CHAPTER ONE

GENERAL INTRODUCTION
 Definition of Law
• There have been different definitions of law
due to various assertions of what law is.
• Aristotle thought law as a “pledge that citizens
of a state will do justice to one another”.
• Plato asserted that law was a form of social
control.
• Cicero believed law was the agreement of
reason and nature, the distinction between the
just and the unjust.
 Contd.
• Sir William Blackstone described law as
“a rule of civil conduct prescribed by
the supreme power in a state,
commanding what is right and
prohibiting what is wrong”.
• Max Weber suggests that an order will
be called law if it is externally
guaranteed by the probability that
coercion to bring about conformity
 Schools of Thought
Natural Law School of Thought
 It assert there are two types of law that govern
social relations.
 One of them is a law made by person to control
the relations within a society and so it may
changed.
 The other one is that controls all human beings of
the world but which is not made by person. Such
laws do not vary.
 Accordingly, laws made by human beings are
labelled positive laws while the laws that do not
made by human being as natural laws.
 Positivist School
• Positivists have the belief that law is the rule
made and enforced by the sovereign body of
the state
• and there is no need to use reason, morality, or
justice to determine the validity of law.
• According to this theory, the law is the law
and must be obeyed irrespective of its content.
 The Marxist Legal Thinking
• school of thought which considerably associated
with its politico-economic paradigm
• This conception of law is substantially different
from other schools of thoughts in that it
questions the very origin and purpose of law and
argued for its elimination
• According to the Marxists, law came into
existence as a result of the emergence of a class
society based on private property
 Legal Realism
• its basis in the common law legal system in which
the decision previously given by a court is
considered as a precedent to be used as a law to
decide future similar case.
• Legal realists are interested in the actual working
of the law rather than its traditional definitions
• For them the law is what the judge decides in court
• rules not put to use to solve practical cases are not
laws but merely existing as dead words and these
dead words of law get life only when applied in
reality
Basic Characteristics of Law
• lack of a consensual definition of law does not
mean that law is without any generally
accepted characteristics.
• Law can be regarded as possessing certain
universally recognized features. These features
or attributes are very important in that they
provide indirect descriptions of what does law
mean.
 Contd.
The basic characteristics of law are:
1) Generality
• Law is a general statement regarding a possible
human conduct. It does not specify the names
of specific persons or behaviours.
• Hence, its generality is both in terms of the
individuals governed and in terms of the social
behaviour controlled.
 Contd.
2. Normativity
• Law is not a factual statement (description is
not in the nature of law); it is rather a
prescriptive tool which purports to shape
human behavior in the future.
• Law creates norms in the society by
prohibiting, allowing or ordering the social
behaviour
 Contd.
3. Intimacy with Human Behavior and State
 Law is a social norm and its ultimate concern is
regulation of the social behavior of human beings.
 The intimacy of the law and the state is far from
question.
 In reality, one cannot have validity or legitimacy
without the other.
 The law would have life and produce the desired
effects only by the backing of centrally organized
state machinery.
 Contd.
4)Sanction
Each and every member of a society is required
to follow the law.
Where there is violation of the law, sanction
would follow.
Sanction is a penalty or coercive measure that
results from failure to comply a law.
 Functions of Law
1. 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.
 Hence, the law is one of the forms of formal
social controls. It is also a typical tool in
reducing, and ultimately eradicating harmful
traditional practices, like Female Genital
Mutilation
 Contd.
2. Dispute settlement
• Disputes are unavoidable 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.
 Contd.
3. Social change
• A number of scholars agree about the role of law
in modern society as instrument to social change.
• Law enhances improvement in the life of the
society through the encouragement of innovation
and creativity.
• It encourages individuals to engage in innovative
tasks by providing exclusive rights for the
enjoyment of their inventions via issuing patents,
copyrights, trademarks and the like.
 Meaning of Business Law
• Black’s law dictionary the term “business” is
defined as “…the activity of making, buying,
selling or supplying goods or services for money”.
• Unless such activities are regulated properly, the
business environment of a country will become
full of chaos.
• Generally speaking, business law could be
defined as rules that govern business relationships
 Contd.
Legal scholars, like DuPlessis and O’Byrne, suggest
that business law performs many functions, including:
 Defining general rules of commerce;
 Protecting business ideas and business assets;
 Providing mechanisms that allow business people to
determine how they will participate in business
ventures and how much risk they will bear;
 etc
 Nature of Business Law
• there is the distinction between substantive law
and procedural law.
• Substantive law consists of the rights and
duties that each person has in a society
• Procedural law deals with the protection and
enforcement of the rights and duties of
substantive law
• Briefly substantive law relates to what the law
is, whereas procedural law relates to how it is
enforced.
 Contd.
• Substantive law is further divided into public
and private law.
• Public law is concerned with the conduct of
government and with the relationship between
government and private individuals.
• Constitutional, criminal, and administrative
laws are generally classified as public law
• Private law on the other hand consists of the
rules governing relations between private
individuals or groups of persons
 Contd.
• Laws such as Agency, law of commercial
paper, trade and business organizations, sales,
torts, banking, and insurance are classified as
private law.
• The law of contracts, business organizations,
banking, insurance, sales and agency are
categories of private law which forms the
substance of business law
• Thus business law is a private substantive law
 Sources of Business Law
• The term ‘sources of law’ can refer to three
different concepts, which should be
distinguished.
1. Formal Source: confers binding authority on a
rule and converts the rule into law. Under the
Ethiopian legal system, the will of the state is the
formal source of law. That is, no rule can have
authority as law unless it has received the express
or tacit acceptance of the state.
 Contd.
2. The Literary Source
such sources provides actual knowledge of the law may
be gained. These are: (i) statutes; (ii) reports of
decided cases; and (iii) text books.
3. Material Source
which supplies the matter or content of the law. The
legal material sources, particularly, include statute law
or legislation, precedent or case etc.
the content of business law is supplied by different
laws such as the law of contracts, Agency, Sales,
Business organizations, banking, insurance,
employment, and negotiable instruments
 CHAPTER TWO
LEGAL PRESONALITY
 The Concept of Personality and its Effect

• In the language of the law the term “person” is

not used in its literal or usual meaning. In the
field of law the term has acquired a wide and
technical meaning. It refers to all entities (human
and non-human)
• Personality is the ability to hold rights and duties.
• In other words, humans and fictitious entities
cannot perform juridical acts without being
recognized as persons before the law.
 Contd.
 The words “human being” and “person” are not
interchangeable.
 All human beings are persons but all persons are
not human beings, e.g. business organizations.
 Personality is a fundamental concept in law
because no dealings of legal significance would
produce effects without it
 Contd.
• Thus, the normal effect of personality is
the ability to be a party to legal
transactions and perform various juridical
acts, i.e. acts having effect at law.
• Contemporary legal literature recognizes
two categories of persons.
• These are real persons/natural/human
beings and fictitious /legal /artificial
/juridical persons having artificial
personality like companies
 Physical Persons

Commencement of Physical Personality

1. The Rule
• As a matter of principle physical personality
begins with birth.
• “the human person is the subject of rights from
its birth…” / Art.1 of the Ethiopian Civil Code/ .
• Birth refers to the complete extrusion of the baby
from its mother's womb either in a natural way or
by a medical operation.
• Birth alone is a sufficient condition to confer
personality under the Ethiopian law
 Contd.
The Exception
• There are instances where the interest of a
conceived child is put at stake if personality is
attributed only after birth.
• However, the law has invented an exception in
that personality may be granted to a merely
conceived baby for the purpose of enabling the
child (if it is born) to take a benefit in all
matters affecting its interest..
 Contd.
• This conception is based on the justification
that a child who has already lost its father
while being in its mother's womb should not
be subjected to further pain of losing a benefit
which it would have secured had it been born
before its father's death.
• So, when there is an interest of the baby at
stake, the unborn baby in the womb should be
regarded as already born and having
personality
 Contd.
• The granting of personality to a conceived child is
subject to compliance with three cumulative
requirements. According to Art 2 of the Ethiopian
Civil Code
• A child merely conceived is considered as though
born where its interest so requires provided it is
born alive and viable.
• Thus, the three conditions are: the interest of the
child must justify the grant of personality, the child
must be born alive, and it must be viable.
• These conditions are cumulative in the sense that the
missing of one suffices to deny the fetus personality
 Contd.
• The law takes certain presumptions to
settle questions of what baby is viable and
what is not.
• The law irrebutably presumes that a child
that lives for 48 hours after its birth is
viable, so that no contrary evidence can be
admitted to disprove this presumption.
 Contd.
• The law also provides for another presumption
in the negative that a child that dies before 48
hours after its birth is deemed to be not viable.
• But this presumption is rebuttable in that it
can be shown to the contrary by proving the
child was viable.
• But we cannot challenge the non-viability of
the child by using deficiency in constitution as
evidence
 Contd.
• That is to say, if a child dies before 48 hours
following its birth due to a disease he caught in
its mother's womb or due to other congenital
biological deficiencies, it will be conclusively
deemed not viable.
• However, external factors that may have caused
the death of the child before 48 hours can be
used to disprove the presumption of non-
viability..
 Contd.
• If, for instance, the baby dies on the 43rd hour
after its birth because of mishandling by nurses
or by hunger or due to a car accident that
occurred while it was being taken home from
hospital, all such can be employed to challenge
the above presumption by proving that the baby
would not have died had it not been for the
extraneous factors
Capacity and Incapacity of Physical Persons
• The term capacity in its legal sense refers to the
ability of physical persons to exercise their rights
and discharge their duties by themselves.
• The fact that physical persons are holders of rights
and duties does not always mean that they will
exercise them.
• Exercising rights and duties require capacity.
• Those who are hindered by law from exercising
their rights and duties are said to be under
incapacity.
 Contd.
• Capacity is the rule and incapacity is the
exception/art 192 civil code/.
• It is presumed by the law that all physical persons
are capable of exercising or enjoying rights by
themselves.
• But in certain circumstances it deems compelling
that the law may explicitly declare a person is
considered incapable to exercise rights and duties.
• Since incapacity is an exception the burden of
proving the existence of incapacity falls on the
party who claims the incapacity.
 Contd.
• thus physical person may be exceptionally
prohibited from personally exercising rights
and duties.
• the prohibition is not total but only his/her
personal exercise is disallowed.
• He or she can still exercise rights and duties
through another person by way of
representation. So, the effect of incapacity in
exercising rights and duties is that the exercise
would be entrusted to a third person
Categories of Incapacitated Persons
The Ethiopian law recognizes five categories of
incapacitated persons. These are:
1. Minority: - Minority in civil law is an
incapacitating condition that occurs because of age.
According to Article 215 of the revised Family Code
Proclamation no. 213/2003, a person below the age
of 18 years is called a minor and is incapable of
exercising rights and duties by him/herself.
 Contd.
•The law intends that these persons lack the proper degree
of appreciation when they transact acts of civil life.
•The law interferes to protect minors from exploitation by
others.
•Accordingly, any civil act undertaken by the minor without
authority is subject to invalidation.
• A minor may validly perform acts of daily life, i.e. simple
and small matters that are quite frequently done and that
do not significantly affect the legal position of the minor .
 Contd.
2. Judicial Interdiction
• Judicial interdiction exists in a case where a
person is with deteriorated mental functioning
as a consequence of insanity, infirmity, senility
and the like.
• Insane persons are believed to be unable to
understand the nature and consequences of
their actions because they have got a mental
disease
 Contd.
• Infirm persons are those with serious physical
deformities so that such deformities will have
the ultimate substantial reduction in mental
functioning.
• Senility is deterioration in mental faculty
because of old age.
• The court can declare the interdiction of the
above persons with mental deficiencies on an
application by the insane or infirm person
him/herself, any of his/her relatives, or the
public prosecutor
 Contd.
3. Legal interdiction
• This kind of interdiction results from the law,
particularly from the criminal law.
• A person will be legally interdicted as a result of
the pronouncement of a legally prescribed
punishment for the violation of criminal law.
• Contrary to minority and judicial interdiction, legal
interdiction concerns exclusively with the property
of the person subject to the interdiction.
• That means, a legally interdicted person retains
capacity over his personality interests and thus no
guardian is necessary.
 Contd.
4.Foreign Nationality
• This is a special incapacity because a person is
prevented from exercising specified categories of
rights.
• For instance, the law states that a foreigner
cannot take part in governmental administrations.
• Likewise, a foreigner cannot own an immovable
in Ethiopia except they have authorization from
the appropriate organ, nor can he entered in to
certain investment fields reserved to Ethiopians.
• Exception- foreign nationals of Ethiopian origin
 Contd.
5. Incapacity from the Exercise of Specific
Functions
Defining the particular cases where incapacity
results from the exercise of a given function is left
to special provisions within the civil code or to
special legislation.
For instance, under the revised Family Code a
tutor of a minor cannot contract with the minor.
 The End of Physical Personality
• The Civil code recognizes two ways in which
physical personality comes to an end in the following
two way:
• Death: Physical personality coincides with physical
existence, i.e. it ends when human beings ceases to
exist
• Declaration of absence: if a person's whereabouts are
not known for a certain period defined by the law, a
judicial declaration of absence having the effect of
death for all legal purposes may be made.
The commencement and Termination of Artificial Personality

• The way how artificial personality commences

depends on the type of artificial person itself.
• There is no uniform rule concerning the
acquisition of artificial personality.
• Of these mechanisms, the famous ones are
issuance of a specific legislation, effecting
registration and requirements of publicity
 Contd.
• For instance, the various state organs derive
their legal personality from establishing
domestic legislation.
• Business organizations, on the other hand,
acquire personality when they fulfill all the
requirements under the commercial code and
register with the Ministry of Trade.
• Some business organizations, like public
enterprises, however, acquire personality not by
registration but by establishing legislation.
 Contd.
• Personality of artificial persons will cease in the
same way as it begins.
• That is to say, just like artificial personality
commences through issuance of statutes or
effecting registration and publicity, it ends
through the enactment of dissolving law or the
striking out of name of the entity from the
public registry.
 Contd.
• Artificial personality may also end as a matter
of fact where the object for which the entity is
established becomes impossible to achieve or
where that organization is dissolved because of
bankruptcy.
• At the termination of personality, the fictitious
beings would die out and they can no more be
parties to transactions having effect at law.
CHAPTER THREE
BUSINESS AND BUSINESS
ENTITIES
 Definition
• Accordingly, 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
• Incorporeal movables are things that do not have a
material existence. However, business is
understood as a composition of both corporeal and
incorporeal movables.
 Contd.
• There are two basic forms of doing business;
1. individually (as sole proprietor) or
2. incorporated body
• Article 210 of the Commercial Code defines a
business entity/organization as “any association
arising out of a partnership agreement.”
• The word “association” is not used here to equate
business organizations to non-profit making entities;
it is used here to mean grouping of people.
• A business organization is, therefore, a grouping of
business persons that comes out of the partnership
agreement.
 Elements of a Business
• business consists both corporeal and incorporeal
things.
• Accordingly, the elements of business includes
tools, equipments, raw materials, goods in stock,
good will, trade name, trade mark, patent, copy
right, and the right to lease of the premises.
• But, immovable properties cannot form part of
the business. That is, the business premises and
the land, on which the premise has been erected,
had been excluded from the ambit of the
definition of the elements of a business.
 Different kinds of Business Entities
• The Ethiopian law recognizes (Article 212 of the
Commercial Code) six types of business
organizations: three types of partnerships, two
types of companies and a joint venture.
• Partnerships are associations of persons and the
personality of members does greatly matter.
• Companies are associations of capital and the
personality traits of shareholders are not
important to the existence of the company.
• Companies are also considered as the best way of
doing business in a corporate form. Though the
main classification is between partnerships and
companies, partnerships can be further broken
down into three legal forms: ordinary partnership,
general partnership, and limited partnership. Joint
ventures are unique forms of business organization.
Companies comprise of two legal forms, namely,
Share Company and Private Limited Company.
 CONTD
• Companies are also considered as the best way
of doing business in a corporate form.
• partnerships can be further broken down into
three legal forms: ordinary partnership, general
partnership, and limited partnership.
• Joint ventures are unique forms of business
organization.
• Companies comprise of two legal forms,
namely, Share Company and Private Limited
Company.
 CONTD.
• business organizations may be either
commercial or non-commercial.
• According to Article 10(1) of the Commercial
Code, a commercial business organization is the
one in which the objects under the memorandum
of association or in fact are to carry on any of
the activities specified in Article 5 of the same
Code.
• Share Companies and Private Limited
Companies shall always be deemed to be of a
commercial nature irrespective of their objects.
 CONTD
• According to Article 213 (1) of the Commercial
Code an ordinary partnership may not be a
commercial business organization
• And thus it may not engage in commercial
activities.
• An ordinary partnership may be set up to
operate other activities that do not make their
doer a trader.
 Partnerships
• Partnerships would have their own
legal personality upon registration
and publicity.
• Partnerships are of three types:
1. ordinary
2. general and
3. limited partnership
 Ordinary Partnerships
• Ordinary partnerships are corporate forms of
doing business in non-commercial activities.
• Partners in an ordinary partnership all jointly
and severally liable for the debts of the
partnership.
• But partners may avoid the joint and several
liability by contractually stipulating to the
contrary.
 General Partnership
• A general partnership is the typical partnership form.
• Partners in a general partnership are personally,
jointly, severally and fully liable as between
themselves and to the partnership for the partnership
firm’s undertakings.
• They cannot even avoid this obligation by a
contractual term.
• Partners in a general partnership have the status of
traders and all of the partners can be managers of the
partnership.
•
 CONTD.
• General partnerships shall have firm-names.
• The firm-names must contain at least the
names of two of the partners accompanied
by the phrase “General partnership”.
• A noteworthy point is that creditors will
have recourse against the partners only after
they exhaust the possibilities of recovery
from the partnership.
 Limited Partnership
• A limited partnership comprises two categories
of partners: general partners and limited
partners.
• The general partners of a limited partnership
assume similar obligation as that of partners of
a general partnership.
• General partners are jointly and severally
liable for the debts and commitments of the
partnership where the assets of the partnership
cannot cover the debts and commitments.
 CONTD.
• These groups of partners act as managers of
the limited partnership.
• Limited partners, on the other hand, are
partners that cannot be held responsible for the
debts of the partnership beyond their original
contribution.
• They cannot also take part in the management
for that is inconsistent with their exemption
from liability
 Joint Venture
• A joint venture is the simplest form of business
organization.
• It is a grouping of people arising out of a
partnership agreement, which is also known as a
joint venture agreement in which two or more
persons combine their labour and/or capital for the
purpose of carrying out economic activities and
participating in the profits and losses arising out
thereof.
• Joint ventures, more often than not, are used for a
single transaction or project, or a related series of
transaction or project.
 CONTD.
• Under the Ethiopian Commercial Code, a
joint venture is a secret business
organization and it is not made known to
third parties.
• Nevertheless, where a joint venture is
made known to third parties, it shall be
deemed, insofar as such parties are
concerned, to be an actual partnership.
 CONTD.
• The agreement forming a joint venture need
not be made in writing.
• A joint venture need not be registered and
publicized by any way.
• Accordingly, a joint venture cannot be a
person; it cannot sue and cannot be sued.
• Third parties only know the manager of the
joint venture.
 CONTD.
• The manager is responsible for all
faults and liabilities that may emerge
because of the business.
• The powers of the manger and
liability of other partners will be
determined in their internal mutual
agreement.
 Private Limited Companies
• Private Limited Company is the
predominant form of company in
Ethiopia.
• Since the Ethiopian business is dominated
by small and medium–sized business
entities, the well adapted and appropriate
form of business organization is Private
Limited Company.
 CONTD
• Private limited company comes into existence
when two or more persons but not greater than
fifty persons come together with a view to
exploit some business opportunity.
• The capital of this company must be at least Birr
15,000 the whole capital of private limited
company must be paid-up when the company is
formed.
• One chief characteristics of this company is
limited liability.
• The liability of the members is limited to their
contribution.
 Public Companies
• Share Company is a separate legal entity
which can own assets and held liable to pay its
liability.
• In other words liability of the members is
limited.
• No member is liable to contribute anything
more than the nominal value of the shares held
by him.
 CONTD.
• Share Company is also defined as one which
does not have restriction on maximum number
of members,
• It can collect capital by inviting public to
subscribe for shares or debentures of the
company, and characterized by free transfer of
shares.
• A minimum of five persons are required to
form a share company
 Contd.
• Share Company can issue two kinds
of securities, equity securities and
debt securities.
• Equity securities are the counter part
of the shareholders contributions to
the capital of the company.
 Contd.
• Equity securities also give to their
holders personal rights which allow the
shareholder to be informed on the
management of the company and to
participate in shareholders’ meetings.
• Equity securities are in real sense shares
that are issued by the company.
 Contd.
• Debt securities, on the other hand, are held
by creditors and rank prior to the
shareholders. Debentures are among debt
securities.
• Debenture is a document given by a
company as evidence of debt to the holder
usually arising out of loan
 Share companies Vs Private Limited
Companies
• Share companies and Private Limited
Companies have remarkable differences.
• Firstly, while the minimum number of
persons required to form PLC is two, a
share company requires a minimum of
five members. There is also a maximum
number of members, i.e. fifty, for Plcs.
 Contd.
• Secondly, a private limited company is
managed by one or more managers while
Share Company is managed by directors
whose minimum number shall be three.
• Thirdly, while a share company can invite
the public to subscribe to its shares and
debentures, a private limited company
cannot go to public to raise its capital.
 Contd.
• Fourthly, in Share Company all capital
must be subscribed and 25% of the
capital must be paid-up before
registration. Private Limited Company
is registered by fully paid-up capital.
 Chapter Five

The Law of Agency

 Definition
Agency can be defined as:
a consensual relationship
created by contract or by law
where one party, the principal, grants
authority for another party, the agent,
to act on behalf of and under the
control of the principal to deal with a
third party.’
 Contd.
Agency law regulates the r/n b/n:
1. The Agent and the principal (i.e.
internal relationship)
2. The Agent and the Third parties with
whom they deal on their principal’s
behalf (i.e. external relationship) and
3. The Principal and the third parties
when the agent deals.
Contd.
 The Need for Agency
To overcome time and space limitation
To overcome limitations of knowledge
and skill
To represent legal persons
To reduces the cost of contracting
To overcome incapacities: (need to
appoint someone else to perform it on
their behalf
 Sources of Agency

1. Contract

2. Judicial Decisions: e.g. curator

3. Law: e.g. guardians and tutors
 Scope of Agency
1. Universal Agency: the agents hold broad authority to act on
behalf of the principal. E.g. they may hold a power of
attorney (also known as a full mandate) or have a
professional relationship in broader context.

2. General Agency: confers authority upon the agent to perform

acts of management. (See; Art 2204 of the civil code)

3. Special Agency: authorizes the agent with a single

transaction or specified series of transactions over a limited
period of time.
 Forms of Agency
1. Disclosed: The agent is not personally liable to
3rd parties unless he acts beyond his authorities
2. Partially disclosed: the agent represents the
principal on the principal’s behalf but acts in his
own name
3. Undisclosed: the agent acts without disclosing
the existence of the principal to third parties. The
contract is solely established only between the
third party and the agent.
 The Three Kinds of Authority of the Agent

1. Actual authority: may be expressed or

implied),
• when the agent exercises this actual
authority, it is as if the principal is
acting, and
• the principal is bound by the agent's acts
and is liable for them
 Cond.
2. Apparent /estopel/ authority
Exists in the eyes of a reasonable person: in
cases where
 One allows another to appear as if he were
his agent
 One allows his agent to give the impression
that he has more authority than he actually
has
 CONTD.
 A principal allows his agent to continue to
appear as his agent while the agency has been
terminated
 The principal limits agent’s actual or implied
authority but fails to inform third parties who
deal with the agent. (See; Art 2195 of the civil
code)
 Cond.
3. Ratified authority
 Even if the agent does act without authority, the
principal may ratify the transaction and accept
liability on the transactions as negotiated
 This may be express or implied from the
principal’s behavior,
 Unauthorized agency/ agency of necessity

 Agency of necessity arises by operation of the law

 in certain cases where a person is faced with an
emergency
 in which the property or interest of another person are
in imminent jeopardy and it becomes necessary,
 in order to preserve the property or interests, to act for
that person without his/her authority.
 the agent takes measures appropriate to preserve the
property of the owner
 Cond.
The Authority arises directly as a result of the
operation of law, and the consequence is that:
 The agent can bind the principal
 The agent will have a defense if sued by the
principal
 The agent will in appropriate circumstances be
entitled to claim reimbursement
 Cond.
Preconditions for an agency of necessity
• First, the agent was unable to obtain instructions from the
principal.
• Second, the agent must act in good faith.
• Third, the action taken by the agent must be reasonable
and prudent in the circumstances.
• Finally, there must be some necessity to act in the way in
which s/he performed. (See; Art 2257-2265 of the civil
code)
 Duties of the Agent and the principal
• Duty to release the agent from damages
and liabilities
• Set-off conditional to the principal
 Agency in Trade (business and commerce)
The three kinds of commission agents are
1. commission agents to buy or sell,
• sells or buys goods, securities in his/her own name but on
behalf of another person, the principal
2. Forwarding agent,
• The forwarding agent, undertakes to enter in his own name
but on behalf of another person, called the principal into a
contract for the forwarding of goods
3. Del credere agents:
del credere agent is entrusted to sale some goods to third
parties and if the third parties failed to effect the payment, the
agent might pay to the principal from his/her own expense
 Extinction/termination of Agency
Agency may be terminated by the agreement of
the parties or by the operation of the law
1. Termination by the act of the parties
Agreement of parties
 Unilateral declaration by the parties(revocation
by the principal or renunciation)
2. Termination by the operation of the law:
when the transaction has been performed
upon death, incapacity, or bankruptcy of either
or both of the parties
 CHAPTER FOUR

THE LAW OF CONTRACTS

 Contracts in General
• legal obligations can be categorized into
penal and civil obligations.
• Civil obligation exist between two or
more persons in their private
relationships concerning something that
one party must undertake towards the
other party.
 Contd.
• The sources of obligations are generally
law and contract.
• In contract, the consent of the parties
forms the basis of the obligation.
• non-contractual obligations emerges from
the law. However, it is beyond the scope
of this study to discus non-contractual
obligations and our focus is on contracts
only.
 The Meaning of Contract

•Article 1675 of the Ethiopian Civil Code

defines contract is as;
• ‘’An agreement whereby two or more persons
as between themselves create, vary or
extinguish obligation of proprietary nature’’.
Analysis of the Defn. of Contract
A. Contract is an agreement
B. Number of parties to contract must be at
least two
C. Privity-binds the parties only
D. Contracts can be concluded for the
creation, variation and extinguishment of
obligations
E. Contracts are of proprietary or patrimonial
nature
 Formation and Elements of Contracts

1. The parties should have capacity

2. Consent of the parties: Offer and
Acceptance
3. Possible, legal and morally acceptable
object
4. Form if prescribed by the law
 Offer
• Offer is the sending of intention of the person
making it to be bound by the content of the
offer.
• The one who makes the proposal to conclude
a contract is called ‘offeror’ and the other who
is expected to reply is ‘offeree’.
• Three elements are necessary for an offer to
be effective at law: serious intention (firm
proposal), certainty or definiteness, and
communication.
 Contd.
• serious intent is not determined by
the subjective intentions, beliefs, and
assumptions of the offeror.
• It is determined by what a reasonable
person in the position of the person to
whom the offer is addressed would
conclude the offeror's words and
actions meant.
 Contd.
1. There are various proposals that are not legal
offers.
2. Social invitations, expressions of opinion, or
statements of motive all do not evidence an
intention to enter into a binding agreement.
Consider the following examples.
 Contd.
• In principle, an offer is binding on the offeror
only if it is addressed to a specified person.
• The reason why the offeror is expected to
know the offeree and address his offer to him
may be to make sure that the offeror has
intended to be bound by his offer .
• Thus, advertisements, catalogues, price lists,
and sale by auction are not considered as
offers to contract but as invitations to
negotiate
Effects and Termination of Offer
• Once an offer is properly made and made
known to the offeree, it will be binding
on the offeror.
• The binding nature distinguishes an offer
from mere declaration.
• A person making mere declaration of
intention can change its declaration at any
time without any legal liability
• The offeror can freely change the content of his
offer or totally withdraw it before it reaches the
offeree. This is known as revocation.
• Revocation is a mechanism through which an
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.
 Contd.
• 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.
• In case the offeror fails to fix time limit for
acceptance, the offer remains binding for
reasonable period only
• So if the offeree remains or unable to decide
within such reasonable time the offeree will
no longer be bound by his offer.
• The effect of an offer may also be terminated
by the act of the offeree, i.e. rejection.
• 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.
 Acceptance
• 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.
• In other words, acceptance must be absolute
and unconditional in the sense that one must
accept just what is offered/mirror image rule
 Contd.
• The offeree can use writing, oral, sign or
conduct as a means of communication to
express his acceptance.
• The offeree may use letter, press, telex, email,
etc to communicate his acceptance in writing.
• He may also use telephone, telegram, video,
radio, television etc as a medium of oral
communication.
• However the offeror may stipulates a special
form of acceptance in the offer which the
offeree must comply
 Contd.
• In principle silence doesn't mean
acceptance.
• In other words, silence is the total absence
of any form of expression, be it verbal,
written or behavioral.
• The principle in Article 1682 of the
Ethiopian Civil Code is that he who keeps
silent does not consent
 Exceptions
• However, the principle silence does not
amount to acceptance suffers exceptions.
These are
A. Contract of adhesion: According to Art.1683
of the Civil Code, 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
• E.g some public enterprises, like Ethiopian
ELPA, ETHIO TELE-COM
• Since the law or concession requires the
offeree to accept the offer, silence in such a
case clearly amounts to an acceptance.
• B. Preexisting Contractual Relation/Art.1684
of the Civil Code/ silence may amounts to
acceptance between parties who have pre-
existing or ongoing business relations and
have previously concluded a contract.
• However, certain conditions are required to be
fulfilled. That is, silence will be considered as
acceptance where:
 Contd.
 The offer is to vary, supplement or
complement preexisting contractual relation

 The offer is made in writing

 The offer should be written on special

document

 The offer contains warning that silence

amounts to acceptance
Effect and Termination of Acceptance
• The timely withdrawal of an acceptance amounts to
aborting a contract which was validly formed unlike
the case of withdrawing an offer.
• “a revocation of offer prevents its birth in law, while
a revocation of acceptance destroys a born valid
acceptance and a completed contract”
• Where not so destroyed, the contract is effective as
from the date of the sending of the acceptance.
 Defect in Consent
1. Mistake
• Every mistake do not constitute defect in
consent and the law requires the fulfillment of
two cumulative conditions: these are
A/ Mistake must be fundamental
• Mistake relating to a contracting party is also
fundamental mistake.
• The mistake may be either on the identity or on
the qualifications expected of the other party.
 Contd.
B/ The mistake must be decisive
• The decisiveness of the mistake should be
determined by court taking into account the
surrounding circumstances and subjective
conditions of the mistaken party.
• Of course, the mistaken party shall prove
that a rational person in his position would
not have entered into such contract had it
not been for the mistake.
 2. Fraud
•Failure to disclose information or disclosing false
information results in invalidation of the contract
provided that two cumulative conditions are fulfilled.
•First, the failure to disclose or the false information
should have been made in bad faith or by negligence.
• Second, there must be a relationship that existed
between the parties and this relationship must be
special in the sense that it requires transparency
between them.
• An example of such special relationship is that
which exists between a lawyer and his or her client.
In such cases, a false statement or non-disclosure
results in the invalidation of the contract if it is
made in bad faith or by negligence.
 3. Duress
• One can raise duress as a cause of invalidation of
contract if the following conditions are cumulatively
fulfilled.
1. The danger threatened must be imminent
2. The danger threatened must be serious
3. The party must believe that the harm will happen
if he does not consent to the contract
4. The danger threatened must be on the person
himself, spouses or his ascendant or descendants
5. The danger threatened must be on person, life,
property, and honor
6. The threat must impress a reasonable person
 Borderline Case to Duress
1. Reverential fear
• Reverential fear, however, becomes a ground
for invalidation only when it induces a
contract with the ascendant or superior
himself and brings him an excessive
advantage.
• For example, the respected superior of a
monastery who induces the followers, without
threat, to sell to him some cattle at a price one
half below their value, may be invalidated.
 B/ Unconscionable Contracts
• These are a kind of contract that will allocate
imbalanced gain to the parties.
• Such is a contractual relationship in which one
party exploits the other party excessively taking
the advantage of the latter’s want, simplicity of
mind, senility or manifest business inexperience.
• Whenever such kind of contracts is concluded, the
law will interfere in order to help the weaker party
 Contd.
•A contract can be invalidated as “unconscionable”
where the following cumulative elements are
fulfilled.
1. The existence of “substantially more favorable”
advantage to the stronger party;

2. Consent induced by the want, simplicity of

mind, senility or manifest business inexperience
of a contracting party;
 Object of Contracts
• “object of a contract” refers to
obligations to perform something
• Parties have the right to define the
nature and scope of the obligation
they subscribe
• It should be lawful, moral and
possible.
 Form of Contracts
• The law gives freedom to the parties to choose
either written or oral (Article 1719/1 of the Civil
Code)
• Freedom of form, however, is not absolute. The
freedom may be limited by law or the parties
themselves.
• In other words, limitation of freedom of form
means denying the parties the option to make
their contract orally
 Contd.
Justifications for the Limitation of
Freedom of Form in Contract to be in
written
• Evidentiary value
• Recalling content of contract
• Indication of intention to create legal
relation
• The Ethiopian law of contract provides
the cases and types of contract (Articles
1721-1726 of the Civil Code) for which
written form is a mandatory requirement.
• That is, contracts of those types will be
rendered invalid if they are not made in
writing.
• The first scenario is when contracts are
required by the law to be made in writing
1. Contract relating to immovable (Article
1723)
2. Contract with public administration (Art
1724)
3. Contracts that last for a longer period of time
(Article 1725)
 Contd.
• The second scenario is when a contract
made in writing is varied (Art 1722)
• The third scenario is in case of preliminary
contract (Art 1721) in which the 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.
• The third scenario is where the parties
themselves made writing a requirement
(Article 1726):
 Effects of form (Art. 1720)
• According to Article 1720 of the Civil Code,
failure to comply with form requirement
makes the contract a mere draft.
• This in effect means that the contract never
exists until the formality requirement is
fulfilled.
• Hence, until such formality is fulfilled, no
party can claim the enforcement of the
contract
 Effect of Contracts
• Once a contract fulfills the requirement of
formation, it becomes a law among the parties.
• The general effect of a validly concluded
contract is its legal enforceability.
• Once they have created a contract between them
following legitimate formation requisites,
parties are obliged to comply with the terms the
breach of which would entail a legal liability.
 Extinction of Obligations
• Performance of Contractual Obligations
1. Performance by Whom? (Art. 1740)
2. Performance to Whom? (Art. 1741-1744)
3. What to Perform? (Art. 1745 – 1751)
4. Place and Time of Performance (Article
1755 and 1756)
 Contract Administration
Non-performance of Contracts
• Non- performance, is a breach of a
contract,
• it refers to the parties’ failure to perform
contractual obligations in conformity
with the terms of the contract and the law.
• The breach of a contractual obligation
may be total or partial
 Non-performance of Contracts
• It is clear that breach by one party affects
the interest of the other party.
• Thus, it is logical to provide a
solution/remedy for the party affected by
non-performance.
• It is noted that one function of contract
law is to enforce contracts.
 Contd.
• One way of doing that is to provide
remedies for non-performance
particularly by sanctioning failures.
• Otherwise parties would be reluctant
to enter in to a contract
 Article 1772 provides that the giving of default notice
is a necessary condition for invoking the remedies of
non-performance.
 However, there are exceptional circumstances where
giving default notice is not necessary.
 Article 1775 provides four cases where the creditor
invokes the remedies of non-performance without
giving default notice.
 Exception to default notice
1. not to do/negative obligation.
2. Obligation to be performed within a
fixed time
3. Express exclusion of default notice
4. Anticipatory breach of contract/ when
the debtor communicates in writing his
refusal to perform the obligation
 Remedies

1. Specific performance

2. Cancellation of the contract

3. Damages caused to him by

non-performance be made good
 Specific (Forced) Performance (Article
1776)
cumulative preconditions to require specific
performance
1. the creditor’s special interest and
2. execution without encroaching the personal liberty of
the debtor
• special interest exists where the goods are services to
be supplied are monopolized by a single entity
 Cancellation

• Cancellation is normally a judicial remedy

• The cancellation of a contract must be
requested from a court
• Under certain exceptional circumstances the
Civil Code authorizes unilateral cancellation
 Judicial Cancellation
• The party who claims cancellation shall bring
a court action to that effect.
• Articles1784 and 1785 of the Civil code deal
with the conditions under which a court may
order the cancellation of the contract.
• The Civil Code provides that the court should
consider the interests of the parties and the
requirement of good faith
 Unilateral cancellation
• In exceptional cases, the creditor can unilaterally
declare the cancellation of a contract. Such cases
are provided under Articles 1786−1789 of the
Civil Code.
• The rationale is that there are certain obvious
breaches of contractual obligations that do not
need ascertainment by a court. Unilateral
cancellation saves the time, energy and resources
consumed by waiting for court disposition.
 Contd.
• The exceptional cases where a contract can
be cancelled unilaterally are:
1. Expiry of time limit (Article 1787):
2. Anticipatory breach (Article 1789):
3. Impossibility of performance (Article
1788): (subsequent impossibility)
 Damages (Compensation)/Art 1791
• The above remedies, sometimes, may not be
sufficient to satisfy the party affected by non-
performance because he may have lost a benefit
he could have gained from performance.
• Hence, the party may claim damages can be
claimed alone or together with specific
performance or cancellation.
 Contd.
• Compensation shall be due where there is non-
performance even if the debtor is not at fault.
• That is, the absence of fault, in principle,
cannot be a defense against the claim for
compensation.
• However, in exceptional cases laid down under
articles 1795 and 1796 the plaintiff is required
to proof fault or grave fault on the part of the
defaulting party, i.e. debtor
1.This implies that if the plaintiff fails to proof that the
debtor has committed fault or grave fault, as the case may
be, he will not succeed in claiming compensation.
2. The other defense, as provided by Article 1791 (2), for
the debtor is force majeure. If the non-performance is the
result of force majeure, the party will be released from
the payment of compensation for the resulting damage.
 Contd.
•Under the Ethiopian law of contract force majeure is a
circumstance which;
 Could not “normally” be foreseen by the debtor (an average
person would not have foreseen it), and
 Prevents the debtor “absolutely” from performing his obligation
(no person could have performed it).

• Unforeseeability and absolute impossibility are cumulative

preconditions
 Chapter Five

Law of sale
 Definition
• A contract of sale is defined as (See; Article
2266 of the civil code):
“…a contract of sale is a contract whereby one of
the parties, the seller, undertakes to deliver a thing
and to transfer its ownership to another party, the
buyer, in consideration of a price expressed in
money which the buyer undertakes to pay him.”
 Elements of Sale Contract

 It is a contract

 It includes a thing as a subject of sale

 Consideration expressed in money

 It transfers ownership

 It is a commutative act
 Obligations of The Seller
 Obligation to deliver the thing
 Obligation to transfer ownership
 Obligation to warranty title, defects, and non-
conformity
1. Defects identified by customary examination:
prompt examination in the presence of the seller and
notification by the buyer required.
2. Latent Defects: prompt notice by the buyer is
required
3. Obvious Defects: no duty bound unless he
declares absence of defect
 Obligations of Buyer
 Obligation to pay Price
 Obligation to take delivery of the thing
Common Obligations of the Seller and the Buyer
 Transfer of Risks: upon deliver and transfer of titles
 Preservation of the Thing
 Expenses:
1. Expenses of delivery, transport, customs duties linked to a
delay caused by the seller, and those incurred due to the
change in business address by the seller, are all borne by
the seller.
2. Expenses of the contract of sale itself, expenses for
payment, expenses after delivery and expenses of
transport where the thing is sent to other place than that
of delivery are borne by the buyer
Non- Performance of Sale Contract
 Demand forced performance if such is so vital
to the buyer, if s/he has particular interest and
cannot be purchased without inconvenience or
considerable expense
 Cancellation of the sale contract
 Damage caused due to the non-performance of
 The Law of :
1. Insurance
2. Negotiable
Instruments/NI
3. Banking
Chapter six Transactions
 6.1. The Law of Insurance
• Definition
Insurance is an economic device by which
a possible but uncertain risk of suffering a
financial or economic loss
resulting from loss or damage to property,
incurring civil liability, illness or accident
or death of the insured person
is transferred from the person bearing it to
another person, called the insurer, for
consideration.
 Cond.

•The main law that regulates such transaction in

Ethiopian is the commercial code of Ethiopia which
covers issues of the following kind:
 Contract of insurance (Art 654)
o Insurance of objects (Art 675-684)
o Insurance of liability for damages (Art 685-688)
 Insurance of persons (Art 689-712)
o Life insurance (Art 691-710)
o Insurance against accidents & illness (Art 711-
712)
Nature of Contracts of Insurance
• From the point of an individual:
 It a risk transfer mechanism whereby a
person, called the insured/assured
transfers a risk of a possible financial
loss resulting from unforeseeable events
affecting property, life or body to a
person called the insurer for
consideration.
 Its primary function is to substitute
uncertainty for certainty.
 Cond.
• The Com.Code of Ethiopia defines
insurance as follows:
Insurance (policy) is a contract whereby a
person, called the insurer, undertakes, against
payment of one or more premiums, to pay to a
person, called the beneficiary, a sum of money
where a specified risk materializes. /Art 654

(1) of the comm. Code)..

• the general principles of the law of contract apply
equally to insurance contract.
i. there must be an agreement between the parties
ii. the agreement must be supported by consideration,
iii. the parties must be capable of contracting (must have
capacity),
iv. the consent of the parties to the agreement must be
free from defects, and
v. the object must be legal or the object must not be illegal
and immoral.
 Nature of Insurances
• These types of insurance are generally
referred to as:
1. Indemnity insurances, in which the
insurer's obligation is to pay compensation,
which is always equal to damage.
2. Non-indemnity insurance: is a contract of
insurance made in respect of human person's
life, body or health in which the insurer’s
obligation is to pay the amount agreed upon
(the sum insured).
See; Art 654 (2) & (3) of the comm. Code)
 Unique Characteristics of Insurance

1. An insurance contract is aleatory: meaning it

has a chance element and an uneven
exchange
2. An insurance contract is a unilateral
contract: only one party, the insurer, makes a
legally enforceable promise.
3. An insurance contract is a conditional
contract: the obligation to pay a claim
depends on whether or not the beneficiary
has complied with all policy conditions.
 Cond.
4. In property insurance, insurance is a
personal contract, which means the contract is
between the insured and the insurer; insures
the owner of property against loss.
 Since the contract is personal, the applicant
for insurance must be acceptable to the
insurer and must meet certain underwriting
standards regarding character, morals, and
credit
 Since a property insurance contract is a
personal contract, it cannot be assigned to
another party without the insurer’s consent.
 Cond.

• 5. The insurance contract is a contract of

adhesion.
 The terms and conditions are not the result
of negotiations rather one party has to
agree to the terms and conditions prepared
by the other.
 In such types of contracts, ambiguities or
uncertainties in the wording of the
agreement will be construed against the
drafter- the insurer
 The Requirements to Carry on Insurance
Business
 Establishments as share Company: Art 513
of the comm. code banks and insurance
companies cannot be established as private
limited companies.
 License From NBE; Art 3 of the
Proclamation to Provide for Insurance
Business No. 746/2012 provides that no
person may engage in insurance business of
any type unless it acquires a license from the
NBE.
 Cond.
 Ethiopian Citizenship: foreigners cannot
engage in insurance business with the need
to protect infant domestic insurance
companies which do not have the desired
financial strength, knowhow and human
resources to be able to compete with foreign
banks which have superior capacity in these
areas.
 The Paying the minimum capital of the
company to be fixed by NBE in the name
of the prospective insurer
 Contd.

 Ethiopian Citizenship: foreigners cannot

engage in insurance business with the need to
protect infant domestic companies which do
not have the desired financial strength,
knowhow and human resources to be able to
compete with foreign banks which have
superior capacity in these areas.
 The Paying the minimum capital of the
company to be fixed by NBE in the name of
the prospective insurer
 Significance of Insurance
Indemnification for Losses:

Reduction of Worry and Fear:

Source of Investment Funds:

Means of Loss Control

Enhancing Credit Worthiness:

 Basic Principles of Insurance
1. Principle of Utmost Good Faith
2. Principle of Indemnity
3. Proximate Cause
4. Insurable Interest
5. Doctrine of Subrogation
6. Risk Must Attach
7. Mitigation of Loss
8. Doctrine of Contribution
 Re-insurance
•An insurer may arrange with another insurer
to off load/transfer the excess of the
undertaken risk over its retention capacity.
•Payment made by the ceding insurer
(original insurer or reinsured) to accepting
insurer (reinsurer) for the assumption of the
risk by the latter is termed ‘reinsurance
 Third Party Interests in Liability Insurance
 Liability insurance originated solely as a protection for
the interests of the insured against loss suffered through
liability to third parties.
 Since indemnification of the employer/insured was the
sole function of the insurance, the injured third party
could not bring a direct action against the insurer even
after obtaining a judgment against the insured.
 Even the insured could not bring action on the policy until
s/he had sustained an actual loss by payment of the
judgment debt to the third-party.
 If the insured happened to be insolvent and judgment
proof, no claim could arise under the policy.
 Cond.
 In subsequent years, legislation
has radically transformed the
function of liability insurance in
many areas
 to make the injured third-party
with a cause of action against the
insured a quasi-third-party
beneficiary of the liability policy.
 Property and Liability Insurance

1. Automobile Insurance
 insurance against physical damage to
automobiles against potential liability arising
out of the ownership, maintenance, or use of an
automobile.
• 2. Vehicle Insurance against Third Party
Risks
justifications: the loss of lives, bodily injuries,
and damages to properties caused by vehicle
accident are creating social problem
 cond.
• Hence; it is necessary to establish a
system for
 facilitating the provision of
emergency medical treatments to
victims of vehicle accidents, and
 to require owners of vehicles to
have third party insurance coverage
against third party risks.
 Proclamation No. 559/2008

1. No person shall drive or cause or permit any other

person to drive a vehicle on a road unless s/he has a
valid vehicle insurance coverage against third party
risks in relation to such vehicle/Article 3

2. An insurance company shall issue a certificate

of insurance to a third person and insurance
stickers
3. Violation of the proclamation/Regulations
 Cond.
 Marine Insurance
1. All types of trade and transportation of goods
depend highly on the availability of insurance for
successful and expeditious handling.
2. The goods shipped by business firms each year are
exposed to damage or loss from numerous
transportation perils. The goods can be protected by
ocean marine and inland marine contracts.
 Aviation Insurance
 Hypothetical case
•Mr. Bogale, who owns a very big villa house in
the town of DebreBerehan, bought a fire insurance
policy with a sum insured one million birr (Br.100,
000, 000) from Nile Insurance S.C. for the house
thereof. Later on, having in mind that renting
could increase his income, Mr. Bogale, leased off
one of the rooms of his house for the local Gas
distributor for a thousand birr per month after the
 cond.
•Unfortunately, the house is destroyed by fire accident and Mr. Bogale
notified the damage on the next day and claimed the payment of the sum
insured. Consequently, the insurer, made general assessment of the
damage and found out that the fire which destroyed the house was
actually started from the room of that local Gas distributor. Moreover, to
the worst of it, the insurer also learned that the actual value of the villa
house during the signing of the contract agreement was only five
hundred thousand birr (Br. 500,000).
1. Nile Insurance S.C. is looking for legal advice on the possible
defenses available to it against Mr. Bogale. Assuming that you are an
insurance lawyer, give it your analytic advice
 6.2. The Law of NI

• A Negotiable Instrument: document

guaranteeing the payment of a specific amount
of money, either on demand, or at a set time with
the payer named on the negotiable instrument.
• Negotiable Instrument is written instrument that
is:
 Signed by the drawer or maker
 Contd.

 Includes an unconditional promise or order to

pay a specified sum of money
 Payable on demand or at a definite time, and
Payable to order or bearer
 Art. 715. – Definitions and uses of NI.

A negotiable instrument is any

document incorporating a right to an
entitlement in such manner that it be
not possible to enforce or transfer the
right separately from the instrument
 Uses of NI

 facilitates trade and commerce and

 are ways of paying without having to

carry large sums of money.
 The Peculiar nature of NI
NIs are unconditional and impose few to
no duties on the issuer or payee other
than payment.
1. It gives the holder; (1) the power to
demand payment; and, (2) the right to
be paid
2. The rights incorporated in NI may be
transferred by the transfer of the
instrument
 Contd.
4. A person may not exercise or enforce them
unless s/he is in possession of the instrument.
 cond.
NI are papers incorporating or containing
various types of rights and duties which
are transferred by endorsement and delivery
or by mere delivery of the document.
The rights and duties of the parties which are
emanating from the transaction using these
NI are governed by the general contract law
provisions
 Types of Negotiable Instruments

• In general, the Comm. Code of

Ethiopia recognizes three NI
1. commercial instruments

2. transferable securities

3. documents of title to goods

 Cond.
• Examples of NI

1. Bill of exchange/BE

2. Promissory notes/PN

3. Cheque/ check

4. Travelers' Cheque/TC

5. Warehouse goods certificates/WGC

 Obligations and Defenses on NI/
Com.Code 715-730

Any possessor of a NI, to be entitled with

such rights:
must show he is the lawful possessor
and
the delivery of the instrument.
Defenses of the Debtor against the Holder of NI
 Defenses based on their personal relations
 Defenses of form and on text of the
instrument
 falsification of signature,
 lack of capacity or power of
representation at the time of issue of the
instrument, or
 Absence of the necessary conditions for
bringing the proceedings
 Form of Transfer of NI
• According to forms provided for
their transfer, NI may be

1. to bearer

2. in a specified name or

3. to order.
 Cond.
 NI payable “to order” may be negotiated
by endorsement and delivery.
 NI payable to bearer may be negotiated
by delivery alone.
 The holder of an instrument in a
specified name establishes his right by
the fact of his designation as beneficiary
therein and in the register held by the
person issuing the said instrument
 Cond.

• Form of endorsements: an endorsement

 shall be written and signed by the endorser
 not containing the name of the endorsee shall be
valid for such endorsement is considered as blank
endorsement
“to bearer” shall be equivalent to an endorsement
in blank
 must be unconditional. And any condition to
which it is made subject shall be of no effect,
partial endorsement shall be null and void
Endorsement transfers all the rights
 Effect of Endorsement
 if the endorsement is in blank the holder
may fill up the blank either with her/his
own name or that of another person.
The holder may also re-endorse the
instrument in blank or to another person,
or
the holder may transfer the instrument to a
third person without filling up the blank
and even without endorsing it.
 Contd.
• Nevertheless, unless otherwise provided by
law or by the instrument, the endorser shall
not be liable where the person issuing the
instrument fails to carry out her/his
obligations. (See; Art 726 & 727 comm. code)
 Commercial Instruments
 Commercial instrument are written
orders or promises to pay money and
which can be passed freely from one
person to another.
 Such documents are widely used in
personal and business transactions.
 Cond.
 Some commercial paper, like cheque and
bills of exchange/drafts serve as
convenient substitute for money
 others, like the promissory notes may
create creditor for the maker
 A party to whom commercial paper is
transferred may acquire rights greater than
those of an ordinary assignee
 Cond.
 The code recognizes the following
instruments as a commercial instrument:
 Bills of Exchange,
 Promissory Notes,
 Cheques,
 Travellers Cheques and Warehouse Goods
Deposit Certificates: (Art 732 (2) comm.
code)
 Bill of Exchange/Draft
 A bill of exchange is a written order by the
drawer to the drawee to pay money to the
payee at a definite time.
 The person who draws the bill/ order to pay
money to the third party
 The party upon whom the bill is
drawn/person to whom the bill is addressed
and who is ordered to pay is called the
drawee. S/he becomes an acceptor when
s/he indicates her/his willingness to pay the
bill.
 The party in whose favor the bill is drawn or is
payable is called the payee.
 Bills of exchange are used primarily in
international trade, and are written orders by one
person to her/his bank to pay the bearer a specific
sum on a specific date (Importers without credit).
 Validity Requirements of BE
A valid BE must contain:
 ‘bill of exchange’ inserted in the body of the
instrument
Unconditional order to pay a sum certain in
money
The name of the person who is to pay (drawee)
The time and place of payment
 Contd.
The name of the person to whom or to
whose order payment is to be made or an
indication that it shall be payable to
bearer
The time and place that the bill is issued
The signature of the person who issues
the bill (drawer)
 Cond.
•Exceptions:
A. A ‘BE’ in which the time of payment is not specified
shall be deemed to be payable at sight
B. Unless otherwise expressly specified the place
mentioned beside the name of the drawer shall be
deemed to be the place of payment and at the same
time the place of the domicile of the drawee.
C. A bill that does not mention the place of its issue shall
be deemed to have been drawn in the place mentioned
beside the name of the drawee. (See; Art 736 of the
 Negotiation of BE

 A ‘BE to bearer’ may be transferred by simple

delivery of the instrument.
 may be also transferred by endorsement
An endorsement shall be unconditional.
Any condition to which it is made subject
shall be of no effect. In the same way, partial
endorsement shall be null and void.
 Cond.
 An endorsement “to bearer” is equivalent
to an endorsement in blank.
 Endorsement may leave the beneficiary
unspecified or may consist simply of the
signature of the endorser.
 In the latter case the endorsement to be
valid shall be written on the back of the
bill of exchange or on the slip affixed
 If the endorsement is in blank the holder may:
 fill up the blank either with her/his own name or with the
name of some other person, or re-endorse the bill in
blank, or to some other person,
 transfer the bill to a third person without filling up the
blank and even without endorsing
 Maturity: a bill of exchange may be drawn payable:
 At sight
 At a fixed period after sight
 At a fixed period after date
 Promissory Note
 A promissory note is a written promise
by one person to pay to order or to bearer
a certain sum of money at a definite time.
 Promissory notes involve only two
parties; the maker and the payee.
 The maker is one who executes or makes
a promissory note and promises to pay.
The payee is the one to whose order the
promissory note is payable
 Requirements for the Valid Promissory Note

 A promissory note shall contain: the

term "promissory note”
 An unconditional promise to pay a sum
certain in money, and the time and
place of payment;
 the name of the person, to whom or to
whose order payment is to be made or
 Cond.
 a statement that the note is
payable to bearer;
 the date, when and place where
the note is issued;
 the signature of the person who
issues the instrument (i.e. maker).
 (See; Art 823 of the comm. code)
 Cheques/ Checks
•Cheque is :
 A bill of exchange/draft drawn on a banker and
payable on demand.
 An unconditional order in writing by the drawer,
to a banker, signed by the drawer, requiring the
bank to pay, on demand, a sum certain in money
to or to the order of specified person or to bearer.
 Cond.
•There are primarily three parties to a cheque:
 Drawer; the party by whom or by whose
authority the cheque is signed.
 Drawee; the party authorized to pay out the
money. (the banker)
 Payee; the party to whom or to whose order
the money is to be paid.
 Validity Requirements
A. Unconditional order to pay a sum certain in
money
B. The order to pay must be addressed by one person
to another, and that other person must be a banker.
C. A cheque must be payable to or to the order of a
specified person or to bearer. Hence, where the
cheque is not made “payable to bearer” the payee
must be named or otherwise indicated with
reasonable certainty.
 Issue
 Issue means delivery of a check w/c is
complete in form to a person who takes it as a
holder
 In order to be valid, the cheque must either
bear the drawer’s signature, or a signature put
on by the authority of the drawer
 A cheque is not invalid by reason that it is not
dated.
 Contd.
• Moreover, a cheque is not invalid, by reason
only that it’s ante-dated or post-dated or that
bears a date on non-working day or holiday.
 Cond.
A.An ante-dated cheque is one that bears a date
before the date of issue:
B. A post-dated cheque is one dated later than
the date of issue.
 Contd.
A. Stale cheque is overdue or, as it is called ‘stale’
when it appears on the face of it to have been in
circulation for unreasonable length of time.
B. If a stale cheque is negotiated, it can only be
negotiated subject to any defect of title affecting
it when it was due.
 Mutilation
 If a drawer tears a cheque across in such a way that its
condition affords sufficient evidence that s/he
intended to cancel it, the banker must suffer any loss
that may be incurred by her/his paying it to a person
who has pasted the pieces together and presented the
cheque.
 If the payee accidentally tears it into two before
presentation, s/he must get the drawer’s confirmation
 Payment of Cheque
•It is the duty of the banker to honor her/his
customer’s cheques provided that:
1. The balance standing to the creditor of
her/his customer is sufficient to pay
her/him
2. The cheques are drawn in the proper
form
3. There is no legal bar prohibiting
payment
 Sufficient causes not to pay cheque
A. Notice of stop payment. (Art 857 of the comm.
Code)
B. Any defect in the title of the person presenting the
cheque
C. Notice of presentation of a bankruptcy petition by
or against its customer, and possibly in the cases
of third party cheques, notice of an available act of
bankruptcy by its customer.
D. In the case of a company customer, notice of the
commencement of winding up
E. Knowledge that the customer contemplates a
breach of trust in case where it is known that funds
credited to the account are trust funds.
 Payment in Due Course
 A cheque is discharged by payment in due
course, that is to say payment made by the
drawee to the holder of the cheque in good
faith and without notice that her/his title to
the cheque is defective.
 A thing is deemed to be done in good faith
where it is in fact done honesty, whether it
is done negligently or not.
 Cond.
 In ordinary circumstances, a cheque
drawn in proper form, and complete
in every particular must be paid or
refused payment as soon as it is
presented.
 But if the circumstances connected
with its presentation are as to raise
reasonable suspicions in the banker’s
mind, s/he is entitled to use discretion
in the matter of immediate payment.
 Cond.

It seems reasonable to suppose that

the banker would also be entitled to
postpone payment if :
 The cheque were drawn in an
unusual manner,
 Bore upon its face peculiarities
that would raise doubt .
 Drawing and Form of Cheque
•A cheque shall contain:(Art 827 comm. code)
1. An unconditional order to pay a sum certain in
money
2. The name of the person who is to pay (drawee)
3. The place of payment
4. The date when and the place where the cheque is
drawn
5. The signature of the person who draws the cheque
(drawer)
• If above requirements is missing, it is not a valid
cheque
 Cond.
A.A cheque may only be drawn on a banker or on an
institution or establishment regarded by law as a
banker
B. A cheque may only be issued if the drawer has funds
with the drawee
C. A cheque in respect of which cover is available to the
drawer may be certified by the drawee if the drawee
so requests.
D.A cover in respect of a certified cheque shall remain
blocked in a separate account for the benefit of the
holder until the expiry of the period of time for
presentment.
 Maturity
A.Principle- A check is payable at sight-
B. Exception- a cheque may be made payable
to;
A specified person with or without the
express clause ‘to order’, or
A specified person with a clause ‘not to
order’, or any similar clause
A cheque made payable to a specified person
with the words ‘or to bearer’ shall be deemed
to be a cheque to bearer.
 Negotiation
 A cheque made payable to a specified
person, with or without the express clause
‘to order’, may be transferred by means of
endorsement
 A cheque made payable to a specified
person in which words ‘not to order’ have
been inserted can only be transferred
according to the form and with the effects
of an ordinary assignment. (See; Art 842
of the comm. code)
 Endorsement
 An endorsement shall be unconditional.
Any condition to which it is made subject
shall have no effect.
 An endorsement "to bearer" shall amount
to an endorsement in blank.
 An endorsement to the drawee has the
effect of a receipt, unless the drawee has
several establishments and the
endorsement is made in favour of an
establishment other than on which the
cheque has been drawn
 Cond.

A cheque which does not specify a payee

shall be deemed to be a cheque to bearer.
A cheque may be drawn to the drawer’s own
order or for account of a third person.
A cheque drawn, by the banker on himself
may not be to bearer.
The drawer of a cheque guarantees payment.
6.3. The Law of Banking Transactions

 Modern banking was started with the

establishment of the first bank, the “Bank
of Abyssinia”, in 1905
 By the agreement signed between the
Ethiopian and the National Bank of
Egypt, which was owned then by the
British.
 However, Ethiopian, under Emperor Haile
Sellassie I, closed the Bank of Abyssinia
 The Emperor has established Bank of
Ethiopia which was fully owned by
Ethiopians
 With the functions of central banking and
commercial banking. The Bank of Ethiopia
opened branches in Dire Dawa, Gore,
Dessie, Debre Tabor and Harrar.
 In 1936 bank of Ethiopia was closed and
replace by Banko di Roma, Banko Di
Napoli.
 After the expulsion of Italy the Emperor
established the State Bank of Ethiopia in
1943
 Cond.
 Finally, Addis Ababa Bank S.C. was
established in 1964 as the first privately owned
company in banking business
 During the Derg era/1975-1991/ all private
banks and 13 insurance companies were
nationalized
 were placed under the coordination, supervision
and control of the National Bank of Ethiopia.
 cond.
 The TGE replaced centrally planned economic
system with a market-oriented system and
ushered in the private sector.
 FDRE constitution, on the basis of Art 51(4) the
same instrument gave the federal government
the duty to formulate and execute the country’s
financial, monetary and foreign investment
policies and strategies.
 Definition

• A BANK can be simply defined as follows:

• “… a financial establishment/ institution

for the deposit, loan, exchange, or issue
of money and for the transmission of
funds.”
 The Law of Banking Business
•The Law of Banking dealing with;
 the definition of banks and banking
transactions
 the specific requirements for the
establishment and operation of banking
business
 the various types of banks, i.e.,
commercial banks and central or national
banks and their functions
 Cond.
The powers and duties of national
banks
Banking transactions such as
deposit of funds
 E.g. bank transfers, deposit and
management of securities
 Major Banking Transactions

Bank deposits

1. Current account

The depositor has the right to dispose of the

deposit at sight or on demand
 Contd.
2. Time account:
In this case the depositor cannot demand
repayment or withdrawal before the lapse
of the agreed period of time
 Cond.

3. Saving Account

It is interest bearing and the right of

the depositor to demand repayment
may be limited.
 Cond.

Bank transfers
• A bank transfer is a transaction by which
a bank debits the account of a depositor,
upon his written instructions, and credits
by its entry another account with the
same amount
 Cond.
 Deposit of securities
Deposit of securities could be defined as an
agreement of parties (i.e. the depositor and
the bank) for the deposit and management
of a security
 Cond.
 Hiring of safes
• The contract of hire of a safe has as its object to place
at the disposal of the hirer a safe or compartment of a
safe for a specified period of time on payment of a
rent. (Art 919 of the comm. code)
• Banks take charge of their customers’ valuables like
jewelry, negotiable securities, and documents of title
to properties, and deposit them, as they can be
conveniently stored.
• Such deposits are special in nature and thus do not
fall under the general category of banks’ deposit
 Cond.
 Contract for current accounts

A contract for a current account is defined under the

comm. Code as a contract whereby named
correspondents agree to enter in an account, by
reciprocal and simultaneous remittances, debts arising
out of transactions between them and thus to substitute
for individual and successive settlements of these
transactions a single settlement to be carried to the sole
balance of, the account at its closure.
 Cond.
Discount

Discount is a contract whereby a bank agrees to pay

to a holder of a commercial instrument having a
future date of payment an amount which is lesser
than its actual value, against the surrender of the
instrument and the undertaking to repay the value of
the instrument by the holder where payment is not
made at the maturity of the instrument.
 Contd.

Documentary credits

• A documentary credit is a credit provided

to persons engaged in foreign trade
particularly importers who need to pay
the price of goods in foreign exchange
 Requirements to run Banking Business
 Establishments as share Company:
 License From NBE
 Ethiopian Citizenship: foreigners cannot
engage in insurance business with the need
to protect infant domestic banks against
foreign banks which have superior capacity in
these areas.
 CHAPTER SEVEN

EMPLOYMENT AND LABOR LAW

DBU
 The Legal Framework

• The 1960 Civil Code,

• Labor Proclamation No 377/2003
• Federal Civil Service Proclamation
No.515/2007
 The Employment Contract/EC/
Labor Proc.No. 377/2003 defines EC as follows:

“A contract of employment shall be deemed

formed where a person agrees directly or
indirectly to perform work for and under the
authority of an employer for a definite or
indefinite period or piece work in return for
wage.”/ article 4
Elements of employment contract
Agreement
Performance of work
Under the authority of the employer
 Duration/Length of employment
Wage
 The Agreement of the Parties
• agreement is crucial to exclude forced
labor.
• Free consent is necessary for a valid CE
• EC is directly concluded if the employee
personally negotiates with the employer.
• It is indirect concluded if it is contracted
through private or public employment
agencies.
 Performance of Work:
Performance is by the employee himself
As a principle the employee is not allowed
to delegate the work s/he is given by the
employer.
Hence, the employee is required to
provide a personal service
And, this is the very unique characteristics
 Under the Authority of the Employer:
•The instruction of the employer is the frame work
of the employee as to the services s/he is required
to perform.
•The employee performs the task under the direct
instruction, supervision and control of the
employer.
•The framework helps the employer to control the
work to be done, when and where it would be
done, and with whom to be done.
 Cond.
• This is the primary element that
differentiates employee from
independent contractor;
• since the latter is not acting under
the direct order of the employer and it
is s/he who decides on the manner of
performing the job since the main
interest of the client is the result, not
the process.
 Duration/Length of Employment:

•In principle CE is made for an indefinite

period
•It may be also for a definite time or for a
specific assignment (to unload sacks of grain
from a truck)
• when it is made for definite period of time,
it has to be in line with the law/See; Art 9 &
10 of proc. No. 377/2003)
 Wage:
 This is the right of the employee and the
duty of the employer
CE shall specify the rate of wages, method of
calculation thereof, manner and interval of
payment
In general, in return for the personal
performance of the work, the employee is
entitled to claim wage as an employment
relationship is not a pro bono service.
Legal Regimes governing Employment Relations

• Similar to many legal traditions in the

world, the Ethiopian employment relation
also has two legal regimes
• the labor law regime that is governed by
proclamation No. 377/2003 and
• the civil servants regime that is governed
by the federal civil servant proclamation
No. 515/2007wo main legal regimes
 Cond.
• while FCSP is applicable to ‘government
institutions, the labor proclamation is
applicable to other institutions
• Government institutions are governed by
the civil service regime if they are fully or
partially financed by gov’t
• Hence, if the gov’t entity could finance
itself by its own sources, it could not be
covered under the FCSP
 Cond.
• Therefore, any person permanently
employed by gov’t institution considered as
a civil servant.
• On the other hand, any government
institution established for profit making
such as the ethio-telecom and the
Ethiopian electric power corporation are
not covered by the Civil Servants
Proclamation
 Cond.
• Therefore, if there are cases not covered
by FCSP and other relevant laws, the labor
proclamation is applicable
• since the law provides that it shall be
applicable to employment relations based
on a contract of employment that exist
between a worker and an employer.
 Cond.

• However, we have to bear in mind

also that the regional states are
entitled to come up with their own
civil servant laws to govern their
employees.
 Obligations of the Employer

• the obligation to pay wages and additional

benefits
• The employer is also obliged to provide all the
materials which are essential for the
performance of the work
• the obligation to provide the worker, upon
termination, free of charge, with a certificate
stating the type of work s/he performed, the
length of service and the wages s/he was
earning.
 Cond.
• the obligation to treat all the workers
equally and without any kind of
discrimination on the bases of various
grounds
• the obligation to protect the dignity and
safety of the workers.
• Etc.
 Obligation of the Worker
• the obligation to perform the work
personally
• The obligation to appear at the work place
in fit and normal physical conditions which
enables her/him to perform the work with
due care and
• Diligence
• respect all the rules and regulations of
work and abide by the work rules.
 Termination of Contract of Employment

• Accordingly, both the Labour Proclamation

and the FCSP spelt out grounds of
termination CE.
• Under the labor law regime the grounds of
termination, there are basically two grounds
of contract of employment.
• These are termination by the law and
termination by the agreement of the parties.
(See; Art 24-32 of the labor proclamation)
 Cond.
Termination of employment contract by the
law
• where the CE is for a definite period or
piece work,
• expiry of the period or the completion of
the work
• the death of the worker,
• the retirement of the worker in accordance
with the relevant law,
 Cond.
• when the undertaking ceases operation
permanently due to bankruptcy or for any
other cause, and
• when the worker is unable to work due to
partial or total permanent incapacity.
 Cond.
Termination of the EC by the act of the
parties due to:
the termination at the initiation of the
employer and/or
 termination at the initiation of the
employee.
 Cond.
The CE could also be terminated with the sole

initiation of the employer.

• To be lawful, the action should be connected with

the worker's conduct or with objective

circumstances arising out of his ability to do his

work or the organizational or operational

requirements of the undertaking.
 Cond.
• Such instances may either be with or
without notice
• due to the instances relating to the conducts
of the employee, the contract could be
terminated by the employer without notice.
The other instances could only be terminated
by giving notice to be lawful.
 Cond.
•The last instance is termination by the worker
either with or without notice.
•So long as the worker may not lose his benefits as
the effect of termination, the parties could agree to
terminate the contract by making it to be made in
written form. The worker could unilaterally
terminate the contract of employment by giving a
thirty days prior notice to the employer.
 Cond.
•termination by the contract without giving
notice
•Termination in accordance with the
stipulation of the law and the parties are
separated for good, there will be surrender
of a month salary
 Cond.
•The same situations are available under the
FSCP in case of: resignation, termination due
to illness, termination on grounds of
inefficiency, termination due to force
majeure, nullification of employment,
termination on disciplinary grounds,
retirement, and termination on the ground of
death.
 End of Slide

The End