ADDIS ABABA UNIVERSITY

College Of Business and Economics

Notes on Business Law
I. Law of Obligations-Contracts
A. Contracts in General
The most famous epigram of Sir Henry Maine which states that: - “The movement of the
progressive societies has hitherto been a movement from status to contract” shows the importance
of contracts in the human relations and marks contract as a turning point in human history.
The principle underlying the law of contracts is “The Freedom of contract” (Art. 1711, 1763).
Consequently most rules of contracts are permissive: They only supplement the contractual
agreements. The application of such suppletory rules may be set aside through the parties
otherwise agreement.
Definition of Contract
Art. 1765 of the Eth. Civil Code defines contract: - a contract is an agreement as expressed in Art.
1680(1) where by two or more persons (as there is no contract with one self) as between
themselves create, vary or extinguish obligations of a proprietary nature.
A contract, being agreement, is not a paper on which it is written and signed. The paper is a means
of providing that an agreement was expressed. Agreement is a meeting of minds, the minds of the
parties to the contract; and the agreement is between two or more persons. There must not be only
one self, but this is not always so. (See Art. 2188, Art 2248 of the Civil Code). The contracting
persons can bind and entitle only themselves. This also is not always true (See Art. 1957 of the
Civil Code). The agreement is either to create, vary or extinguish an already existing obligation,
e.g. Art. 1825, 3307 of the code. The term obligation excludes creation of real rights. Formal
contracts creating or transferring real rights on immovable (Art. 1723) or any act (e.g. delivery; art
1186) creating or transferring real rights on movables are called conveyance.
The phrase “of a proprietary nature” excludes contracts such as betrothal, marriage, adoption etc…
which are obligation of status. They are not primarily of patrimonial or of pecuniary value. Art.
1676 states that the provision on contracts in general apply to all contracts whatever their nature is,
e.g. sale, donation, loan, contracts of bailment, contract of lease or hire service etc. and the parties

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thereto. Its provisions are common to all contracts including those governed by the commercial
code.
Formation of Contracts
Elements of a Contract
Every contract is an agreement but not every agreement is a contract. Art. 1678 enumerates the
essential elements of a valid contract.
The requisites for the existence and validity of a contract, therefore, are the following:-
1. Capacity: - the parties must be capable of contracting and the capacity to contract is
included in the general capacity to act in law-legal capacity (capacity of persons civil code Art.
192 ff.).
2. Consent:- the parties must give their consent; a consent which is sustainable at law, a consent
which is not defective.
3. Object: - the contract must have the object. The object of a contract is the obligation it creates,
or varies or extinguishes. The object must be sufficiently defined and it has to be possible,
lawful and moral.
4. Form: - the contract must be made in the form prescribed by law if any. Form may be
prescribed for proving the contract or for validly making it. The term “If any” denotes that form
is not normally, an essential element of a contract because, normally, contracts can be validly
made on the basis of the first three elements that are mandatory. Form is optional. It would be
mandatory when the law prescribes a particular form.
The above elements of the contract are discussed in detail here under:-
1. Capacity:-parties to a contract may be either physical (natural) persons- the human beings or
artificial (fictitious) persons such as companies, corporations, ministerial offices, other
Government organizations, associations, NGOs etc… with the capacity to act in law.
A. Capacity of the physical persons
The general principle is that every physical person is capable of performing all the acts of civil life
unless he is declared incapable by the law. This is so because the human person is the subject of
rights from its birth to its death and every physical person as a person shall enjoy the rights of
personality and the liberties guaranteed by the Ethiopian constitutions. The capacity to do or
perform juridical acts (acts of civil life) is the inherent quality of personality and the distinctive
character of a human being.

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There are, however, disabilities and they are classified into general and special disabilities.

General disabilities are which depend on the age or mental conditions of persons or on sentences
passed upon them. The special disabilities are those which are prescribed by reason of the
nationality of persons or of the functions exercised by them as provided with in Articles 389-393.
General disabilities:-
 Due to the age of the person-minority
Minority is a cause of disability related to age. A minor is a person of either sex who has not
attained the full age of eighteen years. Minors, since they do not have legal capacity, cannot enter
into contracts. Minors shall be placed under the authority of organs of protection. Minors shall be
placed under the authority of guardians as regards the proper care of their persons. And as far as
concerning their pecuniary interests and the administration of their properties, minors shall be
represented by a tutor.
The disability of a minor shall cease on his attaining majority (the full age of eighteen years) or
being emancipated. Marriage and attaining the age of fifteen years with the decision of the family
council is the cause or the means of emancipation. (Cessations of disability Art. 328-330).
 Due to mental condition- Insane persons, the Assimilated ones and Infirm persons
Persons whose disabilities emanate from mental condition are insane persons. Insane persons fall
under the category of general disables, because their disability depends on their mental conditions.
An insane person is one who, as a consequence of his being insufficiently developed or as a
consequence of a mental disease or of his senility, is not capable to understand the importance (the
legal consequences) of his actions. (Art. 339).
There are assimilated persons to the insane. Persons who are feeble-minded, drug addicted
drunkards or habitually intoxicated and persons who are prodigals are the assimilated ones to the
insane persons.
Infirm persons like deaf-mute, blind persons and other persons who, as a consequence of a
permanent infirmity, are not capable to take care of themselves or to administrate their property
may invoke in their favor the provisions of the law which afford protection to those who are insane
persons.
Insane persons can be classified into two: - they are those who are notoriously insane and whose
insanity is not notorious. An insane person who is an inmate of a hospital or of an institution for
insane persons or of a nursing home by reason of his mental condition is deemed to be notoriously

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insane. In rural communes of less than two thousand inhabitants a person shall be deemed to be
notoriously insane where his family or those with whom he lives keep over him a watch and his
liberty of moving about is restricted by those who are around him. A notoriously insane person
shall be placed under the organs of protection (the Guardian and the Tutor).
Juridical acts of a notoriously insane person performed at the time and the place in which his state
of insanity was notorious may be impugned (challenged) by the person himself, by the
representatives or by his heirs unless the contrary is proved. His consent is deemed to be affected
by a defect which brings about its nullity. However in liabilities that arise extra-contractually a
notoriously insane person is considered as if he is a sound mind. It is similar in case of unlawful
enrichments.
Where an insane person, whose insanity is not notorious, is judicially interdicted shall be subjected
in respect of his person and of his properly to the same rules of protection as minors.
 Capacity of the bodies corporate and property with specific destination
Corporate bodies that have the legal personality and which can perform juridical acts are those
institutions regarded by law as person, as a physical person which is the subject of rights and
duties. They exercise all the rights and duties which are consistent with their nature. E.g. the state
and its organs, other administrative bodies such as Ministries, authorities, commissions, offices,
agencies and corporation commercial organizations such as companies and partnerships,
Associations, NGOs etc…
Associations registered within the registration office of the Ministry of Justice are legal persons
and they can perform juridical acts. An association is a grouping formed between two or more
person with a view to obtaining a result other than the securing or sharing of profits. The legal
personality of the associations is different from the personality of their members.
Endowments, Trusts and Committeeshave legal personality and they exercise rights, bear duties
and perform juridical acts.
Endowment is an act where by a person destines certain properly irrevocably perpetually to a
specific objectives of general interests other than securing of profits.
A trust is an institution by virtue of which specific property is constituted in an autonomous entity
to be administered by a person, the trustee, in accordance with the instructions given by the person
constituting the trust.

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Committees having the object of collecting money or other property in aid of public collections
fairs or activities of the same nature, in favor of a specific philanthropic work or work of General
interest may not exercise their activity unless they have been authorized in that behalf by the
concerned authority where such activity use to be carried out on a national scale, or on a regional,
or provincial or local scale.
2. Consent- elements of Consent
In order to create or make contract consent thereto must be expressed effectively and therefore,
consent is necessary. Art. 1679 of the civil code re-emphasizes the paramount importance of
consent in a contract: therefore, the law requires that the consent of the parties is necessary not
only to the making of the contract, but also the object (content) of the undertaken obligations of the
parties must be consented to. To consent must also relate itself to the intention of the parties to be
bound and obliged by their agreement. There must exist an intention to be obliged by the
agreement they made.
This excludes “gentlemen’s agreement”, contracts of simulation (e.g. Art. 1994 of the code) and
the agreement which is not intended to bind (contracts concluded base on circumstances arising
from good relations, such as good neighborly relations). Therefore, unless a party to a contract
stipulates, simulation or “gentleman’s agreement” or an agreement which is not intended to bind,
he is considered to have the intention to be obliged or be bound by the terms of his agreement. An
ordinary contract may be taken premafacie (based on what seems to be the truth when first seen or
heard) to include the intention to be bound. The burden of proof is up of the defendant denying the
intention to be bound.
Contracts are agreements of expressed declaration. Art 1680(1) states that the will of the parties
should be declared.
The theory of declaration of will is followed by the Ethiopian Law. The rule of Art. 1733 reflects
this theory of declaration of will. An agreement which is not expressed is of no effect. Therefore,
where there is a mental reservation or restriction by one party stated but not communicated to the
other party remains of no avail. An agreement which is not expressed is of no effect. On the other
hand if there is concordance between what is declared and the true will, the contract exists
nevertheless.
Offer and acceptance are the two elements of an agreement: they are the means by which
consent can be expressed. As stated under Art. 1681 (1) offer or acceptance may be made orally or

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in writing or by signs normally in use or by conduct such that in the circumstances of the case,
there is no doubt as to the party’s agreement. A special form for acceptance may be stipulated by a
party who makes an offer. And where a special form of acceptance is stipulated by the offer or
there shall not be a contract unless the acceptance is made in the stipulated form.
The oral form and the written form of declaration of will are the most common and evident. A sign
generally in use at auction may be raising the hand by a participant offering to buy and knocking
the hammer down by the auctioneer accepting such offer (Art 1688). At a village market a sign
generally in use may be a hand shake. Whenever the meaning of the sign is clear from the usage,
we can safely conclude that the will of the parties is sufficiently expressed.
Silence: - Silence being a conduct which is doubtful, where an offer is made not answering it
either in spoken or written words or by any sign or conduct amounting to acceptance (Art. 1682)
shall not amount to acceptance. In principle, “He who keeps silent does not consent”. Therefore,
silence is not acceptance; even where samples of goods are sent with the notice that, “if they are
not returned with a certain period the offer shall be deemed accepted”. There is no acceptance.
However, the principle that silence does not amount to acceptance (Art.1682) suffers exceptions
stated as follows:-

1. The duty to accept: by concession or law

No acceptance, that is no answer, shall be required where a party is bound by law or by concession
granted by the authorities to enter into a contract on terms stipulated in advance. This occurs in
contracts concerning public utilities with undertakings whether state owned or not. Public utilities
comprise vital services such as postal services and telegraphic transmissions, public transports or
vital supplies such as supplies of electric power, water etc…
The undertaking is, bound to enter into a contract on terms stipulated in advance and in such cases
the contract shall be completed upon the receipt of the offer. The undertaking may not refuse any
one in so far as the facilities are available.
Therefore, the obligation to enter into a contract is imposed by the law or by the concession
granted by the authorities.
2. Pre-existing business relations constitutes another exception from the principle that
silence does not amount to acceptance. Therefore, an offer to continue or vary an existing
contract or to enter into subsidiary contract or into complementary contract may be accepted by
silence.

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 The justification for this is that such silence will normally be understood by the parties as
expressing agreement.
Examples of offer to continue or vary an existing contract are:-
Your newspaper offers to continue your subscription or to change its terms-the prices, the number
of copies to sent daily etc…
You write to your insurer requiring continuation of your insurance, to change the amount of
premiums, to decrease or increase the coverage of the insurance etc… or your insurer make the
requests.
Examples of an offer to enter into a subsidiary contract: you propose or you require your borrower
to enter into a contract of security (guarantee) for the existing contract of loan of money.
Examples of an offer enter into a complementary contract is:- you offer to settle certain accessory
questions left un answered in the principal contract such as to the exact time and place of delivery,
the maximum tolerance of impurity in the goods to be delivered, etc….
But however in order that silence can be acceptance in the above cases the following additional
requirement should also be satisfied.
 The offer should be made in a special document exclusively dedicated and destined to the offer
 It should inform the other party that the offer shall be considered (regarded) as accepted if no
reply is given within a reasonable period of time.
This means that the offer must not only be made in a special document but also, its contents must
formally include a warning clause as above destined to make the offered clearly aware of the grave
consequences of not answering.
3. Invoices are not distinct or special documents directed to that end. An invoice is a document
computing sums due on the basis of an existing contract. Therefore, particulars expressing offers
(an offer) entered by a party in an invoice shall not bind other party unless they conform to a prior
agreement or have been expressly accepted by the party. This is the first exception from the
exception.
4. General terms of business
Are the second exceptions from the exception that silence amounts to acceptance. Thus, general
terms of business which are uniformly applied to all customers of an undertaking shall not bind the
other party unless he knew and accepted them or they were prescribed or approved by the public
authorities.

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Particular proposals are then understood to be made within a fixed frame of general terms. Where
the contract consists mostly of general terms, tariffs etc…. prepared and printed in advance by one
party, it is called a contract “of adhesion”. Because the other party only adhere to it, “take it or
leave it”, without free discussion of the terms.
Declaration of intention cannot be considered as making of an offer. Thus there is no contractual
offer where a person declares his intention “to give”, “to do”, or “not to do” something without
communicating his intention to the beneficiary of the declaration. The rule applies only to offers-
intended offers- but not to intended acceptance. An acceptance sent to an absent offer need not be
made known to him. By virtue of Article 1692(1), it is enough for it to be sent to the offer to make
the contract, whether it reaches him or not.
There is no contractual offer where a person sends to another or posts in pubic place, tariffs, price
lists or catalogues or displays goods for sale to the public. A public place is any places open to the
public such as streets, stations, waiting rooms, shop premises, newspaper columns etc…
Offering something for auction is another instance of declaration of intention not amounting to
offer. Since the purpose of an auction is to reach a high price, the auctioneer or his agent must
remain free to reject such a bid which is below the expected level. Some auctioneers reserve
expressly their freedom to reject bids. If auction is not an offer then bids are offers. If bids are
offers, then the auctioneer’s knock upon the last bid is an acceptance and completes the contract.
The principle that declaration of intention is not an offer suffers exception. One is public
promise of a reward as provided in the provisions of Art. 1689. Thus, a promise published by
posters or in any other manner such as newspaper advertisements or transmitted through radio
broad casts or television announcements to reward the person who shall find an object which has
been lost or who shall perform certain act shall be deemed to be accepted where a person brings
the object back or performs the act notwithstanding that he did not know of the promise. The
promisor shall give the promised reward, for the contract has completed.
The second is the result from the “self-acting” nature of automatic distributors of goods which
rebuts the otherwise applicable presumption that display of goods for sale does not constitute an
offer.

An offer can be made with a fixed time limit for acceptance, and it can also be made without a
fixed limit for acceptance. Hence, the offer must be kept open for a reasonable period of time.
Therefore, where a person offers to another to enter into a contract and fixes a time limit for

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acceptance, he shall be bound by his offer until the time limit fixed expires. But where the offer is
rejected by the offer or the acceptance is not communicated to the offer within the time limit fixed
then the offeror shall not be bound by his offer.
On the other hand where a person offers another to enter into a contract and does not fix any time
limit in which offer remains good, he shall be bound by his offer until the time when he can
reasonably expect the other party to decide on the offer. However, in such a case where the
acceptance is late the offer shall, forthwith, inform the other party where he does not intend to be
bound. Otherwise he is bound.
Therefore, where acceptance is late and the offer decided to refuse the acceptance on the ground of
lateness he shall immediately inform the other party that he is not bound by the offer or he has
withdrawn the offer.
So far is concerning with a contract between parties present. But where the parties to a contract are
absent, there are two theories concerning the time and the place of the formation of the contract: -
the theory of reception and the theory of dispatch (sending).
Our law has chosen the theory of sending (dispatch) of the acceptance by post or telegram etc…
the difficulties as to “where and when” acceptance of the offer made arise with regard to absent
parties. Because, this problem has practical implications, the place of contract may determine
which court has jurisdiction and which law is applicable. The place of an international contract
may determine the form prescribed for, or the law applicable to the contract and which court has
the jurisdiction. As to the time of the formation of the contract, the date of the contract may start
the running of interest on loans; it is from such a date that any behavior inconsistent with the
contract shall create liability for breach or non-performance. Also it is the date of the contract that
opens the period of risk from delay in the transmission of the acceptance.
A contract made by telephone is deemed to be made at the place from which acceptance was sent
that is the place of the formation of the contract is the place where the party was called.
Offer and acceptance may be withdrawn. But when does the withdrawal of offer and acceptance
can properly be done? Revocation (withdrawal) of offer is timely if it is previous to, or at least it is
simultaneous with the time of making known the offer. The same is true to the revocation of
acceptance that is, revocation of acceptance is timely if it is made before, or at the same time with
the making known the acceptance.

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Acceptance should not be defective. Acceptance is defective when it goes beyond the offer or does
not exactly conform to the terms of the offer or where it includes restriction or modification to the
offer. Any acceptance modifying general terms, quantities, and qualities offered, forms prescribed
under Article 1681(1), etc… also amount to defective acceptance. The effect of such defective
acceptance is in fact a rejection of the offer which in effect releases the offer accompanied by a
new offer, the constitutes counter offer.
Therefore, in order for a contract to be complete there must, of course, be no declared
disagreement as between offer and acceptance. And the parties’ declared agreement must also
cover all the terms mentioned for negotiation or discussion with the intended contract. A
completed contract presupposes expressed agreement to all such terms of the negotiation; or,
despite the fact that the parties have not yet expressed their agreement to all the terms of the
negotiation, when they agreed on the essential terms of the contract and they show that they intend
to be bound by their agreement the contract is deemed to be completed. In such cases the contract
shall be binding although it is incomplete, for the law shall remedy any deficiency in the
agreement of the parties.
Defects in consent
In the law of contract the underlined moral postulate is that consent should be true, there should be
no basic mistake or fraud or etc…, it should also be free that is there should not be duress, fear
want etc…, and it has to be conscious that is consent must be free from all types of incapacities or
insanity etc… in order for an existing contract to be fully valid and consequently be enforced, the
consent therein must be free from the defects. But where a defect in the consent of a party, the
contract is will be subject to invalidation.
Invalidation is the act of making a contract ineffective, void or voids a bonito. As far as concerning
invalidation the issues which should be treated or discussed are: (1 who may require invalidation
of the contract? 2) when should the action for invalidation be brought? And 3) what is the effect of
the invalidation? According to Art. 1808(1) of the civil code a contract which is affected by a
defect in the consent or by the incapacity of one party may only be invalidation at the request of
that party only (the incapable or whose consent is defective).

However, a contract the object of which is unlawful or immoral or a contract not made in the
prescribed form may be invalidation at the request of any contracting party or interested third
party(Art.1808(2). On the other hand the action for invalidation should be brought within two

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years from the ground for invalidation having disappeared (Art. 1810 (1). E.g. disappearance of
incapacity such as attaining majority age in the case of a minor, knowledge of the truth in the case
of mistake and fraud or the disappearance of the threat of wars in the case of duress. Concerning
the effect of invalidation the law prescribes that where a contract is invalidated, the parties shall as
far as possible reinstated in the position which would have existed, had the contract not been
made; and acts done in performance of the contract shall be of no effect (Art. 1815 of the civil
code). So the effect of invalidation is reinstatement.
The major cause defects in consent may be 1) mistake;2) deceit (fraud) or 3) duress. These may
can be grounds of defect in consent that results in the invalidation of a contract but however, the
legal requirements must be satisfied to each of the vices (defects) of consent in order for such
defects or vices to be a ground for invalidation of a contract.

1. Mistake: - mistake is a false belief, a belief in something untrue. In order for a mistake to
be a ground of invalidation it must be fundamental and decisive: - Mistake is decisive when a
party invoking mistake proved that had he known the truth he would not have entered into the
contract. A party therefore should prove that his firm (decisive) error has determined him to enter
into a contract, which he would not have entered into the contract otherwise.
But this is not in itself sufficient to invalidate a contract. Mistake should also be fundamental. In
that a contract may be invalidated on the ground of decisive mistake where it is fundamental to the
contract.
Mistake is fundamental where it is related to an element of the contract which the parties deem an
element of a contract to be fundamental through expressly calling it a condition or using words to
that effect or through mentioning it implicitly in the letters exchanged or interviews made or
telephone conversation leading to the contract. Even if parties to a contract did not deem an
element to be fundamental there are actually fundamental element in any contract. E.gs.
 Mistake as to the legal nature of the contract, the type of transaction entered into, or as to the
object of the contract.
 Mistake as to the identity of the object- “error in corpora” –or mistake as to the quality or size of
the object error in- “substantia”- the error in substantia is where a party is to give a much great
performance or to receive a much smaller counter performance (consideration) than what he
thinks is do under contract.

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  Mistake as to the person of the other party in the contract-error in person- which may relate to
the identity, to the quality or to the qualification of the other party and such identity, quality or
qualification of the other party and such identify, quality or qualification is a fundamental
element of the contract having regard to good faith and to the circumstances in which the
contract was made.

However, non -fundamental mistake such as the one related to motive or where there is only an
appearance of mistake cannot be aground for invalidation. Also a mistaken party cannot invalidate
a contract contrary to good faith. And whosoever invokes h is mistake to avoid the effect of a
contract shall repair the damage arising out of invalidation unless the other party knew or should
have known of the mistake.

2. Fraud or deceit: - fraud is an intentional false statement accompanied by other “deceitful

practices” making such statements plausible. Therefore, fraud can be a ground for invalidation
where the other party resorts to fraudulent activities so that had he not been deceived by the other
party he would not have entered into the contract. And thus in order to be a ground for the
invalidation of acontract, fraud should be decisive and essential. The end result of fraud is an
induced mistake on the part of the other party.
A party who has been deceived or defrauded by a third party shall not have the right to invalidate
the contract on the ground of fraud unless where the other contracting party knew or should have
known of the fraud on the making of the contract and took advantage thereof.
3. False statement: - under Ethiopian law false statement cannot become a ground for
invalidation of a contract except in the situation where at the conclusion of the contract a party in
bad faith or by negligence made false statement and the parties have a relationship, giving rise to
special confidence and commanding particular loyalty, between them.
The same rule applies where a false statement is made by silence and caused the other party to
believe a fact which is untrue. This is the case where the mistake is induced by silence; in such a
case the mistaken party can invalidate the contract. E.g. to sale a cattle to B a local government
representative because C was told that his cattle are liable to requisition in the presence of B and B
remain silent.
4. Duress: - duress can be a ground for the invalidation of a contract. Duress is the act of
compelling a party to consent to a contract by threats of grave and imminent danger (harm) to such

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a party himself, or to one of his ascendants, descendants or to his spouse. The danger threatened
with must be serious (grave) as to its extent and to its likelihood. The threat must be imminent
which means about to happen. The impending danger may be related to the person, life, honor, or
property, liberty, health, personal rights or morals.
Duress must be decisive and impressing a reasonable person that is it must have determined the
other party to contract. However, the nature of duress shall be decided, whether it is decisive and
determinant or not, having regard to the age, sex and position of the parties concerned.
There is no difference whether duress was exercised by a party who benefits by the contract or by
a third party who does not have any relationship to the contract. However the party who invoked
the invalidation on the ground of duress shall repair the damage arising out of invalidation where
the other contraction party did not or should not have known that the contract was made under the
influence of duress exercised by a third party.
Exercise of rights: - duress must be unjustified. Therefore, a threat to exercise right shall not be a
ground for invalidation of a contract. i.e. as a rule a threat to exercise right cannot be complained
of, except where suchthreat was used with a view to obtaining an excessive advantage.
5. A person may be induced to enter into a contract by reverence and respect for the
known wishes of his parents and/or superiors of course without being threatened and where to no
duress were exercised. Reverential fear alone is, therefore, normally insufficient to be a ground for
invalidation of the contract unless the contract was made with person inspiring the fear and such
person derived an excessive advantage from the contract.
6. Unconscionable contract: - a contract contrary to conscience; that is where the terms of the
contract are substantially more favorable to one party than to the other. A substantially
disproportion in the value of the performances respectively owed alone cannot become a aground
for invalidation of a contract. Security of trade or business would be endangered, were we to allow
invalidation merely because the contract is much profitable for one party than for the other. Where
justice so requires, (i.e. the court is free to refuse this remedy on grounds of equity, e.g. where the
victim is rich and the transaction is insignificant), the contract may be invalidation as
unconscionable where the immoral behavior of the exploiter determines the victim’s consent
through taking advantage of his want, simplicity of mind, senility, or manifest business
inexperience. Want is a term which covers such cases of destitution and other states of distress or
necessity. Simplicity of mind is the kind or mental deficiency which impairs the victim’s

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judgment. Senility is also a mental deficiency resulting from old age and not amounting to
insanity. Manifest business in experience implies a lack of familiarity with business transaction.
Illiteracy and general lack of instruction may often amount to business inexperience however must
be manifest i.e. not only known to the other party, but also obvious to average man in his position.
5. Object of contracts
The third element of a contract is the object. Lack of an object which is specifically defined,
possible, lawful, moral prevents the formation of a valid contract. So in order for a valid contract
to exist there must be an effective object. The term object means obligation to perform something.
Therefore object is the obligation(s) of a party or the parties which the contract has created. The
object of any contract (be it gratuitous or reciprocal) shall be determined in the contract.
Subject to such restrictions and prohibitions provided by the law, the parties shall have the
freedom to define the object and to determine freely the content of their contract. Art. 1711 of the
civil code lays down the basic principle of “freedom of contract”. The principle enshrined in this
Article allows the parties to freely determine, setting aside the permissive rules of the law, the
contents of their contract, contracts so named (nominate) in book V on special contracts (e.g. sale,
loan, hire, bailment, lease, deposit etc…)
The principle also means that the parties are not limited to conclude contracts or transactions so
named, but also they are free to conclude contracts which are innominate. E.g. a banker agrees
with a merchant to give him an opinion on the commercial standing of another merchant.
Only mandatory provisions provide prohibitions or restrictions are provisions limiting the
contractual freedom of the parties. E.g. those are given by Articles 1714-1716 and Art. 1718 of the
civil code.
Obligation “to give”, “to do” or “not to do” as dealt with Art 1712 are illustrative and destined to
induce the parties to be explicit as to which kind of obligations they intend to undertake. When a
party undertakes to procure or transfer all of part of a right, such as right of ownership, right of
possession, right of use of a thing to another party then the obligation is the obligation “to give”.
But where a party undertakes to abstain or refrain from doing or acting in a particular way, the
obligation is the obligation “not to do”. Obligation “to give” and those “not to do” are meant to
procure a result. The party who is obliged to produce a result is normally liable irrespective of fault
(Art. 1791(1) if the intended result is not attended.

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 On the other hand obligation “to do” is where a party undertakes to act or to do in a certain way
that will benefit the other party and such obligations are of two types:-
1. Obligations of result, in which a party undertakes strictly to procure a particular result or
advantage. E.g. hire of work, painting, building, publishing etc… contracts of carriage are usually
meant to procure the result of safe and timely arrival of goods or of passengers to the agreed place;
2. Obligations of means, in which one party undertakes only to do his best (obligation of
diligence) with the aim of procuring or obtaining a result are not normally obligations of result. He
does not guarantee the result and, therefore, he is not liable if the intended result is not obtained.
E.g. in the contract of advocacy or of treatment, the advocate or the physician normally undertakes
“to do” his best to win the suit or to heal the patient. In the obligation of diligence or “to do one’s
best”, the liability for non-performance depends on the commission of grave fault (Art. 1795).
They are not liable for losing the suit or of the patient’s life, if they acted diligently or that they
committed no grave fault.
The contents of a contract, Art. 1713 are those expressed in the terms thereof, those implied by the
suppletory provisions of the law and by such incidental effects as are attached by custom, equity
and good faith, having regard to the nature of the contract.
The meaning of a contract is ascertained by interpretation and the power to interpret contracts, for
they are the laws of the parties, resides in the courts, however, the court may not make a contract
for the parties under the guise of interpretation.
Obligation of the parties or of one of the parties in unilateral obligations (the object of the contract)
has to be defined and precise and which could be ascertained. Otherwise (if the obligation of the
parties or of one of them cannot be ascertained with sufficient precision) the whole contract will be
of no effect, non-existent, null and void or fully invalid. In contracts bilateral or reciprocal
obligation it is sufficient to show that there is no effective object on one side for the whole contract
to be void.
Bilateral obligation conditions each other at all stages: in the contract’s formation, performance,
and cancellation.
Where from the terms expressed in the contract, the implication from suppletory law, custom,
equity and good faith, a party’s obligations cannot be sufficiently ascertained then the object is not
defined. However, since contracts by definition repose on the agreement of the parties and may not

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be imposed from outside, the court may not make a contract for the parties under the guise of
interpretation.
The object of the contract contractual obligations, “to give”, to do” or “not to do”, must be related
to a thing or a fact which is humanly possible to perform. Therefore, where the obligations of the
parties or one of them relate to a thing or a fact which is humanly impossible but not to the specific
party or parties and such impossibility is absolute and insuperable or insurmountable then the
contract shall be of no effect. Impossibility of the object must be at the time when the contract was
concluded (original not supervening impossibility). More over the impossibility must exist in
itself. It must exist without regard to the person involved. It is in such a case that the contract shall
be of no effect or void. There are different types of impossibilities, they are:-
- Original impossibility
- Supervening impossibility
- Physical impossibility
- Impossibility of fact
- Legal impossibility
The object of the contract (the obligations assumed by the parties or one of them) must not be
unlawful or immoral. Unlawful obligations are those which are contrary to the prescriptions of
public law or to the mandatory rules of private law. E.g. sale of a slave, contract of sale of land in
the Ethiopian context, sale of prohibited narcotic drugs such as cocaine, heroin etc…
It is difficult to determine immoral obligations because the standard may differ from place to place
or from society to society. However, there are things commonly considered as immoral e.g. A
man’s promise to pay money to a woman against her undertaking extra-marital sexual intercourse.
Then both obligations (promises) are of no effect.
It is not only when the obligations of the parties or of one of them is either unlawful or immoral
that the contract is void, but a contract shall also be of no effect where the obligations of the parties
be related to each other (taken jointly) appears to be unlawful or immoral even if the obligations of
the parties considered separately (in isolation) are legal and moral. E.g. promise to give money to
the release of a kidnapped child; or to pay a sum of money upon resigning an official position.
The motive for which the parties entered into a contract shall not be taken into account in
determining the unlawful or immoral nature of their obligations. E.g. a contract of loan money to
contrabandist; a contract of lease of a house or of furniture for a prostitute etc…

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However there are exceptions to this principle: - one is where the terms of the contract denote that
the parties or none of them have unlawful or immoral purpose in view and the other where the
party who requires the performance of a contract produces a document denoting such purpose.
4. Form of Contracts (Art. 1719-1930 of the civil code )
As to the form of contracts, the principle is that there are no formal requirements for the
conclusion of contractors; there is the freedom of form and that the contract exists by the mere
agreement of the parties (Art.1719 (1). This principle, however, is set aside in two cases in which
otherwise is provided. These are:-
1. Where the law requires that a particular contract be made in a special form; and
2. Where the parties themselves have provided that their contract be made in a particular form
but not required by law.
Therefore, where the law or the agreement of the parties provided that a certain contract must be
made in a particular form it shall be observed. Failure to observe the required form results in the
invalidity of the contract. Where the form prescribed by law is not observed there shall be no
contract, but there is only a mere draft of a contract. The observance of the prescribed form is
mandatory not only in the making of a contract but also in its variation. Preliminary contracts e.g. a
contract which gives an authority to represent. Art (2200(2) of the civil code must also be made in
the form prescribed for (in respect of) the final contract.
The following are contracts in relation to which the law has prescribed a written form: - regarding
contracts relating to immovable propery (Art. 1723) which creates or assigns rights in ownership
or a usufruct, servitude or mortgage of an immovable; contracts made with public administration
(Art.1724) which binds the government or a public administration shall be in writing and shall be
registered; contracts made for a long period of time Art. 1725, such as contracts of guarantee,
insurance contracts, and other contracts in respect of which such form is required by law.
Where the parties stipulate a special form not required by the law, the contract shall not be deemed
to be completed until it is made in the agreed form. In so far as the form prescribed by either the
law or the parties is observed, a contract shall be valid notwithstanding that fiscal provisions
related to stamp duty or registration fee have not been complied with.
Similarly a contract is valid even if the prescribed measures of publications have not been
complied with unless otherwise provided.

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Where the stipulated form is a written form, the contract shall be supported by a special document
signed by all the parties bound by it, and it shall be attested by two witnesses. Otherwise the
contract shall be of no effect. A signature is a hand written either name, surname, nickname, or a
mark. The best way of signing is to write one’s full name. The above definition of a signature
excludes signatures by mechanical means such as those allowed on bank notes and a mere seal as it
was used by the illiterates. A party who cannot write may sign by affixing his thumb-mark. The
signature or thumb-mark of a blind or illiterate person shall not bind him unless it is authenticated
by a notary, registrar or a judge acting in the discharge of his duties.
Witnesses shall be of age and not judicially interdicted unless otherwise expressly provided. The
sex or nationality of the witness shall not be considered in determining the capacity to act as a
witness. Witnesses to a contract do not guarantee its performances unless they act expressly as
guarantors. The basic duty of witnesses it to certify that a contract was made and the terms thereof.
Effects of Contracts
This chapter deals with defining the basic consequences of contracts. It also treats the
interpretation, performance, variation and non-performance of contracts. The effect of contracts is,
therefore, that a contract lawfully formed becomes the law of the parties and it binds them as
though it were law. Contracts lawfully formed are those made pursuant to the rules of chapter one.
The contents of the contract shall be determined by the parties themselves subject to the mandatory
provisions of the law. This is a reiteration of the rules of Art. 1711 where by the parties can freely
determine the contents (objects) of the contract. The rules of contract law shall apply to contracts
where they are mandatory, so they limit the parties freedom of contract. Where the rules of
contract law are permissive or suppletory, they apply if not set aside through the parties otherwise
agreement.
Performance of Contracts
In relation to performance of contracts issues like who must perform the contract? To whom
performance (payment) be made? What constitutes performance? To what obligation does a given
payment apply? When does performance (payment) due? And who bears the costs of payment or
of performance? Should be treated.
Since contracts create a relationship between a creditor and a debtor- creditor /debtor relationship-,
the debtor is expected to perform the contract; especially in the obligations to do in which the
personal qualifications of the debtor is important; or where the creditor has established that he has

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a special interest in the performance of the obligation by the debtor himself; or where it is
expressly provided that performance shall be made by the debtor himself. In other cases
performance may be made by the agent or the employee of the employee of the debtor in
accordance with the provisions of Art. 1740(2).
Also performance may be made by a third party (person) in the absence of any agreement with the
debtor interfere and perform his contract for him. One will find in the special contracts special
provisions on the personal or the non-personal character of the obligations created by the contract.
Performance is made to the creditor himself or to a third party (person) authorized by the creditor,
by the court or by the law to receive the payment (performance) on his behalf. Where the creditor
is incapable of receiving payment (performance) because of minority or judicial or legal
interdiction, payment may be made to the person designated by the court or the law only.
Payments to unqualified third party cannot be valid unless ratified by the creditor or it benefits
him that is it enriched him in fact or to the extent that it has.
Where the debtor is not or cannot be sure as to who is the creditor qualified for payment, he may
refuse to pay and release himself by depositing the amount due with the court. Where the debtor is
aware of litigation and pays to any of the persons who hold themselves out to be creditors he shall
be considered as if he has paid at his own risk. Any of the litigants may require the debtor to
deposit the amount due if the debt is due while the case is pending in court.
The creditor has the right to refuse a thing other than set forth already in the contract. What must
be given is what the parties have agreed to give. Therefore, the creditor may not accept
notwithstanding that the thing offered to him is of the same or of a greater value than thing due to
him.
Similarly the creditor has the right to refuse payment where the debt is liquidated and fully due.
Where part of the debt is contested, the debtor is under obligation to pay such part of the debt as is
admitted and as the creditor is willing to accept.
Where the performance is related to fungible things, the quality of which is not determined in the
contract then the quality of the fungible thing to be delivered will be determined by the debtor,
however, he cannot offer a thing which is below the average quality.
But on the other hand, where the fungible things (that is goods interchangeable by weight or
measure such as corn, coffee, wine, oil, gold, etc…) delivered does not exactly conform to what is
expressed in the contract or where the quantity of the fungible thing delivered is lesser than what is

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provided in the contract, then the creditor may proportionately reduce his won-performance or he
may claim damages if (where) he has performed. In fact this is where the creditor cannot establish
that the exact conformity of the performance to the terms of the contract is essential to him or
where it has not been expressly agreed.
Where the debt is in a sum of money, payments shall be in the local currency. The sum of money
owed by a party may be fixed by reference to the price of raw materials, goods, or services or any
other element the value of which can be ascertained. Foreign currency: - where under the contract
the debt is to be paid in a currency which is not a legal tender in the place of payment the debt may
be paid in local currency at the rate of exchange on the day when the debt falls due. Unless the
contract contains the words “actual value” or any other provision of the same nature imposing
literal performance of the contract.
Where the rate of interest is not fixed in the contract it shall be nine percent per annum. Cost shall
be paid first, then the interest and eventually the principal debt.
Where the place of payment is not fixed payments shall be made at the normal residence of the
debtor at the time when the contract was made. Payment in respect of a definite thing shall be
made at the place where such thing was at the formation of the contract.
As to the time of payment it is the agreed time where there is an agreement to that effect. Where no
time is fixed in the contract payment may be made forth with. Payment shall be made wherever a
party requires the other party to perform his obligation. Issues concerning points like;
- Simultaneous performance.
- Transfer of risks.
- Limits of right to refuse performance
- Costs of payment.
- Receipt and loss of documents supporting the debt.

Have to be discussed by the student as they are dealt with in the Ethiopian civil code- Arts. 1757
ff.
Non-performance of Contract
A debtor may fail to perform his obligations either totally or in part or he may perform them
improperly or may perform them late. In all of these cases the civil code speaks of non-
performance of the contract.

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Generally, there are three possible consequences of non-performance irrespective of whether or not
the debtor is at fault. They are specific performance, cancellation (either by the court or by the
party) and damages. But what are the conditions under which these various remedies are available?
Subject to the exceptions (Art.1775), as a rule the giving of a prior default notice is a necessary
prerequisite for requesting the application of any of the remedies for non-performance provided by
the law. The creditor must first put the debtor in default by calling his attention to the fact that the
obligations are due. The following are the purposes of notification of default:-
1. It puts the risk of loss of the thing on the debtor, 2) it marks the beginning of accumulation
of interest for delay; 3) it reminds the debtor of his obligation and of the sanctions he will face if
the does not perform, and 4) it would lessen the number of cases that come before the court.
No special formality is required to put the debtor in default; it can be by an official summons, or
simply by a letter even unregistered. The notification of default can be by any act that indicates to
the debtor that the time has come for him to perform his obligations and which indicates the
creditor’s intention to require performance.
When a debtor fails to perform his obligations one of the remedies is to require specific
performance. However the court may not order specific performances. Unless it is of special
interest to the creditor and that the forcedperformance of the contract does not affect the personal
liberty of the debtor.
In situations under which the obligations are “to do” or “not to do” the creditor may be authorized
to do or to cause to be done at the expense of the debtor the obligations which he assumed to do.
The creditor may also be authorized to destroy or to cause to be destroyed at the debtor’s expense
which he has done in violation of his obligation to refrain from doing such things.
Similarly where the obligation is “to give” but what is due is a fungible thing the court may
authorize the creditor to buy at the debtor’s expense the thing which he assumed to deliver.
However, where the creditor cannot or refuses to accept the performance, or the where about of the
creditor is not known, or the debtor cannot deliver for a reason within the control of the creditor, or
there is doubt as to who he is he creditor, the debtor may deposit the thing at the expenses and the
risk of the creditor in a public warehouse or a bank or in any other place named by the court of the
place of payment. The court may authorize the debtor to sell a thing by public auction or by private
agreement and deposit the proceeds of the sale within a public deposit or in a bank where the thing
is of a perishable nature or the costs of its deposit or of custody are disproportionate to its value.

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The debtor shall be released where the court finds that the thing or the proceeds of the sale have
been validly deposited.
A part from requiring specific or forced performance, the creditor may have another remedy for
non-performance of the contract. One of the remedies is the judicial cancellation of contract.
Where a party is failed to perform his obligations, the other party may request from the court the
cancellation of the contract.
The court shall take into account the interests of the parties and the requirements of good faith in
deciding the cancellation. Therefore, a contracts shall not be cancelled except in cases of breach of
a fundamental provision of the contract; and no contract shall be cancelled unless its essence is
affected by non-performance and it is reasonable to hold that the party who requires cancellation
would not have entered into the contract so affected, or without the term, which the other party has
failed to execute, being included.
Fundamental breach is a total and an irreversible breach e.g. B has destroyed the specific chattels
sold to C, or has sold and delivered it (Art. 1186 (1) to D, after its sale to C.
Although cancellation of a contract for non-performance must generally be pronounced by the
court, there are situations in which the creditor can unilaterally declare the cancellation. Therefore,
unilateral cancellation is possible only in the following cases:-
1. Where there is cancellation clause in the contract and the conditions for the enforcement of
the cancellation clause are present.
2. When the time limit expired; that is a party may cancel the contract where the other party
failed to perform his obligations within the period fixed in accordance with Art, 1770, or Art. 1774
or 1775(b) of the civil code.
3. When performance is impossible, it is the supervening impossibility which occurs after the
conclusion of the contract that serves as a ground for unilateral cancellation of a valid contract
under Art. 1788 of the civil code.
4. When performance is refused-that is a party may cancel the contract unilaterally where the
other party informs him in an unequivocal manner that he will not perform the contract.
Specific performance and cancellation of the contract are alternative remedies for non-
performance. However, both of these remedies may not be sufficient therefore, apart from or in
addition to the enforcement or cancellation of the contract, a party may require that the damage
caused to him by other party’s non-performance of his obligations be made good. Damage may be

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required and awarded to reestablish the contractual equilibrium that was upset by the failure to
perform the contract.
A party who failed to perform his obligations is liable to pay damages not-withstanding that he is
not at fault. He may not be released of this obligation unless he can show that performance was
prevented by force majeure. There is force majeure only when there has been an occurrence which
is normally unforeseeable and which absolutely prevents the debtor from performing his
obligation. There shall not be force majeure where the occurrence could normally be foreseen by
the debtor or where the performance of his obligation is rendered more onerous. The debtor shall
be liable to pay damages for non-performance even if he is not at fault. E.g. a’s late delivery of
some merchandize to B because the factory was closed down due to power interruption for two
weeks; or A could not deliver the goods to B because the machine used to manufacture the goods
was broken down.
Creditor should show (prove) that the debtor is at fault where the obligation is “to do his best” or to
procure (give) something but without guaranteeing to succeed, or where such an exception is
expressly provided by law similarly in order to claim damage, creditor should prove that the debtor
has committed a grave fault where the contract is made for the exclusive advantage of the creditor
i.e. a gratuitous contract.
 Normal amount of damages.
 Lesser damage
 Greater damage
 Duty to limit the extent of the damage
 Money debt:- interest for default, interest on interest, greater damage, a damage which
exceeds the interest for default ate to be discussed by the student
II. Contract of Sales (Art. 2266 of the civil code)

Definition: - A contract of sale is a contract where by one of the parties, the seller undertakes to
deliver a thing and transfer its ownership to the other party, the buyer in consideration of a price
expressed in money. Sales are a contract where by the seller transfer or agree to transfer the
property the buyer for a money consideration called the price. Donation (gift) is a transfer of
ownership of a property but there is no price. In bartering, one thing is exchanged for another but
neither thing can be regarded as the price and hence the transaction is not a sale.

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The provisions of the chapter on sales shall apply on the sale of movables (corporeal chattels). The
sale of intrinsic parts of an immovable shall be deemed to be a sale on movables (Art. 2268 of the
civil code) where such parts are, under the contract, to be separated from the immovable and
transferred to the buyer as corporeal chattels such as crops, trees, materials of a building under
demolition or products of a quarry.
Formation of contract of sales: -A sales contract may relate to an existing thing that belongs to
the seller.it may also relate to future thing which the seller undertake to make for delivery to the
buyer. It may also relate to a thing belonging to a third party. The thing is called the subject of sale.
The price of the subject of sale may be decided by the parties themselves or it may be referred to
the arbitration of a third party. There shall be no sale where such third party refuses or is unable to
make an estimate; for the obligation of one of the parties is not sufficiently defined.
Obligation of the seller: - what are his obligations?
The seller has the obligation to deliver the thing to the buyer; to transfer the ownership of the thing
to the buyer; to warranty the buyer against dispossession; and to warranty the buyer against certain
defects in the thing. He shall in addition be liable for other obligations imposed on him by the
contractor law if any.
The essence of obligation to deliver: - delivery consists in the handing over of a thing and its
accessories in accordance with the contract. Where the quantity of the thing to be delivered is to be
fixed approximately or is “about a certain quantity”, is shall be for the seller to determine the exact
quantity to be delivered unless it is included in the sole interest of the buyer.
Time of delivery shall be in accordance with the terms of the contract even by way of inference
from the will of the parties. Where there is no agreement in the contract as to the time of delivery,
it shall take place as soon as the buyer requires the seller to do so. It is the seller who shall fix the
exact date of delivery where it is agreed that delivery shall take place “during a given period”
except where it appears from the circumstances that is for the buyer to do so. Unless otherwise
agreed in the contract, delivery of the thing shall be simultaneous white the payment of the price.
Unless otherwise agreed, place of delivery shall be the business place of the seller at the making
of the contract; or at his normal residence except where the sale is related to a specific thing and
the parties know, at the making of the contract, the place where the thing is situated. Then such
place shall be the place where delivery should take place.

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Transfer of ownership:- seller’s obligation to transfer the ownership of the thing incudes taking all
the necessary steps for transferring unassailable right over the thing to the buyer. The seller shall
warrant the buyer against any total or partial dispossession which might occur as a result of third
party’s exercise of a right he enjoyed at the time of the contract. However, if the buyer knows at
the making of the contract that he risks dispossession the seller shall not warrant dispossession
unless he has undertaken expressly to do so. Contractual provisions excluding or restricting
warranty against dispossession should be construed and interpreted strictly and narrowly.
Warranty against defects in the thing: - the seller shall guarantee to the buyer that the thing sold
conforms to the contract and that it is not affected be defects. Delivery of part of the thing sold or
of a greater or a lesser quantity than undertaken in the contract shall not be deemed to conform to
the contract.
Warranty against defects means that the seller shall guarantee that the thing sold possesses the
quality required for its normal use or commercial exploitation; or that it possesses the quality
required for a particular use as provided expressly or impliedly in the contract or that it possesses
the quality or specifications provided in the contract either expressly or impliedly.
The time for ascertaining conformity with the contract and absence of defects shall be at the time
of the transfer of risk or that the time when the risk would have been transferred where there is no
transfer of risk as a result of cancellation or the replacement of the thing has been required. The
buyer has the obligation to examine the thing as soon as he has the opportunity to do so. He shall
also notify, without delay, the seller of the non-conformity or that there is a defect in the thing
indicating its nature. Where the buyer has not notified the seller or the seller has proved that the
buyer knew of the defect at the time of the contract then the seller shall not be liable of his
warranty against defects.
Any provision excluding or restricting warranty shall not have an effect where the seller has
fraudulently concealed from the buyer the defects in the thing.
Unless the buyer brings a suit on warranty against defects in the thing within one year from the day
when the notice was served on the seller, he shall no longer avail himself of the defects or of non-
conformity.
Seller may put upright defects by replacing defective things by new ones where the sale is related
to fungible things. Seller has also the obligation to be carefully and quickly hands over the
document to the buyer where it is customary to do so. Seller shall also inform the buyer to enter

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into carriage insurance where he is not bound to do so, but it is the custom to contract such
insurance and the buyer requires such information.
Obligations of the buyer: - what are his obligations?
The buyer has the obligations to pay the price, to take over delivery of the thing and to perform
any other obligation imposed upon him by the contract of sale.
The obligation to pay the price shall include taking any step provided by the contract or by the
custom to arrange for, or guarantee the payment of the price. He may be compelled to accept a bill
of exchange to open a credit account, to provide bank security or otherwise. Where the price is to
be determined by weight, the net weight shall be taken into account in cases of doubt. Where the
thing sold is quoted on the market or has a current price or where the sale relates to a thing which
the seller normally sells, the parties shall be deemed to have concluded at such particular price.
Where the seller delivers a quantity greater than the agreed one, buyer is at option to accept or
refuse such quantity as exceeds the agreed quantity. The place of payment of the price shall be the
agreed one. Where there is no agreed place, it shall be the address of the seller. Where the sale is
for cash on delivery buyer shall not be bound to pay the price until he has had an opportunity to
examine the thing. Where the contract relates to a sale on credit and no date of payment is fixed,
the buyer shall pay the price as soon as the seller demands it. Buyer shall take such steps as may be
required of him to enable seller to deliver the thing. Buyer shall take over the delivery and such
steps as may be necessary for completing the delivery of the thing.
Common obligations of the Seller and Buyer
Expenses: - Expenses of the contract and of payment and expenses after delivery and expenses of
transport where the thing sold is to be sent to a place other than that of the delivery place shall be
borne by the buyer. Expenses of delivery and customs duties charging the imported thing shall be
borne by the sell.
Preservation of the thing: - seller shall ensure the preservation of the thing at the buyer’s
expense, where he is late in taking over the delivery of the thing. Also buyer shall ensure the
preservation of the thing at seller’s expense when he intends to refuse the thing and return in to the
seller.
Transfer of risk:- the risks shall be transferred to the buyer from the day when the thing has been
delivered to him in accordance with the provisions of the contract or of the code. There shall be
transfer of risks notwithstanding that the thing delivered does not conform to the contract where

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the buyer has either cancelled, or required the cancellation of the contract, nor required that the
thing be replaced. Except in cases where the sale relates to fungible things, the risks shall be
transferred to the buyer from the day when he is late in taking over the delivery. Where the
fungible thing, clearly designated for the performance of the contract, has been especially allocated
to the buyer and the seller has sent notice to the buyer to take over the delivery, but buyer was late,
the risks shall be transferred to him. Where the thing sold is under voyage the risks shall be
transferred to the buyer from the day when delivery has taken place by the thing having been
handed over to the carrier, except where the seller knew or should have known that the thing has
perished or was damaged at the making of the contract.
III. Agency as a Contract (Art. 2179 ff. of the Civil Code)
Agency defined: - Agency is a contract where by aperson, the agent agrees with another person,
the principlal, to represent him and to perform on his behalf one or several legally binding acts.
In the rapid development of the modern economic world, one man, by virtue of the agency device,
can be in a hundred different places and make contract with hundred persons at the same time.
Thus, the purpose of agency is, therefore, to facilitate and speed up the movement of the business
transaction in the business relationships.

Sources of power of Agency: - The authority to act on behalf of another may be derived from the
law or a contract. Where the source of the power of agency is a contract, the authority may be
conferred upon an agent either expressly or impliedly. Similarly, acceptance by the agent of his
appointment may be either expressed or implied. The appointment as an agent shall be deemed to
be accepted unless it is refused, where the agency refers to functions which are to be carried out in
an official capacity or professionally or where the agent holds himself out publicly for such
functions.
Form of Agency: - where the act to be performed by the agent is under the law to be made in a
prescribed form, such form shall be complied with conferring the power of agency (the authority)
upon the agent. Thus, where the law requires that a contract be made in a written form then, the
agency, as a preliminary contract, shall be made in writing.
Types of Agency: - agency may be classified as General agency and special agency:-
1. General Agency: - is a type of agency expressed in general terms and shall only confer
upon the agent the authority to perform acts of management. What are acts of management? Acts
done for the preservation or maintenance of property, lease for terms not exceeding three years, the

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collection of debts, the investment of income and the discharge of debts shall be deemed to be acts
of management. The sale of crops, goods intended to be sold or of perishable commodities shall
also be deemed to be acts of management.
2. Special Agency: - is the one which confers upon the agent a special authority. And special
authority shall be required from the agent to perform acts other that acts of management. The agent
cannot without special authority alienate or mortgage real estates, invest capitals, sign bills of
exchange, effect a settlement, consent to arbitration, make donations, or bring or defend an action
in the court. Special agency shall confer upon the agent the authority only to conduct the affairs
specified there in and their natural consequences according to the nature of the affairs and usage.
Scope of power of agency:-The scope of power of agency given by contract shall be fixed in
accordance with the contract. Where the scope of agency is not expressly fixed in the contract,
such scope shall be fixed according to the nature of the transaction to which it relations. The scope
of a power of attorney shall be interpreted in a restrictive manner. And in a special agency,
therefore, the scope of the authority of the special agent shall be only the authority to conduct the
affairs specified therein and their natural consequences according to the natures of the affairs and
usage. An act performed by the special agent outside the scope of his authority shall not bind the
principal unless the ratified by the principal or in accordance with the principles governing an
authorized agency.
Complete Agency: - contracts made by an agent in the name of another within the scope of his
power shall be deemed to have been made directly by the principal. The principle may avail
himself of any defects in the consent of the agent at the making of the contract. Any fraud
committed by the agent may be setup against the principal by the party who entered into the
contract with the agent.
Contracts made or acts performed by the agent in the name of another outside the scope of his
authority or on an authority which has already lapsed shall not bind the principal unless he ratified
it; or in accordance with the principles governing unauthorized agency. The principal may at his
option repudiate the contact made or the act performed in his name.
The principal has the obligation to ratify in some cases and, therefore, he shall, where good faith so
requires, ratify the act done by the agent notwithstanding that he departed from his terms of
reference, or where it is reasonable to admit that, in the circumstances, had the principal been
aware of the situation, he would have extended the scope of the agent’s authority.

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Obligation (Duties) of the Agent
The agent has the duty to act with the strictest good faith towards his principal and shall disclose to
his principal any circumstance which would justify the revocation of the agency or the variation of
its terms. He shall act in the exclusive interest of his principal and shall not derive any benefit from
any transaction he enters into pursuant to his authority without the knowledge of the principal. He
shall not use any information he obtained in the performance of his duties as agent to the detriment
of the principal. The agent has the duty to account to his principal all sums he received and all
profits accruing to him in the course of his employment despite the fact that the sums were not
owed to the principal. He shall be liable to the payment of interest where he used the money owed
to the principal. The agent shall exercise the utmost diligence in his carrying out the agency as if it
were his own or of one of the members of him family. He shall be liable for the fraud and for
default he committed in the performance of his duties. The agent has the duty to account his
management affairs to the principal at any time when the later so requests.
Obligation (Duties) of the principal
The principal shall have the obligation to pay to the agent the remuneration fixed in the contract or
fixed by the court in conformity with the recognized rate and usage, or the customary
remuneration. The principal shall advance to the agent the sums necessary for carrying out of the
agency. He shall reimburse outlays and expenses incurred by the agent in the proper carrying out
of the agency. He shall pay interest on such outlays and expenses as from the day when they were
incurred. The principal has the obligation to release the agent from any liability incurred in the
interest of the principal. He shay pay the sums due to the agent notwithstanding that the transaction
was not successful. Until the payment of the sums due to him the agent shall have a lien on the
objects entrusted to him by the principal for the carrying out of the agency.
Termination of Agency
A power of attorney given by the contract shall terminate: - due to the revocation of the agency by
the principal at his discretion; due to the renunciation of the agent by giving notice to the principle;
due the death or incapacity of the agent, when he is declared absent or is adjudicated bankrupt; due
to the death or incapacity of the principal, when he is declared absent or adjudicated bankrupt.
Where the agency terminates due to the death, absence, incapacity or bankruptcy of the agent, his
heirs or the legal representatives who are aware of the agency shall inform the principal of this

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circumstance without delay. They shall, until such time as the necessary steps can be taken by the
principal, do whatever is required in the circumstances to safe guard his interest.
The effects of Agency as regards third parties
The legal relations of the principal, agent and the third parties shall be governed by and subject to
the provisions of Arts. 2179-2198 of the civil code.
Ratification: -when an agent entered in to a contract in the name of another outside his scope or
his power or under an authority which had lapsed, the natural option of the person in whose name
the contract was made is either ratification or repudiation. Where the option is ratification then the
effect of the act will be the legal effect of an act done under a valid agency within the scope of the
power of the agent.
Repudiation:-where the option of the principal is repudiation, the contract shall be in validated in
accordance with the provisions of Arts. 1808-1818 of the civil code. The third party who entered
into the contract with the agent in good faith believing in the existence of a valid authority shall
have the right to demand payment of damages caused to him and the agent shall pay such damage
unless he acted in good faith not knowing the reason for coming an end to his authority. Principal
shall be liable in such a case to pay compensation. There shall be a Joint liability of principal and
agent in the following cases:-
 Principal informed third party the existence of power of attorney but failed to inform him
of the partial or total revocation of such power.
 Principal failed to ask the agent to return the document evidencing the power of attorney
and failed to seek judicial decision to the effect that such document was revoked; or
 Principal caused a third party to believe that the person with whom he was dealing was
authorized to act on his behalf and in his name, by his statements, behavior, gesture, failure to act
or in any other manner.
Cases of liability exclusion: - A third party who prior to entering into the contact took cognizance
of the document evidencing the authority of the agent, or where the personal qualification of the
agent is not essential to him and the agent agrees to be personally bound by the act he has done on
behalf of another shall not have the right to claim compensation from the agent except in cases of
fraud.
 Agent acted on his own name will enjoy the right and liabilities deriving from the contract.

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 Principal shall the right to recover movable which the agent acquired on his behalf while
acting in his name and substitute himself for the agent with a view to enforcing the claims acquired
on his behalf. However, he may not exercise their right unless he discharges his obligations
towards the agent.
Unauthorized Agency:-unauthorized agency occurs where a person has no authority to do so
undertakes or performs with full knowledge of the facts to manage another person’s affairs
without having been appointed an agent. The person may do such acts or perform them either:-
against the principal’s will or the management was undertaken not in the principal’s interest but in
the acting person’s own interest, in these cases provisions relating to unlawful enrichment or where
appropriate, these relating extra-contractual liabilities shall apply.
Where the acting person managed the principal’s affairs at the same time as him own by reason of
the fact that both affairs were closely connected together that one of them could not be managed
separately, provisions of the chapter on un authorized agency shall apply. The acting person shall
as soon as possible inform the principal concerned of the affair that has undertaken him
management. He shall continue the management and bring to completion as long as the principal is
not in a position to take over him. The acting person shall act with strictest good faith and with the
utmost diligence; he will be liable for damages owing to his defaults and breach of good faith.
The principal has the obligation to ratify when his interest required that the management be
undertaken. He shall indemnify all liabilities; reimburse him the expenses incurred in his interest,
compensate him for any damage he suffered in connection with the management and not due to his
default.
Where the principal is bounded by law to ratify the transaction or in fact ratifies it, the provisions
governing agency (Art. 2233) shall apply, which means the effect of ratification will be the same
as the effect of agency as regards third parties (Art. 2179-2198 of the civil code).
IV. Contract of Insurance
Insurance: it is said that insurance is a method of distributing over large number of persons a
possible loss too serious to be conveniently born by an individual. It is a device to distribute a loss
caused by an uncertain event which is covered by insurance over a large number of persons
exposed to similar risk and insure themselves.
Insurance is a business and it is one of the spheres of investment. The general purpose of the
business of insurance is thus to contribute as directly and effectively as possible. The risk of loss

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from any of innumerable perils that beset the person who is active under the condition of modern
life among a large number of those who are exposed to similar perils.
The historical development of insurance goes back to the fourteenth century, the age of
mercantilism. Insurance became an important institution for accumulating capital in a concentrated
form. The accumulation of commercial capital and its transformation in to industrial capital was a
senequanon condition for the advent of industrial capitalism.
V. Contract of Insurance defined:-
A contract of insurance is a contract where by a person, called the insurer, undertakes against
payment of one or more premiums to pay to a person, called the beneficiary, a sum of money
where a specified risk materialized [(Art.654(1)] of the Ethiopian Commercial Code.
Basically insurance is a contract, and therefore, the basic principles relating to contracts in general
apply to the contract of insurance. Thus, there are parties to the contract of insurance who are the
insurer and the insured/ beneficiary. The parties to contract of insurance must have processed the
capacity to enter in to a contract and give their consent sustainable at law. The object of contract of
insurance must be lawful and moral and it has to be defined with sufficient precision. The form in
which the contract of insurance is made must be in writing and supported by a document called
insurance policy and the variation in the terms of the contract of insurance shall only be made in
written document called endorsement.
Parties to the contract of Insurance
The insurer, it is called “the underwriter” is one of the parties to the contract of insurance.
According to Art.4 (1/a) of ProclamationNo.86/94, the insurance business can only be carried out
by a company and according to Art.2 (3) of the above mentioned proclamation the company shall
be “a share company” with a capital wholly owned by Ethiopian nationals and /or organizations
wholly owned by Ethiopians incorporated and registered under the laws of Ethiopia and having
their head office in Ethiopia. Therefore, the insurer is always a business organization (a share
company) not an individual.
From the reading of Art.654 (1) and 657(3) of the Ethiopian Commercial Code, one can say that
the beneficiary (the insured) is the other party in the contract of insurance. However, there are
cases in which the beneficiary may not be a party to the contract. Basically any person who has an
insurable interest can become a party to the contract of insurance and can legally conclude a valid
contract of insurance with the insurer (Art.675) of the commercial code.

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What is an insurable interest?
An insurable interest is a benefit, or right or an interest for example, in a property the destruction
or the damage of which will cause the beneficiary a direct pecuniary or money loss.
The concept of insurable interest has been extended to all forms of insurance. E.g. insurance of
property, life insurance, civil liability insurance, etc. a person may insure his own house against
fire because if the house is burnt he will be the loser. An apparent exception to this occurrence is in
the case of life and accident insurance. But even in this case the law presumes that a person has an
insurable interest in his life, limbs or in his health without limit.
When does the insurable interest should exist? Should it exist at the time of the conclusion of the
contract? or during the materialization of the risk? Or at the stages of the life time of the contract?
Should the insured be interested in the subject matter of insurance at the time of the loss when the
risk materializes though he need not be interested when the insurance is affected? In the case of
property insurance, the insurable interest must exist at the time when the loss occurs (Atr.675 of
the Ethiopian Commercial l Code). In the case of life insurance, insurable interest should exist at
the time when the is the policy is obtained. It is immaterial that the interest no longer exists when
the loss is actually sustained. If the requirement of an insurable interest is not satisfied, the contract
cannot be enforced.
What is the Risk?
The in the definition, it is stated that the insurer undertakes to pay to the beneficiary a sum of
money where a specified risk materialized. But what is a risk? Risk is the danger or probability of
loss to an insured or it may mean the amount that an insurer stands for loss. However, the term risk
denotes uncertainty.
Premium: it is also stated in that the insurer undertakes to pay to a person (the beneficiary) a sum
of money against payment of one or more premiums. What is a premium? A premium is a price
for which the insurer undertakes to discharge the liability arising under the contract of insurance.
The amount of premium is usally fixed by the insurer. Once the amount of premium is fixed, the
insurer cannot subsequently question the adequacy of it because the agreement is conclusive.
Payment of premium is not a condition precedent to complete a contract of insurance.
Classification of insurance in terms of the nature of the interest protected.
There are many different kinds of insurance. However, considered from the nature of the interests
protected, insurance may be classified or can be grouped in to the following categories. They are:

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1. Insurance of objects(property insurance)
In insurance of property, the owner of the property or a person who has insurable interest in a
property (e.g., a possessor, a lease, a mortgagee, a creditor in the life of his debtor or a re-insurer
in the case of re-insurance, etc.) may insure it against losses caused by for example, fire, theft,
burglary, earth quake, explosion, etc.
2. Insurance against liability for loss(civil liability insurance):
This category of insurance is designed to protect the insured from occurrences that impose
liability upon him or cause him loss. E.g., liability upon a motor vehicle owner for a damage
caused by his motorcar, a factory owner or an owner of a building or a carrier of goods or
passengers like the Ethiopian Airline. It includes insurance against employers’ liability to
compensate their workers (work men’s compensation liability)
3. Insurance of persons:
This includes insurance against risks arising out of death, life, injury (accident insurance) or illness
(health insurance).
There is another way of classification i.e., in terms of the risks against which the protection is
accorded. It is a classification by the type of the risks against which the person is insured. E.g., life
insurance for the events of death, accidents, fire insurance, insurance against theft, or burglary or
against explosion, etc.
Principles of Insurance Contract:
Contracts of insurance are based upon certain fundamental principles and the principles are the
following:
a) Utmost good faith (umberrimalfides)
b) Insurable interest- its existence
c) Indemnity (doesn’t apply in insurance of persons)
d) Subrogation
e) Contribution
f) Proximate rule (causa proxima)
g) Attachment of risk
h) Mitigation of loss
Now let us consider in detail what each principle means.
Indemnity:

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Indemnity being compensation, it has been said that it is the controlling principle in insurance law.
Contract of insurance other than insurance of persons is a contract of indemnity and of indemnity
only. Thus, a contract of property insurance is contract of indemnity. The insurer undertakes to
indemnify the insured for what he may actually lost by the happening of the event upon which the
insurer’s liability is to arise. In no circumstances is the insured entitled to make a profit out of his
loss. Therefore, the amount to be insured shall be the actual value of the property and the amount
of compensation shall not exceed the value of the insured has on the day of the occurrence. The
principle of indemnity is therefore, related with other principles such as subrogation, contribution,
even with insurable interest and utmost good faith. It is also related important issues such as over
insurance, under insurance and cumulative insurance.
 Object of over insured: where the amount of compensation in the contract exceeds the
value of the object insured and there has been fraud on the part of either party, the other party may
require the policy to terminate and may in addition claim damages. Where no fraud is committed
the policy shall remain valid but to the extent of the actual value of the object.
 Object under insured: if on the day of the occurrence of a specified risk in the policy, the
object insured is of value greater than the amount of which it is insured, the insured shall be his
own insurer for the difference and shall share proportionately in the damage unless otherwise is
provided in the policy.
Contribution (cumulative insurance): contribution is also corollary to the principle of indemnity.
Contribution arises where several insurers insure the same object against the same risk so that the
object is over insured. If the insured in good faith and no fraud has been committed, all the policies
are in force on the day of the occurrence of a specified risk and each insurer shall proportionally
insure him where the risk materializes.
But where there has been fraud on the part of the insured, each insurer may require termination of
the policy and in addition can claim damages.
Substitution (subrogation) of the insured: An insurer who has paid compensation to the insured
shall have the right to substitute or subrogate him for the insured to the extent of the amount he
paid. If the beneficiary makes substitution impossible, the insurer shall be relieved in whole or in
part of his liability to the beneficiary. However, the insurer has no right of subrogation where the
damages are caused by ascendants, descendants, agent or employees of the insured and against a
person who is living with the insured.

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The principles of indemnity doesnot apply to insurance of persons. Therefore, the contract of
insurance of persons (insurance against the risk of death, life , injury or illness) shall not be
deemed to be a contract of indemnity. Thus, the amount insured may be freely/arbitrarily fixed
and shall due regardless of the damage suffered by the insured person. Substitution is not possible.
The insurer who has paid the agreed amount may not substitute himself for the subscriber or the
beneficiary to claim against persons who caused the damage. Designation of the beneficiary is
possible where the life insurance is made for the events of death (Art.702 of the Comm. Code).
In life insurance, insurable interests must be present at the time of the formation the contract. It is
not necessary afterwards, not even at the time of occurrence of the risk.
Proximity Rule (causa proxima): the principle of proximity rule is that the insured can recover
the loss only when it is caused by the peril insured against the policy. The insured is not liable for
any loss caused by remote or indirect cause. This applies where there is succession of causes in
that where there is occurrence of successive causes as a result a loss occurs. For example, in a fire
insurance for a house burnt immediately after the occurrence of an earthquake a fire broke out
and the house was burnt down. Here the proximate rule applies.
Attachment of risk: the principle of attachment of risk is that the interest insured should be there
at the time of possibility of the occurrence of the risk. Thus, where there is no possibility of the
occurrence of the risk because either the object is already lost or it is no longer exposed to the risk
at the time when the contract is made. Then the contract of insurance shall have no effect and the
premiums paid shall refunded to the insured (Art. 682 of the commercial Code). This is because a
contract of insurance by definition is a contract which the insurer undertakes to protect the insured
from a specified risk if it materializes and this presupposes the possibility of occurrence of the risk
which means the risk is attached.
Mitigation of losses: this principle is enshrined in Art. 669 and 670 of the Ethiopian Commercial
Code. Therefore, the insured is duty bound to inform the insurer the increase in risk, occurrence of
the risk or any other occurrence which will render him liable within the time provided in the law.
When the risk occurred, the insured shall take all the necessary steps to mitigate the loss.
Utmost Good Faith: one of the basic principles upon which a contract of insurance is based is the
utmost good faith principle (uberriima fides). And hence, a contract of insurance is a contract of
utmost good faith. Special rules, therefore, apply to insurance contract relating to non-disclosure

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(concealment) and misrepresentation (false statement) which differs from the rules applicable to
contracts in general.
Art. 667 of the commercial code, therefore, impose upon the insured the obligation to make full
disclosure to the insurer on making proposal insurance policy. The beneficiary shall
state(represent) exactly all the facts and circumstances( communicates) within his knowledge and
which are likely to assist the insured to fully appreciate the risks he undertakes. However, when
in violation of the requirement of the utmost good faith the beneficiary (insured) intentionally
concealed facts or made statements (misrepresented) and such concealment or false statements
(misrepresentation) caused the insurer to appreciate the risk wrongly so that had the insurer been
aware of the truth he wouldn’t have entered in to the contract of insurance or would have
imposed terms less favorable to the beneficiary, then the policy shall have no effect (shall be null
and void) and the insurer shall retain premiums paid . Here, the points which must be noted are:
1. Concealment of material facts, false statements(misrepresentation) has to made
intentionally,
2. The concealment of material facts, facts which are misrepresented (falsely stated) must be
material (relevant)to the policy at hand (to the which is going to be concluded). And a fact is
material where it will influence the insurer in determining whether he will insure the risk and if
so, at what premium and on what conditions,
3. Whether concealment is (non-disclosure) of facts or false statements made are discovered
before or after the risk materialized.
If the above mentioned facts exist and intentionally committed, the contract/policy has no effect
and it has no any legal consequence because such non- disclosure and misrepresentation of
material facts is a fraudulent act. But, where concealment of the facts or the false statements made
are not deliberate and it cannot be shown that the beneficiary acted in bad faith, the contract(the
policy) shall remain in force notwithstanding any provision to the contrary.
Therefore, if concealment or false statement are discovered before the risk is materializes, the
insurer is at option. He may either terminate the policy by giving notice of one month or maintain
the policy and increase the amount of premium. Where concealment or false statement are
discovered after the risk has materialized, the insured sum to be paid by the insurer shall be
reduced taking in to account the difference between the premium actually paid and which ought to
be paid had there not been concealment of facts or false statements.

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The Doctrine of Utmost Good Faith is applicable to all types of insurance policy including
insurance for life.
Formality Requirements: as it is mentioned earlier, a contract of insurance must be supported by
a written document called insurance policy. The policy shall contain the place and date of the
contract, the names and address of the parties, the item(object), the liability or the person insured,
the nature of the risk insured, the amount of guarantee, the amount of premium and the time in
which the contract is made. The policy shall come in to force on the day when is signed unless it is
provided otherwise. It may be provided in the contract that the policy shall only come in to force
after the first premium has been paid. The insurer and insured shall be bound prior to the signature
of the policy or endorsements where the insurer hands to the insured (the beneficiary) a document
setting up a provisional guarantee until the policy or the endorsements are signed. The provisional
guarantee is called a cover note for it covers the risk between the actual date of the contract of
insurance and the actual issuance of the insurance policy.
The types of policies: the insurance policy may be made in the name of a specified person, or may
be made to order. Where the policy is to order the insurer may set up against the assignee or
endorsee the defense which he could have set up against the original beneficiary. The policy may
also be made on behalf a third in case where the subscriber is an accredited agent and even where
the subscriber is not an agent. In such a case the third party on whose behalf the policy is
subscribed can avail himself of the policy only where he accepted and the acceptance may be
given even after the risk insured has materialized. As the policy may be made in the name of a
specified person, it may also be made for an unspecified third party who may eventually have an
interest. Such policy shall be deemed to have been made on behalf of the prospective beneficiary.
Rights and duties of the parties: like other contracts, the contract of insurance gives rise and
imposes obligations up on the parties (the insurer and the insured).
Dues of the insurer: the insurer shall guarantee the beneficiary (the insured):
 Against the risk specified in the policy
 Against losses or damages due to the fault of persons for whom the beneficiary is
responsible
 Against risk arising out of unforeseen events or the negligence of the beneficiary unless
otherwise agreed.

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The insurer pays the agreed sum to the beneficiary within the time specified in the policy or when
the risk insured occurs or at the time specified in the policy. However, the liability of the insurer
doesn’t exceed the amount specified in the policy.
Duties of the insured (beneficiary):
The beneficiary shall pay the agreed premium at the time specified in the policy. However, the
policy may not as of right terminate where the premium is not paid in due time. The insurer shall
demand payment of the premium and the policy shall be suspended for one month from the date of
the notice for payment. When the period of one month expires, the insurer will have options that is
either he may demand payment of the premium or terminate the policy.
On making proposals for a policy the beneficiary shall state exactly all the facts and circumstances
within his knowledge and which are likely to assist the insurer to appreciate fully the risks he
undertakes to insure.
After the making of the policy, the risk insured may increase, the beneficiary has the duty to
inform the insurer with in fifteen days from the occurrence that increases the risk insured or from
the day when the beneficiary being aware of such circumstances. In this case, however, the
increase in risks shall be in such a manner that, had the insurer known the fact at the time when
the policy was made, he would not have entered in to the policy or would have imposed less
favorable terms on the beneficiary.
The beneficiary shall inform the insurer a risk which is likely to render him liable within not more
than five days from the occurrence of the risk and the period may not be shortened in the policy
VI. The Law of Business Organization
Business organizations (BOs) can carry out the same kind of economic activities as traders, Public
Enterprises, or Joint Ventures. They run a business for the purpose of making profit.
Business organizations are formed on the basis of the Commercial Code of Ethiopia. All business
organizations but joint venture carry out their activities, acquire rights and bear liabilities in their
names. Therefore, they have their own legal personality. Business organizations are mostly owned
by non-state persons. It is however, possible that the state may participate in profit making by way
of becoming a shareholder (partner) especially in share companies.
The definition of a business organization is provided under Art.210(1) of the commercial code of
Ethiopia.

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Thus, it is defined as a business organization is “Any Association arising out of partnership
agreement”. Indeed they are associations formed by persons (juridical /physical) on the basis of a
contract called a partnership agreement. Art.210 (2) states that “any business organization other
than JV shall be deemed to a legal person.”A partnership agreement is defined as “ a contract
whereby two or more persons who intend to join together and to cooperate undertake to bring
together contributions for the purpose of carrying out activities of an economic nature and of
participating in the profits and losses arising out thereof, if any”.(Art.211 of the commercial code).
The above definition consists of the following basic elements:
1. A partnership agreement:
This is the basis for the formation of any business organization. The persons thinking about the
formation of a business organization must have agreed to form this association. The agreement
consists of the subjective aspects of its formation. For all business organizations except a joint
venture, a written contract document is required for their formation. This document is called
Memorandum of Association. The terms partnership agreement and memorandum of association
refer to the same thing. The contract is the basis for the formation of any business organization.
The memorandum of association essentially consists of the name, addresses and nationalities of the
parties to the agreement, the name of the business organization, the place where the Head Office
and branch offices are situated, the purpose for which is formed, the contribution of the partners,
and the value of the contributions in kind and/or in cash, the mangers, if any and representatives of
the business organization, the proportion or manner of sharing profits and loss, if and the duration
for which the business organization is established, the nature of liability and such other particulars
as may be necessary.
The partners, on top of the memorandum, prepare the detail rules which govern the operation of
the BO to be formed. This document is called Articles of Association which is complementary to
the memorandum
Finally, in its formation and in other relevant cases, the provisions of contracts in general apply
here when it is necessary (Atr.1678 (a-c), etc.)
2. The partnership agreement at least requires two partners.
This is true for all BOs except Share Company for which there must be at least five partners.
There is no limit to the number of partners who may be members of any BOs except in the case of
private limited company where the maximum number members cannot exceed fifty. As a matter of

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fact, the members to partnerships BOs and joint venture are relatively small. A close personal
relationship is so strong in partnership. Contrary this, the number of members in Share Company
may be huge. Here, a share company is predominantly and association of capital (money) than
personal relationship between the partners. Hence, the members requirements must be fulfilled in
each case.
3. When the partners contemplate to form a BO, they must have intended to join together and to
cooperate, i.e., they must have a community of interests and intent to collaborate on an equal
footing over the operation of the business.
4. The partners undertake to make contributions to form the business organization.
Contributions constitute the physical (objective) aspects of the organization to be formed. These
are things which include cash, kind, service, skills, etc. that is put under the disposal of the BO for
its use in carrying out its activities. In return for which the contributor receives membership
interests in the BO. Each contribution must be of value. In case of company, type, the
contributions are always made in cash or in kind or combined. In partnership type, contribution is
in any type including skills and services. The partners who contribute services or skills are not paid
a fixed salary. Instead, receive a share in the profits. Once the partners make contribution, those
contributions become the property of the BO.
5. The partners must have intended to carry out any activity of an economic nature the
return of which is likely to obtain profit (gain). The undertaking must have an economic purpose
the aim of which is to make profits. Obtaining profits is one of the components of running a
business, loss is another. In both cases, the partners are required to share profits and risks of the
undertaking. Moreover, the partner agreement as a special contract is subject to the law of
contracts in general regarding the formation, performance, etc.
Formation Formalities:
The commercial code of Ethiopia prescribes that the formation of all BOs except a Joint Venture
must be in writing and publicized in news papers and registration. A BO is formed on the basis of
a written contract that is partnership agreement (Memorandum of Association). Except for joint
venture, the Memorandum of associations is always made in writing. Another formality is the
requirement of publicity. The public must know about the formation and existence of a given Bo.
Publication is not only a means of acquainting the Bo with the public. It also informs about the
commencement of existence and operation of a BO. The contents of publicity are the same as in

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 the memorandum of association. Publicity consists of registration, deposit of documents, and
publication on the news papers. The partners are required to submit an application together with
the deposit of Memorandum of Association and Article of Association. Thus the relevant authority
can register the area of business activities they would like to operate in and institutional form.
Following registration, the partners are also required to publish it in news papers that contain the
same particulars provided in the Memorandum of Association.
Therefore, a written form is, first of all required for the formation of the partnership agreement (the
contract) and secondly, publicity must follow. When the formation of a BO is published on a news
paper, it is deemed to have legal personality and thereafter the Bo undertakes its activities in its
own name.
Classification of Business Organizations: Business organizations may be classified on the
following basis:
A. According to form (Art. 212 of the Ethiopian commercial Code): there are six forms of
BOs. These are:
1. Ordinary Partnership 4. Joint Venture
2. General Partnership 5. Private Limited Company
3. Limited partnership 6. Share Company
1. Ordinary Partnership: - is a Bo which carries out its activities in its own name and whose
members are relatively small. This Bo is chiefly engaged in non-commercial activities. The typical
forms include consultancy, counseling, advising, etc. Qualification, specialization, or special skills
are required requisites. Ordinary partnership does not involve in production, manufacturing,
selling, distributing etc., of commodities.
Liability towards creditors is not limited to the assets of the BO. The partners are also personally,
jointly, severally and fully held liable to the debt of the partnership. In principle membership
interest cannot be freely transferable to any third party. It requires unanimous decision.
2. General Partnership:-It has the same nature of ordinary partnership including unlimited
liability except the fact that it engages in commercial activities i.e., in production, sale and
distribution of commodities. That means it is a commercial business organization
3. Limited Partnership: - Limited partnership is a commercial business entity comprised of
two or more persons, with one or more general partners and one or more limited partners. A

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 limited partnership differs from a general partnership in the amount of control and liability of
each partner has. It is a commercial Bo.
General partners run the company's day-to-day operations and hold management control. The
scope of individual general partner responsibilities should be outlined in the partnership
agreement. General partners have the power to bind the partnership and the other partners in
contracts that are made in the ordinary course of partnership business. General partners take on the
legal debts and obligations of the business for which they are jointly and severally liable. They
must be named in the certificate of limited partnership as a “general partner”.
Limited partners contribute investment capital in the form of cash, property, services, or a
promissory note or other obligation to contribute the same. They generally do not participate in the
daily operations of the company. Limited partners are shielded from personal liability for
partnership debts and actions, except to the extent of their contribution. Limited partners may be
granted voting rights in a partnership agreement. Additionally, they have the rights to inspection
and seek information regarding the partnership and the financial condition of the business. Limited
partners can be employees of the limited partnership.
4. Joint Venture:-this is a commercial business organization which has unique
characteristics. It is similar to all other BOs by the fact that it carries out economic activity for
gain and is formed on the basis of partnership agreement under the Commercial Code of
Ethiopia. But a written form is not, however, required for the formation of a Joint Venture. This
is a BO which undertakes its business in secret. Its existence is not known to the public. Its
owners are unknown by the public. Its formation is not published on news papers. Where other
BOs are required to be formed in a written form and publicity, JV doesn’t. Moreover, JV is a
short term project; its hidden existence is limited in scope and time. JV is unknown except in
time of legal dispute where by the owners themselves officially disclosed. At this moment in
time the existence of JV becomes known and it automatically becomes the BO by the name,
general partnership. As regards liability, the members are jointly and severally liable towards the
creditors. They have full liability just like ordinary and general partnerships and general
partners in limited partnership.
5. Private Limited Company: is a BO which undertakes a commercial activity in its own
name. The number of members is fixed. The minimum number of members is two and the
maximum is 50. Hence, they are relatively few as with the case of partnerships. The liability of this

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BO doesn’t exceed beyond its assets. In other words, the members have limited liability that they
are only liable to the extent of their contribution to the company when the assets of the company
are unable to cover the claims of the creditors. In this case it has common feature with a share
company whose members have limited liability. The amount of the initial capital is fixed by the
law of private limited company and it is Birr 15,000. However, the upper limit is not fiexed.
Membership interests are not freely transferable just like partnership.
Therefore, Private Limited Company exhibits the characteristics of partnerships and Share
Company. It is a bridge between the two. But irrespective the activities it carries out, it is always a
commercial business organization (Art. 10(2)of the Commercial Code)
Share Company: - It is a BO which undertakes commercial activities in its own name. The
minimum number of members and its capital required for its formation is five and Birr 50, 000
respectively. There is no upper limit as to the size of membership and capital. In fact a huge
number of persons participate in this form of BO. The number is so huge that all members may
not know each other. The personal relationship, unlike in partnership and private limited company
whose members are few, is week where as the capital association is very strong. In Share
Company Liability is limited like that of private limited company. Membership interest is easily
transferable in Share Company unlike all other BOs. Irrespective the activities it carries out, it is
always a commercial business organization (Art. 10(2) of the Commercial Code)
B. According to Liability of the BO
In BOs there are two types of liabilities and these are limited and unlimited liability. BOs incur
liabilities towards their creditors. They may have enough or inadequate assets to pay all debts.
Some are held liable only to the total assets if the debt exceeds the assets. Liability doesn’t pass to
the personal property of members of these business organizations. They don’t have any fear of
losing their personal property. What they lose is only the contribution they made to the business
organization. Those business organizations that are held liable only to the extent of their total
assets are the company forms: the share company and the private limited company.
In some business organizations’ liability is not limited to the total assets. Where they cannot pay
their debts out of their assets, the members are required to pay debts from their personal property.
They would certainly lose their personal property on top of their contributions to the business
organization. The members to these business organizations have unlimited liabilities towards their
creditors. Hence, they are personally, severally, jointly, fully liable to the creditors interests. That

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means each member or few of the or all are liable to pay debts from their personal property. The
BOs, where whose members have full liability, are: Ordinary Partnership, General partnership,
Joint Venture.
There is only one business organization called Limited Partnership some of whose members have
limited liability and others(general partners) have unlimited liability. The nature of the liability of
the partners may be determined by heir agreement. Therefore, concerning the nature of liability,
the company forms, Share Company and private company, are indeed recommended for investors.
Because the investors don’t have any fear to lose their personal property incase the organization
fail to pay their debts from the total assets they might have at their disposal. The company form
provides the sense of security and invites a host of investors to invest their money. The partnership
form doesn’t, however, guarantee the investors against loss of their personal property. There is
always fear and uncertainty to lose one’s own property where the partnership doesn’t have enough
assets to settle their debts to pay to t heir creditors.
C. According to whether the Bo is Commercial or Non- commercial
All BOs are commercial except the ordinary partnership which is non-commercial business
organization in nature. BOs that produce, sales, distribute commodities exhibit a commercial
character. This is true for General partnership, private limited company, Joint Venture and Share
Company. Contrary to this, ordinary partnership doesn’t engage in production and selling and
buying commodities. It engage in consultancy, advisory, counseling, etc. services, .
Dissolution and Winding-up of Business Organizations
Dissolution is the termination of the operation of a business organization. The Bo ceases to
operate. The following are grounds for dissolution:
1. Where the members agree to dissolve the BO is established
2. Completion of the purpose for which the Bo is established
3. Failure of the purpose or impossibility of achieving it
4. Expiry of the period for which the Bo was formed
5. Good cause such as serious disagreement of the parties failure of cooperation, permanent
illness, and infirmity, absence, etc. in such cases, the court orders the dissolution of the BO
6. In case of share company,75% loss of paid-up capital
7. Up on the decision of the court declaring bankruptcy

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Following the termination of the operation, the BO must settle all debts that it owes and collect
assets (money) which others owe to it. Employees’ claims and taxes must be paid too. The division
of any remaining assets among the members must be accomplished. This process of settling debts
and distributing the remaining assets is called winding-up. It is also called liquidation.
The process of liquidation takes some time to complete. Until it becomes final, the Bo retains its
personality. Members themselves may appoint a liquidator by agreement who can would be in
charge of the liquidation. If they fail to agree, the court can appoint a liquidator(s). This procedure
of appointment is applicable in dissolution caused by non-bankrupt causes. In case of bankruptcy,
always the court appoints a liquidator(s).
The liquidator assumes the duties and the responsibilities of the managers or directors (in case of
Share Company). They take inventory; take possession of accounts, books and property of the Bo
under liquidation. The liquidator represents the Bo, sell the property. They may not carry out a new
business unless it is necessary for the completion of the liquidation process.
The liquidator calls on all the creditors, prepares a financial statement of the BO. Upon the
completion of the settlement of debts and distribution of assets, if any, the dissolution of the Bo is
again publicized on the news papers so that the public becomes aware of the phenomenon. When a
BO is dissolved and wound-up, it ceases to exist. Hence it loses its legal personality.
Summary:
Dissolution is the end of the legal existence of a corporation. It usually occurs after liquidation,
which is the process of paying debts and distributing assets. There are several methods by which a
corporation may be dissolved. The first is voluntary dissolution, which is an elective decision to
dissolve the entity. A second is involuntary dissolution, which occurs upon the happening of
statute-specific events such as a failure to pay taxes. Last, a corporation may be dissolved
judicially, either by shareholder or creditor lawsuit. A dissolved corporation must provide notice to
its creditors of upcoming dissolution.

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