Business law

Course Introduction

The changing scene in the world of business demands the government to step into, make laws to
govern the norm and behavior hence business people have not taken the steps to make moral and
ethical decision on their own. Besides it is important to familiarize with the basic concepts of
business law which you can possibly encounter on your day-to-day activity.

There are many reasons for business today to be legalistic in their managerial decision-making.
Several topics we have covered in this material have indicated the importance of law to business
people. We learned for example that the major benefit of incorporating laws is that it gives
investors limited liability from lawsuits. The decision of risk management showed the law suits
today resulting from product injuries or other liability suits might be so coasty that insurance is
difficult if not impossible to buy. In addition to the lawsuits to the laws, regarding liability, a
business person should be familiar with the laws regarding persons, contracts, agency, sales,
business organization and negotiable instruments.

The role of business law for our growing business is indispensable. Law shapes business ethics.
Law guards a business from business risks and loses. Law controls relations in business
transactions. Law is a day-to-day loyal friend to business. If the business denies the law the law
denies itself.

Therefore, the purpose of this material is to acquaint students with the basic concepts of law and
let them be familiar with the expected legal issues in their legal relationships and transactions.

Chapter one

Introduction to business law

Learning objectives

After completing this unit you will be able to:

 Understand the meaning and nature of law;

 Describe sources functions and classification of laws; and
 Know different types and classification of laws.

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1.1. Meaning and nature of law

1.1.1. Meaning of law

There is no ready-made definition for law until now. Scholars of law adopted various definitions.
Let us see two different definitions of them.

According to the Blacks law dictionary, the first definition adopted by Professor Hugh, law is a
scheme of social control, which by means of legal capacities backed and sanctioned by legal
redress, delimits personal liberty for the protection of social interest.

Social interest is a need of an individual or a group presentation of the peace the protection of
individuals and institution from encroachment by others, and pursuit of economic, social interest
recognized and given protection by the law. The second definitions of law formulated by the
American law institute. Law is the body of principles, standards and rules, which the courts of a
particular state apply in decision of controversies brought before them.

1.1.2. Characteristics of law

Each legal system in the world should have among the other things the following
characteristics

 Prescribe general rules of conduct

 should not be retroactive/non-retroactivity of criminal laws/
 should provide clear standards of decision
 should be given obedience by citizens
1.2. Sources of law

An enforceable human conduct / a law/ may arise from repetition of the conduct, or from
enactment of the rule. The predecessors of law include the custom, the religious , ethical and
beliefs. As society grew more complex, the state emerged and law replaced custom what then
may regard as source of law.

A custom is the habitual repletion of certain conduct. Where that conduct to hold consider, its
observance may ripen into a customary law. Depending on whether a conduct’s recurrence

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originated primarily with the people, with the judges or with contract-makers, the customary
rules eventually arising there from are

 popular
 judicial
 contractual

The following can be taken as the basic sources of law

1.2.1. Legislative sources

Legislation in the modern time especially in the continental law systems and in Ethiopia, are the
cardinal source of laws. Such laws could be Laws enacted by the pertinent law making body of a
state. The law making organ is defined by the supreme law of the state or the constitution. For
example the Federal Democratic Constitution of Ethiopia addresses legislative process and
power in articles 79-92. The laws in general are known as statutes.

1.2.2. judicial sources

Judicial decisions include judicial treatment of statutes and judicial rulings in situations not
governed by statutes. The typical example is the common law countries following judge-
made law.

1.2.3. administrative sources

Laws and regulations published by government agencies, which have the force of law.

1.2.4.Custom

The popular ordinary laws are originated from the people, little by little, through following
concordat usages with the belief that they are binding /opinion necessitates/. For instance certain
amount of money or cattle may be customarily paid in compensation for defined insults or
injuries. In Ethiopia there is a host of such customs. They are not uniform and continuous, but
vary from place to place and from time to time. In early societies custom is the main source of
law. In Ethiopia until the era of codification/1957-1965 G.C/ customary laws were highly
dominant source of laws.

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1.2. Classification of laws

Classification of legal rules is difficult. The border lines between law branches are sometimes
blurred. However imperfect, classification is necessary. Because different principles govern
different law branches, Codification, doctrinal exposition and practice, are all impossible without
an orderly arrangement of subject matter.

1.3.1. Public and private law

i. public Law

Public law regulates the acts of persons who act in general interest in virtue of a direct or
mediate delegation emanating from the sovereign, while private law regulates the acts of
individuals doing by their own names for their own individual interests. Public law may also
be subdivided into international public law and national/domestic/ laws.

A. International public law

International public law governs primarily relations of equality sovereign states. The
legal character of rules is controversial because of their scarce enforceability.
B. National/domestic/ public law
Which governs primarily, relations of authority between states and subjects. This in
return may be subdivided as follows;
 Constitutional law- which defines the legislative, judicial and executive powers of
the state’s supreme organs. In addition many modern constitutions, including the
Ethiopian one, define the fundamental rights of the people. Constitutional law stands
above all other laws.
 Administrative law- concerns the executive branch of government /e.g the
ministries, government officials/. It is recent formation as a distinct branch of law.
 Financial law- concerns the state revenue has its roots in constitutional law. Being
distinct important and coherent it has emerged from administrative law into separate
law branch, which however, is often studied with the public finance branch of
economics, because of the many problems common to both. Ethiopian laws regarding
taxes, other state revenue and budget are found in several Negarit Gazetas.

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 Penal law- is very distinct branches of public law in spite of doctrines maintain that,
for from being autonomous it merely sanctions basic rights/ of personality, of
property…/ expressed in other laws through defining and punishing their
infringements. Penal law is public law branch concerning state imposed punishments,
which safeguard not merely some rights but public order itself.
ii. Private law

There is a distinct nature of private law from that of public law the basic nature is

1. Relations of equality between people of private persons not representing the state or its
agencies. / The private person excluding the public person/. E.g. contracts
2. Certain ordinary relations with the public legal persons themselves. E.g. administrative
contracts supplemented by contracts.

Private law is typically excluded from penal relations/ penal law/. Private law may be subdivided
into international private law and internal/ national/ private law.

A. international private law

Deals with such private legal relations which involve an extra national element / foreigners
marriage of succession, assets abroad etc/ requiring foreign and national laws. Although
involving extra-national elements, these choices of law rules are enacted by the national
governments and are known as conflict of laws.

B. Internal private law

Governs private relations, not containing essential foreign elements. In Ethiopia it would be
governing all private cases were it not for the fact that our courts sometimes choose to apply
foreign laws in certain situations of choice of law. Internal /national/ private law can be
subdivided as follows:

 Civil law: it is the ordinary common law of the people. It contains store of legal
principles and concepts, which also serve other law branches. For example first modern
civil code of Ethiopia was enacted in 1960 G.c embraces the majority of code law and is
so vast that its division and subdivisions may be treated as separate law subjects. The five

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books of the civil code gear on persons, family and succession, goods/property/,
obligations and special contracts.
 Civil procedure law: provides the means for enforcing civil law. In view of the wide
scope and impact of civil procedure law, it is increasingly as an important field of study.
The Ethiopian civil procedure code was enacted in 1965.
 Commercial law: deals with merchants and commerce. Although formally apart from the
civil law through being enacted in separate code, commercial law is closely related to
civil law. Commercial law cannot be really understood and properly applied without prior
knowledge of civil law.
1.3.2. Civil versus Criminal Law

Civil law is a branch of law that deals with civil matters as opposed to criminal matters. In
Ethiopia, we have a civil law codified in 1960, which is known as Civil Code. On the other hand,
criminal law is a form of public law that imposes duties on persons and specifies that any
violation of those duties is wrong not only to the individuals who are immediate victims but also
the public at large. Today we have a criminal law enacted in 2004 which is a revision of the 1957
Penal Code of Ethiopia.

Civil law and criminal law can be distinguished based on two grounds.

 Sanction: If the defendant loses a civil case, the sanction against the defendant is
generally monetary. However, a defendant, who loses a criminal case can be fined, but
also can be imprisoned or even executed.
 Standard of Proof: In a criminal case, the state has the responsibility to prove beyond
reasonable doubt that the defendant is guilty while in a civil case, the plaintiff tries to
prove by a preponderance of the evidence that the defendant was responsible for a civil
wrong.

1.2.3. Substantive versus Procedural Law

Substantive law provides the rights and obligations of citizens. On the other hand, procedural law
provides the procedures and mechanisms of enforcing the rights and obligations, which are

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provided in substantive law. In Ethiopia, there are mainly two procedural codes: The 1965 Civil
Procedure Code of Ethiopia and the 1961 Criminal Procedure Code of Ethiopia.

1.3. Hierarchy of laws

Hierarchy of laws is coordinated arrangement of laws among which superior and subordinate
relationship is manifested as direct reflection of power order in the law-making organ.

LawsLaw making organs

Constitution people
Proclamation parliament
Regulation executive organ

Laws which are made by the superior organs are superior and those which are made by
subordinate organs are subordinate.

In most legal systems the constitution stands at the top of the hierarchy of laws. Primary
legislations come and subordinate laws/ executive laws/ stand next below the primary laws.

1.4. Function of Laws

The much known functions of law can be summarized as follows:

 laws as a tool for preservation of peace and order

 laws as platform of human co-operation
 laws as instrument of domination
 laws as mechanism for human engineering
 laws as an instrument to administer justice

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Chapter two

Law of persons

This Unit concerns itself with the law of persons. It is only persons who can be parties to a legal
relationship. For instance, only persons can be parties to a contract. In later Units we will be
considering such legal relationships as contracts, sale, agency, insurance etc. As a result it
becomes necessary to commence the discussion by considering rules concerning persons who
can be parties to such relations. With this objective in view, the Unit proceeds with a definition
of the term persons. It also deals with rules concerning commencement of personality in natural
and artificial persons and also the attributes or characteristic features of the latter.
Objectives:
At the end of this chapter students are expected to be able to:
 Define person;
 contrast physical and juridical persons;
 explain the beginning of physical personality;
 identify the grounds of incapacity; and
 identify the grounds of termination of personality
2.1. Meaning of Legal Person
In ordinary language the term person refers to individual human being. However, in the field of
law, the term person refers to all beings capable of having rights and duties. Thus, the term
person encompasses all beings bearing rights and duties.
There can be human beings who are not considered as persons or holders of rights and there can
be persons or holders of rights and duties who are not human beings. Such was the case for
slaves in Roman law, monks during the Middle Ages, or people sentenced to civil death. Though
slaves and monks are human beings, they did not enjoy rights and were not bound with duties.
On the other hand, personality may be granted for an unborn child who is not yet a full human
being (See article 2 of the civil code).
Basically, there are two kinds of persons:
1. physical (natural) persons- It refers to human being

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2. Judicial (artificial) persons-Legal persons include beings, which are given rights and
duties by the operation of the law. They are called artificial persons cause of the simple
reason that they are considered as persons with the recognition of the law. They are not
actual human beings. They include associations, share companies, private limited
companies, etc. Judicial persons are also referred to as legal, fictitious, and moral
persons.
2.2. Commencement of Personality in Natural Persons
Article 1 of the Civil Code provides that “The human person is a subject of rights from its birth
to its death.” Thus, in the case of human beings, personality commences or starts at the moment
of birth. In other words, a human being becomes capable of having rights and duties from the
moment of birth. It is contestable when a child is considered to be born. Does it refer to the
separation of the child from his mother’s womb? Is it the beginning of the contraction of the
womb? Is it the total cutting of the umbilical cord? Reflect your stands. Having these questions
in mind let’s proceed to other discussions.
In some cases, birth is not by itself a satisfactory criterion for determining the granting of
physical personality. A merely conceived child might be considered as a person when its interest
so demands. The interest is usually, if not always, connected Utfto the matter of succession. A
typical example is a father dying while his wife is expecting a child. The property of the
deceased father opens for succession before birth and, the conceived child, not being a person, as
he is not yet born, is not taken in to account in the succession of the property of his father. If we
were to apply the principle that personality commences at the moment of birth the unborn child
is not a person. Thus, a conceived child whose father dies before its birth would not be entitled to
the property of his father as he was not yet born when the succession of his father opened. This
would mean that the child would be penalized twice: by the death of his father and by preventing
him to inherit the property of his father.
This shows the application of the rule that personality commences at the moment of birth does
not protect the interest of the unborn or the conceived child. Thus, this makes it necessary to
provide an exception to the general rule laid under Article 1. This exception provided under
Article 2 reads:

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

Therefore, personality is granted to an unborn or merely conceived child up on the fulfillment of

three conditions:

i) the interest of the child justifies the grant of personality;

ii) the child is born alive; and
iii) the child must be born viable.
The interest of the child is said to justify the grant of personality only where the advantages
outweigh the duties or the inconveniences. For instance, it would be in the interest of a conceived
child to be an heir to succession of which the assets would, by far, exceed the liabilities. He
would be a subject of both rights and duties. However, being considered as a person would be
beneficial for him.
Secondly, the child must also be born alive. A child dead in his mother's womb will never be
considered as having had personality.
Lastly, the child must be born viable. Viability means the aptitude to live. A child who lives for
48 hours is presumed to be a person from the moment of his conception. The unborn child is
considered as a person from the moment of his conception onwards.
On the other hand, if a child dies before 48 hours after his birth, there is a presumption that he is
not viable and the first presumption that he was a person from the 300 th day before his birth
onwards, cannot operate. Yet, if the death is not the result of a deficiency in the child's
constitution he would be considered viable though he does not stay for 48 hours.
What are or are not constitutional (natural) deficiencies, in the child's constitution is to be
decided on the basis of medical evidence. There are obvious circumstances where the death does
not result from a constitutional deficiency, e.g. if the child bumped and dies of fracture of the
skull, if he is killed in a car accident, etc. Once it is proved the death is caused as a result of
something different from the child's constitutional deficiency then the child is considered as
having been viable even if he died before 48 hours after his birth.
2.3. Commencement of Personality in Legal (Artificial Persons)
It has been clearly stated above, as a rule, a human being becomes a person or capable of having
rights and duties at the moment of birth. An artificial person such as associations, share

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companies, private limited companies become persons or beings capable of having rights and
duties only where they fulfill two conditions: publicity in a newspaper empowered to publish
legal notices and registration in the commercial register. (Article 223 of the Commercial Code) It
is only up on publicity and registration that an artificial or legal entity would have legal existence
and attains personality. There are other institutions which acquire their legal personality by
proclamations.
Exercise
How does Gondar University acquire its personality?
2.4. Attributes of Legal Personality
The following are some the most important features of artificial persons.
i) They can sue and be sued in their own names. Since artificial persons have their own
legal existence distinct from their associates, they can sue and be sued in their own
names. Thus, if someone claims money from a share company, he has to bring action
against the partnership and not the individual shareholders. Likewise if the share
company claims debt from others, it has to bring the action in its own name.
ii) Artificial persons can conclude certain juridical acts like contracts in their own
names.
iii) They can administer their property in their own names.
2.5. Capacity
It is the ability to exercise one’s rights and duties by oneself. The law assumes, as a rule, all
persons have the ability to exercise their rights and duties by themselves. But, the law regards
some group of persons as incapable and appoints other to exercise his/her rights on his/her
behalf. The civil code generally categorizes these persons into two: general incapacity and
special capacity.
capacity. Under Ethiopian law, the following group of persons are said to be incapable.
1. Minors: Persons who have not attained the full age of 18 years.
2. Judicially interdicted persons: Persons who are declared by the court as incapable
because of their mental problem/senility
3. Notoriously insane persons:
persons: Persons who are inmate of a hospital or an institution for
insane persons or of a nursing home by reason of their mental condition for the time for
which they remains as an insane and persons who are under special protection-family or

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other people keep over them a watch required by their mental condition and where their
liberty of moving is restricted.
4. Legally interdicted persons:
persons: the court examining the behaviors of the criminal, if
assumed important, may withdraw certain civil rights
5. Foreigner: the law imposes some limitations because of their nationality (there are
investment areas exclusively reserved to Ethiopian citizens and political rights).
6. Persons discharging special functions
2.6. Termination of Physical Personality
When does physical personality ends? In Ethiopian law, there are two basic grounds for
termination of physical personality.
i. Death and
ii. Absence;
It is a court declaration given where a person disappears for more than two years and there is no
news on his whereabouts. On the application of any interested person, where the court is
convinced that the person is likely (but not certainly) to be dead, and declared disappeared
person’s absence. Absence has the effect of death. But unlike death, it does not terminate
personality permanently. The counting of time interrupts if any news is heard on his
whereabouts. For instance, assume that Ms.Z has disappeared on September 01, 2012 from her
residence city, Axum. If she is seen on June 10, 2014 in Dire Dawa travelling on train, then the
period of limitation is interrupted since there is news on her whereabouts. The counting of period
of limitation starts as a new.
2.7. Termination of legal personality

The legal personality of artificial persons like share companies, associations, NGOs etc shall
terminate when the concerned entity is dissolved or cancelled from registry

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CHAPTER THREE

Business and Business Entities

Introduction

As Business students comprehending the legal regime governing business would simplify an
undertaking you may shoulder in the course of your professional career. Ethiopian legal system
recognizes trading activities falling under the domain of business, done severally or in
association. Thus the chapter, which thought you about the concept of legal personality, is quite
meaningful for business organizations which trader or non traders may opt to form in order to
run trading or non commercial activities. The procedural and substantive requirements for the
bestowment of legal personality to business organizations will be the subject matter of this
chapter.

The first section of this chapter will define business and the constituent elements of business
especially, the major elements of business that worth protection by law. In addition, it will
identify the persons, be it an artificial and biological person that could participate in trading
activities and differentiate their status from the so called civilians. The next section of this
chapter will discuss the process of formation, management, and dissolution of business
organizations.

7.1. Definition and Elements of Business

The definition of business depends on the profession interested in defining it. So, from legal
point of view it is provided there in our article 124 of our commercial code, a code its scope of
which is limited in governing commercial activities of our nation. Enacting this code is the
exclusive legislative power reserved to the federal government as stated in article 55(4) of the
1994 FDRE Constitution.

Article 124 of the Commercial Code defines business as

“An incorporealmovable consisting of all movable property brought together and

organised for the purpose of carrying out any of the commercial activities specified in
Art.5 of this Code.”

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Clearly, from the definition provided above business is an incorporeal or intangible thing that
doesn’t have a physical existence yet demands a legal protection as everything does. As
infringement or disturbance to corporeal things, with their own physical existence would entitle
the owner or possessor of those things to bring a legal action for the cessation of the interference
so can a business owner claim in the event of intervention to his business. However, the scope of
the definition doesn’t exclude the tangible or corporeal things entirely from the definition of
business. The phrase ‘’all movable property brought together and organized…………..’’
Remarks how movable things like table, chair, TV, machineries, motor vehicles and others can
be defining elements of business to some extent.

The last phrase of the definition clarifies to what end those movable things could be organized. It
says ‘’carrying out any of the commercial activities specified in Art.5 of this Code.” So the
activities that any business pertains are illustrated in article 5 of the commercial code as
commercial activities in the following manner.

(1) Purchasing of movables and immovable with a view to re-selling them either as they are
or after alteration or adaptation;
(2) Purchasing of movables with a view to letting them for hire;
(3) Warehousing activities as defined in Art.2806 of the Civil Code;
(4) Exploitation of mines, including prospecting for and working of mineral oils;
(5) Exploitation of quarries not by handicraftsmen;
(6) Exploitation of salt pans;
(7) Conversion and adaptation of chattels, such as foodstuffs, raw materials or semi-finished
products not by handicraftsmen;
(8) Building, repairing, maintaining, cleaning, painting or dyeing movables not by
handicraftsmen;
(9) Embanking, leveling, trenching or draining carried out for a third party not by
handicraftsmen;
(10) Carriage of goods or persons not by handicraftsmen;
(11) Printing and engraving and works connected with photography or cinematography not
by handicraftsmen;
(12) Capturing, distributing and supplying water:

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(13) Producing, distributing and supplying electricity, gas, compressed air including heating
and cooling;
(14) Operating places of entertainment or radio or television stations;
(15) Operating hotels, restaurants, bars, cafes, inns, hair- dressing establishments not
operated by handicraftsmen and public baths;
(16) Publishing in whatever form, and in particular by means of printing, engraving,
photography or recording;
(17) Operating news and information services;
(18) Operating travel and publicity agencies;
(19) Operating business as an agent, broker, stock-broker or commercial agent;
(20) Operating a banking and money changing business; and
(21) Operating an insurance business.
However you should take note that these are not the only activities which shall be considered as
commercial activities. Hence Business activities may pertain to health, construction and
education activities that have been recently defined as commercial activities by federal
government as per the power entrusted to it constitutionally.

The commercial code’s illustration though ends in article 5, it also illustrates some activities that
could not be considered as a commercial acts. Accordingly as per article 6 of the commercial
code Persons who carryon activities relating to agriculture, forestry, breed cattle or maintaining
pastureland, are not considered as traders. This is the case when they sell the products of the land
they exploit or use, or animals or, the products of animals bred mainly from the resources of the
land which they exploit or use. In addition, the manner of conducting the agricultural or forestry
activity wouldn’t impact the status of such person as he can undertake the exploitation
individually or collectively like in cooperative undertakings.

In addition to the above groups, a Nurseryman who sells plants that grow on the land he exploits
or uses will also not be considered as a trader.

Whilst conducting such agricultural, Forestry or nurseryman activities the mechanism shall be
done in accordance with the usual practice of their act provided that those acts relate only to the
land which they exploit or use without considering the form of activity as it can be done
individually or through cooperative and agricultural community traditions.

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The remaining couple of provisions of the code (article 8 and 9) exclude Fisher man and
Handicraftsman respectively out of the scope of application of the commercial activities.

7.1.1. Trader/Business Person vs. Civilian

Do you think that every person involved in the provision and production of the above lists
(article 5 of the commercial code) could be considered as a trader/business person?

The same article of our commercial code distinguishes a trader from a civilian. So, as you may
have argued it whilst addressing the question above not every person involved in the activities of
article 5 or other activities of other pertinent laws can be considered as a business person or a
trader.

Art. 5., - Persons to be regarded as, traders.

Persons who professionally and for gain carry on any of the following activities (activities listed
above on page 80 ) shall be deemed, to be traders.
So, the person shall professionally participate in the commercial activity. Here, professionally is
referring to an act of the person to continuously or participation of the person on the act without
intervention. For instance he shall not do those activities as his part time works.
Besides the element of professionalism the law demands further element i.e. for gain for a person
to be considered as a trader. So, even if he is doing the aforementioned act professionally or
continuously that will not classify him as a trader unless some financial gains are observable
from the activity. This element is there purposely to disqualify persons who involve in the lists of
article 5 only for not profit sake as it is the case for Non profitable and humanitarian
organizations.
NB identifying a person as a trader or a civilian has various legal ramification. Most notably for
tax purposes, obtaining a business license, and other duties. For instance it is only a trader which
the law imposed an obligation to keep books and accounts, preparing financial statements and
others. Hence a civilian is not under any of therefore mentioned obligations. But a trader who
fails to obtain a business license would be exposed to fine (monetary punishments to be paid to
government) and Imprisonment when the need arises. Plus, even for Tax purposes a trader who
failed to record his daily transaction, who also didn’t prepare financial statements is exposing
himself to tax by the Tax authority’s estimation.

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7.1.2. Basic Elements of Business and their Protection

As mentioned above business has 2 constituent elements, corporeal movables and incorporeal
things. The lionshare characteristics of business is however, claimed by incorporeal assets like
Good will, Trade name, Trademark and Patent and Copy Right.

A. Good will

It is not uncommon to use the term good will in our daily transaction. We even use it to explain
the exorbitant price tags attached in the goods and services we encounter as a consumers, even
though, we also take note that the good will is not an element of a business built with an
overnight investment. It consumes a lot of money, energy and other business skills. Good will is
in fact one of the market barriers that a new market entrant should deal with. The existing firms
with an already established goodwill have a defmite plus over any new entrant firm and make
competition difficult for the new firm. So if good will is the main component, in fact the exact
identity of any business there should be a legal recognition and protection device for it.
Unquestionably therefore or commercial had gave enough credit to this element as an inherent
element of business which is observable in article 127(1) of our commercial code. Particularly
article 130 of the code defines it “The goodwill results from the creation and operation of a
business and is of a value which may vary according to the probable or possible relations
between a trader and third parties who may require from him goods or services.”
The commercial code attaches special importance to the goodwill of a business. This is apparent
when article 127(1) enshrines that a business consists mainly of a good will. Thus, the goodwill
of a business is considered to be the most important element of a business. The question then is
what does goodwill refer to? Article 130 of the code defines goodwill as resulting from the
creation and operation of a business and of a value, which may vary according to the probable or
possible relations between a trader and third parties who may require from him goods or
services.

Goodwill, being the main constituent element of a business, results from the creation of business.
It is reputation, credit, or reliability that a certain business acquires as the result of its goods or
services. The code doesn’t simply define what goodwill is but also envisaged an adequate
protection mechanism of it. For instance what if a certain producer or service provider goes

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against the already established good will of another business? The protection is triggering for the
following main reasons, Consumers being the center of analysis.

1. Any business owner who demises the value of good will of another business is only
benefiting himself not the consumers. Plus he is making a profit not from a healthy
market competition. And in theory it is well noted that healthy competition among firm
owners that can benefit the consumers.
2. As a logical out flaw of the first reason healthy completion will benefit the consumers
since the firms will be able to provide quality goods and services at least price to the
consumers. However, in case of questionable competitions as in the case of acts discredit
or imitate the good will of business consumers would probably be provided less quality
service and good
3. Such kind of malpractices may discourage the business owners from developing
goodwill and only look for destructive behaviors which would ultimately harm
consumers.

In short consumers’ interest from business point of view is safely protected only when there is a
genuine competition between the firms. The deceptive behavior is shadowing a cloud the non
informed consumers only.

Illustration I: Assume that there are 2 hotels involved in the provision of hotel services in
district A. Now the Goodwill of hotel B overrides any hotel in the district due to the location that
is built, the exceptional guest reception system, which include interalia; transportation service,
comfortable bedrooms, cafeteria, restaurant service sparkling and sufficient meeting hull, and
fair price. Now assume further that Hotel C, one of the hotels in the given district imitates the
trade mark of the hotel and let the consumers to be deceived without mentioning the faire market
it shared with Hotel B. Here, Hotel C instead of providing the essential services of Hotel B
simply copied the Trade mark of Hotel B and attracted false fully the consumers to its hotel
which clearly attacks the goodwill of Hotel B.

Considering the occurrence of same circumstances the law regards such acts as unfair acts
targeting the goodwill of a business counterpart.

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Illustration II: In the aforementioned hotel cases hotel C without imitating the trade name,
trademark neither without stealing the copyright or patent of hotel B, could simply discredit the
goodwill of hotel B, by using false statements, likely to misled consumers. These acts are also
purely against the good will of hotel B as they spoil the goodwill of the business owner.

Illustration III: Yet the aforementioned scenarios are not the only causes of unfair competition
or acts that disrupt goodwill. Let’s stick to the hotel cases. Assume that the owner of Hotel B has
sold the hotel for 2,000,000.00 ETB (Two Million Birr) to Ato C on June 23, 2014. Later on, Ato
B, the ex owner of hotel B decided to re open another hotel business at a place 100 meter far
away from his earlier hotel’s address ,which he has already sold it, using the same trade name i.e
hotel B. Now in such cases Ato B is deliberately attacking the hotel of Ato C, hotel B. T he
moment he sold his hotel to Ato C he has transferred everything including the trade name to ato
C. He can’t re open another hotel using the same trade name. After all, Ato C has paid the
purchase price not for the hotel furniture’s as they couldn’t have cost him more than 200,000
ETB (Two hundred thousand birr). Rather the 1,800,000(One million eight hundred thousand is
paid for the Good will of Ato B, i.e. the trade name. So one he gained that price there is no any
legal ground for him to re open using the trade name unless he deliberately wants to attack the
good will of Ato C’s hotel(hotel B).

Legal remedies /Effects of unfair competition.

The protection of good will under our commercial code goes to the extent of payment of
compensation to any of the damages sustained by unfair trading act. Here is what article 134
responds to unfair acts mentioned above.

( 1) The court may, in cases of unfair competition:

( a) Order that damages be paid by the unfair competitor; and
(b) Make such: orders as are necessarily to put an end to the unfair competition.
(2) The court may in particular:
(a) Order the publication, at the costs of the unfair competitor, of notices designed to remove the
effect of the misleading acts or statements of the unfair competitor, in accordance with
(b) Order the unfair competitor to cease ibis unlawful acts in accordance with Art. 2122of the
civil code.

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B. Trade Name
This element as an incorporeal element of business has also got legal protection too under our
commercial code as it is defined “the name under which a person operates his business
and which clearly designates the business”

C. Distinguishing Mark
Though not every business is obliged to have a distinguishing mark, it constitute as an essential
element of a business when assigned once. Here is the definition provided by our code in order to
distinguish it from trade name.
Distinguishing Mark is the name, designation, sign or emblem affixed on the premises where the
trade is carried on and 'which clearly designates the business.
Activity
Discuss the conditions a person should meet in order to run a sole proprietary business?
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7.2. Business Organizations in Ethiopia

Introduction

Students in the first section of this chapter we have seen how competition when protected by law
can serve the best interest of consumers. Unfair competitive behaviors are prohibited by our
commercial code merely because competition is believed to be the safest tool of achieving
consumers’ interest. Besides we have seen a couple of merits of healthy competition most
notably the provision of quality goods and services to the consumers yet without forgetting to
mention the least price that we, consumers, could be offered if there are multiple firms or
individuals involved in the provision of goods and services.

However, it is not only competition which would provide an endless protection to consumers. In
most cases cooperation between an individual and firm competitors appears to be more
protective to consumers. Thus, demands the recognition of cooperation between and among
goods and service providers or producers. Comforting with such kind of objective our

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commercial law once more encourages producers and service providers to work together.
Individuals who have enough capital may not have the skill of administrating it hence must join
with a person who has the desirable skill of managing capital. Similarly, a person who owns land
may not have a cash to make his land marketable nor he may have the skill of administrating it.
Bringing the four economic factors; Land, entrepreneurial skill, capital and labor would
definitely provide a sparkling opportunity to consumers. That is why our commercial code
prohibits for banking and insurance business to be undertaken by individuals. Because Banking
and Insurance Business demands huge amount of capital and other economic factors. Plus
consumers interest could be kept safe when there are numerous members running the banking
and insurance business. Placing the fate of banking and insurance consumers on individuals
would probably cost consumers much had our law been not ignorant to individually or solely
owned banks and insurance business. So, the second section of this chapter will explain the
mechanisms of cooperation between business owners also known as Business Organization.

7.2.1. Business Organization defined

A business organization is any association arising out of a partnership agreement. As you can
observe from the given definition business organization is a form of association but only can
emanate from partnership agreement. Thus demands addressing the meaning of partnership
agreement. A partnership agreement is defined on our commercial code as
“a contract where by two or more persons who intend to join together and to cooperate
undertake to bring together contribution for the purpose of carrying out activities of an
economic nature and of participating in the profits and losses arising out thereof, if any.”
The definition contains a number of essential elements;
1. It is a contract. As you may recapitulate from the chapter addressing law of contracts;
Consent, capacity, object and form, when necessary, are essential elements of every valid
contract. So, a partnership agreement, a primary step to the formation of business
organizations shall also reflect the aforementioned four crucial elements of contract.
2. The other element of the definition is the fact that there must exist two or more persons in
every partnership agreement.
3. Those two or more persons unlike other contracts are not agreeing to secure their
personal interest only. The term ‘who intend to join together and to cooperate; clearly

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portrays that parties in partnership agreement are agreeing for the sake of collective
interest. Still parties will bargain here, though not for individual gains. The negotiation is
only towards one end i.e. to secure their collective interest.
4. Further those parties are undertaking to bring together contribution. As mentioned
above in the introduction part their contribution differs depending on what they actually
have. Since the contribution of Some partners could only be in cash, other partners may
contribute in kind, though it should be valued in cash. For example a partner may
contribute his car to the business organization as some other one could possibly
contribute his skill.
5. They are agreeing to participate in an activity of economic nature. This element of the
definition is there to purposely exclude activities done by civil association with a
humanitarian nature.
6. Finally the last phrase of the definition’participating in the profits and losses arising out
thereof, if any’ relates to the crucial element of any business i.e. Profit and loses.
So, as far as profits and losses are concerned every member shall participate in the profit
or loss the organization may encounter. In other words partners cannot agree to assign the
whole profit to a single partner nor can they assign the whole loss to a single partner. So,
their share in the profit and loses could depend on the amount of contribution they have
made nevertheless a partner can’t be excluded from a profit right entirely nor shall he
shoulder the whole debt or loss of the organization. For example a partner who
contributes 10,000 ETB in cash may not have an equivalent claim of profit with a partner
who contributes a SynoTrack, worth 1000,000 ETB. But he shall have a profit claim to
the extent of his contribution i.e. 10,000 ETB. Similar analogy goes to share of losses as a
partner contributing syno track could share more than a fair loses comparing to the
partner contributing 10,000 ETB.
7.2.2. Types of Business Organizations under Ethiopian Law
There are 6(six) types of business organizations in Ethiopian’s commercial code.
1. Ordinary Partnership(Sole proprietorship)
2. Joint venture
3. General Partnership
4. Limited Partnership

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5. Share Company
6. Private limited Company( private companies)
The six types of business organizations are different and are one of their own kinds, though there
are some characteristics that they share in common. The following points are an indication of the
common nature that all possesses.
 The formation of each type of business organization shall be in writing save for
Joint Venture.
 All of them shall be granted legal personality excluding Joint Venture.
 All of them exist artificially. Even the personality granted to them is only legal;
hence they all run their trading activity through agent (Biological Person) only.
 As mentioned above in the definition part assignment of profit or loss to a single
partner is totally prohibited in all kinds of business organization.
 Other communality between those partners lies on how they shall end. All of them
shall cease to exist as a business organization when partners agreed to the effect,
or via declaration of the Law.
1. Joint Venture

A joint venture is an agreement between partners on terms mutually agreed. Considering the
following reasons Joint Venture is anonymous or clandestine business organization.

 Joint venture is not made known to third parties.

 A joint venture agreement need not be in writing and is not subject to registration
and other forms of publication required in respect of other business organizations.
 A joint venture does not have legal personality.
 Where a joint, venture, is made known to third parties, deemed, insofar as such'
parties are concerned, to be an actual partnership.
 It doesn’t have name, and anonymity of the place of business and its capital
2. Ordinary Partnership
An ordinary partnership is defined in a quit tricky and circular manner in our commercial code.
Here is how the code defines it
‘A 'partnership is an ordinary partnership within the meaning of this Title where it does not have
characteristics which make it a business organization covered by another Title of this Code.’

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As per the definition provided above we must first comprehend the other remaining 5(five) kinds
of business organizations in order to understand what ordinary partnership is?
However, we can take the non commercial nature of ordinary partnership as a distinguishing
remark from other kinds of business organizations. It can only participate in non commercial
activities. Thus, the commercial activities that we have seen in the first section of this chapter are
never meant to be undertaken by ordinary partnership. In case if an ordinary partnership
participates in commercial activities factually it will be considered as a general partnership
instead of ordinary partnership.
Another nature of ordinary partnership is the property, debts and rights brought into or acquired
by the partnership shall belong to the partners in common under the terms of the partnership
agreement. In effect the partners will be held liable if the properties and asset of the ordinary
partnership belongs to them in common which in turn lifts the veil or shield they could enjoy by
the virtue of legal personality. Unquestionably, therefore, the ordinary partners will be obliged to
pay the debt of the partnership from their personal assets that have never been contributed to the
partnership from the outset, in case if the ordinary partnership’s asset is not sufficient to pay the
debts of creditors.
Management of Ordinary Partnership
As per article 233 of our commercial code,
’ All the partners shall have a right to act as managers, unless the partnership agreement or a
decision of the partnership has appointed one or more of the partners or a third party to be the
manager.’
From the provision it is apparently evident that every ordinary partner has the right to manage or
administer the partnership. Their right to manage is obsolete only when they decide to assign one
partner or any other third party, non partner, to administer the partnership.
In addition, the partners may assign more than one manager without specifying the duties of the
managers. In such circumstances decisions shall be made jointly. So, any decisions taken
separately are objectionable by each partner. The only exceptional ground for a single manager
to take act of management without consulting the joint managers is in case of urgent situation, a
situation that doesn’t give a room to consult the joint managers.
Statuary Manager:this refers to a manager who has been assigned by virtue of the
memorandum of association. A statuary manager enjoys a privilege to take decisions alone not

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only without consulting the partners but also against the clear objection of the partners. He can
decide by himself unless he is not defrauding the partnership.
What if the partners want to revoke the power of a statuary manager?
The partners can revoke the power of statuary manager only for good cause such is the case for
intolerable acts like when;
1. He is unfit to exercise the managerial power given to him or;
2. When he grossly breached his duties
Finally it is worth to note that the partners have the right to check the books and accounts of the
partnership. Besides, partners have the right to demand the draw up of financial statement. Aside
from the rights, partners are also expected to show the utmost good faith, degree of diligence and
skill while they are managing the partnership without forgetting to mention that they are also
restricted to involve in situations creating conflict of interest. For instance they can’t represent
other partnership and deal with their own partnership since they have an interest in both
partnerships.
3. General Partnership
General partnership is well known for its principle of liability. It consists partners who are
personally, jointly, severally and fully liable both to the partnership firm’s undertaking and as
between themselves as well. The principle can be illustrated in the following manner
Illustration I:
Assume that Alebachew Gemeda General Partnership consist 5(five) partners. Furthermore, the
partnership has a total debt of 100,000 ETB payable to Ato Solomon. According to the principle
of personal, joint, several and fully liability
A. Ato Solomon can demand 20,000 ETB from each partner or;
B. He can single out any single partner from the 5(five) partners to pay the whole debt,
100,000 ETB.
This is possible because of the joint and several principles to the partnership firm’s
undertaking.
Illustration II:
in the above given example assume that one partner, let us say Ato Hagos paid the whole debt
100,000 ETB to Ato Solomon. Again based on the principle of personally, jointly, severally and
fully liability as between themselves:

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A. Ato Hagos can demand the excess 80,000 he paid(since 20,000 ETB is his shared loss)
by requesting each partner to pay 20,000 ETB or;
B. He can demand another single partner let us say Ato Alebachew to pay him the whole
80,000 ETB that he paid in execs of his share.
Management of General Partnership
Statuary manager as mentioned there above a statuary manager is a manger appointed in the
partnership agreement. His power can’t be revoked even for the existence of good cause. His
power is revocable only when the existence of good cause is proved by a court not by the
partners as clearly stipulated in article 293 of the commercial code.
4. Limited Partnership
A limited partnership comprises two types of partners: general partners in full liable personally,
jointly and severally and limited partners who are only liable to the extent of their contributions.
What do you observe from the definition provided? Limited partnership consists of two types of
partners.
1. General partners who are fully liable personally, jointly and severally and;
2. Limited partners, their liability of which is only to the extent of their contribution. Here
the limited partners unlike general partners can’t owe any creditor third party who may
have a claim over the partnership firm’s undertaking. Their liability extends only to the
extent of their contribution.
Illustration I: Ato Assefa has sold Balcha Girma Limited partnership, steels worth 100,000
ETB. However, the partnership fails to pay back the money for financial difficulties it has
encountered. The partners are 5(five), 2 of them, Ato Lencho and Gutema are limited
partners. From the case provided
A. Ato Assefa can demand Ato Lencho and Gutema to pay only their share of loss, which is
20,000 ETB. He can’t single out any of the limited partners to pay the whole debt,
100,000 ETB though he can do this against the remaining three(3) general partners.
Management of limited partnership is a function exclusively reserved to general partners. This
make sense due to the fact that general partners liability is a bit serious than the liability of
limited partners. Limited partners are not allowed to manage the limited partnership. If any
limited partner participates in the management of the limited partnership he will turn himself to a
general partner.

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Limited partnership like any of the above partnerships needs to have its own Trade name.
However, the name of the limited partners shall not be used in the name of the partnership. If a
limited partner let his name mentioned in the name of the limited partnership then he is turning
himself to a general partner.
5. Private Limited Company
A private limited company is a company whose members are liable onlyto the extent of their
contributions. The liability of the share holders goes only to the extent of their share. Unlike
partners of partnership, except limited partners of a limited partnership, there is no any
possibility that their liability could go to their personal asset. The following are some of the
peculiar natures of private limited company.
 A private limited company shall not have less than two or more thanfifty members and is
always commercial in form.
 The company shall not issue transferable securities in any form. Transferable securities
refer to bonds and debentures that the company could have used them as securities or
guaranty in order to seek loan from the market. The inability to issue such transferable
securities is one of the limitations of Private Limited Company where as it is a plus for
Share companies.
 The capital of a private limited company shall not be less than 15,000 Ethiopian dollars.
 The amount of a share shall not be less than 10 Ethiopian dollars.
 All shares shall be of equal value and a member may hold more than one share.
Preference shares can’t be issued by Private limited company. Preference shares could
give the share holder a priority tight over the profit or asset of the company, in the event
of dissolution. But those shares do have an equal par value with the other ordinary shares.
Such kind of shares can be issued by share companies only not by Private limited
company. Hence they can only issue ordinary share which most investors would find it
unattractive to join the company.
 A private limited company shall not undertake banking, insurance or any business of a
similar nature. These trading activities are exclusively reserved to share companies only.
6. Share Company
A share company is a company whose capital is fixed in advance and divided into shares and
whose liabilities are met only by the assets of the company. Like private limited company the

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name of the members is Share holders and their liability is only to the extent of their
contribution. To mention some of the peculiar natures of Share Companies;
 Minimum amount of capital and a nominal value of shares: The capital shall not be less
than 50,000 Ethiopian dollars.
 The amount of the par value of each share shall not be less than 10 (ten) Ethiopian
dollars.
 Minimum and maximum number of share holders: The Company may not be established
by less than five members.
 Banking and insurance business are the exclusive area of commerce reserved for Share
companies only.
 A share Company shall be formed when it fulfills the following elements
(a) The capital has been fully subscribed. All of the shares offered to absolute the capital
must be subscribed.
(b) One quarter at least of the par value of the shares has been paid up and deposited in a
bank, in the name and to the account of the company. From the subscriptions made at
least quarter of it must have been paid in cash. Plus it should be reserved in a bank.

Chapter Four

Contracts in general

Sources of obligation

There are two major sources of obligations. Those are the law and contract.

A. Law as source of obligation

Some obligations are directly imposed on persons by law. These are legal obligations. Legal
obligations are binding or enforceable on all persons. All persons are bound by legal obligations.
For example, every person who earns income (both physical and juridical person) is required to
pay taxes. Thus, the obligation to pay tax is binding to all persons. Legal obligations do not
depend on the willingness of persons. Whether you like it or not, you must respect legal

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obligations. Obligations to give and military service to defend one’s country against an external
enemy is another example of legal obligation. Obligation of maintenance also has the same
effect. According to article 808 of the civil code, the obligation to maintain your parents in their
old age does not depend on your willingness. It is the law that imposes such obligation.

Article 808-

(1) An obligation to supply maintenance exists between relatives by consanguinity and

affinity in the direct line
(2) An obligation to supply maintenance likewise exists between brothers and sisters born of
the same parents or born of the some father or the same mother.

B. Contract as source of obligation

Q. What are contractual obligations?

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Contractual obligations or obligations created by agreement are the result of your free will. It is
something undertaken willingly. When you make contractual agreement, a binding obligation is
created. For instance, if you sell something to someone, you willingly undertake to transfer the
right that you had on the thing to the buyer. You transferred your right because you consented or
agreed to do so. The buyer pays you because you willingly bought something thereby consenting
to pay. So what is the difference between legal obligations and contractual obligations? Since
contractual obligations are created by agreement, they are binding and enforceable on the parties
who agreed to be bound.

Contractual obligations are not binding on third parties or on non-contracting parties. Two
parties on their agreement cannot impose an obligation on third party.

Definition of contract

What is contract?

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Contract is one of the important legal devices ever developed to create economic security and
stable society. All persons make contracts in their daily lives. When you go to shop and buy a
stationary, when you take taxi,,, when you go to a restaurant and get service, when you visit your
doctor in a clinic, when you rent a dwelling house etc you are making contracts. Although the
government has a power to command obedience, much of its work is accomplished by means of
contract entered voluntarily.

Thus, contract is a binding agreement which is enforceable by law. It is a promise or set of

promises for the breach or violation of which the law gives a remedy. Contract is an agreement
intended to produce binding obligations. An agreement which does not create, vary or extinguish
obligation cannot be considered as a contract.

How does Ethiopian law define a contract?

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Article 1675 of the civil code provides as following:

A contract is an agreement whereby two or more persons as between themselves create, vary or
extinguish obligations of proprietary nature.

This standard definition applies to all types of contracts

1.2.1. Elements in the definition

Q. What are the important elements in the definition?

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I. The first element in the definition is that contract is an agreement. It is something

willingly undertaken. Contract is not something imposed on you. Nobody forces you
to make a contract only if you are willing to do so. Accordingly, a contract is the
result of free will.
II. Parties to a contract are always persons. They may be judicial or physical persons.

The number of contracting parties may be two or more persons. Since one cannot make a
contract with himself. There must be at least two parties to a contract. There is no limitation

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to a maximum number of parties to a contract. The best example is partnership. Partnership

agreement is a contract under article 211 of the commercial code of Ethiopia. There may be
hundreds of partners or contracting parties.

Q. what do parties contract to do?

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Parties to a contract create legally binding obligations that had not existed before. The
willingly create legally binding obligations that had no existed before. They willingly create
a new legal relationship between them. All contractual obligations create obligations. If no
obligation is created in an agreement, that agreement is not contractual agreement. Social
agreements or agreements for social affairs do not create obligations enforceable by court of
law. That is why say all agreements are not contracts.

The freedom of the parties is not limited to the creation of obligations. After creating
obligations, contracting parties may want to vary (change, modify) some terms of their
obligations. They are free to do so. Obligations varied by two contracting parties may be
varied only by those two parties. Nobody else has that power. According to article 1742(2) of
the civil code even courts of law do not have that power.

III. Two or more persons create obligations only as between themselves, without
affecting the interest of third party. Contracting parities A and B cannot impose
obligation on C who is not party to that agreement.
IV. Parties to a contract create obligation of proprietary nature. It is an obligation to do
something or to give something of value which involves economic interest, financial
gain.

Formation of Contracts

Q. What are the requirements to have a valid contract? What does the term valid contract sounds
for?

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The word valid means legally good. Therefore a valid contract is legally binding and
fully enforceable by law.
Article 1678 of the civil code enumerates the following elements:
 capacity
 consent
 object
 form
1.2.2. Capacity

Q. what is capacity? Who are capable persons?

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Capacity means the ability to understand ones actions and the effect of those actions, persons
with ability to contract are legally competent. In principle capacity is presumed unless the
contrary is proved. According to article 192 of the civil code

Every physical person is capable of performing all the acts of civil life unless he is declared
incapable by the law.

Though, as a rule every physical person is incapable, the law, for some rational declares
some members to be incapable. The civil code provides general and special disabilities under
article 193 and 194 respectively.

Three grounds of general incapacity are provided under article 193 of the civil code. These
are:

A. Age
B. Mental condition
C. Sentence passed on a person
Based on the above grounds minors, insane persons and judicially interdicted persons are
deemed to be incapable.
A. Minors

Who is minor?

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Pursuant to article 198 of the civil code persons of either sex who has not attained the full age
of 18 years according to the Ethiopian laws. Minors are given special protection under the
law. For their own protection minors are restricted in their freedom to contract. If left by
themselves minors, may not make wise and reasonable decisions. as a result of their
immaturity, they may make decisions that may negatively affect their own interests.

For his/her own protection, a minor is placed under the authority of other persons, the
guardian and the tutor. The guardian is responsible for the proper care of the minor. If a need
arises, it is the tutor who makes a contract for the minor (in the name of the minor).see
articles 265-268 of c.c

What if a minor enters into contracts outside those exceptional circumstances? Contracts
entered by a minor in excess of his powers shall be avoided. If the contract made by a minor
is beyond his powers, a minor may not be forced to perform his obligations created under
these contracts. But the contracts made by a minor under the exceptional cases provided by
law, remain binding on the minor. In other words, a minor cannot avoid all of his contracts.

On avoiding a contract pursuant to article 316 of the c.c a minor is required to return to the
other party what he had received. He must return the thing or the money if it is still with him.
It also happens that the thing he received may be used immediately, may be damaged or
destroyed. This does not affect the right of the minor to avoid his contract. Besides, pursuant
to article 13 of the commercial code an emancipated minor shall be deemed under the law to
have attached majority in all that concerns the care of his person and the management of his
pecuniary interest. To be emancipated means to be free. Emancipation may not be revoked. it
has lasting effect.

B. Insanity

The second ground of persons declared incapable is the group of insane persons. Pursuant to
article 339 of the civil code an insane person is

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(1) A person who, as a consequence of his being insufficiently develop or as a consequence

of a mental disease, or of a senility, is not capable to understand the importance of his
action.
(2) Persons who are feeble-minded, drunkards or habitually intoxicated persons, and persons
who are prodigals shall in appropriate cases be assimilated to insane persons.

The definition of insanity is given by considering the causes and effect. A person may have
some mental problem or disease, t hat does not make a person insane. Bu t is as a result of
mental disease he/she cannot understand the consequences of his action, such a person is
insane person. The same works true for a person of extreme old age.

Insanity may be classified to notorious and not notorious. This is to determine the effect of
insanity on the formation of contracts. Pursuant to article 343 of the civil code if the degree
of state of insanity is notorious, he/she is automatically protected by law.

However, if his /her conditions are not notorious, the insanity does not have any effect on the
juridical acts. (Article 347 c. c).

C. Judicial interdiction

Q. What is judicial interdiction?

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Judicially interdicted persons are persons prohibited by court from making binding
agreements. Why does the court prohibit a person from making contracts or why does it
withdraw his legal capacity?

According to the readings of article 351 of the civil code, judicial interdiction is another
mechanism of protecting an insane person. Judicial interdiction is pronounced or declared in
the interest of insane person, Or in the interest of his heirs.

However, for the purpose of protecting the public, the interdiction of a person must be
publicizing within the jurisdiction of the court. It is the responsibility of the guardian of the
interdicted to make sure that the judgment of interdiction is brought to notice of the registrar
of the place where the interdicted resides.

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Interdiction does not remain in force indefinitely. It is withdrawn when the interdicted person
regains his normal state of mind or his health.

1.2.3. Consent

Consent is an agreement given freely, willingly, or it is an agreement which is free from any
defect. The freedom of contract is expressed in consent. How can parties express their
consent? Two forms of expressing consent exist. These are the offer and acceptance

Agreements are usually arrived at by means of offer and acceptance. An offer is a definite
statement by one party called the offeror, of the terms under which he will contract. In other
words an offer is a proposal made by one party (the offeror) indicating his willingness to
enter into contractual agreement regarding a particular thing. An offer typically consists of a
promise or commitment by the offeror to give something, to do something or not to do
something.

On the other hand, an acceptance is unqualified agreement of the other party, called the
offeree, to the proposal stated by the offeror.

If vague or indefinite offer is accepted, courts will not enforce the apparent agreement either
party. The terms of the offer must be sufficiently defined and certain to allow a court to
determine what was intended by the parties, and to state the resulting legal rights and duties.

1.2.3.1. Termination of offer

An offer made by the offeror does not remain in force (open) indefinitely it comes to an end.
How does it come to an end? Offer terminates or comes to an end in different ways

a. Offer may come to an end by lapse of time. Offer may be made with or without a time
limit for acceptance. An offer made with a time limit ends at the expiry of the time limit.
Where the offeror does not specify a time limitation, the offerer remains in force for a
reasonable period of time. The problem arises in determining the length of a reasonable
period of time offer also terminates by revocation or withdrawal of the offer
revocation is the power of the offeror important legal problems may arise in connection
with revocation

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Activity

1. Under what circumstance does the offeror have the power to revoke an offer?
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2. What is necessary condition to constitute revocation
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3. When does revocation take effect?

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As a general rule an offeror has the power to revoke an offer at any time before acceptance even
though he or she promised not to do so.

1.2.3.2. Defects in consent (vices of consent)

Consent of the contracting parties must be free from defects. If consent is defective, a valid
contract a valid contract may not be created.

? How does the consent of contracting parties become defective? What are the defects that may
lead to the invalidation of a contract?

Article 1696- a contract may be invalidated where a party gave his consent by a mistake or under
deceit or duress.

Based on the above article there are three defects in consent

A. mistake
B. deceit (fraud)
C. duress
A. Mistake

In contract law, mistake is defined as an erroneous belief in a thing or in a fact. In order to

invalidate a contract on the ground of mistake, it must be fundamental, you cannot invalidate a
contract.

Q. how do you distinguish between fundamental and non-fundamental mistakes? What criteria’s
can you see?

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a. A mistake is fundamental if it relates to the nature of a contract. For example a contract

of sale is completely different from contract of donation.
b. A mistake is fundamental if it relates to the object of the contract. The concept “ object of
the contract” in this context means obligation.
c. Mistake relating to the identity or qualification of a contracting party. This is another
fundamental mistake. Financial position of a person, his personal integrity, his credit
worthiness of your contracting party matters a lot.
Therefore: non-fundamental mistakes do not affect the validity of a contract. Mistakes
relating to the motives of the parties and arithmetical errors are the only mistakes
considered as non-fundamental. Arithmetical errors are errors in computation
(calculation), typing errors etc. motive is something you have in mind.
B. Fraud (deceit)

A contract may be invalidated on the ground of fraud where a party resorts to a deceitful practice
to induce another to make a contract. It is act of practice made with the intention of misleading
another. Fraud creates a wrong impression or belief in the mind of another. Concealments of a
material fact is also fraud. A party who has been deceived by a third party shall be bound by the
contract unless the other contracting party knew or should have known of the fraud on the
making of the contract and took advantage thereof.See
thereof. article 1740 of c.c

C. Duress

Duress refers to compelling a party to give his consent to a contract by use of threat. The threat
must be serious and imminent harm to the party or to his ascendants, children or spouse. The
threat must be imminent or likely to happen soon. This, however, does not mean that it has to be
real. It is sufficient if it appears real. A person who gave his consent because he has been
threatened by use of an unloaded pistol can avoid the contract on the basis of duress. The pistol
might not have bullets but it is sufficient if appeared to the person threatened that it was loaded.
The threat may relate to property or person. The danger to the person may relate to his life,
health, liberty, honor or morals.

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As opposed to third party fraud, third party duress would be sufficient to invalidate a contract.
Thus, if Alemu, threatened by Kassa, cocludes a contract with Berahnu, may demand the
invalidation of the contract though Berhanu, the contracting party, did not exercise it. This is due
to the fact that duress is dangerous for the social order. In the exceptional case that Berhanu, may
not know the duress exercised by Kassa, Alemu would be required to pay damages arising out of
the invalidation of the contract for him. (Art. 1706 &1707)

1.2.4. Object of a contract

Object of a contract means obligation undertaken by the contracting parties. Pursuant to article
1711 the object of the contract shall be determined freely by the parties. But their freedom is not
absolute. There are restrictions and prohibitions by law. Parties can not violate public policy in
determining their obligations. They cannot create obligations against the moral values of the
society.

The obligation of a contract (obligation undertaken) must be defined clearly and precisely,
possible, moral. An obligation that is not clearly defined by the parties may not be defined by the
court of law. A contract of shall be of no effect where the obligation of the parties or of one of
them relates to a thing or a fact which is impossible and such possibility is absolute.

Forms of a contract

Contract may be made orally or in writing. According to article 1719, contracting parties have a
freedom of choosing the form of their contract unless the law prescribes special form for certain
contracts. Sometimes the contracting parties themselves may agree to make their contract in a
special form even if the law does not prescribe a special form.

Most contracts are oral. Many are made in telephone. Others are made and carried out in a single
face to face conversation. So what are the types of contracts required to be made in special form?

Art.1721- Preliminary

Preliminary contracts shall be made in the form of prescribed in respect of final contracts.
Preliminary contracts are contracts facilitating formation of another contract. Sometimes a

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contract may be concluded in order to enter into another contract. A contract that has to be
entered in order to conclude another contract is called preliminary contract.

For example, Ato Kebede a residence of Sweden desired to purchase a residential building in
Addis Ababa. As he cannot come to Ethiopia, he concluded a contract of agency with Ato Abebe
to represent him in purchasing the building from Ato Solomon.

In this example the contract of agency is preliminary contract where as the contract of
purchasing the house is the final contract. Pursuant to article 1721 of the civil code a preliminary
contract has to be made in the form of the final contract. The contract of purchase of the house as
per article 1723 of the civil code has to be made in writing. Accordingly the contract of agency
has also to be made in writing.

Article 1722. Variations

A contract made in special form shall be varied in the same form.

Variation is modification of terms of contracts. Variation has to follow a form in which the
varied contract was made. Thus, a written contract can only be varied where the variation
agreement is made in writing. Where the initial contract is registered the variation has also to be
registered. For example Ato Asnake agreed to sell two residential buildings to Ato Markos.
Later Ato Markos changed his mind and told to Ato Asnake only one of the buildings is enough
to him. Ato Asnake also accepted the variation. As the first contract pursuant to article 1722 has
to be made in writing. The variation agreement has to be made in writing. Contracts relating to
immovable properties shall always be made in writing and registered.

Article 1723- Contracts relating to Immovable

1. a contract creating or assigning rights in ownership or bare ownership on an immovable

or a usufruct , servitude, mortgage or immovable shall be made in writing and registered
with court or notary.
2. Any contract by which an immovable is divided and any compromise, relating to an
immovable shall be in writing and registered with the court or notary.

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3. Notwithstanding the provisions of sub-article (1) of this Article, a contract of mortgage

concluded to provide security to a loan extended by a bank or a micro-financing
institution may not require to be registered by a court or a notary.

Mortgage contract is a security contract that is given as security for performance of

obligation. A mortgage contract is a contract of immovable property and shall be made in
writing.

In addition to the writing requirement of contracts on immovable property the law prescribes
another formality. Contracts on immovable property shall be registered. The purpose of
registration is creating public awareness. It does not affect the validity of the contract.
Unregistered contract is valid among the contracting parties but it may not affect rights of
third parties.

Art 1724-Contracts with public administration

Contracts in which any organ of public administration is party shall be made in writing and
registered. Therefore; any contract binding the government or a public administration and
government organs are party shall always be in writing and registered.

Art. 1725 contracts for long period of time

Contracts that would serve for long period of time shall be made in writing. Do you see the
importance of writing in this case? As memory of human being may fadeout, written
contracts cannot be forgotten. The following contracts shall be made in writing.

 Contracts of guarantee
 Insurance contract
 Any other contract in respect of which such form is required by law

Art 1727- attestation and signature

All written contracts shall satisfy the following requirements

a. Attestation

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Article 1727(2) of the civil code requires all written documents to be attested by two
witnesses. The witnesses declare that they saw the contracting parties conclude the contract.
The witness does not guarantee performance of the contract and by no means liable in any
way. Where dispute arises as to the contents of the contract the witness may be called to
prove it. The witness shall be capable to enter into juridical acts. Thus the witness shall be of
full age.

b. Signature

Article 1727(1)-The person bound by the contract shall sign all written documents.

The signature may be written on the document or thumb mark may be affected. Signatures by
mechanical means’s and seals cannot be used for the purpose of signing on the documents.
Signature increases the validity of the contract. If the document has several pages, signatures
have to be affixed on all pages of the document. Do you know the requirement for?

A party that cannot write may affix his thumb mark on the document. But signature and
thumb mark of a blind cannot bind him unless authenticated. That is to say, the signature has
to be certified. Certification may be made by public offices having the power to authenticate
documents. In Ethiopia this is done by the office of document authentication and vital
registration. The requirement of authentication is to safe guarded the interest of the blind or
illiterate person.

Effects of no-compliance to the formality requirement

Where a contract has to be made in a given form, if non-compliance takes away from the
contract pursuant to article 1720 Where special form is prescribed by law and not observed there
shall be no contract but mere draft of contract.

3.4. Effects of contracts and extinction of obligations

3.4.1. Performance of contracts

A contract creates legal obligations. Performance of contract means the carrying out of this
obligation. Each party must perform or offer to perform the promise, which he has made.

I. Performance by whom?

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Personal performance: In cases involving personal skill or credit, the person who promised
must perform himself in person. The court will enforce the intention of the parties, as expressed
in the contract, or as may be inferred from the circumstances of the case/specific performance/

Art1740- the debtor shall personally carry out his obligation under the contract where this is
essential to the creditor or has been expressly agreed.

Here there are two elements

1. Essential to the creditor. This is to mean sometimes personally of the person doing a
contractual obligation may be important. The creditor must establish that he has special
interest in having the obligation performed by the debtor himself, that because of the
nature of the obligation, it would not be equivalent to have performed by someone else.
2. Has been expressly agreed. If the parties have expressly stipulated performance by the
debtor himself the creditor need not establish this special interest, he can automatically
require the debtor to perform the contract.

Performance by third party:In all other cases the contracting parties or his representative may
employ a competent person to perform it. See Art 1740(2).

II. Time and place of performance

According to the general rules the time and place of performance of a contract are matters to
be determined by agreement between the parties to the contract.

Place of payment

Article 1775 of the civil code, deals with the place of payment of contractual obligation,
accordingly

 Payment shall be made at the agreed place

 Where no place is fixed in the contract, payment shall be made at the place where the
debtor had its normal residence at the time when the contract was made. Where the
contract is silent, the law states the contracts to be performed at the debtors place.

Time of payment

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The time when payment is due, like the place of payment, is to be fixed by agreement between
the parties. Where no time for payment is fixed in the contract the parties are normally required
to perform their obligations immediately. A party must perform as soon as the other party gives
him default notice.( see art 1756 of the c. c)

3.4.2. Transfer of Risk

As a general rule the debtor bound to deliver a thing shall bear the risks of loss of or damages to
such thing until delivery is made in accordance with the contract. As, and exception, sometimes,
risk may transfer to the buyer before the thing is given to him.

3.4.3. Variation of terms of a contract

Variation of a contract is an alteration or bringing about some changes in the terms and
conditions of contract. Contracting parties using freedom of contract can change terms of the
contract in any way appropriate to them. But variation cannot make unless all of the contracting
parties agree.

3.4.4. Non-performance of contractual obligations

Non-performance is failure to perform contractual obligation. It is also called breach. What

happens to a contract if it is performed accordingly? What are the options open to the party
seeking performance?

Failure by a party to perform his obligations accordingly entitles the other party to invoke or
apply certain legal remedies against the non-performing or improperly performing party. This is
stated in article 1771 of the civil code. Where a party does not perform his obligation, the other
party may, according to circumstances, request the enforcement of the contract. Or on the
contrary, request or sometimes himself declare, the cancellation of the contract. He may also
require that the damage caused him by the non-performance be compensated. A party seeking
performance has three possible options open for him. These are:

 Forced performance of the contract

 Cancellation of the contract
 Claiming damages for non-performance

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3.4.5. Extinction of obligation

Contractual obligations are normally extinguished through performance in accordance with the
contract and the law, however, other ways in which a contractual obligation is extinguished are:

A. invalidation and cancellation of contracts/ art 1808-1818/

As we have discussed where the contracts its purpose is to protect one and only one of the
contracting parties. i.e the victim of error, fraud, or duress. in such a case, only the person that
the law intends to protect can invalidate the contract. Example, Ahmed enters into a contract
with smith. Because of mistake induced by smith’s fraud, Ahmed can have the contract
invalidated. But smith cannot.

B. Termination of contracts and remission of Debt/1819-1825/

A contract can be terminated if one of the parties has put an end to the contract. Most of the time
termination of a contract requires the consent of both parties. There are however two exceptions.

1. If the contract itself foresees the possibility for one or both of the parties individually to
denounce it by simple unilateral declaration.
2. Where unilateral termination is possible that of contracts of indefinite duration.

Example, Daniel leases a field to Naomi and no time provision is included.

C. novation

Novation is one of the methods to extinguish an obligation. And it is to mean replacing an

old obligation by new one.

D. set-off
E. Article 1832-1834 define the condition in which set-off occurs automatically. Article
1832 imposes three positive conditions:
 The debts must be in money or similar fungibles
 They must be liquidated
 They must be due

Example; A owes B 2000 birr and B owes A 2000 birr. The two debts are extinguished by set-off

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F. Merger

Merger occurs when one person, with respect to a single debt, becomes creditor and debtor at the
same time. /art 1842-1844/. Merger usually takes place usually takes place in relations connected
with succession, where the creditor is the only hare and up on inheritance, the obligation of the
one and the right of the other merge in the same person.

Example: X company owes y company 50,000.00 birr. After a certain time X Company bought
Y company. Here there is merger.

3.5. Void and voidable contracts

Agreements which do not satisfy the essential elements of a contract may be either void or
voidable.

A. Void agreements: an agreement not enforceable by law is said to be void. A void

agreement has no legal effect. It confers no right on any person and creates no obligation.
/see art 1808(1)of the civil code/.

Example

 An agreement made by a minor or incapable person.

 Agreements against public policy or unlawful agreements
B. Voidable agreement: avoidable agreement is one which can be avoided. i.e set aside by
some of the parties to it, until it is avoided it is a good contract.

Example: contracts brought about by coercion, undue influence, mistake etc.

3.1 Law of agency

Agency is recognized in all legal systems as relevant and unavoidable social institution. It is
clear that person may not able to undertake all activities by himself for different reasons. Or one
may not be at different places at the same moment to perform a certain deed. For instance agent
is appointed when an individual is unable to act by himself due to his manifold occupations,
absence, illness, under age or advanced age, or search for efficiency, to take advantage of special
capacity/specialization, knowledge, experience of the representative and etc.

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Hence if a task has to be carried out in his absence or without his involvement, there has to be
some other individual who can undertake the task on his behalf.

4.1. Defining Agency relationship

Agency is the way in which a person does legally binding act on behalf of another. Where a
person because of different reasons becomes unable to perform a given task, he/she may employ
someone to represent him/her. For instance, a trader in Gondarmay purchase things from a dealer
in Addis Ababa while doing his business in Gondarby appointing someone to act on his own
behalf.

There are three parties in agency relationship:

Principal: a person who authorizes another person to represent him and to act
in his name.

Agent: a person who makes contracts for and on behalf of another person

Third party: a person who enters in to contract with the principal by the
medium of an agent.

For example: Ato Techane wished to purchase a residential house in Axum. However, as he
resides in U.S.A, could not personally purchase the house. Therefore, he appointed Ato Tamene
to purchase a house in Axum. Ato, Tamene accordingly, met Ato Ashenafi who desires to sell
his house. Ato Tamene negotiated with Ato Ashenafi and purchase the house. In this transaction,
Ato Techane is a principal, Ato Tamene is an agent and Ato Ashenafi is a third party.

Law of agency is branch of business law that studies about mechanism of carrying out juridical
acts by proxy/representation. The Law of agency is in most cases defined as the relationship
between two persons, where one (the agent) may act on behalf of the other (principal) and bind
the principal by words and actions.

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What is contract of agency? The 1960 of Ethiopian civil code defines an agency contract as a
contract whereby a person, an agent, agrees with another, principal, to represent him and to
perform on his behalf one or several legally binding acts.

4.2. Importance of Agency

 The concept of agency reduces the cost of contracting. By contracting through an agent,
the principal may reduce the cost of spatial and cultural distances, the need to acquire
expertise, and the inconvenience of having to deal personally with all contracting parties.
 The need to overcome time and space limitation. One person may wish to perform
several transactions at the same time. However, he could be in a position where he is
unable to run these several activities by himself at one instance, for he is at one specific
place (space) at one time. He cannot be at different places (spaces) at one instance (time
 The need to overcome limitations of knowledge and skill. Performing one or more
activities may demand certain skills or knowledge. Hence one may lack the required
knowledge in performing a certain activity. Hence, another individual who has the
required skill may act on behalf of the person who has no such expertise in performing
the duty.
 The need to represent legal persons. Thus, after acquiring the legal personality these
entities will have the right to exercise all activities that a legal person can do. However,
these entities don’t have mental capabilities to analyze the cost and benefit of their
transaction because they don’t have minds like human beings. Hence, they need an agent
to act on behalf of them. The manger of a business organization, for example, is
considered as an agent through which any dealings with a third party is concluded.
 The Need to overcome incapacities. The Ethiopian civil code provides that capacity is required in
order to perform a juridical act. Certain category of people like minors (below the age of 18) and
interdicted people can’t have the appropriate analytical capacity in order to enter into a juridical
act. Hence they may fail to analyze the cost and benefit of the transaction. Hence someone else
who can act on behalf of them is appointed.

4.3. Sources of Agency

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The power to perform on behalf of another person is called agency/authority. According to 2179
of the Ethiopian civil code agency/authority may result by the operation of law or from contract
of agency.

A. An agent by the operation of the law

This situation is not an agency either by a prior agreement of the parties or by the lawmaker. But
it arises by the order of the court upon application or by law. An authority to act on behalf of
another may emanate from the court’s decision. For example court empowers guardian/tutor to
represent incapable persons like minors, or interdicted persons and law empowers spouses to
represent each other.

Agency relationship could emanate from the operation of the law, that is, agency authority is
derived from the law itself. Consequently, the consent of the principal has no role in creating the
agency relationship and hence it is beyond the principal’s consent that agent –principal
relationship comes into existence. This usually happens where a person to be represented is not
in a poison to appoint his agent for one thing or another. Moreover, it is due to the necessity to
safeguard the interest of the person to be represented. Hence, the internal relationship between
the representative and the represented, in this case, is legal and not contractual since it is created
by the operation to the law.

B. Agency created by contract

Who may be an agent?

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What is the form of contract of agency?

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There is also agency that arises from contract. This one is the usual method of formation of
agency relationship in which principal appoints agent to perform juridical acts on the behalf of
principal. Contractual agency is special contract made between principal and agent, in which

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principal gives right/power to agent to deal with third party and principal would be liable for
performance of contract concluded between agent and third party.

Agency is one of the special forms of a contact. Therefore, the elements of a valid contract
provided under art. 1678 of the civil code are also applicable for the formation of contract of
agency. These elements are:

1. Capacity
2. Consent
3. Object
4. Form

When the authority to act on behalf of another emanates from the agreement of the parties, the
outcome will be that there will be two separate contracts. These are:

 The internal contract between the principal and the agent and
 The main contract concluded by the agent in the name of the principal with a third party.

4.4. Scope of Agency

The scope of the power assumed by the agent is determined by the contract-giving rise to
agency. Where the scope of the agency is not expressly fixed in the contract, such scope shall be
fixed according to the nature of the transaction to which it relates. [Art. 2202/1].

The scope of agency conferred on the agent may either be special or general as provided by Art
2202(2) of the Civil Code.

General Agency

An agent conferred with general authority can’t be permitted to carry out certain activities that
demand strict decision-making. Such type of agency is conferred in general terms. Usually, it is
expressed in terms like: all my affairs, anything related to my property, any affairs which I am
called to perform etc.

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The scope of such authorities conferred in general terms is limited only to the management of the
said affairs. It is confirmed under Art. 2203 that “agency expressed in general terms shall only
confer upon the agent authority to perform acts of management.”

In general agency, agent operates all acts necessary for carrying out, the affairs of principal. In
other words, general agency helps principal to confer acts of management. It enables agent to
save business of principal from unforeseen risk when latter fails confer such act on agent.

These acts of the agent are said to be acts of management. What are acts of management? The
law has unequivocally listed down those acts which are named acts of management under Art.
2204. These are:

 Acts done for the preservation of maintenance of property;

 Leases for terms not exceeding three years
 The collection of debts
 The investment of income;
 Discharge of debts
These acts are acts of management of a similar nature in terms of preserving the rights of the
represented.

Similarly:

 the sale of crops; Hi

 the sale of goods intended to be sold; and
 The sale of perishable commodities and other similar acts are categorized as acts of
management.
However, these acts are acts of disposition; a close look at these activities reveals that the
purpose of conferring power to conduct these activities for an agent protects the loss of the rights
of the person represented. And hence, these acts are acts of management.

Special Agency

An authority is said to be special when it is given for particular affair that may require great care
and that may affect the position of the principal considerably.

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Special agency is given to matters demanding special attention and for acts other than acts of
management. It is also known as a full authority because it clearly discloses what could be done
or could not be done by agent. An agent conferred with special authority may execute all
transactions given by that contract. It helps principal by prohibiting abuse of authority by agent
under general agency. It is narrower in scope compared to general agency.

It is provided in the form of an illustrative list under Art 2205 that these acts require a special
power. Agent may not without special authority alienate or mortgage real estate, invest capital,
sign bill of exchange, effect settlement, consent to arbitration, make donation, bring legal action
or defend it.

Act done by agent outside scope of authority shall not bind the principal unless he ratifies.

4.5 Authorities of an Agent

An agent representing a principal should have some kind of authority. The authority may be
actual or apparent.

A. Actual authority
Actual authority is the authority which in fact the agent has been given by the principal under the
agreement or contract which has been made between them or by virtue of subsequent ratification
or by law.

Actual authority exists in two forms: express and implied. Agency is express when principal
clearly authorizes his agent to perform all acts pertaining to his affairs by words in contract.
Authority is implied when agency relationship is inferred from conducts of agent or principal
without verbal expression as it is difficult enumerate all activities in the contract and such
authority is determined having regard to nature of transaction.

B. Apparent authority
If a person is empowered to do a given task but simply appears to outsiders, the kind of authority
assumed by innocent third party is apparent authority. The agent’s authority here is the product
of the principal’s conduct, his conduct that the agent is authorized to act on his behalf. In

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fact/reality, it does not exist; but as a matter of law arising out of the factual position of the
parties in the eyes of third parties. In these circumstances third parties assume that the agent has
authority to act on behalf of the principal.

Apparent authority of the agent emerges out because different causes. If an agent, for example,
has got a written document authorizing him to act on behalf of a given principal. After the
termination of agency the principal has to take back the document authorizing the agent to
represent him. If he fails to take the document back, the agent may act with the lapsed authority.
In this case, the agent actually has no power to represent, but has apparent authority.

Where a person allows another to appear as if he were his agent, whereas in fact he is not an
agent, apparent authority comes out.

Sometimes principal’s treatment of the agent may create an impression by third party as if the
agent has more power. In actual fact, however, the power entrusted to the agent is less than that
thought by the third party.

In Ethiopia apparent authority is not taken as an authority entitling an agent to act on behalf of
the principal. It does not bring agency relationship in Ethiopia.

4.5. Modes of representation

The agent may enter in to contractual relation on behalf of the principal in different ways. There
are three modes by which the agent may represent the principal. These are:

1. Disclosed agency
2. Partially disclosed agency; and
3. Undisclosed agency

Disclosed agency

In disclosed agency, the agent makes the representation with third party revealing the name and
identity of his principal. In this case, the third party enters in to the contract with the agent with

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full understanding that the person negotiating with him is an agent and he/she is a mere
messenger of someone.

Disclosed agency is recognized under Art 2189(1) of the civil code in such a way that the
representation of the principal by the agent shall have the effect of affecting the principal when
the agent discloses the name of the principal

Where the existence of the principal and his name is known to the third party, and the agent acts
within his scope of power, the contract is taken as it was made by the principal directly.

Partially disclosed agency

Partially disclosed agency is the situation where the agent represented the principal on the
principal’s behalf but in the name of himself. The agent instead of disclosing the name and
identity of the principal may communicate to the third party, merely his representative character.
This is made clear by Art. 2197(1) of the C.C.

This kind of agency doesn’t bring agency relationship in Ethiopia. Thus, the third party can ask
the agent for all liability arising from the contract. Therefore, the agent will personally liable.

Undisclosed agency

In this form of representation, the agent neither discloses the existence of his principal nor his
representative character. Therefore, the agent acts on his own name and he is acting on his own
behalf. The third party is not aware of the fact that the agent is acting to the benefit and on behalf
of another.

This last mode of representation does not bring any effect of agency. Yet, the person who acts in
his own name and on his own behalf shall enjoy the benefits or liabilities himself.

4.6 Effects of Agency

The main effect of contract of agency is that contract which is made between agent and third
party binds principal. That is, where an agent acts within ambit of power entrusted by the
principal; a direct contractual relationship emerges out between the principal and third party
(Art.2189 0f cc). Contract concluded through the agent creates rights and obligations only as
between the person represented/principal and third party. This means agent neither acquires

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rights nor incurs obligations. This effect of agency shall come out upon fulfillment of two
conditions: the name test and scope of representation.

The agent must act in the name of the principal. This is one mandatory requirement for the
establishment of a relationship between the principal and the third party. In addition to the name
test, the agent must act within the scope of the power granted.

Where the agent acts in his own name either on his own behalf or on behalf of the principal, it is
only the agent that is liable to the third party.

4.7 Duties of Agent and Principal

Contract of agency creates duties and rights for agent and principal.

4.8.1 Duties of Agent

The following are some of the duties of agent.

A. Duty to follow the instructions of principal: the agent must strictly follow directions
and orders given by principal or custom or nature of the transaction to satisfy best interest
of principal.

B. Duty to Care and Diligence: the agent shall make representation in a way, the interest of
the principal demands and only to safeguard the interest of principal. He shall exercise
the diligence of bonus patter familias (good father).

C. Duty to remit sums and make report: every representation has to be reported and the
records shall be reported. Maintaining books and accounts is a vital for the proper
performance of the agent’s duties. His representation has to be supported by source of
documents. He has settle account with principal about costs & income.

D. Duty to avoid conflict of interest: agent should act in an exclusive interest of principal.
The agent’s personal interest shall not be involved in the representation. For example,
where the agent that is authorized to purchase goods to his principal buys his own
property, the law supposes conflict of interest.

Can a person act as agent for both parties to a contract?

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E. Duty not to delegate/transfer authority: as a rule, the agent is expected to execute the
agency personally i.e. agent cannot delegate the power. His personal integrity may be
very important to the principal. However, there are exceptions when agent can delegate
the authority. The following are some of the exceptions.

I. Nature of activity: in certain cases, a transaction may be of nature that can’t be

operated by agent and so delegation may justified to other person who can perform it.

II. When there is consent of principal. If the principal consents to the delegation, the
agent is free to appoint/delegate someone who may represent the principal
representing the first agent.

III. When there is emergency situation: When there is unforeseen condition/event that
prevents representation by agent and agent cannot perform what is ordered by
principal, agent may delegate the authority by appointing somebody else.

F. Duty to act with strictest good faith and to notify/justify any variation or revocation of
a term. This duty shows that agent should not cheat the principal when he performs
juridical acts. The above listed duties are some of the obligations of agent but they are not
the only duties because there are also many other duties which are not discussed here.
The above duties of agents are rights of principal.

4.8.2. Duties of Principal

The following are some of the duties that a principal has to discharge.

A. Duty to remunerate an agent: the principal should pay remuneration/salary to the

agent as provided in their contract or used customarily.

B. Duty to cover costs and expenses incurred by agent: the principal shall give advance
sum for the agent to carry out his responsibilities. Moreover, if the agent has spent the
money from himself for interest of principal, the principal has to refund that money.

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C. Duty to release agent from liabilities

The principal shall make agent free from any obligations that arise from contract
while agent acts for interest of principal unless agent has fault or exceeds power given
to him.

These three duties are not the only duties of principal as principal has also got other
duties which are not mentioned here. These duties of principal are taken as rights
of agent.

4.9. Termination of Agency

Agency relationship may be terminated/ended by two ways: by act of principal/agent or by
operation of law.

I. Termination by act of the parties

A. Revocation by principal

The principal may revoke/withdraw the power conferred on agent at any time without the need
to give reason for revocation as agency is created by agreement of parties. If the sudden
revocation authority entrusted to the agent causes loss to the agent, the agent can demand
compensation.

B. Renunciation

An agent can renounce the power entrusted on him by giving notice to principal. Thus, until the
principal takes management of his own affairs, the agent should not stop the representation.

II. Termination by operation of law

The death, incapacity or bankruptcy of an agent or principal may end up an agency relationship
(see Art.2230 and 2232 of the civil code).

3.3 Law of sale of Goods

Law of sales is a branch of business law that regulates the relationship between the buyer and
seller of goods. It is a collection of rules pertaining to the formation, performance and breach of

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contract of sale. It imposes certain duties on the buyers and sellers the breach of which gives rise
to remedy.

1.1. Meaning contract of sale

Sale is a transaction involving goods and money. If an item called “good” is exchanged for with
“money”, the result is sale.

Art. 2266 of the civil code envisages the same conception. It states:

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 another party the buyer in
consideration of a price expressed in money, which the buyer undertakes to pay
him.

This definitional provision of sale contains the following important elements:

1. Contract- it is a special kind of contract. If it is a contract, the parties should comply with the
essential conditions for the validity of contracts in general.
2. Parties-there must be two distinct parties to a contract of sale, as a buyer cannot buy his own
goods.
3. Deliver and transfer of ownership- the owner of the thing must agree with the other person to
deliver and transfer ownership of the thing.
4. The thing- the subject matter of contract of sale must be “things”. Things which have
material existence and can move themselves or be moved by themselves without losing their
individual character” are said to be corporeal chattels. Assimilated incorporeal chattels are
also included under things.
5. Price- In addition to goods consideration expressed in terms of money is also an essential
element of the definition. The consideration for contract of sales must be in cash. This
consideration in cash is price.

Law of sales contract, therefore, governs and helps the movement of goods from the original
maker to the final user to fulfill social wants.

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1.2. The Subject matter of law of sales

Principally the subject matter of sale is “goods”. Goods are generally things such as chair,
desk, book which can be appropriated by human beings. Article 2266 and 2267 of the civil code
shows that it is only corporeal chattels which are under the ambit of contract of sale.
What are corporeal chattels?
Corporeal chattels are things that have a material existence and can move themselves
or be moved by man without losing their individual character. Book, table, etc. are
examples of corporeal chattels.

However, some corporeal chattels are excluded from primarily being subject to contract of sale.
E.g. Sale of ships, airplane, car etc. these are special corporeal chattels.
Immovable goods such as land and building are not corporeal chattels as they cannot move by
themselves or be moved without losing their individual character. Therefore, they are not subject
matter of contract of sale. But, the sale of intrinsic parts of an immovable shall be deemed to be a
sale of movables where such parts are, under the contract, to be separated from the immovable
and transferred as corporeal chattels to the buyer. This shall apply in particular where the sale
relates to crops, materials of a building under demolition or products of a quarry.
The concepts of corporeal chattel also covers claims and other incorporeal rights embodied in
securities to bearer. Natural forces of economic value such as electricity are also considered as
corporeal chattels.
In general, the term “thing” in a contract of sale refers to:
 Tangible movables,
 Intrinsic parts of immovable,
 Claims and other incorporeal rights, and
 Natural forces of economic value.
The subject of contract of sale, according to Article 2270, could be existing thing, future thing or
things belonging to third party.
Existing goods are goods, which have physical existence and are in the seller’s ownership or
possession when the contract is concluded.
Future goods are goods which do not exist at the time of the contract or are not in the hands of
the seller. These goods are to be produced, manufactured or acquired by the seller after the
formation of the sale contract.

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The seller may sell the thing that belongs to the third party at the conclusion of the contract. An
agent can be the best example of this when he agrees to sell a thing which is under the ownership
and possession of the seller. This could be an existing thing or a future thing.
In addition goods, price is also the subject of law of sales.A contract of sale must involve
consideration in return for transfer of ownership. If there is no consideration, it is a contract of
donation not a contract of sale.

1.3. Performance of Contract of Sale

As performance of sales contract refers to carrying out of the obligations assumed by the
contracting parties, analyzing the obligations of the seller, obligations of the buyer and common
obligations of the seller and buyer imposed on the parties by the custom, good faith and the
provisions of the law is be necessary to understand performance of sales contract.

1.3.1. Obligation of the seller

The seller assumes certain obligations under the contract of sales. These obligations are the
obligation to deliver, the obligation to transfer ownership, the obligation to warrant the buyer
against dispossession defects and non-conformity to the contract and other obligations.

A. Obligation to deliver the thing

Delivery generally refers to transfers of possession willingly. The seller has to hand over the
thing sold to the buyer. Delivery takes place in accordance with the contract and the default rules
of the law. It consists of handing over in not only the principal subject of the contract but also its
accessories. Under Article 1136 of the civil code, accessory is defined as “anything which the
possessor or owner of a thing has permanently destined for the use of such thing”. When you buy
a new laptop, you may be given a charger together with the laptop.

Modes of delivery

The modes of delivery may be expressly stipulated in the contract of sale. If a particular mode of
delivery is stipulated, it becomes one of the terms of the contract and non-compliance to an
agreed mode may be taken as breach of the term and the party failed to comply the term be
liable.

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Delivery of the thing sold may be effected in three ways. These are actual delivery, constructive
delivery and symbolic delivery.

i. Actual delivery
The usual method of delivery of a subject matter of sale is handing over of the thing
to a buyer. It is the physical handing over of the thing directly to the buyer or his
representative.
ii. Constructive delivery
The seller may not actually hand over the thing sold to the buyer. He may deliver
them to any person who may hold on behalf of the buyer or the thing may remain in
possession of the seller after the contract of sale. This assumed delivery is called a
constructive delivery. For example, X has hired his horse to Y and Y is using the
horse for driving a cart. If X agrees to sell this horse to W and decides to keep the
horse with Y, there is constructive delivery made by X.
A seller may agree to deliver the thing to the agent of the buyer. Under the law of
agency, the act of the agent is the same as that of the principal. Delivery made to the
agent of the buyer releases the seller from his obligation towards the buyer.
iii. Symbolic delivery
In this mode of delivery, thing representing the thing sold or that makes possession of
the thing possible, will be delivered to the buyer. For example, if the seller gives the
key of the store to the buyer, he makes symbolic delivery. Similarly, giving bill of
lading to the buyer is a symbolic delivery. As soon as the document of title is handed
over to the buyer or his agent, ownership passes to the buyer.

Quantity and kind of goods to be delivered

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

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The parties to the contract of sale, according to Article 2275, may agree on delivery of “about
certain quantity” of specified goods. In such case there is a possibility of delivery of a thing,
which is determined by gap filling provisions, where the seller has the discretion to decide the
exact quantity to be delivered.

However, the seller has no duty to determine the exact quantity if the stipulation about certain
quantity was made for the sole interest of the buyer. Accordingly, this benefit might be given to
the buyer where ‘it appears from the circumstances that such stipulation has been included in the
contract in the sole interest of the buyer’. For instance, imagine that Fitsume is celebrating a
graduation ceremony. He invited 50 persons to the ceremony. Since Fitsume was not sure about
the number of persons who would show up, he ordered around 60 bottles of soft drink from
Lelisa. In this case, we understand from the circumstance that Fitsume should determine the
exact quantity.

Place and time of delivery

In principle, time of delivery may be agreed. The seller should deliver the thing sold at agreed
time. Failure to deliver at such time amounts to non-performance of the contract. We resort to
legal provisions only if the parties have no fixed date of delivery in the contract. We resort to
legal provisions only if the parties have no fixed date of delivery in the contract. If not agreed,
the seller shall deliver the thing as soon as the buyer requires to do so. Delivery of the thing shall
be simultaneous with the payment of the price unless there is contrary agreement. The seller may
in such case retain the thing until payment is made.

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

For example, if the seller agreed to deliver the thing sold between July14 and August 16, he has
to make delivery during this period. However, the buyer determines the exact date where
circumstances may give such power to determine the exact date of delivery to the buyer. For
example, if Y agrees to deliver a wedding cake between June 6 and 19 to X, it is clear from
circumstances that X needed the cake on the day of his wedding. Thus, it is X who should decide

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the exact date according to Article 2277 because Y has no interest in the date of delivery and for
that matter Y does not know the date of wedding.

As far as place of delivery is concerned, unless otherwise agreed, the seller shall deliver the thing
at the place where, at the time of the contract, he has his place of business or, failing such, his
normal residence. On the other hand, where the sale relates to a specific thing and the parties
know the place where such thing is at the time of the contract, the seller shall deliver the thing at
such place.

B. Obligation to transfer ownership

Ownership is the widest right that may have on corporeal things. The owner has the right to use,
possession, enjoyment and the right to dispose of it. Accordingly, transfer of ownership means
transfer of all these rights.

The Ethiopian law recognizes two ways of transferring ownership title. These are by the
operation of the law and by contract. Succession is one example of transferring ownership by the
operation of the law. The cases where ownership may pass by contract include contract of sale
and donation.

The seller must transfer ownership of the thing to the buyer. Ownership transfers up on delivery.
However, delivery alone does not transfer ownership. The seller must be the owner of the thing
sold. It is the basic principle of property law that a person can transfer no greater right in
property than he himself possesses. For example, if Kebede steals a watch from Degu and sells it
to Mustafa, Mustafa has no greater title to the watch than Kebede possessed. Thus the obligation
to transfer ownership includes the obligation to have a good title. This is expressed by the latin
expression “nemo dat quad non habet” (a person can’t have transfer a better title than he has ).
Thus a non-owner cannot transfer ownership. If the title of the transferor is defective, the title of
the transferee also becomes defective.

The rule that holds a person can transfer no greater right than his own suffers an exception. That
is, this rule does not apply in certain cases. This exception is possession in good faith. The
principle of possession in good faith holds that a person who in good faith enters for
consideration into a contract to acquire ownership of a corporeal chattel will become owner of

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that corporeal chattel by virtue of his good faith. Good faith must exist at the time of contract or
at the time the buyer entered in to possession of the thing.

C. Obligation to warranty title, defects, and non-conformity

Warranty is a guarantee by the sellers with respect to the goods they sale. Warranties may
be express or implied. An express warranty is an affirmation of a fact or a promise made
by the seller to the buyer concerning the nature of goods. That is, the buyer has purchased
the goods on a reasonable assumption that the goods were as stated by the seller. It can be
made in the form of oral or written statements.
Implied warranty is imposed by law. The law requires that the seller certain minimum
standard of quality. Any seller of goods is required by law to offer a thing that has an
average quality.
Warranty against dispossession: the seller shall warrant the buyer against any total or partial
dispossession which he might suffer in consequence of a third party exercising a right he enjoyed
at the time of the contract. (Art.2282) However, where, at the time of the contract, the buyer
knows that he risks dispossession, the seller shall not warrant the thing unless he has expressly
undertaken to do so.
Warranty against defects: the seller shall guarantee to the buyer that the thing sold conforms to
the contract and is not affected by defects in addition to the warranty of dispossession. There are
circumstances where the seller gives an express warrant against defect. When a seller uses
descriptive terms and the buyer takes them into consideration while making the purchase, the
seller has expressly warranted that the goods he delivers will meet that description. Express
warranty can be given in a limited manner. Where the seller has warranted during a specified
period, certain qualities or the good working condition of the thing, it shall be sufficient for the
buyer to inform the seller of the defect before the expiry of such period.
It must be born in mind that the fact that the seller has given express warrant does not necessarily
mean that he has the obligation to warrant. If the seller can prove that the buyer knew of the
defects at the time of the contract, he is not liable on his warranty against defects. (Art. 2295/2)

The seller does not only warrant for what he has expressly warranted but also for warranties he is
presumed to have undertaken by implication. Implied warranties are imposed by law and arise

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only under certain circumstances and they can be excluded or restricted by the parties as they are
not absolute.
All defects are not warrantable. Certain defects are warrantable and others are not warrantable. A
warrantable defect for which warranty shall become effective according to Article 2289 is where
the thing:
 Does not possess the quality required for its normal use or commercial exploitation;
 Does not possess the quality required for its particular use as provided expressly or
impliedly in the contract; (warranty of fitness for particular use)or;
 Does not possess the quality or specifications provided expressly or impliedly in the
contract (warranty of fitness specified in the contract)Warranty against non-
conformity: A seller, in addition to warranty against dispossession and defect, has the
obligation to warrant against non-conformity of the thing. The thing is deemed not to
conform to the contract where the seller delivered to the buyer part only of the thing
sold or a greater or lesser quantity than he had undertaken in the contract to deliver or
the seller delivered to the buyer a thing different from that provided in the contract or
a thing of a different species.(Art.2288/1).

For example, if the seller agrees to deliver a Sony TV set, he breaches the warranty against non-
conformity when he delivers a tape recorder or JVC TV.
D. Other obligations of the seller

Other obligations of the seller relate to handing over of documents and insurance. If it is
customary for the seller to hand over to the buyer documents concerning the thing sold, the seller
shall, in addition to delivery, hand over such documents. In addition, where the seller must know
from the circumstances that carriage insurance is the custom and where the seller is not bound to
contract such insurance himself, he shall provide the buyer with the necessary information to
enable him to contract insurance, where the buyer requires such information from him.

5.3.2. Obligation of the buyer

The main obligations of the buyer under the contract of sale are the obligation to pay price and
the obligation to take delivery of the thing sold.

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A. Obligation to pay price:The obligation of the buyer to pay price includes the obligation
to take any steps provided by the contract or by the custom to arrange for or guarantee the
payment of price. For example, the contract of sale may provide that the buyer should
pay the price in check. In this case the buyer must open account in bank and deposit
money in the bank from which he orders payment to the seller.

There are different ways of determining price:

 It may be fixed by the contracting parties at the time of contract.

 Where, in the contract of sale, price is to be fixed by weight, the parties shall weigh the
thing and determine the price. It is the net weight that is taken in to account.
 It is also possible to determine price based on market, the price to be effective is the one
prevailing at the time and place where delivery takes place.

If it is difficult to ascertain the price by any of the above methods, and the subject matter relates
to a thing which a seller normally sells, then the parties are deemed to have concluded the sale at
a price normally charged by the seller having regard to the time and place where delivery is
made.

Time and place of payment:time of payment is on delivery of goods unless agreed otherwise.

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

Obligation to take delivery of the thing:the buyer must take necessary steps to complete the
delivery

5.4. Common obligations of seller and buyer

A seller and a buyer have some obligations in common like obligation to pay expenses,
obligation to preserve the thing and obligation to bear unpreventable risk of loss and
deterioration.

5.4.1. Expenses

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There are different expenses involved in sale contract which may be borne by the seller and or
buyer. The expenses of contract of sale and expenses of payment shall be borne by the buyer.
Where the seller has changed the address of his place of business or residence after contract is
made, he shall beer any additional expenses arising from the change.

Expenses of delivery are borne by the seller. These expenses include the cost of counting,
measuring, weighing and packing.

Expenses of transport may be borne by the seller or by the buyer. Where the thing sold is to be
transported to another place than the place agreed for delivery, the buyer shall bear the expenses
of transport. If the place of delivery is agreed by the parties or if it is fixed in the contract, the
seller shall bear the expenses of transport up to the place agreed for delivery.

5.4.2. Preservation of the thing

Both the seller and the buyer are required to ensure the preservation of the thing. But the two
may preserve the thing under different circumstances.

The obligation of the seller to preserve the thing arises when the buyer is late in taking delivery.
It is carried out at the expense of the buyer.

If the thing delivered is defective, the buyer may return the thing to the seller. Until he returns it,
he must preserve the thing at the expense of the seller.

5.5. Transfer of risk under contract of sale

Risk is the liability of loss or deteriorations of a thing sold. Thus, the effect of risk allocation is
that the person who bears the risk is to cover the value of the thing which has been damaged or
lost. Thus, the basic principle, which is provided regarding transfer of risks in the sale of goods,
is that, the buyer shall pay the price notwithstanding that the thing is lost or its value altered
where the risks are transferred to him. The risks shall be transferred to the buyer from the day
when the thing has been delivered to him. Thus, risk and ownership are inseparable.

However, risk will not be transferred to the buyer even after delivery if the thing does not
conform to the contract and the buyer has cancelled the contract, require cancellation or require

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replacement of the thing. Yet, even if there is non-conformity, unless the buyer has cancelled the
contract, require cancellation or require replacement of the thing, he/she bear the risk.

3.4 Law of Insurance

Definition of Insurance
Insurance may be defined in various ways. Firstly, from the point view of an individual it may be
defined as a risk transfer mechanism or an economic device whereby a person, called the
insured/assured transfers a risk of a possible financial loss resulting from unforeseeable events
affecting property, life or body to a person called the insurer for consideration. Thus, it can be
seen that insurance is a device by which an insured person can protect himself from heavy loss
likely to be caused by an uncertain event by paying a comparatively much smaller sum of money
as premium.
For instance, let us take a case of an owner of a motor vehicle, who always runs the risk of
suffering a financial loss resulting from the loss or destruction of his property because of
unforeseeable events such as fire, collision, overturning or even theft. Therefore, if the person
purchases a motor insurance policy covering these risks from an insurer, it means that he
transferred this possible financial loss to the insurer.
Secondly, from the point of view of the insurer, insurance may be defined as a mechanism
through which a risk is distributed among the group of persons who are exposed to the same type
of risk, i.e., persons who bear the risk of suffering a financial loss as a result of events affecting
property, life or body.

From the definitions provided above, we can understand that insurance is a cooperative
economic device to spread the loss caused by a particular risk over a number of persons who are
exposed to it and who agree to insure themselves against that risk. This means that insurance
provides a pool to which many persons contribute a certain amount of money called the
premium, and out of which the insurer compensates the few who suffer losses. This is always
true in the case of property and liability insurance which cover contingencies and given for a
short period of time, usually a period of one year, but does not so fully apply to insurance of
persons particularly life insurance(see Art 692 of the commercial code) in which the policy
usually becomes a claim ultimately.

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It is worth to mention at this juncture that insurance does not and cannot prevent loss of property,
incurring civil liability, death, or injury or illness; rather it provides financial compensation for
the effects of misfortune. In other words, we can say that insurance does not protect the insured
property from loss or damage, or the insured from incurring civil liability or the insured person
from death or injury or illness, but provides a financial compensation to the insured or the
beneficiary who has suffered pecuniary losses as a result of loss or damage to property, or
because he has incurred a civil liability or illness or death of the insured.
The party who promises to pay a certain amount of money to, or to indemnify, the other party is
called the insurer (sometimes called the assurer- in cases of insurance of persons and the under
writer in cases of marine insurance and the party to whom such protection is given is called the
inured (or the assured). The document containing the terms and conditions of the contract of
insurance is called the policy, and the insured is therefore, also referred to as a policyholder.

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

contingent or conditional contract is a contract to do or not to do something, if some event,
collateral to such contract, does or does not happen. In other words, it is a contract in which the
performance of the obligation arising there from by the parties or one of them is dependent upon
the condition or contingency agreed upon by them. Accordingly, as the obligation of the
insurer/assurer to pay compensation or the agreed amount to the insured or the beneficiary is
dependent upon materialization of the risk or risks specified in the policy. Thus, for instance, if
X Insurance Company agrees to pay Birr 100,000 in exchange for B paying Birr 2500 as
premium, if B's house is destroyed by fire; there will be contingent contract, the performance of
which depends upon the happening of an uncertain event, i.e. the destruction of the house by fire.
The insurance covers only when the risk specified in the policy materializes. For instance, the
owner of the house in the above example would not be compensated if the house is destroyed
cause of flood. Therefore, it is very crucial to make sure the insurance policy unequivocally
indicates the risk to avoid ambiguity.
Finally, let us see how a contract of insurance is defined under the insurance law of Ethiopia. Art
654 of the Commercial Code of Ethiopia defines insurance as follows:

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Insurance (policy) is a contract whereby a person, called the insurer, undertakes, against
payment of one or more premiums, to pay to a person, called the beneficiary, a sum of money
where a specified risk materializes.
According to this definition, insurance is a contract between two or more persons in which one
person called the insurer, agrees to pay the agreed amount of money or compensation to another
person, called the insured, or the beneficiary where the insured property is lost or destroyed ( in
cases of property insurance), or where the insured person incurs civil liability (in cases of
liability insurance) or where the insured person dies or suffers bodily injury or falls ill (in case
of insurance of persons). The insurer undertakes this obligation for consideration, called
premium payable by the insured person.
Sub Art(2) of the same article provides that a contract of insurance may be concluded in relation
to "damages" covering risks affecting property or arising out of the insured person’s civil
liability. These types of insurances are generally referred to as indemnity insurances, in which
the insurer’s obligation is to pay compensation, which is always equal to damage. Similarly, sub
Art(3) provides that a contract of insurance may also be made in respect of human person’s life,
body or health in which the insurer’s obligation is to pay the amount agreed upon (the sum
insured). This is a type of insurance in which the principle of indemnity or compensation is not
applicable since human life or body does not have a market value, hence the name Non-
indemnity insurance.
Thus, a contract of insurance, as a contingent contract is a perfectly valid contract, and the
general principles of the law of contract which you discussed in chapter three (general contract)
apply equally to such a contract. Hence, to be valid, it must fulfill the following requirements:
(i) there must be an agreement between the parties (ii) the agreement must be supported by
consideration, (iii) the parties must be capable of contracting (must have capacity), (iv) the
consent of the parties to the agreement must be free from defects, (v) the object must be
precisely/sufficiently defined, legal or the object must not be illegal and immoral, and (vi) the
form indicated by the shall be observed.
Categories/types of insurance
Insurance could be categorized into various types based on different criterion.
Classification based on the nature of insurance given
A. Indemnity insurance

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In these types of insurance, the insurer’s obligation is to pay compensation, which is always
equal to damage. The main essence of these types of insurance is reinstating the insured to the
economic position where he/it had been before the materialization of the risk. Hence, the amount
recoverable mainly depends upon the insured’s economic loss. Unlike non-indemnity insurance;
this type of insurance is easy to calculate the exact economic value/market value of the damage.
Property and liability insurances are contracts for indemnity or compensation, which, in
principle, is equal to the actual value of the object or the amount of economic loss or damage
sustained by the insured. Hence, in cases of insurance of objects, the liability of the insurer, if the
risk materializes, shall be to pay compensation i.e., the actual value of object on the day of
occurrence, where the object is totally destroyed or lost or the cost of repair in cases of partial
damage, provided that such compensation cannot exceed the amount of guarantee/sum insured
indicated in the policy. (See Arts 678, 665(2) of the commercial code).
Since a property insurance contract is a personal contract, it normally cannot be assigned to
another party without the insurer’s consent. Otherwise, the company could not be legally bound
in a contract with an individual to whom it would never have issued a policy originally, and one
in which the nature of the risk is altered substantially.
B. Non-indemnity insurance
In this type of insurance the amount recoverable is not measured by the extent of insured’s
economic loss. In this type of insurance, the insurer’s obligation is to pay the amount agreed
upon (the sum insured). The principle of indemnity or compensation is not applicable since
human life or body does not have a market value. It is usually, if not always, an impossible task
to know exactly the economic value of the subject matter of insurance.
It is an insurance made in respect of human person’s life, body or health. When the insurance is
related to insurance of persons, the parties freely fix the amount of guarantee and is payable
regardless of the actual damage sustained where the risk materialized. This is mainly because it
is generally accepted that human life or limb cannot be valued in terms of money and are
irreplaceable and the insured or beneficiary who receives it cannot be considered to have made a
net profit out of the insurance. (See Art 689 of the commercial code)
A life insurance policy can be freely assigned to anyone without the insurer’s consent because
the assignment does not usually alter the risk and increase the probability of death.
Classification on the basis of Event

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We may categorize insurances based on the materialization of the risks indicated in the
policy.
a) Life insurance-----applicable when the insured dies
b) Fire insurance----applicable when a fire accident happens
Classification on the basis of Nature of Interest affected
We may classify insurances based on the nature of that may be jeopardized because of
the materialization of the risk
A) Personal Insurance----this type of insurance is directly connected to the personal
interest of the insured. E.g. health, life insurance
B) Property Insurance-----it is highly connected to various types of property. Eg motor,
fire insurance
C) Liability insurance----refers to the risk of liability towards third parties, which the
insured is required to pay,such damage to property belonging to third person or
injury or death of third person or both in the case of accident.

Principles of insurance
a. Principle of Utmost Good Faith
This principle is mainly all about disclosing material facts. The duty to make a full and true
disclosure continues until the contract is concluded, i.e., until the proposal of the insured is
accepted by the insurer, whether the policy is then issued or not and it is not a continuing
obligation. Thus, any material fact coming to his knowledge after the conclusion of the contract
need not be disclosed. However, the duty to disclose revives with every renewal of the old policy
or alterations in the existing policy.

If the principle of utmost good faith is not observed by either party, the contract becomes void
able at the option of the party not at fault, irrespective of whether the non-disclosure was
intentional or innocent. Of course, in case of innocent misrepresentation the premium is
refundable on the avoidance of the contract. This principle is mainly applicable to the insured. In
fact the insured is obliged to disclose material facts within his knowledge since the material facts
are decisive to determine the amount of premium.

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b. Principle of Indemnity
The second fundamental principle is that all contracts of insurance are contracts of indemnity,
except those of life and personal accident insurances where no money payment can indemnify
for loss of life or bodily injury. In case of marine and fire insurances, the insurer undertakes to
indemnify the insured for loss or damage resulting from specified perils. In case of loss, the
insured can recover from the insurer the actual amount of loss, not exceeding the amount of
policy. If there is no loss under the policy, the insurer is under no obligation to indemnify the
insured. The purpose of indemnity is to place the insured, after a loss, in the same position he
occupied immediately before the event. Under no circumstances, is the insured allowed to
benefit more than the loss suffered by him. This is because, if that were so, the temptation would
always be present to desire the insured event and thus to obtain the policy proceeds. As it is
discussed briefly above the main purpose of insurance is to reinstate the insured to the position
where he would have been before the materialization of the risk. It is not mean to make profit out
of the materialization of the risk. This would obviously be contrary to public interest. This
principle applies to insurance of objects (property insurances) and liability insurances.

c. Proximate Cause
The next principle of insurance is that the insurer is liable only for those losses which have been
proximately caused by the peril insured against. In other words, in order to make the insurer
liable for a loss, the nearest, immediate, or the last cause has to be looked into, and if it is the
peril insured against, the insured can recover.

Thus, in deciding whether the loss has arisen through any of the risks insured against, the
proximate or the last of the causes is to be looked into and others rejected. If loss is caused by the
operation of more than one peril simultaneously and if one of the perils is excluded (uninsured)
peril, the insurer shall be liable to the extent of the effects of insured peril if it can be separately
ascertained. The insurer shall not be liable at all if the effects of the insured peril and excepted
peril cannot be separated.

d. Insurable Interest
Consistent with the concept of insurance as a means of indemnifying an insured against a loss, is
the corollary that insurance should not provide an insured with the means of showing a net profit
from the event insured against.

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Throughout the development of the insurable interest doctrine in case and statutory law, two
primary purposes have captured the attention of law-makers, both rooted in public policy. The
first is the elimination of insurance as a vehicle for gambling, an activity to which has been
attributed idleness, vice, a socially parasitic way of life, increase in impoverishment and crime,
and the discouragement of useful business and industry. The second is the removal of the
temptation provided by a prospect of a net profit through insurance proceeds to deliberately bring
about the event insured against, whether it is the destruction of property or human life.
‘Insurable interest’ is an essential pre-requisite in effecting a contract of insurance. The insured
must possess an insurable interest in the subject matter of the insurance at the time of contract.
Otherwise, the contract of insurance will be a wagering agreement which shall be void and
unenforceable.

e. Doctrine of Subrogation
The doctrine of subrogation is a corollary to the principle of indemnity and as such, it applies
only to property insurances. According to the principle of indemnity, the insured can recover
only the actual amount of loss caused by the peril insured against and is not allowed to benefit
more than the loss he suffered. In case the loss to the property insured has arisen without any
fault on anybody’s part, the insured can make the claim against the insurer only. In case the loss
has arisen out of tort or fault of a third party, the insured becomes entitled to proceed against
both the insurer as well as the wrongdoer. However, since a contract of insurance is a contract of
indemnity, the insured cannot be allowed to recover from both and thereby make a profit from
his insurance claim. He can make a claim against either the insurer or the wrong doer. If the
insured chooses to be indemnified by the insurer, the doctrine of subrogation comes into play and
as a result, the insurer shall be subrogated to all the rights and remedies of the insured against
third parties in respect of the property destroyed or damaged.

f. Risk Must Attach

The next principle of insurance is that for a valid contract of insurance the risk must attach. If the
subject-matter of insurance ceases to exist (e.g. the goods are burnt) or the insured ship has
already arrived safely, at the time the policy is effected, the risk does not attach, and as a
consequence, the premium paid can be recovered from the insurers because the consideration for
the premium has totally failed. Thus, where the risk is never run, the consideration fails and

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therefore the premium is returnable. It is a general principle of law of insurance that ‘if the
insurers have never been on the risk, they cannot be said to have earned the premium.’

g. Mitigation of Loss
When the event insured against occurs, for example, in the case of a fire insurance policy when
the fire occurs, it is the duty of the policyholder to take steps to mitigate or minimize the loss as
if he were uninsured and must do his best for safeguarding the remaining property. Otherwise,
the insurer can avoid the payment for loss attributable to the negligence of the policyholder. Of
course, the insured is entitled to claim compensation for the loss suffered by him in taking such
steps from the insurer.

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

Thus, the essential conditions required for the application of the doctrine of contribution are:

 There must be double insurance

 There must be either over-insurance or only partial loss

i. Reinsurance
An insurer assuming larger risk from the direct insurance business may arrange with another
insurer to off load the excess of the undertaken risk over his retention capacity. Such
arrangement between two insurers is termed as ‘reinsurance.’ Thus, by the device of reinsurance
the original insurer transfers part of the risk to the reinsurer. Payment made by the ceding insurer
(called original insurer or reinsured) to accepting insurer (called reinsurer) for the assumption of
the risk by the latter is termed ‘reinsurance premium.’

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j. Third Party Interests in Liability Insurance

Liability insurance originated solely as a protection for the interests of the insured against loss
suffered through liability to third parties. It began in the area of employers’ insurance against
loss through liability to employees for work related injuries. Since indemnification of the
employer/insured was the sole function of the insurance, the injured third party could not bring a
direct action against the insurer even after obtaining a judgment against the insured. Even the
insured could not bring action on the policy until he had sustained an actual loss by payment of
the judgment debt to the third-party. If the insured happened to be insolvent and judgment proof,
no claim could arise under the policy.
In subsequent years, legislation has radically transformed the function of liability insurance in
many areas to make the injured third-party with a cause of action against the insured a quasi
third-party beneficiary of the liability policy.
One of the first areas under legislative attack was the inequity of allowing an insured to pay
premiums to an insurer to keep liability insurance current and then to allow the insurer to hide
behind the shield of the insolvency of the tortuous insured to prevent payment of the judgment
debt owed to the third-party victim.
A second form of “no action” clause provides that “No action shall lie against the company until
the amount of the insured’s obligation to pay shall have been finally determined either by
judgment against the insured after actual trial or by written agreement of the insured, the
claimant and the company.”
A third aspect in which legislation has created rights for the third-party victim in the insured’s
liability policy involves defenses against recovery on the policy. In the area of automobile
liability insurance particularly, legislatures have generally provided in financial responsibility
statutes for the protection of tort victims that defenses that would bar collection of the proceeds
by the insured, such as fraud in the application, non-cooperation in defense of a tort action, or
failure to notify the insurer of an accident, will be of no effect in a direct action by the third party
tort victim against the insurer.
In the past, the issue of tort immunity has occupied a more important place in the determination
of insurance issues. With the trend in the law toward limiting tort immunity for charitable
institutions and other parties, the issue of tort immunity in insurance law has become less of a

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factor. However, where the tort feasor is immune from suit, the issue as it relates to liability
insurance is generally addressed in one of three ways.
First, a policy may be silent on the issue of tort immunity. Second, the policy might reserve to
the insured the right to determine whether tort immunity will be exercised. Third, the policy may
totally forbid the insurance company from exercising a right to tort immunity.
6.1. The Requirements to Carry on Insurance Business
Art 656 of the Commercial Code provides that the law shall determine the conditions under
which physical persons or business organizations may carry on insurance business. Therefore,
we have to refer to other parts of the commercial code and other laws to find out as to who may
undertake insurance business and the conditions under which it may be undertaken.
Accordingly, Art 513 of the code provides that banks and insurance companies cannot be
established as private limited companies, i.e., a private limited company cannot engage in
banking, insurance or any other business of similar nature. Similarly, Art 6(1) of the Licensing
and Supervision of Insurance Business Pro No 86/1994 provides that no person may engage in
insurance business of any type unless it applies to and acquires a license from the National Bank
of Ethiopia for the particular class or classes of insurance. Furthermore, Art 4(1) and Art 2(3) of
the same proclamation provide that such person has to be a share company as defined under Art
304 of the commercial code.
According to this article, a share company is a company whose capital is fixed in advance and
divided into shares and whose liabilities are met only by the assets of the company( you have
discusses this issue in detail in chapter eight). The capital of the company to be established as an
insurance company must be wholly owned by Ethiopian nationals and/or business organizations
wholly owned by Ethiopian nationals, and it must be established and registered under Ethiopian
law and must have its head office in Ethiopia.
These requirements / conditions in effect prevent foreigners from engaging in insurance business
and foreign banks from opening branches and operating in Ethiopia. The most probable reason
for this position is the need to protect infant domestic insurance companies which do not have
the desired financial strength, knowhow and human resources to be able to compete with foreign
banks which have superior capacity in these areas.
The other condition that a person must fulfill to obtain a license relates to the minimum capital of
the company, i.e., it must have a minimum capital of 3 million Birr if it is applying for license

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to undertake general insurance business i.e., insurances other than insurance of persons, and 4
million Birr if it is applying for a license to undertake long term insurance business, i.e.,
insurance of persons and 7 million where the application is to undertake both classes of
insurance. Such capital has to be paid up in cash and deposited in a bank in the name of the
company to be established as an insurance company.
6.2. Significance of Insurance
Its significance could be derived from the definitions given above. Hence, Insurance as a
mechanism of transfer of risk has great economic and social benefits to the individual insured,
his family and the country in general. The following are some of the major benefits.
I. Indemnification for Losses
Payment of compensation by the insurer for losses permits individuals and their families to be
restored to their original financial position after a loss has occurred. As a result, they can
maintain their financial security. Since they are restored either in part or in whole after a loss
occurs, they are less likely to seek financial assistance from relatives and friends. It also allows
businesses to remain in business and employees to keep their jobs, suppliers will continue to
receive orders, and customers can still purchase the goods and services they desire. The
community also benefits because its tax base is not eroded. Businesses and families who suffer
unexpected losses are restored or at least moved closer back to their previous economic position.
The advantage to these individuals is obvious. The society also gains because these persons are
restored to production and tax revenues are increased. In short, the indemnification function
contributes greatly to family and business stability and therefore is one of the most important
social and economic benefits of insurance.
II. Reduction of Worry and Fear
Another benefit of insurance is that it reduces worry and fear, both before and after loss. For
instance, if family heads have life insurance for adequate amount to cover the future needs of
their families, they are less likely to worry about the financial security of their dependents in the
event of their premature death. Persons insured for long-term disability do not have to worry
about the loss of earnings if a serious illness or accident occurs. Property owners who are insured
enjoy greater peace of mind since they know that they are covered (they would be compensated)
if loss occurs to their property.

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III. Source of Investment Funds

The insurance industry is an important source of funds for capital investment and accumulation.
Premiums, which are collected by the insurer in advance, usually at the time of conclusion of the
contract and other funds which are not needed to pay for immediate losses and expresses, can be
loaned to businesses or invested in manufacturing, real estate... sectors. These investments
increase the society’s stock of capital goods and promote economic growth.
Insurance, through compensation of losses, also encourages new investment. For instance, if an
individual knows that his or her family will be protected by life insurance in the event of
premature death, his or her and the family's financial resources are protected by various types of
property insurances, he/she may be more willing to invest savings in a long-desired project such
as a business venture, without feeling that the family is being robbed of its basic income security.
In a way a better allocation of resources is achieved, i.e., idle funds/deposits are used for a more
productive purpose. As insurance is an efficient device to reduce risk, investors may also be
willing to enter fields they would otherwise reject as too risky, and the society benefits from
increased services and production.
IV. Means of Loss Control
Although the main function of insurance is not to reduce loss but merely to spread/distribute
losses among members of the insured group, insurers are nevertheless vitally interested in
keeping losses at a minimum. Insurers know that if no effort is made to prevent or minimize
occurrence of insured risks, losses and hence premium would have a tendency to rise. It is human
nature to relax vigilance when they know that the loss will be fully paid by the insurer.
The following illustrations are some of the areas in which insurance companies play a very
important role in loss prevention and control:
- Development of fire safety standards and public education
- programs
- Recovery of stolen properties
- Investigation of fraudulent insurance claims and thereby deterring intentional
destruction of property and life
- The insurance industry also finances programs aimed at reducing premature deaths,
accidents and illness.

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

It is obvious the effect of every contract is creating rights and obligations among contracting
parties. Not being an exception to this fact, contract of insurance creates obligations between an
insured and an insurer. The following are their respective obligations.

1. Obligations of an insurer
a) It shall guarantee the insured against the risks specified in the policy (see article 663 of
the commercial code). In other words, it shall pay the agreed sum which shall not exceed
the amount specified in the policy.
b) It shall act in good faith.
As it is clearly indicated above both parties are highly expect to act in highest standard of
honesty to each other.
2. Obligations of an insured
a) To pay the premium at a specified time in the policy (see article 665 of the
commercial code)

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The amount premium and time of payment would be clearly indicated in the policy
and the insurer shall pay the premium accordingly.
b) To act in good faith
On making proposals for a policy, the beneficiary shall state exactly all the
circumstances within his knowledge and which are likely to assist the insurer to
appreciate fully the risks he undertakes to insure policy (see article 667 of the
commercial code). We have discussed somewhere in this chapter that the insured is
only expect to disclose material facts within his knowledge.
c) Unless he is prevented by force majeure, the beneficiary shall inform the insurer of
any occurrence likely to render the insurer liable as soon as he knows of such
occurrence or within not more than five days (see article 670 of the commercial
code).
6.4. Period of limitation

Any claim arising out of a contract of insurance shall be barred after two years from the
occurrence giving rise to the claim or from the day when the parties knew of the occurrence. In
case of concealment or false statements, the period of limitation shall run from the day when the
insurer knew of the concealment or false statement policy (see article 670 of the commercial
code.)

Chapter FIVE
Law of Negotiable Instruments
A. Definition and nature of Negotiable instruments
Here is the definition suggested by our commercial code.
A negotiable instrument is any document incorporating a right to an entitlement in such manner
that it be not possible to enforce or transfer the right separately from the instrument.
So, negotiable instrument is not a mere document, instead it incorporates a right to an
entitlement. What possible entitlements could a negotiable instrument bestow the document
holder? It may endow the holder of the document a right of ownership,profit share or seek
payment of money.
In order to understand this let us see the types of negotiable instruments that has got cognizance
by our commercial code. Basically our commercial law recognizes in particular as negotiable

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instruments commercial instruments, transferable securities, documents of title to goods as the

three types of Negotiable instruments.
1. Transferable Securities
Typical documents that can be identified as Transferable Securities are; Share certificates
(Stocks), Bonds, Debentures and life insurances. Those documents entitle the holder to claim a
profit in case of dividend as it is the case for share certificates. What entitlement do you think
bonds create to the holder? Consider the renaissance Dum Bond.
2. Documents of Title to Goods
These documents entitle the holder to have an ownership claim over things. Bill of lading, Rail
way bills and Airway bills are the typical illustrations of documents of title to goods. The holder
of these documents is deemed to be the owner of the goods that are in ship yet to arrive at a port
or goods transported through plane still in the air not landing on the land. He can use the
document to show his ownership and can sale the goods without actually delivering them just by
delivering the bill of lading or airway bills.
3. Commercial Instruments
In this chapter we will emphasize more on this type of negotiable instruments
Commercial instruments are negotiable instruments setting out an entitlement consisting in the
payment of a sum of money. So, the entitlement that the holder of commercial instrument could
enjoy is not profit claim nor it is an ownership claim but Money claim. He can demand the
payment of money by merely holding the document.

a. Types of commercial instruments

What kinds of documents can be are commercial instruments/
 Bills of exchange,
 promissory notes,
 cheques,
 traveler’s cheques and
 Warehouse goods deposit certificates shall be deemed to be commercial instruments.
Bill of exchange
‘Bills of exchange are negotiable instruments incorporating an unconditional order, addressed
by one person to another, signed by the person giving it, requiring the person to whom it is

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addressed to pay on demand or at a fixed or determinable future time a certain sum in money to
or to the order of a specified person’

Bill of exchange is therefore, a written acknowledgement of debts written by the creditor and
accepted by the debtor. It is an assignment of right. The creditor is ordering the debtor to pay his
debt to another person, the holder.

From the definition provided we can observe that there are three persons

1. Drawer: is the person who is making the unconditional order. He orders some other
person, usually his debtor, to pay the money to the bill of exchange holder.
2. Drawee: is the person who is ordered to pay the money unconditionally to the bill of
exchange holder.
3. Payee: is the person to whose advantage the unconditional order is made. He is the holder
of the bill of exchange demanding payment from the drawee, a person whos is already
ordered to pay the money by the drawer,

Basic requirements of bill of exchange

 The term “bill of exchange”
 An unconditional order to pay a certain sum in money
 The name of the person who is to pay ( the drawee)
 The time of payment
 The place of payment
 The name of the person to whom or to whose order payment is made or an
indication that it shall be payable to bearer
 The date when and the place where the bill is issued.
 The signature of the person who issues the bill (drawer)
From the elements required by law the second element deserves a little explanation.
Unconditional order means the drawer can’t attach any condition while preparing the bill of
exchange. This is true because bill of exchange, in fact all kinds of commercial instruments, are
an entitlement to money payments. They circulate in the market representing money and money
should circulate in the market smoothly. No one can refuse to accept money since it is issued

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unconditionally to serve as a means of transaction. Same analysis goes to bill of exchange, once
issued it contains amount of money in it so it will be equivalent with money.
Besides the sixth (6th) element i.e. ‘The name of the person to whom or to whose order payment is
made or an indication that it shall be payable to bearer’ too needs an explanation. Basically, this
element is referring to the instrument of the name of the payee though not always. Especially the
term ‘an indication that it shall be payable to bearer” clearly delivers the message that the name
of the payee is not always to be mentioned in the document. Rather, the drawer may leave it open
and make it payable to bearer. If the payee is a bearer, then every person regardless of his
identity can claim the payment of the money as long as he legitimately holds the bill of
exchange.
Legal Consequence of non-fulfillment of the elements
Absence of any of the above eight elements will render the document as void, It would not be
considered as a bill of exchange at all, except;
 Time of payment
 Place of payment and
 Place of issuance
In the above three cases the law fills the gap of the bill of exchange drawn without mentioning
those elements. Accordingly, a bill of exchange that doesn’t contain time of payment shall be
paid at sight or on demand. As we shall see soon in the upcoming discussion on Maturity of bill
of exchange, a bill of exchange payable at sight or on demand means the holder or the payee can
demand the payment any time he wants. On demand means he is only expect to demand payment
irrespective of the time. For the second gap i.e. a bill of exchange that doesn’t contain the place
of payment shall be deemed to be payable at the domicile of the drawee, the person who is
ordered to pay. Finally, the place mentioned next to the name of the drawer shall be deemed to
be the place where the bill is deemed to be drawn.
Here is the graphic representation of the definition and requirements of bill of exchange.

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Bill of exchange
Gondar, March 23,2014

1000,000 ETB On August 15,2014 pay Satcon Construction or order*

The sum of 1000,000 birr for value received

Yotec Construction

To: Gondar University

Gondar
Amhara, Ethiopia

Now students you can check whether all of the 8(eight) elements of bill of exchange have met in
the graphic representation above? spot the drawer, drawee, payee, date of issuance, date of
payment, place of payment and place of issuance of the above bill?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
_____________________________________________________________________________

Negotiation of bill of exchange

As any kind of negotiable instruments they are freely transferable or negotiable from one person
to another. The process of negotiation of those bills is known as Endorsement. In the process of
endorsement there are two persons always, the Endorser and Endorsee. The former is the person
who is transferring or negotiating the bill to another person, the later known as endorsee.
Endorsement is completed when the endorser writes his name and signature at the back of the
bill and actually delivers it to the endorsee.
If the bill of exchange drawn is to bearer or doesn’t mention the name of the payee then it can be
transferred by simple delivery of the instrument. Any other bi1l of exchange even if not

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expressly drawn to order may he transferred by endorsement. Other points worth mentioned
regarding endorsement are;
 An endorsement shall be unconditional. Any condition to which it is made
subject shall be of no effect.
 A partial endorsement shall be null and void
 An endorsement "to bearer" is equivalent to an endorsement in blank.

Maturity of bill of exchange

Categories of maturities;
(I) a bill of exchange may be drawn payable:
1. at sight;
2. at a fixed period after sight;
3. at a fixed period after date;
4. at a fixed date.
Bills of exchange at other maturities or payable by installments shall be null and void. Other
than the four mechanisms of maturities the law disregards any other kind of maturity dates.
Bill of exchange payable At Sight or On Demand
A bill of exchange at sight is payable on presentment. This shows that the payee is only expected
to present the document any time convenient to him starting from the time the bill is issued. The
question is here therefore, till when can he demand payment? When will he lose his right to
demand payment since the maturity date is not fixed in the bill of exchange. For this sake the law
has limited his right to demand payment within a year of its date. The drawer may shorten or
extend this period. These periods may be shortened by the endorsers.

Illustration
Assume that ato Assefa, residing in Addis Ababa has issued a bill of exchange on June 05,2014
unconditionally ordering ato Gebru ,a person living in Hawassa to pay 15,000 ETB to
Selemawit. Now Selemawit, the payee, can demand payment any time starting from June 20,
2014 provided that she can only exercise her right within one year starting from June 20,2014.
Bills of exchange payable at a fixed period after Date

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When a bill is drawn payable right after a certain fixed period of time it shall start to run starting
from the date when it is issued or drawn. For instance in the illustration given above had ato
Assefa set the date of payment as 20 days later then Selemawit shall present the bill for payment
on June 26,2014.
NB the date of which a bill is issued and the date of presentment for acceptance shall not be
considered while calculating the maturity date. That is why Selemawit is enjoying a day plus
benefit. In other words June 05, the date of issuance, is excluded hence the date run from June
o6, 2014 and when we add another 20 days the maturity date will be June 26, 2014.
Besides the payee can demand payment within two days after the maturity date provided that the
2 additional payment requesting dates are working days. For example in the above illustration
thought the maturity date is June 26, 2014 Selemawit can demand payment either on June 26, 27
or 28, 2014, provided that June 27 and 28 are working days. If they are holidays or other non
working days for any reason she can demand payment for an extended period.
Bills of exchange payable at a fixed Date
Bills of exchange drawn with such kind of maturity dates are unique because the exact date of
payment is set in advance by the drawer. In the above illustration, for instance, had ato Assefa set
the date of payment to be on June 23, 2014 then Selemawit shall demand payment on June 23,
2014. Obviously she has got 2 additional working days i.e. July 24 and 25.
Bills of exchange payable at a fixed period After Sight.
The maturity of a bill of exchange payable at a fixed period after sight shall be determined either
by the date of the acceptance or by the date of the protest. Unlike the first three categories of
maturities in this kind the reference date is not the date of issuance, rather it is the date of
acceptance or protest. In order to comprehend this first let us see what acceptance and protest
are.
Presentment of Bills of exchange for acceptance
The payee or the holder of bills of exchange shall present the document for an acceptance to the
drawee before he seeks payment on the maturity date. For example a bill that matures on June24,
2014 also issued on March 23,2014 must have been presented for an acceptance right before the
payee demands payment from the drawee. In particular the payee shall go to the drawee in any of
the days specified between march and June 24, 2014.

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In short acceptance by the drawee means he has agreed to pay the amount stated in the bill. But
he may not necessarily accept the bill he may refuse to accept it such is the case for protest.
Refusal to acknowledge the payment on due or maturity date means he is telling the payee in
advance that he will not pay him even if he come on the maturity date.
The Drawee can accept the payment partially but if he attaches any condition to the acceptance
the condition attached will be disregarded and wouldn’t affect the acceptance. That means he
will be considered as if he accepts the payment. His willingness or acceptance of the bill can be
expressed by terms like ok, agreed or accepted plus his confirmation via signature.
When do you think that the payee should go for an acceptance of the bill?
For the bills their maturity date is known like for a fixed date and fixed period after date the
payee shall present the bill for acceptance before the maturity of these bills. However if the
maturity of the bill is at a fixed period after sight it shill he presented for acceptance within one
year of their date though the drawer can extend or shorten these periods. So the payee has one
year to present the document for acceptance.
With this let me take you back to the fourth category of maturity of bills of exchange i.e. bill
payable at a fixed period after sight. The maturity of such kind of bills depends on the date of
acceptance. We have already seen that he can present the bill for acceptance within one year
starting from the date of issuance. Then the maturity of the bill counts from this date of
acceptance.
Illustration II:
Ato Solomon, a trader residing in Baherdar issued a bill on March 20,2014 ordering ato
Yazachew, a merchant living in Gondar, to pay 200,000 ETB to Gebrewahid 15 days after he
presents the bill for acceptance. Based on this case the maturity of the bill depends on the date
ato Gebrewahid present the bill for acceptance. He can present it within one year. Assume that he
presents the document for acceptance on May 12, 2014. Then the maturity date of the bill will be
May 28, 2014.
5. Promissory Note
Promissory note is defined as a document incorporating an unconditional promise in writing
made by one person to another signed by the maker, engaging to pay, on demand or at a fixed or
determinable future time, a sum certain in money, to or to the order of a specified person or to

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bearer. The definition is almost similar with the definition of bills of exchange except for the
following couple of points.
 Promissory note is a promise not an order. If it is a promise then the maker or the drawer
is the person who is promising the payee to pay him a sum amount specified in money
unconditionally.
 As an extension of the first point therefore, there are only 2(two) persons in promissory
note; the Maker and the Payee, the person to whose advantage the promise is made. Other
related notes like presentment for an acceptance could not make sense to promissory
notes since it is needless to request the person acknowledge the payment for the debt that
he himself initially issued it.
Basic requirements of Promissory note
 The term “promissory note”
 An unconditional promise to pay a sum certain in money
 The time of payment
 The place of payment
 The name of the person to whom or to whose order payment is to be made or a
statement that the note is payable to bearer
 The date when and the place where the note is issued
 The signature of the person who issues the instrument
As one goes through the elements there are about 7(seven) basic requirements for the issuance
of valid promissory note. Absence of any of the elements will render the Note as void except for
 Time of payment which will be payable at sight or on demand
 Place of payment which will be the payable at the address of the maker
 Place of issuance will be at the place mentioned besides the name of the maker.
The subs topics we have discussed under bills of exchange are mutatis mutandis applicable to
promissory note too, inter alia; Maturity date, and other elements.

Cheque/Checks
The basic elements for the issuance of cheque are
 an unconditional order to pay a sum certain in money;

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 the name of the person who is to pay (drawee);

 the place of payment;
 the date when and the place where the cheque is drawn;
 The signature of the personwho draws the cheque (drawer).
Absence of the first two elements would render the cheque as void. If elements missing in the
cheque are place of payment the cheque stays valid and the place of payment will be the place
mentioned under the name of the drawee, failing such the principal address of the drawee will be
the place of payment.
Like bills of exchange checks represents a tripartite relationship between the drawer, drawee and
payee. One of the special nature of check is it may only be drawn on a banker or on an institution
or establishment regarded by law as a banker. So, indisputably bank or institutions regarded by
law as bank are always the drawee in check.
The maturity date of checks is always at sight or on demand. The payee can demand payment
any time starting from the issuance date provided that he demands payment within six months
starting from the date of issuance.
So, there is no concept of acceptance in check since they are payable at sight. Bank or the drawee
is not under obligation to pay the money unless the drawer has sufficient money in his account.

Certification of Checks
Certification of checks is almost similar with concept of acceptance of bills of exchange. The
drawee bank can certify by signing on the face of the check. This is done when the drawer
requests the bank to do so provided that the drawer has sufficient cover in his account. By
verifying such the bank is undertaking to separately block the cover of the drawer for the benefit
of the payee or the holder until the six month period of payment is expired.

Summary
Negotiable instruments are broad though commercial instruments claim the fair share of
discussion under this chapter. Commercial instruments create an entitlement to money claim. In
lieu of money they circulate in market smoothly guarded well by the provisions of our
commercial code

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Bills of exchange, Check and promissory notes are the frequently used instruments of all. There
are some features they share in common, especially bills of exchange and check as long as there
are three persons in both documents. Acceptance of bills of exchange analogous to certification
of checks that makes the 2 documents much more alike. Besides they are all unconditional orders
or promise. Promissory note as a promise made by the maker is issued and paid by one person
i.e. the Maker. Checks are always payable at sight and the drawee is always bank.
Endorsement is a process that reinforces the negotiability nature of commercial instruments. Any
commercial instrument can be endorsed to bearer usually expressed as in blank. Any condition
attached to will be considered as if it hasn’t been made at all. The endorsement will continue to
be valid endorsement when it is conditional but would lose its genuinty if it is made partial.

CHAPTER SIX
LAW BANKING TRANSACTIONS

Introduction

A bank or banker is a business organization or a person engaged in the business of accepting

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

- the definition of banks and banking transactions

- the specific requirements for the establishment and operation of banking business

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

- the powers and duties of central or national banks

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

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

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- the rights and duties of banks and their custom

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

Chapter objective

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

 Understand the notion of banking transaction

 Understand Banking and Banking Transactions in Ethiopia

 List out the elements in Contracts for current accounts

 Explain deposits, hiring of safes, and discount

 Explain Credit transactions

1.1. Definition

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

A bank must always have cash balances on hand in order to pay its depositors upon demand or
when the amounts credited to them become due. It must also keep a proportion of its assets in
forms that can readily be converted into cash. Only in this way can confidence in the banking
system be maintained. Provided it honors its promises (e.g., to provide cash in exchange for

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deposit balances), a bank can create credit for use by its customers by issuing additional notes or
by making new loans, which in their turn become new deposits. The amount of credit it extends
may considerably exceed the sums available to it in cash. However, a bank is able to do this only
as long as the public believes the bank can and will honor its obligations, which are then
accepted at face value and circulate as money. So long as they remain outstanding, these
promises or obligations constitute claims against that bank and can be transferred by means of
checks or other negotiable instruments from one party to another.

Another type of banking is carried on by central banks, bankers to governments and “lenders of
last resort” to commercial banks and other financial institutions. They are often responsible for
formulating and implementing monetary and credit policies, usually in cooperation with the
government. In some cases—e.g., the U.S. Federal Reserve System—they have been established
specifically to lead or regulate the banking system; in other cases—e.g., the Bank of England—
they have come to perform these functions through a process of evolution

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

1.2. Economic significances of banks

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

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

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

 Banks also play a positive role in encouraging savings by providing an incentive to save
through payment of interest on deposits/savings and providing safety and security. Saving
is also an important source of future investment and the improvement of the living
standards of the society.

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

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

1.3. Banking and Banking Transactions in Ethiopia

Book IV Title III of the Commercial Code of Ethiopia, which deals with banking transactions,
fails to provide a definition of a bank and banking transactions though the latter may be gathered
from the various sections governing the various types of transactions undertaken by banks.

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Therefore, we have to refer to other laws to define and determine what banks and banking
transactions are under the Ethiopian legal system.

According Art 2 (12) of the Monetary and Banking Proclamation No 83/1994, banking business
means any operation involving receiving money on deposit, lending money, receiving
commercial instruments on deposit, accepting, negotiating/ transferring, discounting commercial
instruments and other evidences of debt, and buying and selling of gold and silver notes and
foreign exchange. Similarly, Art 2 (2) of the Licensing and Supervision of Banking Business
Proclamation No 84/1994 defines banking business as any business involving acceptance of
money on deposit, using such funds or deposits, in whole or in part, for loans or investments on
the account of and at the risk of the person undertaking the business, purchasing, selling and
deposit of negotiable instruments (shares, bonds and other securities/ and checks, bills and notes,
and buying and selling of gold and silver bullions and foreign exchange. In addition to this, Art
4(2) of the same proclamation clearly prohibits foreign nationals and business organizations from
undertaking banking business in Ethiopia.

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

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

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1.4. Major Banking Transactions

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

1.4.1. Deposit of funds

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

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

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

The type of account opened may either be a current account in which the depositor has the right
to dispose of the deposit at sight or on demand. This type of account also is a check operated
account, i.e., the holder may demand repayment of part or the whole of the deposit by drawing a

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check on the bank payable to himself or a third party. As the repayment may be demanded at any
time, this type of deposit does not bear interest.

The account may also be a saving account, which is interest bearing and the right of the depositor
to demand repayment may be limited. The insured may be prevented from withdrawing an
amount which is greater than a certain amount of money within a certain period or to give notice
of withdrawal. /Art 897, 98. / It may also be a time deposit or account in which the depositor can
not demand repayment or withdrawal before the lapse of the agreed period of time. This type of
deposit normally bears interest at a rate agreed upon between the parties provided that it does not
exceed the maximum limit determined by the National Bank. Where the person has several
accounts, each account shall operate independently unless the parties agree otherwise.

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

1.4.2. Bank transfers

This transaction represents one mode of transferring money from one account to another upon
the written and signed order of the transferor, and a means of performing money obligations. As
a result, it is always a secondary transaction by which the debtor performs his obligations by
payment of money. According to Art 903(1) of the Comm. Code, a bank transfer is a transaction
whereby the bank, upon the written order of the depositor /transferor, debits the account of the
transfer and credits the account of another depositor/the transferee with the amount specified in
the instruction or transfer order. In cases where the intended beneficiary of the transfer does not
have an account of his own, transfer may still be made through the account of another person. In
such cases, the person to whose account the amount is credited shall carry the sum to the actual
beneficiary of the transaction who must be specified in the transfer order or instruction. This type
of transfer, which requires the existence of two separate accounts, has to be distinguished from
international transfers and local transfers that do not require accounts by the transfer and the

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transferee and hence are commonly used modes of transfer. There are no rules governing these
types of transfer, and the rights and duties of the parties are determined by the contract
concluded between the bank and the transfer.

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

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

As we have seen above, the transferee acquires the right of ownership over the money at the time
when the account of the transfer is debited and even before the account of the transferee is
credited with the amount of transfer. Hence, the obligation for the performance of which the
transfer order is issued should have been extinguished by payment/performance according to Art
1806 civil code. However, contrary to this general principle of contracts, Art 909 provides that

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obligations underlying the issuance of transfer orders together with securities and collateral (if
any) shall not be extinguished until the account of the transferee is credited with the amount of
money transferred. This seems to be to protect the transferee's interest against the cases where
the bank is prevented from crediting the account of the transferee upon the opposition of the
transfer on the ground of bankruptcy of the former. /Art 910. / because in such cases the
bankrupt transferee and his creditors will be left without remedy if the underlying obligation is
extinguished according to Art 1806 and the transfer is stopped by opposition. Therefore, this
provision seems to be intended to enable the transferee who is declared bankrupt or his creditors
would be able to resort to such obligations to demand payment from the transferor.

1.4.3. Deposit of securities

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

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

Regarding degree of care expected of the bank, Art 913(1) provides that the bank must ensure
the custody of the securities and act in relation there to (handling and management) with due care

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

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

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

1.4.4. Hiring of safes

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

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

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

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

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

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

In safe deposits or hiring of safes the bank and the customer execute a contract specifying the
conditions on which the safe will be hired the contract includes the customer's duty to pay rental
charges and the method of payment. Sometimes, the customer may be made to open a saving
account and deposit a certain amount of money from which the bank could debit the rental
charges whenever they are due. The nature of the relationship created by the contract is a subject
of argumentation.

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

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

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

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

A safe box may be hired in the joint names of two or three persons. In such a case the banker
should get the mutual consent of all the hirers in executing any instructions or making
subsequent modifications. The contract for hiring of safes can be terminated at the will of the
parties although both parties have the right to unilaterally terminate the contract; the bank, as a
service rendering institution to the general public, should show good cause to terminate the

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contract. The contract could also be terminated at the death of the customer or an individual
banker. At the event of the customer, the bank should deliver the contents of the safe box only
when the person requiring delivery presents a document from a court evidencing the fact that he
is the legal representative of the deceased. The laps of the period of the contract and failure to
pay the rental charges by the customer may also be grounds for terminating the contract.

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

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

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

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

1.4.5. Discounts

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

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

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

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1.4.6. Bank lending

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

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

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

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

1.4.7. Documentary credits

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

importers who need to pay the price of goods in foreign exchange. This type of credit is required
because it is only banks which are allowed to handle and deal in foreign exchange and importers
are required to pay the price of goods imported from abroad through opening letters of credits.
So an importer who intends to import goods into the country has to apply to a bank to open a
letter of credit in which the seller of the goods is the beneficiary. Where the bank accepts the
application of the importer, it opens the letter of credit equivalent to price of the goods and
transmits or communicates it to its branch (if it has a branch at the place where the seller is
situated) or to a bank with which it has a correspondence. The correspondent bank, which has
received the letter of credit, shall notify the seller/beneficiary of the credit. And the
correspondent bank shall pay the price of the goods to the beneficiary of the credit after receiving
documents representing the goods such as an invoice, a bill of lading, a packing list and an
insurance policy covering risks associated with transportation (Where according to the contract
of sale insurance is the obligation of the seller) and after confirming that the documents
presented by the seller confirm with terms and conditions of the credit. The payment may also be
made to third parties such as holders of bills of exchange to whom the right to receive the part or
the whole of value of the letter of credit is transferred.

The correspondent bank which has paid the agreed amount to the seller or third parties to whom
the right to receive payment is transferred, shall send the documents it has received from the
seller to the opening bank and the opening bank will hand over these documents to the importer
after receiving the amount equivalent, in Ethiopian Birr, to the amount paid to the seller, interest

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and service charge (commission) for the service provided. In the absence of a contrary
agreement, the bank is entitled to the hold and dispose of the goods imported (represented by the
documents at its hand) and recover the amount of money it or its correspondent has paid plus
interest and service charge or commission.

Summary

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

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

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

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is only banks which are allowed to handle and deal in foreign exchange and importers are
required to pay the price of goods imported from abroad through opening letters of credits.

CHAPTER SEVEN
LABOR LAW
Introduction

There are different laws which regulate employment relationships. Employees which are
regulated under Ethiopian civil service minster are part of civil service proclamation. Persons
who are serving in the military have also employment relationship regulated under special law.
The judges, federal police, public prosecutors and other government officials are regulated under
other employment laws. Based on these classifications, it can be said that there are difrent laws
which governs employment relationships. This chapter pinpoints legal and theoretical
frameworks which believed is important for students to understand at least basic knowledge
under Ethiopian labour and employment laws. Firstly, this chapter will try to bring to light the
introductory remarks for the course in general. As definition is a basis for understanding a certain
concept, it will begin by defining what a “contract of employment” is and the then the obligation
of the parties i.e. worker and employer in contract of employment. Lastly, this chapter will
discuss ground of termination and its consequences.

Chapter objective

After completing this chapter students are be able to understand

 Understand the meaning of employment contract

 List out the contractual duties of both parties
 Explain the formation and terms of employment contract
 Explain the ground of termination of employment contract

8.1. Definition of contract of employment

To this regard, different countries follow dissimilar approach to define contract of employment.
However, this does not mean that the definition given in different countries are totally different.
In general, Employment relation is established through a contract of employment and it shall be

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deemed formed where a person (the employee) agrees, directly or indirectly, to perform work for
and under the authority of another (the employer) for a definite or indefinite period or piece
work in return for remunerations. Let us try to examine the elements of this definition.

Therefore, to have better understanding definitions which are found in dictionary and in the
different legal instruments such as the Civil Code, Proc. No.64/75, Labour
proclamation.No.377/2003 and the relevant provisions of the Federal civil servant proclamation
(Proc. No.515/2007) could be considered as vital; particularly definitional elements such as;
rendering of service, for the benefit and under the direction of the employer, in return for
remuneration must be highlighted.

Accordingly, as free and full consent of the parties is among the essential elements which valid
contract would be based, agreement in contract of employment has also crucial place to
consider.in contract of employment it is important to note that agreement to employment relation
may be expressed directly or indirectly. For instance, a person may directly or personally
negotiate with his/her employer and conclude a contract of employment thereafter. The other
possibility is public/private employment agencies may serve as intermediaries between the
employer and the employee with a view to facilitating their relations.

The other essential element of contract of employment can be “to perform work for of the
employer”. This is to mean that employee has obligation to perform for employee in diligent
and ethical manner. Besides, the definition of contract of employment also incorporated in which
the employee should be under the authority of the employer. This in effect means the employer
will possess the prerogative to direct, supervise and control the manner and performance of the
employee. However, it is also important to note that the authority granted to the employer over
the employee is not meant and intended to establish a master and servant relationship. As well,
Length of employment can also be considered as one essential element under contract of
employment. A party can conclude their contract either for definite or indefinite periods of time.
The last but not the least important element in the contract of employment is wage. As the
employee is committing himself/herself to render personal service for the benefit and under the
authority of the employer, the employer will have a corresponding duty to perform; among
which affording agreed amount of wage to the employee is cornerstone duty.

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Apart from this, this chapter has incorporated five sub sections such as Individual Employment
Relation, Special Categories of Employees, Legally stipulated minimum working conditions,
Collective bargaining & Collective agreement, and finally important highlights will be addressed
to the concept of employment dispute settlement mechanisms.

8.2. Individual Employment Relation

In the earlier chapter we tried to highlight some basic concepts in relation to the definition of
employment contract, having known this, let’s proceed to discuss on individual employment
relationship.

8.2.1. Formation

Employment relations under the labour law and under the Civil Service have their own peculiar
features. In the labour law setting, the legal instrument is limiting itself towards stipulating
minimum conditions of labour providing sufficient room for flexibility for further bargain by the
parties either through contract or collective bargaining. Under the Civil Service, however,
conditions of work are rigorously regulated by law and there is little or no room for negotiation.
In this sense most (if not all) the work conditions spelt out in the Civil Service instruments are
not only minimum but also the maximum. Specific employment relations which are outside of
the ambit of both the labour and civil service employment regime should be mentioned in order
to show that Ethiopian employment regime is not purely dual. It rather has a “third regime” at the
margin. For example employees such as the police and armed forces, domestic workers,
management staff and others are within the third regime.

As regards to forms of contract, the labour law regime in principle does not require any special
form for contractual validity. For example, if you look article 5 of labour proclamation, it states
that “unless otherwise provided by law, a contract of employment shall not be subject to any
special form” It is under exceptional cases that it requires written form. The Civil service regime
on its part requires written instrument in all cases. As a contract of employment is a contract with
public administration, the civil code requires a special form for the purpose (Art.1724 C.C.). In a
nutshell, as employment contract is one of the especial type of contract, it should follow the
general rules which are prescribed under civil code in one hand should also be bound in special
provisions of both civil servants proclamation and labour proclamation.

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8.2.2. Obligations of employee and employer

Dear students, in the earlier discussion we focused on the formation of employment contract.
Now, in this sub section, we are going to highlight on obligations of contracting parties. As
repeatedly said in different chapters of this course, every contracting party’s bears rights and
obligations in his/her shoulder. In short, there is no valid contractual relationship if the parties do
not bear respective obligations.

8.2.2.1. Obligation of employer

Labour and civil servant proclamations put respective rights and obligations for the contracting
parties. Section three of article 12 of the labour proclamation No. 377/2003 describes
obligations of the employer. Which includes:-

 To provide work to the worker in accordance with the contract of employment

 Unless otherwise stipulated in the contract of employment, to provide him with
implements and materials necessary for the performance of the work;
 to pay the worker wages and other emoluments in accordance with this Proclamation or
the collective agreement;
 to respect the worker's human dignity;
 to take all the necessary occupational safety and health measures and to abide by the
standards and directives to be given by the appropriate authorities in respect of these
measures;
 To defray the cost of medical examination, of the worker whenever such medical
examination is required by law or the approriate authority.
 to keep a register containing the relvant particulars specified in Article 6, hereof weekly
rest days, public holidays and leave utilized by the worker, health conditions and
employment injury of the worker and other particulars required by the Ministry;
 upon termination of a contract of employment or whenever the worker so requests, to
provide the worker, free of charge, with a certifcate stating the type of work he
performed, the length of service and the wages he was earning;
 to observe the provisions of this Proclamation, collective agreement, work rules,
directives and orders issued in accordance with law, and.

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 To record and keep of information as required by this Proclamation, and any other
information necessary for the Ministry to carry out its powers and duties, and submit
same within a reasonable time when requested by the Ministry.

8.2.2.2. Obligations of worker

Every worker shall have the following obligations: see article 13 of proclamation No.377/2003

 To perform in person the work specified in the contract of employment;

 to follow instructions given by the employer based on the terms of the contract and work
rules;
 to handle with due care all instruments and tools entrusted to him for work; to report for
work
 always in fit mental and physical conditions;
 to give all proper aid when an accident occurs or an imminent danger threatens life or
property in his place of work without endangering his safety and health;
 to inform immediately the employer any act which endangers himself or his fellow
workers or which prejudice the interests of the undertakings;
 To observe the provisions of this Proclamation, collective agreement, work rules and
directives issued in accordance with the law.

8.3. Termination

Under the LP grounds of termination could be categorized into the following:

 termination by law
 termination by the agreement of the parties
 termination at the initiation of the employer-(dismissal)
 Without notice or summary dismissal.
 With notice or ordinary dismissal
 Group termination or lay off
 termination at the initiation of the employee-(resignation)
 Resignation with notice/ordinary resignation
 Resignation without notice (constructive dismissal)

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8.3.1. Effects of lawful termination

Once a contract of employment is terminated in accordance with the stipulation of the law and
the parties are separated for good, there will be some consequences which will follow the
termination. Most of the consequences are attached with the ground for termination while few
others are available to all terminations. These are the following:

 Certificate of Service
 Severance pay
 entitlements of compensation
 Period of limitation

8.3.2. Unlawful termination and its effects

Any termination which fails to observe the substantive or procedural requirements of termination
shall be held unlawful. At this point in time, it may be appropriate to examine as to who has the
burden of persuasion whether a certain termination is lawful or not. Under the traditional concept
of contract law, “someone who demands the performanceof an obligation should prove
itsexistence.” As a contract of employment is a special contract, the general principle of contract
law will be applied on it unless and until it possesses its own specific principle on the issue.
Based on this general principle, if and when the employee alleges that s/he has been unlawfully
terminated and requests for reinstatement or compensation or both, s/he will be required to show
to the satisfaction of the impartial that the termination was indeed unlawful. Nevertheless, both
the labour proclamation and the ILO convention on termination of employment seem to deviate
from this general principle. They seem to adopt the reverse burden of proof approach.

8.4. Minimum working conditions

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

The rationale behind stipulating minimum working conditions is predominantly attributed to

what economists call market failure. As employer and employee are not on equal bargaining

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strength, leaving them alone to define their terms of contract failed to bring about equitable
outcome. As the market did not work well in this respect, manifestations of failure such as
injustice and instability of industrial peace became the order of the day. Hence, freedom of
contract (i.e. market) failed in this regard. State intervention has been warranted in situations of
market failure and this seems why many governments decide to intervene, through law making,
and come up with minimum working conditions.

Most provisions of minimum labour conditions are related, but not limited, to prescribing
minimum wage; limiting daily/weekly working hours; provision of paid leaves; employment
security; maintenance of safe and healthy working condition and compensation for employment
injury.

8.4.1. Minimum Wage

Many jurisdictions have succeeded in prescribing minimum hourly/monthly wages to employees

working within their territory. Others leave this issue to the contracting parties. The Ethiopian
employment regime seems to adopt a hybrid of the two approaches. The civil service regime has
prescribed a minimum monthly wage for those working in the civil service; while the labour
law regime has left the issue to the parties themselves.

The rational for such double standard from the side of the Ethiopian government may be
explained away in the light of its economic philosophy. It is believed that in a free market
economy, price of goods and services is to be fixed by taking into account the supply and the
demand side of the item in a forum of bargain. This could be the main reason why the
government opted for deregulation with regard to the private sector. As regards to the civil
service, however, since the government is the sole employer, it can come up with a rule binding
upon itself. This can also serve as a reference for the private sector while negotiating on wage
and other related benefits.

The problem associated with such an approach is the invalidity of considering labour as a
commodity whose price is to be determined against supply and demand. The ILO Conference
under the annex for its Constitution reaffirms that “labour is not a commodity” (Annex-I (a)).
Furthermore countries like the US who claim to be the most faithful exponents of free market

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economy see nothing wrong in determining minimum hourly wage by law. In light of these, the
position of the Ethiopian government seems to deserve second thought.

What do you think the pros and cons of stipulating minimum wage in the present day
Ethiopian reality are? Assume that the Ethiopian government is convinced towards
prescribing minimum wage, how should it go about it? Stipulating minimum wage for the
lowest possible wage or stipulating minimum wage for each possible job classifications

8.4.2. Normal Working hours

Ethiopia, for the first time, introduced a provision limiting working hours in 1964 through a
Regulation issued pursuant to Proclamation No.210/63. It was then stated that normal working
hours shall be eight hours in a day and forty eight hours in a week. Currently, regular working
hours for employees under the civil service and labour have slight differences. Under the civil
service, it has been stipulated that “regular working hours of civil servant shall be determined on
the basis of the conditions of their work and shall not exceed 39 hours a week.” Under the Labor
Proclamation, however, “normal hours of work shall not exceed eight hours a day or forty eight
hours a week”

In order to ensure the reliable application of this limitation, the law has further introduced
additional safety valves. First of all, it declared that overtime work is in principle prohibited. It is
only in cases where exceptional circumstances expressly stated by law have occurred that
overtime work is allowed. Secondly, even if conditions for overtime work are met, the rate of
payment for overtime work is being made expensive partly to discourage the employer from
requiring overtime work. Thirdly, an employer who “causes workers to work beyond the
maximum working hours set forth by or contravenes in any manner the provisions relating to
working hours is liable to fine”

Related with these, the laws grant a certain amount of paid leaves in the form of annual leave. It
is believed that the purpose of annual leave is to enable an employee get rest with payment and
resume work with renewed strength thereafter.

When one looks at the historical development of annual leave in Ethiopia, it was first introduced
through the Civil Code of 1960. It was then 10 consecutive days per year for a service of more

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than one year up to five years; 15 days for a service more than five and up to fifteen years; 20
days for a service more than fifteen years. Four years later, Regulation No.302 of 1964 on
minimum labour standards came up with more generous amount of annual leave. It provided as
follows:

-14 consecutive days for a service of at least one year up to three;

-16 consecutive days for a service more than three years and less than five;

-20 consecutive days for more than five years and less than ten;

-25 consecutive days for more than ten years of service.

Then comes Labour proclamation No.64/1975 which stipulated 14 working days of annual leave
for the first year of service and an additional one working day for every additional year of
service. Unlike the two preceding legal instruments, this proclamation employed the phrase “…
working days” instead of “consecutive days”. The labour proclamation on its part provides 14
working days as an initial leave for the first year of service, and one additional working day for
every additional year of service with no maximum limit. Nevertheless, it is important to note that
the annual leave under the civil service is the minimum and at the same time the maximum while
that of the labour proclamation is only the minimum as it can be increased through individual
contract of employment, work rule or collective agreement.

Sick leaves and public holidays are also items of minimum working conditions. Sick leave on the
basis of the proclamation is six months in duration out of which the first month was with full
wage payment; the next two months with half pay and the last three months with no wage
payment.

Public holidays are also non-working days and at the same time paid holidays. Public holidays
have national, international or religious features. Among the national holidays; Victory of Adwa
(Commemoration)(March 01), Victory day(May 05) are some. The international one is May Day
(01) (International Labour Day). The religious ones tried to address the religious interests of the
two dominant religions in Ethiopia (i.e. Christianity & Islam).

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8.4.3. Safe and Healthy working conditions

It is well known that industrial activities are full of risks. Risks could be either to life, health,
property or the environment or to all. The Risk may express itself in the form of accident,
occupational disease or environmental pollution. More often than not, employees are the most
exposed sector of society to the risk. Employer’s liability in this connection has two levels
(namely; at the level of prevention and at the remedial stage).

i. Preventive measures

At the level of prevention, the employer is duty bound to prevent preventable risks. For this
purpose, it is required to provide safety equipment’s and train how and when to make use of
them. Nevertheless, it is worth noting that the employee has also a corresponding duty at the
level of prevention. He/she is required to make use of the protective tools appropriately and at
appropriate time and place. Furthermore, he/she is obligated to obey all health and safety
instructions. Hence prevention demands the care of both parties.

It must be admitted that prevention may not be successful all the time. Even with utmost care, it
is likely that employment injury may occur. Thus regulating prevention, though necessary is not
sufficient in this regard. With this view in mind, the law comes out with provisions necessary in
regulating the remedial stage.

ii. Remedial measures

By remedial stage what we mean is, taking compensatory measures after the damage has already
been sustained. This stage, in actual effect, is pin pointing the modalities for loss distribution.
Once industrial accident or occupational disease is sustained, the employer is expected to cover
cost of medication including the cost for any necessary prosthetic or orthopedic appliances.
Hence employer’s liability is not limited to the stage of prevention. It rather covers the remedial
stage also so long as the injury is associated with the employment. This will take us to
identifying what employment injury is.

Employment injury could be categorized into two. They are either occupational accident or
occupational disease. Occupational accident is any organic injury or functional disorder
sustained by an employee:

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Occupational disease, on its part, is any pathological condition whether caused by physical,
chemical or biological agents which rises as a consequence of the type of work performed by the
employee or the surroundings in which the employee is obliged to work.

Nevertheless, occupational disease does not include endemic and epidemic disease which is
prevalent in the area where the work is done. Such disease will be occupational disease for those
employees who are exclusively engaged in combating such diseases by reason of their
occupation.

 Extent of liability

Once a certain injury is held to be employment injury and the employer has no ground to invoke
in view of avoiding liability, the next step will be determining the scope of its liability. Although
the scope of liability is closely related to the degree of injury sustained by the employee, there
are common obligations which are applicable to all injuries. These are:

a. Immediate obligation

As soon as the employee is known to have sustained employment injury, the first step the
employee is expected to do is:

-provision of first aid service to the injured employee;

-transporting the injured employee to the nearest medical facility.

- notifying the appropriate government organ about the incident.

b. Medical expenses

Subsequent obligation imposed on the employer will be, covering the following costs of medical
expense:

-costs of medical and surgical care;

-hospital and pharmaceutical costs;

-cost of artificial facilities for the injured when recommended by Medical Board.

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Disability Benefits

The employer’s liability is not limited to cost of medication. It will further be obligated to
provide disability benefit to the employee. The amount of the disability benefit is to depend on
the degree and duration of disability. Ordinarily, disability may be temporary or permanent. It
may also be total or partial; the worst scenario, of course, is death.

The law has regulated these different scenarios differently. For the purpose of the labour
Proclamation, temporary disability is a reduction in working capacity that may last for a
maximum duration of twelve months starting from the date of the occurrence of the injury. Be
that as it may, for this kind of injury, the employer, in addition to covering the medical expenses
of the employee, is also obligated to make payment to such an employee. The mode of payment
is a periodical payment and the amount will be full wage for the first three months; 75% of the
employee’s monthly wage for each of the next three months; and 50% of the monthly wage for
each of the remaining six months.

In cases where the injury resulted in permanent disability, the employer will be obligated to
provide lump sum compensation to the injured. The maximum payment available for an
employee who suffers total permanent disability due to employment injury is a sum equal to five
times of the employee’s annual wage. The employer’s liability, therefore, is both limited and
liquidated. If the injury sustained resulted in permanent but partial disablement, the above
mentioned payment shall be calculated in proportion to the degree of the disability and reduced
accordingly.

As indicated in the case of temporary disability benefit, the permanent disability benefit is also
exempted from tax. In connection with this, it is important to note that an employee will not be
entitled to permanent disability benefit if s/he has already a pension scheme or an insurance
scheme arranged in advance by the employer.

Finally, if an employee dies due to employment injury, the employer will be obliged to pay
dependent’s benefit to the dependents of the deceased. The amount of such payment will be the
employee’s five years wage to be paid in the form of lump sum. Furthermore, the employer will
cover the funeral expenses for the deceased employee.

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Where the deceased left widow, children and parents behind, the dependent’s benefit (i.e. the
deceased’s five years wage) shall be shared among them on the following basis:

 Widow-50%

 Children-10 %( each)

 Parents-10 %( each)

Summary

Dear students in this chapter we have discussed about employment and labor laws. In view of
that, both domestic and international instruments are discussed. Among the pillar points which
would be mentioned worth is the definition of contract of employment. Hence, it is a contract
where a person (the employee) agrees, directly or indirectly, to perform work for and under the
authority of another (the employer) for a definite or indefinite period or piece work in return for
remunerations.

Contract of employment and labour is a special contract which has also be fulfill the general
principals of contract. Among which respective duties of the contracting parties are mandatory
one. As a result, both employee/Worker and employer has their respective duties and obligations
under both labour proclamation and civil servant proclamation.

Under Section three, article 12 of the labour proclamation No. 377/2003 describes obligations of
the employer. Such as providing work to the worker in accordance with the contract of
employment and to provide him with implements and materials necessary for the performance of
the work unless otherwise stipulated in the contract of employment. Besides, obligations of
employee also were discussed.

Reference materials
Laws

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

 The Commercial Code of the Empire of Ethiopia, Proclamation No 166/1960
 Commercial Registration and Business Licensing Proclamation No 67/97

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 Constitution of the Federal Democratic Republic of Ethiopia, NegaritGazetta, 1st year

No.1(1995)
 Labour Proclamation No.1156/219
 Federal Civil Servants Proclamation No.1064/219
 Public Servants’ Pension Proclamation No.714/2011
 The Civil Code of the Empire of Ethiopia, Proclamation No 165 /1960/ Art. 2863-2874/.
 The Commercial Code of the Empire of Ethiopia, Proclamation No 166/1960
 The Licensing and Supervision of Banking Business Proclamation No 84/1994
 The Licensing and Supervision of Insurance Business. Insurance Business Proclamation
No 86/1994
Books

 George Krzeczunowicz, FormationandEffectofContractsinEthiopianLaw, Addis

Ababa University,1983
 Rene David Commentary on Contracts in Ethiopia ,Hailesellasie I University, 1973
 Tilahun Teshome, Basic Principles of Ethiopian Contract Law (in Ahmaric),Federal
Supreme Court,Addis Ababa, 1989
 Mulgeta Mengist, material on Agency law, Mekelle University, Law Faculty, May
2005, unpublished)
 K. N. Ryan, Introduction to Civil Law, (1962)
 Tekle Giorgis Assefa, Risk Management and Insurance, Mekelle 2004
 J. Milnes Holden, the Law and Practice of Banking, Vol. 1 Banker and
Customer, the Pitman Press 1970 Bath
 David Cox, Success in Elements of Banking, fourth Ed. 1988.
 Mehari Redae, Employment and labour law, teaching material, 2009

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