objects of the contract and form
where such is required by law. When we come to the formality requirement of contract of
insurance, the law provides that it must be made in writing which is called a policy and
supported by a proposal form offered to the insured and filled by the insured. It has to be
signed by the parties bound by it and attested by two witnesses.

Contract of insurance is a conditional contract in which the insured makes the payment of the
required premium at the time fixed in the contract; whereas the obligation of the insurer is
conditional on the materialization of the insured risk or the happening of the covered event
which is determined in accordance with the terms of the policy.

With respect to the parties to the contract of insurance, the law provides certain prerequisite as
to who can enter into the contract as an insurer. It is only share company that can be an insurer
under the Ethiopian legal system. To engage in insurance business, share companies must
satisfy the minimum capital requirement which has to be paid up in cash and deposited in a
bank. The law makes it clear that share companies, in order to engage in insurance business,
must allocate their shares wholly to the Ethiopian nationals and/ or organizations wholly
owned by Ethiopian nationals and register under the laws of and having the head office in
Ethiopia. But, to be a party to contract of insurance as an insured, there are no special
requirements and every person presumed to be capable to enter into a contract. Hence, in such
a situation the general rules of capacity can be applied.

From the above definition of contract of insurance, you have seen that the parties involved are
the insured and the insurer having their respective rights and corresponding duties. The insured
has an obligation to pay a sum of money called premium to the insurer. Hence, in absence of
payment of premium there is no contract of insurance.

The insurer, on the other hand, undertakes to pay a sum of money where a risk specified in the
policy is materialized. Thus, contract insurance lacking this very element can be deemed to be
null and void.

90
In the absence of expressed terms in the policy as to the effective date of the policy, the policy
shall come into force on the day when the policy is signed. The parties are also at liberty to
stipulate terms to the effect that the policy shall only come in to force after the first premium
has been paid.

A contract of insurance is a type of contingent or conditional contract. As the name indicates, a

contingent or conditional contract is a contract to do or not to do something, if some event,
collateral to such contract, does or does not happen. In other words, it is a contract in which
the performance of the obligation arising there from by the parties or one of them is dependent
upon the condition or contingency agreed upon by them. Accordingly, as the obligation of the
insurer/assurer to pay compensation or the agreed amount to the insured or the beneficiary is
dependent upon materialization of the risk or risks specified in the policy. Thus, for instance, if
X Insurance Company agrees to pay Birr 100,000 in exchange for B paying Birr 2500 as
premium, if B's house is destroyed by fire; there will be contingent contract, the performance
of which depends upon the happening of an uncertain event, i.e. the destruction of the house
by fire.

Although a contract of insurance resembles, to a certain extent, a wagering or gambling

agreement whereby the insurer bets with the insured that his house will not be burnt and giving
him the odds of its value, it is a legal and enforceable contract with important economic and
social purposes.

A contract of insurance differs from a contract of wagering or gambling for the following
reasons:

 The object or purpose of an insurance contract is to protect the insured against

economic losses resulting from a certain unforeseen future event, while the object of a
wagering or gambling agreement is to gamble for money and money alone.
 In an insurance contract, the insured has an insurable interest in the life or property
sought to be insured. In a wagering or gambling agreement, neither party has any
pecuniary or insurable interest in the subject matter of the agreement except the
resulting gain or loss. This is the main distinguishing feature of a valid contingent
contract as compared to a wagering agreement.

91
  A contract of insurance (except life, accident and sickness insurances) is based on the
principle of indemnity. However, in a wagering agreement there is no question of
indemnity, as it does not cover any risk.

 A contract of insurance is based on scientific calculation of risks and the amount of

premium is ascertained after taking into account the various factors affecting the risk.
In a wager, there is no question of any calculation what so ever, it being a mere
gamble.

4.3.2. Significance of Insurance

Insurance as a mechanism of transfer of risk has great economic and social benefits to the
individual insured, his family and the country in general. The following are some of the major
benefits.

a. Indemnification for Losses

Payment of compensation by the insurer for losses permits individuals and their families to be
restored to their original financial position after a loss has occurred. As a result, they can
maintain their financial security. Since they are restored either in part or in whole after a loss
occurs, they are less likely to seek financial assistance from relatives and friends. It also allows
businesses to remain in business and employees to keep their jobs, suppliers will continue to
receive orders, and customers can still purchase the goods and services they desire. The
community also benefits because its tax base is not eroded.

c. Reduction of Worry and Fear

Another benefit of insurance is that it reduces worry and fear, both before and after loss. For
instance, if family heads have life insurance for adequate amount to cover the future needs of
their families, they are less likely to worry about the financial security of their dependents in
the event of their premature death

d. Means of Loss Control

Although the main function of insurance is not to reduce loss but merely to spread/distribute
losses among members of the insured group, insurers are nevertheless vitally interested in

92
keeping losses at a minimum. Insurers know that if no effort is made to prevent or minimize
occurrence of insured risks, losses and hence premium would have a tendency to rise. It is
human nature to relax vigilance when they know that the loss will be fully paid by the insurer.
The insurance industry usually works for development of fire safety standards and public
education programs and also finances programs aimed at reducing premature deaths, accidents
and illness.

e. Enhancing Credit

Insurance enhances a person's credit, i.e., it makes the borrower/debtor a better credit risk
because it guarantees the value of the borrower’s collateral/mortgage or pledge/, and gives the
creditor /lender greater assurance that the loan will be repaid. For instance, when a house is
purchased on credit provided by a lending institution, the lender normally requires a property
insurance on the house before the mortgage loan is granted. The property insurance protects
the lender's financial interest if the property is damaged or destroyed. Similarly, if a purchase
of an automobile is financed by bank or other lending institution motor vehicle insurance may
be required before the loan is given. It also enhances small businesses’ competitiveness. Small
businesses would not be able to compete with big businesses without an insurance to which
they transfer risks to their assets. This is true because in cases where risks occur they would be
compensated and the business remains in the market. However, in the absence of insurance,
the occurrence of a certain loss may destroy the business and put it out of the market. Big
businesses on the other hand, may safely retain some of such losses even in the absence of
insurance.

? Dear students, is there a similarity between Edir and insurance?

4.3.3. The Rights and Duties of the Insured and the Insurer

Each parties in insurance contract has rights and duties. Payment of premiums and disclosing
material facts which are necessary for the determination of premiums are the duties of the
insured whereas payment of compensation is duty of the insured. Let’s see them one by one.

93
 4.3.3.1. Duties of the insured

 Payment of Premium

Premium is consideration which the insured has to pay to the insurer for the protection given
to him. It is an essential element of contract of insurance. In the absence of payment of
premium on the part of the insured, it is hard to imagine contract of insurance. Payment of
premium is, thus the core obligation of the insured under contract of insurance. The amount of
the premium must be stipulated in the insurance policy.

 Duty of Disclosure.

Contract of insurance is essentially of a fiduciary nature, i.e. it is built on trust. In addition, an

offer is made in contract of insurance by the insured when he has filled out the proposal form
issued by the insurer and for warded it to the insurer. In such a case, the insured knows or
ought to know all relevant facts about the risk proposed for insurance; whereas the insurer
knows little or nothing about the proposed risk. For this reason the insured has an obligation to
disclose, before the contract is concluded every material fact of which he knows or ought to
have known. Moreover, every material representation made by the insured must be
substantially true. The insured is duty bound to state all material facts accurately. This is so
important to the insurer to evaluate the exact risk and set the appropriate rate of premium or
even to decide whether or not to enter into the contract of insurance.

This duty of disclosure extends to disclose increase of risk after conclusion of contract of
insurance and to notification of risk after the risk insured has materialized.

4.3.3.2. Duties of the Insurer

 Payment of Compensation when Risk Materializes

As we has seen earlier, the payment of premium is a core obligation of the insured. Likewise,
payment of compensation is a core obligation of the insurer when the risk covered by the
policy has materialized. The amount of compensation to be paid to the insured when the risk
insured has materialized has to be stipulated in the policy. This is an essential element of

94
contract of insurance. In the absence of stipulation as to the amount of money (or its
equivalent) which is to be paid by the insurer when risk materializes, it is hardly possible to
talk about the conclusion of contract of insurance.

4.3.4. Basic principles of insurance

4.3.4.1. Principle of Utmost Good Faith

Insurance contracts are contracts of utmost good faith. Accordingly, it is the inherent duty of
both parties to a contract of insurance to make full and fair disclosure of all material facts
relating to the subject matter of the proposed insurance.

This principle consists of the following elements under the Ethiopian law; from the point of
view of the insured, the principle of utmost good faith requires the insured;

A) To disclose to the insurer, at the time of the conclusion of the contract, all facts related to
the object, liability or person to be insured and of which he is aware and which he thinks
will help the insurer to fully understand the risks it undertakes to insure. The insured is
required to disclose facts which may influence the decision of the insurer to enter into the
contract or not or if it decides to enter into the contract if it would affect the amount of
premium it would charge.

B) To notify the insurer of changes that may occur after the conclusion of the contract. The
insured must notify the insurer of changes in facts and circumstances surrounding the
object or liability insured if such changes are capable of increasing the probability of
occurrence of the insured risks. The test of materiality is also applicable here as the insured
has to notify of changes if they are of such a nature or importance that, had they existed at
the time of the conclusion of the contract and had the insurer known them, they would
have influenced the decision of the insurer to enter into the contract or not and the level of
premium it would have imposed. For instance, where the insured changes the purpose or
use of his house from residence to a business purpose, let us say, distribution of gases /fuel.
The insured has to notify the insurer of such change within fifteen days from the date he
changed the purpose of the house and started the business, because the house is more
exposed to risk of fire than when it was being used for residence.

95
 Failure to comply with these elements of the principle of utmost good faith may have one
of the following effects depending on the motive of the insured person. If the insured
concealed material facts or made false statements there in intentionally with the motive to
benefit from a lower rate /amount of premium, the contract will have no effect and the
insurer shall retain the premium. Failure to notify the increase of risks according to Art
669(1) internationally and with similar motive shall have the same effect.

C) To refrain from any fraudulent act aimed at making a net profit or obtaining undeserved
benefit out of a contract of insurance. For instance, the insured must refrain from
intentional /fraudulent over-insurance of the object, which occurs where on the date of
conclusion of the contract, the sum insured/amount of guarantee provided in the policy
exceeds the value of the object or where the insured purchases several insurance policies
from several insurers in respect of the same object, covering the same types of risks and
the sum insured or amount of guarantee provided by the policies exceed the actual value
of the object. Over insurance where it is intentional or fraudulent may result in the
termination of the contract by the court upon the application of the insurer to this effect and
in addition, the insurer may be entitled to payment of compensation for any damage the
insurer might have suffered because of the violation of the duty to act in good faith.

D) To refrain from purchasing an insurance policy in respect of goods or objects which are
already lost or damaged or destroyed or in respect of goods or objects which are no longer
exposed to a risk with the motive of receiving compensation for the loss or damage
sustained before the conclusion of the contract.

4.3.4.2. Principle of Indemnity

The second fundamental principle is that all contracts of insurance are contracts of indemnity,
except those of life and personal accident insurances where no money payment can indemnify
for loss of life or bodily injury. The purpose of indemnity is to place the insured, after a loss,
in the same position he occupied immediately before the event. Under no circumstances, is the
insured allowed to benefit more than the loss suffered by him. This is because, if that were so,
the temptation would always be present to desire the insured event and thus to obtain the
policy proceeds. This would obviously be contrary to public interest.
96
The principle of indemnity implies that the sum insured or the amount of guarantee provided
in the policy is not necessarily payable. This is in line with purpose of insurance, i.e.,
reinstating a person who has suffered a financial loss to his original financial position. It also
shows that the insured cannot claim its payment where the risk materializes unless the sum
insured is equal to actual value of the object at the time of loss or damage or unless the policy
is a valued policy as discussed above.

However, there are instances, in which the principle of indemnity does not apply. such
instance is related to insurance of persons, where the parties freely fix the amount of guarantee
and is payable regardless of the actual damage sustained where the risk materialized. This is
mainly because it is generally accepted that human life or limb cannot be valued in terms of
money and are irreplaceable and the insured or beneficiary who receives it cannot be
considered to have made a net profit out of the insurance.

4.3.4.3. Insurable Interest

Consistent with the concept of insurance as a means of indemnifying an insured against a loss,
is the corollary that insurance should not provide an insured with the means of showing a net
profit from the event insured against. One rather rough-hewn method of enforcing that
corollary is the doctrine of insurable interest.

Insurable interest means some proprietary or pecuniary interest. The object of insurance is to
protect the pecuniary interest of the insured in the subject matter of the insurance and not the
material property as such. A person is said to have an insurable interest in the subject matter
insured where he will derive pecuniary benefit from its existence or will suffer pecuniary loss
from its destruction. Insurable interest is thus a financial interest in the preservation of the
subject matter of insurance. A purely sentimental interest or a non-monetary benefit will not
cause an insurable interest. Accordingly, a creditor has an insurable interest in the life of the
debtor but a son has no insurable interest in the life of his mother who is supported by him.

4.3.4.4. Doctrine of Subrogation

The principle of subrogation is one of the corollaries of indemnity. Under this principle an
insurer that has paid a loss under the contract of insurance is entitled to all rights and remedies

97
belonging to the insured against third party. It also prevents an insured who has insurance
policy from recovering from that of his insurer a sum amount greater than the actual financial
loss he has sustained as a result of the happing of the risk insured against. The insurer who has
paid the agreed compensation to the insured must substitute himself to the extent of the
amount paid by him for the purpose of claiming against third parties who caused the damage.
The insured has to facilitate the substitution. If he makes the substitution impossible, the
insurer may be relieved in whole or in part of his liabilities to the insured.

Be that as it may, there is an exception to the principle of subrogation. This is the case when
the damage is caused by the ascendants, descendants, agents, employees of the insured or
persons to whom the insured is responsible. In such a case, the insurer may not claim against
them by resorting to the principle of subrogation. As an exception to this exception, the insurer
may claim against the afore-listed persons provided that they have acted and caused the
damage maliciously or with the intention to cause the damage.

The following points are worth noting in connection with the doctrine of subrogation:

 This doctrine will not apply until the assured has recovered a full indemnity in respect of
his loss from the insurer. If the amount of the insurance claim is less than actual loss
suffered, the assured can keep the compensation amount received from any third party with
himself to the extent of deficiency, and if after full indemnification there remains some
surplus he will hold it in trust for the insurer, to the extent the insurer has paid under the
policy.

 The insured should provide all such facilities to the insurer that may be required by the
insurer for enforcing his rights against third parties. Any action taken by the insurer is
generally in the name of the insured, but the cost is to be borne by the insurer.

 The insurer gets only such rights that are available to the insured. He gets no superior
rights than the assured. As such, the insurer can recover under this doctrine, only that
which the assured himself could have recovered.

98
 4.3.4.5. Doctrine of Contribution

Like the doctrine of subrogation, the doctrine of contribution also applies only to contracts of
indemnity, i.e., to property insurances. Double insurance occurs where the same subject matter
is insured against the same risk with more than one insurer. If two different policies are taken
from the same insurer, it is not a case of double insurance. It will be termed as ‘full insurance.’
Under double insurance, the same risk and the same subject matter must be insured with two
or more different insurers. In the event of loss under double insurance, the assured may claim
payment from the insurers in such order as he thinks fit, but he cannot recover more than the
amount of actual loss, as the contract of property insurance is a contract of indemnity.

The doctrine of contribution states that ‘in case of double insurance all insurers must share the
burden of payment in proportion to the amount assured by each. If an insurer pays more than
his ratable proportion of the loss, he has a right to recover the excess from his co-insurers, who
have paid less than their retable proportion.’

4.3.5. Types of Insurance Policies

4.3.5.1. Insurance against Damage

a. Property Insurance

Property insurance is one forms of insurance against damage. Under this type of contract of
insurance, the insurer undertakes, for consideration of premium, to indemnify the insured
against any financial loss he may sustain as a result of the occurrence of an insured risk to the
property which forms the subject matter insurance. The principle of indemnity with its
corollaries such as subrogation and contribution is applicable to property insurance in general.

b. Liability Insurance

Liability insurance is a contract of insurance where the insurer undertakes, for consideration of
premium, to cover a loss resulting from the insured’s liability to a third party. The principle of
indemnity and its corollaries is also applicable to liability insurance. Under this type of
insurance policy, the insured may recover a loss incurred as a result of his legal liability
against third person. The source of liability may be contract or tort (extra-contractual liability).
For instance a doctor or a lawyer may enter into liability insurance against their potential

99
liability to a patient or client as the case may be. A car owner may insure against his liability to
a pedestrian.

Under the contract of liability insurance, the insurer is not supposed to pay compensation until
a claim is made against the insured person with a view to amicable (though negotiation,
mediation, or arbitration process) or judicial (through court action) settlement. Nor the insured
receive compensation until the third party injured has been paid to the extent of the amount
insured.

4.3.5.2. Insurance of Persons

a. Life Insurance

 Endorsement life insurance (insurance for the event of life)

Endorsement insurance is one form of life insurance that is payable to the insured at the end of
a specified period. In this case, the insurer undertakes, for consideration of premium, to pay a
specified capital or life interest provided that the insured person is alive at a date stipulated in
the policy.

 Life insurance for the event of death

Life insurance for the event of death is a type of life insurance in which case the insurer agrees
to pay a specified capital or life interest to those having rights from the insured or to the
beneficiary named in the policy upon the death of the insured person. The insurer may not be
held liable to pay a specified capital or life interest unless the person whose life is insured dies.
Life insurance, generally, is not regulated by the principle of indemnity and its corollaries.

As a general rule, a contract of life insurance may be made between the insured and the
insurer. However, an insurance policy for the event of death may be made by a third party
provided that the insured person agrees in writing and indicated the amount insured. Where the
insured person is married, the consent of his spouse must be secured in addition to the consent
of the person whose life is to be insured by third party.

100
In life insurance for the event of death, the death of the insured person is a condition precedent
for the insurer to be held liable and for beneficiaries or those who have legal rights to claim
from the insurer. But, in a case where the death of the insured person is due to intentional
suicide, the insurer cannot be held liable. The same is true where the beneficiary intentionally
kills the insured person and is convicted thereof by a criminal court.

b. Insurance against Accident and Illness

 Insurance against accident
This is the type of non-indemnity insurance. An accident can be anything that begins to be or
that happens or that is a result with which is not anticipated and is unforeseen and unexpected
by a person affected. An accident takes place without the insured’s foresight or expectation
and without design or causation in his part. It is undesigned contingency. It may be caused
with or without human agency. An accident includes any bodily injury arising out of
unexpected extraneous occurrences.
 Insurance against illness
Under this type of insurance policy, the insured person may recover from that of the insurer
medical expenses arising out of sickness or injury. It may also cover losses that are sustained
by the insured due to the insured’s sickness

Summary
Contract of insurance is special type of contract whose performance depends on the occurrence
of uncertain event. The uncertainty may be whether or not the event will happen. In a case
where it is certain that the event will happen, the uncertainty will be as to the time when it will
happen. Although a contract of insurance resembles, to a certain extent, a wagering or
gambling agreement whereby the insurer bets with the insured that his house will not be burnt
and giving him the odds of its value, it is a legal and enforceable contract with important
economic and social purposes.

Insurance as a mechanism of transfer of risk has great economic and social benefits to the
individual insured, his family and the country in general. Specifically, indemnification for
Losses, reduction of Worry and Fear, means of Loss Control and Enhancing of credit are some
of the purpose of insurance.

101
Each parties in insurance contract has rights and duties. With respect to obligation of the
insured the law provides that he has a duty to pay premium and to disclose material facts
which are necessary for the determination of premiums. Premium is consideration which the
insured has to pay to the insurer for the protection given to him. It is an essential element of
contract of insurance. In the absence of payment of premium on the part of the insured, it is
hard to imagine contract of insurance. Disclosure of material facts refers to the obligation of
the insured to disclose, before the contract is concluded every material fact of which he knows
or ought to have known.

Insurance has its own distinguishing principles. Principe of utmost good faith, insurable
interest, subrogation, contribution and indemnity are the most common principles’ of
insurance. Based on the means of compensation and nature insurance is classified as insurance
against damage and insurance persons. Insurance against damage includes property insurance
and liability insurance. Whereas, insurance of persons includes life insurance and insurance
against illness and accident. Life insurance is classified as life insurance in the event of life
and life insurance in the event of death.

Activities of the unit

1. Identify the false statement about rights and obligation of parties under insurance policy?
A. the insurer is obliged to insure all risks
B. the insured is obliged to pay premium
C. the insured obliged to provide material information in good faith
D. all

2. one of the following is non-indemnity insurance

A. property insurance
B. liability insurance
C. accident insurance
D. all
3. A principle which entitles the insurer that has paid a loss under the contract of insuranc to
all rights and remedies belonging to the insured against third party is called,
A. Subrogation
102
 B. Contribution
C. Insurable interest
D. Indemnity

4. List down obligation of the insured and the insurer.

5. “The beneficiary is not necessarily the insured party.” Discuss the validity and otherwise
of this statement.

6. “As an exception, the principle of subrogation may not be applicable in the case where the
damage is caused by the ascendants, descendants, agents, and employees of the insured,
nor where the damage is caused by the person to whom the insured is responsible.”
Explain, and state the exception, if there is any, to this exception

7. What are the essential requirements for the formation of valid contract of insurance?

References

1. The Civil Code of the Empire of Ethiopia, Proclamation No 165 /1960

2. The Commercial Code of the Empire of Ethiopia, Proclamation No 166/1960

3. The Licensing and Supervision of Banking Business Proclamation

4. Fasil Alemayehu and Merhatbeb Teklemedhin, Law of Banking, Negotiable Instruments

and Insurance, Teaching Material, 2009

5. David Kelly et al, Business law, 4th ed., 2002

6. Miller and Jentz, Business law today, 9th ed. 2011

103
 Chapter Five
Business and Business Entities

Introduction

Business is a property in the legal usage of the term. It is an incorporeal (intangible) property
consisting of all movable property brought together and organized for the purpose of carrying
out any of commercial activities listed under Article 5 of the Commercial Code of Ethiopia. a
person may carry out trading activities

In this unit you will be introduced to the legal notion of business. The unit has two sections.
You will briefly study the definition and elements of business under section one and two
respectively.

Objectives of the Unit

At the end of this unit, the students will be able to:-

104
  Define the very term “ business” in its legal sense
 identify the constituent elements of business
 define business organization
 explain partnership agreement and its essential elements.
 identify the different ways of classifying business organizations
 classify business organizations in to commercial and non commercial business
organizations
 state peculiar features of each forms of business organizations

5.1. Business

5.1.1. Definition of Business

How do you define the term business?

The Commercial Code of Ethiopia defines business as “an incorporeal movable consisting of
all movable property brought together and organized for the purpose of carrying out any of the
commercial activities specified in Article 5 of the Code. The following activities deemed to be
commercial under Article 5 of the Commercial Code of Ethiopia:

1) Purchase of movables or immovables with a view to re-sell 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 Art. 2806 of the Civil Code;

4) Exploitation of mine, including prospecting for and working of mineral oils;

5) Exploitation of quarries not by handicraftsmen;

6) Exploitation of salt pans;

7) Conversion and adaptation of chattels, such as foodstuffs, raw materials or sem-

finished products not by handicraftsmen;

105
 8) Building, repairing, maintaining, cleaning, painting or dyeing movables not by
handicraftsmen;

9) Embanking, 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,

photography or recording;

17) Operating news and information services;

18) Operating travel and publicity agencies;

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.

As has been seen here-in-above, the term “business” includes both the tangible and intangible
assets of the business, such as tools, equipment, materials, stock, goodwill, trade marks,
patents, trade names, and the lease of the place of business. But, immovable property in
general can not form part of the business; hence, the land and building which form the
business premises and the textures on such premises are no part of the business even though
they are owned by the trader or business organization in question. It also noting worth that

106
movable property can only form part of business if they are brought together for the purpose of
carrying out the afore-listed commercial activities.

What is the difference between commercial and non-commercial activities?

5.1.2. Elements of Business

As afore-mentioned, the term business embraces both tangible and intangible property.
Tangible property, excluding immovable, to be categorized as “business” must be employed to
carry out commercial activities listed above. Intangible property refers to those things that you
can not perceive in your sense organs but can be used, or disposed of. Goodwill, trade names,
patents, copy right are intangible property that can be form part of business. With a view to
introduce students to the legal sense of these terms, each of intangible property just mentioned
has been portrayed with some comments here- in-bellow.

 Goodwill

Black’s Law Dictionary defines the term good will as “a business’s reputation, patronage and
other intangible assets that are considered when appraising the business, especially for the
purchase; the ability to earn income in excess of the income that would be expected from the
business viewed as a mere collection of assets.”

Good will refers to the benefit of advantage which is a business has in its connection with its
customers. It is an asset of a business, and on the sale of a business with goodwill, the
purchaser usually obtains the premises and the right to use the name of the old firm, and the
right to represent himself as the successor of the old firm. The seller of a business may be
restrained from soliciting his former customer.

The commercial code of Ethiopia states in this regard that the goodwill results from the
creation and operation of business and of a value which may vary according to the probable or
possible relations between a trader and third parties who may require from him goods and
services. The code also stipulates that on the sale of business with goodwill, the seller shall
refrain from doing any act of competition likely to injure the buyer. The law also prohibits the

107
seller from carrying on, in the vicinity of the business he sold, a trade similar to the trade
carried on by the buyer. Such prohibition and restriction remain in tact for five years from the
sale of the business and shall be deemed to be an element of the business and may be enforced
by the byer and his heirs and by subsequent buyer.

 Trade names

Trade name is one of the elements of business. It is the name under which a person operates
his business and which clearly designated the business. This can be the name of the trader, his
family or a place etc.

 Trade marks

Trade mark refers to distinctive sign or indicator of some kind which is used by an individual,
business organization or other legal entity to identify the source of its products and /or services
to consumers, and to distinguish its products or services from those of other entities.

Trade mark should be able to distinguish the goods or services of one undertaking from other
undertaking. It is closely associated with business image, good will, and reputation. The sign
will be symbols or words so long as they are distinctive. Trade mark has benefit to the
producer for its product is associated with trader mark which has certain quality and the public
will opt for that product. It enables to retain the producer to his quality product from inferior
products produced by other manufacturers which produce similar product. It also reduces
shopping costs since it enables buyers to associate the quality of certain products with its trade
mark.

 Patents

Patent is a right granted by the state to an inventor to exclude others from commercially
exploiting the invention for a limited period provided that the inventor discloses the invention
with a view to enable others to gain the benefit of the invention. It is not all invention that can
be protected and form part of business. But, an invention which satisfies certain criteria set
under the law. It is protected, only if it:

108
 i. consists of patentable subject matter;
ii. is industrially applicable (useful) ;
iii. is new (novel) ;
iv. exhibits a sufficient “inventive step” (must be non- obvious); and
v. The disclosure of the invention in the patent application must meet certain
standards

A patented invention is a property for all legal purpose and form part of a business though it
does not have physical existence.

 Copyrights

Another intangible element of business is copyright. It is a protection given by law to literary,

scientific and artistic works. It embraces literary works such as novels, short stories, poems,
dramatic works and any other writings; musical works such as songs, choruses, operas etc;
artistic works like drawings, etchings, lithography sculptures, architectural works etc;
photographic works including portraits, landscape, current events etc; motion pictures;
computer programs; works of applied art such as artistic jewelry; lamps; wall paper etc.

The law protects the above works if they are original, fixed or expressed in some outwardly
perceptible or tangible physical forms.

Discuss elements of business and their importance.

5.2. Business Organizations

Discuss the types of business organization

The Commercial Code of Ethiopia defines a business organization as any association arising
out of a partnership agreement. Partnership agreement is a contract whereby two or more
persons who intend to join together and to cooperate undertake to bring together contributions
109
for the purpose of carrying out activities of an economic nature and of participating in the
profits and losses arising out thereof, if any. Partnership agreement is a sine qua non for the
formation of any business organizations in Ethiopia. Most, if not all, of business organizations
are invested with legal personality. Thus, they are deemed legal persons and as such can
acquire rights and incur liabilities; enter into contracts; sue or be sued in their own name; own
and transfer property etc. In this unit you will introduced to the main rules and principles that
regulate business organizations in Ethiopia.

This unit is divided in to three sections. The first section deals with the concept of partnership
agreement and its essential elements. In section two you will study different ways of
classifying business organizations. Section three is devoted to the legal forms of business
organizations. It touches upon the common rules governing all legal forms of business
organizations. You will also discuss specific rules that regulate each form of business
organization.

5.2.1. Definition

Under the Commercial Code of Ethiopia, business organization is defined as follows:

Article 210 –Business organization defined.

(1) A business organization is any association arising out of a

partnership agreement.

Here, it behooves us to look into the concept of partnership agreement in order to understand
the very notion of business organization itself. This is so for the fact that the later comes into
existence on the basis of the later.

The Commercial Code defines partnership agreements as a contract whereby two or more
persons who intend to join together and to cooperate undertake to bring together contributions
for the purpose of carrying out activities of an economic nature and of participating in the
profits and losses arising out thereof, if any.

110
Generally, any business organization must be formed by a contract known as partnership
agreement. As defined above, partnership agreement has certain essential elements. These
include the followings:

i. Contract

Partnership agreement is a contract. The rules and principles of contract in general are
applicable to a partnership agreement in addition to the pertinent provisions under the
Commercial Code.

Accordingly, in order to a contract to be a valid partnership agreement, the parties to it must

fulfill the substantive and formality requirements set down under the law of contract in
general. That is the parties must have a capacity to enter in to contracts. They must give their
consent to the terms of the contract. The consent must be free from mistake, fraud, duress that
vitiates its validity. The object of the contract must be sufficiently defined, possible, lawful
and moral. The contract must be made in the form, if there is any, provided by law. In this
regard, you will, just after a while, see the formality requirements for the formation of
partnership agreement.

ii. Two or more persons

As you have seen under the law of contract in general, a person can not enter into a contract
with himself. For the formation of a valid contract there must exist at least two persons. The
persons can be physical or juridical person. This is also true in the case of partnership
agreement.

The minimum requirement of two persons is a must for all business organizations except in
the share company to which there must be at least five persons for its formation. This
requirement excludes a sole proprietorship from the realms of the law of business
organizations. Sole proprietorship is form of business in which the owner and the business are
one. The owner is the business. There is no separate legal entity. With respect to maximum
number of persons, the law does not provide a limit except in the case of private limited
company where it is fixed at fifty.

111
 iii. Intent to join together and cooperate.

Parties to the partnership agreement must have the intention to form business organization and
to do business in cooperation. This element makes partnership agreement special since the
parties are expected to have a community of interest.

iv. Contribution

Parties to the partnership agreement must contribute or undertake to make contributions.

Contributions in all legal forms of business organizations, with the exception of share
company and private limited company, could be made in cash, in kind or in service.
Contribution in Share Company and private limited company may only be made in cash or in
kind.

v. objective(Purpose)

Maximization of profit is always the underlying motive for the formation of business
organization. The parties to the partnership agreement undertake to form business organization
to carry on economic activities. This element distinguishes business organization from other
civil societies, charitable organizations, political organizations, religious institutions,
professional associations and other institutions of the same sorts.

vi. hare in the profits and losses

All parties to the partnership agreement must intend to participate both in the profits and
losses, if there is any. The share in the profit may not or need not be equal. Allocation of profit
and losses, if any, depends on the amount of contribution, and the parties are at liberty to agree
in advance as to the manner of distribution of profits and losses. In the absence of agreement to
the contrary, however, the law presumes that all the partners have equal contribution, and
profit and loss will be allocated equally.

vii. Written form ,registration and publicity

112
As you noted, all business of organizations are formed by partnership agreement. The law also
requires that partnership agreement for the establishment of all business organizations, except
joint venture, must be made in writing. Beyond, except joint venture, all business
organizations may only come into existence after the fulfillment of the requirements relating to
publicity which include deposit of documents ( such as memorandum of association, and
article of association, if any) and registration in the commercial register.

5.2.2. Classification of Business Organization

Business organizations can be broadly classified in to two categories depending on their

general characteristics shared in common as: partnerships and companies. Partnership can
further be classified into four legal forms as: joint venture, ordinary partnership, general
partnership, and limited partnership. Companies comprise two legal forms namely; share
company and private limited company. It is also possible to classify business organizations in
to commercial and non-commercial business organizations depending on the activities they
carry out or the legal forms of organization they adopt as the case may be. Now, let us briefly
discuss these classifications one by one.

i. Classification into Partnerships and companies.

As have been mentioned earlier, business organizations can be classified in two broad types
depending on their features shared in common as partnerships and companies. In this respect,
we will see, here-in-below, the common features of partnerships and then proceed to that of
companies.

 Common features of partnerships

The principal features shared by partnerships include:-

- Partnership is an aggregate or collection of individual members. It does not exist

independently of partners
- In partnership, personality of individual partner has paramount importance. For the fact
that incapacity or death of one of partners may results in dissolution of the partnership.

113
 - Partners are also expected to carry out their business in collaboration so as to avoid
serious disagreement between them. Or else, the partnership may be dissolved due to
serious disagreement. This feature makes partnerships suitable for small business
involving a relationship of mutual trust and confidence. Where there is mutual trust and
confidence between partners, there will be a high probability to resolve dispute
amicably or at best they will not face serious disagreement.
- In the absence of contrary agreement, partnership comes to an end where a partner
dies or become insolvent. Thus, the length of existence of partnership is contingent
upon the life time or solvency of its members (partners).
- Partners are deemed to be an agent of each other. Normally, their liability is joint and
several.
- A partner can not transfer or assign his interest in the firm to the third party without
securing the consent of all other partners.
 Common features of Companies

The principal features shared by companies include:-

- Company is an aggregate or collection of shares or capital

- Legal personality of the company has paramount importance
- It is entirely distinct from its members
- It has permanent existence, never dies or is never incapacitated by physical or mental
illness
- In the absence of contrary terms in the memorandum of association of the company,
shares in a company are freely transferable
- Members of a company ( share holders) are not entitled to take part in management
unless they become directors
- The liability of members of a company is limited to the amount of their contribution.

ii. Classification into Commercial and non-commercial

Classifications of business organizations into commercial and non-commercial depends upon

the activities they carry out and their organizational forms. If a business organization carries

114
out activities enumerated under Article 5 of the Commercial Code, it may be regarded as a
commercial business organization. This is also true where a business organization puts one of
these commercial activities in the objective clause of its memorandum of association or article
of association even though it is not actually operating a commercial activity.

General partnership, limited partnership and joint venture may or may not be commercial
business organization, depending whether one of the objective under the memorandum of
association or in fact is to carry on any activities listed in Article 5 of the commercial code.

Owing to its form, an ordinary partnership may not be a commercial business organization
and, as such may not carry out any of the activities enumerated under Article 5 of the
Commercial Code. If ordinary partnership engages in one of activities listed under Article 5, it
is deemed to be a commercial general partnership. Conversely, share company and private
limited company are always commercial whether or not their objects include any of the
activities listed in Article 5. In a case where the form of a business organization is not known,
or could not be known and it sought to engage or in fact carries out commercial activities, the
unknown business organization is deemed to be commercial general partnership.

Here, it is noting worth that a noncommercial business organization is a business organization

that is formed for the purpose of profit making, but engages in non-commercial activities.
There is no business organization that is not operating for profit since one of the essential
elements of partnership agreement is carrying on activity of economic nature with a view to
make profits

The purpose of classifying business organizations into commercial or non commercial is

similar with that of classifying individuals as either trade or non trader. Commercial business
organizations are subject to the provisions governing traders. They have to discharge
obligations that the law imposes on trades. They have to keep account etc.

5.2.3. Legal Forms of Business Organizations

So far you have seen how business organizations can be classified into partnerships and
companies. You have also seen the classification of business organization into commercial and

115
non commercial. Here, you will study the six forms of business organizations and the common
rules governing all of them. You will also study specific rules pertaining to each legal forms of
business organization generally. There are six legal forms of business organizations under the
Commercial Code. These are:

- Ordinary partnership;

- Joint venture;

- General partnership;

- Limited partnership;

- Private limited company ;and

- Share company.

a. Common Rules Governing All Forms of Business Organizations

 Legal personality

The term “person” in its legal sense is any being whom the law regards as capable of holding
rights and duties. The test of legal personality is capacity to hold rights and duties. The
concept of legal personality is an artificial creation of the law. Therefore, the term legal
persons (or fictitious persons or artificial persons or juristic persons or moral persons) are any
subject matter other than a human being to which the law attributes personality.

Under the Commercial Code of Ethiopia, all business organizations, except joint venture, are
vested with legal personality. They are, as legal entities, the subject of rights and duties. They
are capable of enjoying rights and assuming duties. All business organizations have explicitly
been vested with the capacity to carry on any trade. Except joint venture, all business
organizations have firm names and head office, they can acquire rights and incur liabilities and
can sue and be sued in their firm names and have nationality.

 Formality requirement

As you have studied earlier, business organization is formed by a contract called partnership
agreement. You have also seen that partnership agreement as a contract is subjected to the
substantive and formality requirements for the formation of valid contract. With respect to
116
formality requirement, all business organizations, except joint venture ,must be formed by a
written partnership agreement which must be signed by all the parties bound by the contract
and attested by two witnesses.

A business organization shall have neither legal existence nor personality until all the
requirements relating to publicity have been complied with. Publicity consisted in the
cumulative fulfillments to publication of notice, deposit of documents, and registration in
commercial register. Be that as it may, business organizations shall acquire legal personality
by registering in the commercial register without being publicized in a news paper for their
establishments and amendments to their memorandum of associations.

 Terms prohibited.

The terms of contract are to be determined by the parties subject to the mandatory provisions
of the law. The parties to the contract are at liberty to determine the terms of their contract in
so far as they have complied such prohibitions or restrictions provided by law. You have
already seen the rules pertaining to the object of a contract. Here, you will see a particular term
which must not be stipulated in a partnership agreement. The parties to a partnership
agreement may not agree and put a term in their contract having the effect of giving all the
profits to one partner or relieving one or more partners of his share in the losses.

However, in ordinary partnership, terms may be made in the agreement to the effect that a
partner who contributes skill only share in the profit and not in the losses.

 Dissolution, winding up and termination

 Dissolution

As personality of natural persons comes to an end due to the death of a person concerned, the
legal existence of business organizations comes to an end upon dissolution. A business
organization may be dissolved by operation of law, the agreement of the parties or the decision
of the court. Let us discuss each one by one.

i. Dissolution by the operation of law (legal dissolution)

117
 In this case any business organization shall be dissolved as of right where its purpose has
been achieved or can not be achieved. It is also dissolved where the term for which the
business organization was formed expires provided that there is no agreement by the
partners to continue the business.

ii. Dissolution by agreement (consensual dissolution)

A business organization is formed by the agreement of the parties. It is also dissolved

where the partners agree to the dissolution prior to the expiry of the term for which the
business organization was established.

iii.Dissolution by the court (judicial dissolution)

The court may declare the dissolution of certain business organization provided, however,
that there is a good cause and an application to this effect by interested parties.

The above mentioned grounds of dissolution are common to all forms of business organization. There
are additional grounds of dissolution specifically applicable to partnerships such as ordinary
partnership, joint venture, general partnership and limited partnership. These are dissolution by
notice; dissolution due to death, incapacity and insolvency of a partner.

 Winding up (liquidation)

A business organization may not come to an end upon dissolution automatically. But, it
has to go through the winding up process. It is through winding up procedure that
unfinished business is completed, receivables are collected, payments are made to
creditors and the remaining assets are distributed among partners.

 Termination

Where the process of winding up has been completed, the liquidators are duty bound to apply
for the cancellation of the registration of business organization from commercial register. It is
this de-registration that results in the termination of business organization.

118
 c. Specific Rules Pertinent to Each Form of Business Organization

i. Ordinary Partnership

Ordinary partnership is one forms of business organization having few members. The law does
not fix the maximum number, but its nature can not accommodate too many members. It is not
considered and formed as commercial business organization. In ordinary partnership, in the
absence of agreement to the contrary , all partner shall have a right to act as managers, and
duty bound to use the diligence and skill which they use in conducting their private affairs.

Partners of ordinary partnership may agree to the effect that a partner who contributes skill
only shall share in the profits and not the losses. Creditors of the ordinary partnership may
satisfy their claim against partnership’s assets and the personal property of the partners.

ii. General Partnership

General partnership is a business organization which may engage in commercial and non-
commercial activities. Like ordinary partnership, its nature can not accommodate too many
partners.

Partners of general partnership are personally, jointly and severally liable to each other and to
the partnership. Thus, creditors of the firm can resort to the personal property of the partners so
as to satisfy their claim. But, they can not do so before demanding their claim from the firm.

The partnership shall have firm name, which consists of the names of at least two of the
partners followed by the words “General Partnership” and may not contain names of persons
who are not partners. It should also have memorandum association, which contains the
necessary specifications. It may acquire rights and incur liabilities, and sue or be sued under
its firm name. It shall be administered by one or more mangers which may or may not
partners. In the absence of contrary agreement, all partners are presumed to be administrators
of the partnership. The manager is liable only when he acts beyond the scope of his power.

119
 iii. Limited Partnership

Limited partnership is one form of business organization having legal personality. It would be
commercial or noncommercial depending on the activities it carries on or intends to carry on.
Limited partnership comprises two types of partners:

i. General partners who are personally, jointly and severally liable to the debt of the
partnership; and
ii. Limited partners who are liable to the debts of the partnership only to the extent of their
contribution.

It shall have firm name which consists the names of general partners (but not names of limited
partners) with the words “Limited Partnership”

The management position of limited partnership can only be assumed by the general partners.
Partners who enjoy limited liability can not be managers. Share in limited partnership may not be
assigned except with the consent of the managers and the majority of the limited partners.

iv. Joint Venture

Joint venture is the simplest form of business organization recognized under the Commercial Code
of Ethiopia. One of the peculiar features of joint venture is that it does not have legal personality.
Thus, it may not have a firm name; may not enjoy rights and incur liabilities; can not sue and be
sued.

Moreover, it is not made known to third parties. A joint venture agreement need not be in writing
and is not subject to registration. In the absence of agreement to the contrary, every venturer owns
his contribution.

Joint venture may not issue negotiable securities. In their agreement, ventures may assign manager
who shall be fully responsible for the liabilities of the joint venture. Venturers who are not managers
are liable only for the extent stipulated in the joint venture agreement.

120
 v. Share Company

Share company is a business organization whose capital is fixed in advance and divided in to shares
and whose liabilities only the assets of the company meet. The minimum amount of the capital for
the formation of share company is fixed by law at ETB 50,000 and the amount of the par value of
each share shall not be less than ETB 10.

The minimum members of a company may not be less than five. The name of the company is agreed
but shall include the word “share company” The company shall have memorandum of association
which shall be public. Share shall be registered in the register of the company either in the name of
share holder or the bearer. It can be assigned to third party either in the form of sale, pledge,
usufruct etc. Share company shall have directors and auditors appointed by the meeting of
subscribers or general meetings. Share holder of the company have such basic right as the rights to
take part in the meetings, the right to vote, to receive dividends, a share in winding up etc.

In share company, there are two classes of meeting of share holders. These are general meetings,
which comprise share holders of all classes; and special meetings, which comprise only share
holders of a special class.

vi. Private Limited Company

Private limited company is a company whose members are liable only to the extent of their
contribution, and the number of its members is restricted not to be less than two and greater than
fifty. The minimum amount of its capital is fixed at ETB 15,000 and the minimum of a share is ETB
10. Private limited company is not allowed to undertake banking, insurance, or any business of a
similar nature. It may have firm name which may indicate the nature of the business and followed
by the words “private limited company” It is a must that all documents, invoices, publications and
other papers of the company shall indicate the firm name and the amount of its capital.

Summary
Business is an incorporeal (intangible) property consisting of all movable property brought together
and organized for the purpose of carrying out commercial activities. But; immovable property such
as land and building can-not form part of the business in general though they are owned by the

121
trader or business organizations in question. Intangible properties like goodwill, trade names, trade-
marks, patents, and copy rights are deemed to be part of business.

A business organization is any association arising out of a partnership agreement. A partnership

agreement is a contract whereby two or more persons who intend to join together and to cooperate
undertake to bring together contributions for the purpose of carrying out activities of an economic
nature and of participating in the profit and losses, if any.

Partnership agreement as a contract must satisfy the substantive and formality requirements of valid
contract. Business organization can be formed only for the purpose of carrying on activities of
economic nature. Profit maximization is the motive behind the formation of business organization.
This feature distinguishes a business organization from charitable, religious, political institutions or
professional associations.

Business organizations can be classified in to commercial and non-commercial business

organizations depending upon the activities they carry on or intend to carry on or organizational
form they adopt. Share company and private limited company are always commercial in nature.
Ordinary partnership is always non-commercial and as such, it cannot engage in commercial
activities. General partnership, limited partnership and joint venture can either commercial or non-
commercial depending on the activities they actually engaged in or sought to engage in. except joint
venture, all business organizations are legal persons. A business organization shall have no legal
existence nor legal personality until all the requirements relating to registration and publicity are
met. Joint venture need not be made in writing nor need of registration. Beyond, it need not be made
know to third parties.

Activities of the Chapter

Based on your reading to the above unit, attempt the following questions

I. Multiple choices

Choose the best answer and respond by encircling the letter that carries the correct
answer

122
1. Which one of the following must be fulfilled to from a business organization.
A. There must be partnership agreement
B. The business organization must be formed to make profit
C. There must be contribution from the members
D. The contribution must be in cash in all cases.
E. A.B.and C.
F. All
2. Which one of the following business organizations requires special form for its
formation?
A. Ordinary partnership
B. Joint venture
C. General partnership
D. Limited partnership
E. Share company
F. All, except E
G. All, except B
H. All
3. Which one of the following is different as to the maximum number of members a
business organization?
A. Private limited company
B. Share company
C. Limited partnership
D. Joint venture
E. All, except D
F. None
4. Which one of the following is different as to the composition of members of a business
organization?
A. Ordinary partnership
B. Joint venture
C. General partnership
D. Limited partnership
123
 5. Which one of the following is true?
A. In partnership the personality of members mattes
B. Partnership share can be transferred freely to any person
C. In all kinds of partnership, there is personal liability
D. Partnership is a collection of capital 16
E. All

II : Essay type

1) Define the notion of “business” in its legal sense.

2) What are the constituent elements of business?
3) State the difference between trade names and trademarks.

Chapter Six
Law of banking

Introduction

124
A bank or banker is a business organization or a person engaged in the business of accepting
money, valuable things and documents on deposit, lending the money it accepted on deposit to
others, depositing and managing securities, buying and selling foreign exchange and gold and
silver bullions and discounting commercial instruments and transferable securities having a
future maturity date. The Law of Banking is a special area of Commercial Law that
incorporates rules dealing with;

- the definition of banks and banking transactions

- the specific requirements for the establishment and operation of banking

business

- the various types of banks, i.e., commercial banks and central or national banks
and their functions

- the powers and duties of central or national banks

- the various types of banking transactions or operations such as deposit of funds,

bank transfers, deposit and management of securities, lending deposit of
valuable things and documents, discount of commercial instruments and
securities

- the rights and duties of banks and their custom

In this chapter, we are going to look up on general introduction to banks, banking transactions,
types of banks and their functions, the requirements for the establishment and operation of
banks and the economic significance of banks.

Chapter objective

At the end of this Chapter students will be able to:

 Understand the notion of banking transaction

 Understand Banking and Banking Transactions in Ethiopia

 List out the elements in Contracts for current accounts

 Explain deposits, hiring of safes, and discount

125
 Explain Credit transactions

6.1. Definition

The term bank refers to an institution that deals in money and its substitutes and provides other
financial services. Banks accept deposits, make loans, and derive a profit from the difference
in the interest rates paid and charged respectively. Some banks also have the power to create
money. The principal types of banking in the modern industrial world are commercial banking
and central banking. A commercial banker is a dealer in money and in substitutes for money,
such as checks or bills of exchange. The banker also provides a variety of other financial
services. The basis of the banking business is borrowing from individuals, firms, and
occasionally governments—i.e., receiving “deposits” from them. With these resources and
with the bank's own capital, the banker makes loans or extends credit and invests in securities.
The banker makes profit by borrowing at one rate of interest and lending at a higher rate and
by charging commissions for services rendered.

A bank must always have cash balances on hand in order to pay its depositors upon demand or
when the amounts credited to them become due. It must also keep a proportion of its assets in
forms that can readily be converted into cash. Only in this way can confidence in the banking
system be maintained. Provided it honors its promises (e.g., to provide cash in exchange for
deposit balances), a bank can create credit for use by its customers by issuing additional notes
or by making new loans, which in their turn become new deposits. The amount of credit it
extends may considerably exceed the sums available to it in cash. However, a bank is able to
do this only as long as the public believes the bank can and will honor its obligations, which
are then accepted at face value and circulate as money. So long as they remain outstanding,
these promises or obligations constitute claims against that bank and can be transferred by
means of checks or other negotiable instruments from one party to another.

Another type of banking is carried on by central banks, bankers to governments and “lenders
of last resort” to commercial banks and other financial institutions. They are often responsible
for formulating and implementing monetary and credit policies, usually in cooperation with
the government. In some cases—e.g., the U.S. Federal Reserve System—they have been

126
established specifically to lead or regulate the banking system; in other cases—e.g., the Bank
of England—they have come to perform these functions through a process of evolution

Some institutions often called banks, such as finance companies, savings banks, investment
banks, trust companies, and home-loan banks, do not perform the banking functions described
above and are best classified as financial intermediaries. Their economic function is that of
channeling savings from private individuals into the hands of those who will use them, in the
form of loans for building purposes or for the purchase of capital assets. These financial
intermediaries cannot, however, create money (i.e., credit) as the commercial banks do; they
can lend no more than savers place with them.

6.2. Economic significances of banks

Discuss economic significance of Bank?

The existence of a strong and effective banking system is very important for the economic
development of a country.

 Banks through acceptance of deposit of money from persons who do not need it at the
present and lending it to persons who want it for investment, serve as financial
intermediaries thereby providing ideal source of fund for investment that is crucial in
increasing production, exports, creation of jobs and foreign exchange earnings of the
country.

 Similarly bank lending to customers who need the money for consummation, purchase
of various goods and services, construction of houses, and education increases demand
for those goods and services, thereby encouraging producers and service providers to
expand their undertakings and increase production. Expansion and increase in
production requires employment of additional workers, thereby creating new jobs,
encourage producers and suppliers of raw materials to increase their production and
supply.

 Banks also play a positive role in encouraging savings by providing an incentive to

save through payment of interest on deposits/savings and providing safety and security.

127
 Saving is also an important source of future investment and the improvement of the
living standards of the society.

 The power of the national bank in fixing interest rates is particularly crucial in both
investment and saving. If the rate of interest fixed by the bank on deposits /i.e. the
interest banks pay on money deposited on saving and other accounts / is attractive, it
will encourage people to save their money rather than spend it. However, such interest
should not discourage people from investment and productive activities and turn them
to rent collection /potential investors may decide to deposit their money and collect
interest/. If the rate of interest charged by banks on money given on loan to borrowers
is lower, it may encourage potential borrowers and investors to borrow and invest,
thereby contributing their part in the expansion and increase of production of goods
and services, creation of employment opportunities, increase in exports and foreign
exchange earnings of the country.

 The existence of a network of banks covering all parts of a country facilities business
transactions in the country by making payments easier, safer and cheaper. Payment
through banks also avoids the risk of loss or theft of money.

6.3. Banking and Banking Transactions in Ethiopia

Book IV Title III of the Commercial Code of Ethiopia, which deals with banking transactions,
fails to provide a definition of a bank and banking transactions though the latter may be
gathered from the various sections governing the various types of transactions undertaken by
banks. Therefore, we have to refer to other laws to define and determine what banks and
banking transactions are under the Ethiopian legal system.

According Art 2 (12) of the Monetary and Banking Proclamation No 83/1994, banking
business means any operation involving receiving money on deposit, lending money, receiving
commercial instruments on deposit, accepting, negotiating/ transferring, discounting
commercial instruments and other evidences of debt, and buying and selling of gold and silver
notes and foreign exchange. Similarly, Art 2 (2) of the Licensing and Supervision of Banking
Business Proclamation No 84/1994 defines banking business as any business involving

128
acceptance of money on deposit, using such funds or deposits, in whole or in part, for loans or
investments on the account of and at the risk of the person undertaking the business,
purchasing, selling and deposit of negotiable instruments (shares, bonds and other securities/
and checks, bills and notes, and buying and selling of gold and silver bullions and foreign
exchange. In addition to this, Art 4(2) of the same proclamation clearly prohibits foreign
nationals and business organizations from undertaking banking business in Ethiopia.

According to the preamble of Proclamation No. 40/1996 the monetary and banking laws in
force do not provide for micro financing institutions catering for the credit needs of peasant
farmers and others engaged in small scale production and service activities. Hence it has
become necessary to legislate on the licensing and supervision of the business of micro
financing institutions. Although the development of microfinance institutions in Ethiopia started
very recently, the industry has shown a remarkable growth in terms of outreach, particularly in the
number of clients. Since the issuance of Proclamation 40/1996, which provides the establishment of
microfinance institutions, sixteen microfinance institutions (MFIs) have been legally registered by the
National Bank of Ethiopia (NBE) and started delivering services, and two more applications by new
MFIs are currently being processed.

The main constraints of micro and small enterprises include lack of finance, business
information, business premises, skills and managerial expertise, access to appropriate
technology, lack of adequate infrastructure and in some instances discriminatory regulatory
practices. In the Ethiopian context, and in terms of partially solving the problem of financial
resources, the agency has to integrate its activities with the microfinance industry.

6.4. Major Banking Transactions

In this section students are going to discuss major banking transactions such as deposit of
funds, bank transfer, deposit of securities, hiring of safes, discount, and bank lending,
documentary credits.

6.4.1. Deposit of funds

A deposit of funds is a contract whereby a person agrees to deliver and transfer the ownership
of specified amount of money to a bank which agrees to repay them under the conditions

129
agreed up-on in the contract or on the demand of the depositor. The bank, as the owner of
money deposited, has right to use it in respect of its professional activities, i.e. the bank may
lend it to its customers or invest it in areas which are allowed by the national bank /Art 896 of
commercial code/. The contract of deposit of funds is almost identical to contracts of loan of
money or other fungible things under Art 2471 of the Civil Code of Ethiopia in which the
borrower becomes the owner of the money or fungible he borrowed and has the right to
dispose of in any manner he wishes.

However, where the deposit relates to “coins and other individual monetary tokens” and where
there has been an agreement that they shall be refunded to the depositor in kind, the bank does
not acquire the right of ownership and hence cannot dispose of such items. /Art 896 second
proviso/. This rule applies, it seems, not to coins and paper money that are a legal tender
currency at the time of deposit unless they bear special signs which are of historic or
sentimental importance to the depositor. It also applies to currencies or coins used previously
in the history of a country and which are considered by the owner/depositor of historic
importance.

The contract of deposit of funds results in the opening of an account in the name of the
depositor by the bank in which the latter enters all transactions made with the depositor. The
bank credits the account of the depositor with all deposits made by the depositor and debits the
account where the depositor makes withdrawals or order payments to third parties. (Art 897).

The type of account opened may either be a current account in which the depositor has the
right to dispose of the deposit at sight or on demand. This type of account also is a check
operated account, i.e., the holder may demand repayment of part or the whole of the deposit by
drawing a check on the bank payable to himself or a third party. As the repayment may be
demanded at any time, this type of deposit does not bear interest.

The account may also be a saving account, which is interest bearing and the right of the
depositor to demand repayment may be limited. The insured may be prevented from
withdrawing an amount which is greater than a certain amount of money within a certain
period or to give notice of withdrawal. /Art 897, 98. / It may also be a time deposit or account

130
in which the depositor can not demand repayment or withdrawal before the lapse of the agreed
period of time. This type of deposit normally bears interest at a rate agreed upon between the
parties provided that it does not exceed the maximum limit determined by the National Bank.
Where the person has several accounts, each account shall operate independently unless the
parties agree otherwise.

However, a contract of deposit of funds does not entitle the depositor to demand withdrawal of
an amount that is greater than the balance in his favor in the account. In other words, the right
of the depositor to demand repayment is limited to the amount of money held in account in his
favor and he does not have the right to overdraw his account without a special agreement to
this effect, which is one form in which banks give loan to their customers. /Art 899,945 of the
Comm.

6.4.2. Bank transfers

This transaction represents one mode of transferring money from one account to another upon
the written and signed order of the transferor, and a means of performing money obligations.
As a result, it is always a secondary transaction by which the debtor performs his obligations
by payment of money. According to Art 903(1) of the Comm. Code, a bank transfer is a
transaction whereby the bank, upon the written order of the depositor /transferor, debits the
account of the transfer and credits the account of another depositor/the transferee with the
amount specified in the instruction or transfer order. In cases where the intended beneficiary of
the transfer does not have an account of his own, transfer may still be made through the
account of another person. In such cases, the person to whose account the amount is credited
shall carry the sum to the actual beneficiary of the transaction who must be specified in the
transfer order or instruction. This type of transfer, which requires the existence of two separate
accounts, has to be distinguished from international transfers and local transfers that do not
require accounts by the transfer and the transferee and hence are commonly used modes of
transfer. There are no rules governing these types of transfer, and the rights and duties of the
parties are determined by the contract concluded between the bank and the transfer.

Bank transfer as defined by Art 903(1) may be internal where the accounts of the transfer and
the transferee are opened within the same branch or external where the accounts of the transfer
131
and the transferee are opened at two different branches of the same bank Art 904. Transfer
order represents one form of demanding repayment by the depositor. Hence the transfer can
instruct the bank to transfer an amount which does not exceed the balance of his account. The
transferor cannot order the bank the transfer of an amount which exceeds the balance without a
special agreement between the transferor and the bank under which the transfer under takes to
deposit the agreed amount within a period determined in advance. The transfer made pursuant
to this type of agreement is considered as a loan or overdraft provided by the bank to transfer

Transfer order may be issued and communicated directly by the transfer to the bank for
execution or it may be issued by the transfer but handed over to the beneficiary to present it to
the bank for execution. The transferee or the beneficiary of the transfer shall acquire the right
of ownership/title/ to the money to be transferred at the time when the bank debits the account
of the transfer. And the transfer may cancel the transfer at any time before his account is
debited and before the transferee acquires ownership right to the money. However, if the
transfer order is communicated to the bank by the beneficiary as agreed according to Art
907(1), the transferor loses the right to cancel the order from the time the transfer order is
issued and handed over to the beneficiary. This is mainly because the issuance of the order and
its handing over to the beneficiary shows the existence of a valid contract formed by the
acceptance by the transferee of the offer made by the transfer to pay a certain amount of
money which cannot be cancelled by one party.

As we have seen above, the transferee acquires the right of ownership over the money at the
time when the account of the transfer is debited and even before the account of the transferee
is credited with the amount of transfer. Hence, the obligation for the performance of which the
transfer order is issued should have been extinguished by payment/performance according to
Art 1806 civil code. However, contrary to this general principle of contracts, Art 909 provides
that obligations underlying the issuance of transfer orders together with securities and
collateral (if any) shall not be extinguished until the account of the transferee is credited with
the amount of money transferred. This seems to be to protect the transferee's interest against
the cases where the bank is prevented from crediting the account of the transferee upon the
opposition of the transfer on the ground of bankruptcy of the former. /Art 910. / because in

132
such cases the bankrupt transferee and his creditors will be left without remedy if the
underlying obligation is extinguished according to Art 1806 and the transfer is stopped by
opposition. Therefore, this provision seems to be intended to enable the transferee who is
declared bankrupt or his creditors would be able to resort to such obligations to demand
payment from the transferor.

6.4.3. Deposit of securities

Though the relevant provisions of the commercial code do not provide a definition of this
transaction, a contract of deposit of securities may be defined as a contract whereby an owner
or of securities (shares or stocks, government bonds and company bonds (debentures) or other
right holder agrees to deposit the securities with a bank which agrees to provide safe custody
and handle or manage them for consideration. In other words, this is a transaction by which
banks keep securities in their custody and perform all functions relating to them such as the
collection of yields arising from securities deposited, i.e., dividends from shares/stocks, capital
repayments and interest arising from bonds and handle purchase and sale of securities in the
name and on behalf of the depositor.

According to Art 912 and 914 of the commercial code, the bank which deposits securities has
the duty to handle the securities deposited and to collect interest, dividends, capital repayments
amortization and any other entitlements arising out of securities as soon as they can be
claimed. It also has the duty to deposit the money collected by entering them in the deposit
account of the depositor of the securities. From the definition provided above and the these
provisions of the code, we can understand, that this transaction is not a contract for deposit
alone but a contract which involves handling or management of securities by the bank
including sale and purchase of securities in the name and on behalf of the depositor,

Regarding degree of care expected of the bank, Art 913(1) provides that the bank must ensure
the custody of the securities and act in relation there to (handling and management) with due
care required of paid bailee, i.e., a person to whom goods are entrusted for specific purpose.
The degree of care expected of the bank is that paid bailee, since the bank provides this service
for consideration in the form of service charge or commission. A gratuitous bailee is only
bound to take the same care of the property entrusted to him as a reasonably prudent and
133
careful man might fairly be expected to take care of his own property of the same nature and
shall be liable only in cases of gross negligence. However, a paid bailee, on the other hand, is
liable for loss through mere negligence and must safeguard the property and the rights arising
there from by every means in his power and provide the most effective possible appliances to
this end.

The bank must also take necessary measures and comply with formalities necessary to
preserve the rights, arising out of securities such as renewal of coupon and payment of stamp
duty. The bank must also notify, through registered letters, the depositor before making
decisions which involve several options, for instance, between receiving dividends on shares
or to receive additional stocks or shares issued in lieu of cash. However, the bank shall make a
decision to on one of the options where the depositor fails to give instructions within a
reasonable period.

Finally, where the contract of deposit of securities is terminated either by the decision of the
depositor, the bank has the duty to restore them to the depositor or his agent or his creditors,
even where the securities are registered in the name of a third party. Securities deposited by
the usufractuary may be restored to the bare owner if the latter produces evidence of the death
of the former. But the law does not contain rules applicable in cases of deposit of other types
of property, such as valuables, and documents such as title deeds, wills and insurance policies,
except the second proviso of Art 896, which governs the deposit coins and other individual
monetary tokens.

6.4.4. Hiring of safes

Banks take charge of their customers’ valuables like jewelry, negotiable securities, and
documents of title to properties, will, and deposit them, as they can be conveniently stored.
Such deposits are special in nature and thus do not fall under the general category of banks’
deposit.

The acceptance of valuables for safekeeping from their customers is one of the essential,
though subsidiary, services of banks. The right of a bank to render this service is recognized as
a legitimate banking transaction. Though deposit or storage companies can render the service

134
as well, the fact that the modern bank, for its own protection, is well equipped with safes and
strong rooms it particularly suitable for rendering this service. Banks deposit their customer’s
values in either of the following two ways: By accepting the valuables for safe-custody or By
hiring out safe deposit boxes to their customers.

In the first case, customer's valuables are handed over to the bank either openly or in a sealed
cover box. The particulars of the deposit may be known to the bank in which case a record of
them will be made in the safe custody register. However, as it was said above, valuables
constitute special deposit and, as a matter of principle, special deposit should not be
commingled with the banks’ other deposits. Banks usually place the valuables in their safes
together with other deposits. This service is known as ‘safe - custody’.

Nowadays, safe-custody service is being abolished, because of the nature of the service in
increasing the liability of banks for the loss of customer's valuables; undoubtedly, the banks
will be held liable for their customers, as bailers will to their bailees.

At present in correspondence with their customers, banks usually avoid the term safe-custody’
preferring to use the term ‘safe-deposit’. Facilitating safe deposit of valuables by hiring out
safe boxes for their customers is the dominant service of banks in most countries of the world,
including Ethiopia. This mode of deposit, also known as safe deposit, constitutes the second
way of depositing valuables. In this case, the bank hires out safe boxes and the valuables to be
deposited are not as such handed over to the bank; rather the customers themselves place them
in the hired safe boxes. The particulars of the deposit will not be disclosed to the bank. This
service is known as ‘safe-deposit. Some banks provide a service whereby they make available
to their customers a safe deposit box to which the customer himself keeps the key and to which
he may have access during business hours.

In safe deposits or hiring of safes the bank and the customer execute a contract specifying the
conditions on which the safe will be hired the contract includes the customer's duty to pay
rental charges and the method of payment. Sometimes, the customer may be made to open a
saving account and deposit a certain amount of money from which the bank could debit the

135
rental charges whenever they are due. The nature of the relationship created by the contract is
a subject of argumentation.

When a customer enters into a contract for hiring of safe, a safe or compartment of a safe will
be placed at his disposal for a specified period. The key of the safe box, with its reserves, will
be given to the customer. This key will be at his exclusive possession during the terms of the
contract. The customer can use the safe box to deposit any article that he wants as far as the
article to be deposited in the safe box is not dangerous in such a way as to cause damage to the
bank’s and other customers’ property or is not thought to be harmful to the public at large.

Having exclusive possessions of the key to the safe box, the customer and his duly authorized
agent are the only ones who could have access to the safe box, and they are also the only
persons who could have direct control over the deposited valuables. To ensure this the
customer will be provided with an access identification card when he enters into the contract.

The bank maintains a safe deposit register in which it will take down the customer’s name,
address and safe box number. The customer's specimen signature will also be taken on the
signature card. As an additional safeguard to identify the customer and his signature, he may
be required to choose a ‘code word’ or a ‘pass word’ which he will communicate to the strong
room attendant when he comes to visit his safe box. The safe boxes are placed in the strong
rooms of the bank. The customer can not have access to his safe box without the permission of
the strong room attendant. Thus, despite the contract for hire the bank can control the
customer’s visits to his safe by putting restrictions on visiting hours. For instance, the
customer can be made not to visit his safe box outside the specified business hours.

The customer’s right to deposit anything he wants in the safe box can be restricted in the
contract based on different considerations, like the bank’s and other customers’ security and
security of the public at large. The customer is not obliged to disclose the contents of his safe
box. As a matter of fact, the bank has no interest in knowing the contents of the safe box since
in such a case it is less likely to be held responsible for any loss or damage to the contents of
the safe box.

136
A safe box may be hired in the joint names of two or three persons. In such a case the banker
should get the mutual consent of all the hirers in executing any instructions or making
subsequent modifications. The contract for hiring of safes can be terminated at the will of the
parties although both parties have the right to unilaterally terminate the contract; the bank, as a
service rendering institution to the general public, should show good cause to terminate the
contract. The contract could also be terminated at the death of the customer or an individual
banker. At the event of the customer, the bank should deliver the contents of the safe box only
when the person requiring delivery presents a document from a court evidencing the fact that
he is the legal representative of the deceased. The laps of the period of the contract and failure
to pay the rental charges by the customer may also be grounds for terminating the contract.

Under Ethiopian law, a contract of hire of a safe is defined as a contract whereby a bank agrees
to place at the disposal of the hirer a safe or a compartment of a safe for a specified period of
time on payment of a rent. The bank under this transaction has the duty to prepare a room
where the safes are to be kept called a strong room and prepare safes for the hirer, and take the
necessary measures to ensure the up keep and safe custody of safes. However, the bank is
under no obligation for the deterioration or damage of the contents of the safe. A person may
hire a safe in a bank to deposit valuables such as gold, silver, diamond (jewelries), important
documents such as title deeds, insurance policies, wills, inventions and works of art. However,
the hirer may not deposit things that are dangerous by themselves such as explosives,
inflammable things, narcotic drugs, guns and legal tender currency, which is supposed to
circulate, or deposited through contracts of deposit of funds and not in hired safe, as this puts
the money out of beneficial use. Violation of this prohibition is a ground for the cancellation of
the contract by the bank.

In addition to making sure that the safe and the strong room are not endangered by fire, water
or breach by unauthorized third parties, the bank must give immediate notice of the danger to
hirers and enable them to empty the content of their safes before the risk materializes. The
bank has this obligation even where the danger occurs outside working days and hours of
business. However, the bank is not required to give individual notices to each hirer. The bank

137
may notify the hirers by means such as local radio or TV stations or through public
announcements.

The bank has also the obligation to allow the hirer or his agent to have access to the safe by
providing him with keys and identification cards during working days and of hours of
business. The obligation of the hirer on the other hand is the obligation to pay the rent on time
and return the keys to the safe by emptying the contents of the safe upon termination or
cancellation of the contract.

The contract of hire of a safe shall terminate as of right where the hirer fails to pay a rent
within a period of one month from the date of notice by registered letter given by the bank.
Where the hirer fails to pay a rent for a single term, the bank demands payment by a registered
letter. The contract shall terminate as of right where the hirer fails to pay the rent within a
period of one month from the date when the bank gave the notice, and the bank shall take
possession of the safe at the end of the period of notice by calling the hirer to be present on the
date and time fixed. Where the hirer fails to appear on the fixed date and time or refuses to
return the key and give up his safe by removing his deposits, the safe shall be forced open in
the presence of a court official who shall draw up a descriptive report of the contents of the
safe which shall constitute a conclusive evidence as regards all interested parties.

6.4.5. Discounts

Discount is a contract whereby a bank agrees to pay to a holder of a commercial instrument or

security having a future date of payment an amount which is lesser than its actual value,
against the surrender of the instrument and the undertaking to repay the value of the instrument
by the holder where payment is not made at the maturity of the instrument. A bank discounts a
commercial instrument for consideration, which is the difference between the value of the
instrument and the discounted amount paid by the bank to the holder. On the other hand, a
holder of a commercial instrument agrees to receive an amount which is lesser than the actual
value of the instrument in most cases because he needs the money for immediate uses and his
rights in the instrument do not mature until a distant future date and he cannot get the money
he needs from other sources and the need does not allow him waiting until that date.

138
The amount of commission and interest charged by the bank which discounts the instrument
shall be calculated by taking into account the time remaining until maturity of the instrument
and the value of the instrument respectively. The bank, which discounts a commercial
instrument or a security, shall acquire all the rights of the beneficiary of discount on the
instrument including the right to demand payment from the person or persons who are liable
on the instrument. In addition, where the bank receives the full value of the instrument at
maturity, the obligations arising out of discount shall be extinguished. However, if the bank is
not successful in its claim for payment at maturity.

6.4.6. Bank lending

Bank lending or credit services provided by banks are one of the most common and traditional
functions of banks which, if properly used, may play a vital role in a country's economic
development.

Art 2471 of the Civil Code, which also applies to loans provided by banks, defines a contract
of loan of money or other fungible things as a contract where by a party called the lender,
under stakes to deliver to the other party, the borrower, a certain amount of money or other
fungible things and to transfer to him the ownership thereof on the condition that the borrower
will return to him as much of the same amount and quality.

Contracts of loan of money or other fungible things are not subject to special form and may be
made in any manner. However, the contract or the repayment of loan of money exceeding five
hundred Birr has to be proven by producing documents such as receipts, accounts, registers
and so on. It may also be proven by confession of either party as to the existence of the
contract of loan or its repayment, or the oath taken in court by either party. Art 2472.
However, where the contract of loan is concluded between a bank and its customers, the
contract of loan or its repayment may be proven even by witnesses or presumptions /compare
Art 2020-26 of the civil code/. As we have seen in the definition of contracts of loan, loans
under ordinary circumstances are given by the lender by way of delivering the agreed amount
of money at once. However, under special circumstances the loan may also be given by
allowing the customer of the bank to overdraw his account up to the agreed amount for
purposes of conducting his business. This type of loan is given usually for traders as means of
139
payment of their obligations. An open credit or overdraft loan may be given for limited or
unlimited period of time, i.e. the bank may allow the customer to over draw his account for a
period of one year, for instance, and the customer is expected to have the amount put at his
disposal by the bank plus interest by the end of the period. The bank has the right to cancel
contracts of loan made for unlimited period at any time. Similarly, the bank may also cancel
the contract on the death, incapacity of the beneficiary, or suspension of payment even where
it is not established by a judgment of a court or because of his gross negligence in the use of
credit granted. All types of bank loans are given following certain procedures:

The bank under all cases must assess the credit-worthiness of the customer by studying the
business and financial position of the customer, his credit history and finally by requiring a
security or collateral in the form of mortgage or pledge. A bank may require a potential
borrower to mortgage a building, a motor vehicle, a business or his right to use urban land
acquired by lease if the amount of guarantee does not exceed the lease price paid by the holder.
A bank may also provide loan against pledge of chattels of various types or pledge of
incorporeal things particular claims, and securities documents of title to goods such as bills of
lading, warehouse goods deposit certificates.

6.4.7. Documentary credits

A documentary credit is a credit provided to persons engaged in foreign trade particularly

importers who need to pay the price of goods in foreign exchange. This type of credit is
required because it is only banks which are allowed to handle and deal in foreign exchange and
importers are required to pay the price of goods imported from abroad through opening letters
of credits. So an importer who intends to import goods into the country has to apply to a bank
to open a letter of credit in which the seller of the goods is the beneficiary. Where the bank
accepts the application of the importer, it opens the letter of credit equivalent to price of the
goods and transmits or communicates it to its branch (if it has a branch at the place where the
seller is situated) or to a bank with which it has a correspondence. The correspondent bank,
which has received the letter of credit, shall notify the seller/beneficiary of the credit. And the
correspondent bank shall pay the price of the goods to the beneficiary of the credit after
receiving documents representing the goods such as an invoice, a bill of lading, a packing list

140
and an insurance policy covering risks associated with transportation (Where according to the
contract of sale insurance is the obligation of the seller) and after confirming that the
documents presented by the seller confirm with terms and conditions of the credit. The
payment may also be made to third parties such as holders of bills of exchange to whom the
right to receive the part or the whole of value of the letter of credit is transferred.

The correspondent bank which has paid the agreed amount to the seller or third parties to
whom the right to receive payment is transferred, shall send the documents it has received
from the seller to the opening bank and the opening bank will hand over these documents to
the importer after receiving the amount equivalent, in Ethiopian Birr, to the amount paid to the
seller, interest and service charge (commission) for the service provided. In the absence of a
contrary agreement, the bank is entitled to the hold and dispose of the goods imported
(represented by the documents at its hand) and recover the amount of money it or its
correspondent has paid plus interest and service charge or commission.

Summary

The term bank refers to an institution that deals in money and its substitutes and provides other
financial services. Banks accept deposits, make loans, and derive a profit from the difference
in the interest rates paid and charged respectively. Some banks also have the power to create
money. The significance of banking is that the existence of a strong and effective banking
system is very important for the economic development of a country

A deposit of funds is a contract whereby a person agrees to deliver and transfer the ownership
of a specified amount of money to a bank which agrees to repay them under the conditions
agreed upon in the contract or on the demand of the depositor. The bank, as the owner of
money deposited, has the right to use it in respect of its professional activities. Though the
relevant provisions of the commercial code do not provide a definition of a contract of deposit
of securities, it may be defined as a contract whereby an owner of securities (shares or stocks,
government bonds and company bonds (debentures)) or other right holder agrees to deposit the
securities with a bank which agrees to provide safe custody and handle or manage them for
consideration.

141
Banks take charge of their customers’ valuables like jewelry, negotiable securities, and
documents of title to properties, will, and deposit them, as they can be conveniently stored.
Discount is a contract whereby a bank agrees to pay to a holder of a commercial instrument or
security having a future date of payment an amount which is lesser than its actual value,
against the surrender of the instrument and the undertaking to repay the value of the instrument
by the holder where payment is not made at the maturity of the instrument. Besides, Bank
lending or credit services provided by banks are one of the most common and traditional
functions of banks which, if properly used, may play a vital role in a country's economic
development. Finally, a documentary credit is a credit provided to persons engaged in foreign
trade particularly importers who need to pay the price of goods in foreign exchange. This type
of credit is required because it is only banks which are allowed to handle and deal in foreign
exchange and importers are required to pay the price of goods imported from abroad through
opening letters of credits.

Activities of the chapter

1. Discuss banking transactions in Ethiopia

2. Discuss the following concepts

A. Hiring of Safes

B. Contracts for current accounts

C. Discount

D. Credit transactions

3. Who are expected to open Letter of credit? Why?

4. Discuss what securities and deposit of Securities is.

5. Define what discount is on the basis of the Commercial Code of Ethiopia.

6. Discuss the role of Bank Lending in the realization of economic development.

142
References

1. The Civil Code of the Empire of Ethiopia, Proclamation No 165 /1960/ Art. 2863-
2874/.

2. The Commercial Code of the Empire of Ethiopia, Proclamation No 166/1960

3. The Licensing and Supervision of Banking Business Proclamation No 84/1994

4. The Licensing and Supervision of Insurance Business. Insurance Business

Proclamation No 86/1994

5. J. Milnes Holden, the Law and Practice of Banking, Vol. 1 Banker and Customer, the
Pitman Press 1970 Bath

6. David Cox, Success in Elements of Banking, fourth Ed. 1988.

Chapter Seven

The Law of Negotiable instruments

What do you think are importance negotiable instruments?

143
Introduction

Negotiable instrument, under the Commercial Code of Ethiopia, is any document

incorporating an entitlement. The document and the entitlement are not separated. What is
more, the entitlement cannot be enforced separately from the document.

In this unit you will be introduced to the concept of negotiable instruments that have been
recognized under the Ethiopia Commercial Code. The law recognizes commercial instruments,
transferable securities and documents of title to goods as negotiable instruments. Here,
students will be introduced to the principles of law that regulate negotiable instruments.

This unit is divided in to four sections. The first section deals with the definition and
characteristics of negotiable instruments. The second section highlights the types of negotiable
instruments that have been recognized in Ethiopia. In section three, you will study major, if not
all, types of commercial instruments. This section touches up on commercial instruments such
as bill of exchange, promissory note and cheque. Section four is devoted to the concept of
negotiability of negotiable instruments. In this section you will study how negotiable
instruments are transferred from one person to another.

Objectives of the chapter

At the end of this unit, the students will be able to:-

 define negotiable instruments

 describe the characteristics of negotiable instruments

 identify different types of negotiable instruments

 Differentiate between bill of exchange, promissory note and cheque.

 explain the concept of negotiability

144
  explain the negotiation of instrument to bearer, to order and instrument in a
specified name.

7.1. Definition and Characteristics of Negotiable Instruments

According to Commercial Code of Ethiopia A negotiable instrument is defined as any document

incorporating a right to an entitlement in such manner that it be not possible to enforce or transfer
the right separately from the instrument.

The law defines negotiable instruments as a transferable document by which a right is created
in favor of some person. From this definition and other pertinent provisions of the Commercial
Code, it is possible to infer some characteristics of negotiable instruments. These are:-

A. Transferability

The instrument and the right therein are capable of being transferred from one person to
another person by delivery with or without endorsement depending on whether the instrument
is to bearer or order. Bearer instrument can be transferred by the mere fact of delivery of the
document to the transferee. If the instrument is to order, it can only be transferred by
endorsement and delivery of the instrument to the endorsee. And in the case of instrument in a
specified name, it is upon the entrance of the new holder’s name in the instrument and in the
register held by the person issuing the instrument that the process of transferring the
instrument is completed.

B. Inseparability of the Document and the Rights therein

The instrument and the rights therein are inseparably intertwined. The right can not be enforced
nor transferred without the instrument. So, the instrument must be presented and surrendered for
payment to be collected. This is why Article 716 provides that the debtor shall only pay against
delivery the instruments.

C. Better Protection for Holder in Due Course

Since negotiable instruments are capable of being transferred from one person to another, they
are subject to rule of acquisition in good faith and hence confer better right. In this respect,
Article 718 of the Commercial Code stipulates that “No claim for recovery may be made against

145
a person who has acquired a negotiable instrument in due course, in accordance with the rules
applying to negotiation.”

Hence, the person to whom a current and apparently regular negotiable instrument has been
negotiated obtains a good title (better protection) even though his transferor had a defective title
provided that it is negotiated to him for consideration (for value); he takes possession of the
instrument in good faith. This is a shield to protect third party, who being an innocent takes such
a negotiable instrument in good faith and for consideration. But a finder, a thief or a person who
obtains negotiable instrument by fraud does not acquire a good title to it.

7.2. Types of Negotiable Instruments

Under the Commercial Code of Ethiopia, the following instruments are recognized as
negotiable instruments:-

7.2.1. Commercial Instruments

Commercial instruments are instruments carrying an unconditional order or promise to pay

certain sum in money and include the following: bill of exchange; promissory notes; cheques;
travelers cheques and warehouse goods deposited certificate.

Here, you have to keeping mind the fact that, generally, commercial instruments represent
unconditional order or promise to pay a sum of money, but warehouse goods deposit
certificates do not. In spite of this, the law assimilates warehouse goods deposit certificates as
commercial negotiable instruments.

i. Transferable Securities

Transferable securities are documents representing financial interests and include the
following: share certificates, bonds and debentures, life insurance policies etc.

ii. Documents of Title to Goods

Documents of title to goods are written description, identification of goods authorizing the
holder to receive, hold, and dispose of documents ad goods they cover. They include bills of

146
lading, air way bills, warehouse goods deposit certificates (though they is assimilated to
commercial instruments) etc.

7.2.2. Commercial Instruments

So far we have seen the types of negotiable instruments that have been recognized under the
Ethiopian Commercial Code. Now, it is a time to highlight some of commercial instruments,
namely, bills of exchange, promissory notes and cheques separately.

i. Bills of Exchange

Bills of exchange is commercial negotiable instrument in writing containing an unconditional

order, signed by the maker, directing a certain person to pay certain sum of money only to or
to the order of, a certain person or to bearer of the instrument.

There are three parties to a bill of exchange. These are:

- Drawer- one who order the money to be paid

- Drawee- one who is requested to pay the money
- Payee –one who is to receive the money

A bill of exchange is required by law to contain the following:

- The term bill of exchange

- An unconditional order to pay
- The name of the drawee
- The time of payment
- The place of payment
- The place of payment
- The name of the payee or to whose order payments to be made or an indication that it shall
be payable to bearer
- The date and the place where the bill is issued
- The signature of the drawer of the bill of exchange

147
The time of payment (maturity date) in a bill of exchange is categorized by law in to fours.
The drawer is not allowed to use any method of determination of maturity date than provided
by law. These are:

i. A bill of exchange payable at sight (on demand). This is an instrument payable

upon presentment (as of right or beginning from the date of issue of the
instrument.)
ii. A bill of exchange payable at fixed period after sight; here the fixed period is to be
computed from the date the instrument presented for acceptance (sight) to the
drawee or protest for non-acceptance.
iii. A bill of exchange payable at fixed period after date. Here, the fixed period is to
be computed from the date of issuance of the instrument.
iv. A bill of exchange payable at a fixed date. This is the case where the bill will be
due for payment on the date fixed in the instrument.

ii. Promissory Note

A promissory note is a written promise by one person called the maker, to pay money to
another person called the payee. It involves only 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.

The law stipulates that a promissory note shall contain the following:

- The term promissory note

- An unconditional promise to pay a sum certain in money
- The time and place of payment
- The name of the payee or to whose order payment is to be made or a statement indicating
that it is payable to bearer
- The date when the place where the note is issued
- The signature of the maker

148
 iii. Cheques

A cheque is an unconditional order in writing drawn on a banker, signed by the drawer,

requiring the banker to pay on demand(at sight) a sum certain in money to or the order of
specified person or to bearer. Cheques are bill of exchange in many respects. However, there
are some distinguishing features from bill of exchange.

These distinguishing features are:

i. It is always drawn on a specific banker or an institution or establishment regarded by

law as banker; and
ii. It is payable on demand. The drawer shall fix the maturity date of the cheque only at
sight which is payable up on presentment. Any other method of determination of
maturity date is not allowed.

There are three parties to a cheque:

- Drawer- one who orders the money to be paid and has an account at the drawee bank.
- Drawee (the banker)- one who is requested to pay the money
- Payee- the party to whom or to whose order the money is to be paid.

As provided under the law, a cheque shall contain the following elements:

- An unconditional order to pay

- The name of the drawee
- The place of payment
- The date when and the place where the cheque is drawn
- The signature of the drawer

Finally, you have to keep in mind the fact that a cheque must be drawn if only the drawer has
sufficient funds with the drawee. It is drawn when a cover with respect to the face value the
cheque is available in the drawer’s current account (i.e. cheque operated account) with the
drawee (bank).

Drawing cheques without cover has the following serious consequences against the drawer:

149
  The holder of cheque which is so draw in the absence of adequate cover will
bring a civil suit against him;
 Administrative measures may be taken against him by the National Bank of
Ethiopia which include preventing him from getting any bank services for
certain period of time; and
 He will also be held criminally liable under the criminal law since such an act
has already been criminalized.

7.3. Negotiation of Negotiable Instruments

Negotiation is the way by which the third party is put in possession of the instrument and is
also entitle a holder thereof to receive the sum amount thereon. Negotiation of negotiable
instruments varies depending on whether the instrument is to order or bear or in a specified
name. For the sake of clarity, we will see the negotiability of instrument to bearer, to order and
in a specified name respectively.

i. Negotiation of Bearer Instrument

Bearer instrument is a negotiable instrument payable to the person who holds it. Bearer
instrument can be transferred from one person to another person by the mere fact of delivery of
the document to the new transferee.

The holder of bearer instrument establishes his right to the entitlement as expressed in the
instrument by the sole fact of presentment of the instrument in question. The holder is not
required to establish his identity. The law presumes the holder of bearer instrument to be the
owner thereof. Hence, bearer instrument can be negotiated simply by handing over of the
document to the new holder.

ii. Negotiation of Instrument to Order

Instrument to order is a document payable on the order of the drawer or endorser. It is

transferred by endorsement followed by delivery of the instrument to the transferee.
Endorsement consists of writing (making an order), signing and dating on the instrument. It
can be made at anywhere on the document. It must be unconditional. Endorsement can be

150
made in variety of ways. It is possible to endorse negotiable instruments in one of the
following forms:

a. Endorsement in Blank

Where the endorser signs only his name without putting the name of the endorsee for the
purpose of negotiating it, then it is called an endorsement in blank. The effect of endorsement
in blank is that it converts the order instruments into bearer. When to order instrument
endorsed in blank, it may simply be negotiated by delivery and the bearer is entitled to its
payment. It remains so until and unless the endorsement in blank is converted in to
endorsement in full by the holder.

b. Endorsement in full

Where the endorser sings and puts the name of the person to whom or to whose order the
instrument is to be paid, is an endorsement in full. The effect of endorsement in full is that the
instrument can be paid only to the endorsee and can further be negotiated only by his
endorsement.

c. Restrictive or Qualified Endorsement

An endorsement results normally in making the endorsee the owner of the instrument and
confers upon him the right of further negotiation. However, where the right of further
negotiation is, by express word in the endorsement, restricted or prohibited, then the
endorsement is called restrictive endorsement. An endorsement that disclaims or limits liability
on the instrument is called qualified endorsement.

iii. Negotiation of Instruments in a Specified Name

Instrument in a specified name is a document payable to the person whose name is indicated
on it. It has the name of the beneficiary. The holder this type of instrument establishes his right
to the entitlement as expressed in the instrument by the fact of his designation as beneficiary
therein and in the register held by the person issuing the said instruments.

151
Instruments in a specified name may be transferred by the entry of the name of the transferee
in the instruments and in the register held by the person issuing the instrument. They may also
be transferred by delivery of a new instrument in the name of the new holder. In such a case,
the delivery shall be entered in the register.

Summary

Negotiable instrument is any document incorporating a right to entitlement in such a manner

that it is not possible to enforce or to transfer a right separately from the instrument.
Commercial instruments, transferable securities and documents of title to goods are recognized
as negotiable instruments under the Commercial Code of Ethiopia.

Bill of exchange is one of commercial instruments under the Commercial Code. It is a request
for payment of money drawn by one person to another. There are three parties to a bill of
exchange, namely drawer, drawee and payee. Bill of exchange shall contain the requirements
as provided by law.

A promissory note is a written promise by one person called the maker, to pay money to
another person called the payee. It involves only two parties -the maker and the payee.
Promissory note has to contain all of the necessary requirements under the law.

heque is an unconditional order in writing drawn on a banker, signed by the drawer, requiring
the banker to pay on demand (at sight) a sum certain in money to or to the order of a specified
person or to bearer. There are three parties to a cheque: drawer, drawee (the banker) and
payee. A cheque is payable at sight (on demand). It may only be drawn on a banker or an
institution or establishment regarded by law as a banker. Cheque must be issued if and only if
the drawer has sufficient funds with the drawee-bank. What is more, it shall contain all of the
requirements that the law provides.

Negotiation of negotiable instruments varies depending on whether the instrument is to bearer,

to order or in a specified name. Bearer instruments can be transferred from one person to
another by delivery of the instrument to the transferee. Instrument to order transferred by

152
endorsement followed by delivery of the instrument to the transferee. Endorsement consists of
writing (making order), sighing and dating on the instrument. It must also be unconditional.

Activities of the Chapter

Based on your reading to the above chapter t, attempt the following questions

1. What is negotiable instrument? Briefly explain basic characteristics of negotiable

instruments.
2. Who is holder in due course? What is the position of the law with respect to holder in due
course?
3. Write short note on:
i. Commercial instruments
ii. Transferable securities
iii. Documents of title to goods
4. State the peculiar features of commercial instruments. And then list the types of
commercial instruments which have been recognized under the Commercial Code of
Ethiopia.
5. What are the essential elements that a bill of exchange must contain? Explain four possible
methods of determining maturity date of a bill of exchange.
6. Distinguish between bill of exchange and promissory note.
7. What is cheque? State distinguishing features of cheque.
8. Describe in brief negotiation of :
i. Bearer instruments
ii. Instrument to order
iii. Instrument in a specified name.
9. Discuss the consequences of drawing a cheque without having sufficient cover in the
drawee bank.

Chapter Eight

153
 The Law of Insurance
Chapter OBJECTIVES

General Objectives

After successful completion of the chapter students are expected to:

 Discuss what insurance law is and its significance;

 the establishment and operation of insurance companies;

 the concept and requisites of insurable interest;

 the concept of indemnity;

 what utmost good faith is;

 the meaning of indemnity, and the need for indemnity;

 commencement and duration of insurance contract;

 the claim and settlement issues in relation to insurance.

 explain the different types of insurances

8.1. Nature of the Contract of Insurance

Under the Commercial Code Ethiopia contract of insurance is defined as “a contract whereby a
person, called the insurer, undertakes against payment of one or more premiums to pay to a
person, called the beneficiary, a sum of money where a specified risk materializes”

Contract of insurance is special type of contract whose performance depends on the occurrence
of uncertain event. The uncertainty may be whether or not the event will happen. In a case
where it is certain that the event will happen, the uncertainty will be as to the time when it will
happen. For instance in life insurance policy against death, it is not the death of the person that
the uncertainty element relates. Rather, it is the time when the death will happen.

It is also important to note here that contract of insurance as special contract is subjected to the
principles of contract in general. As such it must fulfill the essential elements of valid contract
relating to capacity and consent of the contracting parties, objects of the contract and form
where such is required by law. When we come to the formality requirement of contract of

154
insurance, the law provides that it must be made in writing which is called a policy and
supported by a proposal form offered to the insured and filled by the insured. It has to be
signed by the parties bound by it and attested by two witnesses.

Contract of insurance is a conditional contract in which the insured makes the payment of the
required premium at the time fixed in the contract; whereas the obligation of the insurer is
conditional on the materialization of the insured risk or the happening of the covered event
which is determined in accordance with the terms of the policy.

With respect to the parties to the contract of insurance, the law provides certain prerequisite as
to who can enter into the contract as an insurer. It is only share company that can be an insurer
under the Ethiopian legal system. To engage in insurance business, share companies must
satisfy the minimum capital requirement which has to be paid up in cash and deposited in a
bank. The law makes it clear that share companies, in order to engage in insurance business,
must allocate their shares wholly to the Ethiopian nationals and/ or organizations wholly
owned by Ethiopian nationals and register under the laws of and having the head office in
Ethiopia. But, to be a party to contract of insurance as an insured, there are no special
requirements and every person presumed to be capable to enter into a contract. Hence, in such
a situation the general rules of capacity can be applied.

From the above definition of contract of insurance, you have seen that the parties involved are
the insured and the insurer having their respective rights and corresponding duties.

The insured has an obligation to pay a sum of money called premium to the insurer. Hence, in
absence of payment of premium there is no contract of insurance.

The insurer, on the other hand, undertakes to pay a sum of money where a risk specified in the
policy is materialized. Thus, contract insurance lacking this very element can be deemed to be
null and void.

In the absence of expressed terms in the policy as to the effective date of the policy, the policy
shall come into force on the day when the policy is signed. The parties are also at liberty to
stipulate terms to the effect that the policy shall only come in to force after the first premium
has been paid.

8.2. The Rights and Duties of the Insured and the Insurer
155
 8.2.1. Duties of the insured
 Payment of Premium

Premium is consideration which the insured has to pay to the insurer for the protection given
to him. It is an essential element of contract of insurance. In the absence of payment of
premium on the part of the insured, it is hard to imagine contract of insurance. Payment of
premium is, thus the core obligation of the insured under contract of insurance. The amount of
the premium must be stipulated in the insurance policy.

 Duty of Disclosure.

Contract of insurance is essentially of a fiduciary nature, i.e. it is built on trust. In addition, an

offer is made in contract of insurance by the insured when he has filled out the proposal form
issued by the insurer and for warded it to the insurer. In such a case, the insured knows or
ought to know all relevant facts about the risk proposed for insurance; whereas the insurer
knows little or nothing about the proposed risk. For this reason the insured has an obligation to
disclose, before the contract is concluded every material fact of which he knows or ought to
have known. Moreover, every material representation made by the insured must be
substantially true. The insured is duty bound to state all material facts accurately. This is so
important to the insurer to evaluate the exact risk and set the appropriate rate of premium or
even to decide whether or not to enter into the contract of insurance.

This duty of disclosure extends to disclose increase of risk after conclusion of contract of
insurance and to notification of risk after the risk insured has materialized.

8.2.2. Duties of the Insurer

 Payment of Compensation when Risk Materializes

As we has seen earlier, the payment of premium is a core obligation of the insured. Likewise,
payment of compensation is a core obligation of the insurer when the risk covered by the
policy has materialized. The amount of compensation to be paid to the insured when the risk
insured has materialized has to be stipulated in the policy. This is an essential element of
contract of insurance. In the absence of stipulation as to the amount of money (or its
equivalent) which is to be paid by the insurer when risk materializes, it is hardly possible to
talk about the conclusion of contract of insurance.
156
 BASIC PRINCIPLES OF INSURANCE

A. Principle of Utmost Good Faith

Insurance contracts are contracts of utmost good faith. Accordingly, it is the inherent duty of
both parties to a contract of insurance to make full and fair disclosure of all material facts
relating to the subject matter of the proposed insurance.

This principle consists of the following elements under the Ethiopian law; from the point of
view of the insured, the principle of utmost good faith requires the insured;

A) To disclose to the insurer, at the time of the conclusion of the contract, all facts related to
the object, liability or person to be insured and of which he is aware and which he thinks
will help the insurer to fully understand the risks it undertakes to insure. The insured is
required to disclose facts which may influence the decision of the insurer to enter into the
contract or not or if it decides to enter into the contract if it would affect the amount of
premium it would charge (Art 668(1))

B) To notify the insurer of changes that may occur after the conclusion of the contract. The
insured must notify the insurer of changes in facts and circumstances surrounding the
object or liability insured if such changes are capable of increasing the probability of
occurrence of the insured risks. The test of materiality is also applicable here as the insured
has to notify of changes if they are of such a nature or importance that, had they existed at
the time of the conclusion of the contract and had the insurer known them, they would
have influenced the decision of the insurer to enter into the contract or not and the level of
premium it would have imposed. /Art 669/1/. For instance, where the insured changes the
purpose or use of his house from residence to a business purpose, let us say, distribution of
gases /fuel. The insured has to notify the insurer of such change within fifteen days from
the date he changed the purpose of the house and started the business, because the house is
more exposed to risk of fire than when it was being used for residence.

157
 Failure to comply with these elements of the principle of utmost good faith may have one
of the following effects depending on the motive of the insured person. If the insured
concealed material facts or made false statements there in intentionally with the motive to
benefit from a lower rate /amount of premium, the contract will have no effect and the
insurer shall retain the premium. Failure to notify the increase of risks according to Art
669(1) internationally and with similar motive shall have the same effect.

C) To refrain from any fraudulent act aimed at making a net profit or obtaining undeserved
benefit out of a contract of insurance. For instance, the insured must refrain from
intentional /fraudulent over-insurance of the object, which occurs where on the date of
conclusion of the contract, the sum insured/amount of guarantee provided in the policy
exceeds the value of the object /Art. 680/1// or where the insured purchases several
insurance policies from several insurers in respect of the same object, covering the same
types of risks and the sum insured or amount of guarantee provided by the policies exceed
the actual value of the object. Over insurance where it is intentional or fraudulent may
result in the termination of the contract by the court upon the application of the insurer to
this effect and in addition, the insurer may be entitled to payment of compensation for any
damage the insurer might have suffered because of the violation of the duty to act in good
faith.

D) To refrain from purchasing an insurance policy in respect of goods or objects which are
already lost or damaged or destroyed or in respect of goods or objects which are no longer
exposed to a risk with the motive of receiving compensation for the loss or damage
sustained before the conclusion of the contract.

B. Principle of Indemnity

The second fundamental principle is that all contracts of insurance are contracts of indemnity,
except those of life and personal accident insurances where no money payment can indemnify
for loss of life or bodily injury. The purpose of indemnity is to place the insured, after a loss,
in the same position he occupied immediately before the event. Under no circumstances, is the
insured allowed to benefit more than the loss suffered by him. This is because, if that were so,

158
the temptation would always be present to desire the insured event and thus to obtain the
policy proceeds. This would obviously be contrary to public interest.

The principle of indemnity implies that the sum insured or the amount of guarantee provided
in the policy is not necessarily payable. This is in line with purpose of insurance, i.e.,
reinstating a person who has suffered a financial loss to his original financial position. It also
shows that the insured cannot claim its payment where the risk materializes unless the sum
insured is equal to actual value of the object at the time of loss or damage or unless the policy
is a valued policy as discussed above.

However, there are instances, in which the principle of indemnity does not apply. such
instance is related to insurance of persons, where the parties freely fix the amount of guarantee
and is payable regardless of the actual damage sustained where the risk materialized. This is
mainly because it is generally accepted that human life or limb cannot be valued in terms of
money and are irreplaceable and the insured or beneficiary who receives it cannot be
considered to have made a net profit out of the insurance. (Art 689)

C. Insurable Interest

Consistent with the concept of insurance as a means of indemnifying an insured against a loss,
is the corollary that insurance should not provide an insured with the means of showing a net
profit from the event insured against. One rather rough-hewn method of enforcing that
corollary is the doctrine of insurable interest.

Insurable interest means some proprietary or pecuniary interest. The object of insurance is to
protect the pecuniary interest of the insured in the subject matter of the insurance and not the
material property as such. A person is said to have an insurable interest in the subject matter
insured where he will derive pecuniary benefit from its existence or will suffer pecuniary loss
from its destruction. Insurable interest is thus a financial interest in the preservation of the
subject matter of insurance. A purely sentimental interest or a non-monetary benefit will not
cause an insurable interest. Accordingly, a creditor has an insurable interest in the life of the
debtor but a son has no insurable interest in the life of his mother who is supported by him.

159
 D. Doctrine of Subrogation

The doctrine of subrogation is a corollary to the principle of indemnity and as such, it applies
only to property insurances. According to the principle of indemnity, the insured can recover
only the actual amount of loss caused by the peril insured against and is not allowed to benefit
more than the loss he suffered. In case the loss to the property insured has arisen without any
fault on anybody’s part, the insured can make the claim against the insurer only.

The following points are worth noting in connection with the doctrine of subrogation:

1. This doctrine will not apply until the assured has recovered a full indemnity in respect of his
loss from the insurer. If the amount of the insurance claim is less than actual loss suffered,
the assured can keep the compensation amount received from any third party with himself
to the extent of deficiency, and if after full indemnification there remains some surplus he
will hold it in trust for the insurer, to the extent the insurer has paid under the policy.

2. The insured should provide all such facilities to the insurer that may be required by the
insurer for enforcing his rights against third parties. Any action taken by the insurer is
generally in the name of the insured, but the cost is to be borne by the insurer.

3. The insurer gets only such rights that are available to the insured. He gets no superior rights
than the assured. As such, the insurer can recover under this doctrine, only that which the
assured himself could have recovered.

E. Doctrine of Contribution

Like the doctrine of subrogation, the doctrine of contribution also applies only to contracts of
indemnity, i.e., to property insurances. Double insurance occurs where the same subject matter
is insured against the same risk with more than one insurer. If two different policies are taken
from the same insurer, it is not a case of double insurance. It will be termed as ‘full insurance.’
Under double insurance, the same risk and the same subject matter must be insured with two
or more different insurers. In the event of loss under double insurance, the assured may claim
payment from the insurers in such order as he thinks fit, but he cannot recover more than the
amount of actual loss, as the contract of property insurance is a contract of indemnity.

160
The doctrine of contribution states that ‘in case of double insurance all insurers must share the
burden of payment in proportion to the amount assured by each. If an insurer pays more than
his ratable proportion of the loss, he has a right to recover the excess from his co-insurers, who
have paid less than their retable proportion.’

Chapter Nine
Labor Law
Introduction

There are different laws which regulate employment relationships. Employees which are
regulated under Ethiopian civil service minster are part of civil service proclamation. Persons
who are serving in the military have also employment relationship regulated under special law.
The judges, federal police, public prosecutors and other government officials are regulated
under other employment laws. Based on these classifications, it can be said that there are
difrent laws which governs employment relationships. This chapter pinpoints legal and
theoretical frameworks which believed is important for students to understand at least basic
knowledge under Ethiopian labour and employment laws. Firstly, this chapter will try to bring
to light the introductory remarks for the course in general. As definition is a basis for
understanding a certain concept, it will begin by defining what a “contract of employment” is
and the then the obligation of the parties i.e. worker and employer in contract of employment.
Lastly, this chapter will discuss ground of termination and its consequences.

Chapter objective

After completing this chapter students are be able to understand

 Understand the meaning of employment contract

161
  List out the contractual duties of both parties
 Explain the formation and terms of employment contract
 Explain the ground of termination of employment contract

9.1. Definition of contract of employment

To this regard, different countries follow dissimilar approach to define contract of

employment. However, this does not mean that the definition given in different countries are
totally different. In general, Employment relation is established through a contract of
employment and it shall be deemed formed where a person (the employee) agrees, directly or
indirectly, to perform work for and under the authority of another (the employer) for a definite
or indefinite period or piece work in return for remunerations. Let us try to examine the
elements of this definition.

Therefore, to have better understanding definitions which are found in dictionary and in the
different legal instruments such as the Civil Code, Proc. No.64/75, Labour
proclamation.No.377/2003 and the relevant provisions of the Federal civil servant
proclamation (Proc. No.515/2007) could be considered as vital. Particularly definitional
elements such as; rendering of service, for the benefit and under the direction of the employer,
in return for remuneration must be highlighted.

Accordingly, as free and full consent of the parties is among the essential elements which valid
contract would be based, agreement in contract of employment has also crucial place to
consider.in contract of employment it is important to note that agreement to employment
relation may be expressed directly or indirectly. For instance, a person may directly or
personally negotiate with his/her employer and conclude a contract of employment thereafter.
The other possibility is public/private employment agencies may serve as intermediaries
between the employer and the employee with a view to facilitating their relations.

The other essential element of contract of employment can be “to perform work for of the
employer”. This is to mean that employee has obligation to perform for employee in diligent
and ethical manner. Besides, the definition of contract of employment also incorporated in
which the employee should be under the authority of the employer. This in effect means the

162
employer will possess the prerogative to direct, supervise and control the manner and
performance of the employee. However, it is also important to note that the authority granted
to the employer over the employee is not meant and intended to establish a master and servant
relationship. As well, Length of employment can also be considered as one essential element
under contract of employment. A party can conclude their contract either for definite or
indefinite periods of time. The last but not the least important element in the contract of
employment is wage. As the employee is committing himself/herself to render personal
service for the benefit and under the authority of the employer, the employer will have a
corresponding duty to perform; among which affording agreed amount of wage to the
employee is cornerstone duty.

Apart from this, this chapter has incorporated five sub sections such as Individual Employment
Relation, Special Categories of Employees, Legally stipulated minimum working conditions,
Collective bargaining & Collective agreement, and finally important highlights will be
addressed to the concept of employment dispute settlement mechanisms.

9.2. Individual Employment Relation

In the earlier chapter we tried to highlight some basic concepts in relation to the definition of
employment contract. Having known this, let’s proceed to discuss on individual employment
relationship.

9.2.1. Formation

Employment relations under the labour law and under the Civil Service have their own
peculiar features. In the labour law setting, the legal instrument is limiting itself towards
stipulating minimum conditions of labour providing sufficient room for flexibility for further
bargain by the parties either through contract or collective bargaining. Under the Civil Service,
however, conditions of work are rigorously regulated by law and there is little or no room for
negotiation. In this sense most (if not all) the work conditions spelt out in the Civil Service
instruments are not only minimum but also the maximum. Specific employment relations
which are outside of the ambit of both the labour and civil service employment regime should
be mentioned in order to show that Ethiopian employment regime is not purely dual. It rather

163
has a “third regime” at the margin. For example employees such as the police and armed
forces, domestic workers, management staff and others are within the third regime.

As regards to forms of contract, the labour law regime in principle does not require any special
form for contractual validity. For example, if you look article 5 of labour proclamation, it
states that “unless otherwise provided by law, a contract of employment shall not be subject
to any special form” It is under exceptional cases that it requires written form. The Civil
service regime on its part requires written instrument in all cases. As a contract of employment
is a contract with public administration, the civil code requires a special form for the purpose
(Art.1724 C.C.). In a nutshell, as employment contract is one of the especial type of contract, it
should follow the general rules which are prescribed under civil code in one hand should also
be bound in special provisions of both civil servants proclamation and labour proclamation.

9.2.2. obligations of employee and employer

Dear students, in the earlier discussion we focused on the formation of employment contract.
Now, in this sub section, we are going to highlight on obligations of contracting parties. As
repeatedly said in different chapters of this course, every contracting party’s bears rights and
obligations in his/her shoulder. In short, there is no valid contractual relationship if the parties
do not bear respective obligations.

9.2.2.1. Obligation of employer

Labour and civil servant proclamations put respective rights and obligations for the contracting
parties. Section three, article 12 of the labour proclamation No. 377/2003 describes
obligations of the employer. Which includes:-

 To provide work to the worker in accordance with the contract of employment

 Unless otherwise stipulated in the contract of employment, to provide him with
implements and materials necessary for the performance of the work;
 to pay the worker wages and other emoluments in accordance with this Proclamation
or the collective agreement;
 to respect the worker's human dignity;

164
  to take all the necessary occupational safety and health measures and to abide by the
standards and directives to be given by the appropriate authorities in respect of these
measures;
 To defray the cost of medical examination, of the worker whenever such medical
examination is required by law or the approriate authority.
 to keep a register containing the relvant particulars specified in Article 6, hereof
weekly rest days, public holidays and leave utilized by the worker, health conditions
and employment injury of the worker and other particulars required by the Ministry;
 upon termination of a contract of employment or whenever the worker so requests, to
provide the worker, free of charge, with a certifcate stating the type of work he
performed, the length of service and the wages he was earning;
 to observe the provisions of this Proclamation, collective agreement, work rules,
directives and orders issued in accordance with law, and.
 To record and keep of information as required by this Proclamation, and any other
information necessary for the Ministry to carry out its powers and duties, and submit
same within a reasonable time when requested by the Ministry.

9.2.2.2. Obligations of worker

Every worker shall have the following obligations: see article 13 of proclamation No.377/2003

 To perform in person the work specified in the contract of employment;

 to follow instructions given by the employer based on the terms of the contract and
work rules;
 to handle with due care all instruments and tools entrusted to him for work; to report
for work
 always in fit mental and physical conditions;
 to give all proper aid when an accident occurs or an imminent danger threatens life or
property in his place of work without endangering his safety and health;
 to inform immediately the employer any act which endangers himself or his fellow
workers or which prejudice the interests of the undertakings;

165
  To observe the provisions of this Proclamation, collective agreement, work rules and
directives issued in accordance with the law.

9.3. Termination

Under the LP grounds of termination could be categorized into the following:

 termination by law
 termination by the agreement of the parties
 termination at the initiation of the employer-(dismissal)
 Without notice or summary dismissal.
 With notice or ordinary dismissal
 Group termination or lay off
 termination at the initiation of the employee-(resignation)
 Resignation with notice/ordinary resignation
 Resignation without notice (constructive dismissal)

9.3.1. Effects of lawful termination

Once a contract of employment is terminated in accordance with the stipulation of the law and
the parties are separated for good, there will be some consequences which will follow the
termination. Most of the consequences are attached with the ground for termination while few
others are available to all terminations. These are the following:

 Certificate of Service
 Severance pay
 entitlements of compensation
 Period of limitation

9.3.2. Unlawful termination and its effects

Any termination which fails to observe the substantive or procedural requirements of

termination shall be held unlawful. At this point in time, it may be appropriate to examine as to
who has the burden of persuasion whether a certain termination is lawful or not. Under the
traditional concept of contract law, “someone who demands the performance of an obligation

166
should prove its existence.” As a contract of employment is a special contract, the general
principle of contract law will be applied on it unless and until it possesses its own specific
principle on the issue. Based on this general principle, if and when the employee alleges that
s/he has been unlawfully terminated and requests for reinstatement or compensation or both,
s/he will be required to show to the satisfaction of the impartial that the termination was indeed
unlawful. Nevertheless, both the labour proclamation and the ILO convention on termination
of employment seem to deviate from this general principle. They seem to adopt the reverse
burden of proof approach.

9.4. Minimum working conditions

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

The rationale behind stipulating minimum working conditions is predominantly attributed to

what economists call market failure. As employer and employee are not on equal bargaining
strength, leaving them alone to define their terms of contract failed to bring about equitable
outcome. As the market did not work well in this respect, manifestations of failure such as
injustice and instability of industrial peace became the order of the day. Hence, freedom of
contract (i.e. market) failed in this regard. State intervention has been warranted in situations
of market failure and this seems why many governments decide to intervene, through law
making, and come up with minimum working conditions.

Most provisions of minimum labour conditions are related, but not limited, to prescribing
minimum wage; limiting daily/weekly working hours; provision of paid leaves; employment
security; maintenance of safe and healthy working condition and compensation for
employment injury.

167
9.4.1. Minimum Wage

Many jurisdictions have succeeded in prescribing minimum hourly/monthly wages to

employees working within their territory. Others leave this issue to the contracting parties. The
Ethiopian employment regime seems to adopt a hybrid of the two approaches. The civil
service regime has prescribed a minimum monthly wage for those working in the civil service;
while the labour law regime has left the issue to the parties themselves.

The rational for such double standard from the side of the Ethiopian government may be
explained away in the light of its economic philosophy. It is believed that in a free market
economy, price of goods and services is to be fixed by taking into account the supply and the
demand side of the item in a forum of bargain. This could be the main reason why the
government opted for deregulation with regard to the private sector. As regards to the civil
service, however, since the government is the sole employer, it can come up with a rule
binding upon itself. This can also serve as a reference for the private sector while negotiating
on wage and other related benefits.

The problem associated with such an approach is the invalidity of considering labour as a
commodity whose price is to be determined against supply and demand. The ILO Conference
under the annex for its Constitution reaffirms that “labour is not a commodity” (Annex-I (a)).
Furthermore countries like the US who claim to be the most faithful exponents of free market
economy see nothing wrong in determining minimum hourly wage by law. In light of these,
the position of the Ethiopian government seems to deserve second thought.

? What do you think the pros and cons of stipulating minimum wage in the present day
Ethiopian reality are? Assume that the Ethiopian government is convinced towards
prescribing minimum wage, how should it go about it? Stipulating minimum wage for the
lowest possible wage or stipulating minimum wage for each possible job classifications

9.4.2. Normal Working hours

Ethiopia, for the first time, introduced a provision limiting working hours in 1964 through a
Regulation issued pursuant to Proclamation No.210/63. It was then stated that normal working

168
hours shall be eight hours in a day and forty eight hours in a week. Currently, regular working
hours for employees under the civil service and labour have slight differences. Under the civil
service, it has been stipulated that “regular working hours of civil servant shall be determined
on the basis of the conditions of their work and shall not exceed 39 hours a week.” Under the
Labour Proclamation, however, “normal hours of work shall not exceed eight hours a day or
forty eight hours a week”

In order to ensure the reliable application of this limitation, the law has further introduced
additional safety valves. First of all, it declared that overtime work is in principle prohibited. It
is only in cases where exceptional circumstances expressly stated by law have occurred that
overtime work is allowed. Secondly, even if conditions for overtime work are met, the rate of
payment for overtime work is being made expensive partly to discourage the employer from
requiring overtime work. Thirdly, an employer who “causes workers to work beyond the
maximum working hours set forth by or contravenes in any manner the provisions relating to
working hours is liable to fine”

Related with these, the laws grant a certain amount of paid leaves in the form of annual leave.
It is believed that the purpose of annual leave is to enable an employee get rest with payment
and resume work with renewed strength thereafter.

When one looks at the historical development of annual leave in Ethiopia, it was first
introduced through the Civil Code of 1960. It was then 10 consecutive days per year for a
service of more than one year up to five years; 15 days for a service more than five and up to
fifteen years; 20 days for a service more than fifteen years. Four years later, Regulation
No.302 of 1964 on minimum labour standards came up with more generous amount of annual
leave. It provided as follows:

-14 consecutive days for a service of at least one year up to three;

-16 consecutive days for a service more than three years and less than five;

-20 consecutive days for more than five years and less than ten;

-25 consecutive days for more than ten years of service.

169
Then comes Labour proclamation No.64/1975 which stipulated 14 working days of annual
leave for the first year of service and an additional one working day for every additional year
of service. Unlike the two preceding legal instruments, this proclamation employed the phrase
“…working days” instead of “consecutive days”. The labour proclamation on its part provides
14 working days as an initial leave for the first year of service, and one additional working day
for every additional year of service with no maximum limit. Nevertheless, it is important to
note that the annual leave under the civil service is the minimum and at the same time the
maximum while that of the labour proclamation is only the minimum as it can be increased
through individual contract of employment, work rule or collective agreement.

Sick leaves and public holidays are also items of minimum working conditions. Sick leave on
the basis of the proclamation is six months in duration out of which the first month was with
full wage payment; the next two months with half pay and the last three months with no wage
payment.

Public holidays are also non-working days and at the same time paid holidays. Public holidays
have national, international or religious features. Among the national holidays; Victory of
Adwa (Commemoration)(March 01), Victory day(May 05) are some. The international one is
May Day (01) (International Labour Day). The religious ones tried to address the religious
interests of the two dominant religions in Ethiopia (i.e. Christianity & Islam).

9.4.3. Safe and Healthy working conditions

It is well known that industrial activities are full of risks. Risks could be either to life, health,
property or the environment or to all. The Risk may express itself in the form of accident,
occupational disease or environmental pollution. More often than not, employees are the most
exposed sector of society to the risk. Employer’s liability in this connection has two levels
(namely; at the level of prevention and at the remedial stage).

170
 i. Preventive measures

At the level of prevention, the employer is duty bound to prevent preventable risks. For this
purpose, it is required to provide safety equipment’s and train how and when to make use of
them. Nevertheless, it is worth noting that the employee has also a corresponding duty at the
level of prevention. He/she is required to make use of the protective tools appropriately and at
appropriate time and place. Furthermore, he/she is obligated to obey all health and safety
instructions. Hence prevention demands the care of both parties.

It must be admitted that prevention may not be successful all the time. Even with utmost care,
it is likely that employment injury may occur. Thus regulating prevention, though necessary is
not sufficient in this regard. With this view in mind, the law comes out with provisions
necessary in regulating the remedial stage.

ii. Remedial measures

By remedial stage what we mean is, taking compensatory measures after the damage has
already been sustained. This stage, in actual effect, is pin pointing the modalities for loss
distribution. Once industrial accident or occupational disease is sustained, the employer is
expected to cover cost of medication including the cost for any necessary prosthetic or
orthopedic appliances. Hence employer’s liability is not limited to the stage of prevention. It
rather covers the remedial stage also so long as the injury is associated with the employment.
This will take us to identifying what employment injury is.

Employment injury could be categorized into two. They are either occupational accident or
occupational disease. Occupational accident is any organic injury or functional disorder
sustained by an employee:

Occupational disease, on its part, is any pathological condition whether caused by physical,
chemical or biological agents which rises as a consequence of the type of work performed by
the employee or the surroundings in which the employee is obliged to work.

Nevertheless, occupational disease does not include endemic and epidemic disease which is
prevalent in the area where the work is done. Such disease will be occupational disease for

171
those employees who are exclusively engaged in combating such diseases by reason of their
occupation.

 Extent of liability

Once a certain injury is held to be employment injury and the employer has no ground to
invoke in view of avoiding liability, the next step will be determining the scope of its liability.
Although the scope of liability is closely related to the degree of injury sustained by the
employee, there are common obligations which are applicable to all injuries. These are:

b. Immediate obligation

As soon as the employee is known to have sustained employment injury, the first step the
employee is expected to do is:

-provision of first aid service to the injured employee;

-transporting the injured employee to the nearest medical facility.

- notifying the appropriate government organ about the incident.

b. Medical expenses

Subsequent obligation imposed on the employer will be, covering the following costs of
medical expense:

-costs of medical and surgical care;

-hospital and pharmaceutical costs;

-cost of artificial facilities for the injured when recommended by Medical Board.

?What if the injury sustained by the employee demands and is verified by the medical
board for medication abroad, Will the employer be required to cover such costs?(discuss)

 Disability Benefits

172
The employer’s liability is not limited to cost of medication. It will further be obligated to
provide disability benefit to the employee. The amount of the disability benefit is to depend on
the degree and duration of disability. Ordinarily, disability may be temporary or permanent. It
may also be total or partial; the worst scenario, of course, is death.

The law has regulated these different scenarios differently. For the purpose of the labour
Proclamation, temporary disability is a reduction in working capacity that may last for a
maximum duration of twelve months starting from the date of the occurrence of the injury. Be
that as it may, for this kind of injury, the employer, in addition to covering the medical
expenses of the employee, is also obligated to make payment to such an employee. The mode
of payment is a periodical payment and the amount will be full wage for the first three months;
75% of the employee’s monthly wage for each of the next three months; and 50% of the
monthly wage for each of the remaining six months.

In cases where the injury resulted in permanent disability, the employer will be obligated to
provide lump sum compensation to the injured. The maximum payment available for an
employee who suffers total permanent disability due to employment injury is a sum equal to
five times of the employee’s annual wage. The employer’s liability, therefore, is both limited
and liquidated. If the injury sustained resulted in permanent but partial disablement, the above
mentioned payment shall be calculated in proportion to the degree of the disability and reduced
accordingly.

As indicated in the case of temporary disability benefit, the permanent disability benefit is also
exempted from tax. In connection with this, it is important to note that an employee will not be
entitled to permanent disability benefit if s/he has already a pension scheme or an insurance
scheme arranged in advance by the employer.

Finally, if an employee dies due to employment injury, the employer will be obliged to pay
dependent’s benefit to the dependents of the deceased. The amount of such payment will be
the employee’s five years wage to be paid in the form of lump sum. Furthermore, the employer
will cover the funeral expenses for the deceased employee.

173
Where the deceased left widow, children and parents behind, the dependent’s benefit (i.e. the
deceased’s five years wage) shall be shared among them on the following basis:

 Widow-50%

 Children-10 %( each)

 Parents-10 %( each)

Summary

Dear students in this chapter we have discussed about employment and labor laws. In view of
that, both domestic and international instruments are discussed. Among the pillar points which
would be mentioned worth is the definition of contract of employment. Hence, it is a contract
where a person (the employee) agrees, directly or indirectly, to perform work for and under
the authority of another (the employer) for a definite or indefinite period or piece work in
return for remunerations.

Contract of employment and labour is a special contract which has also be fulfill the general
principals of contract. Among which respective duties of the contracting parties are mandatory
one. As a result, both employee/Worker and employer has their respective duties and
obligations under both labour proclamation and civil servant proclamation.

Under Section three, article 12 of the labour proclamation No. 377/2003 describes obligations
of the employer. Such as providing work to the worker in accordance with the contract of
employment and to provide him with implements and materials necessary for the performance
of the work unless otherwise stipulated in the contract of employment. Besides, obligations of
employee also were discussed.

Chapter activity

1. Explain contract of employment under Ethiopian legal system

2. What makes contract of employment special from the general contract?

174
 3. Clearly discuss the obligations and rights of both employee and employer under
relevant Ethiopian law.

4. What will happen if contract of employment is terminated illegally?

References

1. Constitution of the Federal Democratic Republic of Ethiopia, Negarit Gazetta, 1st year
No.1(1995)
2. Labour Proclamation No.377/2003, Negarit Gazetta, 10th year, No.12(2004)
3. Federal Civil Servants Proclamation No.515/2007, Negarit Gazetta, 13th year,
No.15(2007)
4. Public Servants’ Pension Proclamation No.345/2003, Negarit Gazetta, 9th year,
No.65(2003)
5. Civil Code of Ethiopia Proclamation No.165/1960, Negarit Gazetta, 19th year,
No.2(1960)
6. Mehari Redae, Employment and labour law, teaching material, 2009

175
\

Bibliography
i. Laws
5. The Constitution of the Federal Democratic Republic of Ethiopia, 1995

6. Civil Code of the Empire of Ethiopia, Proclamation No. 1 of 1960

7. The Commercial Code of the Empire of Ethiopia, Proclamation No 166/1960

8. Labour Proclamation No.377/2003, Negarit Gazetta, 10th year, No.12(2004)

9. Federal Civil Servants Proclamation No.515/2007, Negarit Gazetta, 13th year,

No.15(2007)

10. Public Servants’ Pension Proclamation No.345/2003, Negarit Gazetta, 9th year,
No.65(2003)

11. The Licensing and Supervision of Banking Business Proclamation

12. The Licensing and Supervision of Insurance Business Proclamation

ii. Teaching Materials

1. Tesfaye Abate, Materials on Introduction to Law & Ethiopian Legal System,

176
 (Justice and Legal System Research Institute)2007

2. E. Stebek, Ethiopian Law of Persons: Notes and Materials (Justice and Legal
System Research Institute), 2007

3. Mesganaw Kifelew and Demelash Shiferaw, Law of Contract I, Teaching Material,

(Justice and Legal System Research Institute)2005

4. Awet Hailezgi and Addisu Damtie, Ethiopian law of agency, teaching material,
(Justice and Legal System Research Institute)2005

5. Gadissa Tesfaye and Mebrathom Fetewi, Law of Sales and Security Devices,
Teaching Material, (Justice and Legal System Research Institute)2005

6. Fasil Alemayehu and Merhatbeb Teklemedhin, Law of Banking, Negotiable

Instruments and Insurance, Teaching Material, (Justice and Legal System
Research Institute)2009

7. Mehari Redae, Employment and labour law, teaching material, (Justice and Legal
System Research Institute)2009

iii. Books

1. Jacques Vanderlinden, Commentaries Upon (Ethiopian) Law of Physical Persons

(HSIU, 1969)
2. Robert Allen Sedler, Nationality, Domicile and the Personal Law in Ethiopia,
Journal of Ethiopian Law, Vol. II, No.1, Summer 1965
3. Tilahun Teshome, Basic Principles of Ethiopian Contract Law (in
Ahmaric),Federal Supreme Court,Addis Ababa, 1989
4. George Krzeczunowicz, Formation and Effect of Contracts in Ethiopian Law,
Addis Ababa University,1983

5. Rene David Commentary on Contracts in Ethiopia ,Hailesellasie I University,

1973

6. Girma Gizaw Ethiopian Contract Law , General Provisions Commercial Printing

Press,Addis Ababa,2002

177
 7. Willaim L.Church, A commentary on the law of agency representation in Ethiopia
Journal Of Ethiopian law, Vol.3

8. David Kelly et al, Business law, 4th ed., 2002

9. Miller and Jentz, Business law today,9th ed. 2011

10. J. Milnes Holden, the Law and Practice of Banking, Vol. 1 Banker and
Customer, the Pitman Press 1970 Bath

11. David Cox, Success in Elements of Banking, fourth Ed. 1988.

Wolkite University

College of Business and Economics

Department Of Accounting

Summer program

Business Law (Law-M3202 ) Individual Assignment

Name_____________________ ID No. __________________ Section ______

Instructions

 Attempt all questions

 Load : 30%
 Please write legibly; We can’t mark what we can’t read

Questions:

1. Kebede, Alemayhu and Sintayehu are in the way to establish a business organization.
Before they choose the kind of business organization, they approached you to consider

178
 some of the basic issues that may affect the kind of business organization. The
following are the facts that they need to be considered:
 The business organization is known to third parties
 shareholders are liable to the amount of their share holding
 The business organization can issue to bearer shares
 it will be managed by board of directors

Question: advise them the kind of business organization that could conform to the
above consideration.5%%

2. Mrs. Almaz and Mr. Mekuria began to live as a husband and wife since a long time go.
However, their marriage was not joyful to the level of their expectation due to their
liability to see the fruits of their marriage i.e. child. After such long time, Almaz go to
clinic to check whether she is pregnant and the result of the examination shows that
Almaz is three months pregnant. When she goes back to her house to tell her husband
about her pregnancy, she heard a bad news as to the death of her husband due to car
accident. She gave birth to a child six months after the death of her husband but the
child dies before attaining forty eight hours due to the failure of the hospital to give
necessary care.

Question: Is the child viable and capable of succeeding his father? 5%

3. What are the effects of non-performance under the Ethiopian contract laws? 5%
4. Some scholars say that there is a similarity between traditional Edir and modern
insurance. Do you agree? Why or why not? 5%
5. Identify to which law business law belongs based on the next classifications of
laws.5%
 Public versus private law
 Criminal versus civil
 Procedural versus substantive law
 National versus international law
6. Discuss common obligations of seller and buyer under Ethiopian law of sale.5%

179