Chapter One: Introduction Business Law & Law

•What is Business Law? Before defining business law it is better to define business and law.

What is Business? What are the main elements that constitute a Business?

Business can be defined from different perspectives; from accounting and legal perspectives.

From Accounting perspective Business may be defined as a process of producing goods and

rendering of services in return for profit.

Wikipedia define it as:

Business is the activity of making one’s living or making money by producing or buying and

selling products (goods and services). Simply put, it is “any activity or enterprise entered into for

profit.

It does not mean it is a company, a corporation, partnership, or have any such formal

organization, but it can range from a street peddler to General Motors.”

Definition of business in legal perspective

The legal definition of a business is more or less provided under Article 124 of the Commercial

Code. Under this Article Business is defined as an incorporeal movable which is consists of

movable and immovable things.

Here what we understand from both definitions is that business is a concept which is intangible

and movable thing.

As a result business is different from the movable and immovable things which are part of the

business.

Rather business is mainly consists of intangible things such as good will, trade name, trade

mark and intellectual property rights such as patent rights, copy rights and industrial design.
What is business law?

Business law is also known as commercial law and is that branch of law that deals with the

legal rights, duties, liabilities of parties involved in any kind of business transactions related to

commerce, trade, sales and merchandising.

Business law deals with legal aspects such as the laws of principal and agent, carriage by sea

or land, laws of indemnity and guarantee, laws of insurance (marine, fire, life, accident

insurance), laws of banking, partnership and much more.

 Business law is a very broad term by itself and has many divisions and
types of law to be studied under it.
Here are a few important features of business law –

•It is the law of sales as it deals with all the aspects of entering into selling and purchasing

agreements.

•It includes the study of the law of contract which is important in agreements or contracts that

involve two or more parties buying and selling things in exchange for a consideration or

purchase price.

•Business law clearly explains the rights, duties, liabilities and legal obligations of the parties

involved in a contract of sales, purchase or any other kind of contract or agreement entered into

in relation to any kind of business or commercial activity.

•It includes intellectual property law (patents, trademarks, copyrights, etc.) and consumer

protection law.

•Business law will also apply to anyone who plans on opening or starting a business of their

own.

•Business law also deals with banking law, finance law and other important civil laws.

In Black’s Law Dictionary law is defined as follows:

Law is the regime that orders human activities and relations through systematic

application of the force of politically organized society, or through social pressure, or

normative sanctions.
So far there is no single definition of law agreed up on.

However, we can have the following comprehensive and conventional definition: Law is the

generally accepted norm; principle or rules of conduct enacted by the sovereign body which

regulates social interaction and is backed by sanction or punishment.

In general, law is a body of rules of action or conduct that determines what is right and what is

wrong. What ought to be done and what should not. The mere fact that the people obey certain

rule doesn’t justify that rule as a law. In order for a certain rule to be a law, it should emanate

from a legitimate authority i.e. a state.

Business Law, therefore, is a Legal regime which regulates Traders, business person, business

organizations and business transaction.

BASIC FEATURES OF LAW
 Among these features and natures, the ones considered as essential include
generality, normatively and sanction.
Generality
 Generality nature of Law connotes two meanings. The first meaning
indicates that law is stated in a general terms or languages in which details
are left for enforcement organs.
 While the second meaning of generality implies that law is enacted to
govern or bind all members who belong to the group without distinction.
 When it is said that the law is general one have to note that law does not
invariably apply to the people of the world. It only applies to those who fall
within its jurisdiction.
 Illustrations
The extent of its generality depends on-on whom the law is made to be applicable.
Consider the following illustrations.
1. “Every one has the right to life, liberty and the security of a person.” [Art 3,
UNDHR; 1948].
- This law is made to be applicable to every person on this world. Therefore, it is
universal.
2. “Every person has the inviolable and inalienable right to life, the security
of person and liberty.” [Article 14 of the 1995 Constitution of the Federal
Democratic Republic of Ethiopia].
- This constitutional provision is made to be applicable to every person in Ethiopia.
so, the extent of its generality is national. This is less general than the first
illustration.

“
3. “Every Ethiopian national, without any discrimination based on colour, race,

nation, nationality, sex, status, has the following rights…

(b) On attainment of 18 years of age, to vote in accordance with the law.”
[Article 38(1)(b) of the 1995 Constitution of the Federal Democratic Republic
of Ethiopia.].
- This law is made to be applicable only to Ethiopian nationals who attain 18
years of age. Therefore, it is even less general than the second illustration.
4. Whoever intentionally spreads or transmits a communicable human disease
is punishable with rigorous imprisonment not exceeding ten years.” [Article 514
(1) of the 2004 Criminal Code of the Federal Democratic Republic of Ethiopia].
- This law is made to be applicable only on a person who commits the crime.
Therefore, it is even less general than the third illustration.
5. “The term of office of the presidents shall be six years. No person shall be
selected president for more than two terms” [Article 70(4) of the 1995
Constitution of the Federal Democratic Republic of Ethiopia].
- This law is made to be applicable only to a person who becomes a president in
Ethiopia. Therefore, it is even less general than the fourth illustration.
 Under all these illustrations, the subjects of laws are given in general terms.
However, the extents of the generalities decrease from universality to an individual
person.
Generality of the subject of the law may serve two purposes.
1) Firstly, it promotes uniformity and equality before the law because any person
falling under the group governed by the law will be equally treated under the
same law.
2) Secondly, it gives relative permanence to the law. Since it does not specify the
names of the persons governed, the same law governs any person that falls in
the subject on whom the law is made to be applicable. There is no need to
change the law when individuals leave the group.
NORMATIVITY
 Law does not simply describe or explain the human conduct it is made to
control. It is created with the intention to create some norms in the society.
Law creates norms by allowing, ordering or prohibiting the social behaviour.
 The law is binding on its subjects whether one wants or not. Law is the
mandatory rule of conduct which is mainly respected for fear of sanction or
punishment. It is this nature of law which mainly differentiates law from other
non-binding social norms.
 This shows the normative feature of the law. Based on this feature, law can be
classified as permissive, directive or prohibitive.
A) Permissive Law
Permissive laws allow or permit their subjects to do the act they provide. They
give right or option to their subjects whether to act or not to act. Most of the time
such laws use phrases like:
-has/ have the right to
-is/are permitted/allowed to
-shall have the right
-shall be entitled to
-may
-is/are free to
Illustrations:
1. “Every person is free to think and to express his idea.” [Article 14 of The 1960
Civil Code of Ethiopia].
- The human conduct to think and to express ideas is permitted by this law.
Therefore, it is a permissive law.
2. “Accused persons have the right to be informed with sufficient particulars of
charge brought against them and to be given the charge in writing.” [Article
20(2) of the 1995 Constitution of the Federal Democratic Republic of Ethiopia].
- “have the right to” in this law shows that the subject is given the right or
permitted to get the charge in writing and to be informed its particulars.
Therefore, it is permissive law.
B) Directive law
Directive law orders, directs or commands the subject to do the act provided in
the law. It is not optional. Therefore, the subject has legal duty to do it whether
s/he likes it or not, otherwise, there is an evil consequence that s/he incurs
unless s/he does it as directed by the law. Directive law usually uses phrases like:
 Must
 Shall
 has/have the obligation
 is/are obliged to
 is/are ordered to
 shall have the obligation/duty
Illustrations:
1. “The debtor shall personally carry out his obligations under the contract where
this is essential to the creditor or has been expressly agreed.” [Civ. C. Art.
1740(1)]. “Shall…. carryout” in this law shows that the contracting party, the
debtor, is directed, ordered or commanded by the law as it is provided.
Therefore, this law is directive law.
2. “Every worker shall have the following obligations to perform in person the
work specified in the contract of employment.” ( emphasis added) [Article 13(1)
of the 2003 Labour Code Proclamation No. 377/2003].
”Shall have the … obligations to” in this law shows that the worker is directed by
the law as it is provided in the law. Therefore, it is directive law.
In general, directive laws are mandatory provisions of laws. They oblige the
subject to act, as they require him/her to act.
Prohibitive law
 Prohibitive law discourages the subject from doing the act required not to be
done. If the subject does the act against the prohibition, an evil follows as the
consequence of the violation. All criminal code provisions are prohibitive
laws. Prohibitive laws usually use phrases like:
 must not;
 shall not;
 should not;
 no one shall/should;
 no person shall/should;
Illustrations:
1. “Any unmarried person who marries another he knows to be tied by the bond of
an existing marriage is punishable with simple imprisonment.” [Article 650(2) of
the 2004 Criminal Code of Ethiopia]
”is punishable” in this law, indicates that the law discourages such act. Therefore,
it is prohibitive law.
2. “No one may enter the domicile of another against the will of such person,
neither may a search be effected there in, except in the case provided by law.”[Civ.
C. Art 13].
“No one may” shows that any one is discouraged from acting as provided by the
law and so it is a prohibitive law.
Sanction
 Each and every member of a society is required to follow the law. Where
there is violation the law sanction would follow. Sanction according to Black’s
Law Dictionary , is a penalty or coercive measure that results from failure to
comply a law.
 The main purpose of sanction is to make a party (a wrong doer) to respond.
 In other words, sanction will make the wrong doer to think that s/he made a
fault and s/he should correct it.
 Sanction may be criminal. Criminal sanction is a sanction attached to criminal
liability If the fault committed is defined by criminal law, the person will be
liable to a sanction provided under the criminal law.
FUNCTIONS OF LAW
Why we need law?
 As the issue of definition of law, there is no agreement among scholars as to
the functions of law. Jurists have expressed different views about the purpose
and function of law. It is well known that law is a dynamic concept, which
keeps on changing with time and place. It must change with changes in the
society.
 Law, in the modern sense, is considered not as an end in itself, but is a means
to an end. The end is securing of social justice. Almost all theorists agree that
law is an instrument of securing justice.
 In the absence of law the society lives in the’ state of nature’ which means a social
condition which is characterized by no systematic social interaction, no individual
property, civil war, use of force, no orderly change, etc.
 For Kant, the aim of law is the adjustment of one’s freedom to those of other
members of the community.
 Bentham gave a very practical version of the purpose of law, which according
to him, is maximization of the happiness of the greatest number of the
members of the community.
Today the following are taken as important functions of law.
 Social control – members of the society may have different social values,
various behaviours and interests. It is important to control those behaviours
and to inculcate socially acceptable social norms among the members of the
society.
 law plays important role in social control by clearly specifying rules and norms
that are essential for the society and punishing deviant behaviour.
 Dispute settlement
 Disputes are un avoidable in the life of society and it is the role of the law to
settle disputes. Thus, disagreements that are justiciable will be resolved by law
in court or out of court using alternative dispute settlement mechanisms
Social change
Law enables us to have purposive, planned, and directed social change.
 In static society, law can be used as instrument of social change.
 Law induces patterns of behaviour conducive to propensity.
 Where there are evil customs, they can be eliminated by law, law abolishes
those customs. Therefore it is used to bring about social change by influencing
behaviour, beliefs and values.
 In dynamic societies, social norms are ahead of legal words. In such case it is
necessary to bring the legal code in conformity with societal norms. Flexibility
of law provides some measure of discretion in law to make it adaptable to
social conditions. Therefore, some amount of flexibility is inevitable in law.
Generally, the following are some of the main functions of law:

 Keeping peace and order within a society

 Shaping moral standards
 Promoting social justice
 Maintaining the status quo-maintaining social peace and order
 Providing basis for compromise
 Maximizing individual freedom
Sources of Law
 In the context of legal research, the term ‘sources of law’ can refer
to three different concepts, which should be distinguished. One, it
can refer to the origins of legal concepts and ideas … Two, it can
refer to governmental institutions that formulate legal rules.
Three, it can refer to the published manifestations of the law.
In broad terms there are two main categories of sources of law
namely: material and formal source.
MATERIAL SOURCES OF LAW
 We have seen above that one of the sources of law is material,
which would include custom, religion, legislation, and court
decision.
CUSTOM AS A SOURCE OF LAW
Custom is one of the oldest sources of law making. However, the
importance of custom as a source of law continuously diminishes
as the legal system grows. The reason being that with the
emergence and growing power of the State, custom is largely
superseded by legislation as a source of law.
Most of the time custom and religion are used as the primary
material source of law. Law is, at least theoretically expected to
reflect custom, religion, values and morality of the society.
Even custom and religion are recognized as material sources of
law under the Ethiopian Constitution. Hence, we can say that
custom and religion are the common material sources of law.
However, there are times where custom and religion are totally
rejected in order to bring new behavioral change in the society.
For instance, in case the custom and religion are against the
universally accepted principles and when they are considered to
teach and maintain harmful and traditional practices, they are
totally rejected from being sources of law.
There are pre requisites that must be fulfilled a custom to be recognized as
law.
 Reasonableness: - A custom must be reasonable. A custom shall not be
valid if it is obviously and seriously repugnant to right and reason and it
is likely to do more mischief than good if enforced.
 Consistency: - A custom to be valid must be in conformity with statute
law. In other words, it should not be contrary to an act of Parliament. A
custom should necessarily yield where it conflicts with a statutory law.
 Compulsory Observance- A custom to be legally recognised as a valid
custom must be observed as of right. It must be regarded by those
affected by it not merely as an optional rule but as an obligatory or
binding rule of conduct. If a practice is left to individual choice, it cannot
be treated as a customary law. Etc…..
RELIGION AS SOURCE OF LAW
In ancient time religion exerted great influence on primitive
societies. It contributed very largely to the growth of legal
systems in most parts of the world. The ancient Roman and Greek
laws were largely based on religion.
In England, during the middle ages law was mostly contained in
religious testaments because of the dominance of Church over
the State.
In Ethiopia, ancient law, the fetha negest is influenced by both
Muslim and Christian law.
Such an influence is not discontinued. The FDRE Constitution
permits the adjudication of family and private disputes according
to the rules of religion(Art. 34(5) of the Constitution).
It is also recognized that marriage concluded pursuant to the
rules of religion as one type of marriage under our law (Art. 579
of the Civil Code and Art. 3 and 26 of RFC).
Classification of Laws
Based on different factors, laws are classified into different
categories.
 Geography-based on geographical location and scopes of
application of the Laws we have International and National laws
and Federal and State Laws.
 Function of Laws-Based on the specific functions of laws, we can
classify laws into: Substantive and Procedural; Public and Private
and Civil and Criminal laws.
 Substantive laws are those group of laws which lay down the
rights and duties of the citizen, while procedural laws are laws
which serve for the enforcement of the substantive rights.
 Public laws regulate the relationship between the Government
and the public or the people whereas private laws regulate the
relationship between the individuals.
 Civil laws are laws which states civil rights and duties while
criminal laws formulate crimes and their punishment.
 Authority-based on the authority or organ that enacted the law
we have primary and secondary laws.
 Primary laws are all laws which are enacted by the parliament
while secondary laws are all other laws which are enacted by
other subsidiary organs through delegation.

End of chapter
 Chapter Two
Introduction to Ethiopian law persons
• Law of person is a branch of private law
• It is also called the law of personal status….
• It introduces you with the concept of personality, which is a requirement to enter
into/ perform any juridical acts.
Juridical act as used in civil law refers to a lawful act or expression of will intended
to have legal consequences.
Definition: Persons
 The word ‘person’ traces its roots from the Latin ‘persona’ which in its ancient usage of
the theatre meant “the mask which covers the figure of the actor.”
 The mask indicated the role that the actor played, and the audience in effect “recognized
the character as soon as it saw the mask.” Persona thus designated what we now call a
role or part.
 Under earlier legal systems (Roman Law) human beings who took part in juridical
relations were regarded as persons while those who couldn’t perform juridical acts were
considered as lacking legal personality.
 At present, application of the term ‘person’ has gone beyond the sphere of legal entities
under municipal laws, and it also applies to entities that have international legal
personality.
 The words “human being” and “person” are not interchangeable. All human
beings in modern legal systems are persons, and take part in legal relationships
as subjects of rights and duties. However, entities other than human beings also take part
in legally defined relationships as holder of rights and bearer of obligations.
 From this we can conclude that unlike Ancient Roman Law there is no distinction among
human beings with regard to legal personality.
Commencement of physical personality
• “The human person is subject of rights from its birth to its death”
The words “human person” (under Article 1) refer to anyone who is member of mankind.
• What if the new born child is has serious deformities or handicapped?
• Deformities and handicaps are acceptable as long as they are the sorts that could
occur through various natural or other misfortunes. But, if the deformity is so
serious that coining new name is necessary it can’t be considered as human.
• Generally, Physical personality begins from birth and lasts until death. Birth is thus the
beginning of physical personality.
• Then, how can we define birth??
• Black’s law dictionary defines birth as “the act of being wholly brought to separate
existence.” Again, When is a child considered to have a separate existence?
 “In this respect some people tends to make a distinction between the complete extrusion
of the child from his mother’s womb and the cutting of the umbilical cord. At any rate
from that moment on, the child becomes a person in the legal sense of the word.
 Now, we have resolved the issue of Birth then the question that needs to be addressed is
whether the legal existence of a person begins as of birth without the requirement of
viability.
 Viability: The ability of a fetus to survive outside of the womb. viable means
capable of prolonged life outside the mother's womb.
 Article 4: viability is presumed if the child lives for 48 (forty-eight) hours after
birth.
There are two contending interpretations
 According to the first interpretation, the only condition for acquisition of
personality is birth; and the issue of viability arises by way of an exception only
when the interest of the conceived child requires the tentative acquisition of
personality under the mandatory conditions that the child be born ‘alive’ and ‘viable’,
short of which the personality granted shall be annulled.
 The second line of interpretation contends that for a child to acquire personality s/he
should in all cases be born alive and viable. the conditions of life and viability as
prerequisites for physical personality.
 Many lawyers support the first interpretation based on two grounds:
Anticipated personality: Conception and viability
 There are instances where the interest of a conceived child is put at stake if personality
is attributed only after birth. A case in point is the inheritance right of a child whose
father has died before he is born, as envisaged under Article 834 of the Civil Code.
 Similarly, the interest of a conceived child should be protected where a parent dies under
circumstances that entitle children of a deceased to receive damages, life insurance or
other payments.
 Article 2 is meant to solve such problems. It reads: A child merely conceived shall be
considered born whenever his interest so demands provided that he is born alive and
viable (Article 2).
 When a child is conceived? A child is deemed to have been conceived on the 300th day
preceding its birth (Article 3). A conceived child may acquire personality while he is still
in his mother’s womb provided that:
 his interest so requires, particularly where the interest of a conceived child requires that he
be called for succession (Article 834),
 he is born alive, and,
 he is viable (i.e.- capable of living for at least forty-eight hours
after birth (Arts. 4/1 and 4/2). Viability clearly includes the condition of being born alive
since of the child is not born alive the issue of viability doesn’t arise.
 The three cumulative conditions for granting personality to a conceived child are
the interest of the child, life and viability.
 However, if for example a succession devolves upon the child "of which the debts exceed the
assets, it can very well be that his personality will not be invoked in that connection". This is
because the child does not have interest in being called for the succession.
 Viability is presumed where a child lives for 48 (Forty eight) hours after its birth
(Article 4/1). Moreover, a child who dies within 48 hours after its birth “due to a
cause other than a deficiency in (bodily) constitution” is presumed to be viable
because s/he wouldn’t have died at that moment had it not been for the incidence
that caused the child’s death.
INDIVIDUALIZING AND LOCATING PHYSICAL PERSONS
Name
Names have the purpose of identifying individual physical persons. They are among the
attributes of physical personality. The Constitution of the Federal
Democratic Ethiopia considers name as the right of every child. Article 36/1(b) of the
Constitution provides that “Every child has the right to a name and nationality.”
The particular laws that deal with name of physical persons are Articles 32 to 46 and
Articles 3358 to 3360 of the Civil Code.
a) Principle:
According to Article 32, every individual has a family name, one or more first names and a
patronymic; and they are written in that order in administrative documents.
c) Family name:
• A person born after the promulgation of the Civil Code of 1960 takes the father’s family
name. If the father doesn’t have a family name, the child shall take his father’s first name
(patronymic) as his family name. (Articles 33/1, 36, 3359/2)
d) Choice of first names

According to Articles 34 and 35 of the Civil Code, first name is chosen by the
father, or, in his default, by the family of the father. This clearly reflects the
traditional male supremacy.
e) Forbidden first names (Art. 38)
 A person may have more than one first name but one of such names should be
primary and official name. But, a person cannot have the first name of the father,
mother, brother or sister.
g) Change of names:
• Change of family name may be authorized by court (42) where it is applied for
good cause and if such change is not prejudicial to third persons.
• Change of first name (43) can be authorized by court upon application. Unlike
change of family name, the condition of good cause or another restriction has not
been attached to change of first names.
Abuse and usurpation of name
abuse and usurpation of name bears civil and criminal liabilities. Abuse of name
is using one’s own name in bad faith and to the prejudice of other person with the
same name. It is illegal to use your name in a confusing and misleading manner to
use the good will or reputation of others.
Usurpation is assuming the name of other person for personal gain and by
causing damage to the holder of that name. A common instance is when an
amateur singer uses the name of well-known singers to get undue acceptance from
the crowd.
Residence and Domicile
In addition to identifying persons by name, persons should also be individually
located. Citizenship, domicile and residence identify the location of persons for the
purpose of legal transactions.
Residence links a person to the particular place where he normally resides. Articles
174 to 191 deal with residence and domicile.
a) Definition
“The residence of a person is the place where he normally resides” (Article 174).
b) Rationale
The determination of residence is essential for the purposes of marriage (597 CC.,
Art. 22 of the Revised Family Code), successions (826), contracts (1755/2) and
summons (Art.106 of the Civil Procedure Code). It is also essential during elections, for
taxation and other purposes.
d) Principal and secondary residence

A person may have several residences (177), and in such cases one of them
shall be considered as “principal residence” owing to the criteria of normality,
frequency and the length of time.
e) Stipulated residence
Residence may be stipulated for the purpose of a specific relationship, business
or activity (181).
Public officials and traders
The place where a public official exercises his functions is considered as his
residence (179), and the place where a person carries on trade shall be deemed
to be the residence of the trader (180).
 Domicile
a) Definition

Article 183 defines domicile as “the place where such person has established the
principal seat of his business and of his interest, with the intention of living there
permanently”.
Principal seat of business refers to the place where occupational activities are
carried out; and a person’s seat of social and family life is considered as the
principal seat of his interest.
Permanent intention to reside in a certain place is presumed “where a person has
his normal residence in such place”. (184/1)
b) Rationale
The issue of domicile arises when conflict of laws require the determination of
the legal system that must be applicable.
LESSENED CAPACITY
• As per Article 1 of the Civil Code every person without distinction holds rights of
personality starting from birth and under certain circumstance during conception
provided that the interest of the child so requires and if the conceived child is born
alive and viable (Arts. 2-4, 834).
• distinction between holding rights and exercising them. A person may hold right but
without exercising them.
• A person who holds rights and exercises them is said to have the capacity to enter
into legal relations, while a person who holds rights, but exercises them through
a guardian or tutor is referred to as a person with lessened capacity.
 • Purposes of lessened capacity
The law duly lessens such rights of certain groups of persons
• To protect incapacitated persons from others who may take advantage of
their inexperience, inferior judgment, etc.; and to protect these persons of
lessened capacity from their own erroneous decisions and acts that could
be detrimental to their interests.
• In the case of legal interdiction, the incapacity has the purpose of
protecting society from offenders.
 • Types of capacity
• Minority
• A minor is a person of either sex, who is below eighteen years of age (Art. 215 - RFC), and
minority starts from the beginning of physical personality.
• A minor cannot perform juridical acts (i.e.-acts that entail legal consequences) “except in
cases provided by law” (216/3- RFC). The words “except in cases provided by law”
indicate that there are certain juridical acts that minors are allowed to perform.
Sanctions against the acts of a minor performed in excess of his
powers
• Juridical acts of a minor performed within the limits of his power are valid and binding.
Minority can’t thus be invoked to invalidate such acts.
• juridical acts performed by a minor in excess of his powers are voidable (i.e.-subject to
invalidation) upon the request of the minor, his heirs or representatives.
• However, request for invalidation (on the ground of incapacity) cannot be made
by the party who has contracted with the minor nor any other party other than
those stated under Article 300 (RFC).
Mere Statement of Majority. (304)
I) The mere statement made by a minor that he is a major shall not deprive him of the right
of availing himself of his minority.
2) Such statement shall not amount to a fault entailing his extra-contractual liability .
Termination of minority
By virtue of Article 310 (RFC), the lessened capacity of the minor shall cease upon his
attainment of majority (i.e. –eighteen years) or upon being emancipated.
Insane and infirm persons
Insanity that is not notorious
According to Article 339/1, an insane person is one:
- who cannot understand the importance of his actions
- as a result of being insufficiently developed (i.e.- retarded development, mental
disease or senility).
The two cumulative elements in the definition of insanity pertain primarily to the
mental condition of the person, and secondly to his inability to understand the
importance of his actions.
In appropriate cases, persons who are feeble-minded, alcoholics, persons who are
habitually intoxicated and prodigals (a recklessly extravagant person) shall be entitled
to the protection given to insane persons (339/2).
Juridical acts performed by an insane person are not invalidated on mere
grounds of insanity unless the insanity is notorious (347/1, 341, 342). Yet, the
insane person can invoke defects in consent (1696-1710) on account of his
insanity (347/2).
This remedy can be invoked only by the insane person himself and not by his
heirs or his creditors (348).
There are two exceptions (Art. 349) where heirs or creditors may invoke
defects in consent on account of insanity, namely:
a) where the terms of the contract clearly reveal insanity (349/1), or,
b) where the judicial interdiction of the person has been demanded.
Notorious insanity and apparent infirmity
Legal protection is given to a person whose insanity is notorious (publicly
known) or whose infirmity is evident (343}.
a) Definition of notorious insanity (341)
A person is notoriously insane where:
 he is an inmate of a hospital or an institution for insane persons or nursing
home by reason of his mental condition (339)
for the period for which he remains an inmate.
The three cumulative elements of the definition are being an inmate, the
mental condition of the person and the duration of the legal protection.
b) Apparent infirmity
The Civil Code defines infirmity under Article 340, according to which, an
infirm is deaf-mute, blind, etc. who as a result of his condition can’t take care of
himself or administer his property.
Infirm persons are given legal protection only where they “invoke in their
favour the provisions of the law which afford protection to those who are
insane” (340).
In other words, an infirm person is not availed with the protection unless he
demands for it.
Juridical acts of notoriously insane and apparently infirm persons
Juridical acts performed by a notoriously insane (343/1) or apparently infirm
(343/2) person may be invalidated upon the request of that person, his
representatives or his heirs.
Their acts are subject to invalidation (344) on mere ground of notorious insanity
or apparent infirmity.
Parties who had in good faith concluded contracts with notoriously insane or
apparently infirm persons are entitled to damages caused by the invalidation (345,
346).
Moreover, the notoriously insane person is extra-contractually liable (2027-
2161) and is bound by obligations resulting from unlawful enrichment (2162-
2178) as though they were of a sound mind (350).
Unless otherwise provided by law, Article 2030/3 requires assessment of fault on the basis of good usage or reasonable
standards of good conduct for the purpose of extra-contractual liability without regard to the age or mental condition of
the person concerned.
Judicial interdiction
Notorious insanity only lasts for the period during which the person is an inmate
of a hospital, an institution for insane persons or a nursing home by reason of his
mental condition. And, the issue whether an infirmity is apparent is at times
controversial.
The best means of securing adequate and sustained legal protection for insane
and infirm persons is thus through judicial interdiction i.e. the withdrawal of the
capacity to perform juridical acts in order to protect the interest of the interdicted
person and his presumptive heirs.
Juridical acts in excess of the interdicted person’s powers
Acts that are performed by an interdicted person in excess of his powers shall be
invalidated upon application by the judicially interdicted person, his
representatives or heirs (Article 373/1 cum 314).
third party in good faith who is not aware of the interdicted person’s disability is entitled to damages
(Articles 374, 375).
The disability of the interdicted person shall cease upon the court’s
pronouncement of withdrawal of interdiction (377/1).
Legal Interdiction
Unlike the other varieties of general incapacity, the rationale behind legal
interdiction is not to protect the incapacitated individual, but instead, to protect
society from the legally interdicted person.
According to Article 380 “a person interdicted by law is one from whom the law
withdraws the administration of his property as a consequence of a criminal
sentence."
Article 123 (c) of the 2004 Criminal Code inter alia (among other things)
deprives an unworthy offender of “his rights to exercise a profession, art, trade or
to carry on any industry or commerce.”
The rules governing judicial interdiction apply in cases of legal interdiction
(381). subject to invalidation upon request by the interdicted person, the person
who has contracted with the legally interdicted person, or by the public prosecutor
(387/2).
Many lawyers strongly argue in favour of considering juridical acts of a legally
interdicted person as void.
The rights of the legally interdicted remain unaffected in relation to his person
(i.e. marriage, divorce, acknowledgement of a child and disowning a child).
FOREIGN NATIONALITY
Article 389-393 read…
The source is having distinct nationality from Ethiopian.
No foreigner may own immovable property situate in Ethiopia
Organs of protection
The organs embodied in the Civil Code in order to protect, represent and care
for minors, judicially interdicted persons and legally interdicted persons are the
guardian, tutor, co-tutor, tutor ad-hoc, family council and the assistant tutor.
Courts also play a significant role as an organ of protection.
 END OF PHYSICAL PERSONALITY
The endpoint of physical personality is obvious. It is to be recalled that Article 1
of the Civil Code states death as the end point of physical personality. There are,
however, cases where death is probable, but not certain. Such cases involve the
issue of absence.
Probable death of a person: Absence
The uncertainty of his death or his being alive creates problems with regard to the
execution of rights that depend on his death (such as the interest of heirs
and legatees) or
as regards the performance of obligations that are dependent on his
being alive.
Declaration of absence thus fills the gap of this uncertainty through mechanisms such as
granting certain rights to heirs and legatees, and meanwhile securing the right of the
absent person in case he would reappear.
Probability of death should be the ground for the judicial declaration of absence.
However, declaring absence mainly focusing on lack of news from the person that is alleged
to have been absent is incorrect.
Declaration of absence
a) Conditions, application and jurisdiction
b) “Where a person has disappeared and has given no news of himself for two years,
any interested party may apply to the court to declare his absence” (154/1).
The two conditions herein :
1. disappearance of a person
2. absence of news from him for two years or more
e) Declaration of death where the absentee’s death is certain
If the evidence that has been gathered by court “establishes in a manner which may be
considered certain that the absentee is dead, the court to which the application for the
declaration of absence was made, may deliver a judgment declaring the death of the
absentee” (161).
General effects of absence
Declaration of absence will affect those whose rights depend on the death of the
absentee and those whose obligations toward the absentee depend on his being
alive.
The persons who have rights dependent on the death of the absentee, such as, a
beneficiary of life insurance or heirs, may enforce these rights “after the judgment
declaring the absence has become final as though the absentee were dead”
(165/1).
However, they are required to give a guarantee or security for possible
restitution in case the absentee reappears (165/2).
Secondly, “Persons who have obligations depending on the condition that the
absentee is alive shall no longer be bound to fulfill such obligations” (166/1). Yet,
the court may require guarantee or security, in case the absentee should still be
alive (166/2). The following example illustrates this condition.
The second major special effect of absence is related to inheritance to which the absentee
would have been entitled. Succession devolving on absentee shall devolve on the other heirs
or legatees (if he has no descendants ) without taking into account the portion which would
have been assigned to the absentee (164/1).
“The marriage of the absentee shall be dissolved on the day on which the judgment
declaring the absence has become final” (Article 75/a - RFC, Article 163/1 Civil Code).
The third special effect of absence pertains to the property owned by the absentee.
According to Article 167, the property of the absentee may be placed in possession of
persons who would have been called to succeed in case the absentee had died on the day of
the last news.
Such persons are required to take good care of the property as if it is their own (168/1),
and may be obliged by the court to give a guarantee or security (168/2).
Moreover, they are bound to observe the restrictions against transfer of ownership
(169/2) and the duty to invest sums received (169/1) within three months from the date of
their receipt.
 Upon reappearance, the absentee is entitled to recover his property (Art.171/1) in its
current condition, i.e., despite depreciation through the normal (168/1) use and
enjoyment of the property (bonus pater familias).
 The absentee shall also recover the proceeds of property that has been transferred (e.g.
through sale) and the property acquired through the investment of the capital. But
income derived from the property (171/2) is retained by the heirs and legatees who had
taken possession of the absentee’s property.
 The absentee has the right to claim damages where heirs or legatees infringe the
obligations stated under Article 171/1 or 171/2; or where they commit fraud
(173/3).
 juridical person
A juridical person is a non-human legal entity, in other words any organization that is not
a single natural person but is authorized by law with duties and rights and is recognized as
a legal person and as having a distinct identity.
Entity (such as a firm) other than a natural person (human being) created by law and
recognized as a legal entity having distinct identity, legal personality, and duties and rights.
Also called artificial person, juridical entity, juristic person, or legal person.
juridical persons are different from the managers and employees who work
for them. They are also different from the buildings they use as premises,
because such premises are analogous to the houses physical persons live in.
 Legal persons acquire personality upon recognition by domestic laws and upon their
subsequent establishment, registration and publicity as the case may be.
 The laws according to which these entities are constituted and administrative laws regulate
the functions of these legal entities.
 The development of international law has further widened the scope of juridical
personality onto the international plane. States and international institutions, for
example, have international legal personality.
 Under ‘bodies corporate’ the Civil Code recognizes the legal personality of the State
(Article 394), Territorial Sub-divisions of the State (Article 395), Ministries, public
administrative authorities, public establishments and religious institutions (Articles 396
– 399).
 The Civil Code also recognizes associations (Articles 404 to 482)
 .
 The capacity of these juridical persons is determined by the issue whether such a legal
entity exercises its rights and activities within the scope of its functions.
 As stipulated under Article 401/1 of the Civil Code “Acts performed by the bodies
referred to in (Articles 394 to 399) in excess of the powers given to them by law or
without the observance of the conditions or formalities required by law shall be of no
effect.”
 This is known as the principle of ‘ultra vires’ acts.
 As per articles 403 afterwards “the bodies (Articles 394 to 399) shall be
liable for any damage arising from the fault or act of their organs or (employees) in
accordance with the provisions … of (the Civil Code) relating to ‘Extra contractual
Liability and Unlawful Enrichment”.
 Remember! Other laws may also provide liability of legal persons.
 Companies, however, have distinct legal personality of their own that
is distinct from shareholders. In effect, liability of a private limited company or a share
company does not go beyond assets of the company.
Legal Personality (of business organizations)
 Regarding business organizations, Article 210(2) of the Commercial Code provides that
“any business organization other than a joint venture shall be deemed to be a legal
person.” This is a way of enabling the organization to become the subject of rights and
obligations.
 A business organization is chiefly a collection of physical persons and of
property.
 If the business organization is not treated as a person, obligation incurred in
the course of operating the business would normally be made in the name of
one or more of the members.
 When the law attributes legal personality to the organization, the organization
itself may own the property and obligations may be made in the name of the
organization.
 Thus, in the eyes of the law, they are analogous to a physical person.
 The organization pays a tax, sell its properties act and when it does it does
so in its own name.
 distinct from the persons who are its members.
• The Commercial Code of 1960 enumerated six types of business organizations
are
• General Partnerships,
• Limited Partnerships,
• Ordinary Partnerships,
• Private Limited Companies and
• Share Companies.
• The sixth type of business organization referred to as “Joint Venture”
doesn’t have legal personality. 272
 Attributes of the Legal Person with reference to business organizations.
Capacity
 The extent to which the law permits a person to posses and exercise rights is
called his capacity.
 When the law deprives the organization its rights or of the permission to exercise rights,
we say the organization is incapable.
 The distinction between the enjoyment of rights and their exercise should be
noted.
 When we speak of the capacity of a legal person, we are only concerned
with its enjoyment of rights.
 A legal person cannot by its very nature exercise any rights by itself; it must act through
agents.
 As per article 22 of the commercial code Subject to such prohibitions or lawful
restrictions regarding unfair competition as may be prescribed, any, person or business
organization has the right to carry on any trade in accordance with the provisions
regulating such trade.
 Specific requirements as to, qualifications, nationality or license may be imposed by law
in respect of particular trades. 23
Rights and Liabilities
• the organization may sue or be sued.
• The property of the organization is not available to satisfy judgments against its
members on their personal debts.
• A personal creditor of a member who obtains a judgment against (the latter) may not
have it executed on the property belonging to the organization even if the property
was contributed to the organization by that member. The member is not the owner of
such property, either alone or jointly. On the other hand, the personal creditor may
proceed against the membership interest of the member. …
• There is no set-off between debts owed to third parties by the
organization and debts owned by third parties to individual members (or in
the converse situation).
 When a member dies, his heirs inherit no rights of ownership over the property
belonging to the organization. Their rights only involve the membership interest of the
deceased. That is why an organization have a “life” which survives that of its members.
 A business organization may be put into bankruptcy or employ a scheme
or arrangement.
Representation and Civil Liability
Since a legal person cannot act by itself, Article 216 of the Commercial Code
provides that “a business organization shall acquire rights and incur liabilities by its
agents in accordance with the provisions relating to agency.” Title XIV of the Civil Code
contains the general rules of agency in Ethiopia.
In general pursuant to the rules of agency, a business organization is bound by
any contracts or other act made in its name by an agent acting within the scope
of his powers.
It may also be bound in certain other circumstances; for example, in a general
partnership, when a manger acts in his own name but for
the benefit of the partnership.

A business organization is subject to extra-contractual liability when one of its
agents or employees incurs a liability in the discharge of his duties. In such a case,
the organization and the agent or employee are jointly and severally liable.
The organization will not be liable if the person who incurs the liability is not
subject to its control or is deemed to have retained his independence.
The liability is presumed to have occurred in the discharge of duties if the
damage is caused at the place where or during the time when the agent or
employee is normally employed; this presumption is rebuttable by evidence to the
contrary.
Name
A legal person usually has a name. The name of a business organization is chosen by the
members, subject to any legal requirements. There are no specific requirements for the
name of an ordinary partnership.
The name of any of the other types of business organization must contain the type of
organization it is –“General Partnership,” “Share Company,” etc.
In addition, the name of a general partnership must consist of the names of at least two
partners and the name of a limited partnership may only consist of the names of general
partners.
The names of a share company and private limited company may be freely chosen; for
example, with the names of one or more members, or a term of fantasy, an indication of the
purpose of the business, or a combination of these.
Article 305 of the Commercial code prohibits the choice of a share company name which
offends public policy or the rights of third parties.
Various provisions deal with specific rights of third parties, or wrongs which may be
done by the use of a name.
In general, a name may not be chosen for a business organization which would tend to
create confusion among customers with the name of a competing business organization or
trader. If such a name is chosen, the rule concerning unfair competition would apply.
Head Office
The place of its head office has consequences for the legal person similar to those of
domicile for the physical person.
The location of the head office is important in procedural matters, particularly insofar as
court jurisdiction and service of process are concerned. It also is important in matters related
to nationality.
Nationality
One may hear business organizations, particularly share companies, referred to as ‘Ethiopian”
or “foreign.”
the rights and obligations of an organization may be different if it is connected in some
way with a foreign country.

End of chapter Two

 Chapter Three: Law of General Contracts
The Concept of Obligation
Definition of Obligations- Many scholars defined obligation in different ways based on
their own observations and understanding.
However, the common definition of obligation is that it is the relationship between two or
more person whereby the parties are bound to do, not to do or to give something towards
each other.
Sources of Obligations
obligations can arise from different sources due to the diversity of human relationship.
They are:
1. Obligations arising from contractual relation ship, non-contractual and legal sources.
Contractual obligation transpires from agreements concluded between parties which are
sustainable at law.
2. Extra-contractual source of obligation is all about the civil liabilities that arise from
different non-contractual transactions or relations. It is governed by the law of extra-
contractual liabilities and unlawful enrichments.
3. Legal obligations are those obligations imposed up on a person through the
instrumentality of different laws for various policy reasons. The examples are family
obligations, tax liabilities, maintenance claims, fees, government levies, fines, etc.
Types of Obligation (Based on the number of parties legally bound)
-Unilateral obligation arises from contract in which two parties are participate. However,
only one of the parties is legally bound by the contract for the benefit of the other
contracting party. Example, donations, a reward contract. For example, suppose that A
promises B a sum of $100 if B is able to find A's lost cat. This is a unilateral contract because
the A is only obligated to pay the $100 sum once B finds the lost cat.
-Bilateral obligation arises from a contract entered into by two parties in which these
contracting parties are bound legally to each other on equal terms. Accordingly, there are
two promisors and two promises.
-Multilateral obligation. This is a case where more than two persons undertake to perform
an obligation.
Multilateral obligation obligations can be classified into three:
1) Simple joint obligation
2) Joint obligations
3) Several and joint obligations
•Simple joint obligation.
In this type’s obligation, parties who are bound by such obligation are not jointly liable for
the total debts, but each debtor is liable for its own share with the exception of Art.1917 of
the Ethiopian civil code
•Joint obligations
It arises from the contractual obligation in which more than two parties participate and
debtors are jointly liable for the debt secured as a result of the obligation entered into with
the creditor or creditors.
•Several and joint obligations.
 In this kinds obligations the co-debtors shall be jointly and severally liable unlike joint
obligation where the debtors are jointly obliged to undertake a given obligation, in the
several and joint obligation, the creditor may require all the debtors or one of them to
discharge the obligation in whole or in part.
Types of Obligations (based on the nature of activities)
Divisible obligation
 This is one whereby a party undertakes to perform its obligations by dividing into
parties. For instance, if A and B owed C 1,000 BIRR such parties to the obligation perform or
discharge the obligations by paying half (part) of the debt to C, which is 500 each.
Indivisible obligations
 In this type of obligation, the performance of the obligation undertaken cannot be divided
into parts. Hence, in this type of obligation partial performance is impossible given the
conditions and circumstances of its formation, which does not allow the performance of
obligation by dividing into parts.
Positive obligation
This is a situation where a person’s obligation is to do or to give some thing to another. It
requires an action from the debtor.
Negative obligation.
This is a situation where a person’s obligation not to do some thing or it refrains from
doing some thing. Such obligations are also called obligations not to do.
The meaning of contract/contract law
One may say contract law is most obviously the law relating to agreements or promises.
It is primarily concerned with agreements in which one party, or each party, gives an
undertaking or promise to the other.
It governs such questions as which agreements the law will enforce, what obligations are
imposed by the agreement in question and what remedies are available if the obligations
are not performed.
Thus contract law is the law based on liability for breach of promises. However, not all
promises give rise to contracts.
You want to buy your 18 year old son a car. In return you ask that he promise you his
undying love, respect, and gratitude. You want the ability to take back the car should
he ever stop loving and respecting you.
So, what kind of agreements does the law recognize as creating enforceable rights and
duties?
To answer this, we need to look in the rules of each legal system, which provide their own
specific definitions of the term contract and its elements.
When we come to the Ethiopian legal system, we find the definition of contracts
(enforceable agreements) under Article 1675 of the Ethiopian Civil Code. As such contract is
defined as;
‘’An agreement whereby two or more persons as between themselves create, vary or
extinguish obligation of proprietary nature’’.
This definitional article plus Article 1678 on elements of contract tell as in general the type
of agreements enforceable by the law of contract in Ethiopian legal system.
A contract in its most basic definition is nothing more than a legally enforceable
promise.
It is necessary to identify whether the parties intended only moral obligation or legal
obligation. For a contract to exist parties must agree that any violation of the obligation
would be punished by using state machinery.
Contracts and other forms of Non-Binding Agreements
When should I enter into a Contract?
You should enter into a Contract when you want to be able to legally enforce promises
made by another party and are happy for promises that you make to be legally enforceable
against you.
Memorandum of Understanding, What is it?
A 'Memorandum of Understanding' is also known as an 'MOU'.MOUs are generally used to
document a relationship of goodwill between the parties to the MOU.
MOUs are generally not legally binding (however note that a MOU may be legally binding
if it satisfies all of the elements of a Contract).
If the parties to a MOU do not intend for the MOU to be legally binding (i.e. neither party
wants to be able to enforce the MOU in a court) then the parties should ensure that the
MOU:
A. states something to the effect that "The Parties do not intend this MOU to be
legally binding"; and
B. does not set out obligations for both parties using language such as "Party A shall
do xyz" but instead uses language such as "Party A may do xyz".
Heads of Agreement What is it?
A Heads of Agreement ('HoA') is a document that specifies the intentions of the parties to
enter into a Contract at some point in the future and sets out a summary of the provisions to
be included in that future Contract.
A HoA is generally not legally binding but it may be legally binding if the parties intend for
it to be legally binding and it satisfies the six elements of a Contract.
If the parties to a HoA do not want the HoA to be legally binding they should ensure that the
HoA:
A. states something to the effect that "The Parties do not intend this Heads of
Agreement to be legally binding"; and
B. does not set out obligations for both parties using language such as "Party A
shall do xyz" but instead uses language such as "Party A may do xyz".
Mere domestic or social agreements
Mere domestic or social agreements are not usually intended to be binding and, therefore,
are not contracts. E.g. A father told his son that he (father) will reward 10,000 Birr if the son
scores 4.00 points in his first semester exam.
A binding contract is usually in the nature of a commercial bargain, involving some
exchange of goods or service for a price.
In considering whether sufficient intention to create a binding contract is present; two
situations are possible:
1. Where the parties expressed by denying the intention (for commercial agreement). e.g.
A written commercial agreements described itself merely as an “honorable pledge and
stated expressly that it was not “to be subject to the jurisdiction of any court.
2. Where the parties do not expressly deny intention to create legal relation. It is in each
case a question of construction for court to decide as to whether a contract is intended.
Thus, in commercial agreements, there is a refutable presumption that a contract is
intended but in social or domestic or family agreements there is a refutable presumption
that no contract is intended. (But note that in each case the presumption is refutable by
evidence to the contrary.)
 The Purpose and Scope of Contract Law
The purposes of contracts law are multi-faceted. Nonetheless, the basic purpose of the
laws of contract is to govern and facilitate the healthy contractual transactions among the
people by putting some basic legal principles to be adhered to by the contracting parties.
•The scope of general contract is basically cross-cutting.
Article 1676(1) of the Ethiopian civil code stipulated the application or scope of general
contract to apply to contracts regardless of the nature thereof and the parties thereto. Thus,
the general rules of contract law apply to all contracts.
However, the provision also recognizes that special provisions, as laid down in Book V of
the Civil Code and the Commercial Code, may be applicable to certain contracts.
The law also stipulate that the relevant provision of the Civil Code, Book IV title XII, shall
apply to obligations notwithstanding that they do not arise out of contract.
Accordingly, contract law may be applicable to extra-contractual obligations, unlawful
enrichment obligation and so on. However, the scope of application of this law does not
affect the special provisions applicable to certain obligations by reason of their origin or
nature (Art. 1677(2)).
FORMATION OF CONTRACTS
Freedom of contract
Formation of contact involves the criteria that the state uses in order to determine
whether or not it has to execute agreements of persons between themselves. In other
words, the state uses the following yardsticks to check whether or not persons have made a
law that binds them. Basic elements for the formation of contracts(Article 1678)
Capacity
Consent (expressed through an offer and an acceptance of that offer)
Consideration from both parties (for example money (consideration) for a service
Object,
An intention to create a legal relationship (the phrase “…agrees to be bound
thereby…” )
Form, if any
All contract involve the element of capacity, consent, Consideration, An intention and object
i.e. contract can not be imagined without capacity, consent, and object. However form is
required for few contracts only.
Capacity
Minors and judicially interdicted persons cannot enter into a contract. However; when a
legally interdicted person enters into a contract which he was prohibited from such is not
limited to incapacity but also extends to illegality as per Art 1716.
Sanctions against the acts of a minor performed in excess of his
powers
• Juridical acts of a minor performed within the limits of his power are valid and binding.
Minority can’t thus be invoked to invalidate such acts.
• Article 299 (RFC) provides that “The juridical acts performed by a minor in excess of his
powers shall be of no effect”.
• The literal reading of this provision renders the contract void from the very beginning (void ab
initio), while a careful contextual interpretation in light of Article 300 (RFC) and other
provisions clearly shows that juridical acts performed by a minor in excess of his powers are
voidable
• However, request for invalidation (on the ground of incapacity) cannot be made
by the party who has contracted with the minor nor any other party other than
those stated under Article 300 (RFC). This clearly indicates that the contract remains valid
Exceptions where contracts with minors are not invalidated
• Acts of everyday life shall remain valid “…where the other contracting party could in good
faith believe that the minor had received the authorization to conclude them and has not
taken advantage of the inexperience of the minor" (Article 301/1 RFC).
• This provision can’t be overstretched and be made to apply to juridical acts other than
acts of everyday life (Arts. 292, 293 -RFC)), because the contracting party is not
presumed to believe that the minor is authorized to perform an act that is beyond the
tutor’s power of authorization.
• Payment made to a minor remains valid “to the extent of the enrichment which remains
to his benefit on the day when the action of invalidation is instituted” (Art. 302/1 -RFC).
In other cases, the minor is not bound to make repayments. (302/2 –RFC).
Mere Statement of Majority. (304)
• I) The mere statement made by a minor that he is a major shall not deprive him of the
right of availing himself of his minority.
2) Such statement shall not amount to a fault entailing his extra-contractual liability
Juridical acts performed by an insane person are not invalidated on mere grounds of
insanity unless the insanity is notorious (347/1, 341, 342). Yet, the insane person can
invoke defects in consent (1696-1710) on account of his insanity (347/2).
Juridical acts performed by a notoriously insane (343/1) or apparently infirm (343/2)
person may be invalidated upon the request of that person, his representatives or his heirs.
Their acts are subject to invalidation (344) on mere ground of notorious insanity or
apparent infirmity.
Parties who had in good faith concluded contracts with notoriously insane or apparently
infirm persons are entitled to damages caused by the invalidation (345, 346).
Similarly, acts that are performed by a judicially interdicted person in excess of his
powers shall be invalidated upon application by the judicially interdicted person, his
representatives or heirs (Article 373/1 cum 314).
Third party in good faith who is not aware of the interdicted person’s disability is entitled
to damages caused by the invalidation of the contract (Articles 374, 375).
Consent (Art.1679-1710)
Communication of Consent (Art. 1681)
Consent- it is one of the basic elements of formation of contract. Consent should be free,
volitional, non-vitiated, intended and with the purposes to be bound. What makes consent
sustainable at law?
Communication of Consent-for the contract to be formed the consent of one party should
reach the other contracting party.
Consent is expressed either in the form of offer or acceptance. Offer or acceptance is
declared to another person by ordinary ways of communication. These ways of
communication are oral, written, signal and conduct. Bu it should not be ambiguous or
unclear. The communication should convey the intention of the party.
Offer
Offer is laying down contents of would be contract.
offer contains three important elements, the content of the contract, the agreement of an
offeror to be bound and request of the offeror to the offeree to be bound by the offer. The
person making the offer is called offeror.
The offeror has autonomy to choose any of the four ways of communication (Oral, written,
signal and conduct).
He/she may even choose the ways that the offeree shall use to give a response (Art. 1681).
Written declaration of offer is when all the elements of offer are reduced in writing on a
paper or electronics, email, fax…
Oral commutation of an offer is when the offeror uses voice to tell to the offeree the
contents of the offer and the offeree uses hearing (ears).. telephone, telegram …
Signal communication is of two types: gesture (Nodding head, shaking hands and
hammering down in an auction sale) and object placed to give information (commodity
exchange market).
Communication of offer by conduct is when the offeror performs partly or wholly the
obligation that he will perform if the contract is entered into. Earnest
In principle, an offer is binding on the offeror only if it is addressed to a specified person
(Art 1687- 1688). To avoid the possibility of multiple acceptances for a single contract. The
person may want to advertise his product or service without any intention to be bound.
An exception to this principle is public promise of reward. In case of public promise of
reward the media of declaration never matter and the person who performs a specific act in
the promise need not know the promise (Art 1689).
Effects of Offer (Art.1690, 1691, 1693(1), 2055)
Once the offer is made, it means one side of the parties to the contract (the offeror) has
agreed to be bound. This indicates that the conclusion of a contract is partly completed. The
party making an offer cannot change his opinion.
An offeror who changes his offer partially (make some modification to the content of his
offer) or totally (refusing to be bound by his offer) is liable for any material damage on the
offeree.
If offer is binding, where does it begin to be binding? There might be time gap between
the offeror’s release of the offer and the offeree’s reception of the same.
The offer begins to be binding at earliest from the moment the offeree knew its content.
So the offeror can freely change the content of his offer or totally withdraw it before it
reaches the offeree (Art 1693(1).
The offeror can make his offer not to reach the offeree by informing the offeree that
change has been made to the content of the offer or that it has been withdrawn. This has to
reach the offeree before he receives the offer or at latest before the offeree takes decision
that affects his material interest on the assumption of the offer (Art 1693).
So what is crucial is not the time when the offeree received the offer but the decision he
has taken due to his knowledge of the offer.
So the burden of proving that the offer is changed or withdrawn after he takes decision
that affects his material interest is on the offeree. Changing or withdrawing an offer is a fault
(Art.2055).
How Long does the Offer Bind?
As we see above offer is binding from the moment the offeree knows its existence.
The offeror may himself determine how long the offer remains binding. After expiry of
such ten days the offeror can change, modify or withdraw his offer for whatsoever reason
and without any liability to the offeree (Art 1690).
In case the offeror fails to fix time limit for acceptance, the offer remains binding for
reasonable period only (Art 1691). Reasonable period indicates the time that the offeree
needs to understand the offer and decide to accept or reject it.
The third ground that terminates the effect of an offer is the offeree’s rejection of the offer
(Art 1690(2). Rejection of an offer is, either making modification to the content of the offer
or sending a “no” answer to the offeror.
Offer is deemed to be rejected “where acceptance is made with reservation or does not
exactly conform to the term of acceptance” (Art 1694).
Art.1690 (2) expressly provides rejection of offer as a cause of termination of offer where
the offer contains fixed period of time for acceptance. There is no logic for offeror to wait for
an expiry of reasonable period once the offeree rejects the offer.
Acceptance (Art 1681-1685, 1689(1), 1694) (1893(3)
Acceptance is a positive response to an offer i.e. it is a declaration of intention to be bound
by each and every contents of an offer.
In short acceptance is a “Yes” answer to all the contents of the offer. Any slightest
modification made to the content of the offer is considered as rejecting the offer and
making, an alternative offer (Art.1694).
So “where acceptance is made with reservation or does not exactly conform to the terms
of the offer” the offeree must remind himself that he is taking the position of the offeror and
the offeror then becomes an offeree (Art. 1694).
How acceptance is made
Since acceptance is communication of intention, like an offer, it can be made in all possible
ways of communication. So, the offeree can use writing, oral, sign or conduct as a means of
communication.
Duty to Respond (Art. 1682 -1685)
In principle, the offeree does not have a duty to give response to the proposal of the
offeror. He can respond negatively or positively only if he wants to. Therefore silence shall
not amount to acceptance (Art. 1682).
However, in the following cases the offeree has a duty to respond a “no” answer if he does
not want to be bound by an offer, otherwise his silence may be taken as a sign of acceptance by
the offeror.
1. Duty to accept: - sometimes a law or contract may impose on the offeree the obligation
to accept offers made to it. This is mainly when the offeree is a monopoly supplier of
goods or provider of services.
 Some public enterprises are established by law to provide goods and services to the
public, hence they are duty bound to accept an offer from the public. EEPCO, Ethio
telecom
 If they do not want to be bound by the offer they have to notify with in time specified in
the offer, if any (Art. 1690(1) or within a reasonable time (Art 1691(1). Otherwise their
silence is considered as an acceptance (Art.1683).
2. Preexisting Contractual Relation Silence may also amount to acceptance where
I. the content of the offer is to vary, supplement or complement preexisting
contractual relation (Art. 1684 (1).
II. But, in this case silence can be interpreted as acceptance only if the offeror
uses written form of communication that is addressed directly to the offeree
(Art 1684(2).
III. the offer should be written on special document (Art 1684 (2). The document
that contains the offer should contain nothing else than the offer.
IV. The offer contains express warning that silence amounts to acceptance after
expiry of the time limit. Art. (1690(1) or reasonable period (Art.1691 (1) (Art
1684 (2)
So if the above four conditions are fulfilled both the offeree and offeror can claim that
silence amounts to acceptance
Effect of Acceptance
In general, it can be inferred from Art 1679 and 1693(2) that once an offer is accepted the
offeree is bound by his word. Once we know that acceptance is binding the question that
comes to our mind is “the moment at which acceptance begins to be binding.” I
n other words “does acceptance begin to be binding at the time the offeree says “yes!” to
the offer or at the time such “Yes” answer is received by the offeror”.
Art 1692(1) of the code has answer for this. It provides that acceptance becomes effective
from the moment the offeree sends it to the offeror. Here it is not from the moment an
offeree writes a letter of acceptance but from the moment he put it in a post office or if it is
email, from the moment he clicks the “send” button regardless of the knowledge of the
offeror.
In short acceptance begins to produce effect from the moment the offeree sends it to the
offeror provided it reaches the offeror before expiry of time limit specified in the offer (Art.
1690) or reasonable per (Art.1691 (1).
However, the offeree may freely withdraw his acceptance before the offeror knows such
acceptance through the medium the offeree uses to communicate the acceptance to him .
if the offeror knows the acceptance earlier than the offeree expects from a friend or other
sources; the offeree can still withdraw his acceptance regardless of the knowledge of the
offeror.
Defect in Consent (Art 1696 – 1710)
If the consent expressed in the form of offer and acceptance does not indicate what the
offeree or the offeror really intended then there exists defect in consent.
The cause of defect in consent is either wrong information (mistake, false statement,
fraud) or threat (duress, reverential fear, threat to exercise rights) or lesion.
Defect in consent may be a cause for invalidation of contract (Art 1696). However, the
existence of defect in consent does not necessarily lead to the invalidation of contract.
Firstly defect in consent can invalidate a contract only if a party who agreed to be
bound because of information or threat demands invalidation (Art 1808).
Secondly in some cases the party whose consent was defective may not be entitled to
claim invalidation (1708, 1709, and 1710).
False statement (Art 1705) false statements is untrue statement made
A/ knowingly (intentionally) or
B/ with out give being indifferent whether it be true or false
(reckless) or
C/ negligently (Art 1705)
In principle telling a false statement cannot lead to invalidation of contract. A party can lie
as much as possible unless his morality, religion and reputation matters him.
In a free market economy it is believed that neither party owes any duty regarding
voluntary information to other nor is he entitled to rely on the other.
The only general limitation is that no one can resort to fraud. So a contracting party is free
to lie about the thing he sells or service he renders.
However: false statement can be a ground for invalidation of contract where
1. A/ there is a special relationship between the liar contracting party and the
mistaken party. Here the special relation should be a legally recognized relation which
creates duty to trust one another. Example of legally recognized special relationship is
husband-wife, patient-doctor client-lawyer citizen-government.
2. Such special relation ship led the mistaken party to believe the statements of the
other party. False statement made by third party to the contract can not be the cause of
invalidation of contract.
Objects of Contracts (Art 1711-1718)
Generally, under Ethiopian law; freedom of contract is limited by the following:
Clarity of objects (Art 1714) as stated in our earlier discussion; the object of a contract
should be sufficiently clear; otherwise the court concludes as though parties did not
exercise freedom of contract.
1. Object Defined
 Object of a contract is what parties have actually agreed to undertake. It is the obligation
of both parties to the contract (different from subject matter of contract).
As stated under Art 1679, parties are the ones who define the content of their contract.
They are free to determine what each party is bound to perform, where and when to
perform and may also specify penalty for non performance.
Generally parties should expressly and clearly define content of contract. On any matter
which parties did not expressly agree, they are presumed to have left the matter to be
governed by law, custom, equity and good faith respectively.
However; law, custom, equity and good faith merely supplements the contract. If there is
no contract, law, custom, equity cannot by themselves create contract (Art 1704 (1).
Therefore, parties must at least indicate the main obligation.
2. Possibility of object (Art 1715).
Parties’ freedom does not allow them to bind themselves to perform humanly impossible
things. The law wants to protect the public from superstitious believe. For example, if a
person agrees to raise a dead body; to duplicate money by mystery.
3. Legality of the object (Art 1716(1)
No person can be bound by contract to violate any law of the country since such is
contradiction in terms. For example, if a person is forbidden to commit abduction, it is
illogical to allow a person to bind himself by a contract to abduct someone.
4. Morality of Object (Art.1716 (1)
Society wants to perpetuate itself. For the society to perpetuate, individual members of
the society have to have certain standard of conduct generally known as morality.
The obligation may not be contrary to law but it may be contrary to morality. Even though
the state does not have a duty to enforce such morality it should refrain from indirectly
assisting the violation of morality.
Motives of the Parties.
Parties are expected to know content of their contract only (Art 1679). A party is not
bound by restriction or reservation of the other party. Motives are mostly hidden agenda of
parties and knowing these motives is very difficult.
Therefore, motivate of the parties are irrelevant to determine the legality or
morality of the object (Art 1717).
 Examples of motives
.g.1 Cain is butter dealer. He bought many kilograms of banana from Enoch and agreed that delivery
and payment be on April 20, Enoch came to know that Cain wanted the bananas to mix it up with butter
and sell it to the public. Enoch cannot refuse to perform the contract.

E.g.2 Saul agreed to lease his houses to Satnael for birr 1200 per month. They agreed that the contract
remain effective for 12 months. Saul later on came to know that Satnael has planned to use the house as a
head quarter for terrorist activities in East Africa. Saul cannot claim the invalidation of contract. The only
option he has is to inform the case to police.
However; if the illegal or immoral motives of a party is understandable from the content of the contract
itself i.e., the illegal criminal motive is indicated as one of the content of the contract, such contract may
not be enforced although it has nothing to do with the objects of contract.
Notice that Art 1718 (1) never talks about invalidation. The courts never invalidate a
contract even if the illegal or immoral motive is clear from the contract itself.
Courts refusal to invalidate does have legal effect since there would not be reinstatement
so the court never touchs what has already been performed and never help the completion
of performance (Art. 1815).
Form of Contracts (Art 1719 – 1730)
It is the way in which the content of the contract exists or appears to others. It answers the
question as to how third parties such as court could know the agreement of parties.
Therefore, contract may exist either in written form or oral form.
Freedom of Form (Art 1719)
Do you believe that for a contract to be legally binding, it must be made in writing and
signed at least by the parties to contract?
The law gives freedom to the parties to choose either written or form. So contract can be
valid if consent, object and capacity requirements are fulfilled.
Limitation on Freedom of Form Art.1719 (2, 3)
Freedom of form is not absolute. The freedom may be limited by law or the offeror. An
offerer has a freedom to determine the form of acceptance (Art 1681 (2). Similarly he can
propose written form.
The reason for such limitation may be;
A. Evidentiary value:

Sometimes we may feel insecure when we make contracts orally especially when the
contract involves considerable property interest. Lack of witness, ablity to know the
personality of parties..
B. Recalling content of contract:
This means if contract is in oral form, there is high possibility that its content be forgotten
both by parties and witnesses specially when the content of a contract is a complex one and
remains effective for a relatively longer period.
Contracts made in Written Form (Art 1721 – 1726)
The following contract shall be made in writing.
A/ contracts required by the law to be made in writing
Some of the contracts that the law expressly requires to be made in writing are:
1)Contract relating to immovable: - all contracts that affect a right on an immovable except
lease must be made in writing. Therefore, sale, usufruct, servitude, mortgage, antichresis
partition, compromise and even arbitration agreement concerning house or land should
be made in writing.
2)Contract with public administration (Art 1724): Any contract to which a government
agency is a party, including any type of employment contract, should be made in writing.
In public administration, officials do not stay in office indefinitely rather they may leave
their office by election, removal or resignation.
1)Contract of guarantee (Art 1725 (a)
2)Contract of insurance (Art 1725 (b)
3)Contract of marriage
4)Partnership contract
5)Pledge for a loan exceeding 500 birr (Art 2828 (2)
6)Sale and mortgage of business (Art 152, 177 (2) comm. code)
7)Promise of sale and preemptions (Art 1412)
B/ contracts required to be made in writing by the parties
Even if the law has not expressly provided written form as a mandatory requirement for
validity of contract, parties may themselves provide written form. Once the parties agree to
make their contract in writing, then contract will not be completed until such form is
fulfilled. (Art 1726).
No party can require the performance of the contract until it is made in writing.
However, parties can change any express agreement by another express agreement. So,
any agreement to be a contract in writing may be changed in a manner it was made.
C. Preliminary contract (Art 1721)
A contract that intends to lead to another contract shall be made in writing if the contract
to which it leads is required to be made in writing either by the law or the parties. Example,
If the agent’s power is to enter into a contract in writing he should be conferred with such
power in writing (Art 2200(1).
D/ Variation of contract made in writing (Art 1722)
Variation of contract is a contract itself (Art. 1675). So, if such contract relates to contracts
indicated under Art. 1723, 1724 and 1725, it should necessarily be made in writing. Also,
the law expressly provides that variation of a contract made in writing shall be made in
writing.
Consideration
 Contract is an agreement of proprietary nature (1675) as defined in the civil code.
According to Article 1675 of the Civil Code, Contract is defined as an Agreement
whereby two or more persons as between themselves create, vary or extinguish an
obligation of proprietary nature.
Effects of form (Art. 1720)
When the parties or the law requires the contract to be made in writing, failure to comply
with such requirement make the contract a mere draft (Art. 1720). The contract never
exists until the formality requirement is fulfilled.
Effects of non fulfillment of Elements of Contract (Art, 1808-1818)
Generally a contract that misses any of these elements is either void or voidable.
Difference between void and voidable contracts (Art, 1808-1814)
Defination
Void contract is a contract which parties intend to produce binding effect but does not
actually have any legal effect. The obligation intended by the parties does not exist from the
beginning. So, it is called void abinitio.
But voidable contract is a contract that has begun to produce effect intended by the
parties carrying with itself certain birth defects that may destroy the effect it has produced.
Cause:
A contract is said to be void when the object or form element are missed. The object is
either immoral or unlawful/impossible or unclear. Or the special form required by the law
or the parties has not been complied with.
But voidable contract is due to defect in consent or lack of capacity (Art.1808 (1).
Plaintiff: -
Here, plaintiff indicates the person who brings void or violable contract to the attention of
court. Anybody, including public prosecutor, can bring void contract to the attention of court
(1808(2).
But in case of void able contract only a person whose consent was defective or the person
who was lacking capacity and limited persons can bring action.
Relief Sought
In case of void contract, the person is not intending to have the contract invalidated since
there is nothing to be invalidated.
Therefore, he wants either to make sure that the contract is void or wants the court to
stop parties from violating the law/moral standard of the society under the guise of
performance of contract.
Therefore, a party who is sure that the contract was void and has made no payment need
not go to court and shall refuse to perform the contract (Art 1809).
Finally a person may apply to court to get back any thing he has given believing that the
contract was valid.
Incidentally, although invalidation does not exist, a person must claim reinstatement
within ten year from the time date of conclusion of void contract (Art. 1845).
On the other hand, voidable contract is a contract that has produced effect. Therefore, the
relief sought is to have such contract declared void.
Voidable contract produces legal effect unless the party whose consent was vitiated or
incapable at he time of conclusion of contract challenges its validity (Art. 1808 (1).
The contract will be cured where.
A. Invalidation is not claimed within two years. A party whose consent was
vitiated loses his right to invalidate the contract unless he brings court action within
two years from the moment he knew the fraud or mistake or from the moment the
duress disappears (1810(1). The right will be absolutely barred if he has been unable
to know the existence of defect in consent or the duress has not disappear with in ten
years from date of conclusion of the contract ( Art 1845:
B Contract is confirmed a person whose consent is vitiated may waive his right to
demand invalidation. Such waiver is a contract and has to be made in same form as the
main contract (Art 1811(2).
C The injury is made good. A contract vitiated by lesion remains valid if the party
taking undue benefit agrees to return such benefit (Art. 1812).
D. The vitiated provisions of the contract are avoided. Contract may be
invalidated partially provided the valid one is independent of the invalid one (Art
1813).
Similarities between Void and Void able Contracts (Art 1815-1818)
As we have said void contract is devoid of any legal effect by its very nature and violable
contract is devoid of legal effect by court decision only.
So the following are similarities of void and voidable contract.
1. Unable to Produce Legal Effect on the Parties like void contract voidable contract is
also considered as void abolition once it is invalidated.
2. Reinstatement (Art 1815-1818): Void contract and voidable contract that is invaliated
do not produce obligation but parties might have made payment believing that the
contract was valid i.e. such payment was made unduly or improperly.
So a party who receives such undue payment shall give it back. Such giving back is called
reinstatement Art 1815 (2). A contract was void or was made void does not mean that
those who made undue payment will be without remedy (Art 1815 (2).
Effect of Contract (Art. 1731 -1805)
 There are two major principles in contract: which are freedom of contract and sanctity of
contract.
 Sanctity of contract indicates that parities are bound by their agreement. To make a
serious promise certainly involves a moral duty to keep it. There is Latin saying “pacta
sunt servanda’ which means that a person is bound by his words (/የተናገሩት ከሚጠፋ የወለዱት
ይጥፋ/).
 However, contract is binding not only morally but also legally. Any agreement which
parties did not intend to create legally binding obligation is not a contact (Art 1679).
 Therefore, once a contract fulfills the legal requirements (under Art 1678), it becomes a
law. Law is enforced by executive and interpreted by the judiciary.
 So, effect of a contract implies that it becomes the law of the nation in the sense that the
executive has a constitutional duty to implement it and the judiciary has a constitutional duty
to interpret it.
 Also, effects of contract are interpretation, performance, court’s inability to vary contract
and effects of non-performance.
Interpretation of Contract (Art 1732 -1739)
 Since a contract is a law, it may be interpreted. A law is interpreted when it is vague,
silent, illogical, ambiguous, and contradictory. So interpretation is giving meaning to the
provisions of the contract.
 Interpretation is, therefore, searching the intention of the parties (Art. 1734(1). If the
provision of the contract is clear, there is no need to interpret (Art 1733).
 Whenever the provision of the contract is clear court should not depart from clear
meaning even if such clear meaning is unfair.
Searching Intention of Parties
A. Presumption of Good Faith
 While searching the intention of the parties we have to presume that parties entered into
a contract in good faith (Art. 1732).
 In short, interpretation is necessitated without need and expectation of all parties to the
contract. Had any party known the problem at the time of conclusion of contract, such
problem would have been solved then and there.
 Moreover; parties might have not thoroughly examined each provision and words in the
contract believing that controversies would not arise i.e. they trusted each other that
none of them would attempt to avoid the effect of contract (Art. 1732).
 interpretation becomes necessary either because parties were not able to imagine the
dispute, or words are imprecise by their nature, or errors are committed in formulating
contract.
B. How to Search Intention of Parties (Art. 1734-17387)
Having the presumption of good faith in mind, the court uses the following techniques to
arrive at the probable common intention of parties at the time of conclusion of the
contract.
1) Conduct of the parties
 The conduct may be shown before, during or after the conclusion of the contract (Art
1734(2).
2. Context of the contract
 As much as possible the meaning of a contract should be searched from a whole text of
the contract itself.
 c) Business practice
As indicated under Art. 1713 and 1732 business practice is part of contract. So if there is
no clear provisions that excludes it, it will be used to give a meaning for ambiguous or
vague (general) terms (Art. 1735, Art. 1736 (2).
e) Equity
f) Positive interpretation
 Parties are presumed to have entered into a contract expecting certain result. So every
provisions of a contract should also be given effect.
Interpretation in Favor of Debtor
 As mentioned early, the main objective of interpretation is searching for the intention of
the parties. But the court may not always succeed in searching the intention. Therefore,
if the court is unable to know the intention, the law guides the court to interpret the
controversial provision or word in favor of the debtor (Art 1738(1)).
 This is in line with the principle under procedural law that whosoever, claims a right
has to prove its existence. So the creditor has to prove the existence of a claim or else
the court presumes that the debtor should not be expected to perform an obligation
which the creditor is unable to prove.
 However, an exception to the principle of interpreting in favor of the debtor is contract of
adhesion (Art. 1738(2)). If a contract is a contract of adhesion, the court shall interpret the
provisions or words in the adhesive contract against the party who prepared such contract
even when he is a debtor (Art. 1738(2).
Performances of Contracts (Art. 1740-1762)
 Performance of contract means fulfilling one’s own obligation as agreed.
 So the major questions during performance are ‘Who perform contract’? To whom
should contract be performed? What should be performed, When and where should it be
performed?
Who Performs Contract (Art. 1740)
 The contract can be performed by the debtor, his agent or by person authorized by court
or law (Art. 1740(2).
 However; the law never mention about performance of a contract by a third party not
authorized by debtor, court or law.
 However; we can easily argue that if the creditor accepts the payment, the debtor has no
right to stop third party from performing the obligation.
 But, a creditor is not duty bound to receive payment from a person not authorized by
debtor or court or law, he is free to accept or reject such payment without any effect on
his right against the debtor.
 The creditor may sometimes insist that debtor himself should perform the obligation (Art.
1740(1).
 This is when the contract or law expressly provides that the debtor shall perform the
contract personally. For example, Ethiopian labor law provides that the employee should perform the
contract personally.

 The second case where personal performance becomes necessary is when the
creditor proves that personal performance is essential to him. The creditor can
be able to prove such only when the obligation is obligation to “do” of a professional
nature or art. For example, a lawyer, or a doctor ,a musicians, painters, Poet, actor
Who May Receive Payment (Art. 1741-1744)
 Payment should normally be made to the creditor or his agent (Art. 1741). However;
payment may be made to a tutor, liquidator, or trusted (Art. 1741)
Payment to Incapables (Art.1742)
 If the creditor is a minor or judicially interdicted person, payment should not be made to
such creditor (Art. 1742).
Payment to Unqualified Creditor (Art.1743)
 Another issue in relation to creditor is payment to unqualified person. In principle,
payment to unqualified person is invalid. But in the following case, such payment is valid
(Art. 1743);
Payment benefited the real creditor: The creditor is benefited when the debtor
pays the debt of the creditor.
Payment confirmed: Here even if the creditor did not benefit from the payment,
he may confirm the payment. Such confirmation has the effect of ratifying an act done
without authority (Art. 2192, Art. 2190).
NB: When confirmation is because of benefit such confirmation does not have legal importance.
a) Payment to a person who appears without doubt to be the creditor
Here the holder of the title is legally entitled to claim payment although he is not the real
creditor. The document gives an apparent right to the holder. The payment made to an
apparent creditor is valid even if the document is invalidated later on. However; such
payment to an apparent creditor never releases the debtor if the debtor knows that he is
paying to apparent creditor. The examples of apparent creditor are;
 Certificate of heir annulled
 Document evidencing power of agency: a principal might have revoked the agency
power but he may fail to collect the document.
 N.B In all of the above case, the debtor should be in good faith. For example if the real
creditor warns the debtor to forbear from paying the debt, the debtor is liable if he pays
against such warning.
Doubt as to the Creditor (Art.1744)
 Sometimes two or more persons may independently claim the payment of a debt. This
mainly arises when the original creditor dies and heirs and creditors are claiming
payment.
 The debtor is not a court and cannot settle such dispute, hence, he shall refuse to pay to
any of them.
 If he wants to release himself from obligation, he can deposit the debt in court of law as
per Art. 290 – 293 of the civil procedure code (Art. 1744 (1). If he is not willing to
deposit his debt, any claimant may require him to deposit in court (Art.1744 (3).
What to Perform (Art. 1745 – 1751)
 What to pay (perform) answers the question relating to identify, quality or quality of
the thing to be delivered. To properly answer such question we will classify things into
definite thing, fungible things and money debts.
Definite Thing (Art. 1745 – 1746)
 The debtor shall deliver the thing agreed (Art. 1745). The creditor may however,
accept things of different identity if he wants.
 Definite thing is a thing that can easily be identified from similar things of the same
species. In short definite thing has its own peculiar identity. Animals and immovable
are most prominent examples of definite thing.
 For example if the sale is white teff the thing is definite in relative to the generic term teff.
However; when we come to groups white teff itself is indefinite thing since white teff is of
different variety.
Fungible Goods (Art. 1747–1748)
 Fungible goods are goods that are indicated in the contract by using generic terms such
as pasta, teff, wheat, barely.
 In such case since the thing is not expressly indicated in the contract, the contract is
interpreted in favorer of the debtor (Art. 1738 (1) and the debtor can freely determine
its quality (Art. 1747). However, the quality should not be less than the average
(Art.1747 (2).
Money Debts (Art. 1749–1751)
 If the debt is money debt, payment should be made in local currency of place of payment
(Art. 1749 (1).
 Notice that parties may agree that payment shall be made in actual currency indicated on the contract (Art.1750).
Appropriation of payment (Art. 1752-1754)
Appropriation of payment is important when the debtor pays only part of his obligation.
Such payment has some effect on the rights of a creditor in relation to the remaining
obligation.
Principal Debts and its accessories (Art 1752)
 If a person is unable to pay the whole debt (principal, interest and cost) at one time, the
part payment made by the debtor shall be appropriated firstly to the cost; secondly to the
interest; and finally to the principal (Art. 1752).
The effect is that the interest continues to count on the principal.
Multiple principal Debts (Art. 1753-1754)
In case of multiple debts, choice is given to the parties and only if they fail to exercise their right
of choice that the legislator chooses the debt to be paid first and the debt that follows.
Choice by the parties (Art.1753)
unless the parties agree that choice should be made by the creditor, the law presumes that
the right to choose is for the debtor (Art 1753 (1). This is in accordance with the principle of
interpretation in favor of the debtor.
The debtor may indicate his choice by opposing an appropriation made by creditor on
receipt of payment (Art. 1753(2).
However, if the debtor has failed to indicate his choice to the creditor and has not opposed
the appropriation written on the receipt, the debtor is presumed to have given this chance
to the creditor. So the choice of the creditor binds the debtor (Art. 1753) (2).
Choice by the law (Art. 1754)
When both the debtor and creditor fail to indicate the appropriation the law presumes the
following appropriation.
Debts already due. Appropriation is to the debt which is most advantageous to the
debtor (Art.1754 (2).
Debts due vs. future debts: - Appropriation shall be made to the debt which is
already due (Art. 1754(1).
Future debts Vs future debts: - appropriation is to the debt which becomes due
earlier (Art.1754 (1)
Future debts having the same due date: to the debt which first appropriation
benefits the debtor most (Art. 1754(2) but if the advantages are equal payment shall be
appropriated proportionally (Art. 1754(3).
Place of Performance
Place of performance has an implication on cost of payment, currency for money debts and
territorial jurisdiction of court.
The law encourages the parties to determine place of performance in their contract.
The civil code provides three alternatives; agreed place, residence of the debtor and place
where the thing situates.
But if they fail to mention place of performance the law then resorts to search the possible
intention of the parties:
In case of definite thing the parties should be presumed to have agreed to perform
the contract at the place where such definite thing situate at the time of conclusion of
contract.
The last resort of the law is to rule of interpretation in favor of the debtor. Such
interpretation leads to the residence of the debtor. By so doing the law exempts the
debtor from transportation cost, inconveniences and waste of working hours. So
delivery of fungible things should be made at the residence of the debtor (Art.1755
(2). However; the debtor may have more than one residence (Art 177(2). In such case
the place of performance is the principal residence.
Time of Performance
Time of performance is very important to determine transfer of risk (in case of contract
that transfer ownership such as sales and donation see Art.1758), cost of maintenance and
preservation (see Art.1779-1783) and most importantly to claim damage for non-
performance.
Time of performance greatly affects the benefit parties expect to derive from the contract.
This is especially true when there is market instability which has become the feature of modern
economy.
Like in place of performance, parties are advised to determine time of performance. So
performance should be made at agreed time (Art.1756 (1).
where there is no contractually agreed time, contract should be performed when either
the debtor Art.1756 (2) or the creditor demand performance (Art.1756 (3).
If both of them determine date of performance the earliest date is performance date.
As indicated under Art. 1756(2) by the phrase forthwith the creditor must take delivery
just at the time he is informed to take delivery.
Where the creditor refuses without good cause to accept the thing offered to him, the
debtor may deposit the thing at the risk and expense of the creditor in a public warehouse
or deposit bank or in any other place named by the court of the place where payment is to
be made. Art. 1779
But, although the creditor may be required to receive payment just at the moment the debtor
wants to make payment, the creditor is expected to give reasonable time to the debtor.
A creditor never invoke non-performance without giving default notice (Art.1772) and in his
default notice he may fix a reasonable period that enables the debtor to carry out his obligation
(Art.1774).
Court may also extend time of performance for a maximum period of six month (Art.1770). This extension
has to be given when contract does not exclude the court from giving grace period.
In doing so; the court must make sure that such extension of time causes little influence on the creditor
and such influence is financial compensable and that the debtor will perform his obligation with in grace
period.
Notice that the creditor may deny the debtor to benefit from grace period by unilaterally canceling the
contract. (See Art 1774, 1786, 1787).
Debtor’ Right to Receipt (Art.1761-1762)
Whenever required, the debtor has a duty to prove that he has properly discharged his
obligation (Art.2001 (2).
The debtor has a right to claim receipt and a creditor has an obligation to give receipt.
In addition to claim receipt the debtor has also the right to claim the cancellation or
return of documents evidencing the obligation, provided he has fully discharged his
obligation (Art. 1762).
If the debt is partly performed such part performance has to be indicated on the
document evidencing the obligation. If the creditor alleges that the document is lost he has
to give to the debtor another written document that contains his allegation.
Returning document evidencing obligation to the debtor raises the presumption that
the debt has been paid (Art.2020).
Non-Performance of Contract & Its Remedies
Remedies for non-performance (Articles 1771 cum with Articles 17761784, 1785,
1786-1789, 1790, 1994, 1795)
Non-performance refers to parties failure to perform contractual obligations in
conformity with the terms of the contract and the law. It is also called breach of contract.
Generally any deviation by a party from the terms of the contract amounts to non-
performance.
It is important at this junction to note that the parties may stipulate contractual remedies
for breach, for example by incorporating penalty clauses. These kinds of remedies may be
enforced by the law (see articles 1886-1895).
However, the law of contract provides remedies even if there is no contractual provision
to that effect. These are called legal remedies.
The legal remedies for non-performance protect the interest of the party that is affected by
non-performance. The interest that is affected by non-performance of the contract is the
benefit, which could have been gained, had the contract been performed. Accordingly, the
remedies are supposed to put the victim party in the position he would have been had the
The legal remedies for non-performance protect the interest of the party that is affected by
non-performance. The interest that is affected by non-performance of the contract is the
benefit, which could have been gained, had the contract been performed. Accordingly, the
remedies are supposed to put the victim party in the position he would have been had the
contract been performed.
As such, in most legal systems, the law of contract generally recognizes three remedies.
1) The first one is the enforcement of the contract.
 This remedy is designed to satisfy the victim party by enforcing the terms of the
contract. It may be done either by compelling the debtor (failing party) to perform
his/her obligations or by authorizing the creditor (victim) party to perform the
debtor’s obligation at the cost and expense of the debtor.
 The former is usually referred to as forced performance, while the latter is called
substituted performance.
where forced performance is the fundamental basis of the contract and it does not
interfere with the freedom of the debtor.
If substituted performance is possible, specific performance should not be ordered by the
court.
Specific performance is highly tenable for service contract.
2. The second remedy available to the creditor is cancellation of the contract.
This may take place either court judgment (judicial cancellation) or unilateral act of the
victim party. Unilateral cancellation applies in exceptional circumstances.
The effect of cancellation is to put the parties the position which would have existed, had
the contract not been made. Thus, the Victim party can claim back what he has paid or
delivered.
3. The third remedy is damages (compensation).
The victim party can claim compensation for the damage or loss he has incurred as a
result of non-performance. This remedy may be claimed in addition to either of the above
remedies or independently.
The pre-requisites for invoking the remedies of non-performance
the victim party shall give default notice to the debtor, demanding the later to
perform his/her obligations within a reasonable time.
There is no formal requirement for default notice & it may be given in any
form
Regarding time, default notice cannot be given before the due date of the
obligation.
the creditor shall fix a period of time and this period of time must be
reasonable to allow the debtor to discharge his obligations (taking into
account the nature and circumstance of the case).
However, there are exceptional circumstances where the creditor can resort to the
remedies with out giving default notice to his debtor.
1. The first case indicated in sub (a) is where the obligation of the debtor is an
obligation not to do, i.e., negative obligation (the non-performance cannot be
reversed )
2. The second case indicated in sub (b) is when the obligation of the debtor is
such that it may be performed only within a fixed time and the debtor fails
(Here time is crucial).
3. The third case indicated in sub (c) is when the debtor communicates his
refusal to perform in writing. debtor’s oral refusal to perform does not relieve
the creditor of his obligations to give default notice.
4. The last case indicated in sub (d) when the parties have in their contract
excluded the giving of default notice.
Extinction of Obligations
Extinction of Obligations
An already formed contract creates obligation of proprietary nature among the
contracting parties. These obligations rarely exist forever without being
extinguished.
In light of this, this sub section deals with the grounds on which on already created
obligation is extinguishes.
Cumulative reading of Articles 1806 and 1807 of the C.C takes performance, invalidation,
cancellation, termination, novation, set off, period of limitation of a contract, and merger as
grounds of extinction of obligation.
Performance of contract
One of the ways by which contractual obligation extinguishes is through performance of
contract.
Performance of the contract shall however be made according to the terms of the
contract and mandatoy provisions of the law if it shall extinguish contractual
obligation.
Invalidation and cancellation of a contract
Invalidation of contract is one means by which contractual obligations are extinguised.
Invalidation of a contract happens when there is defect in the formation of the contract.
Now that invalidation of contract takes us to the conclusion that the contract is not
properly formed, the effect of contract is said to be restitution.
After a contract is invalidated or cancelled the obligations created by the invalidated or
cancelled contract disappears. There is no more contractual obligation to be discharged.
Extinction of contractual obligation does not however mean that there is not any
obligation left to be carried out by the obligation. If one of the parties or both have
discharged their obligations, invalidation or cancellation will create obligation of effecting
restitution.
 Termination of contract
In addition to invalidation and cancellation, termination is also one way by which obligation
is extinguished. Termination of contract is making the contract ineffective starting from the
time of termination of the contract.
 If the contract is terminated the parties are not required to give back what they have given to
each other. And they are no more required to carry out their obligation as of the time of
termination.
Remission of debt
Along with termination, remission of debt is also one way of extinction of obligation.
Remission of debt is voluntary release of debtor of his obligation by the creditor. Article 1825
According to Article 1825 of the C.C the mere willingness of the creditor to release the
debtor by remission is not enough to make the remission effective and result in extinguishing
of obligation. The willingness of the debtor to that effect is also required.
 Novation
Novation is also one way by which a contract is extinguished.
novation is substitution of an existing obligation by new obligation in its nature or object.
The new obligation shall be different from the substituted obligation either by its object or
nature.
Mere difference without substantial change either in the object or in the nature does
not amount to novation; rather it is variation in fact.
Set off
Set-off is among the grounds by which a contract is extinguished.
Two parties in which one is a debtor in respect of one obligation while a creditor with
respect of another obligation to other party may extinguish the obligation by set-off.
The conditions that are provided in Article 1832 are.
(a) The debts shall be money debt or fungible things of the same species.
(b) The debts shall be liquidated: The parties shall not have a dispute as to the amount of
the debt.
(c) The debts shall be due: This requirement protects the debtor who can be beneficiary of
time limit
1833 Negative conditions
Set –off shall occur regardless of the cause of either obligation except where
1.the special nature of the obligation requires that the creditor be actually paid , as in the case of
maintenance or wages necessary for the livelihood of the creditor and his family; or
2. the obligation is owing to state or municipality ; or
3. The obligation is to restore a thing of which the owner has been unjustly deprived ;or
4. The obligation is to return a thing deposited.
Limitation of action
Contractual obligation comes to an end is limitation of action.
Art.1845__ Period of limitation
Unless provided by law, action for performance of a contract, action based on non-performance
of a contract and action for invalidation of a contract shall be barred if not brought within ten
years.
Merger
Among the grounds of extinction of obligation, merger is also one.
Merger happens when the position of creditor and debtor becomes one and the same.
There are different reasons for merger between debtor and creditor. Successions,
formation of partnership are among the juridical acts which result in merger.
Merger makes the debtor and creditor the same person.
Performance of obligation after merger is not actually realistic once the creditor and
debtor become the same since performing certain obligation towards one self is actually
absurd.
Obligation extinguished by merger might revive in certain circumstances. The
circumstance which results in revival of obligation extinguished by merger is when the
merger comes to an end.
If the two parties split back to their original position, merger is said to cease and the
obligation will revive on the debtor.
 End of
chapter three
Chapter Four: Sale Contract
Sale contract is one form of special contracts with its distinctive features.
Sale contract creates a seller-buyer relationship whereby both of the parties have a
reciprocal rights and duties against each other.

Contract of sale is defined under Article 2266 of the Civil Code as follows: “Contract of
sale is a contract whereby one of the parties, the seller, undertakes to deliver a thing and
transfer its ownership to another person called the, Buyer, in consideration of a price
expressed in money which the buyer undertakes to pay.”
from the above definition we can deduce the following basic elements for sale contract to
exist:
1. There should be a Seller-Buyer relationship,
2. there must be delivery of specified thing(s): but not necessarily at a spot
3. Ownership has to be transferred from the seller to the buyer: The seller cannot sale the thing
by retaining its ownership
4. the price should be paid in money: distinguishes sale contract from Barter
 The Scope of sale contract
Sale contract is sale of the principal thing with its intrinsic elements and accessories thereto.
Unless there exist is a prior agreement otherwise, sale of a thing includes intrinsic elements and
accessories (Article 2268 and 1133-1139 of the Civil Code).
1132.- 2. Definid-.
(1) Anything which by custom is regarded as forming part of a thing shall be deemed to be an
intrinsic element thereof.
(2) Anything which is materially united to a thing and cannot be detached there from
without destroying or damaging such thing shall be deemed to be intrinsic element thereof.
Anything which the which the possessor or the owner of a thing has permanently destined for
the use of such thing shall be deemed to be an accessory thereof.
The Subject matter of law of sales
Generally, the subject matter of law of sales is things. However, all things are not subject of
contract of sale. Things, which cannot be appropriated by human beings, cannot be the
subject of contract of sale.
The subject of contract of sale, according to Article 2270, could be existing thing, future
thing or things belonging to third party.
Existing goods
Existing goods are goods, which have physical existence. In addition to physical existence,
the goods should be in the seller’s ownership or possession when the contract is
concluded. It does not matter that the thing is in possession of third party.
Goods belonging to third party
The seller may sell the thing that belongs to the third party at the conclusion of the
contract. Things belonging to third parties are existing goods. Agent, bailor or pledger…
Future goods
Future goods are goods which do not exist at the time of the contract or are not in the
hands of the seller although they do have material existence. Goods to be produced
manufactured or acquired by the seller after the formation of the sale contract are termed
as “future goods”. Article 2270 (2)
Contingent goods
There are also special future goods, which are called contingent goods. Contingent goods
are future goods which the seller acquires depending on an uncertain contingency.
The specialty with contingent goods is that the seller may or may not acquire the goods
depending on the condition.
Can the parties make non-existent goods the subject matter of contract of sale?
The elements of sale contract
It is Contract
Among the elements of the definition of sale its being contract is one. Contract of sale is a
special kind of contract. The parties should comply with the essential conditions for the
validity of contracts in general. Thus the parties must be capable, that is they should not be
minor, insane and infirm, judicially interdicted person, or legally interdicted person.
Two Parties
There must be two distinct parties to a contract of sale, as a person cannot buy his own
goods. But this does not mean that the parties to the contract of sale are only two
individuals. Two persons is the minimum requirement.
These two distinct parties are the buyer and the seller. The seller is the person who
assumes the obligation to deliver a thing while the buyer is the person who assumes the
obligation to pay money as a price.
Delivery and Transfer of ownership
The owner of the thing must agree with the other person to deliver and transfer
ownership of the thing. A mere agreement to transfer possession cannot be termed as a
contract of sale.
The Thing
The definitional provision also puts “things” as an essential element of sale. The subject
matter of contract of sale must be “things”. Normally all things cannot be subject matter of
sales contract if they cannot be appropriated by human beings.
Application of this Chapter.
1. Corporeal chattels.(1) The provisions of this Chapter shall apply to the sale of corporeal
chattels.
(2) Nothing in this Article shall affect the special provisions relating to the sale of certain
kinds of corporeal chattels.
Article 1127 of the Civil Code gives the meaning of movables under the title of corporal
chattels. According to this provision, 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.
The 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.
•Thus, 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.
•Thus, it is essential that money be used us a medium of exchange. If the consideration is in
kind it is a contract of barter not a contract of sale.
•However, this does not take as to the extreme that negotiable instruments like bills of
exchange or check cannot be used.
The rights and Duties of the parties to sale contract (Performance of the Contract)
The rights and duties of the parties are simply to mean performance of the contract. So,
questions such as who, what, where, when, and how to perform are pertinent to determine the
rights and duties of the buyer and the seller.
Who perform a sale contract?
-Both the seller and the buyer perform their part
What to perform?
The seller has to deliver a thing its intrinsic elements and accessories which are free from
defect, non-conformity, and transfer full ownership free from any encumbrances.
The seller should deliver the thing of the same quality, quantity and species (see Article
2288-2290 of the C.C). The seller should a warranty against defect or dispossession and Bear
some costs and expenses and cooperate in good faith.
The buyer has an obligation to pay price on the fixed date or up on demand. The payment
of price should be as agreed in the contract. Of course, the primary obligation of the buyer is
to effect payment on time (Article 2303 of C.C). Payment of some expenses and costs and
showing cooperation is also the duty of the buyer.
Where to perform?
The ordinary place of performance is the place fixed by the parties in their contract. In the
absence of contrary stipulation, the seller has to deliver the thing at his normal residence or
place of business.
The buyer should also make payment at the same place (see Articles 2287 and 2309 0f the
C.C).
When to perform?
-In most cases, performance is made simultaneously. The buyer should pay at sight when s/he
takes delivery of the thing or when demanded by the seller. However, the parties can agree
otherwise.
How to perform?
The mode of performance of a sale contract is as agreed by the parties in the terms of their
contract. For instance, the parties may agree for successive delivery of the thing or installment
payment.
Obligation to warranty title, defects, and non – conformity
The obligation of the seller to warrant is extended to
•Warranty of dispossession,
•Defect, and
•Non-conformity.
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.
Transfer of risk under contract of sales of movables
•Risk is the liability of loss or deteriorations of a thing sold. The thing sold may be damaged,
destroyed or lost during transportation.
•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 Article 2323
•The risks shall be transferred to the buyer from the day when the thing has been
delivered to him in accordance with the provisions of the contract or of this code.
•The risk is transferred upon delivery notwithstanding that the thing delivered does not
conform to the contract, but only where the buyer has not cancelled or required the
cancellation of the contract or required that the thing be replaced.
Risk transfers from the seller to the buyer in the following cases.
•Delivery
•Delay of buyer
•Handing over to carriage
Modes of Delivery:
Delivery can be conducted in different modes.
Actual delivery,
constructive delivery,
and symbolic delivery.
What constitutes non-performance of sale Contract?
Failure to perform according to the terms of the contract constitutes non-performance.
Delivering defective or non-conforming thing,
Transfer of non-pure ownership,
Partial delivery,
Failure to pay price or
Performing to a wrong person, at a wrong time and place and in a different mode
constitutes non-performance.
Remedies for Non-performance
The legal remedies for non-performance of a sale contract are:
Cancellation of the contract : (Mutual, Unilateral, and Legal or default and judicial as
may be appropriate)
Compensation and Specific or forced performance.
The least availed remedy for non-performance of sale contract is forced performance
because there is no freedom of the seller at stake and substituted performance is easily
possible in most of the cases. Personal service of the seller is not required; rather it is
delivery of the thing.
Different Forms of sale
A) Sale of cattle and other living animals:- Sale of cattle and other living things is one
the various forms of sales. This special form of sales has certain peculiar characteristics of
which the obligation of the seller is one.
The seller has the obligation to warranty against contagious diseases and defect. On
making delivery, the seller shall guarantee that the animal sold by him does not suffer from
any of the diseases which are listed in Article 2369.
And any contractual stipulation contrary to this is of no effect.
In contract of sale leave alone express exclusion of warranty, the knowledge of the buyer
about the defect denies the buyer protection.
B) Sale by sample:-
Sale by sample refers to a contract where an example of the thing to be delivered is given
to the buyer.
In a sale by sample or pattern, the qualities of the thing shall conform to those of the
sample or pattern. Where there is discrepancy between the sample and the manner in
which the thing is described in the contract, the sample prevails.
The basic difference between sale by sample and sale contract is that in sale by sample
there is warranty indicating that the example given is the same as the thing to be delivered.
There is no sale by sample or pattern where the seller proves that the sample or pattern
was only presented to the buyer by way of information without any undertaking as to
conformity.
C) Sale on trial: - In sale on trial acceptance is required to be within a certain period of time or
a reasonable period.
Article 2380 connotes that where the sale has been made upon trial, the buyer shall, within
the period fixed in the contract, declare whether he accepts or refuses the thing.
As far as risk transfer is concerned, Article 2383 shows that risks shall be borne by the
seller notwithstanding that the thing has been delivered to the buyer, as long as the buyer
has not accepted it.
Sale by Installments-it is sale contract in which delivery of the thing or payment of the
price is at different interval.
Art.2385 shows that where the contract is cancelled, the seller and the buyer shall return
the payments, which they have made to each other. The seller may, however, claim a fair rent
and an indemnity for the wear and tear of the thing.
E) Sale with ownership reserved:- Sale with ownership reserved is a contract where the
seller delivers the thing to the buyer without transferring ownership unlike the contract of
sale where ownership is required to be transferred.
Article2388 dictates that the risks are born by the buyer from the time the thing is
delivered to him.
F) Sale with right of redemption
The seller may reserve to himself the right to redeem within a given period of time the
thing which he sold to the buyer pursuant to Article 2390.
Article 2391 has been put to attenuate such negative impact by providing limitation on
the time of redemption. The period for exercising the right of redemption may not exceed
two years.
The seller who exercises his right of redemption shall refund the buyer the price, which
he had received, and the expenses of the contract of sale.
G) Sale with the obligation to forward the thing:- Sale with obligation to forward
occurs when the seller is duty bound to convey the thing to the buyer.
H) Sale by auction:- Sale by auction has certain peculiar features one of which is its
formation.
The auctioneer does not have the right to refuse for the highest bid.
the bidder shall be bound by his offer on the terms of the conditions of sale. Unless
otherwise provided, he shall be released where a higher bid is made or his offer is not
accepted immediately after the usual calls.
contract allied to sale
I) Barter contract:- Barter is one of the contracts allied to sale. Barter is a contract where
a thing is exchanged for a thing.
treated as a contract under Ethiopian laws.
Each of the exchangers shall, as regards the things subject to the exchange, have the same
rights and obligations as a seller and buyer.
J) Transfer of rights other than ownership:-
Transfer of rights other than ownership includes transfer of usufruct and incorporeal rights.
One of the basic differences with contract of sale is lack of obligation to transfer ownership.
the provisions applicable to contracts of sale apply where a person transfers for consideration
the usufruct of a thing.
The provisions applicable to contracts of sale shall, as far as possible and without prejudice to
the provisions of special laws, apply Where a person transfers for consideration an incorporeal
right. Copy rights, business as it constitutes mainly good will can be under this provision.
 End of
chapter four
 Chapter Five
One may not be able to perform a given task by oneself for several reasons. Or
one may not be at different places at the same moment to perform a certain deed,
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.
This where we need agency.
Creation of Agency
There are three main ways by which a agency relationship can be created;
I. By express agreement
II. By implied agreement
III. By operation of law
Creation of Agency by express agreement
Here the appointment of the agent is made in writing or verbally. In formal cases
when written appointments are made, it is done by a power of attorney which is
normally stamped and registered.
Creation of Agency by implied agreement
There is no evidence that the agent has been appointed by any writing or
verbally. But, there are facts and circumstances that can show that an agency has
been created. In other words, agency is implied from the special circumstances of
the case.
Example : For several months, the principal has paid the third party for goods
sold on credit by the agent for the principals use and benefit. the principal had
never disputed the agents authority to receive the goods given to him by third
party. Therefore, by conduct there is an implied agreement that the agent was
acting as the principals agent when buying goods on credit from third party.
Creation of Agency by operation of law
An agent by operation of law can be described as a person who, in circumstances of an
emergency acquires by operation of law, a presumed authority to act as an agent. Here,
some unforeseen events can create an agency and the agency relationship can arise even
against the intentions and wishes of the parties concerned.
It is a general principle of contract law that only the parties to the contract acquire rights
and liabilities under it. A well recognized exception to this general rule is the concept of
agency.
Here, a representative called an “agent” contracts with third parties on behalf of another
person called the “principal”. The “principal” acquires rights and liabilities under such a
contract.
A significant feature of an agency relationship is that the agent by his act and agency
affects the principal’s legal position towards third parties.
In legal terms, agency involves three persons,
I. The principal
II. The agent
III. The third party
The principal is the person who gives authority to another, called an agent, to
act on his or her behalf.
An agent is a person authorized, expressly or impliedly, to act for his principal so
as to create or affect legal relations between the principal and the third party.
There are two important general rules governing agency, namely,
I. Whatever a person may do himself, he may do through an agent except acts that
involve personal skill and qualifications. Also, where the contract to be performed
is of a personal nature, no agent can be employed. Example : Marriage is a contract
between two parties but is a contract of a personal nature. Accordingly, a person
cannot marry through an agent.
II. Subject to the above rule, the second rule is that “He who does through another,
does by himself”. In other words, the acts of an agent are, for all legal purposes, the
acts of the principal.
Why agency?
 a person can perform only one thing and be in only one place at one time.
 The complexity of modern life, particularly in the commercial area, is such that the law
must permit a person to make contracts and perform other juridical acts by a means of
the representative.
 An individual may be unable to act himself on account of his multiple occupations,
absence, illness, age
Principals may lack knowledge or experience to perform by themselves
Agency reduces the cost of contracting (Both of principal and third party).
Though it increases the number of parties and transactions, it has made possible
for individuals to utilize the services of others. By facilitating specialization of
function and expanding the scares resources of time, energy and knowledge
available to the principal.
The need to represent legal persons
Legal personality is endowed to non-living entities. Thus, after acquiring the legal
personality these entities will have the right to exercise all activities that a legal
person can do.
Guess what would happen to Commerce if businessmen and merchants could
not employ the services of factors, brokers, forwarding agents, auctioneers and the
like and were expected to do everything by themselves. Commerce would literally
come to a standstill
In a nutshell, such agency relationship is introduced in order to avoid
transaction barriers that might be result due to time, incapacity, knowledge and
place limitation.
Sources of authority
An agent is a person who has the authority to act in the name and on behalf of
another person called the principal.
These acts performed within the scope of the authority granted, will bind the
principal directly. That means the rights and obligations of the contract are that of
the principal and the third party.
The agent there is only to facilitate the formation of the contract and hence
cannot be held liable for the non-performance by both the principal and the third
party.
Here the main question to be raised is: what is mean by the authority of the agent.
Authority, as regards the law of agency, means an ability on the part of the agent
to execute certain acts in the name and on behalf of the principal.
Accordingly, the authority of an agent is the power of agency which the agent
acquirs by the operation of the law or by a contract concluded between the agent
and the principal to this end.
Sources of authority
as provided under art. 2179 of the civil code, the authority to act on behalf of another may
derive from law or contract.
Authority derived from a contract.
 Agency which is derived from a contractual relationship is the most usual kind of agency.
as articulated under art.2199 of the civil code.
‘’Agency is a contract where by a person, the agent, agrees with another person, the
principal, to represent him and to perform on his behalf one or several legally
binding acts’’
Thus, as per the above provision, an agency is a contract, which is formed between the
agent and the principal.
Under such agency relationship, which arises out of a contract, we find two independent
contracts.
1) Internal contract [subordinate contract]
2) External contract [main contract]
I. Internal contract [subordinate contract]
Internal contract is a contract that exists between the principal and an agent.
Under this contract the principal concludes a contract with an agent under the
auspices that the agent could play an important role in the formation of the main
contract.
That is the agent could enable the principal to transact with a third party
through an intermediary or an agent. This contract is essentially concerned with
the rights and duties of such parties.
II External contract [main contract]
External contract is a contract that exists between the principal and a third party.
This relationship is the most crucial aspect as far as the law of agency is concerned.
It is concerned with the rights, duties and liabilities that could be created as
between a principal and a third party through the intermediary of an agent.
In this regard, for a direct relationship to be created between the principal and
the third party, in principle, the agent must have acted in the name and on behalf
of the principal within the scope of his power.
Consequently, the rules of an ordinary contract, which could operate between
two contracting parties, will be applicable to the principal and third party
relationship.
Furthermore, it must be noted that agency is one of the special types of contract
and thus, the rules applicable to the formation of a valid contract, are of necessity,
applicable to the agency relationship.
Authority by Judicial Act
The other kind of source of agency is authority granted by the court. That is, an
authority to act on behalf of another may emanate form the court’s decision.
Courts, upon evolvements of some conditions, may appoint some other person to
do activities pertaining to the other.
The person appointed by order of the court is called the curator.
This appointment of curator is usually necessitated when the person whose
interest are to be represented is not in a position to appoint an agent by reason
of being a way, ill or any similar causes (Art 2255).
Only relatives and/or spouses shall apply to a court in order to protect the
interest of the person represented against misuse of his interest. The person to be
appointed is going to carry out those “acts as are of an urgent nature” [Art.
2255(2)]
The curator is a contractual agent for all the rights and duties [Art. 2256].
C. Authority Derived from the Law
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. Also called Agent of
necessity.
In spite of the legal relation created between the representative and the
represented, the rights and duties arising there from are governed by the provision
pertaining to agency contract once the law has established the relation.
Agency Contract under the Ethiopian Law
The Internal Contract or Contract of Mandate
Formation and Requirements
 Pursuant to Art. 2179 of the Ethiopian civil code, we find two sources of
representation: the agreement of the parties or by law.
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 main
contract concluded by the agent in the name of the principal with a third party.
In order to form a contract, consideration is one among the essential elements
in the common law legal system. However, this is not an essential element of
contract under the Ethiopian law of agency.
Therefore, in order to form an agency contract, consideration may not be
essential under the Ethiopian law of agency.
In addition to this, the elements of a valid contract provided for under art. 1678 of
the civil code are also applicable for the formation of contract of a agency. These
elements are:
1.Sufficiently defined, possible and lawful object
2.Consent and capacity
3.Form should be fulfilled.
Issue for consideration on capacity
The first essential requirement for the validity of a contract is the capacity of the parties.
Does a person, though without power to contract in his own right may act as an agent for
another?
In some cases; the legal capacity of a person has nothing to do with with the
individual’s actual ability.
The question is whether or not an agent must have the legally required capacity to act on
behalf of a principal.
under American Commercial Law Sec. 9. ‘Power To Act As Agent’
A person must be capable of acting in his own right (sui juris) to be principal, for the simple
reason that what he has no power to do personally he cannot acquire power to do by doing it
through another.
But what one may not do for himself because he lacks capacity he may do for another who
has the capacity.
The reason is that the agent does not bind himself but acts as a mere intermediary through
which the minds of the contracting parties meet, whereupon the agent has performed his office.
The Ethiopian civil code, under the agency law nowhere specifically provides that an
agent has to posses a legally required capacity to act on behalf of the principal. Thus it is not
clear whether our law requires capacity of an agent.
Form of Agency Contract
There is no special requirement for the form of agency contract. It can be made
in any form.
But, as per article 2180, if the law for the contract that the agent concludes in
the name of the principal prescribes a special form, the authority to make such a
contract should be given in the same form.
For instance, art.1725 of the civil code provides that a contract of insurance
shall be concluded in writing. Supposing principal (P) authorizes the agent to
make a contract of insurance for him, the authority for this purpose must be
given in writing.
In addition, the contract of agency can be expressed, that is, written or oral, or it
can be implied, that is, it can be inferred from the conduct of the parties as
provided under art.2200 [1] of the civil code.
Keeping in mind the fact that agency contract should fulfill the essential
elements for the formation of valid contract like any other contract, a question
would arise as to what would be the fate of the contract entered into by the
agent in the name of the principal with a third party when the agency contract
between the principal and the agent is invalidated for the lack of any of the
elements of the contract?
This issue may be resolved in two different ways.
First, it can be argued that since the agency contract is the basis of the main
contract, the invalidation of the former should automatically cause the
invalidation of the latter.
This approach renders the position of the third party insecure in that it makes the
validity of the contract that exists between the third party and the principal totally
dependent on the existence of the contract between the principal and the agent to
which the third party has no connection.
This problem can be minimized to a large extent by the application of art.1816 of the civil
code, which provides that acts done in the performance of a contract shall not be
invalidated when the interest of the third party in good faith so requires.
Therefore, although the agency contract is invalidated the main contract between the
principal with the third party remains in force as between the principal and the third party
where the interest of the third party so demands.
This is however subjected to the qualification that such third party must not have been
aware of the possible causes of the invalidation of the agency contract .
The second solution is based on the doctrine of separation. According to this doctrine,
mandate and representation are independent.
Therefore, the invalidation of the agency contract should not by itself constitute a ground of
invalidation for the main contract.
According to the above arguments, it is better to adopt the second solution in Ethiopia. it
affords more protection for third parties that the protection under this solution is not
restricted by the requirement of good faith on the part of the third party.
Scope of Authority
Once a contract of agency is formed, the parties to the contract of agency assume
the obligations that arise out of “the terms of the contract and by such incidental
effects as are attached to the obligations concerned by custom, equity and good
faith, having regard to the nature of the contract of agency
The scope of the power assumed by the agent is determined by the contract-
giving rise to agency.
Yet, the scope of the agency assumed by the agent might not be expressly
determined by the contract. In the latter case it is determined by the nature of the
transaction to which the agency relates [Art. 2202].
The scope of agency conferred on the agent may either be
special or
general as provided by Art
General Agency
Such type of agency is conferred in general terms. Usually, it is expressed in
terms like: all my affairs, anything related to my property, any affairs which I am
called to perform etc.
The scope of such authorities conferred in general terms is limited only to the
management of the said affairs.
A person, conferred with agency in general terms is only empowered to sustain
the rights of the principal and is not empowered to perform acts of disposing the
rights of the principals.
Hence, such agents have a limited power less of disposing the rights of the
person represented.
What are acts of management? The law has unequivocally listed down those act
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 th
rights of the represented.
Similarly:
•the sale of crops;
•the sale of goods intended to be sold; and
•The sale of perishable commodities
Special Agency
 Special agency is an authority different from general agency in that it empowers
the agent to dispose the rights of the person represented.
 Sometimes, this authority is named as act of disposition.
 A special agent is a person who is given power by the principal to act in a
particular transaction. Usually, it does not involve continuity of services unlike
general agency.
 The acts to be performed by the special agent have to be specified in such a way
that the agent and the principal have priorly agreed on what acts are to be
performed.
 Special agency confers upon the agent authority only to conduct the affairs
specified by the agreement and their natural consequences according to the
nature of the affair and usage.
 Where an agent is called upon to perform acts other than acts of management, a
special authority is required [Art 2205(1)].
Authorities of an Agent
 The authority of the agent is the power within which the agent can act with the
effect of making the principal liable with third parities.
 It is provided under Art. 2206(2) that anything that the agent does in excess of
that authority will not affect the principal either to benefit or make him liable
unless he has acted post facto acknowledging the act done.
 The authority to act on behalf of another is the result of actual authority. Yet,
there are also authorities which do not actually exist but looking like to exist,
apparent.
 These two varieties of authorities to act through another are actual (real) and
apparent authority.
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.
Express
 the authority of the agent to act for another which arises from what are
specified by the contract.
 an actual authority is a legal relationship between principal and agent created
by a consensual agreement to which they alone are parties. It is express when it
is given by express words.
Implied
 the authority of the agent to act for another which arises from the natural
consequences according to the nature of the affair and usage.
 Implied authority is one implied from the nature of the business which the
agent is authorized to transact in express terms.
 For example, where an agent is empowered to conclude a written and
registered sales contract with a third party, it can be implied that this agent
is empowered to buy a pen, a piece of paper, or sometimes to employ an
expert to prepare a written contract when required by the law. Implied
authority is important for the carrying out of the authority expressly
granted.
 Where such implication can be made they are made on the basis that the
principal has in fact consented to the agent’s having authority to act in such a
manner or as regards such transaction.
 Hence this authority is one aspect of the agent’s actual or real authority.
Apparent Authority
 Apparent authority is not an authority arising from the consent of the principal
whether express or implied.
 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.
 It is an authority which apparently exists, having regard to the conduct of the
parties. In 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 must be carefully distinguished from implied authority.
 When the agent has acted with an apparent authority, both the principal and the
agent are liable towards the third party with which the agent has acted.
What is the nature of apparent authority under the Ethiopian legal system?
It is provided under Art. 2195 that the principal is liable with the agent in three cases:
i) Where the principal has informed a third party of the existence of the power of attorney but
failed to inform him of the partial or total revocation of such power;
o Once an authority is established to the agent from the principal, the latter
may inform this authority to third parties.
o In such case, the third party to whom the establishment of the authority
was informed need to be informed too as to the new fact.
o The none fulfillment of this is making the principal liable with the agent.
i) Where the principal failed to demand the return of a document evidencing
power of attorney, if any;
o when the power to act for another is evidenced by a written instrument the
revocation of authority is not alone sufficient to terminate the relationship
between the principal, the agent and third parties.
o This is because the agent even when his authorities are terminated
conceptually may act in the name of the principal supported by the written
evidence unless this document is returned to the principal.

o What if the documents are lost? When the agent alleges that the
document is lost/destroyed the principal needs to seek a judicial remedy,
i.e. declaration that the power evidenced by the written instrument is
revoked. This is supported by Art. 2185 of the civil code.
iii. Where the statement, behavior has made third parties believe the existence of
authority.
o It is the case where the “principal” and/or the “agent” alone has made
certain statements or acts that give rise to third parties to believe that these
two persons have agency principal relationship among themselves.
o Here it is not proper to use the terms agency and principal, because these
persons have not agreed to develop agency-principal relationship.
o But, a mere statement or act made by the individual in front of third parties
enabling the latter to believe that there is agency principal-relationship
legally makes the principal liable with the agent.
o For example, in a certain place where people get together, X has declared
in the presence of Y that he is an agent to the latter in doing some
juridical acts. When Y remains silent, third parties may perceive that
there is agency principal relationship among these persons.
Modes of Representation
 While he/she acts on behalf of the principal the way he approaches third parties
may be different. The Ethiopian law has acknowledged three modes by which
the agent may represent the principal.
 However, these three modes of representation do not have the same effect under
the Ethiopian law.
I. Disclosed Agency
 As the name shows disclosed agency is the mode of representation in which the
agent reveals the name of the principal to the third parties.
 It have the effect of affecting the principal when the agent discloses the name of
the principal.
II. Partially Disclosed Agency
 This type of representation is said to be partially disclosed because the agent
does not disclose the name of the principal but discloses that he is making the
contract on behalf of a principal, and the third party is also aware that there is a
person behind the scene whose name is not disclosed.
 The effect of agency in this case is: it does not affect the principal but the agent
himself shall enjoy the rights and incur the liabilities arising out of the
transactions.
III. Undisclosed Agency
 That is neither the fact that he is acting on behalf of another person nor the
name of another person is made known to the third party contracting.
Therefore, the agent acts on his own name and he is acting on his own behalf.
 It 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.
 Only disclosed agency which is termed as complete agency under Art 2189 of the Civil Code
shall bring effects of agency.
 The other two forms of agency explained under Art. 2197 of the Civil Code are not capable of
affecting the principal and hence bringing the effects of agency.
Unauthorized Agency and Ratification
 Unauthorized Agency (Agency of necessity) happens when a person does not represent an
agent on his behalf but conditions dictate the management of his affair. This kind of agency
relationship arises when a person who has no authority to act for another person,
undertakes with full knowledge of the facts to manage this person’s affair without securing
prior authorization.
 Absence of consent on the part of the principal is attributed to the impossibility of tracing or
communicating what is happening to his interest. For instance, if the person who acted on
behalf of another knows the whereabouts of the principal and could easily contact him
before the danger appears, he is not considered as agent of necessity.
 Upon the fulfillment of the above conditions, it is mandatory to make
ratification. The principal to whose benefit the act is made in the absence of his
consent shall accept the act as performed by himself.
Ratification
 The agent binds his principal when he contracts, on his principal‘s behalf and
within the scope of his authority. There are instances where an agent may act on
behalf of his principal without any authority or exceeding his authority.
 The person, on whose behalf the agent acts, has the option to accept or
repudiate the fruits of the unauthorized dealing. If he opts to accept or adopt the
agent’s act as if he had actually been authorized, agency relationship will evolve
consequently.
 The adoption of unauthorized act is called ratification. When the principal
chooses to ratify, the agent is indeed to have acted within the scope of his power.
 In here we can note that ratification could either be implied or express. Ratification is express
when it is made in clear words, and we call it implied when approval of the unauthorized act is
made by conduct.
 EFFECTS OF AGENCY
Establishing a Relationship between the Principal and the Third Party
 The agent must act in the name of the principal. In addition to the name test, the
agent must act within the scope of the power granted.
 These two elements are cumulative. The non-fulfillment of either or both is a
barrier to establish the link between the principal and the third party.
 The Obligations of Agency
 Duties and rights are correlative, duties of an agent are rights of the principal and duties
of an agent are rights of the agent.
 Rights and Duties of the Agent and the Principal
 The Rights of the Principal (Duties of the Agent):
 Personal service
 Fiduciary duty
 Confidentiality
 Duty of diligence
 Acting on behalf and for the benefit of the Principal
 Duty to account
 Prior Notification for unauthorized works
 Avoiding conflict of interests
 Good faith
 The Rights of the Agent (Duties of the Principal):

 Payment of Fair Remuneration

 Duty to approve the works up on completion
 Duty to ratify necessary works done in excess of scope of Agency
 Duty to Provide Necessary work tools and means and cover outlays and expenses
 Cooperation
 Refrain from untimely termination of Agency

Termination of Agency
 Agency relation may come to an end due to one or more of the following reasons:
 Completion of the work
 Death ,Absence, Incapacity or Bankruptcy of the Principal or the Agent
 Revocation by the Principal
 Renunciation by the Agent
End of Chapter
five
 Chapter Six- Law of Traders and Business Organizations
TRADERS AND BUSINESSES
Traders: Defined
 Businesses are operated by persons, whether physical or juridical. However,
sole businesses or sole proprietorships can only be run by physical persons.
 Physical persons who operate a sole business are referred to as traders.
 This provisions dealing with definition of traders has two key elements: the
general condition and the special condition.
 Positive defination
 The general condition consists, in the existence of:
 an enterprise or business,
 One cannot be a trader without operating a business or an enterprise.
From this, it appears that there is no trader who does not operate a
business.
 profession, and
 The second requirement of the general condition says that one who
operates a business has to do so professionally.
 It means that a person should do the act as a principal calling, vocation, or
employment that the Code makes use of it. To say that the business that is
being operated by a certain person has to be her principal calling is, in effect,
to say that she who operates a business as a pastime or in her leisure does no
be counted as a trader.
 the goal of realizing profits
 One who starts a business and engages herself in such business professionally
does not become a trader unless she does so for profit.
 Special condition
 a person does not become a trader the moment she runs a business professionally
and for gain.
 the special condition is such that the person carries out any of the activities
enumerated in article 5 as her business object
Negative Definition
 A negative definition of the trader is also to be found in Articles 6-9, which
exclude from farmers, fishermen and artisans from the scope of the Code’s
applicability.
Businesses
 Article 124 of the Commercial Code defines business as “an incorporeal movable
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.”
 Thus, the ultimate essence or quality of any business, is its incorporeality
irrespective of the existence of corporeal elements.
Article 127, stipulates:
(1) A business consists mainly of a goodwill.
A business may consist of other incorporeal elements such as:
 the trade-name;
 the special designation under which the trade is carried on;
 the right to lease the premises in which the trade is carried on;
 patents or copyrights;
 According to Art. 128, the corporeal elements that make up a business include
equipment's and goods. Therefore, immovables, i.e. the business premises and
the land on which the premises has been erected, had been excluded from the
ambit of the definition of the elements of a business.
 The business is regarded as an entity distinct from its constituent elements,
as long as the whole is more valuable than the sum of the constituent parts.
 In this sense, the business is a res, thing, or object over which a person can
exercise property rights, including ownership, usufruct, and lease.
 BUSINESS ORGANIZATIONS
 Business organizations, from a legal viewpoint, are undertakings with more
than one member, having assets distinct from the private assets of the
members and a formal system of management, which may or may not
include members of the organization.
 The first feature BO is , plurality of membership, distinguishes the
business organization from the business owned by one man.
 The second feature, the possession of distinct assets, is essential for two
purposes: to identify the assets to which creditors of the organization can
resort to satisfy their claims and to make clear what assets the managers
of the organization may use to carry on business for the member’s benefit.
 The third essential feature, a system of management, varies greatly. In a
simple form of business organization the members are entitled to
participate in the management, and each member has an equal voice in
management decisions.
Definition
What is a Business Organization?
 Article 210 of the Commercial Code defines a business organization as “any
association arising out of a partnership agreement.” A partnership agreement,
pursuant to Article 211 of the Code, is “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 there or ,if any.”
 It is an essential character of a business organization that it should have a
profit motive.
Distinguishing Between Business Organizations and Associations
 Article 404 of the Civil Code defines an association as “a grouping formed
between two or more persons with a view to obtaining a result other than the
securing or sharing of profits. “
 If profit is considered to be the underlying motive for the formation of a certain
organization, then it is said to be a business organization. Associations are
always formed for non-profit purposes. Examples are charitable organizations,
religious groups, literary clubs, local and international NGOS, etc.
 Associations and business organizations are governed by two different legal
regimes which are independent of each other.
 Associations are expressly prohibited from engaging in any of the commercial
activities listed in Article 5 of the Commercial Code. Article 25(1) provides that
“associations may not carry on any trade. “
Cooperative Societies Distinguished
 Cooperative Societies are groupings that are organized to provide an economic
service without profit to their members. Cooperative societies are governed by
the Cooperative Societies Proclamation
 Credit cooperatives, consumer, sellers and farmers’ cooperatives are other
examples of this form of groupings.
 Forms of Business Organizations
 there are six legal forms of business organizations provided for in Article 212 of
the Commercial Code:
 Ordinary partnership
 Joint venture
 General partnership
 Limited partnership
 Share company
 Private limited company
 Though it is difficult to deal with all forms of BO, it is important to see their
essential characteristics under two main categories.
 Business organizations may be classified into two basic types according to the
general characteristics they share in common: partnerships on the one hand and
companies on the other.
(i) Partnerships.
 A partnership is an aggregate or collection of individual members.
 Thus, in a partnership firm, of paramount importance is personality of the
individual partner. (This is so, because incapacity, death, or serious
disagreement between partners may result in dissolution of the partnership
firm.)
 only persons who know each other very closely may enter into a partnership
agreement giving rise to a partnership firm.
 Consequently, partnerships are suitable for small business involving a relationship
of mutual trust and confidence.
 The partners are agents for each other. Therefore, they are normally jointly and
severally liable fort the acts of each other.
 The liability of each partner to third parties is unlimited, although they are
liable to contribute to each other’s liability and entitled to claim to an
indemnity from the partner at fault.
 With respect to its length of existence the partnership firm, in the absence of a
contract to the contrary, comes to an end when a partner dies or becomes
insolvent.
 Finally, a partner cannot transfer or assign his interest in the firm to an outsider
or third party and make the transferee or assignee a partner without the
consent of all the other partners.
 In other words, a partner can transfer his share in the firm, but the assignee
does not thereby become a partner and is merely entitled to the assigning
partner’s share of the profits.
(ii) Companies.
 A company is an aggregate or collection of shares or capital.
 Thus, the company may own property, make contracts, and sue and be sued
under its name. Also, it is entirely distinct from its members.
 The company has perpetual succession. As a result, death or insolvency of a
shareholder does not affect its existence.
 With respect to transfer of shares, shares in a company are freely transferable
unless the company’s articles of association otherwise provides. Thus, a
shareholder can transfer his share and ordinarily the transferee becomes a
member.
 Members of a company are not entitled to take part directly in the management
of the company unless they become directors. That is to say, a shareholder of a
company acting in his individual capacity cannot bind the firm by his acts.
 A company is managed by a board of directors, general manager, shareholders’
meetings, and auditors.