Ethiopian Lawof Contracts

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Getahun's Lectures - Ethiopian Law of Contracts
Presentation · August 2022

DOI: 10.13140/RG.2.2.35168.76802
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Getahun Walelgn│LL.M, LL.M, LL.M, LL.B
Ph.D. Student │Addis Ababa University │School of Law
Attorney and Consultant│All Federal Courts
Lecturer in Laws│Ethiopian Civil Service University
mobile: +251911560601
email: getahun.dagnaw@gmail.com
Law of Contracts Lecture Notes
The Law of Obligations

The term ‘law of obligations’ under English law is reserved to the law of
contract, tort and restitution”.
It traces its origin from Roman Law. The notion of law of obligations goes
back to the Roman Law where it was a category that consisted of
personal actions (actiones in personam) which could be brought by one
person against another named person. (Samuel G, 2001).
It was a sub-category of the law of things. ‘things’ (res) in this respect
being construed to include not only physical things but intangible forms
of property embracing even obligations, or legal duties, to act and to
refrain from acting. (Samuel G, 2001). The other sub-category in the ‘law
of things’ was what is today known as ‘law of property’ and this
comprised of actions originally seen as being available only to things
(actiones in rem). (Samuel G, 2001).
The law of obligations is now seen as a category containing personal
rights while law of property is reserved for real rights. (Samuel G, 2001).
Definition
It is defined as a means of personal undertaking or legally binding
relationship where one party promises the other party to perform some
acts or to do something.
This definition was developed out of the personal opinions of different
Roman Jurists
o Year Gay: a means of personal claim brought against another in
order to force him before us to give us so as to we are able to
enforce our rights: This definition considered obligation as a
unilateral character.
o Pavel: an undertaking by non-Romans to give to do or to render
some rights to Romans. This definition has unilateral character
too.
o Both definitions were discriminatory in nature.
o Institutes of Justina: legally binding relationship when Roman
citizens undertake to perform acts or do something in accordance
with Roman Law: This refers to undertaking of Romans towards
others.
Haramaya University 1 College of Law

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o Black’s Law Dictionary: a legal or moral duty to do or not to do

something. This definition is broad in that it also includes moral
duty.
o French Civil Code: a contract is an agreement to establish, vary or
extinguish rights and obligations of the parties (Debtor and
Creditor). it indirectly defines obligations by defining contracts.
o Ethiopian Civil Code: Contract is an agreement between two or
more persons as between themselves to create, vary or extinguish
obligations of proprietary nature.
o USA: Contracts are agreements enforceable at law.
Source of Obligations:
o Contract
o Extra Contractual:
o Unlawful Enrichment:
o Law
Types of Obligations
Divisible and Indivisible: (possibility (legal or physical) of performing the
obligation in installments.
Alternative Obligations: whether there is an option for the debtor to
perform one of the obligations among many and the discharge of one is
discharge of everything.
Facultative obligations: the debtor is bound to perform only what is
specified in the contract. But in case the specified thing is lost or
destroyed he can deliver something else as a substitute for the thing
destroyed or lost.
Unilateral and Bilateral: whether one or both parties are bound on the
contract/obligation. In Unilateral obligations only one of the parties is
bound. The term unilateral does not show the number of parties but
indicates the party who is unilaterally bound by the contract. E.g.
Contract of donation, Article 2427 Ethiopian Civil Code). Bilateral
obligations on the other hand presuppose reciprocal obligations. Both
parties are legally bound to one another. E.g. Contract of sale (Article
2266 Ethiopian Civil Code).
Positive and Negative: whether it require the party to do/to give or
refrain from doing/giving. Positive obligations impose on a party an
obligation to do or to give to the other party. E.g. an obligation to
deliver, to construct a building, etc. But negative obligations require a
party to refrain from doing something. It is an obligation not to do. E.g.

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After the sale of his business. person undertakes an obligation not to

engage in similar business in the same locality
Simple joint and joint & several obligations: Both assume the existence
of several debtors and creditors. The basis for classification is the
liabilities of debtors and rights of creditors in discharging their
obligation/requiring performance. In simple joint obligations two or
more debtors are bound to perform one and the same obligation and
each debtor is liable for his own lawful share. In joint and several
obligations there are two or more debtors to perform one and the same
obligation and one of the debtor is bound to discharge the whole
obligation.
Contract Law
A law relating to promises or agreements. Its primarily concerned with
agreements in which one party, or each party, gives an undertaking or a
promise to the other. It deals with questions such as which agreements
the law will enforce, what obligations are imposed by the agreement,
what amounts to breach of contract and what remedies are available.
Therefore, it refers to the whole collection of rules that apply to
contracts such as which agreements the law will enforce, what
obligations are imposed by the agreement and what remedies are
available for breach of contract. And those rules can be non-contractual
in nature too such as rules on mistake, fraud, duress etc. The victim party
can avail himself of the remedies of contract law but such things are not
necessarily agreed between the parties.
Contract law is mainly concerned with the institution of exchange but it
is not as broad as the institution itself.
Definition of Contract
Ethiopian Civil Code: 1675: A contract is an agreement….
Based on the seriousness of the commitment and resultant legal
remedies a contract can be divided into:
o Social contract: mere domestic or social agreements that are not
intended to be binding. Inviting someone for lunch, birthday etc.…
o Legal contract: a contract whereby the contracting parties are
legally bound. Accordingly, a contract:
Presupposes at least two parties
Shall have effect between the parties

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Is to create, vary or extinguish obligations

The obligations have proprietary nature: object should be
able to be expressed in monetary terms. Obligations of
status such as betrothal, marriage and adoption are not
governed by Ethiopian Contract Law.
Types of Contracts:
Unilateral or Bilateral Contracts: whether one or both parties are bound
to perform an obligation? A unilateral contract is a contract where only
one of the contracting parties are bound. A typical example is contract of
donation. A bilateral contract arises where A promises to sell goods to
be in return for B promising to pay the price of the goods. In this case
there is a bilateral contract as soon as the promises are exchanged
between the two parties because as soon as the parties have
agreed/exchanged the promises there is a contract to which the two
parties are bound.
Commutative or Aleatory Contracts: This classification takes into
consideration of time of performance of the obligation undertaken by
the parties. Whether the parties have to perform the obligation
simultaneously or they have some time after the conclusion of the
contract? Contracts which require both parties to perform their
obligations simultaneously are known as commutative contracts. E.g.
Cash sale contracts. But in aleatory contracts the obligations undertaken
by the parties are going to be performed at different times. E.g.
Insurance Contracts
Solemn or consensual: the basis for classification in this case is whether
there is a special form to be followed by the parties. In Solemn contracts
there are formal requirements to be followed. E.g. Marriage Contracts.
Consensual contracts are contracts that do not require parties to follow
certain formal/ceremonial requirements.
Contracts of Consultation or Adhesion: the classification is based on
whether parties are allowed to negotiate or is it take it or leave it type. In
contracts of consultation contracting parties can negotiate on terms and
conditions of the contract. E.g. Ordinary sale contracts. In contracts of
adhesion there is no room for negotiation of the terms of the contract.
E.g. insurance contracts.
Development of Contract Law
During 18th and 19th century:
o contracts were simple and parties deal face to face

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o parties knew each other’s good will or reputation for fair dealing
o The things exchanged were relatively simple and buyers knew
enough about their purchases.
o The guiding policy was laissez faire - courts were not willing to
interfere in the private agreements of the parties. Freedom of
contracts was the guiding rule. This ‘hands-off’ approach was ideal
for business.
o As long as parties commit themselves voluntarily courts would
generally enforce it even if grossly unfair.
Industrial Revolution:
o Industrial revolution changed many of the assumptions for
contract law.
o Things people bought and sold become more complex
o People/buyers often had little or no knowledge about the things
they are buying
o People were buying goods that are produced hundreds of miles
away from their home and from sellers they do not know.
o An increased number of contracts were based form contracts and
people usually do not sit down and discuss the terms.
o Later it was seen that free-market theories were no longer the
correct basis for public policy in a modern society.
o Legal systems began to respond to the peoples’ way of life and
thereby changed the contract law in the process
o Many important contractual relationships that had earlier been left to
private bargaining began to be controlled to some degree by
legislations.
o The theory of equality of bargaining power had brought certain
unnecessary results because parties to a contract doesn’t necessarily
have equality.
o Many courts also began to shift from protecting business and
promoting industrialization to protecting consumers and workers.
o Despite this trend, however, the idea that a contract is an
agreement freely entered into by the parties is still the basis
for enforcing most contracts today. Stated otherwise, the
theory of freedom of contract and equality of bargaining
power are still the foundations of contract law in many legal
systems.

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o Generally, contract law continues to change to meet new

challenges and conditions.
Importance of Contract Law
Concerned with supporting the institutions of exchange which is an
enormous part of our life.
People will not enter into transactions that they are no sure of their
performance.
Creates smooth functioning of business transaction by creating certainty,
predictability, and enforceability
Scope of Application:
Article 1676: Provisions applicable to contracts (Arts. 1675-2025):
applicable to all contracts regardless of the nature thereof and the
parties thereto. This applies to nominate and innominate.
o Whether sales, agency, donation, lease, employment, hire,
deposit, loan, partnership, etc.…
o Whether physical/natural or juridical persons (company, state…)
o The title on Contracts in general applies to special and commercial
contracts (Book V and Commercial Code).
o This includes both:
Nominate: named contracts and they have special rule. E.g.
Sales, Agency, Lease, Contract of Services, Employment,
Administrative Contracts, etc.
Innominate: no special provision to govern them
o In case of contradiction between the special law and the general
contract law provisions, the special law applies. This is based on
the principle of special rules derogate from the general rules. This
is when there is a special provision dealing with special problems.
This is between legal rules of the same rank.
Article 1677: Scope of Applications of the Title: applicable to all
obligations regardless of their nature/source.
o This provision makes general contract a general part of the law of
obligations.
o Sub article (1) embraces to all obligations.
o Contractual, extra-contractual, law…Arts. Provisions from 1675-
2026 are applicable.

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o Sub article (2) narrows its scope to exclude affecting the special
provisions applicable to obligations of non-contractual origin and
nature.
o Exception: when there is a special law governing a certain
obligation, then the special law prevails.

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Formation of Contracts
Formation involves criterion or yardsticks which state uses in order to
determine whether it has to enforce the agreement of parties. The state
will check whether the parties have made a law that binds them.
The essential validity requirements for the formation of a valid contract
are:
o Capacity
o Consent
o Object and
o Formal requirements
Capacity:
o Is the ability to enter into juridical acts.
o Article 1: a human person is subject of rights and duties from birth
to death. But the holder of these rights and duties cannot exercise
the rights and discharge the duties from that moment.
o Article 192: states Capacity is the rule and incapacity is the
exception. Everyone is presumed to be capable of performing all
acts of civil life unless declared incapable by law.
o Article 198: Minority
o Articles 339 & ff: Judicially Interdicted persons
o Articles 380 & ff: Legally interdicted persons
Consent: 1679 & 1680
o A true and free will of a party to enter into a contract/transaction
o Consent is a declaration of intention to be bound by an obligation.
A person has to express his willingness to create an obligation on
himself, or give up some or all of his proprietary rights.
o It should be free from any of the vices of consent
o The basis of contract law should be based up on the free
agreement of the parties
o A contract should be free from behaviors that may take away the
free judgement of the parties to that transaction.
o These behaviors are mistake, fraud, duress, false statement,
reverential fear, threat to exercise a right, undue influence etc.
o Terms and conditions of the contract:
An agreement on every detail of the contract is required
• Price
• Obligations of the parties
• The time the contract will have effect
• Dispute resolution mechanism
Contract Law Notes

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Meeting of mind: there should be meeting of mind: “consensus ad idem”
the minds of the offeror and the offeree should meet up on the common
object of the contract.
o The declaration of both parties must relate to the same subject
matter.
o There should be objective appearance of offer and acceptance.
o Consent is inferred from offer and acceptance and the law is
concerned with the objective appearance of offer and acceptance
than the real intention of the parties.
o Parties are bound not by what they think or their real intention.
They are bound by what they said, written or done.
o The person is bound whatever his real intention may be if a reasonable man
would believe that he was assenting to the terms proposed by other party
and upon such belief he enters into a contract with him.
Intention to be bound by: there should be an intention to be bound by
the promise
o any intention of a party that is not intended will never form part of
the contract.
o Meeting of mind coupled with intentio obligandi differentiates
legal contracts from social contracts/simulated contracts.
Article 1679: emphasizes the overriding importance of consent.
There are no legally binding contracts in the case of simulated contracts
or where the declarations are not intended seriously.
o Man promises to give his wife money monthly for household
expenses
o Father promises his son for award if he scores good grades
Articles 1680 and 1695:
o There are two theories with regard to declaration of intention:
o Theory of will:
Search for the real intention of the parties
Known as French theory
Moral grounds: a man should not be tied to an agreement
for which he didn't do it by his free will.
We have to search for the real intention of the party and not
what he has expressed.
o Theory of declaration of will:
A contract is made, completed, not by agreement of wills,
but by agreement of declaration of wills.
in order to decide the cases brought before the court, the
court must look, first of all, at the parties’ expression.
Contract Law Notes

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Based on social grounds: there cannot be contract, trade or
order if men cannot rely on their expressed declarations.
This is Swiss Theory
According to this theory, one should not discover what one
of the parties internally desired: the external manifestation
of his intentions, are what are legally significant. Only such
external signs or manifestation are considered in order to
determine whether or not a contract has been formed.
Ethiopian Law follows this theory.
Do you think this expressed consent has to be on each and every detail of the
contract?
o See Article 1695(2): only declaration of intention on the most
important elements of the contract is necessary.
o So under Ethiopian Law declaration of intention or manifestation of
will is legally significant and one shall not try to discover the internal
desire of the party. Article 1733 confirms the theory too.
But what if there is a discordance between true will and declared will of the
parties? Is there a valid contract?
o Theory of Declaration of will: Still there will be a contract but the
same can be invalidated subjected to Article 1703 and or can be
subjected to interpretation according to the rules of Articles 1732-
1739
o Theory of Will: there never was a genuine contract and damages
are due only in case of tort.
What if someone signs on a blank paper later to be filled by a trusted friend?

Do you think Article 1680 be applicable? NO
o The person signing should prove that he has signed prior to
the filling.
o The other party: prove that the filling is in accordance with
prior oral agreement.
An agreement which is not expressed is of no effect. Concordant
declarations without true agreement create (complete) a contract but
may be open to avoidance. Examples:
o I buy “your car” thinking it is the one you are driving every day.
Your car is another car. The contract is complete subject to
paragraph two.
Contract Law Notes

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o Signing a contract without reading it or signing a contract in a
foreign language without translation. The contract is complete
subject to paragraph two.
From the above example: Ethiopian law is a compromise between the
two theories. Declarations alone can create a contract but the contract
may be invalidated on the grounds of different vices of consent.
Article: 1680 (2): Reserves and restrictions…
Contracts are not agreements of interior wills, but of expressed
declarations, and they can never be made of what is not expressed.
Reservations or restrictions stated but not communicated to the other
party, remain of no avail.
Communication of Consent
When a dispute arises, there are two things the court will consider.
o Is there a contract?
o If there is a valid contract, what are the terms of the contract?
The rationale: contract law is based on the idea of enforcing agreements
that the parties made freely.
For this offer plays an important role.
One party makes an offer or arrangement and the other accepts. This
can be called a 'concurrence of wills' or 'ad idem' (meeting of the minds)
Offer
Manifestation of will to enter into a contract
It is laying down the contents of a would-be contract indicating the
obligations of the contracting parties and terms of the contract.
The question what amounts to offer is important for several reasons:
o If there is no offer there is nothing to be accepted
o To know what are the terms of the offer
Offer has to be:
o Certain
o Communicated
Specific person
Group of persons
Public
• What if more than one person performs the act?
o First in time
o To all in equal shares
o Fully to each
o Unconditional
Contract Law Notes

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o Distinguished from an invitation to treat
Form of Offer & Acceptance
Offer/acceptance can be made in any form
o Orally
o In writing
o By sign normally in use: 1688
o Conduct: Public Phone, city bus stopping at a “Bus Stop”, Coca
Cola auto retailer
There should not be any doubt as to the party’s agreement/it should be
unequivocal
Exception to the freedom of form
o Offer may stipulate special form, then the other should adhere to
that.
o Law provides special form
Offer should be distinguished from Invitation to treat
An offer is different from a mere invitation to treat.
Example sending price lists is not an offer:
o No intention to be bound by
o It doesn't indicate rights and obligations
o In practice it is advertisement
o Creates a problem of multiple acceptance
Acceptance
Is positive response to the terms of the offer
It could be made:
o Orally
o In writing
o By sign normally in use: auction
o Conduct: performing the act
Defective Acceptance
Silence as an Acceptance:
o Basis of contract law is voluntary agreement of the parties
o The law requires some affirmative indications of assent from the
offeree
o An offeree is not allowed to word his offer in such a way that the
offeree has to act to avoid being bound
o Silence is not acceptance, in principle:
Legal relationship cannot be established on equivocal terms
Contract Law Notes

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It is not certain whether the offeree is accepting it or
rejecting it and that shouldn't be considered as tacit
acceptance
Ethiopia is following theory of declaration
Answering all offers would make any active man’s life
unbearable. Nobody needs to bother answering offers.
o Exceptions to the rule:
o When it is duty to accept by the law: a person is bound in
advance by a concession granted by authorities to enter into
a contract on terms stipulated in advance.
Vital services and,
Vital supplies to the community (water, electricity,
telephone,
• Rationale:
• the vital nature of the services and supplies
involved
• monopolistic situation that the concerned
undertakings tend to enjoy and to abuse, if not
strictly regulated.
o Pre-existing business relationship
Pre-existing relationship
A proposal to continue or vary an existing contract
The offer is made in a special document
Warning that the contract is deemed accepted if no
reply is given in reasonable period of time
Invitation to treat
Mere declaration of intention
Price lists, catalogues,
Auction
Time of Offer
Offer with time limit:
o Shall wait till the time set in the offer expires
o Do not have to wait if receives rejection earlier
Offer without time limit:
o Offer is bound to wait for reasonable period of time
o This time is determined having regard to:
Current price
Market stability
Complicated nature of the contract
Contract Law Notes

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Contract Law Notes

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Vices of Consent and Available Remedies

If the consent expressed in the form of offer and acceptance could not
achieve what the parties have intended, then there is a defect in
consent. This defect in consent may arise from:
• Being misinformed of something by ways of mistake, false
statement, fraud
• Being threatened by another psychologically or physically (duress,
reverential fear, threat to exercise a right)
• Unconscionable contracts (want, simplicity of mind, senility and
business inexperience)
If it is discovered that the contract is affected by any of the vices of
consent it may be invalidated as in the sense of Article 1696 and the
following provisions.
Defect in consent may not necessarily invalidate the contract:
• First an application to that effect is needed
• Secondly, the application should be based on the grounds that will
entitle invalidation of the contract
Mistake
• Mistake is a false belief in something, a belief which is actually
untrue.
• Under Common law error without misrepresentation will not make a
contract void or voidable. The promises will be valid and
enforceable. (Samuel G, 2001)
• There is no mechanism by which the subjective intentions of the
parties affect the objectivity of the promise. (Samuel G, 2001)
• Consequently, the general principle under common law is that the
contract is neither void nor voidable simply as a result of the
existence of error. (Samuel G, 2001)
• But this principle is not as quite simple in practice as the general
principle states. A fundamental mistake in relation to the subject
matter (error in corpore), legal nature of the contract (error in
negotio), obligations of the parties (error in substantia) or to the
identity of the other contracting party (error in persona) might
1 Law of Contracts Notes

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result in a common law court holding that there never was

consensus ad idem. (Samuel G, 2001)
• This means the fundamental mistake will make the contract void
because of the absence of an essential condition of validity. For
example, in a sales agreement if one party had one object/thing in
mind while the other had a different object then the contract might
well be void for lack of consensus. (Samuel G, 2001)
• Under the Civilian Tradition, a contract is made up of two
declarations of will, and each of these, as the term suggests, of two
elements: verba and voluntas. As a rule a will and declaration of
will coincide. (Reinhard Zimmermann, 1996)
• If there is a discrepancy between intention and declaration the
minds of the parties did not met “in unam sententiam” and hence
there is no consent. (Reinhard Zimmermann, 1996)
• Sole emphasis on the external manifestations of intention is
conducive to the certainty of the law, but is bound to lead to harsh
and inequitable results. And a balance between the two theories is
necessary. Will theory should give some concessions with the view
of protecting the other parties reliance and cannot give effect to all
sorts of mistakes/errors. And in the same way declaration theory
can serve only as a starting point and must be modified so as to
accommodate the reasonable interests of the author of the
declaration. (Reinhard Zimmermann, 1996)
• In South Africa case law both approaches have been competing for
recognition. On the one hand it has been held that error excludes
consensus and thus prevents the formation of the contract. 1
(Reinhard Zimmermann, 1996). But not every kind of error has this
effect. The mistake/error must relate to one of the essential
elements of the contract. (Reinhard Zimmermann, 1996). Further,
1 Cf. e.g. Robinson v. Randfontein Gold Mining Co., Lid. 1925 AD 173; Trollip v, Jordaatt 1961 (1) SA 238
(A); Ocean Cargo Line Ltd- v. F. R. Warm? (Pty.) Ltd. 1963 (4) SA 641 (A) ,

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the theory of will is tempered by the doctrine of assent by estoppel.

If you make a declaration deliberately or negligently then later you
are estopped from proving the truth and will be forced to proceed
as if the misrepresentation has been true. (Reinhard Zimmermann,
1996).
• On the other hand there are those who say that “...the law should
not concern itself with the working of minds of the parties to a
contract but with the external manifestation of their minds. This is
an endorsement of the declaration theory. But this theory is also
modified by the doctrine of iustus error: if a party to a contract is
laboring under a reasonable mistake, he may repudiate the
contract. (Reinhard Zimmermann, 1996).
• The question where the mistake is reasonable is addressed as it
must relate to one of the vital elements of the agreement and must
not have been due to inattention and negligence on the part of the
erran/mistaken party.
• Under Roman Law it was the declaration that counted. All legal acts
were of strictly formal nature. There was an irrebutable
presumption that the will of the parties was correctly and
adequately reflected in the agreement. There was, ofcourse, no
room for taking any kind of error into account. (Reinhard
Zimmermann, 1996).
• According to the law reflected on the Justinian’s compilations, on
the other hand, certain types of mistake exclude consensus, the
essential element for thhe formation f contract
• Under Ethiopian Law mistake is, as a rule, a ground for invalidation
of the contract.
• The false belief must be firm and should not be mere probable
supposition.
• A party who has to prove his firm error should in addition establish
that such mistake has led him to contract; that he would not
otherwise contract.

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• But for the person who invokes his mistake it is not sufficient hat he
proved the subjective test. To this the law adds an object element.
The mistake has to be fundamental:
o When the mistake relates to something which ordinarily or
normally seems to be an essential element of the contract under
consideration (identity of the thing sold, price, special qualification
of the other party)
o When it relates to an element the parties deem it fundamental
(e.g. Formal guarantee a person is advised to have but fails to do
so will be protected by the law)
Mistake can be classified as:
• Mistake as to the legal nature of the contract/ error in
negotio
o This is where parties did not agree or there is no meeting of mind
as to the nature of transaction.
Intend to conclude contract of sale but stated in the contract as
donation
Witness-guarantee
Undertaking to organize a petition for fund raising but stated as
an undertaking to make annual contribution
Deposite is mistaken to contract of loan
• Mistake as to the object of the contract/error in substantia
o This is the most intriguing and disputed kind of mistake
considered by Roman lawyers.
o This include cases where vinegar is sold as wine, bronze as
gold, lead or some other metal resembling silver as silver,
etc. (Reinhard Zimmermann, 1996).
o This is not the case of error in corpore. There is no dispute
between the parties as the thing considered in the contract
for both the seller and buyer have the same object/thing in
their mind. But he purchaser is in a disadvantaged by the
deal because the liquid is turned out to be vinegar, the metal
not gold. (Reinhard Zimmermann, 1996).

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o The mistake here as to what the subject matter of sale

consisted of, the mistake relates to the substance of the
thing. This is the crucial feature of the problem. (Reinhard
Zimmermann, 1996).
o Where the mistaken party has undertaken to make a
performance substantially greater and receive a consideration
substantially smaller than intended. This mistake can be
Mistake as to:
the identity of the object
its qualities: where the parties have different subject matter in
mind. It is not about the values the thing possesses but about
distinguishing the subject matter the buyer is intending to buy
(A intends to buy BMW belong to B but later understand that
the offer if for the sale of Toyota; A sends offer to B intending
to buy a horse belonging to B but in fact the horse belongs to
C; a person sold his gold ring thinking that he sold the gold-
plated one; buying fertilizer sulfur thinking that he is buying
pharmacy sulfur)
generally, the mistake is substantial, by common
sense or legal provision.
Mistakes as to counter performance or
consideration are more common than mistakes as
to performance a s a person knows less about
what he is to receive than about what he is to
give:
• A creditor who releases his debtor under
Article 1825 for the full amount thinking
that the remission was for few current
installments
• A person who sells his house which later
turnout to have much more square meter
than he believed to have at the making of
the contract

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• A person rents a villa in the belief that it

includes water well and several other
facilities but in fact doesn't have
o The value of the performance is irrelevant. There must be more or
less meter square living space, etc. Mistake as to money value of
what to give or to receive is not in itself a ground of invalidation.
Had money values of what to give or receive were considered
security of commercial transactions would have been at stake.
• Mistake as to the person/ error in persona

o It may relate to mistake to identity & quality
o Mistake as to identity and quality is important coz identity
mistakes invalidate marriage while quality mistakes may invalidate
marriage on limited cases.
o Under General contract law mistake as to the identity or quality
has very little importance coz neither identity nor quality mistakes
invalidate a contract
o But exceptionally there are cases where the identity and or quality
of the other contracting party is important. This is coz the
performance of the contract is wholly dependent on the
qualification or identity of the contracting party.
o Examples:
Gratuitous Contracts (donation, remission, free loan, guarantee)
certain insurance contracts
hire of qualified services (clerk, painter, artist, doctor, lawyer)
Partnership, etc.
Non-fundamental Mistakes
• They don't relate to the fundamental element of the contract but
only motives

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• A will quite truly declared may be induced by untrue external points

that motivates parties to contract
• Such doesn’t relate to the contract but motives.
• Examples:
o A bought a house from B to install his son, after the Son got
married. (marriage is motive)
o Buy a painting thinking that it was painted by famous artist
o Buying house in Harar thinking that my job there will last long but
transferred immediately after the contract
o Selling a house thinking that gov’t will expropriate but that wasn't
true.
• But mistake as to motive can be a ground of invalidation where the
parties expressly or implicitly make it a condition of the contract.
• Arithmetical or calculation errors
Good faith of Mistaken Party (Art. 1702)
• Proposal to guarantee substantial quality but rejected by other
Damages Arising out of Invalidation
• Errans fault: Roman & English Law says no invalidation
• Both parties’ innocent: French & Swiss Laws: Invalidation but no
compensation
• Ethiopian Law?? See Article 1703. Whether at fault or not the
mistaken party who avoided the effect of the contract through
invalidation has to make the damage arising out of invalidation
good. He has to pay compensation to the other contracting party.
The only situation where the mistaken party will not pay damages is
if the other party has knowledge of the mistake.
• Knowledge of the mistaken party
o He knew: Actual knowledge
o Should have known: Presumed Knowledge
• Under Ethiopian Law: The only defense for the mistaken party
not to pay damages is to prove the knowledge of the other
contracting party and not his innocence.

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o But invalidating mistake and of its knowledge by the other party

which makes invalidation worthwhile are difficult to prove.
o The court should take into consideration of circumstances
Example
• A bought gold-plated ring for 5000 birr thinking that it is pure gold.
The price of gold-plated one is 500. In this case:
o There is decisive mistake: as no one in his senses would buy
gold-plated ring for 2000 birr
o There is fundamental mistake as in the sense of Art. 1699 (b)
o The seller’s fault is presumed as he should have known the sellers
mistake. This much price differences show that the buyer has
wrongly appreciated the material facts.
• Damages Arising out of invalidation vs damages for non-
performance
o Invalidation: It will put the parties in the position they would
have been had the contract not been made
o Non-performance: It will put the parties to the position they
would have been had the contract been performed
Fraud
o Is a false representation by means of conduct, statement made
knowingly in order to gain a material advantage against another
party.
o It doesn't mean telling false statement/untruth. It is beyond that
o To invoke fraud, the following need to be fulfilled:
• Knowledge of falsity (intentionally): the person making the
misstatement (guilty of fraud) knows that their statement
is untrue and this should be done with the intent to
deceive.
• Materiality: It should be in relation to a material fact-a fact
that would contribute to a reasonable person’s decision to

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enter into that contract. Determination of materiality is

dependent upon the circumstances of each particular case.
Example Kedir bought, by mail, a house from Sunshine
real estate because the agent of the real estate told him
that general description of the house and its
neighborhood. Included in the description were the
statement that the house is within an easy walking
distance of the church, schools, shopping centers etc.…
after moving in, Kedir discovered that the house is about
10 km away from the school. Is the fraud sufficiently
material to justify invalidation? The answer depends on
who Kedir is. If Kedir is a retired childless widower the
fraud could be adjudged immaterial because he has no
interest in the nearness or otherwise of the school. But if
he has children the fraud as to the distance of the school
is material and can invalidate the contract.
Justifiable Reliance
causal connection/cause-effect relationship
The party must take reasonable effort to ascertain the
truth
the fraud should be in relation to present or past fact. The
subject of fraud should be knowable. Statements of opinion do
not serve as a ground for invalidation of the contract although
the parties may rely on them for the conclusion of the contract.
• Why fraud? Why not mistake?
o It is easier to prove fraud/deceitful practice than the errans state
of mind
o An innocent mistaken party may be liable to pay damages. But in
case of fraud even a negligent mistaken party may claim damages
o Coz it is difficult to determine the amount and size of substantial
error under Art. 1699(b). But in case of fraud there is no need to
go thru this brainstorming process.
• Two types:

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o Decisive fraud: deceived party wouldn't have contracted

otherwise and it is a ground of invalidation.
o Incidental fraud: have no determining effect on the contract.
Deceived party would even have contracted even if he knew he is
deceived but only at a less onerous terms. It is not therefore a
ground of invalidation. But can be a basis for claim in tort.
• Third Party fraud:
o A party who has been deceived by a third party is still bound by
the contract unless the other party knew or should have known of
the fraud.
o It cannot be a ground of invalidation unless the other party knew
or should have known of the fraud.
Labor exchange agency’s fraud on employer not known to the
employer
Debtors fraud on the guarantor not known to the creditor
o Knowledge should be at the making of the contract and not after.
• Remedies for fraud:
o Invalidation
o Payment of damages
o Criminal penalty
False statement
o False statement, as a rule, is not a ground of invalidation
o Exceptionally, however, where false statement is made and
relationship giving rise to special confidence, loyalty and trust
existed between the parties.
o Such special confidential relationship should have existed before
the contract
o False statement without the confidential relationship is only
actionable under tort.
o Under Ethiopian law the only contract remedy for the victim of
false statement is based on fundamental mistake unless the type
of relationship exists.
• What relationships are considered under Article 1705?

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o Family relationships at least up to second degree

o Membership to close religious community
o Subordination created by contract (employer-employee)
o Professional service relationships (lawyer-client)
• Why false statement? Why not mistake?
o Proving mere false statement is easy
o Mistaken party may not be required to pay damages
Article 1705(2): False statement induced by silence
o A person sells his house because he heard that there will be
expropriation of extra houses. The city Mayor knew the false
statement but entered into a contract with the seller. By his
silence he led the party to believe the false information.
Duress:
o Psychological or physical pressure exerted on a person
o Threat of imminent danger which may be future or immediate
o Threatened harm must be such that disastrous loss would occur if
the threat were carried out.
o The wrongful act should leave the person with no reasonable
alternative
o There should be little time left between the threat and impending
realization
o It should be serious and imminent but it does not mean that it
should be real.
o Example: pointing a gun on some one’s head but the gun was
unloaded.
o Should impress a reasonable person but standard to be used to
determine if an alleged duress is sufficient to invalidate a contract
is conditional subjective. This is not the same as an objective
standard in the sense of an average reasonable person in the
position of the victim. Article 1706(3) states that the nature of
duress should be determined having regard to age, sex and
positions of the person.

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o So, the standard is partly subjective and partly objective: would

another person, having the same age, sex, and position as that of
the victim, be coerced into this contract? Examples:
A minor threatened an adult to conclude a contract? It cannot
be a ground to invalidate the contract.
A threatened to kidnap B’s wife unless he agrees to enter into a
contract? There is no serious and imminent danger posed
against him. There is a time gap between the threat and its
materialization and the victim can resort to alternatives.
A pointed a gun at B to sign a contract. In this case the threat is
serious and imminent.
Lawyer A threatened client B to pay him excessive lawyer fee at
the pain of disclosing the secrets of B. The contract can be
invalidated.
• Third Party Duress
o For the contract to be invalidated on the ground of duress the
source of duress is not important. Be it by the party himself or a
third party it is a ground for the invalidation of the contract.
o Were it not for this provision it would have been very tempting for
any powerful man to exercise duress through his followers and
argue lack of knowledge stating that he is unware.
o When there is innocent beneficiary, invalidation is tempered by
the qualified possibility of damages.
o The law has different treatment of fraud and duress in this regard.
What is the difference between Articles 1704(2) and 1707?
Gross Disparity:
Unconscionable Contracts
o Lesion is to mean when the contract concluded is disadvantageous
for one party but substantially favorable to the other party.
o Substantial disproportion in the values of the performances of the
parties is necessary, but not sufficient for invalidation
o It does not apply to gratuitous contracts as there is no point in
assessing the mutual advantages of the parties.

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o It doesn’t apply if it is after the conclusion of the contract. In that

case Art. 1764 is applicable
o Rationale: security of commercial transactions would have been at
stake, were we allow invalidation for the mere fact of imbalance of
obligations.
o immoral behaviour of the exploiter amounts to determining the
victims consent through taking advantage of his want, simplicity of
mind, senility, and inexperience
o unconscionable contract to be invoked as a ground of invalidation:
• the advantage must be substantially favourable to the
other party
• Want, simplicity if mind, senility and business
inexperience of the other party must be utilized
• Justice (morality) requires that contract to be invalidated.
What is the balance of the contract is affected by unforeseen
circumstances that happened after the formation? Article 1764 is
applicable in this regard.
Threat to exercise a Right-Article 1709
o It is not a ground of invalidation. The duress must be unjustified.
o This is a problem of abuses of rights.
o Threat is used with a view of obtaining an excessive advantage.
Examples:
Employer catches his employee stealing and later forced him to
sign a contract to work for free or he will face jail
Husband catches his wife while she is cheating and forced her to
sign a contract and agreed that she will not share from the
common property
Reverential Fear-Article 1709
o A person may be induced to enter into a contract and accept terms
because of the respect they have for the known wishes of parents
or superiors.
o In most cases, a confidential relationship raises the presumption of
undue influence that the benefiting party must disprove.

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o It is a respect for parents and superiors.

o In principle it is not a ground of invalidation of a contract
o The Ethiopian law assumes that the influence of respected ones and
superiors is good.
o Victims of undue influence/reverential fear must have the mental
capacity to enter into contracts but they lack the ability to
adequately protect themselves from the influence of superiors who
gain their confidence.
o The fact that the other arty inspires the fear will not render the
contract voidable. In addition, it should be proved that the other
party drives an excessive advantage from the contract.
o A reverential fear may become a ground of invalidation when the
fear induces a contract with ascendant or superior himself and
brings an excess of advantage.

Getahun Walelgn │LL.M, LL.M, LL.M, LL.B
Attorney and Consultant │All Federal Courts
Lecturer in Laws │Ethiopian Civil Service University

mobile: +251911560601
Contracts Law Notes
Object of the Contract

• Definition
o It is the respective obligations of the contracting parties
o It is different from the thing over which the contract is based on or
the subject matter of the Contract.
o Object does not mean an article such as movable or immovable
which is the subject matter of the contract.
o In a contract of sale of house, the object of the contract is not the
house but rather the obligations of the parties, to transfer
ownership and to pay the price of the house.
o In a contract of employment, the object is professional service
delivered by the employee and paying salary by the employer.
o The object of a contract is identical for all contracts of the same
nature even though individually they carry different articles or
• Freedom of Contract (Art. 1711): freedom of contract with regard to
the choice of object.
• This shows a liberalist capitalist economy which leaves an ample space
for the parties’ initiative.
• This freedom is both to:
o nominate: already named contracts
o innominate: contracts which may be created/produced by human
ingenuity
• Article 1711: parties are free to determine the object of their
undertaking
• The object could be an obligation:
o to give: an obligation to transfer ownership
o to do: to perform/procure a certain advantage
o not to do: refrain from doing something
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• Article: 1713
o Article 1712 requires the parties to state the object of their
undertaking clearly. But it is unlikely for the parties to state
everything and the obligation of the parties may be determined by
incidental effects attached to the obligation by custom, equity,
good faith and the nature of the contract
o The object of the contract may be determined globally and the
parties are deemed to have agreed on all the obligations derived
from custom, equity and good faith. In other words, it leaves
ample room for the initiative of the parties, the evolution of the
contract overtime, the evolution of habits and interpretations by
courts (1732 of the civil code)
o So the agreement articulated by the parties should be
supplemented incidental effects that obviously follow from it as a
result of custom, equity and good faith
o accessory obligations are imposed by the virtue of the custom and
good faith, although the contract is silent in this respect.
o Therefore, we will not make the contract void for the mere fact
that the parties fail to provide or specify the object of their
undertaking
o Example: Transfer of risk and the duty to preserve and protect
the thing
Freedom of Contract and Limits
• There are exceptions to this freedom: limitations and restrictions

provided by the law.
• Despite the prevalence in the Western world of the principle of freedom
of contract, every legal system must reserve the right to declare a
contract void if it is legally or morally offensive., i.e when it is contrary
to public policy. (K. Zweigert & H. Kotz, Introd. To Comparative Law, 1998).
• Illegality and immorality are universally seen as grounds for
invalidating contracts, and it is in the law of contract that the question
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is dealt with in both Anglo-American and Romanistic systems. (K. Zweigert

& H. Kotz, Introd. To Comparative Law, 1998).
• Under French and Italian Law the question of the nullity of the contract
is dealt within terms of the doctrine of cause or causa. E.g Article 1131
of the Code Civil: A contract is void if it is based on une cause illicite. (K.
Zweigert & H. Kotz, Introd. To Comparative Law, 1998).
• Cause here is taken to include not only the reason which led the party
to enter the obligation, such as his intention of acquiring the land or its
use in return for the price or rent he is to pay, but also his ulterior aim
and purpose in entering the transaction, fore example to run a casino
or brothel. (K. Zweigert & H. Kotz, Introd. To Comparative Law, 1998).
• Under French law a contract can also be held invalid if its content or
subject is unpermitted (object illicite). Fore example if a person
promises to commit a crime for reward. Accordingly, the contract is
invalid because the promised act is illegal. (K. Zweigert & H. Kotz, Introd. To
Comparative Law, 1998).
• When we talk about nullity of a contract on the ground of illegality or
immorality, we mean that such contracts give rise to no claim for
performance or damages. (K. Zweigert & H. Kotz, Introd. To Comparative Law, 1998).
Criterions of object under Ethiopian Law

• Clarity: the object must be sufficiently defined
• Possible: the obligation of the parties should be possible
• Lawfulness and morality: it should be moral and lawful
Article 1714: Object must be defined
• The object of the contract should be determined and or at least
determinable (Art. 1679 with 1695)
• If the object is not determined or is not determinable it is void
• But it does not require the parties to list out all the terms of the
contract.
• But If, after consideration of all the implied terms, there remains a gap,
then the contract is void.
o Example: An obligation to transfer ownership and pay the price-
determined
o An obligation to give some one with “best award”-void
• The court cannot make a contract for the parties under the guise of
interpretation. This is with the view of maintaining contractual security
3

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Article 1715: Object must be possible

• The obligation should be possible at the time of the contract
• It is about initial possibility
• Only absolute and insuperable impossibility
o Absolute: is general and not only in relation to a given contract.
This must be a contract which some other person could perform
o Insuperable/undefeatable impossibility is some thing which is
impossible to overcome
• Impossibility is objective and should be the same for any one finding
himself in the same situation
4
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Effects of Contracts
• Effect has different meanings. It could mean the time within which
the contract is considered to be binding on the parties. And the
second meaning could be the fulfillment or performance of the
promises made by the parties.
• In general effect refers to the legal consequence of a validly formed
contract
• Under modern contract law, especially Civil law legal system, the
widely accepted principle is that one is free to enter into contracts
but once he has made a legally binding agreement it is enforceable
under the law.
• Thus, the two fundamental principles of contract law are principles
of freedom of contracts and sanctity of contracts.
• Pacta sunt servanda or a man’s word is his bond or failure to keep a
promise is worse than loosing a descendant (moral principle).
• But contracts are binding not only morally but also legally once the
parties have shown unequivocal intention to be bound by the
obligation they undertake.
• Pacta sunt servanda is not an absolute principle for the following
reasons:
o Non-performance due to events beyond the parties’ control
(force majuer)
o contracting parties are bound not only in their words
expressly stated in the contract but also to implied terms and
incidental effects which of effective interpretation is to be left
for the judges as in the sense of Article 1713 of the civil code
o Finally a contract shall be effective when the contracting
parties are subjected to the imperative provisions of the law,
while determining the object of the contract. Since mandatory
provisions of the law cannot be set aside by the contracting
parties; they limit the parties’ freedom in contracting.
Interpretation of Contracts
• The means to arrive at the true meaning of the contract.
• Contracts are laws for the parties and are subject to interpretation
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• When the provisions of a contract are not clear, interpretation is

required to ascertain the terms of the contract.
• Article 1732 establishes the role of good faith in the interpretation
of contracts. Good faith is referred to imply terms into a contract.
In addition to that, reference should also be made to good faith in
the interpretation of a contract: ‘contracts shall be interpreted in
accordance with good faith, having regard to the loyalty and
confidence which should exist between the parties according to
business practice’.
• Interpretation of contracts basically involves discovering the
common intention of the parties. To that effect, the behavior of the
parties before and after the contract is taken into account. On this
point, Article 1734 provides ‘where the provisions of a contract are
ambiguous, the common intention of the parties shall be sought’
and ‘the general conduct of the parties before and after the making
of the contract shall be taken into consideration to this effect’. And
it should not be the intention of one party but both.
• Example:
What if interpretation is prohibited by legal provision? (Example Articles
1922, 1828)?
• Invalidation
• Declaration of nullity
Approaches
Formation and interpretation are influenced by objective and subjective
theories of contracts.
• Objective:/English Courts
o Gives emphasis to contractual assent that is “determined by
analyzing external evidence”. So it is based on communication and
not by cognition.
o Looking in to what the parties have said, done, expressed.
o Interpretation of vague and ambiguous terms are made by
examining what the parties have said, wrote or did and not what
they actually intended to say, write or do.
o So courts will apply an objective test to determine what meaning
should be given to the vague terms.
2 Contract Law Notes

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o The basis is economic consideration and the main concern is

security of commercial transactions.
o Great uncertainty will be created if men appeared to have agreed
to certain terms could escape liability by claiming that he/she had
no real intention to agree to them.
o The major consequence of this approach is the presence of Parole
Evidence Rule. the written instrument is conclusive evidence.
(Article 2005 of Eth. Civ. Code)
• Subjective:/French Courts
o Subjective assent has little to do with external perceptions, but
rather is concerned with whether the parties each subjectively
intend to make the contract
o Searching for the real/actual intentions of the parties. Correcting
imprecise terms or incorrect figures where necessary.
o Concerned with the actual meeting of minds or literal intentions of
the parties.
o External manifestations of assent are merely taken as evidence of
the actual intent of the parties.
o It promotes freedom of contract: parties should only be bound
when they clearly and subjectively intend to be bound by the
contract.
o If the real intentions of the parties cannot be ascertained with
sufficient precision, then Civil Law courts (French) declared the
contract null.
• Are the two theories mutually exclusive? Rules of equity in English Law
allow some correction of contracts to give effect to the true intentions
of the parties; while the difficulty of discovering real intention on the
other hand leads a French Judge to give primary attention to the
declaration of the parties.
o So the two approaches may not be mutually exclusive.
o Judges are not endowed with divine power to know what the parties
really intend in entering to a contract. It is also difficult to know
whether parties have changed the true intention they had after the
making of the contract.

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o Courts do not love an objective theory of contract or apply it in the

process of interpretation merely because it is objective. They apply it
only when they find in fact that one of the parties understood the
words of an agreement in harmony with such interpretation and that
the other party had a reason to know that he did”
o Ethiopian Law is a kind of compromise between the two. The two

guiding principles under Ethiopian law on the issue of interpretation of
contracts are:
o Limitations on judicial interpretation: The court cannot make
a contract for the parties. It shall never invent a contract for
the parties under the guise of interpretation.
o Ascertaining the common intentions of the parties: In
interpreting the contract the court has to ascertain the
common intention of the parties and should not label as
common which is only the intention of one party.
Modes of Interpretation
• Literal Interpretation:
o Article 1733 provides that when the provisions of a contract
are clear, the court may not depart from them.
o The courts duty here is to determine the legal effect of the
contract and not to interpret it.
o Inquiry into the actual intent of the parties is prohibited.
o The remedy for a person who claimed his intention is
incorrectly stated is to require invalidation of the contract
o The court cannot make a contract under the guise of
interpretation
o Justifications:
Security of trade If the courts try to interpret while the
contract is clear then security of commerce will be at
stake.
Theory of declaration: Ethiopia is following theory of
declaration of will and if the contract is clear the judge
should not look into the real intent of the parties.

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o This is similar to the objective test that is used in Common

Law.
• Common Intention:
o Once the term of the contract is found ambiguous the court is
expected to interpret to find the true meaning.
o The main objective of interpretation is to discover the
common intentions of the parties.
o This is in line with the subjective method of interpretation.
• Interpretation in accordance with Good Faith:
o Good faith should mean that no party to the contract intends
to deceive the other party by intentionally making the
provision of the contract vague, ambiguous, silent or
contradictory.
o Had any party knew the problem, it would have been solved
then and there
o No party wanted the problem of interpretation to arise but
because of the above imperfections, interpretation becomes
necessary.
o Article 1732 reaffirms the rule we discussed under Article
1713 together with the added guidelines of loyalty and trust
in business relationships.
o One will assume that the parties intended their relations
governed by good faith, expected of a reasonable man
o Good faith and usage are meant to fill gaps created by
ambiguous words.
o Usage is jurisdiction specific (Coffee growers in Sidamo and
khat growers in Awaday)
o Example: 1 kg. khat in Awaday and Bahir Dar ( the way its
measured is different).
• Interpretation in Accordance with General Terms
o A contract shall be deemed to relate to such matters only on
which it appears that the parties intend to contract, however,
general the terms used.
o Example: Law Professor asked to teach economics for the fact
that he is hired as a ‘professor’ and is stated to teach courses

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he is assigned to. He is a law professor and the agreement is

only to teach law and not teaching every course.
o Contract between American and Ethiopian for the sale of
American’s property. Later on the Ethiopian guy demands
delivery of the American’s property all over the world. Both
parties in Ethiopia at the making of the contract and American
guy has property in Ethiopia.
o You insured your Addis Ababa house on the basis of a
declaration that “…you never had any fires before…”. Later
the insurer discovered that you had a fire accident on your
house in Awassa ten years ago. So evidence of intention and
insurance usage show that the term “…never had any fires”
should be restricted to mean “in my insured house” and not in
the different houses I own across the country.
• Interpretation in Accordance with the Context (Article 1736)
o The provisions of a contract shall be interpreted though one
another and each provision shall be given the meaning
required by the whole contract.
o A stated ‘…i sold my furniture such as chairs, wooden shelf,
cupboard, and the like for 7000 birr to B. B later demands
delivery of the bed, refrigerator, Television, Laundry machine,
wooden buffet
o “A” has a small sanctuary whereby he used to protect certain
species of animals; among them are bears, monkeys, apes
etc. And an insurance company concluded a contract of
insurance in that it will insure the liability A may incur
because of the animals he kept in the zoo. In such cases, if
there is a phrase which says “bear liability”, does this mean
the liability in respect of bears (those dangerous animals) or
simply to say the synonym of to be responsible? The answer
depends on the context. The insurer does not cover the bear
liability of the zoo owner: mean that the insurance does not
cover the risk generated by these dangerous animals.
Whereas the sentence which says “the owner of the zoo will
not bear liability” mean that he is not responsible”.

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• Positive Interpretation
o Provisions capable of two meanings shall be given the
meaning that will render the contract effective.
o When there are two meanings for a certain word and one of
them will make it effective and the other not, the court should
give a meaning which will make the contract effective
o This is relevant to secure the positive attitude of the society
towards freedom of contract and contracts. If most contracts
that come to the court are to be invalidated as result of
negative interpretation, people may lose faith in contracts and
the legal system.
o It is in the general interest of the economy that contracts are
implemented rather than we open too many ways (cases)
where they may be avoided.
o Policy wise also it is generally much better to try and bring
contractual agreement to its end rather than try to reinstate
the parties in their position they would have been had they
not concluded a contract.
o Eg. The principal (P) gives the Agent (A) a general authority
regarding “mans trade activity”. Public Prosecutor says it is
slave trade and human trafficking and the parties state that it
is a business activity that any reasonable man can do. Which
meaning should the court has to give?
o But then, can the judge reconstruct or rebuild a clause which
was badly drafted in order to give it a meaning? The answer
is NO under Ethiopian Law. Articles, 1714(2), 1733 and 1763
of the civil code.
• Interpretation in favor of the Debtor
o Cases of doubt should be interpreted in favor of the debtor or
against the party who stipulates the vague or ambiguous
term.
o Known in latin as “verba contra stipulatorem interpretenda
sunt”
o It is only in case of doubt
o Rational behind for this rule:

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o The party who offers (stipulates obligations) makes more

emphasis in advancing his own interest.
o The elements (terms) of the contract which led to doubt are
inserted in the text of the contract are by the party who
stipulates obligation. At least he is the first to create the
trouble and should be punished for that.
• Partial Approach (Gratuitous Contracts)
o Where the contract is a gratuitous contract it shall be
construed or interpreted narrowly.
o This could also fall under Article 1738 as the benefactor is the
only debtor of the obligation.
Rules of Interpretation Under Ethiopian Law: Summary
o Discretionary:(1734-1737)
The court may use any of them as it thinks fit.
Interpretation according to context
Interpretation in accordance with good faith and usage
Interpretation of general terms
Interpretation by reference to conduct
Positive interpretation
o Mandatory: 1738-1739)
Are intended to be applied in the event no solution is found by the
application of any of the other rules of interpretation.
Interpretation in favor of the debtor
Interpretation in favor of the adhering party

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Performance and Variation

I. Performance
o Performance is discharging of resultant obligations by a party
o It’s the most common & desirable way of extinctions of obligations
o It is also an effect of contracts
Standards of Performance
o Satisfactory/complete performance:
• where the obligation can be perfectly and completely
performed.
• Some kinds of obligations can be performed to the highest
degree of perfection in this case
• Example: Payment of Money debts, delivery of documents,
delivery of goods
o Substantial performance:
• some obligations are difficult to perform them perfectly due to
their nature and the ability of human beings.
• There will be slight deviation in what was promised and what
is performed.
• It is a performance short of complete performance in minor
aspects but will not deprive the promisee the material part of
the consideration.
• Example a building that deviates slightly from the
specifications
o Breach of contract:
• is the case where the promisor fails to reach the degree of
perfection the other party is justified in expecting it under the
circumstances
• the promisee is entitled to bring action based on non-
performance.
1 Law of Contracts Lecture Notes: Performance & Variation of Contracts

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Who should pay?

o Logically, performance should be by the party who undertakes to
perform a certain obligation.
o Contracts may impose variety of obligations on the debtor and this
variety will lead us to make a distinction when personal performance
is necessary for the creditor or not.
o The debtor or someone authorized by the debtor, court or law
o Peculiar to Ethiopian law/not common in other civil law systems
o Exceptionally the debtor may be required to perform his obligation if:
• this is essential to the creditor: performance by some one
else is not equivalent. These kinds of contracts are entered in
consideration of a person
• has been expressly agreed:
o This personal performance is dependent up on whether the obligation
is an obligation of means or that of result
• Obligation result: it is not essential whether it is performed by
the debtor or a third party. Personal performance exists in
obligations of result when it expressly agreed.
• Obligation of means: personal performance is essential to the
creditor and performance by some other person may not be
equivalent to performance by the debtor.
Who is qualified to Receive payment?
o Logically, payment should be to the creditor.
o The law says payment should be to:
• creditor or
• third party authorized by the creditor, court (Arts. 213, 950)
or law (204, 947)

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o Performance to the creditor may not always be valid. Example when

the creditor is incapable (minor) performance will be valid only to the
extent the creditor benefited.
o Payment to unqualified creditor is not valid but exceptionally it can be
valid. Such cases include:
• The payment benefits the creditor: A owed B 50,000. In
another transaction B owed C 50. If A pays C 50,000 that
benefits B.
• The creditor confirms existence of payment: (Arts. 2190,
2192)
• Payment to apparent creditor: this is payment to a person
with valid title
Certificate of heir annulled after payment
Documents evidencing power of agency revoked but not
collected
Holder of negotiable instrument
o In all the above cases the debtor should be in good faith. If he is
warned not to pay but do so, he will bear the risk.
o When there is a doubt as to the creditor the debtor may refuse to pay.
If there is a doubt as to the creditors, then the debtor pays one of
them at his own risk.
o Article 1744 should be interpreted in light of Articles 1780-1783
What Constitutes Performance (Arts. 1745-1748)

o What must be given is what was promised. What must be paid is what
was agreed at the making of the contract.
o A contracting party cannot deliver something else than the one agreed
even if the thing delivered is of a greater quality than the promised
thing. Example: A agreed to deliver 10 bottles of Ethiopian Acacia

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Wine to B. But A delivered South African Wine with superior quality.

B can refuse payment.
o This is reaffirmation of the principle of pacta sunt servanda (Article
1731).
o The court does not have power to authorize the debtor to deliver
something else than agreed at the making of the contract.
Partial Payment (Article 1746)
o The creditor may refuse part payment when its fully due and
liquidated.
• Due: Matured
• Liquidated: certain as to the amount
o Accepting part payment is a simple possibility open for the creditor.
o The idea is the creditor may not be forced to give an extended delay
for non-performance. This is because it may have adverse effects on
the creditor. Example: the creditor will lose surety as in the sense of
Article 1928(2) if it gives extended period for performance without
being authorized to do so.
o When part of the debt is contested, the debtor shall pay such part of
the debt the creditor is willing to accept. This will avoid a kind of
blackmail exercised by powerful debtors.
• Example: Salary (wage), maintenance
Fungible Things (Art. 1747 & 1748)
o Fungibility is a criterion of interchangeability. It implies the two things
are identical in specification where individual units of a commodity or
a good can be mutually substituted.
o It assumes everyone values all goods of that class the same.
o Fungible goods are goods that are indicated in the contract by using
generic terms such as pasta, teff, wheat, barely, corn, sugar etc.
o When fungible things are due the debtor has to deliver a thing of
average quality

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o The right to choose is the right of the debtor unless agreed otherwise
o When fungible things are due the contract is not express enough but it
can be interpreted in favor of the debtor and the debtor will choose
the thing to be delivered
o Example: 100 quintals of teff and nothing is mentioned as to its
quality, then average quality should be delivered.
o Article 1747 is a gap filling provision to evade the supreme sanction of
nullity of a contract based on insufficient definition of object of the
contract as in the sense of Article 1714.
• Article 1748
o is where insufficient quality and quantity is provided or where the
quality/quantity is not what is agreed by the parties. Under Article
1694 lack of concordance between offer and acceptance prevents
formation of contracts but once a contract is formed based on such
concordance the same is not required during performance of the
obligation.
o Hence once the contract is created the performance is not required to
conform exactly to what was promised.
o When the thing delivered, or performed is of higher quality than
agreed there is no problem. Its only problem when lesser quantity
and quality is delivered.
o Either different circumstances or the limited capacity of human beings
may result in discordance between what has been promised and what
actually is performed. In such cases the creditor may not refuse to
take delivery of fungible things on the ground that it does not exactly
conform to what has been promised in the contract unless he can
show that it is essential for him or expressly agreed in the contract.
• Example: A agreed to deliver 100-liter alcohol with 98%
alcoholic concentration to B, but delivered 95 liters with 95%

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concentration. Here the creditor cannot refuse it where it is

no essential for him or has been expressly agreed.
• In order to refuse he has to prove special interest and the
burden of proof is on him. His motive for refusal may be price
decline
• Special interest: the alcohol is for medical research and
application and a 1% deficiency will have substantial impact
on the result from the use of the alcohol.
• When it has been expressly agreed, the creditor can refuse
non-conformity. Even he can base his actions based on Article
1745 stating that it is not what was agreed.
o This provision should be read with Article 1713. Commercial usage
often indicates the maximum amount of deficiency that can be
tolerated. Example 5% impurities in coffee market
o The sanction for this non-conformity is proportionate reduction of the
price when it was not paid or damages when it is paid
o Rational behind of Article 1748 is that the law seeks to ensure that
maximum number of contracts should be performed. The law
discourages the parties from taking as a pretext the smallest non-
conformity to avoid contracts.
o Articles 2287 & ff, Law of Sales, states minor and negotiable defects
will not be a ground to avoid the contract.
o Generally, Article 1748 is intended to cover small non-conformities and
avoids sever sanction of contracts through invalidation like in cases
of Articles 1694 & 1745 when there is non-conformity. And in fact, it
is a very good judicial policy.
Transfer of Risk (Art. 1758)

o Transfer of risk is what logically comes to our mind after we discuss
time of performance.

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o Transfer of risk is dependent on time of performance.

o Transfer of risk is an issue only in contracts that involve transfer of
ownership. It is not a common characteristic of all contracts.
o The principle is res perit dominio. Risk always follows
ownership/possession. The possessor who physically holds the thing, is
the person most suited to ensure its protection. So the rule linking the
burden of risk to the delivery of the thing is perfectly logical.
o The same rule applies where the person who has to take the thing is
given an official; notice to take the thing. In this case, even if the
possession remains with one party the risk will transfer and operates
against the other nevertheless.
II. Variation of Contracts

o Variation is making amendments to the provision of the contract.
o Variation normally becomes necessary when there are change of
circumstances.
o The problem of variation of contract addresses the situation where
there is a change I the balance of the parties’ contractual obligations
after the contract was concluded.
o This change leads to obligations which are not performed as a party
thought they would be more expensive or more difficult to discharge.
o This party cannot claim a ground for annulment or cancellation of the
contract by basing his defense on the ground of vices of consent nor
the existence of force majeure.
o The contract is legally speaking without defect. In practice, however,
the case appears where in the course of the contract, the parties’
obligation become too heavy or unfair, at least in the opinion of that
party.
o Example: Tatek, a farmer around Debre Berhan, enters into a
contract with Miki cafeteria, for the delivery of 10 liters of milk

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per a day for a price of 5.00 birr per unit. The contract is to last
for three years. But there appears a rate of 50% inflation in the
first year of performance apart from the increase in the price of
fodder for the cows of Abdu. Can Tatek ask for an increase of the
price by 100% to 10.00 birr per liter, or obliged to stay with the
price of 5.00 birr?
o Here there is no fault on the part of the farmer, but he is under severe
economic advantage, while the cafeteria is profiting from the situation.
Can the court make or allowed to vary the contract to make it fairer or
equitable?
o In all these situations the court cannot modify or vary the contract or
alter its terms.
o This is an echo of the prohibition to amend the object of contracts
under the guise of interpretation as in Arts. 1714(2), 1733. The same
guideline is given for the judge under Article 1710.
o So, the contract will not be invalidated (Art.1710) or varied (1763 &
1764) for the mere fact that there is an imbalance in the obligations of
the parties.
o So the rule is that only parties themselves can vary the contract.
o The principle is immutability of contracts. Courts have no an inherent
power in modifying the agreement of the parties as set out in in Arts.
1714(2), 1733, 1763 of the Civil Code.
o But there are exceptions to this principle and there are cases where
courts have delegated power in varying contracts.
o Maintaining the balance of the contract is restricted to the cases of
1767 and 1768 of the Civil Code.
o These exceptional cases are:
• Special Relationship between the parties (Art. 1766): in case
there is a special relationship between the parties courts can
vary the contract. Example: a boy of 15 years is employed by his

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uncle and is still paid the same salary as he was a minor. He

feels that he cannot ask for the salary increase because of the
special relation and confidence. The law puts a simple possibility
on the judge and not an obligation. The type of relationship
envisaged in this provision should also be understood
restrictively. The provisions allowing judicial variation are
exceptions and should be taken restrictively. So special
confidential relationship should be construed as narrowly as
possible and better to give remedies based on defects in
consent.
• Contracts with public administration (Art. 1767): a government

has a legislative and policy making power that may enable it to
change the balance of the contract in its favor, whether intended
or not. But generally this happens that the balance of the
contract is affected where the government or administrative
agency is pursuing a general policy objective and the imbalance
is incidental. The situation is much worse in countries like
Ethiopia that claimed to be developmental state where the state
interferes in each and every socio-economic and political activity.
The government has greater role in manipulating the contract.
Were it not for the above provision entering into a contract with
an administrative agency would have been risky. The above
provision, therefore, gives the person contracting with
administrative agency a privileged position in that s/he can
require modification.
A private transporting company concludes a contract of
transport for a certain orphans school, at 10.00 birr per
day per child. This contract is subjected to a 10 % tax. If
later on the government raises the tax to 25% for the

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entire economy, it will affect the balance of the contract

and modification may be demanded through court of law.
The same will hold true if A undertakes, in a contract with
state of Oromia, to provide transportation service between
Harar and Dire Dawa. The government establishes a new
gasoline tax or requires the payment of charge for the use
of a bridge between the two cities.
Sunshine Construction P.L.C. entered into a construction
contract with Ethiopian Road Authority to construct 180 km
asphalt road for birr one billion. At the time the contract
was concluded asphalt used to be imported custom duty
free but few months after twenty five percent custom duty
taxes was imposed. The contract may be varied.
• Partial impossibility of Performance (1768): To maintain the balance

of the contract, the judge may also reduce the obligation of one
party where the other part’s obligations have become impossible in
part. This is where the impossibility is not sufficient to justify
cancellation as in Art. 1788. There is no also a ground to invalidate
the contract. If the obligation is partly impossible at the making of
the contract the remedy is Art. 1813. Thus Art.1768 applies if
impossibility occurs after the conclusion of contract and if such
impossibility never leads to breach of fundamental provisions of the
contract as indicated under Art.1785.
Example: For example, in a contract of sale of 200 quintals
of coffee if hundreds of them are damaged the court may
require the buyer to receive the remaining hundred and
make proportionate payment. Notice that Art. 1748 is in
conformity with Art. 1768. Likewise the application of
Art.1768 should be limited to fungible things so that it
should not contradict with Art.1746.

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• Period of Grace (Art. 1770): the Court may also extend time of
performance for a maximum period of six month. This extension
has to be given when contract does not exclude the court from
giving grace period. Moreover; the court must make sure that
such extension of time causes little influence on the creditor and
such influence is financial compensable. In other words the court
must conclude that cancellation of the contract and giving of
grace period will have equivalent consequence on the creditor. In
general Article 1770, allows the court to grant such period of
grace subject to the following conditions;
It must be justified by the position of the debtor, i.e. serious

economic difficulties, for which the debtor himself is not
responsible.
It must be dictated by equity. Here both the situation of the
debtor and the creditor has to be considered as equity is
common sense, justice, fairness and the respect for the right
of others.
The court must exercise all necessary care: this is a great
deal of restraint in granting of the period of grace. In other
the granting is only in exceptional cases.
The maximum term allowed is six months.

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Non-Performance & Remedies

§ The provisions of the contract lawfully formed shall be binding on the
parties as though they were law. So there are remedial or punitive
sanctions for non-performance.
§ Non-performance could take several forms such as partial, total, defective
and late performances
§ Any purported act of performance by the debtor could be considered non-
performance if it fails to comply with the terms of the contract or contract
law provisions.
§ We said provisions of a lawfully formed contract are binding on the
parties as though they were law. So as laws put sanction/punishment on
citizens contracts will carry sanction on contracting parties too.
§ This is the normative effect/ principle of sanctity of contracts
§ Ethiopian Law provides for three remedies of non-performance:
§ Enforcement of the Contract (1776-1783
o Specific Performance
o Substituted performance
§ Cancellation of the contract (1784-1798)
§ Additionally, damage/compensation (1790-1805)
§ Enforcement and cancellation are mutually exclusive but damage could be
available with either enforcement or cancellation
§ Cancellation is a lenient remedy and in most cases, it will be accompanied
by damages this is because the effect of cancellation reinstatement which
protects the reliance interest of the creditor. But damages in enforcement
of the contract protects both reliance and expected interests.
§ Cancellation is different from invalidation of contracts:
§ The grounds: invalidation is caused by defects in the formation while
cancellation is the result of non-performance
§ Damage: in invalidation, the compensation is meant to put he
parties back to their original position before the conclusion of the
contract but in cancellation it is to put the parties in the position
they would have been had the contract been performed.
Law of Contracts Lecture Notes: Non-performance & remedies

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§ Default Notice
§ In order to exercise any of the remedies of non-performance the
creditor should put the debtor in default
§ It is demanding the debtor to perform his obligation under the
contract
§ So notice is a pre-requisite to exercise remedies of non-performance
and in no circumstance, save for thee exceptions, the creditor can
exercise remedies of non-performance without informing the other
party of his intention to demand payment
§ What if notice is not given? Would it preclude the creditor from going to
the court seeking any of the remedies? Why such a restriction on a
creditor who diligently performed his part? Is it fair?
§ The necessity of giving notice can be justified by the functions it is
meant to serve
o In an obligation to pay money it begins the accumulation of
interest for delay
o It is a reminder for the debtor so that he will be alerted and
aware of the consequences of his failure
o It will lessen the number of cases before the court
o Creditor cannot claim costs and fees (opening file, registrar,
judge, etc.) if the debtor is not put in default.
§ Failure to give default notice will not preclude the creditor from
using any of the remedies for non-performance.
§ Some scholars (Dr. Girma Gizaw) argue that the rule that requires
to put the debtor in default is unfair.
o In terms of the law both parties are equal: assumption of
contract law
o both have undertaken an obligation willingly and promised to
perform the same at some fixed date and place.
o If the time for performance has expired why is the creditor
obliged to give notice? He should be allowed to exercise any
of the remedies of non-performance.
o He stated that Article 1772 can rightly be actionable in two
ways:
2 Law of Contracts Lecture Notes: Non-performance & remedies

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o When the parties have agreed on the necessity of notice

before running to the court. This could be implied or
express agreement. They provide that the other party
cannot exercise any of the remedies before putting the
non-performing party in default.
o Secondly, when the contract is concluded for
undetermined period of time. Examples:
§ Contract of Loan without stating time of
payment.
§ Payment of price of the car without stating time of
delivery
§ Delivering a car without fixing date of payment of
the price. In all these the creditor, should give
notice to the non-performing debtor before
rushing to the court for utilizing any of the
remedies.
Form of default Notice
§ There is no formal requirement
§ It can be in any form as long as it shows the creditors intent to get
performance/remedies of non-performance
Time of default Notice
§ They shall be given when the obligation is due
§ Even if performance is late the debtor may offer, after being in default,
to perform is or her obligation and the creditor cannot decline
performance tendered by the debtor unless it is made after a reasonable
period of time fixed in the notice.
o Such reasonable time will be determined having regard to the
nature and circumstances of the case. Example in an obligation to
deliver a thing we have to see if the thing is in the hand of the
debtor or it is going to be manufactured.
o In a construction contract the time has to take into consideration
of the stage of construction and the time it will take according to
the business practice.
§ Setting time of performance has certain purposes:

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o In situations where performance of contracts would be useless

after a certain period of time, the creditor can avoid the
possibility of being forced to receive performance, which does not
bring him or her any economic benefit.
o By providing such period of time, the creditor can spare him- or
herself from the ordeal of going through judicial proceedings in
order to cancel the contract and he or she can unilaterally,
without there being any need to get the blessing of the court,
declare the contract cancelled
§ So the creditor shall give a reasonable period within which the
debtor will perform his obligation
o What is reasonable should be determined having regard to nature
and circumstances of the case. But to determine this period may
not be easy.
o When reasonable time is longer rather than wait for such period
the creditor will be better off if request judicial cancellation
provided that the conditions are fulfilled. Article 1787 stipulates
the same principle.
§ The notice should state that lacking performance he will cancel the
contract.
§ This will have two importance:
o This will preclude judicial intervention in the form of period of
grace (Article 1770)
o Up on the lapse of a certain period the creditor may unilaterally
cancel the contract. The only case the court may intervene is
about the reasonability of the time given and not about the
cancellation
When Notice is unnecessary
§ The obligation is an obligation not to do
o if the obligation was an obligation not to do and the party has
done what he should not have, there is no need for default
notice. The breach has already occurred and this will make the
notice pointless.
§ A sold his business for B and the seller agreed not to
open a similar business in the same vicinity. If later A

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did what he should not have, there is no need for

notice.
§ An artist agreed to perform only in A’s theatre only. But
later he was found to perform in B’s theatre. No need
for default notice.
§ Obligation is to be performed with in a certain period of time and
such period is expired/ Compulsory time…essential for the creditor
o Example: Addis Ababa University organized a conference n
International Law from November 20-23, 2016. It concluded a
contract with a Hotel so that the later will serve meals, coffee&
tea. But the hotel did not do that for the said days. There is no
need to give default notice.
o Birth day Cake, Weeding Cake…if the cake is not delivered on the
said date then there is no need for default notice because
performance after that date is not important.
o The contract’s compelling expression (must deliver on October 1st
by latest) or necessary implications (delivery must occur for my
birthday party on January 1, excludes the possibility/necessity of
giving default notice.
§ The debtor declared in writing that he will not perform his
obligation: this is the case of anticipatory breach. If the debtor
declares in writing that he is not going to perform the obligation,
then there is no need for default notice.
§ Notice is excluded by agreement of the parties: freedom of contract
o This is the implementation of freedom of contract principle of
Article 1711.
o By their freedom, the parties can disregard the permissive
provision of Article 1772.
§ Generally, default notice is not required if
o it appears from circumstances that the contract allows
performance only within that period of time.
o Parties agreed that default notice is not required
What do you understand from the readings of Article 1757(2), 1775(c) and
1789(3)?

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o 1757(2):Entitles the party to suspend his performance where the other

party clearly shows his intention not to perform the contract. The
intention is not required to be expressed in a particular way. This is
anticipatory breach.
o 1775(c): the same anticipatory breach is communicated to the other
party in the most formal way, in writing. In this case, there is no slight
doubt as to the intention of the debtor.
o 1789(3): when the anticipatory breach is communicated to the creditor
in writing this will be a ground for unilateral cancellation of the
contract.
Remedies of Non-Performance
I. Enforcement of the Contract:
• The debtor will either be forced to perform the obligation or the
creditor could be authorized to perform the obligation at the debtor’s
expense. Ethiopian law take a common-law approach in this regard.
• Accordingly, the court may order:
§ Forced Performance
§ Substituted (self-help) performance at the debtor’s expense
Forced Performance
• It is judicial remedy. A court order is necessary.
• Two elements should be fulfilled:
o The creditor's special interest
• Special interest typically exists when the consumer is supplied
with vital goods (water, electricity) or services (tele, post) by
monopolistic entity which excludes the possibility of getting
supplied or served elsewhere.
• Special interest is to refer to the importance of the obligation
to the creditor and the possibility of getting it discharged
otherwise.
• Forced performance can only be ordered where the person
cannot get the property or the work from any other place.
• This will lead us to make a distinction between unique and
non-unique things which will help us deciding whether specific
performance has to be ordered or not. If the thing is unique

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and cannot be found somewhere else/from some other

person, then specific performance can be ordered.
o Preservation of the debtor’s personal liberty
• The fact that thing considered under the contract is unique
may be sufficient to prove the creditor’s special interest but it
is not sufficient to get an order for specific performance.
• The order for specific performance should not affect the
personal liberty of the debtor.
• This seems to suggest that only an obligation to give could be
subject to this remedy. An obligation to do or not to do will in
all cases affect the personal liberty of the debtor.
• Despite the strict requirement the Civil Code has provided
with regard to the application of specific performance, the
Civil Procedure Code (Arts. 394 (payment of money),399
(attachment of assets),401 (eviction of person from
abuilding) & 402 etc.) seems to suggest that the application
of the remedy is not determined by reference to the form of
the obligation. In cases of obligations to do and not to do the
Civil Procedure Code provides mechanisms to put pressure on
defaulting debtor.
Substituted Performance:
§ In obligations to do, the actual performance of the obligation cannot be,
as a rule, be enforced without affecting the personal liberty of the debtor
which is, in fact, contrary to the principle of Article 1776.
§ In certain cases, the creditor may be able to perform or make perform
the debtor’s obligation to do. In such cases, he may have it performed at
the debtor’s expense if so authorized by the court.
§ This is also judicial remedy. A court order is necessary.
§ So, the court may authorize this self-help remedy at the debtor’s expense
if this is special interest to the creditor.
o Example: A concluded a contract with a garage to get his car
serviced for 5000 birr. The garage owner failed to perform his
obligation for reasons of his own. A put him in default and wanted
to get court authorization to get it serviced by C. C charges on

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hourly basis and the ultimate price C charges has become 8000 birr
including the price of spare parts. A can get his car serviced for this
price and ask for the expenses (3000 birr) from B.
§ The same rule applies when fungible things are due. The creditor will be
authorized to buy at the debtor’s expense.
§ This only concern is an obligation to deliver fungible things. In
commercial usage, such an operation is called purchase-in-replacement.
(See Article 2330 of the Civil Code)
§ When the thing due is specified and is held by the debtor, then Article
1776 will be applicable.
II. Cancellation of Contracts
§ Is a second option where a party failed to carry out the obligation under
the contract.
§ The essence of cancellation as a remedy for non-performance lies in its
legal effect. It will have reinstatement effect: parties will be put in their
original position before the making of the contract.
§ Cancellation may be a justified option for different reasons:
o A performance forced on unwilling debtor may be badly performed
generating further problems as to conformity etc.
o It could also be a source of delay and other problems
o Performance of the obligation may not be feasible at all.
§ In the case of total and definitive failure to perform an obligation the
cancellation of the contract seems unavoidable but the problem is when
there is delay in performance or there is defective performance
o Eg. Cases of Article 1748 (performance is not exactly to what was
expressly agreed), or Article 1770 with regard to delay in
performance or defective performance
§ Cancellation could be:
o Judicial
o Unilateral
o By operation of the law
Judicial Cancellation:(1784-1785)
§ The Ethiopian law recognizes the sweeping and retroactive effect of
cancellation and the same is not allowed whenever there is non-
performance.

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§ Why judicial Cancellation?

§ Pacta sunt servanda: contract is a law for the parties and they
should not escape from their obligations easily
§ The need for greater contractual stability: it is in the interest of
business
Article 1784
§ The court in deciding whether to cancel the contract or not should
consider the interest of both parties
§ When the creditor is only slightly/little affected by the incomplete
performance but the debtor will be gravely affected by cancellation,
then the court should not cancel the contract.
§ The good faith of the party requiring cancellation is also another
factor that needs to be considered.
o Example: Demand cancellation for defective/incomplete
performance while the real reason is decline in the price of the
thing sold.
§ Ethiopian law, therefore, recognizes the sweeping and retroactive
effect of cancellation and hence does not allow cancellation
whenever there is non-performance.
§ So the contract can be cancelled only when the interest of the
parties and the requirement of good faith demands it. But looking
into the provision it is not clear when the interest of the parties
requires that and what good faith means.
§ In addition to the above requirements the Civil Code stipulates that
the contract cannot be cancelled unless the non-performance relates
to the fundamental provision of the contract.
§ Fundamental breach is a breach which will deprive party of what he
is entitled to expect under the contract.
§ No contract shall be cancelled unless its essence is affected by non-
performance and it is reasonable to hold for such reason that the
party requiring cancellation of contract would not have entered into
the contract without the term which the other party has failed to
execute being included.

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Do you think the requirements under Article 1785 (1) & (3) are
cumulative?
o If we say cumulative: in addition to the fundamentality of the
breach “interest of the parties” and “good faith “will be considered.
o But when the fundamental element of the contract is affected that
is obviously against the interest of a party.
o So, the sole reason that the requirements under (1) will be
sufficient to cancel the contract
o The court’s refusal to order cancellation will not affect the right of a
party for compensation (Art. 1790 & ff) or other remedies (Art.
1748(2)(reduction of his own performance).
§ When the breach is not fundamental the court has to base its
analysis on performance or variation of contracts. Unless
exact conformity was essential or expressly agreed, a small
insufficiency in quality or quantity is not even non-
performance. The remedy will be variation.
Unilateral Cancellation: (1786-1789)
o The general rule that only courts can decide on cancellation of
contracts is based on the principle that a person should not take the
law into his/her own hands.
o But in certain cases, the creditor may unilaterally declare the
cancellation of the contract.
o Whether you go to the court or not the only feasible remedy will be
only cancellation of the contract.
Policy reasons for unilateral Cancellation
o Rapidity of business transactions
o Avoid delay and backlog of cases
o Whether you go to the court or not cancellation is the only option
o Freedom of contract. Parties using their contractual freedom may
state a provision to the effect of cancellation.
o Expiry of time limit
§ Non-performance after period of grace
§ Non-performance after default notice is given
§ Non-performance with in a specific period of time

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o Performance impossible: what if it was impossible at the making of

the contract? What if part of it is impossible? Is partial impossibility
a ground of cancellation?
o Anticipatory breach
§ In some cases, one of the parties may declare the
cancellation of the contract even before the obligation of the
other party has become due. This is cancellation of the
contract in an anticipation of the unavoidable non-
performance.
§ Example: a uniquely gifted pianist engaged in a contract a
year advance but who lost his two fingers in an accident. In
this case the possibility of cancelling the contract is
unavoidable.

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Damages (Arts. 1771(2), 1790-1805)

o Damages are the principal remedies of non-performance under
Ethiopian law.
o Both enforcement and cancellation can be insufficient remedies for
non-performance. It is proper to reestablish the balance of the
contract upset by the failure or the necessity to resort to forced
performance by payment of damages.
o Are both independent and collateral remedies
o The scope is restricted to what is necessary to repair (to make
good)
Establishing Liability (Articles 1791-1798)
o Whether at fault or not a party who failed to perform his obligation
is liable to make damages.
o Ethiopian law follows irrespective of fault principle.
o That is what makes it different from extra-contractual liability which
has fault as the major element. And the proof is easier in contracts
than extra-contractual liability.
o Under contract law the aggrieved party has to show:
§ Existence of the contract
§ The fact of non-performance
§ Injury/harm
• Force majeure:
o The occurrence must be unforeseeable: any event that could not
normally, reasonably be foreseen. If it can be foreseen, then
force majeure cannot be invoked as a defense
o The occurrence must be insuperable/overwhelming: it must be
absolutely and not only normally impossible to perform the
obligation. Where performance simply becomes onerous or costly
force majeure cannot be a defense.
o The standard of reference in both cases is ‘average person
placed in the situation of the defaulting debtor.
o The two elements are cumulative.
What is the difference between force majeure and impossibility?
1 Law of Contracts Notes: Damages

Getahun Walelgn Dagnaw
Lecturer, Debre Berhan University, College of Law
Adjunct Lecturer, Addis Ababa University, School of Law
LL.M Comparative Law, Economics & Finance (IUC & UniTo)
LL.M International Business Law (CEU)
LL.M International Economic Law (Kyushu University)
Bachelor of Laws (LL. B) Haramaya University
Email: getahun.dagnaw@gmail.com
§ Impossibility is a ground of unilateral cancellation and the

aggrieved party may resort to damages as well.
§ 1792 is applicable not only for mere impossibility but
unforseeability. So impossibility and unforeseeability are
cumulative requirements to raise the defense of force
majeure.
• Cases of Force majeure: Art. 1793
§ illustrative but non-limitative list of cases of force majeure
§ Article 1794 absence of force majeure
o Damages even in case of force majeure Articles 1797-1798)
§ Where the debtor is negligent and does not inform the
creditor the reason why he di not perform his obligation. In
this case the debtor has to pay the prejudice suffered by the
creditor due t that failure to inform the situations for the
creditor. Full damages are, therefore, not necessarily due coz
the court has to identify the damages that arise from absence
of information.
§ The second case where damage will be due even n case of
force majeure is where the debtor is already in default and
force majeure occurred after.
• Contractual Fault (Articles 1795-1796)
§ In contract law obligation of result is the rule and in case of
uncertainties it is for the defendant (debtor) to establish the
applicability of the exceptional provisions. And the claimant
has to prove fault of the defendant (debtor).
§ In these two cases the creditor needs to prove the fault of
the debtor.
§ These are cases of:
§ Obligation of means
§ Grave fault
Calculation of Damages (Arts.1799-1805)
• Once the liability for the debtor is determined the next question is the
amount of compensation to be paid to the creditor.
• Two types of damages:
o Direct Damages:
2 Law of Contracts Lecture Notes: Damages

§ Damages a reasonable, ordinary, and prudent person would

expect the non-breaching party to suffer from the breach.
o Consequential Damages:
o Damages are those beyond direct damages.
o Usually are the big damages the victim party wants to get
and the breaching party resists.
o Examples: loss of profit, loss of use of any work, loss of any
contract because of delay and cancellation
o Reduced value because of design or quality
Hadley rule: (Hadley v Baxendale):

Facts
o Hadley (plaintiff) has a milling business. And Hadley’s
(plaintiff’s) mill suffered a broken crank shaft and the
business needed to send the broken shaft to an engineer so a
new one could be made. In the meantime, the meal could not
operate.
o Hadley (plaintiff) asked Baxendale (defendant) to carry the
shaft to the engineer. Baxendale agreed and told Hadley that
it would be delivered the next day if it received the shaft
before noon.
o The delivery of the shaft was delayed by the negligence of
Baxendale, so Hadley did not receive the new shaft as early
as they should have. The business lost profits as a result.
o So, Hadley sued Baxendale for breach of contract and lost
profits.
Decision of Lower Courts:
o Lower Court Jury: Awarded Hadley 25 pounds.
o The Court of Exchequer reversed and ordered new trial,
award should not include lost profits.
Issues:
Under what Circumstances should the breaching party be held
liable for consequential damages?
Holding:
After breach, the injured party may recover damages reasonably
considered to arise naturally from the breach of contract or

damages within the reasonable contemplation of the parties at the

time of contracting.
So the Hadley Principle is stated as follows:
o When two parties have made a contract which one of them has
broken the damages which the other party ought to receive in
respect of such breach of contract should be such as may fairly and
reasonably have considered as either arising naturally, i.e.
according to the usual/normal course of things, from such breach of
contract itself, or such as may reasonably be supposed to have
been in the contemplation of both parties at the time they made the
contract as the probable result of the breach of it. That is to say the
debtor is only liable for the damages foreseen, or which might have
been foreseen at the time of making of the contract.
o If special circumstances under which the contract was made were
communicated to the debtor, and thus known to both parties, the
damages resulting from the breach of such contract which they
would reasonably contemplate would be the amount of injury which
would ordinarily follow from breach of contract under the special
circumstances so known and communicated.
o But if the special circumstances were wholly unknown to the
breaching party, he, at the most, could only supposed to have had
in his contemplation the amount of injury which would arise
generally, and in the great multitude of cases not affected by any
special circumstances, from such a breach of contract.
o Thus, the loss of profits cannot reasonably be considered such as a
consequence of the breach of contract as could have been fairly and
reasonably contemplated by both parties when they made this
contract.
Ethiopian Law
o Ethiopian Civil Code got an inspiration for Hadley rule and is not
based on French Law/theory of damage. “In order to decide how
much must be paid as damages, there is no need to start, as one
does in continental legal systems, from the actual injury that the
non-performance caused to the creditor. One begin by asking, more

abstractly, what injury one would normally expect from the failure
to perform the contract.” (Rene David).
French Civil Code: Where his nonperformance is not intentional, the debtor is
liable only for the damages that were foreseen or could be foreseen at the time of
the contract.
George Krzeczunowick: Does not agree on Rene David. Read Page: 149-150
o Article 1799: damage shall be equal to the damage which non-
performance would normally have caused to the creditor in the eyes
of a reasonable person.
o Therefore, the basic principle under Ethiopian Law 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.
o So the question is not how much the particular creditor has lost but
how much a reasonable person as the creditor would have lost as a
result of non-performance.
o A damage is considered “normal amount of damage” if it is possible
to assume reasonably that such circumstance has been
contemplated by the parties as the basic factor in the making of the
contract.
o The rationale behind of this rule: Only such contemplation before
the contract is finalized is enables a party to change the terms or
withdrew if the risk involves seems to heavy.
o So the criterion is an objective one. What injury one would normally
expect from the failure to perform the contract?
o In determining the amount several factors such as the professions
of and the relations between the parties and any circumstance
known to the debtor which surrounds the making of the contract
shall be taken into consideration.
o Examples:
o Employee (A), without good cause, terminates the contract of
employment he had with the Employer (B). He is normally
liable for what is foreseeable damages he has caused to (B).
If A is not a hard-to-get type of expert, it is not normally
foreseeable (B) will suffer continuing harm as a result of
being unable to replace (A). So, A is not liable for this harm.

o What is a is a rare expert and both parties knew that it is

hard to replace him?
o In doing so damages under general contracts departs from the
principle of damages in extra-contractual liability.
o Article 2091 of the Code on Torts states that damages due by a
person legally declared to be liable shall be equal to the damage
caused to the victim by the act giving rise to the liability.
Accordingly, the provision does not limit the amount of damage to
only foreseeable harms. In doing so Art. 1799(1) departs from the
principle of equivalence adopted under Art. 2091 of the Code.
o But there are exceptions to this rule. these exceptions are a return
to the principle of equivalence
§ Lesser damage (Art. 1800): Where the debtor can show that
the amount calculated under Art. 1799 is greater than the
damage caused to the creditor, then the debtor will be liable
for lesser damage, the damage actually caused to the
creditor.
§ Greater Damage (Art. 1801): the amount of damage shall be
equal to the damage actually caused to the creditor when the
debtor on entering into the contract was informed by the
creditor of the special circumstances owing to which the
damage is greater.
o A very important point to note is that in case of money debts, a
creditor is entitled to compensation at the rate fixed under 1803 &
1804 without the need to prove the extent of loss/damage he has
sustained as a result of non-performance. However, the creditor
may claim more compensation if the compensation to be assessed
according to 1803 & 1804 are not adequate for the greater
damage/loss he has sustained (see Article 1805).

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Extinctions of Obligations
Meaning of Extinction
o Stoppage or coming to an end of contractually created obligations.
Grounds of Extinction
o Performance
o invalidation
o Cancellation
o Termination
o Remission
o Novation
o Setoff
o Merger
o Limitations of actions
Performance
• The most common and most desirable way of extinctions of
obligations.
• That's why the law in the very first place provide performance as a
ground of obligations.
• This is the case where parties discharge their resultant obligations
in accordance with their agreement and the law.
• So it is not only effect but also a ground of extinctions of obligations
Article 1808
Two types of nullities:1
• Relative nullity (voidable contracts):
• Absolute nullity (void contracts):
Distinction between them:
• Ground for nullity: (consent and incapacity for relative nullity while
non-observance and form and object requirements for absolute
nullity)
• Interest to be protected: in the case of relative nullity the law
intends to protect the interest of the individual victim but in case of
absolute nullities the interest to be protected is public interest

1
For a detailed discussion of void and voidable contracts under Ethiopian law refer the following article.
Lantera Nadew, Void Agreements and Voidable Contracts, 2(1) Mizan Law Review, 2008

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• Possibility of confirmation: in relative nullities confirmation is

possible but not in the case of absolute nullities
• Limitation period: the limitation period to bring action for
invalidation is shorter in absolute nullities than relative nullities
• Who has the right to require invalidation: in case of relative nullities
only the victim can require invalidation but in case of absolute
nullities both parties and any interested third party can apply to the
court.
Who is interested party?
• Public prosecutor? Yes! But contract is a private relationship?
Article 42 of Civ. Procedure: the public prosecutor shall intervene
whenever his intervention is required by law.
Question: whether the legislative requirement of “his intervention
is required by law” is satisfied by the notion of “any interested
party”?
• Judge? No! but is he to tolerate before him an obviously invalid
contract?
Eg. A asks B to refund him back 2000 birr which he claimed he has
loaned her. B did not deny she received the money but refused to
pay. In the course of examination it appears that the money was
given in order to secure her consent to sexual relation. Because she
decided to break off that he asked her the money out of revenge.
Can the judge raise the issue of immorality and avoid the contract?
Solution: procedural-the judge has to bring the matter into the
debate.
Voidable Contracts:
• a contract which has effect but is liable to be deprived of its effect
at the option of the victim party. It’ll have effect until invalidated.
• Voidable contract will have effect until it is invalidated by the option
of the party whom the law wants to protect.
• A voidable contract is, therefore, a ‘sick contract’ that can be cured
or killed depending upon the option of the party the law wanted to
protect. (Lantera, 2008).
2 Law of Contracts Lecture Notes

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•If the victim arty waive the right to require invalidation of such
contract, the contract will be deemed to have been free from
defect.
Void contracts:
• a void contract is an act that the law holds it to be no contract at
all- a nullity from the very beginning.
• Conclusion of void contracts does not change the position of
contractants.
• It is, therefore, incapable of having effect according to its apparent
purport. It is considered to have no effect form the very inception.
It does not have effect by law not by invalidation.
• Such form of contract, therefore, cannot hold the term contract in
real sense as categorizing generally such an empty act under
contract is regarded as a contradiction in terms. As a result some
authors prefer to call it void agreement.
• Void contracts produce no legal effect. Neither party can sue the
other party for enforcement or base don that agreement.
• The defect affecting the contract is incurable and has no binding
legal effect.
• And invalidation of a void contract is equivalent to killing a dead.
§ Ethiopian law appears to intermingle the legal effect of void and voidable
contracts. The provisions running from Art.1808-1818 (dealing with
invalidation and its effects) appear to allow invalidation of a void contract
(affected by defect in object and form).
§ It ridiculous to talk about the invalidation of a non-existing obligation,
which is already invalid by the operation of the law, from the very
beginning. It is awkward to kill what is already dead. (Lantera, 2008).
When to ask Invalidation?

• Where the contract is not performed: as long as the contract is not
performed and the situation is unchanged there is no time limit to
assert invalidity. The victim party can refuse to perform the
obligation at any time.

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• Where it is performed/performance is underway: Two cases

o Generally 2 years from the ground for invalidation disappears
o Unconscionable contracts: two years from the making of the
contract. So the beginning of the two years period is different
when the ground of invalidation is under Art. 1710 of the code
§ Ethiopian law adopts very short period of limitation. Just two years from
the ground for invalidation has disappeared.
§ Rene David: this limitation period is applicable only for cases of defect in
consent as this is the only case where the ground for invalidation will
disappear. Other cases will be covered under Article 1845.
§ Jean Mark Baissus: there is no legal or textual ground to limit the
applicability of the provision. The coming of age of a minor is for example
the case where the ground for invalidation disappeared.
§ Where the contract is void the period will be governed by Art. 1845.
§ The fact that the contract is invalid does not mean that it will be
invalidated. There are cases where the contract may be upheld. These
are:
• Contract Confirmed: 1811
o Confirmation is where the victim party, knowing the defect,
decides nevertheless to maintain the contract.
o It concerns defect in consent and capacity
o It is possible after the defect is known and has disappeared.
o The effect is that the defect is removed from the contract.
o Do you think the confirming party is entitled for damages?
No!
• Partially maintained (1813)
o When part of the obligation is vitiated only that part will be
invalidated
• Putting an end to the action (1812)
o Where the contract is unconscionable the other party may put
an end to the action by offering to make go the injury.
o The door open to the plaintiff is so narrow that the defendant
can close it at any time by making go the injury, for instance
offering the true price or paying back the excess.

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§ The rational for these cases is because the legislature wants to limit the
number of invalidated and cancelled contracts.

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Novation
• Is substitution of an original obligation by a new one and the new
one different from the original obligation by its object and cause.
• It is an illustration of contractual freedom
• Two things about novation;
o Some thing new characterizes the new obligation.
o It has extinctive effect on the original obligation, former
obligation disappears with all its accessories.
Conditions of novation;
• Valid and already existing obligation: usually parties may seek
to save the life of an already null obligation by claiming that the
vice was covered by novation while in fact the object of the second
obligation is the first one. There should be a kind of link or
otherwise the second contract is just a new independent contract.
This rule normally works in the case of absolute nullities. Example
Sale of Kidney is substituted with contract of loan.
• The new obligation has to be valid; If the new obligation is
invalid then the original obligation will revive with all its
accessories.
• New object or cause: The new obligation should be different from
the original one by its cause or object. Example a thing should
replace payment of money; a contract of employment to contract of
partnership etc. When the change only concerns rate of interest,
place of payment, date of payment, the amount of debt, the
qualification of the contract, the currency in which the debt is
labled, etc . it is not novation.
• Intention to novation: (animus novadi) Novation exists when
there is unequivocal intention to novation. Novation may amount to
waiver of a right to ask a particular performance and hence cannot
be presumed. But there is no novation if the change only concerns
accord elements of the contract.
Effects of novation: (Art. 1807(c), 1827)
• The effect of novation is that the main obligation will be
extinguished.
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• Accessory obligations such as suretyship, preferential rights, or

securities in general, will also be extinguished.
Set-off
• Where two parties are debtor and creditors interchangeably in two
different transactions set-off will extinguish the obligations of
parties, at least to the extent of the lowest debt.
• Is a sign of developed and active economy. High level of set-off can
be observed in financial sectors, such as banks, credit institutions
and insurance companies. Eg banks with different branches.
• Most interesting manner of extinctions as it affects two debts at the
same time though one of them partly in many cases.
• Set-off is an exception to the rule of prohibition of part payment.
Such part payment thus automatically happens when the conditions
of set-off are present.
• It is also an equivalent of granting of preferential right of payment
even though he is non-secured creditor.
Example:
A debtor D is insolvent and has only 1000 birr to his name to pay
three creditors who each hold a 1000 birr claim against him. The
creditor who is in a position to compensate will in fact be
advantaged.
There should be an intention for set-off. The debtor has to request
for it.
Conditions of set-off
• Positive Conditions
o Reciprocity
o Liquidity
o fungiblity
o Maturity (due debts)
• Negative Conditions
o Special nature of the obligation demands payment and not
set-off. This includes the obligation to pay maintenance. This
is based on the idea that the creditor of that special obligation
has an absolute need for the money. The same is true in the
relationship between employee and employer.

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o Debts owed to state or municipalities: When the obligation is

owed to the state or municipalities set-off is not possible. This
prohibition is perfectly clear because debts owing to such
bodies are in the public interest and answer the needs of the
collectivity. An obligation owing to the state or municipalities
is not subjected to set off because the action by which the
state or municipality becomes debtor and the creditor can be
different. In such a case setoff can miss up the accounting
system of the state or municipalities.
o Restoring unjustly deprived thing: set-off will only occur
between parties who hold good faith debts. Allowing set-off
with debt owing unjust deprivation on the other hand entails
negative connotation of deprivation.
o Return of deposited thing: when the obligation is to return a
thing deposited. Here the obligation is to keep the thing
momently and it will be an abuse if it were to be used as an
argument to impose a set off.
• Set-off
o Legal
o Judicial
o Contractual
Merger
• Is the case where the position of debtorship and creditorship rests
on the same person. As it is not feasible to pay oneself the
obligation of the parties will extinguish at that point.
• The classical example is succession case where a son received loan
from his father. Later the father become deceased and the son
being the only heir inherits everything.
Effect of Merger
• Extinction of the obligation
• Merger will not affect the rights of third parties
Why merger is an exception?
• The obligation may revive where the merger comes to an end.

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Limitation of Actions
• Though the purpose and enforcement may be different, every legal
system provides for a time limit within which a certain action or
right has to be exercised.
• Period of limitation could be :
o Limitation of actions: in this case what is prohibited is
bringing any court action to enforce a certain right. It does
not bar the exercise of other self-help remedies if there are
any such as private dispute settlement mechanisms. (French
Formula)
o Limitation of rights: it will totally bar any right and right
cannot be enforced in any manner. (Italian Formula)
Which formula do you think is adopted under Ethiopian law?

Prof. Rene David:
The formula of the French Civil Code is that all actions are barred if not
brought within the time established by the Code. The Ethiopian Code
preferred the formula found in the Italian Civil Code, which provides that all
rights are subject to a ten-year limitation. This makes it clear that at the end
of ten years the possibility of raising a right as a defense to another action is
precluded as well as the possibility of asserting the right in an affirmative
action. The right created by the contract disappears by limitation; it cannot
be asserted in any way.
So from the above statement the drafter seems to intend that the formula
adopted under Ethiopian law is limitation of a right.
But Dr. Mulugeta Mengist disagreed with this position for the following
reasons:
a. the section of the civil code is entitled limitation of actions
b. Article 1845 bars only actions/Court actions
c. Article 1850 recognizes the possibility of exercising a right on
any available pledge, even if the right of action is barred.
d. Lastly, Article 1809 provides that a party who was incapable or
gave a defective consent may refuse to perform, even if
his or her right of action to invalidate the contract is
barred.

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Then, the question is What does one make of the above quote from
the drafter?
There are two possible explanations.
• First, it can be said that the intent of the drafter is not correctly
translated into words and since the text of the Civil Code is clear,
one cannot resort to the above quotation in order to determine the
intention of the drafter.
• Second, it might not even be what the drafter has intended to do.
This is because the above quote is taken from a book translated
from French into English by another author and the translator might
have himself created that error.
• The idea of limiting actions is justified out of several reasons:

o Where the creditor fails to exercise his rights over a certain
period of time the safety of legal relationships calls for a time
limit to be set by the law.
o Perpetual actions would create too much legal uncertainty
o If the creditor does not act for a long time it is to be assumed
that his right is extinguished by payment or any other reason.
o Let sleeping things lie; one has to see his situation stabilized
after the lapse of a certain period of time rather than let him
live in a perpetual state of instability
o Limitation is a simple technique of establishing extinction as it
rests only on the factual passing of a certain period of time.
o Generally, it creates security of commercial transactions by
eroding uncertainty,
o It avoids bafflement which might be created owing to loss of
evidence when time lapses
o It is deterrence on dormant contractants
o Under Ethiopian law, the right to ask performance or rights
based on non-performance will be extinguished if not brought
before the court in 10 years period.
o This is known as an extinctive prescription. (as opposed to
acquisitive prescription)

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o This is legal limitation period and cannot be either extended

or shortened by the parties.
Issues
• Starting point of the period
• Calculation
• Interruption
• Interpretation of bad faith under Article 1854
Starting Point
• Firstly when the obligation is due; The first starting point is based
on the idea that creditor cannot act until the date is due. This is
independent of the day of default notice as maturity date is
prerequisite for default notice.
• Secondly, where the rights under the contract could be exercised.
This includes cases where the contract is only enforceable after
notice
Annuities;
• Special point of calculation is provided with regard to annuities.
• The idea is the law does not want the debtor to be presented after a
certain period of time with an enormous amount of debt. The
explanation is convincing for the fact that;
• Another reason is that such annuities are often related to
maintenance cost and here the rule is that such payment does not
add up. Either the debtor really needs them or there is no reason to
believe he will not stake a claim immediately, or if he does not the
presumption that he can live without.
Calculation of Period of Limitation
• The rule of calculation is to omit the initial day from the count to
end the period to the very end of the last day of the period. One
looks for the day in the month and the month which the same
numeral as the day when the limitation started but ten years later.
• The calendar to be followed is Ethiopian calendar.

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Interruption and Suspension

• The debtor admits or acknowledges the claim by paying interest or
producing guarantee
• the creditor brings an action for the debtor to discharge his
obligations.
Bad faith (Art. 1854)
• A party in bad faith may plead limitation
• An innocent creditor may see his claim barred by limitation by bad
faith debtors
Effect of Period of Limitation
• Extinction of obligation
• Limitation has to be requested or should be brought as a defense

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• Merger happens when the position of creditor and debtor become one
and the same.
• An infrequent situation, the classical illustration of which is what
happens when the debtor inherits the estate of his creditor in which
the debt was included;
• Another is when the company redeems its own debentures: the later
are in the nature of a debt owed by the company and so it is
extinguished when the company buys it back.
• Merger is also commonly used to describe the situation arising when
two companies associate themselves to become only one, there again
merger happens in the meaning of fusion of the position of the creditor
and debtor of the same debt.
• Performance of obligation after merger is not actually realistic once the
creditor and debtor become the same performing certain obligation
towards oneself is actually absurd.
• Extinction on account of merger has limitations. It should not affect
the rights of third parties. This has got support from the principle of
privity.
• Example: The interest of a third party on a debt (such as interest).
• The extinction based on merger is imperfect as the obligation revives
when merger comes to an end.
• Example: Later discovered unworthiness of a successor; Separated
companies
Limitations of Actions
• Ethiopian law provides a period of time after the expiry of which a
contractual right is limited. This is known as extinctive prescription.
• Part of the Civil Code dealing with property provides another kind of
prescription, acquisitive prescription, a means of acquiring a new right.
This section is concerned with extinctive prescription. (Mulugeta M.)
• The rule of period of limitation is a principle by a holder of right who
does not claim it with in the period prescribed may lose his right and it
is a principle by which a non holder of right may acquire a right
provided that he has come up with the requirement of the law.
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• The idea of limiting actions is justified out of several reasons.

• Where the creditor fails to enforce his right over a certain period of
time, the safety of legal relationship calls for a limit in time to be set
by the law:
o Perpetual actions would create so much legal uncertainty.
o if the creditor does not act for a long time, it is to be assumed
that his action is extinguished by payment or some other form of
extinction- remission for instance or that he has waived his right
for a long time it is to be assumed his action is extinguished by
payment or some other form of extinction.
o One has to ensure that his situation is stabilized after the
passing of certain period of time rather than let him live in a
perpetual, state of stability. This is expressed in Latin maxim
“quiet non movere” which means “let sleeping things lie”.
o Limitation is also a simple technique to establish the extinction of
obligation as it rests only on the factual element of the passing
of time and it also makes easier the burden of proof for the party
claiming it.
o Making period of limitation as a means to an extinction of
obligation creates security of business transactions eroding
uncertainty among contractants.
o Avoids bafflement which might be created owing to loss of
evidence when time lapses.
o Its deterrence on dormant contractants is also considerable
purpose of extinction of obligation by period of limitation.

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• Under Ethiopian Law for invalidation, performance and non-
performance shall be barred after ten years, and this is the legal
limitation period.
• Starting Point
o Firstly when the obligation is due; The first starting point is
based on the idea that creditor cannot act until the date is due.
This is independent of the day of default notice as maturity date
is prerequisite for default notice.
o Secondly, where the rights under the contract could be
exercised. This includes cases where the contract is only
enforceable after notice
• Annuities;
o Special point of calculation is provided with regard to annuities.
o The idea is the law does not want the debtor to be presented
after a certain period of time with an enormous amount of debt.
This explanation is moderately convincing.
o Another reason is that such annuities are often related to
maintenance cost and here the rule is that such payment does
not add up. Either the debtor really needs them or there is no
reason to believe he will not stake a claim immediately, or if he
does not the presumption that he can live without.
• Calculation of Period of Limitation
o The rule of calculation is to omit the initial day from the count to
end the period to the very end of the last day of the period. One
looks for the day in the month and the month which the same
numeral as the day when the limitation started but ten years
later.
o The calendar to be followed is Ethiopian calendar.
• Interruption and Suspension
o The debtor admits/acknowledges the claim by paying interest or
producing guarantee
o the creditor brings an action for the debtor to discharge his
obligations.
• Bad faith Art. 1854

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o A party in bad faith may plead limitation
o An innocent creditor may see his claim barred by limitation by
bad faith debtors
• Effect of Period of Limitation
o Extinction of obligation
o Limitation has to be requested or should be rose as a defense
Chapter Five
Special Provisions Relating to Contracts
• As we have said before it is impossible for the parties to agree on each
and every detail of the contract. It is also impossible to give meaning
and effect for all the terms of the provisions of the contract.
• There are some contractual provisions frequently used and it is
important to give meaning for such provisions.
• Special terms of obligations or contracts are rationed to deal with gap
filling provisions; it includes certain mandatory provisions though.
• These includes: time provisions, condition, alternative obligations,
earnest and provisions as to liability.
Time Provisions:
• Contracting parties may provide the time of performance within certain
period of time without specifically stating the time.
• They may also provide the time in certain number of weeks, months,
or ambiguously on first, last, or middle of a month.
• The presence of different days in months in Gregorian calendar and
the presence of thirteen months in Ethiopian calendar might
continually and unexpectedly create gap as to time.
• Save for cash sale contracts and contracts whose very nature requires
performance of the obligation at the time of conclusion of the contract,
contracting parties usually stipulate time for the performance of the
obligation.

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• Obligations which are performed some time after they are created are
known as obligations on term. It is on such types of obligations that
the time provisions shall be applicable.
• Time of performance may be fixed in terms of days, weeks, months or
even certain range of time.
Benefit of Time
• The period shall be deemed to be fixed for the benefit of the debtor
unless otherwise agreed or circumstances show that it is also fixed
for the creditor.
• The creditor may not require performance before the expiry of the
period unless it is for his exclusive advantage.
Renunciation (Forfeiture of Benefit of Time) (Arts. 1866, 1868)
• Renunciation of benefit of time: when the benefit of time is fixed for
the exclusive advantage of the creditor may not require the
performance of the obligation prior to the date of performance. The
debtor may, however, waive such benefit of time by offering to
perform the obligation prior to the due date. Once the renunciation is
made, it shall be final and cannot be withdrawn. And payments made
prior to the due date cannot be recovered.
• Loss of benefit of time: Unlike the case of renunciation, in the case of
forfeiture the debtor loses the benefit of time by the operation of the law
against his will. Such loss of the benefit of time results from two grounds:
the debtors insolvency and the debtor’s act of reducing the values of
securities given by him to the creditor.
Condition
• Contracting parties can design their agreement in any way they like.
• Providing a condition upon the fulfillment of which the effect depends
is one way by which they exercise their freedom.
• This will help them cope with contingencies.
• Condition is an event situated in the future of which no one knows
whether it will happen in fact or not.
• In the case of condition, the uncertainty relates to the happening or
non-happening of the very event itself.

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• In this regard a condition is different from a term of no fixed date. A
term of no fixed date is a future event which is sure to happen, even if
the date is unknown. In condition the question is happening or non-
happening of the event itself while in the case of a term of no fixed
date the event is sure to happen though there is uncertainty as to the
date of its happening.
• Example: In a life insurance between an insurer and insured, the
former undertakes to pay a certain sum of money as compensation to
the beneficiaries of the insured upon his death. In this case, the
insurer’s obligation for payment of the compensation shall be invoked
upon the death of the insured. The event (the death of the insured) is
sure to happen but there is uncertainty as to the date at which the
insured will die. This is a term of no fixed date. But if the event is
labeled “if the insured dies before his wife”, this is a condition because
no one is sure that the insured will die before his wife.
• a conditional contract is one the existence or cancellation of which is
dependent upon the fulfillment or otherwise of an uncertain event. This
means, either the existence or the cancellation of the contract will
depend on the fulfillment or otherwise of the uncertain event.
• Accordingly, there are two types of conditions:
Condition precedent
• A condition precedent is the situation where an otherwise perfectly
valid obligation is suspended to the arrival of a future and uncertain
event.
• Had it not been the condition attached to it, the obligation could have
been executed from the very moment of its creation. The attachment
of the condition to the contract shall make the obligation dormant until
the time when the uncertain event (condition) is fulfilled.
• This implies that neither the creditor can require performance nor the
debtor be obliged to perform his obligations until the uncertain event
arrives.
• A condition precedent also known as suspensive condition.
• Examples:

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o In property insurance for burglary signed between the insured
and the insurer, the latter’s obligation for the payment of
compensation will be suspended until such time when the
property is robbed.
o If the parties to a sale contract agreed that the sale will take
place if the bank lends money to the buyer for the purchase, the
sale agreement will not take effect until the buyer secures the
loan from the said bank.
Condition Subsequent
• A condition subsequent is the situation where the contract is concluded
and performed, but it may be challenged by the arrival of a future and
uncertain event.
• The contract is effective from the very day of its conclusion and as
such produces the regular effects of contracts – the creditor is entitled
to claim performance and the debtor is bound to carry out the
contract.
• But upon the arrival of the uncertain event the contract ceases to
produce any effect whatsoever.
• Thus, the arrival of the future and uncertain event shall make the
already effective contract ineffective one.
• Examples:
o An elder brother undertakes an obligation to make a contribution
of 200 birr per month to his little brother until the latter secures
an employment. The obligation of the elder brother starts to
produce effect as of the time of its creation but ceases to
produce effect as soon as the little brother secures a job.
o A contract of lease of a house signed subject to the regular
payment of the rent by the lessee shall be performed from the
very moment of its conclusion. If the lessee fails to pay a
monthly term, the contract of lease is terminated and the leaser
shall possess the property and the lessee will be kicked out of
the house.
What if the parties agreement silent or vague about the type of condition?

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• The presumption is condition precedent. This goes in line with Article
1738. This is because the debtor’s performance of the obligation
cannot be invoked until the uncertain event has materialized.
Validity of Conditional Contracts

o Unlawful, immoral and Impossible Conditions
• Articles 1715-16 talks about the impossibility, immorality and
unlawfulness of the very obligation itself. But Article 1878 talks
about the consequence of the modality of an otherwise perfectly
valid obligation.
• Examples:
o Impossible condition: I will sell you my house if you bring
ten quintals of coffee from Mars. In this example, the
obligation created by the sell contract is perfectly valid but
the condition attached to its performance is impossible.
o Unlawful condition: A person promise to pay a salary to his
employee if the latter steals the trade secrets of the former’s
competitor.
o Immoral condition: The prospective employer promises to
employ the housemaid if she accepts sexual relations with
him.

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• So the question is, would the nullity of the condition bring about the
nullity of the main contract?
o Rene David: It depends on the importance of the condition in
relation to the whole contract.
o Baissus: the intention of the parties is necessary. If they
intend the condition (immoral, unlawful & impossible) is
central to their agreement the nullity of the conditions will
infect the whole contract. But if the condition was simply
accessory in nature to the entire economy of the contract and
it is immoral, unlawful or impossible then only the condition
will be void the main contract will survive.
o You can see also practical example under Article 879 of the
Civil Code.
o Article 879 even goes further and stated that no matter how
important and proximate is the condition to the main
contract, the nullity of the condition will not bring about the
nullity of the main obligation. The legacy will be executed as
unconditional.
• Contracting parties have the autonomy to attach any condition they

want subject to the limitations of Article 1878 &1879.
• Article 1878 prohibits the parties from attaching an impossible,
unlawful and immoral condition and Article 1879 bans attaching
conditions the fulfillment of which is dependent on the party only.
This is known as potestive condition.
• Thus, potestive conditions are types of conditions the fulfillment of
which is exclusively dependent on either of the parties to the
contract.
• A potestive condition can be divided in to two types – a condition
whose fulfillment totally depends upon the party who assumes an
obligation (potestive on the obligee), and a condition of which
fulfillment totally depends upon the will of the party who is entitled
to require performance (potestive on the obligor).

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• Article 1879 addresses the situation where a condition is solely in
the hands of the party who assumes the obligation, in other words,
in the hands of the debtor.
• It declares a case for nullity where the obligation is conditioned by a
condition which solely rests with the debtor, who may or may not,
arbitrarily, decide to fulfill it.
o Example: I will pay if I feel like I have to do it.
• The arrival of the condition is at his discretion.
• Hence there is no an enforceable contract as the creditor will be
powerless.
• The rationale behind of making potestive conditional obligations
void is because the party who assumes the obligation under this
condition is assumed not to have an intention to be bound, intentio
obligandi is missing. This devoid the contract of its binding nature.
• Bear in mind that the case of Article 1879 is a cause of nullity of the
obligation itself, and not only the condition.
But what is the condition is potestive on the part of the creditor

(obligor)?
• Potestive condition is acceptable when it is on the part of the
creditor. Here the debtor is bound the debt will not cease to exist
simply because the creditor does not claim payment. But a debt
cannot exist if the debtor is not bound.
• Article 1879(2) provides cases where liability for non-performance
is excluded. This can also be considered as potestive condition. In
such cases the contract lacks binding nature and is therefore null
and void.

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Alternative Obligations
o Among several ways the parties can exercise their contractual freedom is
providing alternative obligations.
o The debtor may assume alternative obligations where he is to discharge
either of the several obligations provided.
o Providing alternative obligations may leave gaps as to:
o Who will choose the obligation to be discharged?
o What would happen if one of the obligations is impossible?
o What if the impossibility is owing to the parties?
o Alternative obligation is that has as its object two or more presentations
and the discharge of one extinguishes the obligations of the parties.
o Is should always be with the agreement of the parties and it is not for the
debtor to impose an alternative where the creditor did not agree.
Otherwise it will be against Art. 1745 and hence non-performance.
o The obligations to be performed should not be less than two.
o The value of the alternative obligations may be disproportional and this
element is not necessary to say there is alternative obligations.
o The right to choose among the obligations to be discharged is for the
debtor, if not expressly agreed in the contract.
What if the right to choose was given to third party but the third
party failed to do so?
o One argument is that the object of the contract is not sufficiently defined
and should be considered void. But the third party should be liable to pay
damages.
o The other argument is positive interpretation. The debtor shall benefit
from such ambiguous situation and the contract should be given effect.
(Arts. 1737 & 1738)
Performance impossible
o Where the performance of one of the obligations is impossible the debtor
shall discharge the other obligation.
o Art. 1882 assumes the existence of only two obligations.
Law of Contracts Lecture Notes

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o Where the impossibility is due to the fault of a party who is not entitled to
choose damages shall be paid.
Earnest
o It is a payment of part of the price of the goods sold for the purpose of
binding the contract. It is a sum of money paid at the time of entering
into a contract to indicate ones intention and ability to perform the whole
contract.
o It is a testament for the conclusion of a contract.
o It can also serve as a ground for unilateral cancellation of the contract.
What makes earnest different from part payment? What if there is a

doubt as to money given? Whether it is earnest or part payment?
In doubtful cases it should be interpreted against earnest. Because it is a
special situation.
Consequence of Earnest
o Performance:
o Non-performance:
Provisions as to Liability
• You have seen that there are times when the parties may fail to
perform their contractual obligation.
• The Law has provided a remedies for this failure to perform as
discussed under Arts. 1771-1805 of the Civil Code. Nevertheless, the
freedom of the parties to set aside such gap filling provisions and
provide their own is permitted.
• Provisions as to liability are one the ways where such gap filling
provisions can be set aside.
• In doing so the parties may either extend or limit their liability subject
to the legal limitation of unconscionable contracts.
• The liability of the parties for the payment of contractual damages may
be amended by two specific clauses.
o A clause that affects the scope of the parties’ liability. In other
words, the parties are allowed, in fact with certain limitations, to
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Contract Law Lecture Notes
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make their liability more (Article 1886) or less (Article 1887 &
1888) than that normally provided for by Articles 1791 - 1798.
o A clause affects the amount of the compensation normally
derived from Articles 1799 to Article 1805 either by establishing
a penalty clause (Article 1889 - 1894) or by providing for other
sanctions (Article 1895). In doing so they set aside the amount
of damage that would have been due in accordance with Arts.
1799-1805.
Extension of Liability
• The parties may extend their liability stating that they will be liable,
even, in the case of force majuer.
• Normally force majuer is the situation where the non-performing party
may not be liable to pay damages. But using their contractual freedom
parties may extend their liability as stated above.
Limitation of Liability
• The parties may limit their liability stating that they will not be liable
unless they commit fault.
• Normally, the principle is irrespective of fault. But the parties can limit
this in the above way.
Can we imagine an extension of liability where the parties agree to change
the nature of their obligation from an obligation of means to an obligation of
result (see Article 1712 (2), Article 1791, 1795 and 1796)?
• Jean Mark Baissus; provides we can imagine an extension of liability
where the parties agree to change the nature of the obligation from
obligation of means to obligation of result. Despite such an opinion of
this scholar, there seems no single phrase under Article 1886 which
tends to allow extension of liability even in the cases of obligations of
means. Where the parties are changing their obligation of means to
one of result, the debtor is in effect undertaking to procure the end
result, which at times may amount to promising the impossible.
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Penalty Clause
• The parties often foresee the non-performance or the tardy
performance, and they themselves fix in advance the amount of the
indemnity which is to be paid in the case that happens.
• This is done by means of an agreement called a penalty clause; it is
ordinarily inserted in the principal act, but it is equally valid if it is
made afterwards, by a separate act.
• The penalty clause is, therefore, a contractual liquidation of damages,
which is made arbitrarily, because it is unknown in advance what the
real damage will be.”
• Penalty is an arbitrary contractual liquidation of damages. It is
arbitrary because it is fixed without knowing the extent of loss that
may be suffered by a creditor as a result of the non-performance.
• Penalty clause has advantages and disadvantages:
Advantages:
o Avoids lengthy discussions as to the amount of damages which
will have to be paid, and prevent parties from seeking judicial
assistance.
o It ensures enforceability of contracts. The amount may be such
that the debtor encouraged performing than to pay the penalty.
Disadvantages:
o If their amount is too low the defaulting party may prefer to
break his obligations, as he knows precisely how much this will
cost him.
o When the amount is two high it will encourage performance of
inefficient contracts.
Effects and Enforcement of Penalty
Right of the Creditor:

• Article 1890 puts a presumption against alternative obligations.
• Even where a penalty clause was provided for in case of non-
performance, the creditor may require and enforce performance from
the defaulting debtor.
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• Stated otherwise, the mere fact of inclusion of a penalty clause should
not limit the rights of the creditor to require the enforcement of the
contract. At his option, he may claim the penalty or even require the
enforcement of the contract.
• Unless it is agreed that the penalty is an alternative obligation, the
debtor cannot extinguish his obligations by paying the amount stated
in the penalty clause. He may, however, be entitled to require both
payment of penalty and enforcement of the contract, in some limited
instances specified by Article 1890 (2).
• If the creditor wants to require both the payment of the damages fixed
by the penalty clause and the specific performance of the obligation,
he has to show that the penalty was fixed either for delayed
performance or non-performance of a collateral obligation.
• In principle, therefore, the creditor will not be entitled to require
payment of the penalty and the enforcement of the contract
simultaneously. This is because the penalty clause will be interpreted
as covering any non-performance.
Conditions of Application-Article 1891
• The penalty is due every time that the creditor is normally entitled to
claim damages.
• This provision is cross referring to the application of the rules
governing the circumstances in which damages are due for non-
performance of the obligation Subject to the agreement of the parties
to extend, limit or exclude their liability, the ordinary rules governing
the admissibility of damages have to be observed as stated in the
general part of the law of contracts (Article 1771 - 1805).
• Accordingly, the creditor must put the debtor in default by giving
default notice of Article 1772 or prove the fulfillment of either of the
instances of Article 1775 in which case the debtor will be in default
without giving default notice. He may not be entitled to invoke the
penalty clause where the debtor proves that the performance was
prevented by force majeure (Article 1791 (2)).
• In case where the obligation of the debtor is one of obligation of
means, the creditor must prove fault or grave fault on the part of the
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debtor (Article 1795 and 1796). These and other similar requirements
set out under the provisions cited above must be satisfied before the
creditor is entitled to invoke the penalty clause.
• Even though the aforementioned conditions are fulfilled, unless there
is actual damage, a party is not entitled to compensation as it can be
inferred from Article 1801. Such condition is not, however, applied in
case of penalty. An exception to 1891 has been provided under Article
1892, which sets aside the condition to get compensation to be applied
to penalty. This provision shows that there shall be penalty even in the
absence of actual damage.
• Actual damage which is more than the penalty and less than the
penalty cannot be required. However, exceptionally actual damage
instead of penalty can be required if the damage is caused
intentionally or with gross negligence or grave fault.
• The underlying reason to provide a penalty clause is to be certain as
to the remedies of non-performance.
Variation of Penalty
• The court can vary the penalty clause only if there is partial
performance.
• His goes in line with the principle of immutability of contracts as
discussed Articles 1763/64.
• Allowing the power of variation provided when there is partial
performance seems to be justified on account of securing justice vent
at the expense of certainty. Ordering the whole penalty while there is
partial performance is actually unfair which begs correction even
paying certainty as a cost.
In what proportion is the court entitled to reduce the penalty in cases of
partial performance of the obligation?
Article 1893 does not state any rule of proportionality between the scope of
the part payment and the amount of the reduction; in other words, it is
technically possible a court may reduce the amount of the penalty clause
almost to nothing even though performance was very small. The court may
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not, however, set aside completely the contractually fixed damages. On the
contrary, if courts want to be very strict, they can systematically refuse to
reduce penalty clauses, even if performance is almost complete. Thus, this
article becomes what the courts make of it.
Invalidation
• A Penalty shall be of no effect the contract is invalidated.
• A contract will remain in force even if the penalty is invalidated. In this
case the creditor can resort to the provisions of 1790-1805.
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Solidary Obligations/Joint and Several Obligations

• Plurality of Debtors
• Plurality of creditors
• Obligations other than joint obligations
Plurality of Debtors (Solidarity of Debtors) Arts. 1896-1897
• The presumption is presumption of solidarity. The mere fact that
there are two or more debtors in a given contractual transaction will
make them jointly and severally liable. Hence, Ethiopian law favors
the creditor and goes against the principle of interpretation under
Art. 1738 of the Civil Code.
• German and French codes states the reverse. The French law favors
divided obligations. Solidarity arise in very limited cases where the
debtor is succeeded by several heirs or when solidarity is agreed.
Save for these exceptions the presumption is against solidarity. So
the foreign legislations protect the debtors in cases of doubt.
• Under Ethiopian law each debtor is considered as the debtor of the
entire debt. That is to say, each debtor is obliged as if he is the only
debtor.
• Ethiopian law choice is dictated by the idea of seeing contracts
enforced and not to see the creditor face the risk of insolvency of
the debtors and not to see the creditor’s claim divided among
several debtors.
• So the presumption is a pedagogical approach forcing up on the
debtors the meaning of enforceability of contracts.
• The debtors are jointly and severally liable.
• Accordingly, solidarity of debtors is an automatic by-product where
the number of debtors is just more than two.
Effects of Joint & Several Obligations (1898-1909)
Apart from the effects discussed above the fundamental effects of joint &
several obligations may be illustrated on issues res judicata, novation,
setoff, merger etc.
Res judicata
• What is res judicata? It is a doctrine that bars claims that has been
litigated before. It means a cause of action may not be re-litigated
once it has been judged on the merits. This is finality.
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• But what is the effect of res judicata on joint debtors? as provided

under Art. 1897 (2) the extent of plurality right is illustrated by the
fact that the creditor may assign some of his rights in respect of
one of the co-debtors and exercise it in respect of another. He may
also prosecute different debtors at different courts if necessary.
• So action against one of the co-debtors is not waiver of action
against another debtor.
• What is prohibited is action against the same person and not action
against every one-the co-debtors in the case at hand.
• Personal objections may not be extended from one debtor to the
other.
Notice
• Notice putting one co-debtor in default is effective against all and
interrupts limitation against all (1912).
• There is an implied reciprocal representation/mandate among the
debtors.
Void and voidable contracts
• Absolute nullity
o An action by one debtor benefits all the co-debtors
o It is a defense common to all debtors
• Relative nullity
o Only the victim debtor can benefit out of relative nullity.
o It is personal defense.
Payment & Limitations
• Any debtor may setup against the creditor defense based on total
or partial payment of the obligation or limitation.
• If payment is barred by limitation and invoked by one it will benefit
all. And if one of the co-debtors perform the obligation, others will
be released too.
• This based on the theory that co-debtors are bound as one.
Remission of Debt
• Is where the creditor without getting compensation liberates the
debtor in whole or in part.
• It may be general or special remission.
Law of Contracts Lecture Notes 2

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o General/total: all the debtors will be released. This is the

logical consequence of joint & several liability/solidarity.
o Special: only the debtor will be released & that will benefit
others to the extent of the debt in respect of which remission
is made.
o There should be specification by the creditor. Doubts will be
interpreted as if it is made in favor of all.
Discrepancy between the Amharic and English version:
• Amharic: the other cod-debtors will benefit to the extent of the
remitted debt.
• English: the other co-debtors will benefit if the debt would
ultimately rest on the debtor remitted.
Novation
• When the creditor agrees with one of the co-debtors to substitute
the original obligation with the new one all the co-debtors shall be
released. But how about the unequivocal intention required under
Art. 1828?
Set-off
• When one debtor make set-off with the creditors the others will be
released to the extent of the share of the party with whom set-off is
made.
Merger
• When one debtor becomes a creditor, the other co-debtors will be
released to the extent of the share of beneficiary of merger.
Duty among co-debtors
• Liability: failure to raise a common defense
• Duty to share in the debt
Duty of the creditor
• Substitution:
Joint Creditors
• Presumption (Art. 1910): against solidarity. The reverse of Art.
1897
• Joint creditors are not entitled to claim payment jointly and
severally.
• Each creditor can claim only his share of the claim.

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• It is not common and the only example is case of joint account
How do you see non-existence of solidarity under Art. 1910 and the
rule under Art. 1911?
• One line of argument: Art. 1911 is applicable only when there is by
creditors as to joint and several entitlements.
• Second line of argument: There is mutual representation/agency
relationship among creditors. So, the creditor is entitled to claim
payment in excess of his share on the behalf of other not as a
principal creditor but by way of representation.
Art. 1911
• Each joint creditor may require the debtor to pay the whole debt.
• Payment to one is effective to all
• Debtor can pay any of the creditor until informed not to do so.
• Art. 1911(3) Court action or simple notice? Two contradictory
meanings:
o Amharic: Simple notice is sufficient-tenable coz there is no
presumption of joint & several entitlement. This warns the
debtor from paying the joint creditor.
o English: judicial proceeding
Art. 1912
• The principle of unity of debt states that any act interrupting period
of limitation for one interrupts for the benefit of all.
Art. 1913-15
• The plurality link can be seen from the two provisions.
• Remission/novation by one creditor only affects that creditor.
• Although one creditor is considered as representative of the other
he cannot dispose the entire credit individually.
• Each co-creditor can do whatever is useful to the other co-creditor
but not any thing prejudicial. So, there is a limitation on one co-
creditor to represent the other.
• In case of set-off, the debtor can invoke it to the extent of the
creditor’s ultimate share in the claim, which has to be equal in the
absence of agreement (Art. 1916).

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Obligations other than Joint obligations

• Indivisible obligations: Art. 1917
o Is a character of the object of obligations?
o Where corporeal/ physical indivisibility is factually or legally
impossible. E.g delivery of horse, an obligation to construct a
house.
o If indivisible the debtor has to perform the obligation in whole
and not in part.
Question: Discuss the various effects of indivisibility when there are
more than two debtors/in case of plurality of debtors.
• Divisible obligations: Art. 1918 & 1919
o An obligation is divisible where it neither joint nor indivisible.
o The debt is divided into as many fractions as there are
debtors.
o There is no representation among co-debtors.
Question: Discuss various effects of divisibility incase of plurality of
Creditors?

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Suretyship
Definition and Nature
o A creditor may reinforce the performance of an obligation by requiring
either real or personal security.
o Suretyship is a form of personal security by which a person binds himself
for another already bound, either in whole or in part, as for his debt,
default or miscarriage.
o It is accessory in nature. And the obligation of the third party is
secondary in nature.
o The third party, surety, steps in and guarantees the performance of the
obligation of the debtor should the latter failed to perform the primary
obligation.
o So the obligation of the surety presupposes the existence of obligation of
principal debtor. If the principal debtor defaults the surety will step in and
perform the obligation of the debtor.
o A third party is introduced in the bilateral relationship of the debtor and
the creditor.
Advantages of Suretyship
For the creditor:
• Increase the safety of the creditor by entering into such secured
transaction. The creditor will have in fact two debtors for the same
debt.
• Encouraged to enter into riskier transaction as he will proceed
against the surety.
• It will enable the trader to enter into a buyer he does not know the
his solvency. Suretyship is a classic and extremely frequent in
commercial transactions. This is the case, mostly, in countries
where commercial information is standstill.
For the debtor:
• He will get credibility before the creditor.
• Is important to set up a new business or engage in new activity.
• Cheapest way of curing credits, getting loans,

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For banks and Insurance Companies:
• Encourages transparency in commercial transactions.
• Encourages the development of professionalism.
For the guarantor:

• The benefits are not evident.
• The effect of Suretyship is that the risk of not getting paid will be
transferred from the creditor to the surety.
• His chances of being refunded are slim, by definition, as he is called
to pay when the principal debtor failed to perform the obligation.
Formation of Suretyship Contract

• Consent of the debtor is not necessary. (Art. 1921) although he will
be asked to refund the surety later on. Suretyship contract can be
formed without a need of getting a blessing from the debtor.
• The Suretyship contract is a contract between the surety and the
creditor and the debtor is considered as third party in this regard,
or his consent is not necessary.
• It is an exception to the very general principle that a person may
only be obliged where he has given consent.
• The rationale behind to this exception is to protect the surety who
gratuitously undertook to discharge the debtor’s obligation. And
also the debtor has already consented to the principal obligation
and his duty towards the surety arises from the primary debt.
Characteristics of Suretyship
• Unilateral in nature (Art. 1920): Only the surety is bound by the
contract of Suretyship. There is no obligation by the creditor to the
surety.
• Accessory/secondary in nature (Art. 1923): As you can see from
the definition of Sureytyship there are two obligations. The first is
the primary obligation between the debtor and creditor and the
second is the obligation created by the Suretyship contract. The
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Sureytyship cannot stand by itself and it exists only in relation to
the former. In other words, the accessory cannot subsist without
the principal.
• Presupposes the existence a valid primary obligation. (Arts. 1926 &
1923). If the principal obligation is void, then the surety will be void
too.
• Consensual in nature (Art. 1920): Suretyship is always voluntary
and conventional.
• From the point of view of the debtor the Suretyship may be
conventional, judicial or legal.
o Judicial: when the debtor is required by the court to furnish a
security
o Legal: when provided under the law that the judge has
discretion to determine surety.
o Conventional: voluntarily by the surety.
Form of Suretyship
• It should be in written form. (Arts. 1725 (a) 1922(1) & 2003) & Art.
1727 & ff.
The essential rule is that a suretyship may not be presumed, it has to
be expressly given. It shall be expressed (Art. 1922(1)). Suretyship
is not presumed. It has to be expressly given. The rational is that
such security is dangerous for the surety as he takes the final risk
of default payment without expecting counter performance. So,
there must not be a doubt as to the identity of the debtor and the
debt to be secured.
Art. 1734…..interpretation??? And gratuitous contracts??
Where interpretation is prohibited by legal provision…
Interpretation in the case of gratuitous contracts.
• Maximum amount should be specified (Art. 1922(2)). A suretyship
must have limits and maximum amount must be indicated. It
ensures that the guarantor undertakes a calculable risk. If not the
sanction is that the Suretyship contract is void.
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• The guarantor liability depends on the way the primary debtor
performs and as such facts are beyond the situations control,
accordingly the law requires the surety’s obligation to be specified.
• If the maximum amount for which the surety is liable is not
provided the sanction is the contract of Suretyship will be void.
Question: How do you see the provision of Art. 1922(3) with the
traditional practice of securing employee’s loyalty? Art. 1925?
Would the surety be liable to pay interests and legal costs

beyond the maximum amount secured in the instrument of
guarantee?
o Art. 1930-Interests: he will be liable to pay interests to the
extent of the maximum amount provided in the instrument of
guarantee. He will not be asked more than that.
o Art. 1931- Legal costs: the rule is different from interests.
Provided that he has received sufficient notice that legal
action is going to be instituted, to be able to forestall them,
he will be liable to pay legal costs/ costs of proceeding.
o The provision addresses the situation where the guarantor
may pay the debt before an action knowing that the debtor
will not perform it and there is no valid defense to refuse
performance. It would be, therefore, unfair to make him pay
the legal costs without being informed as he could prevent
the costs by paying the debt. The creditor who does not
timely inform the surety will lose claim for legal costs.
o So Art. 1931 is a sanction against the creditor who does not
timely inform the surety as to his intention to bring action.
Limits of Guarantee (Arts. 1924, 1928)

• Guarantee may not exceed the amount owed by the debtor nor
contracted on more burdensome terms. (Art. 1924(1) & 1928(1))
• If it is more burdensome or extended beyond the debt owed by the
debtor it shall not be void but merely reducible.
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• The surety may undertake less or equal to the debt owed by the
debtor but not greater.
• The scope may not be extended by the agreement between the
debtor and the creditor. (Art. 1928) The guarantor’s condition
should not be worsened by posterior agreement of the debtor and
the creditor after the main contract. This variation may be:
o Content of the contract: the guarantor will not be liable for
the addition.
o Time of performance: if the creditor allowed the debtor an
extended time of performance than agreed in the contract the
guarantor will be released totally. But the period of grace
should be given before the obligation is due and the debtor
failed to perform it.
What Obligations Can be Guaranteed?

o Any valid primary obligation:
• Previously Suretyship was intended to cover payment of money
debts. But now any obligation can be guaranteed. If the primary
obligation is void the surety given will be void too. (Art. 1923(1))
• If the principal obligation is voidable it can be guaranteed provided
that the surety has knowledge of that. (Arts. 1923(2) & 1926(3)).
In case of defects in consent or incapacity, the surety will be
considered an accomplice as it is presumed that he knows the
debtor very well. But what is the debtor was insolvent at the time of
Suretyship contract? The Suretyship is valid unless there is fraud.
o Future/Conditional obligations
• Future/conditional obligations may be guaranteed. So it is not
necessary that the debt to be secured is in existence at the time of
Suretyship contract.
• Properly speaking there is no Suretyship until the obligation exists
but in the interim period the surety cannot withdraw his promise.
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Effect of Suretyship
The Moment of Action (Art. 1929)
• Refers to the time within which the creditor may ask performance
from the surety.
• It is about the period of limitation.
• Proceedings instituted against the debtor interrupt limitation
against the guarantor.
• The link between the debtor and the creditor plays against the
surety. Because any action by the creditor shows that he is diligent
and does not have an intention of not getting payment. The law
encourages diligent parties and punishes negligent ones.
(remember one of the justification for the idea of limiting actions)
Maturity of the Debt (Art. 1932)

• The surety should not be treated worse than the principal debtor.
• It goes to the extent that a date of maturity which isn’t any more
beneficial to the debtor (Art. 1868) still benefits the surety.
• The reason is that the guarantor has accepted the surety taking
into consideration of the agreed time between the debtor and
creditor for the maturity of the debt.
• When the debt is exigible after notice, then such should be given to
the surety too.
Types of Sureties
o There are two types of Suretyship.
o Distinction is based on the idea that whether the creditor can require
performance from the surety without asking the principal debtor to
perform the obligation under the principal contract.
Simple Suretyship (Arts. 1920 & 1934)
• The obligation of the simple guarantor subsides to the obligation of
the principal debtor.
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• He will be asked to preform the obligation should the principal
debtor failed to discharge the obligation under the contract. The
failure of the principal debtor is a precondition to ask performance
from the surety. That is non-execution of the principal obligation by
the debtor.
• Hence, the obligation of the simple guarantor is secondary one.
• But what the phrase “should the principal debtor failed..” mean?
o Soon after performance has fallen due? The debtor failed to
perform his obligation soon after performance has fallen due.
o After the debtor has been put in default?
o After the creditor brings action against the debtor and failed
to obtain performance? Not necessary!
• The basic distinction between joint-surety and simple surety is that
in the former the creditor can bring action against the surety even
without demanding payment from the debtor (Art. 1933). In simple
surety, the creditor may not sue the surety before demanding
payment from the principal debtor.
• So Art. 1933 shows what “fail to discharge..” under Art. 1920
means. The guarantor may not be asked to preform the obligation
before the due date. The debtor is deemed to have failed to
discharge his obligation if he does not perform is, in spite of the
creditor’s demand to that effect, after the expiry of a certain period
of time fixed for payment of the primary debt. So the creditor has
to put the debtor in default and has to realize the real securities
available, then he can ask the surety. He does not need to sue the
debtor first.
Joint Suretyship (Art. 1933)
• Is the case where the surety expressly describes himself as a joint-
guarantor, co-debtor or use equivalent terms implying joint liability.
• In such a case the creditor is entitled to proceed against the
guarantor even without demanding payment from the debtor.
• There is no principal difference between the debtor and the
guarantor.
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• It is, therefore, dangerous for the guarantor who may be asked to
perform the obligation of the debtor who still have assets to
discharge the obligation.
• Because of such consequences such type of guarantee the form is
important and should unequivocally show the waiver of benefit of
discussion.
Rights of Surety
• Surety, be it simple or joint, has certain rights (defenses) against
the creditor.
• Some of the rights are for simple surety only while others can be
enjoyed by both.
1) Benefit of Discussion (Arts. 1934(2), 1935 & 1936)
• Available only for simple guarantor (Arts. 1920 & 1934).
• Here the surety images himself should the principal debtor failed to
discharge the obligation.
• It is not to pay where the principal debtor arbitrarily refuses to do
so. It must really be the case where payment in kind through sale
of assets or realization of securities is impossible. It is therefore a
procedural delay before coming to the guarantor.
• The guarantor can compel the creditor to discuss the assets of the
debtor, realize securities and satisfy his claim out of the proceeds.
• The guarantor cannot simply exercise benefit of discussion and in
effect it is not easy to exercise benefit of discussion. The surety has
to do the following:
o Raising the defense at an earlier possible time when
proceeded first. (Arts. 1935(1) & 244)
o Cooperate with the creditor in indicating the assets of the
debtor. (Art. 1936(1))
o Advance some money to cover procedural costs of discussion.
(Art. 1936(1)).
o The debtor should not be a one that is declared bankrupt.
(Art. 1935(2))
But what if the insolvency is factual than judicial? Can the surety
exercise benefit of discussion?
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• Even if the surety cannot exercise benefit of discussion he may
avoid liability by showing that the bankruptcy of the debtor was not
communicated to him and the creditor is ware of such a fact. (Art.
1947).
• The guarantor’s liability shall decrease in proportion to the amount
of loss sustained by him due to the creditor’s failure to inform him
of the bankruptcy.
But what the guarantor will lose if not informed of the debtor’s
bankruptcy?
• The guarantor could have exercised rights under Art. 1748 if
informed the bankruptcy of the debtor in time.
Effects of failure to proceed (Art. 1937)
• When the creditor failed to proceed while the surety has done every
thing necessary, the later should be released from the obligation in
proportion to the assets thus indicated.
2) Acceleration of Action (Arts. 1938 & 1939)
• the guarantor may require the creditor to institute action within six
weeks and accepts payment.
• This is coz as time lapses the debtor may become bankrupt.
• If the creditor failed to do so the guarantor shall be released and
the creditor will be unsecured creditor.
• The surety may also tender payment rather than waiting for the
principal debtor. This may be the case where the debtor is not in a
position to perform it and there are no grounds to exercise benefit
of discussion.
• When the creditor refuses to accept payment and or handover
securities he enjoyed the surety will be released.
• Art. 1939(2) envisage the existence of both real and personal
securities.
Right of Indemnification and Subrogation (Arts. 1940, 1944 & 1971)
• Once he has performed the obligation of the principal debtor the
surety will have recourse against the principal debtor.
• This right of recourse may be before (Art. 1948-recourse by
anticipation) or after payment (Art. ).
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• Two sets of rights for the surety:
o Chirographic Action (right of indemnification) (Art.
1940)
§ Emanates from contract of Suretyship coz of the
mandate existed between the surety & debtor.
§ After payment the surety is entitled to claim indemnity.
o Right of subrogation (Art. 1944 & 1971)
§ The surety after payment will be subrogated to the
position of the creditor.
§ This is not coz of mandate relationship but coz he has
effected payment to the creditor.
§ The surety will exercise whatever rights have the
creditor against the debtor.
Can every surety ask for indemnity claim?
• Not every surety who has paid will be entitled to an indemnity
claim.
• The surety will not be entitled for indemnity claim where:
o He failed to raise defenses available to the principal debtor
unless such defenses are personal for the debtor. (Art. 1942)
o The debtor makes second payment coz the surety did not
informed him of the performance of the obligation. (Art.
1943).
Duty of the Creditor

• Handover documents evidencing the debt and payment of the
same. (Art. 1945)
• He has to make subrogation possible. (Art. 1946)
• Prove the debtors bankruptcy. (Art. 1947)
Plurality of Guarantors
o Counter Guarantor (Art. 1949)
• Guarantees the effectiveness of surety’s indemnity claim.
• Has no relation with the creditor.
o Secondary Guarantor (Art. 1950)
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• Will be required to perform should the simple guarantor failed to
discharge the obligation of the debtor.
o Plurality of simple/joint guarantors (Art. 1951)

• Art. 1951(1): for his own share (Art. 1934) & for the share of others
(Art. 1950)
• Art. 1951(2): Successive acts: he who binds himself in the second
place as a secondary guarantor.
• Art. 1951(3): jointly and severally liable
11
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Getahun's Lectures - Ethiopian Law of Contracts

Presentation · August 2022

Ethiopian Contract Law: Cases and Materials View project

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Law of Contracts Lecture Notes

The Law of Obligations

Haramaya University 1 College of Law

o Black’s Law Dictionary: a legal or moral duty to do or not to do

Haramaya University 2 College of Law

After the sale of his business. person undertakes an obligation not to

Haramaya University 3 College of Law

Is to create, vary or extinguish obligations

Haramaya University 4 College of Law

Haramaya University 5 College of Law

o Generally, contract law continues to change to meet new

Haramaya University 6 College of Law

Haramaya University 7 College of Law

Contract Law Notes

Contract Law Notes

What if someone signs on a blank paper later to be filled by a trusted friend?

Contract Law Notes

Contract Law Notes

Contract Law Notes

Contract Law Notes

Contract Law Notes

Vices of Consent and Available Remedies

1 Law of Contracts Notes

result in a common law court holding that there never was

2 Law of Contracts Notes

the theory of will is tempered by the doctrine of assent by estoppel.

3 Law of Contracts Notes

4 Law of Contracts Notes

o The mistake here as to what the subject matter of sale

5 Law of Contracts Notes

• A person rents a villa in the belief that it

• Mistake as to the person/ error in persona

6 Law of Contracts Notes

• A will quite truly declared may be induced by untrue external points

7 Law of Contracts Notes

o But invalidating mistake and of its knowledge by the other party

8 Law of Contracts Notes

enter into that contract. Determination of materiality is

9 Law of Contracts Notes

o Decisive fraud: deceived party wouldn't have contracted

10 Law of Contracts Notes

o Family relationships at least up to second degree

11 Law of Contracts Notes

o So, the standard is partly subjective and partly objective: would

12 Law of Contracts Notes

o It doesn’t apply if it is after the conclusion of the contract. In that

13 Law of Contracts Notes

o It is a respect for parents and superiors.

14 Law of Contracts Notes

Attorney and Consultant │All Federal Courts

Lecturer in Laws │Ethiopian Civil Service University

Contracts Law Notes

Object of the Contract

Attorney and Consultant │All Federal Courts

Lecturer in Laws │Ethiopian Civil Service University

Freedom of Contract and Limits

• There are exceptions to this freedom: limitations and restrictions

Attorney and Consultant │All Federal Courts