Law of Contracts

Definition
 Definition and Formation
• Law of Contract- body of rules governing
formation, performance and termination or
enforcement of contract.
• Contract- an agreement where by two or more
persons as between themselves create, vary or
extinguish obligations of proprietary nature.
As defined under Art. 1675 of the CC-
Elements
 Agreement- Meeting of mind
Two or more parties- Plurality of parties
 Formation of Contracts
 Proprietary nature- pecuniary nature
 contract is an agreement but not all agreements
are contracts. B/c all agreements are not
proprietary nature (e.g. marriage &
adoption- contracts of status) and not legally
binding (e.g. simulated contract and social
contracts- are not intended to bind)
 To create, vary or extinguish obligation
obligation- to do, to give, not to do
 Formation of Contracts
• Obligation to do & to give are positive obligations
• Obligation not to do is negative obligation- i.e.
doing the prohibited act is a breach of obligation.
• Obligation- obligation of:
 Result- specified result is aimed and
attainable. e.g. painter, builder, publisher.
 Diligence- doesn’t guarantee to bring about
determined result- rather do own best e.g.
Physician doesn’t guarantee saving patients
life, advocate doesn’t guarantee to win the suit.
 Sources of obligation
• Obligation may arise either from contract or
law.
• Obligations arise from contracts are assumed
by free will. e.g. obligation of a seller to
deliver an object s/he sold to the buyer.
• Obligations arise from law are mandatory-
e.g. obligation to pay tax- mandatory.
 Requirements for a contract
• Art. 1678 of CC- Elements of valid contract
 Capacity- capacity to contract
 Consent- willingness- reached an agreement
by process of offer and acceptance
 Object- (sufficiently defined, lawful, moral &
possible)
 Form (if any)- special form- in writing for
certain types of contracts.
 Capacity
• Capacity- the ability to perform juridical acts.
• Juridical acts- acts of civil life (Art. 192) like
contract, marriage, property administration,
making a will, donation, e.t.c
• Contractual capacity:
 Mentally able to understand the nature and
consequence of making a contract
 Physically able to manifest consent to a bargain
 Capacity Cont’d
 Permitted by law to make the contract.
• The person who lacks these abilities is under
incapacity.
 Presumption- Every physical person is
presumed capable of performing all the acts of
civil life- Art.192- presumed to have total
contractual capacity.
 To rebut- one of the parties may allege lack
of capacity at the time of contracting.
 Capacity Cont’d
• Rule- capacity; exception-incapacity- Art. 196
• Incapacity may arise from age, mental illness
or court decision.
Contractual Capacity of Minors-
• Minors- under the age of 18 years- RFC & CC.
• Contract concluded by minors- shall be of no
effect and can be invalidated by the minor or
their legal representatives or heirs- RFC-299,
CC-313 and 1808 with in 2 years after attaining
age of 18.
 Capacity Cont’d
• This is because- minors need protection from
their immaturity and inexperience.
• Exception- acts of everyday life- RFC- 293,
CC, 305.
• Acts of everyday life- obligation or expense the
act entails doesn’t exceed ETB 300 and
authorized by the tutor- RFC, CC- ETB 100
• Tutor- administrator of the pecuniary interest of
the minor.
• Parents are jointly the legal tutor of the minor.
 Capacity Cont’d
• Apart from acts of every day life-
 Power to receive income from work at the age
of 14- the - Art. 263 of RFC
 Can make will by his/herself at the Age of 16-
Art. 295 of RFC
Minority ends at the age of majority and if
emancipated.
 Age of majority- 18 years.
 Emancipation refers to freeing a minor from
legal restraint.
 Capacity Cont’d
• A minor may emancipated for two reasons:
 If gets married before the age of 18 years.
upon the grant of dispensation of two years for
good cause- e.g. if a girl gets pregnant.
 Judicial emancipation- court order of
emancipation- when the interest of the child
demands and capable of tending to own
affairs or business.
 Capacity cont’d
• Contractual Capacity of Insane Persons
• Insufficient development of mind/mental
illness.
• Assimilated to insane persons- feeble –minded,
drunkards or habitually intoxicated
Notorious and non-notorious insanity
Notorious-
 an inmate of hospital or institution for insane
person.
 Capacity Cont’d
 In commune of 2000 inhabitants, liberty of
moving restricted. If not fulfilled- non-notorious
Effects of Insanity on contracts
 depends on whether the insanity is notorious or
non- notorious at the time of contracting.
 If notorious- invalidation by the insane,
representatives, heirs.
 If not notorious- may avoid the contract only if
proves he cannot give consent free from defects at
the time of contracting.
 Capacity Cont’d
• Interdiction- withdrawal of capacity to perform
juridical acts by court decision
Judicial vs. Legal interdiction
• Judicial- may be declared in respect of insane
person where his health and interest requires, in the
interest of heirs, in respect of deaf-mute, blind,
permanently disable persons who can’t take care of
themselves and administer their own property- The
court appoint guardian and tutor for them.
• Legal interdiction- declared in respect of person
convicted of criminal offence- Effect- void
 Consent: Offer and Acceptance
• Consent- willingness to enter into a binding
agreement- reached by the process of offer and
acceptance.
• An offer is a proposal to create a legally binding
obligation- by the Offeror.
• An offer must be definite and certain- must be
communicated to the beneficiary.
• Declaration of intention without communication
is not an offer.
 Offer
 Declaration of intention- invitation to submit
offers- public place tariffs, price tag, price lists,
catalogues, display of goods for sale to the public.
 Sale by Auction- in the case of sale by auction-
the auctioneer is not considered as making an
offer- he is instead an offeree- the intention is to
get a high price.
 Public Promise of a Reward- notices of a reward
addressed to the public at large and not a specific
person are offers.
 Acceptance
• Acceptance- is an agreement to the terms of
the offer- in exact conformity with the terms of
the offer.
• Add or change of terms is not acceptance-
defective acceptance.
• Defective acceptance- new offer or counter
offer- No contract arises unless the original
offeror accepts the counter offer.
 Form of Offer and Acceptance
• Normally, offer and acceptance can be
expressed orally, in written, by signs normally
in use, by conduct.
• E.g. signs normally in use at a public auction
may be raising hand by the bidder to buy and
the falling of the hammer by the auctioneer
accepting such offer.
• By conduct- placing phone in public place by
telecom is offer by conduct.
 Form of offer and Acceptance
• The offeror is entitled to specify a special mode
of acceptance.
Rule- silent doesn’t amount to acceptance.
• Exception-
 Duty to accept by the law- e.g public utility
undertakings- which are extensively regulated
by law for two reasons- 1) render vital services,
2) enjoy monopolistic situations.
 Offer and Acceptance
• Preexisting business relationship- offer to
continue or vary an existing contract or to enter
into a subsidiary or complementary contract may
be accepted by silence. Requirements:-
 Prior contract
 One of parties propose renewal or modification
 One of them includes a warning clause in his
offer
 This offer made in a special document.
 Duration of Offer
• An offer doesn’t continue indefinitely.
• Offer can be made with time limit or without
time limit.
• Offer with time limit- the offeror will be bound
by the offer until the laps of the time limit fixed-
Article 1690(1) of the CC.
• Offers made with time limit are irrevocable.
• But, the offeror is not bound by the offer if the
offer is rejected by the offeree with in the time
limit fixed.
 Duration of the Offer
• Offer without time limit- offer will be remain
open until the laps of reasonable time.
• The offeror who feels that acceptance was not
made within reasonable time must declare his
intention to the offeree immediately.
• If failed to do so, a contract would arise even
if the acceptance is not made within a
reasonable time.
 Contract between Absent Parties
• Theory of reception- reception of the acceptance
completes the contract- the offeror may adopt this
system if s/he wishes too, by conditioning the
completion of the contract on the reception of the
acceptance.
• Theory of dispatch- If the offeror didn’t
conditioned the completion of the contract, the
law adopt theory of dispatch- contract is
concluded at the time and place where the
acceptance is sent not at its reception.
 Absent Parties (cont’d
• If the contracting parties are negotiating over
the telephone the law provides the contract is
concluded at the place where the party called.
• Parties negotiating over the telephone are
assimilated to present parties.
• Acceptance must made before the parties end
their conversation.
 Defects in Consent
• Consent needs to be true, conscious, and free.
• Consent induced by mistake, fraud or duress is
not true, conscious and free- rather vitiated or
defective consent.
• So, the contract may be invalidated at the request
of the party whose consent is defective. B/c
• A party in a contract should not be tied to an
agreement he did not will.
• So, mistake, fraud and duress are grounds for
invalidating a contract, each of which result in
defective consent.
 Mistake
• Mistake is a belief that is not in accordance with
the facts.
• Invalidation of contract on the basis of mistake
is only if the mistake is decisive and
fundamental.
• Decisive- where a party proves that he was
determined to a contract because of his mistake-
he wouldn’t have concluded the contract had it
not been for the mistake.
 Mistake
• Fundamental- where the mistake is related to
normal elements of contract.
The legal nature of the contract
(negotium),
e.g. signing a lease in mistaken belief of signing
a sell, guarantee an obligation while intended
to attest
If the mistake occurred due to a mislead by
the other contracting party, it becomes fraud.
 Mistake
Capable consenting parties (persona) - A
ground of invalidation only where the contract is
concluded in consideration of the person- e.g.
personal quality of an accountant but
convicted of forgery/ breach of trust
Object or obligation to be performed
(corpus) Mistakes related to the identity of
the object- always sufficient ground of
invalidation.
Mistakes related to the quality of the object-
ground of invalidation if the lacking/missing
 Mistake
• Mistakes relating to motives- facts motivating
the conclusion of the contract are not sufficient
to invalidate the contract.
• Mistakes relating to motivations to enter into
contract do not relate to the contract but to
motives.
• Arithmetical mistakes shall not affect the validity
of the contract and they shall be corrected.
• Mistaken party cannot invoke his mistake in a
manner contrary to good faith.
 Fraud
• Fraud- deceitful practice- mistake induced by
cheating.
• Invalidation- when a party resorts to deceitful
practices so that the other party would not have
entered into the contract had he not been deceived.
• False statements are not fraud under Ethiopian law.
• False statement should be accompanied by
practice to constitute fraud.- e.g. A man obtaining
life insurance by showing health certificate
knowing that he is sick.
 Fraud
Decisive vs. Incidental Fraud
• Decisive- the deceived party wouldn’t have thought
of concluding the contract.
• Incidental- the defrauded party, even knowing the
truth, would have thought of contracting but at less
onerous term.
• Incidental Fraud is not sufficient for the purpose
of invalidating the contract.
• Deceived by 3rd party- bound by the contract unless
the other contracting party knew or should have
known of the fraud and took advantage thereof.
 Duress
• Duress- compelling a party to give his
consent to a contract by use of threat.
• The threat must be serious and imminent
harm to the party, ascendants, descendants,
spouse.
• Threat may relate to person or property.
• Third party duress- sufficient to invalidate a
contract- as opposed to fraud.
 Duress
• Threat to exercise right is not a ground of
invalidation unless exercised with a view to
obtain excessive advantage.
• Reverential fear is not a ground of invalidation.
• Reverential fear is fear and respect for the wishes
and aspirations of an ascendant or superior.
• Reverential fear may be a ground for invalidation
only if the contract is concluded with the
person inspiring the fear.
 Lesion (unconscionable contract)
• Unconscionable contract- contrary to conscious.
• A contract no sensible man would make.
• Invalidated by court if it is shown that a
contracting party took advantage of the want,
simplicity of mind, senility, or business
inexprience of the other contracting party. e.g. old
lady sell her jewelry at a manifestly low price b/c of senility, rural
girl buy artificial glass necklace at high price at extraordinary high
price due to simplicity of mind and business inexprience.
• Substantial disproportionate in performance is not
sufficient to invalidate contract.
 Object of contract
• Object- obligation to be performed.
• Parties are free to determine the content of their
contract.
• They can set aside permissive provisions of the
law but not mandatory provisions of the law.
• Object must be sufficiently defined, legal, moral
and possible.
• But, legal contract motivated by illegal motives
are not subject to invalidation.
 Form
• In principle- form is not required- freedom of
contract.
• Exception- .where the law requires
• Where the parties stipulate special
form.
• Failure to observe required form results in nullity.
• The law requires writing for contracts relating to
immovables, contracts made with public
administration, contracts of guarantee, insurance,
loan- the amount exceeds ETB 500
 Written form
• Must be in special document.
• Signed by the parties.
• Attested by at least two capable witnesses.
• Signature of the parties needs to be handwritten.
• If the party unable to write- affix fingerprint.
• Signature or thumb-mark of a blind or illiterate
person shall be authenticated or certified by a
judge or court registrar or notary.
 Invalidation of contract
• Contract lawfully formed is law of the parties.
• A contract is said to be lawfully formed if an
element of capacity, consent, object, and
form, if any, are fulfilled.
• However, the contract may be invalidated one
of the parties lacks capacity, gave defective
consent and be void if the object is illegal,
immoral, impossible or insufficiently defined.
 Who can demand Invalidation?
• when the ground of invalidation is incapacity and
defects in consent, only the incapable or the
victims of defective consent may demand
invalidation.
• If the ground of invalidation is defects in the
object of the contract both parties to the contract
and a third person may demand invalidation.
• When the ground of invalidation is form of the
contract, both parties to the contract may demand
invalidation.
 Period of Limitation
• The right to demand invalidation doesn’t
continue indefinitely.
• Action for invalidation shall be brought within
two years from the ground for invalidation
having disappeared, if not barred by lapse of
period of limitation.
• Period of limitation starts running two years
from the ground for invalidation having
disappeared not from the day of the making of
the contract
 Performance of contract
• Who shall perform?
 Obligation under the contract may be carried
out by the debtor, by the person authorized by
the debtor, by law, by court.
 As a rule, the debtor is not required to perform
the obligation personally.
 Exception- the debtor must carry out the
obligations himself where there is express
agreement and where the creditor shows that
personal performance is essential to him/her.
 Performance (cont’d)
• Who shall Receive Performance?
 A person qualified to receive performance is only
the creditor or somebody authorized by the
creditor, by the court or law.
 Exception- the rule doesn’t apply to incapable
person
 A creditor incapable to receive performance is a
minor, or a person incapacitated because of
insanity or judicial interdiction.
 Performance (cont’d)
 Performance made to incapable creditor is
invalid unless it has benefited or enriched the
incapable creditor.
 Performance made to a person unqualified to
receive it is invalid unless the creditor confirms
it or such performance benefited him.
 Person unqualified to receive performance is one
who is not authorized the creditor, court or law.
 Performance made to a person who appears to
be the creditor without doubt is valid.
 Performance (cont’d)
• What should be performed?
 The debtor performs his obligations under the
contract by tendering the thing due- exactly what
was promised.- this rule flows from the principle
that contracts are the law of the parties.
 If the performance is not in conformity with
what was exactly promised, the creditor is
entitled to refuse performance, to suspend his
performance, and exercise remedies of non
performance.
 Performance (cont’d)
 However, the creditor may not refuse the delivery
of fungible things due to small deficiencies in the
quality and quantity unless this has been
expressly agreed up on or this is essential to him.
 Fungible things are things which are
interchangeable by weight and measure. e.g. teff,
corn, oil, alcohol etc.
 Though the creditor may not refuse delivery, as a
rule, he may reduce his own performance
proportionately.
 Performance (cont’d)
• Place of performance-
 Parties are free to agree place of performance-
place of performance is the agreed place.
 If there is no agreed place- place of performance
is the normal residence of the debtor at the time of
the contract- beneficial to the debtor as preserves
him from forwarding cost.
 Change of residence- perform at original
residence.
 Definite things place of performance- the place
 Performance (cont’d)
• Time of performance- Agreed time
 If the contract doesn’t specify time for
performance- the debtor shall perform when
required by the creditor to do so.
 Exception- a non-performing party who has no
benefit of time may not require the other to
carry out his obligations. e.g. the buyer may
demand the delivery of jewel before paying
where he has benefit of time/ purchase is post-
payable purchase or credit.
 Performance (cont’d)
• Anticipatory Breach-
 A party is allowed to suspend performance, if
the other party clearly shows that he will not
perform when the time for performance
arrives.
• Transfer of risk-
 As a rule risk is with the person who is in
actual control of the object.
 Performance (cont’d)
 Risk transfers upon delivery.
 However, a creditor placed in default but failed
to take over the thing bears the risk and will not
be entitled to the thing despite the object was
under control of the debtor.
 E.g. A buyer placed in default to take over the
thing he bought but failed to do so is obliged to
pay the price of the object though the object is
damaged before he take over it.
 Non-performance of contract
• Non-performance- failure to carry out contractual
obligations- then the other party resort to
remedies.
• Default notice- default notice is prerequisite to
seek remedies of non-performance.
• Default notice is demanding the debtor to perform
his obligations, in written, orally, any other act.
• In default notice- the creditor set time limit
(reasonable time considering circumstances) after
which he will no longer accept performance.
 Non-performance (cont’d)
• Giving default notice is not always necessary.
Default notice is not necessary:-
 If the obligation is that of not to do type.
 If the debtor declared in writing that he will not
perform his obligation.
 If the contract states that the debtor would be at
default upon lapse of time fixed in the contract
without the need to give default notice.
 If the obligation the debtor assumed may only be
performed only within a fixed period of time.
 Non-performance (cont’d)
• Remedies of non-performance
 Forced performance- 1776 of CC- conditions
 The creditor must have special interest in
forced performance.
 The forced performance must not affect the
personal liberty of the debtor.
 Cancellation- differs from invalidation both in
its causes and effects.
 Non-performance (cont’d)
• Invalidation is due to the fact that the contract is
not lawfully formed.
• Cancellation is due to non-performance- failure on
the part of one of the party to carry out obligation.
• Effect of invalidation- restoration of the parties
to the position where they would be had the
contract not been made.
• Effect of cancellation- restoration of the parties
to the position where they would be had the
contract been performed.
 Non-performance (cont’d)
 Cancellation: unilateral or judicial
 Cancellation as a rule is judicial- Judicial
cancellation is cancellation by a court of law.
 Judicial cancellation may be ordered only
where there is a fundamental breach.
 Fundamental breach- breach that affect the
very basis of the contract- non performance is
total and irreversible- then judicial cancellation
will be ordered.
 Non-performance (cont’d)
 Unilateral cancellation- is cancellation by the
contracting party as an exception to the rule-
judicial cancellation-
 Unilateral cancellation- can be made in four
exceptional cases only.
 If there is cancellation clause in the contract.
 Where the period of grace (time for performance
by court, reasonable time, fixed time for the
performance of obligation lapse.
 Non-performance (cont’d)
 Where the debtor performance becomes impossible.
 Where the other party informed, in writing, the s/he
is not going to perform his obligation.
 Compensation for damage
 In addition to forced performance and cancellation,
a party may apply for compensation for damage.
 Compensation is where there is damage and the
damage is caused by the other party’s non-
performance of a contractual obligation.
 Non-performance (cont’d)
 The defendant may avoid liability to pay damage
if he establishes-
The precise cause of his non-performance
That the cause was force majeure.
 Force majeure is an event making performance
impossible.
 An event is force majeure if it is unforeseeable
(reasonable person would not normally foreseen
the event) and insurmountable (make the
performance absolutely impossible). Cumulative!
 Non-performance (cont’d)
 Examples of force majeure events
 Unforeseeable act of a third party for whom
the debtor is not responsible.
 Governmental prohibition preventing the
performance of the contract.
 A natural catastrophe such as earthquake,
lightening or flood.
 International or civil war
 The death or unexpected grave accident or
illness of the debtor.