Law of Contracts

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Chapter I: Introduction to Obligation
Definition and Nature of Obligation
 In the modern legal systems and currently existing legal
materials, there is no exact or single whole definition of
obligation.
 Black’s law dictionary defines obligation as ‘a legal or
moral duty to do or not to do something’.
 Common-law scholars such as Fredrick Pollock defines
obligation in its popular sense as merely synonym for
‘duty’.
 French judges define the term obligation as a legally
binding relations to another party [where he/she] is
obliged to give [or not to give] or to do or not to do
something.
 Likewise the Ethiopian civil code, in the book IV of the
code uses the term obligations with out defining what it 2
means.
 Definition and Nature of Obligation…ctd

 Obligations should be created by the competent parties

with their express or implied consent; courts cannot
create a contract for the parties.
Sources of Obligation
 In general, the fundamental sources of obligations can
be classified into two:
1. Contractual sources of obligations and
2. Non-contractual sources of obligations
 While contractual sources of obligations arise from the
terms of the contract, non-contractual sources, as the
name itself implies, are obligations whose sources are
other than contractual relationships.

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 Sources of Obligation…ctd
 In the Ethiopian legal system, even if there are no
clearly stated classifications of sources of obligations,
the close readings of the provisions of the civil code
show that there are both contractual and non-
contractual sources of obligations.
 In this regard while Contractual obligations arise from
Article 1675 of the civil code, non-contractual
obligations arise from Arts. 2027-2178 of the same code
 Non-contractual sources of obligations may, in turn,
classified into three major categories which include:
 Obligations arising from tort (Arts. 2027- 2161 CC)
 Obligations arising from unjust enrichment (Arts.
2162-2178 CC) &
 Obligations arising from other laws
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 Sources of Obligation…ctd

 Obligation arising from the law is a unilateral

obligation imposed on citizens or contracting
parties without their consent. It includes among
other things:
Obligation to pay income taxes;
Obligation to render military services;
Obligations of creditors;
Obligation of debtors;
Obligations of families to their children, etc

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 Definition and Nature of Contract
 There is no single and universal definition of contract for
various legal systems and countries fail to define it
uniformly.
 However, owing to its nature, contract can be defined as
legally enforceable promise or agreement.
 Contract is defined as legally enforceable promise or
agreement because the breach of the promise or agreement
gives rise to legal claim before a court of law. However, all
promises or agreements are not enforceable. Would you
institute a legal action before a court of law if your friend
fails to keep his promise of inviting you a tea?
 Contract law, in turn, defined as a law which governs such
questions as which agreements the law will enforce?, what
obligations are imposed by the agreement in question ? and
what remedies are available if the obligations are not
performed?
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 Definition and Nature of Contract…ctd
 More complete definition of contract is provided under
Article 1675 of the 1960 Ethiopian Civil Code which
defines contract as:
‘’An agreement whereby two or more persons as between
themselves create, vary or extinguish obligation of
proprietary nature’’.
 This definition contain so many points which worth
separate analysis:
1) “ A contract is an agreement….” similar with the general
definition we analyzed above.
2) “…whereby two or more persons…” i.e. except in agency
relationships(Art.2188), one cannot contract with oneself;
there must be 2 or more persons to form a contract.
3) “… as between themselves…” i.e. except under Art. 1957
CC, the section on “ promises and stipulations concerning
third parties”, the contracting persons can bind and
entitle only themselves, not outsiders. 7
 Definition and Nature of Contract…ctd
4) “… create, vary or extinguish obligations…” powers of
contracting parties … which makes the definition of
contract more fitting and complete in Ethiopia.
5) “… obligations…” i.e. to mean contracts are legally
enforceable obligations
6) “… of a proprietary( patrimonial ) nature.) This definition
excludes contracts of “status”, such as betrothal,
marriage and adoption which creates obligations of
status pre-defined by law of non-patrimonial nature.
Types of Contract
 we could have various types of contracts depending on
the factors of classification (time, place, parties, the legal
systems they operate in etc) . In our case, depending on
the parties to the contract, we may broadly classify
contracts in to two:
1) Private contracts and
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2) Administrative contract
 Types of Contract…ctd
 Private contracts, as the name itself indicates, is a
contract between two private persons(whether natural or
artificial). It is the scope of this very course.
 Administrative contract is a contract entered between
Administrative agencies and private persons whose main
aim is to maintain public interest (the common good). E.g.
water and electric service contracts, public construction
contracts etc.
Importance of Contract and Contract Law
 In general both helps to facilitate smooth business
transaction(relationships) because contracts,inter alia :
1. are legally enforceable agreements or promises
2. specify the rights and obligations of contracting parties
3. are written documents that outline the full understanding
of the business relationship and scope of the work. and
4. minimize risks 9
 Historical Development of Contract
 Law
The historical development of contract law can be traced
back to ancient and classical Roman law.
 However, the foundation of the present day law of contract
were laid in the 19th century, the historical period which
saw rapid expansion of trade and industry which, in turn,
made commercial disputes inevitable.
 Because of Commercial disputes people turned to the
court of law for solutions.
 Gradually, there developed a body of settled rules which
was affected by the dominant economic philosophy, the so
called the laissez-faire philosophy (individualism) or
Market liberalism which propagates that states should
not intervene in the functioning of markets and individuals
should be free to determine their own destiny.

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Historical Development of Contract Law…ctd

 The philosophy of laissez faire was mirrored in the law of

contract by two assumptions:- freedom of contract and
equality of bargaining power.
 But both freedom of contract and equality of bargaining
power are proved to have their own limitations.
Nowadays, the law limits freedom of contracts on the
grounds of capacity, consent, object and the like.
 Similarly, it was noticed that the theory of equality of
bargaining power had brought certain unnecessary results
because parties to a contract do not necessarily have
equality. For example, employers and employees in the
time of work and amount of wages etc, producers and
consumers, lenders and borrowers do not have equal
power in the negotiations.

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 Historical Development of Contract Law…ctd
 This all finally led to various dissatisfactions, riots &
unrests which called for the intervention of the
government to set minimum standards of enforceable
contracts & this gave rise to modern contract laws in
various corners of the world.
Jurisdictions on Contract Law in Ethiopia
 subject to material jurisdiction of the courts, all courts in
Ethiopia, both at federal and regional levels, have
jurisdiction over contract matters
 Since Jurisdictional matters are the concern of
procedural laws, students will have more detailed and
clear picture of the matter when they take the courses.

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 Chapter II: Formation of Contract
Validity Requirements of Contract
 A valid contract is formed if it fulfills the following
yardsticks that the state uses to check whether or not
persons have made a contract. They are called validity
requirements or elements of a valid contract and include:
1) Capacity;
2) Consent ;
3) Object and
4) Form, if any . Article 1678 CC
 While all contracts are expected to fulfill the
requirements of capacity, consent and object, form is
required only for few contracts . That is why it is phrased
as ‘form, if any’.
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 1. Capacity
 I hope you are familiar with the concept of capacity from
your law of persons course. so, what is capacity? Is there
distinction between capacity of natural persons and of
artificial persons?
 In general, we can say capacity, in both cases, is the
power to enter into legal transactions.
 Regarding the capacity of natural persons, which is the
concern of this course; Minors, judicially interdicted
persons (Insane & infirm) and legally interdicted persons
cannot enter into a contract.
 when a legally interdicted person enters into a contract
which he was prohibited from such is not limited to
incapacity but also extends to illegality as per Art 1716.
 There are also some special incapacities such as
nationality and functions of persons that prohibit the
person from entering into a contract as provided under Art.
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194 of the CC.
 2. Consent
 Consent is a declaration of intention to be bound by an
obligation. A person has to express his willingness
(agreement) to create an obligation on himself, or give up
some or all of his proprietary rights.
 Consent is one of the defining features of individual
autonomy and freedom of contract.
 We cannot imagine a contract without the valid consent of
the parties to the contract.
 as addressed in the opening of the 1st chapter too, mere
domestic or social agreements are not usually intended to be
binding and, therefore, are not contracts. This is because
these agreements or promises are only moral agreements or
promises which lack state backing for their enforcement .
 A binding contract, however, is usually in the nature of a
commercial bargain, involving some exchange of goods or
services for a price. 15
 Consent…ctd
 Consent in a contract is not about moral obligation; it is
about legal obligation. Here, for a contract to exist, parties
must agree that any violation of the obligation would be
punished by using state machinery.
 The phrases “…consent sustainable at law under Art.1678 (1)
&agrees to be bound thereby …” under Art. 1679 imply the
parties’ intention to take any controversies, in relation to
obligation, to court thereby allowing the court to interfere in
their relation.
Communication of Consent
 Consent is expressed either in the form of offer or
acceptance which are ways of communicating one’s own
intention to be bound by an obligation.

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 Communication of Consent…ctd
 Offer or acceptance is declared to another person
by ordinary ways of communication which are:
1) Oral,
2) Written,
3) Signal and
4) Conduct
Offer and Declaration of Intention
 Offer contains three important elements:
1) The content of the contract,
2) The agreement of an offeror to be bound and
3) Request of the offeror to the offeree to be bound by
the offer.
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 Offer and Declaration of Intention…ctd
 The offeror can make his offer in writing or orally, or by
signs normally in use or by conduct (Art.1681 (1).
 The offeror has the autonomy not only to choose ways of
the communications listed above but also to choose the
ways that the offeree shall use to give a response (Art.
1681(2).
 Written declaration of offer is when all the elements of offer
are reduced in writing on a paper or electronics and
delivered to the offeree. For example, if the offeror sends his
offer through letter, email or fax such is written
communication of an offer.
 Oral communication of an offer is when the offeror uses his
voice to tell to the offeree the contents of the offer and the
offeree uses hearing (ears) to know what the offeror is
communicating to him.
 Besides the face to face communication, using telephone,
telegram e.t.c to communicate an offer is oral 18

communication of an offer.
Offer and Declaration of Intention…ctd
 Signal communication is of two types: gesture and object
placed to give information (indicate intention to be bound).
Mute and/or deaf people use such way of communication
either to make or accept offer.
 Moreover, raising hand at auction to accept the offer,
nodding head, shaking hands and hammering down in an
auction sale are also examples of communication by
gesture.
 Communication of offer by conduct is when the offeror
performs partly or wholly the obligation that he will perform
if the contract is entered into.
 Offer by conduct is an implied offer because the offeree is
forced to infer the offer from the conduct of the offeror. If
a father calls a doctor to see his minor child for some
infection, the doctor infers that the father is the one who
pays him .
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Offer and Declaration of Intention…ctd
 Offer is different from declaration of intention. In principle, an
offer is binding on the offeror only if it is addressed to a
specified person. In short, while offer addresses an identified
person or beneficiary, declaration of intention does not.
 The ultimate goal of the declaration of intention is
advertisement of a product or service without any intention to
be bound by the content of the advertisement.
 The person declaring his intention can change his
declaration at any time for whatsoever reason without any
legal liability for unreasonable and arbitrary change of his
intention.
 Articles 1687 & 1688 of the CC provide examples of
declaration of intention. These are:
1) Sending price lists or tariffs ;
2) Posting up price list/tariff and catalogue in a public place ;
3) Display of goods for sale to the public and
4) Sale by Auction (until the winner signs a valid contract)
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 Offer and Declaration of Intention…ctd
 All of the above instances are declarations of intention, not
offer because:
i. They do not address a particular person(beneficiary)
ii. They are not binding
iii. They do not indicate all terms of the contract such as due
date, place of performance, quantity, etc & thus incomplete.
iv. There would be multiple acceptances if the declaration of
intention is to be considered as an offer.
 But, exceptionally, as per Art. 1689 CC, public promise of
reward is a special and binding offer.
 Public promise of reward is notifying the public that
whosoever performs a certain act indicated in the notice
will be given benefit of proprietary nature by the promisor.

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 Offer and Declaration of Intention…ctd
 Public promise of reward can be accepted by conduct.
 Public promise of reward can be published by posters or by
any other means such as news papers or radio or Television
etc.
 Some scholars argued that Public promise of reward does not
include simple oral announcements even if made at public
meetings. But some others argued against this very argument/
view.
 Public promise of reward is a true offer. It cannot be
withdrawn; and binds the offeror within the stipulated delay of
Article 1690(1) or the reasonable delay of article 1691(1).
 What happen if the promise is performed by more than one
person? In such case the promiser may reward in one of the
following options:
1. To the first in time, or
2. To all in equal shares, or
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3. Fully to each.
 Acceptance of Public promise of reward is a complete
 Effects of Offer (Art.1690, 1691, 1693(1),
2055)
 Unlike the declaration of intention where the person
declaring his intention can change his declaration at any
time for whatsoever reason without any legal liability for
unreasonable and arbitrary change of his intention, the
offeror cannot change his offer for unjustified reasons
once he sent his offer to the offeree. In short, offer legally
binds the offeror.
 Once the offer is made, it means that one side of the
parties to the contract (the offeror) has agreed to be
bound by his/her offer. Therefore, an offeror who changes
his offer partially or totally is liable for any material
damage sustained by the offeree.
 When does offer begin to be binding? Is it exactly at the
time when the offeror sends his offer to the offeree or at
the time the offeree knows and accepts the contents of the
offer?

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 Effects of Offer…ctd
 An offer begins to be binding at the time the offeree accepts
and takes decision that affects his material interest .
 However, if the offeror withdraws his offer after he has sent to
the offeree, he should immediately inform the withdrawal of
the offer to the offeree before he receives the offer or at least
before the offeree takes decision that affects his material
interest on the assumption of the offer. In such case, the law
presumes the offer is not made (Art 1693).
 This means an offer may be withdrawn or modified as far as
the offeree has not incurred expenses with a view to
concluding a contract with the offeror. So, what is crucial is
not the time when the offeree received the offer but the
decision he has taken due to his knowledge of the offer.
 The burden of proving that the offer is changed or withdrawn
after he takes decision that affects his material interest is on
the offeree.

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 Effects of Offer…ctd
 As per Article 2055 of the civil code, changing/
withdrawing an offer is a fault. However, change or
withdrawal of an offer is not a fault when it is withdrawn
or changed:
i. before the offeree knows the offer or
ii. at the time the offeree know the offer or
iii. at any time before acceptance for justified reason
 What about after acceptance but before the offeree takes
a decision that affects his material interest?
 How Long should the Offeror bound by his offer or how
long should he wait for acceptance ?
 The offeror may himself determine how long the offer
remains binding. However, after expiry of such time limit,
the offeror can change, modify or withdraw his offer for
whatsoever reason and without any liability to the offeree
(Art 1690).

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 Effects of Offer…ctd
 What if the offeror fails to fix time limit for acceptance? In case
the offeror fails to fix time limit for acceptance, the offer remains
binding for reasonable period (Art 1691).
 Reasonable period indicates the time that the offeree needs to
understand the offer and decide to accept or reject it. So, if the
offeree remains or unable to decide within such reasonable time,
the offeror will no longer be bound by his offer.
 But another important question is that how long is a reasonable
period? The length of reasonable period is the average time that
the average person may need to determine on the offer.
 The length of reasonable period does not tolerate subjective
weaknesses of the offeree b/c contract is not a charity and the
offeror is running for gain and has no legal or moral obligation to
sacrify for such weaknesses.
 However, objective criteria such as price fluctuation, market in/
stability, and complication of content of the contract should be
taken into account to determine the length of reasonable period .

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 Effects of Offer…ctd

 Market and price have direct relation because market

instability results in price fluctuation thereby affecting the
decision of both the offeror & offeree. So, when there is
market instability reasonable period should depend on the
frequency of price change.
 If the acceptance reaches the offeror after expiry of
reasonable period, the offeror has a duty to inform the
offeree the lateness of the acceptance by using the
speediest medium of communication available. Such
medium should at least be as speedy as the medium used
by offeree to send his acceptance.
 If the offeror fails to reject the acceptance immediately,
the offeree has the right to claim that the acceptance was
given within reasonable period and hence contract was
concluded (Art 1691(2).
 The other ground that terminates the effect of an offer is
the offeree’s rejection of the offer (Art 1690(2). Rejection of
an offer is, either making modification to the content of the
offer or sending a “no” answer to the offeror.
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 Effects of Offer…ctd
 Offer is deemed to be rejected “where acceptance is
made with reservation or does not exactly conform to
the term of acceptance” (Art 1694).
 There is no reason for the offeror to wait for an expiry
of reasonable period once the offeree rejects the offer.
 Rejection releases the offeror because there is no
justification for the offeree to get time to revoke his
rejection and claim to accept the offer simply because
the objective reasonable time has not yet expired.
Moreover, there is a less possibility that an offeree
who once rejected an offer could come to accept the
same and forcing the offeror to wait such change of
mind is fooling him and inequitable.

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 Acceptance (Art 1681-1685, 1689(1), 1694)
(1893(3)
 Acceptance is a positive response to an offer. In
other words, it is a declaration of intention to be
bound by each and every contents of an offer.
 Acceptance is declaring agreement which
presupposes knowledge of the obligation for which
the agreement is given.
 However; if the offer is public promise of reward the
offeree is not known to the offeror; hence whosever
performs the promise is considered as if he accept by
conduct.
 Any slightest modification made to the content of the
offer is considered as rejecting the offer and making,
an alternative offer (Art.1694).
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 Acceptance…ctd
 On receiving an offer, the offeree has three alternative
answers to an offer;
1. The “Yes” answer which means accepting the offer as it
was made; without any modification or reservation,
2. The “No” answer which means totally rejecting the offer or
3. “Acceptance with reservation” which means having
reservation or alternative proposals for some of the
contents of the offer.
 Where acceptance is made with reservation or does not
exactly conform to the terms of the offer” the offeree takes
the position of the offeror and the offeror then becomes an
offeree (Art. 1694).
 In such case, the [former] offeree (the current offeror) is
bound by the new offer he makes until the time limit he fixes
or the reasonable time for acceptance expires as per Art.
1690(1)& Art.1691(1) CC respectively. 30
 How acceptance is Made
 Since acceptance is communication of intention, like an
offer, it can be made in all possible ways of
communication (i.e. it can be made in writing or orally or
by signs normally in use or by conduct).
 However, if a special form is prescribed by the offeror,
the offeree should accept the offer only in the special
form prescribed by the offeror (Art. 1681(2)). E.g. if the
offer prescribes acceptance should be in writing/letter,
even immediate telephone acceptance is of no effect.
Silence where an offer is made
 If he/she is not willing to accept the offer, the offeree
does not have a duty to give response to the proposal of
the offeror. In such case his/her silence should not be
considered as acceptance pursuant to Art. 1682 of the
CC which provides this principle.
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Silence Where an Offer is Made…ctd
 Silence, in this context, means not answering to the offer
in one of ways of communications addressed.
 Silence is not acceptance because there is no consent in
silence.
Exceptions (Art. 1682 -1685)
 The principle that silence is not acceptance has some
exceptions . In general, the exceptions emanate from the
law or contract. In such cases, the offeror shall not wait for
the acceptance of the offer by the offeree. See Art.
1683(1)CC.
 The law or contract may impose on the offeree the
obligation to accept offers made to it. This is mainly when
the offeree is a Public Enterprise which provides:
1. Vital services to the community, such as postal and
telegraphic transmissions, telephone services, public
transport etc… or
2. Vital supplies to the community, such as supplies of light,
water etc…
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 Exceptions…ctd
 Moreover, no acceptance shall be required where a party is
bound by a concession granted by the authorities to enter
into a contract on terms stipulated in advance.
 Terms stipulated in advance are terms which usually fix the
scale of prices to be charged and the limitations on the
undertaking’s liability for non performance.
 Pursuant to Art. 1683(2) of the CC, since no acceptance is
required from the offeree (such undertakings), the receipt of
offer makes the contract, which exists from that time
onwards. In other words, the offer alone creates the
contract and makes it enforceable by the offeror against the
offeree.
 For example, Ethiopian Electric Power Corporation, Ethiopian
Telecommunications Corporation, Water & Sewerage
Authorities are expected to accept offer for electric use,
telephone line and pipe line. They cannot reject the offer
from the public except on rare and justified grounds. In such 33
cases, to avoid the presumption of silence, they have to
respond per Arts. 1690(1) or 1691(1).
 Exceptions …ctd
 The writer of the teaching material argues against the literal
meaning of Art. 1683 which can be interpreted as once offer is
made, acceptance is automatic and the offeror can claim
performance of the contract by the offeree.
 He argues this interpretation is illogical because:
1. The offeree’s consent is absent;
2. The offeree may lack resource to accept the contract;
3. The offeree may have legal or contractual or legal authority to
stream line offerors i.e. duty to prioritise some groups, e.g.
investors;
4. The offeree can refuse to perform his contractual or legal
obligation ? [Without justified reasons????]
 Based on these justifications, the writer, even recommends for
the amendment of the provision as:
Where an offeree has legal or contractual duty to accept an
offer, the offer shall be deemed to have been accepted unless
the offeree rejects the offer with in time specified in the offer
or where no time is specified within reasonable period.

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 Preexisting business relations
 In addition to the cases of public undertakings and
concession contracts, silence amounts to acceptance in
preexisting business relations. However, in preexisting
business relations, offer is said to be accepted by silence
when it:
i. is to vary, supplement or complement preexisting
contractual relation ;
ii. is made in writing;
iii. is written on special document and
iv. contains warning that silence amounts to acceptance .
I. to vary, supplement or complement preexisting
contractual relation
 Variation of a contract means changing, modifying or
avoiding some of the provisions of the contract.For
example, in a sale contract, the buyer may offer to change
the delivery date.

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 Preexisting business relations…ctd

 Supplementary or subsidiary contract is a contract that

may exist independently but that help to facilitate the
implementation of preexisting contract. Examples include:-
 you bought goods and the seller offers you to provide
transport service;
 Photocopier proposes to bind the paper s/he has
photocopied;
 a contractor who builds the house proposes to construct a
fence for the same building.
II. The offer should be made in writing
 In principle, offer can be made orally, in writing, by signs
normally in use or conduct depending on the preference
of the offeror. But silence [by the offeree] can be
interpreted as acceptance only if the offeror uses written
form of communication that is addressed directly to the
offeree (Art 1684(2).
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Preexisting business relations…ctd

III. The offer should be written on special document

(Art 1684 (2)
 The document that contains the offer should contain
nothing else than the offer. E.g. offer written on the back
of an invoice should not be deemed to have been
accepted by silence (Art.1685). Moreover, offer should be
written on a paper; E-mail is not a document.
IV. warning indicating that silence amounts to
acceptance
 The offeror should also expressly indicate in his offer that
he considers the silence of the offeree as acceptance
after expiry of time limit indicated in the offer. Art. (1690(1)
or reasonable period (Art.1691 (1) (Art 1684 (2)

37
 Effect of Acceptance
 In general, it can be inferred from Art 1679 and 1693(2)
that once an offer is accepted, the offeree is bound by his
word.
 Acceptance begins to produce effect from the moment the
offeree sends it to the offeror provided that it reaches the
offeror within time specified under Art. 1690(1) or 1691(2)
 The offeree may abort the contract by withdrawing his
acceptance (Art.1693 (2). He can freely withdraw his
acceptance before the offeror knows such acceptance or
regardless of his/her knowledge.
General Terms of Business
 No party is bound by general terms of business which he
did not agree to be bound with (Art 1685);any annexes to
main contract never bind a party who has not known its
content and not agreed to be bound. 38
Negotiation vs. Consent (Art.1695)
 Negotiation is a discussion made between parties
intending to shape the content of a would be contract.
 Any proposal made during negotiation is not binding on
the party making the proposal i.e. a party may withdraw
from the negotiation at any time (Art 1695 (1).
 However; if the negotiation is completed (content of the
contract is determined) and both parties agree to be
bound by the negotiation, then it ends up becoming a
contract (Art 1695 (1).
 In negotiation, it is very difficult to know the party who
made an offer. However; we may take as an offeror the
party who proposes the content of the contract last.
 In negotiation, parties need not reach agreement on all
contents of the contract. They may expressly agree to be
bound by contents of the negotiation thereby leaving
detail to be completed by the law (Art 1695 (2).
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 Defect in Consent and Available
Remedies (Art 1696 – 1710)
 If the consent expressed in the form of offer and acceptance does
not indicate what the offeree or the offeror really intended, then,
there exists defect in consent.
 The common causes of defect in consent are:
1) Wrong information w/c comprises mistake, false statement and
fraud;
2) Threat w/c comprises duress, reverential fear, threat to exercise a
right &
3) Lesion.
 The existence of defect in consent may be a cause for invalidation
of contract per Art. 1696. However, it should be noted that there
are cases where defect in consent does not necessarily lead to
the invalidation of contract. These cases are :
 When a party who agreed to be bound because of defective
consent fails to demand the invalidation per Art. 1808. and
 in those cases provided under Arts.1708, 1709, and 1710.
40
 1. Defect of Consent due to Wrong Information
 Mistake, fraud, and false statements may lead an offeror or
offeree to have a wrong knowledge about the content of the
contract i.e. a person is passing a decision to be bound on
the basis of wrong information.
I. Mistake (Art 1696- 1703)
 is a false belief, a belief in something which is untrue.
 is when a party makes misunderstanding on the content of
the contract or on the identity of the other contracting party.
 The person might have committed such misunderstanding
either because of his own poor inference from given facts
or false statement or deceitful practice of others person.
 E.g. a buyer purchased a bracelet believing that it is pure
gold and latter on found out that it is silver mixed. A seller
says nothing to the buyer about the quality of the bracelet.

41
 Mistake (Art 1996- 1703)…ctd
 As per Arts. 1697& 1698, one can invalidate or avoid his
obligation on the basis of mistake if the following two
conditions are cumulatively fulfilled. These are:
A. Mistake must be fundamental (Art 1698) and
B. Mistake must be decisive. (Art 1697)
A. Mistake must be fundamental (Art 1698)
 A mistake is said to be fundamental when a person
misunderstands the object or nature of the contract or
identity of the contracting party (the person with whom he
has entered into the contract).
 The ‘element of the contract which the parties deem to be
fundamental’ is the object (rights & duties of parties to the
contract); It does not mean the elements of a contract
provided under Art. 1678 (consent, capacity object and form )
.
 Mistake in the object of the contract is not limited only to
the obligations of the parties to the contract but also
includes characteristics such as size, quality and type of the
subject of the contract.
42
 Mistake (Art 1996- 1703)…ctd
 Nature of contract refers to types of contract.
 Example of mistake in the nature of the contract is if a person
who intended sale contract enters into donation contract etc.
 Example of mistake in the object of the contract is when
some one buys a television produced by china believing that it
is Japan’s product.
 Example of mistake in the identity of the other contracting
party is when the person concludes a contract with “B”
believing that he is “A”. B and A could be twins, supply similar
product etc.
 The law also attempts to indicate what “fundamental
mistake” means by telling us non fundamental mistake (Art.
1701). Mistake of the motive of a party or arithmetic mistake
are non-fundamental.
 Arithmetical mistake is taken as non- fundamental mistake
because it can be easily corrected (Art 1701(2). This happens
when both parties accept the arithmetic mistake. But if the
arithmetic mistake is claimed by one party only, it may be
fundamental mistake.
43
 Mistake (Art 1996- 1703)…ctd
 Arithmetic error is all about clerical error or a slip of the pen;
that is why it is said non- true mistake.
 Example of arithmetic mistake is when “A” signs a check
believing that s/he orders a payment of 50,000 birr although
the check indicated birr 500,000 which the payee read and
accepted. In this case, the payee accepted the check
believing that it carried an order of 500,000 birr but “A”
believed it to be 50,000 birr.
 A mistake is arithmetic when amounts, numbers or even
provisions are missed or improperly typed due to clerical
error regardless of the common intention of the parties
expressed in the form of offer and acceptance.
 Generally, arithmetic mistake is is editorial error and may
also be applied to any other editorial error such as missing
of provisions that indicate rights and obligation of the
parties. e.g. in a contract of sale, the phrase dealing with
place of delivery is missed although the parties consented
that it is in Addis Ababa.

44
 Mistake (Art 1996- 1703)…ctd
B. Mistake must be decisive. (Art 1697)
 The mistake is decisive when the mistaken party proves that a
rational person in his position would not have entered into such
contract had it not been for the mistake (Art 1697).
 The decisiveness of the mistake should be determined by court
taking into account the surrounding circumstances and
subjective conditions of the mistaken party.
 The criteria that are going to used by courts for the
decisiveness of a mistake are subjective (Arts. 1697 & 1699).
 The purpose of considering the subjective criteria is searching
the intention of the mistaken party since contract is binding only
when the person knows his rights and obligation and agrees to
be bound. However, knowing intention of such mistaken party is
possible only by putting oneself in his position i.e. ‘what would I
do as a rational person, had I been in his condition’.

45
Mistake (Art 1996- 1703)…ctd
Good Faith ofMistaken Party (Art.1702)
 The mistaken party must be in a good faith to be out of the
contract concluded in such mistake.
Reparation (Art.1703)
 Invalidation of contract on ground of mistake entails
payment of damages (compensation) by mistaken party to
the other party. However, a mistaken party can escape such
liability only if he proves that the other party knew or should
have known such mistake (Art. 1703)
II. Fraud (Art 1704)
 Is another category of wrong information which causes
defect in consent.
 Fraud is an intentional act of preparing false or wrong
information or changing or modifying the content of the
subject matter of the contract in a manner that cannot be
noticed by ordinary observation.
46
 Fraud (Art 1704)…ctd

 Fraud is a mistake provoked by deceit or cheating.

 It is making things or documents to give wrong information.
 Fraud is a deceitful practice which may be accompanied
by false statement, though false statement by itself, is not a
fraud.
 Examples of fraud common in our country include; The
practice of mixing up banana with butter, red ash with
pepper, milk with water, sugar with honey and so on.
 Fraud can have three fold aspect/effects:
1. A contract aspect, leading to invalidation;
2. A tort aspect, leading to damages and
3. Criminal aspect, leading to punishment.

47
 Fraud (Art 1704)…ctd
 Sub-article 2 of Art. 1704 provides that “a contracting party
who has been deceived by a third party shall be bound by
the contract unless the other contracting a party knew or
should have known of the fraud on the making of the
contract and took advantage thereof”. E.g. A, the employer
wants to employ a qualified employee for some position in
his company. B is a recent college graduate who is not well
qualified for the position A is seeking to employ. If C who is
a broker deceived A that B is qualified for the position and
A employs B believing B is qualified, A cannot terminate
contract of B but can institute court action against C
provided that B has no knowledge about the fraud.
 N.B A party who is unable to prove Art.1704 [fraud] may
resort to proving existence of mistake although practically
proving mistake is more stringent than fraud.

48
 III. False statement (Art 1705)
 False statement is untrue statement made either
intentionally or negligently.
 Misleading conducts (manners) or silence may also
amount to false statement. Art 1705(2)
 In principle, pursuant to Art 1705(1), even if it is made in
bad faith and negligently, telling a false statement cannot
lead to invalidation of contract. It is what we may expect
in free market economic system. For example, the seller
told the buyer that the product will serve for 5 years but it
actually served only for 2 years.
 Exceptionally, however, false statement can be a ground
for invalidation of contract where:
A. There is a special relationship between the liar
contracting party and the mistaken party and
B. Such special relationship led the mistaken party to
believe the statements of the other party.

49
A. Special relationship between the liar contracting
party and the mistaken party
 Here, the special relation should be a legally recognized
relation which creates duty to trust one another. The duty
to trust one another may be either legal or moral.
 The verb “existed” in the past tense under sub-Article one
of the provision at hand shows that the relationship must
exist prior to the challenged contract and not created by it.
 Examples of legally recognized special relationships are
husband-wife, doctor-patient, lawyer-client citizen-
government, confessor-penitent, employer-employee
relationships and the like.
B) Such special relationship led the mistaken party to
believe the statements of the other party
 False statement or silence can be a ground for the
invalidation of the contract in such relation only if it is
made by the party to the contract, not by third party to the
contract.
 Moreover, supplying false information have tort aspect
which may lead to damages. (Art. 2059(1)) 50
 2. Defect in Consent due to Threat
(Art.1706-1709)
 A person may be threatened either physically or
psychologically to make an offer or to accept an offer made
to him.
 In such case, the person is declaring his intention to be bound
as an alternative means of avoiding the effect of the threat.
 In principle, parties enter into a contract for purpose of
deriving economic benefit but in case of threat, both or at
least one of the party is entering into a contract to avoid a
possible risk that has been directed against him, his relative
or his property interest.
 So, had it not been for the threat, the person would not have
declared to be bound i.e. intention to be bound is lacking.
 As highlighted in the opening, defect in consent due to threat
includes:
I. Duress;
51
II. A Threat to Exercise a Right and
III. Reverential fear.
 I. Duress (Art.1706 & 1707)
 “Duress” is the compelling of a party to consent to a
contract by threats of grave and imminent harm to such
party or his ascendants, descendants or spouse.
 One can raise duress as a cause of invalidation of
contract if the following conditions are cumulatively
fulfilled:
A. There is a threat or warning to cause harm .
 The person must be told expressly that he has to choose
either suffering from the harm or entering into a contract.
In other words, he should not infer the threat of harm
from the behavior or identity of the parties.
 For example, if some gangsters come to a home of
certain rich man and remained in seat for an hour without
giving any instruction to him he cannot claim duress if he
writes them a check of 500,000 birr and made them to
leave his house. 52
I. Duress (Art.1706 1707)…ctd

B. The harm is on the person himself or his/her spouse or

his/her ascendants or descendants.
NB:- The law limited the threat only to the above mentioned
family members. So, this means one cannot invoke for the
invalidation of contract made on ground of duress directed
against his/her collaterals such as brothers, sisters, aunts,
How do you See this provision??? Don’t you
uncles and the like.
think the latter family members should be included in the
provision?
C.The harm is on person, life, property, and honor .
 Harm on person is when the threat is to cause bodily damage
to any of the above stated persons.
 Harm to a life is when the threat is to kill any of the above
stated persons.
 Harm to honor is when the threat is to commit a certain act
that negatively affects the reputation or public image of any of
the above listed persons i.e. threatening to release information
which the threatened person wants to keep secret.

53
 I. Duress (Art.1706 1707)…ctd
 Harm to property is when threat is to destroy certain
property. In other words , the person is threatened either to
enter into a contract or he is going lose certain property.
D. The party believes that the harm will happen if he does not
consent to the contract.
 The existence or non existence of duress depends on the
subjective mentality of a party. Therefore; it is enough if the
threat is apparent to a party, although there was no real
For example, the fact that the pistol used to threaten
threat.
a party was artificial does not matter; it is enough if he
believed that the pistol was the true one.
E. The threat should be serious: -
 The threat is said to be serious when the harm to be caused
is greater than the obligation that a party enters into.E.g. a
simple warning that s/he would face a kiss on the lip or a
slap on the face and the like if s/he is not consenting is not
a serious threat. 54
I. Duress (Art.1706 1707)…ctd

F. The harm must be imminent:-

 Here, the harm is going to happen soon; A party does not have
time to think of another option to avoid the happening of the
harm except by consenting to the contract.
 The person or property threatened should be under the control
of the threatening party and the threatening party will cause the
damage at the moment a party refuses to consent.
 Example of imminent harm is If Shibbiru and Ashebir
kidnapped Abel’s daughter, and made a telephone call to him
that he either bring half million birr to the place where his
daughter is detained within few minutes without reporting the
fact to the police or they will rape his daughter
Example of non-imminent harm is if a bank manager receives a
letter warning him to sign a check of 1,000,000 birr for a burglar
within a weak or he would suffer the consequence.

55
I. Duress (Art.1706 1707)…ctd
G. The threat must impress a reasonable person:-
 The law does not expect a citizen to be a hero who can
have courage to resist any threat. It, however, does not
want us to be cowardice. A citizen should have some
courage to resist some threats.
 The law punishes cowardice by denying the opportunity
to invalidate contracts if the threat was such that any
ordinary person would have resisted it.
 For example, the law does not accept a healthy man of 35
to claim that he was threatened by a young girl of 12. Of
course, here one may raise the weapon with which he/she
is threatened
 In determining the cowardliness, the court should take
into account the health, sex, age and position of the
person threatened and threatening. Normally, males may
be expected to defend themselves better than women.
Adults are also expected to defend themselves better than
minors.
56
 Duress (Art.1706 1707)…ctd
 Moreover; health, education and other psychological factors
are also important to determine whether or not the person
was cowardice or had reason for failure to resist the threat.
Duress by third Party (Art.1707)
 The threatened party can claim the invalidation of contract
whether he is threatened by the other party to the contract
or by a third party to the contract. (Art 1707 (1). Thus,
duress by anybody is a ground for the invalidation of a
contract. This is justified on the ground that duress is
dangerous to the social order.
 Moreover; the other party cannot raise his unawareness of
the duress as a justification to avoid invalidation. Such
justification may, however; be a ground to claim damage
from a party who got the contract invalidated (Art 1707 (2).
E.g. if X threatened Y to make an offer to Z and Z accepts
such offer being unaware that Y was threatened by X to
make such offer, upon invalidation of the contract, Z may
claim damage caused to him due to such invalidation.
57
 II. A Threat to Exercise a Right (Art 1708)
 Unlike duress where physical violence is used as a means to
compel a person to enter into contract, a threat to exercise a
right is when right is used as a means to compel a person to
enter into a contract i.e. a person is made to choose either to
perform/undergo certain legal obligation or to enter into a
contract.
 E.g. “A” the owner and “B” the Architect entered into
construction contract for residential house. The terms of the
contract provides that “B” should complete the house within
a year for otherwise he will pay 200,000 Birr as a penalty and
the contract may be cancelled. “B” failed to accomplish the
house within the agreed time and “A” warns him to build a
fence (which is not part of the original contract) for otherwise
he is using his right of claiming 200,000 Birr and cancellation
of the contract. “B” builds a fence being threatened “A” is
going to exercise his right as provided in the original contract.

58
A Threat to Exercise a Right…ctd
 As per Art. 1708, a threat to exercise a right shall be no
ground for invalidating a contract unless such threat was
used with a view to obtaining an excessive advantage.
 However, if threat was used with a view to obtaining an
excessive advantage i.e. an advantage which exceeds the
weight of the right threatened with, it could be a ground for
invalidating a contract.
 Obtaining an advantage which exceeds the weight of the
right threatened with is an abuse of right and amounts to
duress which is , thus, open to invalidation.
 However; the threat to exercise a right may be directed
against the person from whom the threatening person does
not have any right. E.g. a threat to exercise a right may be
directed against the father for the wrong done by his son or
against the mother for the wrong done by her minor
daughter etc. The father or mother enters into the contract
to protect his/her son and daughter respectively.

59
 III. Reverential fear(Art. 1709)
 Reverential fear, as provided under the provision, is fear of
an ascendant or a superior.
 Reverential fear is a psychological threat. The threatening
person is playing against the psychological (mental) feeling
of the threatened person. It is a psychological intimidation
that if the person does not give his consent to be bound by
the contract he will be belittled by some one or the public in
general. It is, in short, the fear of opinions.
 Reverential fear is also called undue influence (see Art. 868
of the civil code).
 However; the mere existence of reverential fear of
ascendant or superior is not enough to invalidate the
contract. The reverential fear must make the person to lose
certain advantages i.e. his bargaining power was reduced;
he was not free to bargain properly so that the other
contracting party get excessive advantage from the
contract.
60
 Reverential fear…ctd
 Even if a person enters into a contract which he did not want,
he must prove financial loss to invalidate contract on the
basis of reverential fear.
 What should be proved is not only the financial loss but also
the fact that the financial loss has gone to the benefit of the
person who is the source of reverential fear.
 In short, only contracts entered into with superior/ascendant
can be invalidated on basis of reverential fear provided such
ascendants/superior derived excessive advantage. Whether
the advantage is excessive or not should be determined case
by case by taking into account the economic position of both
parties.
 Reverential fear is presumed. The fact that superior/
ascendant made an offer is enough to prove the existence of
undue influence. The offeree should be presumed that he
entered into such substantially disadvantageous contract
because of reverential fear. However; the superior/ascendant 61
can disprove such presumption by any means.
 3. Defect in Consent Due to Lesion/
Unconscionable Contract (Art 1710)
 Lesion or unconscionable contract is a type of contract which
substantially favors only one party to a contract. Art 1710(1)
 In the free market economy, contracting parties are presumed equal.
Moreover, Security of trade would be endangered if it is allowed to
invalidate a contract merely because it is much more profitable for
one party than for the other.
 Gratuitous contracts do not fall under the operation of sub-article 1 of
Article 1710. This is because, there is no point in assessing the mutual
advantage in gratuitous contracts w/c are precisely intended to be in
favor of only one party. The law on donations addresses this point. Art.
2439
 Nevertheless, equality of contracting parties may be affected by
individual want, simplicity of mind and business inexperience thereby
giving the other party the opportunity to exploit such weakness. It is,
thus, in such cases that the party who has given defective consent
can claim the invalidation of the contract. Art 1710 (2) 62
Defect in Consent Due to Lesion…ctd

 “where justice requires” under sub-article 2 of Article 1710,

means that the court is free to refuse this remedy (i.e.
invalidation of the contract on grounds of equity). E.g.
when the victim is rich and the transaction is insignificant.
 The term “want” can be understood to cover cases of
destitution or states of distress or necessity.E,g. if a
woman agrees to pay whatever amount of money to
certain rescuing group so that the group rescue her
daughter from some other mafia group who detained her
daughter and the rescuing group claimed 2,000,000$ after
rescuing her daughter, there is no duress against the
woman by the rescuing group but she is in distress/they
are using her want.
 Simplicity of mind is a kind of mental limitation which
impairs the victim’s judgment. It may results from
illiteracy.

63
 Defect in Consent Due to Lesion…ctd

 Senility is general incapacity which may result from old

age.
 But we should bear in mind that all old people are not
senile and then generally incapable for there are even some
old people who are wiser than the young people. The point
is that there could be some old people with reduced
consciousness and it is a contract entered with such old
people which may be invalidated on the ground of senility.
 Business inexperience implies lack of familiarity with
business transactions. Professional merchants cannot
invoke this ground of contract invalidation but it can be
invoked by non-merchants. Illiteracy and general lack of
instruction may often amount to business inexperience.
 Simplicity of mind and business inexperience may overlap
some times. E.g. A country side girl who over paid for a
necklace, can claim the invalidation of the contract. i.e. she
can invoke both the simplicity of her mind and business
inexperience.

64
3. Objects of Contracts (Art 1711-1718)
 Like capacity and consent, object is another crucial
validity requirement of a contract.
I. Definition
 What does the term “object” mean?
 The objects of a contract are obligations to perform
something.E.g. If “A” is a car seller and “B” is buyer, it is
the obligation of “A” to show the car to “B” and it is, in turn,
the obligation of “B” to pay. Strictly speaking, in the above
sale contract, the object of the contract is the car.
 Broadly speaking, object of the contract is an obligation
or agreement of parties to do something (obligation to
act) or to refrain from doing something (obligation not to
act) or obligation to give something to someone.
 As we shall see ahead, lack of object makes a contract
non-existent or null and void from the very beginning.

65
 Objects of Contracts…ctd

 As provided under Article 1678c, an object of a contact

should be sufficiently defined, and is possible and is lawful
and moral.
 When it is said that object should be defined, it is to mean
that obligations of the parties or of one of them should be
ascertained with sufficient precision. Art. 1714(1).
 For example, the object of employment contract is the
employers’ agreement to pay wage and employees’
agreement to do certain thing.
 In the same fashion, In contract of sale of house; the
obligation of the seller is to transfer ownership and
possession to the buyer and the obligation of the buyer is to
pay price.

66
 Freedom of Contract
 As per Art 1679, parties are the ones who define the content
of their contract. They are free to determine:
 what to perform,
 where to perform (place of performance)
 when to perform (time of performance)
 How to perform (manner of performance) and
 penalty for non performance .
 They are free to enter into any type of obligation, obligation
to do “not to do” or “to give” (Art 1712(1).
 However; parties may fail to specify all the possible
contents of the contract. In such cases and when dispute
arises, courts could refer to good faith, equity, custom and
law for matters that are not clearly settled in the contract.
 In order to settle disputes, courts should first refer to
contractual provisions and if they are found to be
insufficient, then to legal provisions and if still the matter is
not resolved, to customs and at the end good faith and
equity be applied.
67
 Freedom of Contract…ctd
 However; law, custom, equity and good faith merely
supplements the contract. If there is no contract (main
obligation), they cannot by themselves create contract
In other words, the object of the contract
(Art 1704 (1).
should be understood by referring to the contract itself
without referring to law custom, equity or good faith
 That is why (Art 1714(2) provides that “the court may not
make a contract for the parties under the guise of
interpretation.”
 So, a contract is interpreted only if it is sufficiently clear,
at least on the main object, so that such sufficiency be
completed. For example, in a sale contract, the court
should at least know obligation of a seller and then it can
refer to the law to determine its price (See Art 2305-2307).

68
 Limitations to Freedom of Contract
 Parties’ freedom of contract is not absolute (Art 1711). It
is limited for the following major reasons. Absolute
freedom of one may violate the rights of others. Moreover,
to attain social justice, peace and tranquility and public
morality; it is necessary to limit freedom of contract.
 Under Ethiopian law; freedom of contract is limited
depending on:
I. Clarity of the object (Art 1714),
II. Possibility of the object (Art 1715),
III. Legality of the object (Art 1716(1) and
IV. Morality of the Object (Art.1716 (1)

69
 I. Clarity of the object (Art 1714):
 The object of a contract should be sufficiently clear; otherwise the
court concludes as though parties did not exercise freedom of
contract.
 Where a Party’s obligations cannot be sufficiently ascertained, the
object is not defined and there is no contract at all.
II. Possibility of the object (Art 1715):
 The object of a contract or contractual obligations must be
humanly possible to perform. Parties’ freedom does not allow
them to bind themselves to perform humanly impossible things.
 Impossible obligation is the obligation whose performance is
beyond the nature of human being. Impossible obligation is not an
obligation.E.g. If “x” agrees to sell a dead sheep to “Y” the sale is
void as the object of the contract is an impossible object.
 Moreover, the law wants to protect the public from some
superstitious believes.For example, if a person agrees to raise a
dead body; to duplicate money by mystery, to bring audio visual
image of dead body; to make a person very rich etc the object of
the contract is impossible.

70
III. Legality of the object (Art 1716(1)
 The object of a contract should not violate any law of the
country (The Constitution, International Treaties and
E.g.
Subordinate laws) for otherwise it is of no effect.
Article 9(1) of the EDRE Constitution stipulates that:
“The Constitution is the supreme law of the land. Any law,
customary practice or a decision of an organ of state or a
public official which contravenes this Constitution shall
be of no effect.” Thus, contracting parties cannot enter
into an obligation which contravenes the constitution.
 Moreover, parties cannot enter into an obligation which
contravenes other subordinate laws of the country.E.g. a
contract concluded by parties to abduct or assist
abduction of a woman violates criminal law of the land.
The object of this contract is illegal.

71
 Legality of the object…ctd
 N.B restriction and prohibitions indicated under Art 1711
differ from legality of object. Restrictions and prohibition
indicate the concept of social and customer protection
where as legality indicates concept of public order.
 Restrictions and prohibitions are mainly found in labor law
and trade practice law. They are also found in commercial
code and civil code.
 Restrictions and prohibitions are intended to protect the
individual contracting party whereas legality is intended to
protect the public.
 So, legality of the object is determined by referring to
criminal law whereas restrictions and prohibitions are to be
found in the private law area.

72
 IV. Morality of Object (Art.1716 (1)
 Literally, morality is a standard set by a society concerning
the distinction b/n right and wrong or good and bad behavior.
 One problem with morality is that it is subjective; i.e. what is
moral in certain society could be immoral in some other
society and vice versa.
 As a means of self defense the society punishes those who
violate morality. Law is part of morality that is entrusted by
the society for its enforcement. The remaining part of
morality is to be enforced by the society itself by means of
public opinion.
 Even though the state does not have a duty to enforce
morality, it should refrain from indirectly assisting the
violation of morality. Therefore, any immoral obligation
cannot be enforced by court or executive (Art.1716 (1).
 The obligation may not be crime but it may be contrary to
morality.E.g. A contract for sexual intercourse/prostitution .

73
4. Form of Contracts (Art 1719 – 1730)
Definition
 Form is the way in which the content of the contract exists
or appears to others.
 It answers the question as to how third parties such as
court could know the agreement of parties. Thus, it has a
probative value.
 A contract may exist either in written form or oral form.
When contract is in written form, a court or third parties
know the agreement by reading a paper on which it was
written (Art 2003). And when contract is in oral form, the
court can know the agreement of parties from oral
testimony of the parties themselves or witnesses (Art 2002)
.
 Moreover, oral form of contract includes conduct, signs
normally in use and partially written and partially unwritten
agreement . when part of the agreement is written while the
remaining is unwritten, the written part could only be used
as corroborative evidence to oral testimony.
74
 Freedom of Form (Art 1719)
 Most non lawyers think that for a contract to be binding it
should be always in writing and signed by the parties to the
contract. However, the law gives freedom to the parties to
choose either written or oral form.
 So, in ppl, a contract can be valid if consent, object and
capacity requirements are fulfilled.
Limitations(Exceptions) to Freedom of Form Art.1719
(2, 3)
 Freedom of form is not absolute. It may be limited by law or
contracting parties. An offerer has a freedom to determine
the form of acceptance (Art 1681 (2). If the written form
proposed by the offeror is rejected, then the offer itself is
rejected (Art 1694).

75
Reasons for Limitation on Freedom of Form
A. Evidentiary value:
 Sometimes, we may feel insecure when we make contracts
orally especially when the contract involves considerable
property interest.
 Those factors which may exacerbate the insecurity are:
 If we made oral contract in the absence of witnesses, there is a
probability that a person with whom we entered into the contract
denies the contract.
 High mobility of people which creates shortage of information to
properly know the personality of the individual we are contracting
with.
 The disintegration of social life (Social bond) which also
contributes to our insecurity since there is less possibility to use
public opinion to punish the people who dishonor his words.
 So, to reduce such insecurity people may prefer to make their
contract in written form.

76
 B. Recalling content of a contract:
 There is an Amharic adage that says “ በቃል ያለ ይረሣል
በtsሑፍ ያለ ይወረሣል” may be translated as “things in mind
can be forgotten; things in writing can be recalled.”
 If a contract is formed orally, there is high possibility that
its content be forgotten both by parties and witnesses
specially when the content of a contract is a complex
one and remains effective for a relatively longer period.
 In general, to protect parties against failure of memory
as time passes, parties may agree to make their contract
in a written form.

77
C. Indication of intention to create legal relation:
 Making a contract in a written form is a clear indication of
an intention to be bound.
 If a contract is to be made in writing, a party thinks twice
before he gives his final consent to be bound. The person
thinks both before consenting to the contract and signing
on the written contractual document. He has a time to
think whether to insist in his consent or change his mind
before the signing on the document.
 Moreover, when one party proposes written form the
other party may understand that the contract is being
taken seriously by proposer of the form.
 Generally, written form makes parties to be conscious of
the effect of the contract. So, written form may be taken
as an indication of intention to create legal relation.

78
 D. To Prevent or Minimize Corruption
 Under some special types of contracts such as
Administrative Contract, written form of contract is
mandatory. This is because it is believed that oral contract
opens a room for corruption since keeping information is
difficult.
 Thus, to prevent or at least minimize corruption,
administrative contracts shall be made only in written form.
Contracts made in Written Form (Art 1721 – 1726)
 As we have addressed herein above, in principle, form is not
an essential element of a contract; there is freedom of form.
However, exceptionally, freedom of form can be limited
either by the law or parties to the contract.
 As per Arts. 1719 (2) & 1720 (1), where a special form is
expressly prescribed by law, such form shall be observed for
otherwise it is not a contract but a mere draft.

79
Contracts made in Written Form…ctd

 Accordingly, the following contracts shall be made in

writing:
A. Contracts the law requires to be made in writing,
B. Contracts parties want to make in writing,
C. Preliminary contract (Art 1721),
D. Variation of contract made in writing (Art 1722
A/ Contracts the law requires to be made in writing
 Some of the contracts that the law expressly requires to
be made in writing are:
I. Contracts relating to immovable: - All contracts that
affect a right on an immovable, except lease or rent of
house, must be made in writing. Therefore, sale,
usufruct, servitude, mortgage etc. should be made in
writing. Art. 1723
80
 Contracts required by the law to be made in writing…ctd
 However, as per FSCCD in the case between Rented Houses
Administration Agency vs.Sosina Asfaw in a file No15992,
lease or rent relating to immovable (House) need not be
made in writing.
II. Contract with public administration (Art 1724): any
contract to which a government agency is a party, including any
type of employment contract, should be made in writing.
 Can you mention the reasons behind making administrative
contracts in written form ? The common reasons are:
 In public administration, because officials may leave their office
by election, removal or resignation, it would be difficult to
ascertain the content of the contract entered into during their
stay in office unless it is made in a written form.
 As we know, because contracts concluded by public officials
representing the agency continues to be effective even after they
leave their office, they should be made carefully in a written form.
 Moreover, oral contract opens a room for corruption since
81
keeping information is difficult in orally made contracts.
Contracts required by the law to be made in writing…ctd
 Some other types of contracts which the law requires to
be made in writing include:
 Contract of guarantee ( Art 1725 (a);
 Contract of insurance (Art 1725 (b);
 Partnership contract;
 Pledge for a loan exceeding 500 birr (Art 2828 (2);
 Sale and mortgage of business (Art 152, 177 (2) comm.
code);
 Promise of sale and preemptions (Art 1412) and
 Agreement prohibiting assignment or attachment of a
certain thing (Art 1430)

82
 B. Contracts parties want to make in writing
 Under the section on freedom of the form, we have seen that
freedom of form can be limited either by law or parties to the
contract. Therefore, using their freedom of form, parties are at
liberty to choose their contract be made in a written form.
 Moreover,we have already addressed the possible reasons why
parties may prefer written contract over its oral counterpart.
 Once the parties agree to make their contract in writing, then
contract will not be completed until such form is fulfilled. (Art
1726). No party can require the performance of the contract
until it is made in writing.
 Even if the parties have begun to perform the contract, the
court does not help them to have the performance completed
unless they comply with their prior agreement to make the
contract in writing. This means parties cannot change their prior
agreement impliedly by performing the contract.

83
 Contracts required to be made in writing by the parties…ctd

 Express agreements cannot be changed by implied

agreement. However, parties can change any express
agreement by another express agreement.
 As per Art. 1722, a contract made in a special form shall be
varied in the same form. Therefore , If the agreement was
made in writing its change should also be made in writing
vice versa .
and
C. Preliminary contract (Art 1721)
 Another type of contract which should be made in writing
is preliminary contract. Preliminary contract is a contract
which has to be concluded before another contract. It
intends to lead to another contract.
 Preliminary 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 best example is agency
contract. If the agent’s power is to enter into a contract in
writing, he should be conferred with such power in writing
(Art 2200(1).
84
 D/ Variation of contract made in writing (Art 1722)
 As we have seen under Art. 1675, variation of contract is a
contract itself. So, if such contract relates to contracts
indicated under Art. 1723contracts
( relating to immovables )
, Art. 1724Contracts
( made with a public administration )
and Art. 1725 Contracts
( for a Iong period of time ), it
should necessarily be made in writing.
 N.B The law provides form for creation and variation of a
contract but it is silent about form for extinguishing a
contract. The drafter also expressly states that provisions
dealing with form of contract do not include extinction of
contract (David.p.28).
 The writers of the teaching material are of the opinion that
when parties intend to extinguish contractual obligation
that exists between them, they shall extinguish it in the
same special form they made the contract.

85
Variation of contract made in writing…ctd

 The writers of the teaching material are of the opinion that

extinction of the contract should be made in the same
form of its formation for the following reasons:
I. Extinction of contract is a contract itself- As we have
addressed in the definitional part too, a contract is not
only an agreement to create and vary but also an
agreement to extinguish obligations of proprietary nature.
So, when the law provides that a contract be made in
writing, it includes extinction since extinction by itself is a
contract.
II. Intention to create legal relation can be clear: a person
should be presumed to have changed his previous stand
only when he uses the same way of declaration of
intention as he used earlier. Art. 1726
III. Probatory value of written instrument (Art. 2005): A
contract formed in written form has to be extinguished
only in a written form; otherwise, it is very difficulty to
prove that a written contract has been extinguished by a
later oral contract.
86
 Effects of form
 When the law or parties requires the contract to be made in
writing, failure to comply with such requirement make the
contract a mere draft (Art. 1720). The contract never exists
until the formality requirement is fulfilled.
 As per Article 1720 (1),Some contracts need to be registered.
Such registration is normally intended to make third parties
to be aware of the existence of such contract. such
registration does not have any relationship with form of the
contract. That means, even if the legal requirement of
registration has not been fulfilled, the contract can still be
enforced between parties.
 Registration can affect the validity of contract only when the
law expressly states that failure to register the contract shall
make the contract non-existent (Art.1720 (3). E.g. although
Art 1723 provides that contract relating to immovable be
registered, it does not state that failure to register shall make
the contract non-existence. Therefore, according to Art.1720 87
(3), contract relating to immovable remains valid even if the
 Written form (Art 1727-1729)
 A contract is said to be in writing where:
 The content of a contract is written i.e. the content is
readable.
 The writing is made on a special form. Special form means
anypure paper that is intended for a specific contract only .
Therefore; if a paper contains another contract or other
things such paper is not a special document.
 Moreover; writing on electronics does not fulfill the
requirement of special document.
 Parties to the contract sign the special document. Parties
sign by putting hand written mark on the special document
(Art 1728). Here, two things are interesting firstly the law
does not allow the use of mechanical process such as
stamp; secondly, thumb mark never binds unless it is made
in the presence of notary, registrar or a judge acting in
discharge of his duty( Art-1728 (2)
 At least two capable witnesses should sign the special
document. Art-1729

88
 Other Special Forms
 There are also other special forms of contracts. These
other special forms should contain contents of the contract
in a readable manner but the thing on which the readable
content is found may be a special document, scrape of
paper, electronics or any other thing.
 Moreover; such form may be signed either by both parties
or only one of them or it may not be signed at all. Also,
there is no need of witness to sign.The best example of
such special forms is commercial instruments. Signing or
issuing a commercial instrument is concluding a contract.
Such contract should be made in a special form.
 Parties can also agree to make their contract in the
special form. E.g. they can agree the contract is binding
without the need of witnesses etc. Therefore; when the
parties agree to make their contract in special form; they
should clearly define what that special form means.

89
 Consequences of Validity Requirements
 Validity requirements also known as elements of contract, as
addressed above, are consent, object, capacity and form.
Generally a contract that misses any of these elements is
either void or voidable. Void and voidable contracts have
differences and similarities.
I. Differences between void and voidable contracts (Art,
1808-1814)
A. Differences in terms of Definition:-
 Void contract is a contract which parties intend to produce
binding effect but does not actually have any legal effect.
The obligation intended by the parties does not exist from
void abinitio .
the very beginning. So, it is called
 voidable contract is a contract that has begun to produce
effect intended by the parties however it contains certain
formation defects that may destroy the effect it has
produced.
90
 Differences between void and voidable contracts…ctd
 Void contract cannot be cured but voidable contract may be cured
by agreement of both parties to the contract (Art.1811).
B. Differences in terms of Cause
 A contract is said to be void when the object or form elements are
missed.
 If the object is unclear (undefined), unlawful, impossible or
immoral, the contract is said to be void contract.
 Likewise, if the especial form prescribed by law or agreed by
parties is not complied with, the contract is said to be void
contract.
 On the other hand, a contract is said to be voidable if it contains
defect in consent or capacity (Art.1808 (1).
C. Differences in terms of plaintiff
 Void contract can be brought before the attention of a court by
any body, including the public prosecutor. Art.1808(2). But in case
of voidable contract, only a person whose consent was defective
or the person who was lacking capacity at the time of conclusion
of the contract can bring the case to the attention of the court(see
Art.33 of Ethiopian Civil Procedure Code).

91
 D. Differences in terms of Relief Sought
 In case of void contract, the person bringing the contract to
the attention of the court is not intending to have the
contract invalidated since there is nothing to be invalidated.
Rather, he wants either to make sure that the contract is void
or wants the court to stop parties from violating the law/
moral standard of the society under the guise of performance
of contract.
 Moreover, a person may apply to court to get back any thing
he has given believing that the contract was valid.
 However, a party who is sure that the contract was void and
has made no payment, need not go to court and shall refuse
to perform the contract (Art 1809).
 On the other hand, voidable contract is a contract that has
begun to produce effect. In case of voidable contract, the
person bringing the contract to the attention of the court is
intending to have the contract invalidated. In short, the relief
sought is to have such contract declared void.

92
 Differences between void and voidable contracts…ctd

 Voidable contract produces legal effect unless the party

whose consent was vitiated or incapable at the time of
conclusion of contract challenges its validity (Art. 1808 (1).
 But unlike void contract which does not exist from the very
beginning, voidable contract can be cured where:
a. Invalidation is not claimed within two years
 A party whose consent was vitiated loses his right to
invalidate the contract unless he brings court action
within two years from the moment he knew the fraud or
mistake or from the moment the duress disappears (Art.
1810(1).
 In case of lesion, the period of two years begin to count
from date of conclusion of contract; not from the date a
person knows the existence of lesion ( Art 1810 (2).
 Notice that a contract affected by incapacity need to be
invalidated within two year from the date the person
became capable (Art 1810 (1).
93
 b. Contract is confirmed
 Voidable contract can be cured where a person whose consent
is vitiated waives his right to demand invalidation (Art 1811(1).
c. The injury is made good
 A contract vitiated by lesion remains valid if the party taking
undue benefit agrees to return such benefit (Art. 1812).
d. The vitiated provisions of the contract are avoided
 Contract may be invalidated partially provided the valid one is
independent of the invalid one (Art 1813). This is if a contract
contains both lawful/moral and immoral/unlawful obligation,
the immoral/unlawful obligation shall be considered as if not
written and the remaining should be given effect, provided that
it is clear and meaningful.
 E.g. C and D agreed that D shall serve as a maid servant and
she shall also make herself ready for sexual intercourse twice a
week with C and C shall pay birr 400 per month. Here, the part
dealing with sexual intercourse should be considered as if not
written or ( does not exist).

94
 II. Similarities between Void and Voidable
Contracts (Art 1815-1818)
 The following are similarities of void and voidable contract:-
A. Unable to Produce Legal Effect on the Parties: Like void
contract, voidable contract is also considered asvoid
abinitio once it is invalidated.
 Invalidation of voidable contract has a retroactive effect
thereby denying the contract to produce any obligation
from the moment of its inception. Invalidation of voidable
contract is similar with aborting the embryo.
B. Reinstatement (Art 1815-1818): when a person inters
into void or voidable contract and made undue payment, it
does not mean that he will be without remedy. A party who
received undue payment shall give it back and such giving
back is called reinstatement ( Art 1815 (2). Thus, void and
voidable contract which is invalidated are similar in
reinstatement.

95
 Similarities between Void and Voidable Contracts…ctd
 Reinstatement is made either by returning back the
payment (thing) received or by paying appropriate
compensation for the thing that cannot be returned.
 In the following cases, reinstatement may be made by
paying compensation:-
i. When Ownership of the Thing is transferred to third party
Possessor in Good faith Art. 1161
ii. Loss or damage of the thing by fault of receiver Art.2028
iii. Obligation “to do” or “not to do”:- In these two types of
obligation, there is no transfer of ownership or holding.
The contract requires the parties to perform certain
intellectual or physical (labor) activities that benefit the
other or to refrain from exercising certain property rights.
So the concept of reinstating the parties by returning the
thing does not work since there was nothing delivered.
96
Similarities between Void and Voidable Contracts…ctd

iv. Transformation of the thing: where the thing is

transformed (substantially changed or altered), the
). E.g.
receiver shall pay the price of the thing (Art 1817 (2
Almaz bought flour from Shemsu’s shop but she has
already made a bread. In such cases since reintatement of
the thing is impossible the receiver should pay money.
v. Returning the thing is uneconomical: The thing may not
have been transferred, damaged, lost or transformed, but
repayment expense may be high. In such case, the court
should not order the repayment of the thing. Rather, it
should order payment of compensation.
 In short, if the contract is invalid, any performance made
on the basis of such contract becomes invalid. This means
the receiver shall return the thing he received (Art 1815).
However, if returning is not possible for whatsoever reason,
an appropriate compensation shall be paid (Art 1817).

97
 Chapter III: Effects of Contract
What Does Effects of Contract Mean? (Art.1731)
 The two major principles of contract are freedom of
contract and its sanctity (binding nature).
 To make a serious promise certainly involves a moral duty
to keep it. There is Latin saying“pacta sunt servanda”
which means that a person is bound by his words. There
is also an equivalent Ethiopian proverb, ‘የተናገሩት ከሚጠፋ
የወለዱት ይጥፋ’ may be translated as failure
” to keep a word
is worse than losing a descendant .”
 Contract is binding not only morally but also legally i.e.
Once a contract fulfills the requirement of Art 1678
(consent, capacity, object and form, if any), it becomes a
law. It is, thus, a law between contracting parties ( See Art.
1731/1).
 As we know, law is enforced by executive and interpreted
by the judiciary.
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What Does Effects of Contract Mean?...ctd

 As law makers, parties to the contract, can repeal or amend

the contract.
 Moreover, the law must be implemented i.e. contract should
be performed for violating a law entails punishment i.e. non-
performance of contract leads to payment of damages.
 Effects of contract, in this section, mainly address:
I. Interpretation of contract,
II. Performance of contract and
III. Variation of contract.
I. Interpretation of contract (Art 1732 -1739)
 As a law, a contract may be interpreted. Interpretation is
giving meaning to the provisions of the law/contract.
 However, a law/contract is interpreted when it is vague,
silent, illogical, ambiguous, and contradictory. In other
words, if the provision of the contract is clear, there is no
need to interpret (Art 1733).
99
 Interpretation of contract…ctd

 Law is an express intention of the legislators.

Interpretation is, therefore, searching the intention of the
parties (Art. 1734(1).
 In line with art. 1733, in a case b/n Ethiopian Development
Bank vs.Abdurahman Telisa, file No. 15662 presented to it
on Megabit 13, 1999 FSCCD properly ruled that whenever
the provision of the contract is clear, court should not
depart from clear meaning even if such clear meaning is
unfair.
Presumption of Good Faith
 While interpreting a contract i.e., searching for the intention
of parties, we have to presume that parties entered into a
contract in good faith (Art. 1732).
 Good faith should mean that no party to the contract
intends to deceive the other party by intentionally making
the provision of the contract vague, ambiguous, silent or
contradictory.
100
 Interpretation of contract…ctd
 While concluding a contract, it is presumed that parties
neither know a problem nor thoroughly examined each
provision believing that controversies would not arise i.e.
they trusted each other that none of them would attempt
to avoid the effect of contract (Art. 1732).
 In short, good faith means that at the time of conclusion
of a contracts each party believes that everyone in the
contract intends to get his own fair benefit without
harming another party.
 Interpretation becomes necessary either because parties
were not able to imagine the dispute, or words are
imprecise by their nature, or errors are committed in
formulating contract.

101
 When to Interpret a Contract
 As addressed herein above, if the provision of the contract
is clear, there is no need to interpret. Therefore, contract is
interpreted when it is vague, silent, illogical, ambiguous,
and contradictory.
How to Interpret a Contract
 We said that interpretation is searching the intention of
the parties (Art. 1734(1). In other words, to interpret a
contract is to search for the intention of parties to the
contract.
 While interpreting a contract, the court should take into
account the following techniques:
A. Conduct of the parties:- a conduct of a person may be
taken as a means of ascertaining what he was intending
and what the other party understood from such conduct.
As per Art. 1734 (2), the general conduct of the parties
before and after the making of the contract shall be taken
into consideration to[ interpret a contract].

102
 How to Interpret a Contract…ctd
B. Context of the contract:- the meaning of a contract should
be searched from the contract itself since there is a
possibility that one provision may indicate the meaning of
another provision or word in the contract. (See Art. 1736(1)
C. Business practice:- Business practice should also be taken
into account to interpret a contract.
D. Good Faith:- Here good faith indicates the innocent
expectation of a party from a contract (Art. 1735). This is in
accordance with the golden rule, “had I been in the position
of my opponent what would I have expected from the
contract?”
E. Equity:- The fairness aspect should also be taken into
account.
F. Positive interpretation:- Provisions capable of two meanings
shall be given a meaning to render them effective rather
than a meaning which would render them ineffective.

103
 How to Interpret a Contract…ctd
G. Interpretation in Favor of Debtor:- if the court is unable to
know the intention of the parties, the law guides the court
to interpret the controversial provision or word in favor of
the debtor (Art 1738(1)). But this is not always true ,esp, if
the obligations of the parties to the contract are stipulated
by the debtor b/c the debtor cannot be double beneficiary.
II. Performance of contracts (Art. 1740-1762)
 Performance of contract means fulfilling one’s own
obligation or executing validly formed contract as agreed.
 To elaborate a little bit, If the obligation is to “do”, doing
what was provided in the contract exactly in the same way
as provided, if the obligation is “not to do” forbearing from
doing what is forbidden by contract and if the obligation is
to “give” delivering the thing with its accessories on the
agreed date and place is called performance of a contract.

104
 Performance of contracts…ctd

 Performance of a contract extinguishes the obligation of

the parties to the contract.
 Performance of an obligation addresses questions such as:
1. Who performs a contract’?
2. To whom should a contract be performed?
3. What should be performed?
4. Where to perform a contract ? and
5. When to perform a contract ?
1. Who Performs a Contract?
 As per (Art. 1740), contract can be performed by the
debtor or his agent or by a person authorized by court or
by a law.
 The persons authorized by law are tutors, liquidators,
trustees and person authorized by court is either a curator
or an interested creditor who wants to save the rights of
the debtor by performing his obligation.
105
 Performance of contracts…ctd

 However; the law is silent about performance of a contract

by a third party not authorized by debtor, court or law.
Nevertheless, it can be argued that if the creditor accepts
the payment, the debtor has no right to stop third party from
performing the obligation. In such case, if the debtor insists
on paying the debt, he can pay it to the person who paid the
creditor (Art. 1824).
 However, a creditor is not duty bound to receive payment
from a person not authorized by debtor or court or law, he is
free to accept or reject such payment without any effect on
his right against the debtor.
 The 2nd rule of performance of a contract, as per Art. 1740(1)
is performance of an obligation only by the debtor. The
debtor may perform his obligation personally in two cases.
The 1st case is when the contract or law expressly provides
that the debtor shall perform the contract personally and the
2nd case is when the creditor proves that personal
performance is essential to him.

106
 Performance of contracts…ctd
 To start with the 1st one, a contract or law may expressly provide
that the debtor shall perform the contract personally. E.g,
Ethiopian labor law provides that the employee should perform
the contract personally. So, if certain construction company
employ’s “A” as a daily laborer, he cannot authorize his son or
brother to carry out the labor work and the company can refuse
to accept “A”’s son or brother and dismisses “A” from work.
 As stated herein above, the second case where personal
performance becomes necessary is when the creditor proves
that personal performance is essential to him. The creditor can
be able to prove that personal performance is essential to him
only when the obligation is obligation to “do” of a professional
nature or art. E.g, a lawyer, or a doctor can not authorize a duty
which he agreed to do. Moreover, a musicians, painters, Poet,
actor, dancer etc cannot authorize someone to perform his
obligation.
 But do you think that the term “personally” imply performance
only by the debtor without any assistance? No, it may include
performance with the assistance of others but under the control
of the debtor. However, the assistance should be limited
assistance to say the debtor performed himself.
107
2. To whom should a contract be performed?
(Art. 1741-1744)
 Payment/ performance should be made to the creditor or
a 3rd party authorized by the creditor (an agent)or by the
court or by the law (tutor, liquidator, or trustee). Art. 1741
Payment to Incapables (Art.1742)
 If the creditor is a minor or judicially and legally
interdicted person, payment should not be made to such
creditor; rather it should be made to his tutor or legal
representative.
Payment to Unqualified Creditor (Art.1743)
 In principle, payment to unqualified person (a person who
is not authorized to receive payment per Art. 1741) is
invalid. But in the following cases, such payment is valid.
These are when:-
A. Payment benefited the real creditor or
108
B. Payment is confirmed or
 A. Payment benefited the real creditor
 This is the case when the debtor pays the debt of his creditor.
E.g. “X” borrowed 2000 Birr from “Y”. “Y”, in turn, once bought
a jewelry that worth 2000 Birr from “Z” but not paid him. If “X”
pays “Z” 2000 Birr, the debt of his creditor i.e “Y”, the payment
benefits “Y”. Thus, this is an exception to the principle,
‘payment to unqualified person is invalid.’
 Notice that such payment may be paid either without the
knowledge of creditor or even against his express opposition.
B. Payment confirmed
 Here even if the creditor did not benefit from the payment, he
may confirm the payment. E.g. “A” borrowed 5000 Birr from “B”
. “C” is the daughter of “B”. “A” paid the money to “C” in the
belief that she would give it to her father. If she consumed the
money for her private affair and her father confirms that, it is
a valid payment. However, if her father is not willing to
confirm, “A” can claim recovery of the money from “C” under
the rules of undue payment(Art. 2164). 109
 C.Payment to a person with a valid title
 Here the holder of the title is legally entitled to claim payment
although he is not the real creditor. The document gives an
apparent right to the holder. The payment made to an apparent
creditor is valid even if the document is invalidated later on. The
following two cases elaborate this fact.
I. Document evidencing power of agency: a principal might have
revoked the agency power but he may fail to collect the
document from the agent and the agent may use the document to
collect principal’s claim. If the debtor, in good faith, pays to the
agent whose agency power is revoked, the payment is valid b/c
failure to collect the document authorizing the agent is the fault
of the principal not the fault of the debtor.
II.Holder of Negotiable Instruments (Art. 716 & 751 of comm.c ):
- A debtor who paid to a holder of negotiable instrument in
accordance of the rules of transfer of negotiable instrument is
released from his obligation. E.g. “A” issued a check to “B” and
thief stolen the check from “B”’s pocket and received payment
from Dashen Bank. “A” is released by such payment. NB:- In both
cases the debtor should be in good faith.

110
 Doubt as to the Creditor
 when the debtor is unable to know the real creditor ( b/c two
or more persons may independently claim the payment of a
debt), he shall deposit the debt in court either by his own
(Art.1744)
initiative or by the request of the claimants.
3. What should be performed? (Art. 1745 – 1751)
 What to pay (perform) answers the question relating to identity,
quality or quantity of the thing to be delivered. To properly
answer such question we may classify things into definite
thing, fungible things and money debts.
I. Definite Thing (Art. 1745 – 1746)
 Definite thing is a thing that can easily be identified from
similar things of the same species. In short definite thing has
its own peculiar identity.Animals and immovable are most
prominent examples of definite things.
 If a thing is definite thing, we can not find its replicate in the
world.
 However, for contract law definiteness of a thing simply
indicates that a thing which is a subject of sale is indicated in
the contract in its own specific name.
111
 What should be performed?...ctd

 As per Art. 1745,the debtor shall deliver the thing agreed i.e.
the creditor is not bound to accept other than the thing
agreed. The creditor may however, accept things of
different identity if he wants .
 If the creditor accepts the new thing offered to him by the
debtor, it means that they agreed to vary or modify contract.
For instance, A be lag r
eed tose l
l Ad aa teffto Ge bru .
B u
t
sin ce Abe lu nab l
e tog etAdaa teff,
h e su ppli
ed M e njartef
f
o
f t
he s am e qualit
y .G ebr
u w oul
d h ave an o pt
ion e i
th erto
r
e
je ct orac c ept the d eli
ver
y.
 The creditor has also a right to refuse partial payment of a
definite thing. He has also a right to claim partial payment
and bring court action for the remaining part or give grace
period for such part payment (Art 1746).

112
 II. Fungible Things
 Fungible goods are goods that are indicated in the contract
by using generic terms such as pasta, teff, wheat, barely etc.
 Unlike definite things, since fungible goods are those goods
which cannot be expressly indicated in the contract, the
contract is interpreted in favorer of the debtor (Art. 1738 (1)
and the debtor can freely determine its quality (Art. 1747)
though the quality should not be less than the average
For example, if a seller agreed to sell
quality (Art.1747 (2).
five hundred quintals of teff, he can deliver teff of average
quality regardless of where the teff is from.
 As per Art. 1748(1):- The creditor may not refuse fungible
things on the ground that the quantity or quality offered to
him does not exactly conform to the contract, unless this is
essential to him or has been expressly agreed .
 The theme of this provision is that since exact conformity
between the offer and acceptance may not be met b/c of
various reasons, the creditor is recommended to tolerate
small deficiency unless exact conformity is agreed upon or
essential to him or unless it is declared to be fundamental
breach of contract.
113
 Fungible Things…ctd
 To use an example given by George krzeczunowicz, where [a
debtor] accepted that he would deliver 100 litres of alcohol
of 90 % concentration but delivers instead 99 litres of 89%
concentration, common sense and commercial usage
require that the creditor does not refuse them where this is
not essential to him.
 In the above example, it is for the creditor to prove that
exact conformity is essential to him, through showing, for
instance, that the alcohol was ordered for medical or
chemical purposes where 1% concentration deficiency
makes an essential difference.
 Small deficiencies due to climate, transportation, etc are
some times unavoidable and are customary tolerances.
 But even if the quantity /quality is not essential or
fundamental to the creditor, the contract may provide
unilateral cancellation if such quality or quantity is violated
(Art. 1786 cum. 1748 (1).

114
 III. Money Debts(Art. 1749–1751)
 If the debt is money debt, payment should be made in local
currency of place of payment (Art. 1749 (1). This is so for two
reasons:
 Firstly, the debtor may not be able to get the foreign currency in
the place of performance for this could be allowed only for
some groups or prohibited totally.
 Secondly, it may be illegal to carry foreign currency for more than
a certain time limit.
 If payment is in a local currency, the exchange rate is
determined on the basis of exchange rate on the day of payment
(Art 1750).
 But the law never answers the place that is to be used as a
reference to determine the rate. For example the exchange rate
of birr in dollar may differ in USA and Ethiopia on the same days.
 Although the law is silent on this point, the writers believe that
the place where the currency indicated on the contract serves as
medium of exchanges should be taken as a reference market to
determine the exchange rate. 115
 Money Debts…ctd
 Notice that parties may agree that payment shall be made in
actual currency indicated on the contract (Art.1750).
 Incidental to money debt are inflation of currency and interest
rate. Parties may avoid inflation by determining the amount
of money debt in reference to the price of a specified good.
For example, a person who lends birr 200,000 to be repaid
after ten years may say that the amount to be repaid shall be
able to buy 50 tons of first quality Ada’a teff at the time of
payment.
Appropriation of payment (Art. 1752-1754)
 Appropriation of payment is important when the debtor pays
only part of his obligation.
Principal Debts and its accessories
 If a person is unable to pay the whole debt (principal, interest
and cost) at one time, the partial payment made by the debtor
shall be appropriated firstly to the cost; secondly to the
interest; and finally to the principal (Art. 1752).
116
 Principal Debts and its accessories…ctd
 For example, Belaynesh borrowed birr 100,000 in 2000 at a
rate of 9% per annum and debt was to be paid after five
years. But Belaynesh failed to pay the debt, and the
creditor brought court action and incurred cost of birr 10,
000. So the principal debt is 100,000, interest, 72,000 and
cost 10,000. Assume Belaynesh made a payment of 30,000;
the appropriation is first to the cost so the cost is
extinguished and the remaining 20,000 is apportioned to
the interest. So the debt of Belaynesh is principal 100,000
and interest 52,000. The effect is that the interest
continues to count on the total 100,000 birr.
Multiple principal Debts (Art. 1753-1754)
 In case of multiple debts, choice is given to the parties and
only if they fail to exercise their right of choice that the
legislator chooses the debt to be paid first and the debt
that follows.
117
 Multiple principal Debts…ctd

Choice by the parties (Art.1753 ):- unless the parties agree

that choice should be made by the creditor, the law
presumes that the right to choose is for the debtor (Art
1753 (1). This is in accordance with the principle of
interpretation in favor of the debtor.
 However, if the debtor has failed to indicate his choice to
the creditor and has not opposed the appropriation written
on the receipt, the debtor is presumed to have given this
chance to the creditor. So the choice of the creditor binds
the debtor (Art. 1753) (2).
Choice by the law (Art. 1754):- When both the debtor and
creditor fail to indicate the appropriation the law presumes
the following appropriation:

118
 Choice by the law…ctd
A. Debts already due:- Appropriation is to the debt which
is most advantageous to the debtor (Art.1754 (2). For
example the loan of 500,000 which imposes 12% interest
rate and which was due on Jan 2, 2008 and sale price
without penalty.
B. Debts due vs. future debts:- Appropriation shall be
made to the debt which is already due (Art. 1754(1).
C. Future debts Vs future debts:- appropriation is to the
debt which becomes due earlier (Art.1754 (1)
D. Future debts having the same due date:- appropriation
is to the debt which first appropriation benefits the
debtor most (Art. 1754(2) but if the advantages are equal
payment shall be appropriated proportionally (Art. 1754(3)
.

119
 4. Where to perform a contract:- Place of

Performance
Place of performance/payment has an implication on cost of
payment, currency for money debts and territorial jurisdiction of
court.
 The civil code, under Art. 1755, provides three alternatives
regarding place of performance; agreed place, residence of the
debtor and place where the thing situates.
 According to this provision, the 1st option as to the place of
performance is left to the agreement of the contracting parties.
This is pursuant to freedom of contract addressed in the earlier
sections.
 However, if parties to the contract failed to mention the place of
performance by their agreement, as a 2nd option, it is determined
by the law (1755(2,3)).
 In this regard, the place of performance for the delivery of fungible
things is the place where the debtor had his normal residence at
the time when the contract was made & the place for the
performance of definite thing is the place where such definite
thing situate at the time of conclusion of the contract. 120
 Where to perform a contract…ctd
 We have seen that the place of performance for the delivery
of fungible things is the place where the debtor had his
normal residence at the time when the contract was made.
This law reflects the principle of interpretation in favor of
the debtor(Art. 1738,1). Here, the law aims at exempting the
debtor from transportation cost, inconveniences and waste
of working hours.
 Dear students, where shall be the place of performance in case
if the debtor has more than one residence? In such cases,
performance shall be made at the principal residence of the
debtor.
 Coming to the place of performance for a definite thing, We
have to notice that there may be difference between place of
conclusion of contract and place where the definite thing situate
at the time of conclusion of contract.
 Moreover, the place where a thing situate at the time of
conclusion of contract and at the time of performance of a
contract may be different i.e. the thing might have been shifted
from the place where it was at time of formation of contract.
121
 Where to perform a contract…ctd
 Generally Ethiopian civil code advises the parties to exercise
their freedom of contract and determine place of
performance. But if they fail to do so the law imports the old
[French] maxim, “payments are not portable [by the debtor to
the creditor] but “ fetchable” [by the creditor from the debtor]
i.e. the creditor has to go to either to the place where the
definite thing situate or to the residence of the debtor.
5. When to perform a contract:-Time of Performance
 The last but not least question that should be addressed in
the performance of a contract is time of performance.
 Time of performance is very important to determine transfer
of risk, cost of maintenance and preservation and most
importantly to claim compensation for non-performance
(see Art.1779-1783) .

122
 Time of Performance…ctd
 Time of performance greatly affects the benefit parties
expect to derive from the contract. This is especially true
when there is market instability which has become the
feature of modern economy.
 The importance of time also depends on the nature of the
contract or obligation of the parties.
 Like in place of performance, in principle, payment shall be
made at the agreed time. Art. 1756(1).
 In the absence of contractually agreed time, payment may
be made “forthwith” Art. 1756(2).
 But the question is when is “forthwith”? Should it be
construed as immediately?
 The general consensus is that the term “forthwith” should
not be construed as immediate performance. This is b/c by
their nature most contracts cannot be performed
immediately. Instead, the creditor is expected to give the
debtor a reasonable time to perform his obligation.

123
 Time of Performance…ctd

 A creditor never invoke non-performance without giving default

notice (Art.1772) and in his default notice he may fix a
reasonable period that enables the debtor to carry out his
obligation (Art.1774).
 Article 1756(3) comes with 3rd type of requiring performance. i.
e., whenever a party requires the other party to perform his
obligation though this should not depend on the whim & will of
requiring party but upon fulfilling the standards provided under
Art. 1757.
 As per Art. 1757, a party can require another party to perform
his obligations when 2 things are fulfilled. These are:
1. The requiring party should be beneficiary of time limit having
regard to the terms or nature of the contract or
2. He should himself performed or offered to perform obligation
on his side. i.e., to require the other party to perform his/her
obligations one should either perform his/her obligations or ,
at least, show his or her preparedness to perform his
obligations.

124
 Time of Performance…ctd
 But when it is clearly provided that the other party is not
performing his obligations or his insolvency is declared by
court, a party can refuse to carryout his obligations. This
phenomenon is known as anticipatory breach of contract
and it is provided under Art.1757(2).
 In conclusion, time of performance is determined either by
contract or unilaterally by any party to the contract and the
mere failure to indicate time of performance never makes
the contract incomplete.
Transfer of Risk
 According to Article 1758(1), “the debtor bound to deliver a
thing shall bear the risks of loss of or damage to such thing
until delivery is made in accordance with the contract.”
 However, sub-article 2 of the same provision provides that
the risk is transferred to the creditor if he fails to take over
the thing.

125
 Transfer of Risk…ctd

 Transfer of risk is dependent on time of performance.

However, transfer of risk is an issue only in contracts that
involve transfer of ownership. It is not a common
characteristic of all contracts. The relevant law to discuss
transfer of risk is law of sales.
Cost of Payment (Art.1760)
 Costs of payment are those of counting, measuring,
weighing, packing etc. Cost of payment (also) comprises
those of the receipt that is in practice the amount of any
stamp duty on it, to be reimbursed by the debtor.
 The unless otherwise agreed clause under Art. 1760 is to
mean that when the court is unable to ascertain a party
that should bear the cost of payment by reference to their
contract or custom, equity and good faith as indicated
under Art 1713, the debtor should cover such costs.
126
 Debtor’s Right to Receipt (Art.1761-1762)
 Whenever required, the debtor has a duty to prove that he
has properly discharged his obligation (Art.2001 (2). One
means that the debtor can use to prove the performance of
the contract is by obtaining written evidence from the
creditor (Art.2002).
 Receipt is, therefore; such written evidence given by the
creditor to the debtor. The debtor has a right to claim
receipt and a creditor has an obligation to give receipt.
 As per Art. 1761(1), the debtor can demand receipt for the
payment s made, even if it is partial payment, and if the
debt is fully paid, he can demand the delivery or
cancellation of the document supporting the debt.
 Moreover, If the debt is partly performed such part
performance has to be indicated on the document
evidencing the obligation. If the creditor alleges that the
document is lost he has to give to the debtor another
written document that contains his allegation. Art. 1762

127
 III. Variations of Contracts
 Another effect of contract is its variation. Variation is
making amendments to the provisions of a contract.
Variation of Contract is equivalent to amendment of law.
 As we have addresses earlier, variation of a contract by
parties is a contract itself (Art.1675). Here parties to the
contract can vary it for whatever reason and at any time.
 However, to vary a given contract the validity
requirements provided under art. 1678 should be
observed.
 Variation normally becomes necessary because of
fundamental changes in circumstance that the parties or
the legislator does not want to tolerate. Minor changes
may not lead to variation of Contract.
 It is not only the parties who can vary a given contract; it
can also be varied by the legislature and the judiciary.
128
 Variations of Contracts…ctd
 Since a contract is a law the legislator may vary its contents
either by a law issued prior to the conclusion of such contract
or by a law that is issued to modify certain already concluded
contracts.
Judicial Variation of Contract
 Dear students can a court vary a given contract? How do you
understand Articles 1733 & 1763? Do you think they contradict
or support each other?
 A court may be delegated by the legislature to vary a contract.
However, it is not at all times that the court can vary a given
contract; it is when fundamental change in circumstance
affects the object of the contract (Art.1766-1770). These can
be taken as exceptions provided by the law.
 Moreover, court may also vary a contract where there is undue
influence or lesion that never leads to invalidation of the
contract.
 But if the defect in consent is a kind of defect that leads to129
invalidation , the court cannot vary the contract but only
 Variations of Contracts…ctd
 In general, a court of law may modify the following
contracts:-
1) Contract between persons having Special Relation, (Art.
1766):- Here the phrase special relationship must refer to
relations that are recognized by the law such as spouses,
relation by consanguinity and affinity, employer-employee,
lawyer-client, doctor-patient and agent principal etc. As it
is widely addressed under consent part, a contract made
in the afore listed relations may be varied on the ground
of lesion, and undue influence(reverential fear) i.e. on the
ground of defect in consent if such defect is not enough
to invalidate the contract.
2) Contract with public administration , (See Art. 1767)
3) Partial Impossibly of Performance: - on justified grounds
such as force majeure (See Art. 1768)
4) Time of Performance:- This is about the grace period that
can be given by the court taking into account the position 130
of the debtor. (See Art. 1770). This is an exception to Art.
 Chapter IV: Non-Performance of
Contract and Its Consequences
Definition of Non-Performance
 Non-performance (breach of contract) refers to parties
failure to perform contractual obligations in conformity
with the terms of the contract and the law.
 In general non performance include:-
 Total non performance, where a party totally fails to honor
the terms of contract or
 Partial non performance, where a party has performed
his/her obligations only partly or
 Delay in performance or
 Offering performance at a place other than the place
agreed up on (place fixed by law) or
 Delivering a thing that does not conform to the contract
or delivering a defective thing.

131
 Default Notice: Requirement and Exceptions
 Before resorting to the remedies of non-performance
(Specific performance, cancellation or Compensation), the
victim party shall put the other party in default by giving
him a notice. ( See Art. 1772).
 Default notice is demanding the debtor to perform his/her
obligation within a certain time limit.
 It has a number of functions including that of reminding
the debtor and reducing litigation. Though contested, it
also helps to transfer risks as the date of notice denotes
date of transfer of risks.
 Moreover, default notice is an indispensable proof of the
intention of non performing party because it helps the
performing party to solicit the real intention of the party to
be put in default.
132
 Default Notice: Requirement and Exceptions…ctd

 Nevertheless, before giving a default notice to the non

performing party, questions like when to give notice, in what
form and how much time should be given to the defaulting
party to perform his obligations should be addressed
 These questions are addressed under Articles 1773 & 1774.
Art. 1773(2) answers the question when to give notice.
Accordingly, notice should be given only after the obligation
is due.
 On its part, Art. 1773(1) ) answers the question in what
form notice should be given? As per this article, there is no
formal requirement for default notice & it may be given in
any form: in writing, orally or clear conduct. What is crucial
is an unambiguous, clear communication/expression of the
creditor’s intention to obtain performance of contract.
 In general, the law of notice does not force us to follow one
or another form; however, issues of proof oblige us to give a
notice which later on can be adduced without difficulty.
133
 Default Notice: Requirement and Exceptions…ctd
 The last question that should be addressed before giving a
default notice is the time that should be given to the
defaulting party to perform his obligations. Article 1774
addresses this question. As per Art. 1774(1) “The creditor
may in the notice fix a period of time after the expiry of
which he will not accept performance of the contract.”
 As per this sub-article, creditors have the right to fix a period
of time within which they expect performance of the
Obligation. Under such notice, the creditor will clearly show
his intention not to accept performance after the lapse of
the stipulated time.
 The other question, in this regard, is how much time should
be given by the creditor to the debtor to perform his
obligations within fixed time? Even if the law does not fix
such period, the creditor is expected to give a reasonable
time having regard to the nature and circumstances of the
case.
 Thus, nature and circumstances of the case are the criteria
to determine whether the time fixed in the default notice is
reasonable or not.
134
 Default Notice: Requirement and Exceptions…ctd
 However, there are exceptional circumstances to the rule
of default notice where the creditor can resort to the
remedies of non performance with out giving default
notice to his debtor. These circumstances are provided
under Article 1775 where the law rules out the importance
of giving notice in four circumstances. They are:-
i. If the obligation is to refrain from doing something;
ii. if the obligations assumed are those to be carried out
within fixed period of time and when they are not carried
out within this fixed period of time;
iii. If the debtor clearly shows in writing his/her intention not
to perform his obligation or
iv. When the parties have an agreement not to give notice.

135
 Default Notice: Requirement and Exceptions…ctd
 In the 1st case, i.e. when the obligation is to refrain from
doing something (obligation not to do or negative obligation)
, non-performance results from the debtor’s doing of the
prohibited act. Since, the non-performance cannot be
reversed /rectified by notice, the giving of default notice
serves no purpose, and thus becomes useless/unnecessary.
 In the 2nd case, i.e. when obligations should be carried out
within fixed period of time but not observed, the nature of
the obligation is a determining factor. It may be inferred
from the contract that any performance after the expiry the
time fixed is useless for the creditor. E.g. X ordered cakes
and drinks for the celebration of his birthday but Y, the
debtor, fails to perform his obligation within the time fixed.
Here X need not give default notice to Y simply because
performance is no more necessary after the birth date. He
may invoke the remedies of non-performance with out
giving default notice.
136
 Default Notice: Requirement and Exceptions…ctd
 In the 3rd case, i.e., when the debtor clearly shows in writing
his/her intention not to perform his obligation notice should
not be given. The debtor’s refusal to perform his obligation
in writing, also known as anticipatory breach, relieves the
creditor of his obligations to give default notice.
 However, it is only when the refusal is communicated in
writing that the creditor be relieved of the pre-requisite of
default notice.
 The last case indicated in sub (d) of Art. 1775 is when the
parties have in their contract (agreement) excluded the
giving of default notice. This is a recognition and
implementation of freedom of contract; the parties are free
to disregard/exclude the provisions of article 1772, thereby
non-performing party is in default as of the expiry of the
time fixed for performance with out need for the creditor to
give a default notice. Thus, the creditor may invoke the
remedies of non-performance immediately.

137
 Consequences of Non-Performance
 Consequences of non performance of obligation by the
debtor or otherwise remedies available for the creditor
because of non performance of obligation are:-
1) Forced(Specific) Performance;
2) Substituted performance;
3) Cancellation and
4) Compensation(Damages).
 As addressed in the opening, save for the cases under
Art.1775 where the creditor may directly resorts to the
remedies of non performance without giving the default
notice, as of a rule or in all other cases, he should give
default notice to the debtor before resorting to these
remedies.
 But if the debtor still fails to perform his/her obligation/s
even after default notice, the creditor can resort to one or
more of the remedies provided hereinabove.

138
 1. Forced(Specific) Performance
 One of the effects/consequences of non performance of a contract
by the debtor is forced/specific performance which implies the
physical compulsion of the debtor to discharge his/her obligation.
 refers to performance directly imposed on the debtor through the
execution process. Thus, it take place through court order/
judgment.
 Nevertheless, specific performance can be ordered only if it meets
the two cumulative criteria provided under Article 1776 of the CC,
which are especial interest to the requiring party and without
affecting the personal liberty of the debtor.
 Pursuant to this Art, the first thing that the court shall determine is
whether performance is ‘of special interest to the creditor’. The
presence of special interest can be inferred from the importance of
the obligation required to be discharged towards the creditor and its
possibility of being discharged otherwise. If forced performance has
no special advantage to the creditor, then the court may not order it.
E. g special interest to the creditor(consumer) exists with supply of
vital goods like water. Where water supplying gov.t entity cuts off
the supply, a court forces it to supply the same because it is of
special interest to the creditor i. e. Life is unthinkable without water.
However, physical coercion is contested here.

139
 Forced(Specific) Performance…ctd
 The other important thing that the court shall determine is
whether performance affects the personal liberty of the
debtor. In short, if specific/forced performance affects the
personal liberty of the debtor, the court shall not order it.
 Contracts should affect only the proprietary interest of
parties not their liberty. A person cannot be deprived of his
liberty for failure to discharge his contractual obligations.
 The jurisprudence behind prohibiting forced performance
emphasizes that since contracts are not servitudes/slavery,
they should not go to the extent of subjugating the personal
liberty of the debtor.
 There is freedom of contract subject to the requirements of
law and morality but there is no slavery in the contract under
the guise of freedom of contract or non performance.
 Forced performance cannot be employed as an instance of
self help; it take place through court order/judgment.

140
 2. Substituted performance
 Another remedy for the creditor because of non
performance by the debtor is substituted performance,
performance by the creditor himself or by the person
authorized by the creditor.
 Substituted performance is made at the expense and cost
of the debtor. The cost may include the increased cost
due to non-performance .
 Court authorization is , however, indispensable for
substituted performance because with out such
authorization the creditor cannot recover the costs and
expenses from the debtor.
 The rules concerning substituted performance are
provided under Arts. 1777& 1778. They are similar with the
rules of law of sales provided under Arts. 2330 & 2333.

141
 Substituted performance…ctd

 Article 1777(1) addresses substituted performance during

non performance of obligation to do. As per this Art.the
creditor may be authorized to do or to cause to be done at
the debtor's expense the acts which the debtor assumed to
do. E,g. If Ato Belay, the debtor, fails to dig a well, Ato Abel,
the creditor can dig the well himself or have dug the well by
any one at Ato Belay's expense up on court authorization.
 On the other hand, Article 1777(2) addresses substituted
performance during non performance of obligation not to
do (obligation to refrain from doing sth). The provision
“The creditor may be authorized to destroy or to
reads
cause to be destroyed at the debtor's expense the things
done in violation of the debtor‘s obligation to refrain from
doing such things.” E,g. If “A”'s obligation was to refrain
from erecting a building and fail to do so by erecting a
building, “B”, the creditor can have the building destroyed or
destroy himself.

142
 Substituted performance…ctd

 Article 1778 also deals with substituted performance in

respect of obligation to deliver fungible things. It reads:
Where fungible things are due, the creditor may be
authorized by the court to buy at the debtor’s expense the
things which the debtor assumed to deliver. E.g. If Mr. A fail
to perform his obligation of delivering 500 quintals of
coffee in due time, the creditor may buy the agreed amount
of coffee from the market upon court authorization.
 The provisions of Articles 1779-83 also are aspects of
substituted performance but they apply in different
circumstances; when the debtor is ready to perform but
unable to discharge his obligation either because the
creditor refuse to accept performance or the creditor is
unknown or uncertain or where delivery cannot be made for
any reason personal to the creditor.

143
 Substituted performance…ctd
 In all these situations, the debtor has no fault; ready to
perform but prevented from performing. Thus, the law
allows him to discharge his obligations by depositing the
thing or money at such place as instructed by the court.
This will relieve the debtor from his obligations. However,
the deposit shall be made upon court order and the debtor
shall obtain a court confirmation as to the validity of the
deposit.
3. Cancellation
 One of the effects/consequences of non performance of a
contract by the debtor is cancellation. In other words, it is
another remedy for the creditor because of non
performance of the obligation by the debtor.
 A creditor may opt for the cancellation of the contract
where the above discussed two remedies are unavailable
or for any other reasons.

144
 Cancellation…ctd
 Cancellation ends an already existing contract. Cancellation
may take two forms-
i. Judicial cancellation, which is a rule (Art.1784 & 1785 ) &
ii. Unilateral cancellation (Art.1786 & 1789 ) which is an
exception to the rule.
I. judicial cancellation
 In principle, cancellation of a contract takes place through court
action, i.e., the party who claims cancellation as a remedy of
non-performance shall bring an action to that effect.
 The court decides, after hearing the parties, upon the request
for cancellation submitted by the aggrieved party. But it does
not mean that the court automatically cancels the contract
upon the mere request of the aggrieved party. See Art. 1784,
A party may move the court to cancel the contract
which reads:
where the other party has not or not fully and adequately
performed his obligations within the agreed period of time.

145
 judicial cancellation…ctd
 The term ‘may’ in the above provision indicates that the
court may or may not decide in favor of the party
requesting cancellation; instead it should take into
account the conditions provided under Article1785 of the
CC. As per this Article, good faith should guide the court
in deciding on cancellation.
 let us analyze sub-Article 1 of Art. 1785 which reads:- In
making its decision, the court shall have regard to the
interests of [both] parties and the requirements of good
faith . As per this provision, the court should consider
both the interest of the creditor and of the debtor. E.g. if
the creditors interest is only slightly affected by the
debtor’s incomplete performance while the debtor’s
interest would be gravely affected by a cancellation of
the contract, or vice versa, such factor should be taken
into account.
146
 judicial cancellation…ctd
 Both Sub-articles 2 &3 of the same provision addresses
fundamental breach of a contract which means that non
performance of a contract is total and irreversible. In such
case, cancellation must be granted irrespective of sub
article 1 which addresses interest of the parties and the
requirement of good faith.
 The breach is fundamental where, because of its
importance in relation to the whole contract, it can be
reasonably assumed that the claimant would not have
concluded the contract had he foreseen such breach.
 The burden of proving that the breach is fundamental
rests on the party who requires such cancellation. As
discussed right now, minor deviations from the terms of
the contract (whether in quantity or quality or delay etc)
may not be sufficient to cancel it. We may reiterate Art.
the creditor may not refuse
1748 (1) which reads that:
fungible things on the ground that the quantity or quality
offered to him does not exactly conform to the contract,
unless this is essential to him or has been expressly
agreed.
147
 judicial cancellation…ctd
 But the refusal of the court to grant the cancellation does not
affect the aggrieved party’s right to compensation.
II. Unilateral cancellation (Art.1786-1789 )
 Unilateral cancellation connotes cancellation of a contract
by one party without going to the court of law.
 It is an exception to judicial cancellation of a contract. There
are policy reasons for the introduction of these exceptions
such as the rapidity of modern business, which requires quick
solution and the need to avoid work load of courts of law.
 As addressed under Articles 1786-1789, there are four
circumstances under which a party can unilaterally cancel a
contract without going to the court of law. These are:-
i. Where there is a cancellation clause in the contract;
ii. Where the debtor has failed to honor certain time limits;
iii. Where performance becomes impossible and
iv. The case of anticipatory breach of contract 148
 Unilateral cancellation…ctd
 Now let us analyze the circumstances one by one.
 The first case, as indicated under Article 1786, is where
there is a cancellation clause in the contract. Article 1786
reads as:A party may cancel the contract where a provision
to this effect has been made in the contract and the
conditions for enforcing such provision are present.
 This provision is a reaffirmation of freedom of contract
which enables parties to incorporate a cancellation clause
in their contract.
 The second case as indicated under Article 1787, is where
the debtor has failed to honor certain time limits.
According to this Article:A party may cancel the contract
where the other party has failed to perform his oblations
within the period fixed in accordance with Art. 1770 [i.e.
1774
period of grace], [i.e. period fixed in the default notice],
or 1775 (b) [obligations that are such that they must be
performed within the time fixed]. 149

 In legal parlance, such periods are called compulsory

 Unilateral cancellation…ctd
 The third case as indicated under Article 1788, is where
performance becomes impossible. The Article reads as:-A
party may cancel the contract even before the obligation of
the other party is due where the performance by the other
party of his obligations has become impossible or is
hindered so that the essence of the contract is affected.
 This provision envisages situation where performance was
possible at the time of the making of the contract but
which becomes impossible afterwards. This is usually
referred to as intervening impossibility. Here, the material
fact for the cancellation of a validly formed contract occurs
after the conclusion of the contract.
 E.g. “X” agrees to deliver his bracelet to “Y”. Unfortunately
“X” lost it before he delivers to “Y”. In this case because
performance is impossible. “Y” can unilaterally cancel the
contract. “Y” can do this even before the due date simply
because there is no point in waiting the arrival of the due
date .
150
 Unilateral cancellation…ctd
 The last case where unilateral cancellation can be invoked is the
case of anticipatory breach of contract. Anticipatory breach of
contract is when party to the contract refuses to perform his
obligation. Read Art. 1789 of the CC carefully.
 As per sub – Article 1 of this provision, when one of the parties
expressly communicates his refusal to perform, the other party
may unilaterally cancel the contract if he chooses.
 But the question that may be posed under sub- Article 2 is that
why the party who intends to cancel the contract shall place the
other party in default even if the defaulting party expressly
communicated his refusal to perform his obligation?
 Sub- Article 3 answers this question. As per this sub- Article, it is
only where the defaulting party communicates his refusal orally
that the other party may place him in default. However, if the
refusal is communicated in writing, there is no need of default
notice and the other party can immediately cancel the contract.

151
 Unilateral cancellation…ctd
 Under sub- Article 2, the party who orally communicated his
refusal may prevent the cancellation of the contract by
furnishing, within fifteen days, sufficient security to
guarantee that he will perform his obligations at the agreed
time. The furnishing of the sufficient security within fifteen
days is an indication of change of mind.
 Dear students do you think change of mind benefits a party
who has communicated his express refusal in writing? The
law is clear enough here, it is only a party who has refused
orally who can benefit from the change of his mind.
 Even if this point is covered under chapter 7, the last but
important point that should be raised in relation to
cancellation of a contract is its effect. The teaching
material wrongly states that the effect of cancellation is
reinstating parties to the position which would have existed,
had the contract not been made. As we shall see in chapter
7, however, the effect of cancellation is putting the parties in
the position had the contract been performed, not had the152
contract not been made.
 4. Damages /Compensation (Art. 1771 (2) &
1790-1805)
 Damages/Compensation is another remedy for a party
affected by non-performance. The cumulative reading of
Articles 1771 (2) and 1790 shows that under Ethiopian law
damages can be claimed as an additional or alternative
remedy.
 Dear students what do you think is the purpose of
compensation?
 The purpose of compensation for non-performance is to
put the victim party in a position he would have been had
the contract been performed.
 According to Article 1790(1) of the CC, a party is entitled to
compensation only if he /she has incurred loss or damage
as a result of non-performance. The central notion here is
no loss, no compensation.
 Dear students, do you think absence of fault is a defense
against the claim of compensation for non performance? 153
 Damages /Compensation…ctd
 Article 1791(1) answers this question. It reads:- “ the party
who fails to perform his obligations shall be liable to pay
damages notwithstanding that he is not at fault”. As per
this sub- Article (In principle), absence of fault is not a
defense against the claim of compensation for non
performance.
 However, Article 1791(1) should be read in conjunction with
Article 1790 i.e. a party who is not at fault may pays
compensation for non performance only if the creditor
incurs loss/damage because of such non performance.
 Drear students, do you think there are Defenses for the party
required to pay compensation? The answer is positive;
There are two defenses for the debtor against the claim of
compensation by the creditor. The first defense is the
absence of fault. Even if we said that in principle absence of
fault is not a defense against the claim of compensation for
non performance, under Articles 1795& 1796 of the CC,
there are certain exceptions to this general rule.
154
 Damages /Compensation…ctd
 As per these exceptional provisions, the plaintiff has to prove
fault or grave fault on the part of the debtor so as to succeed in
claiming compensation.
 The 2nd defense for the debtor is force majeure. Art.1791(2)
states that “ [the debtor]shall not be released unless he can
show that performance was prevented by force majeure”. The
acontrario reading of this provision suggests that the debtor is
released of payment of compensation if he can show that
performance was prevented by force majeure.
 It is also important to look at:-
 Article 1792 which provides the criteria for determining what
constitutes force majeure;
 Article 1793 which provides list of specific cases that constitute
force majeure &
 Article 1794 which provides list of specific cases that do not
constitute force majeure.
 Nevertheless, pursuant to Article 1798 of the CC, force
majeure is not defense if it happened after the debtor had
been already placed in default.

155
 Damages /Compensation…ctd
 Once, the liability of the debtor for damage is determined,
the next question is to assess the amount of
compensation (damages) to be paid to the creditor.
Compensation is assessed according to the rules of
Articles 1799-1805.
 The basic principle in assessing compensation is that
compensation shall be equal to the damage/loss which
non-performance would normally cause to the creditor in
the eyes of a reasonable person (Art.1799 (1))i.e.,
damage=damages. Thus we have objective criteria for
assessing damage.
 NB:- in case of money debts, a creditor is entitled to
compensation at the rate fixed under 1803 & 1804 without
the need to prove the extent of loss/damage he has
sustained as a result of non-performance. However, the
creditor may claim more compensation if the
compensation to be assessed according to 1803 & 1804
are not adequate for the greater damage/loss he has
sustained (see Article 1805). 156
 Chapter V: Special Provisions Relating To
Contracts
 Special provisions relating to contracts are those provisions
which help as gap fillers i.e. they help to fill those gaps left by
parties to the contract.
 The most frequent areas where the parties do leave gaps or
agree less clearly are stipulation as to:- time, earnest, liability
(penalty clause), alternative obligations and Conditional
Contractual Obligations.
1. Provision as to time
 Parties to the contract may more probably provide the time of
performance within certain period of time without specifically
stating the time. They may also provide the time in certain
number of days, weeks, months, or ambiguously on first, last, or
middle of a month.
 The presence of different days in months in Gregorian calendar
and the presence of thirteen months in Ethiopian calendar
coupled with the presence of holidays in between the stipulated
time might continually and unexpectedly create gap as to time.
157
 Provision as to time…ctd
 Provisions as to time generally deals with the time at which
performance is due in order that the debtor can be clear as
to exactly when to perform his obligation.
 Article 1858 addresses time fixed in days. According to this
provision Where the period is fixed in days, the debt shall be
due on the last day of such period, the day of the making of
the contract not being included.
o For instance, if a contract made on Hidar 23/03/09
stipulates that performance should be within 7 days from
the date of formation of the contract, the last date for the
performance of the contract is on Hidar 30/03/09 excluding
the reference timeHidar 23/03/09. It is counted within 24,
25, 26, 27, 28, 29 ,30 (7 days excluding the date of formation)
.
 Article 1859 reveal the calculation of the period fixed in
weeks. As per this Article, Where the period is fixed in weeks,
the debt shall be due on such day of the last week as
corresponds by its name to the day of the making of the
contract.

158
 Provision as to time…ctd
 To illustrate, assume Samson concluded a contract to
perform his obligation on Monday Sene 1/3/1998. He agreed
to perform his obligation after three weeks from the making
of the contract. The due date is then Monday 22/1998.
 Here, Monday in the time of formation of the contract should
correspond to Monday in the time when performance shall
be made.
 Article 1860 reveal the calculation of the period fixed in
months.
 As per sub-article 1 of Article 1860, Where the period is
fixed in months or so as to include several months, the debt
shall be due on such day of the last month as corresponds
by its number to the day of the making of the contract.
 As per this sub-article, the last date to perform an obligation
is the day of the last month which corresponds the day of
the making of the contract in number, not in name.

159
 Provision as to time…ctd
o For example, the last date for someone, who entered into
contract on Hidar 23, 2009 promising to perform his
obligation within three months, is Yekatit 23, 2009.
 Here, Sameness shall be in date not in name. If the date
in the formation of the contract is23 and the date of
performance shall also be23 .
 Sometimes certain dates of a month in Gregorian
calendar might not have corresponding number in other
months.
 In such cases, the absence of corresponding number
might create uncertainty whether it will be transferred to
the next month or it will be the last day of the month,
which does not have a corresponding number.
 In filling such gaps, Sub Article (2) of Article 1860,
stipulates the due date to be the last day of the last
month. Read the whole sub article

160
 Provision as to time…ctd
 For instance, the due date of someone who concludes a
contract on October 31 to perform his obligation in four
months is February 29. Normally the corresponding number
shall be 31. But there is no such number in February. This is
because February does not have the date 31. Its last date is
29. Accordingly, the due date is February 29.
 Coming to Ethiopian Calendar, there could be a gap because
of its 13th month, Phagume. This is because, as the
thirteenth month has five or six days, the probability of not
getting corresponding date is more probable.
 As a result, under Sub Article 3 of Article 1860, the law
opted to totally disregard the 13th month of Ethiopia.
 Hence, Phagume is not taken into account in monthly
calculation of time and a contract concluded on any day of
Phagume is considered that it has been made on Meskerem
1 in the Ethiopian calendar.

161
 Provision as to time…ctd
 Sometimes, contracts may stipulate time provisions with less
clarity using indistinct and puzzling expressions like, at the
beginning, in the middle or at the end of a certain month.
 Article 1861 is designed to fill such gaps. As per Article 1861(1),
Where the period expires at the beginning or at the end of a month,
such period shall expire on the first or on the last day of such
month.
 As per Article 1861(2),Where the period expires in the middle of a
month such period shall expire on the fifteenth of such month.
 The law also wants to fill gaps which might be created because of
holidays. According to Article 1862,Where the period expires on a
day which is holiday at the place of payment, such period shall
expire on the next working day.
 But the law is not clear as regards the type of holiday; is it only
national holiday? Or limited to Saturday and Sunday? Or Religious
or customary holiday? The writers believe that the holiday should
not necessarily limited to national holiday.
 There are also some provisions addressing other time related
issues from Article 1863-1868 which should be read by yourselves.
162
 2. Conditional Contractual
Obligations
 Providing a condition upon the fulfillment of which the effect of
contract depends is one way by which parties to the contract
exercise their freedom of contract.
 It is one way by which parties may determine the fate of their
agreement.
 Contracting parties can make their contract conditional as a
whole or partially (one of its terms).
 The rule(principle) of conditional contractual obligations is
stipulated under Article 1869 of the CC which reads as:-“A
contract shall be deemed to be conditional where it relates to an
obligation whose existence[or non-existence] depends on the
occurrence or non-occurrence of uncertain event.”
 Condition determines the effect of contract in two ways. It either
makes the contract effective upon its fulfillment or ends the
effect of contract.
 While a condition which makes the contract effective upon its
fulfillment is called Condition precedent or suspensive condition
the one which ends the effect of contract is called condition
Subsequent or resolutive condtion.
163
 A. Condition precedent (suspensive)
condition
 As we discussed it right now, a precedent
(suspensive)condition is a condition of uncertain event
upon the happening or fulfillment of which a contract
subject to it becomes effective.
 In short it is a condition which keeps the contract in
suspense until its fulfillment. Contract is effective only
upon the fulfillment of a condition.
 Now look at Article 1871 which states that:-“Unless
otherwise agreed, the contract shall be effective as from the
day when the condition is fulfilled”.
 This provision provides a presumption in favor of condition
precedent in the absence of agreement otherwise.
o For instance, Getachew concluded a contract with Alemu
that he is going to sell his car if he wins foreign scholarship.
In the case at hand, the contract of sale of car will have
effect only if Getachew wins foreign scholarship.

164
 B. Condition Subsequent(Resolutive
condition)
 Is a condition of an uncertain event upon the fulfillment of
which the contract subject to it ceases to exist(terminated).
This condition is direct opposite of a precedent condition.
 In this type of condition, the effect of the contract starts
immediately after the formation of the contract but the
contract ceases to exist (terminated) upon the occurrence of
the event.
 Now look at Article 1872 which addresses this type of
condition.
(1).A contract whose cancellation ( termination) depends on the
occurrence of an uncertain event shall be effective forthwith.
(2).It shall cease to be effective where the event occurs.
E.g. Chala concluded contract of house rent with Abdi on the
condition that he lives in the house until Abdi gets married.
 Even if the effect of the condition subsequent is termination
of the contract up on its fulfillment an uncertain event, it is
not followed by compensation since the termination is
because of the agreement(Contract) of the parties .
165
 Condition Subsequent(Resolutive condition)
 Another point worth mentioning as regards Condition
Subsequent(Resolutive condition) is that during the agreement,
parties to the contract should expressly agree that the condition is
Condition Subsequent(Resolutive condition) for otherwise the law
presumes the condition to be condition precedent. Art. 1871.
Good faith in Conditional contractual Obligations
 Dear students, what do you think if one of the parties to the
contract prevents the fulfillment of certain event in a bad faith?
 Article 1870 has an answer for this question. It reads as:-A party
may regard a condition as fulfilled where the other party has
prevented its fulfillment in a manner contrary to good faith.
 Even though the condition is not fulfilled, if its fulfillment is
hindered by one of the parties and his act of hindrance emanates
from bad faith, the condition can be presumed to have been
fulfilled. Then the party may require the right he would have done
so had the condition been fulfilled.
 Let us see an example provided by the writers.assume that Ato
Abebe entered into a contract with Senait to sell his house if he is
employed. Later, if Ato Abebe refuses the employment having got
the chance, Senait can require performance of the contract
proving that he did it in bad faith.
166
 Good faith…ctd
 Article 1870 is equally applicable to condition
subsequent(Resolutive condition too).
 In the earlier example, i.e. in the contract of house rent
concluded between Chala and Abdi on the condition that
Chala lives in the house until Abdi gets married if Chala
prevents the marriage of Abdi by whatever way to stay in
the house, the law presumes that the condition is fulfilled i.
e Abdi got married so that Chala should search for another
house to rent.
 Article 1873 lacks clarity even if it seems redundant in the
presence of Article 1870.
Acts of management with regard to the object of
the contract subject to condition
 It does not mean, however, that the parties are absolutely
excluded from any act with regard to the object of the
contract subject to condition.
 Strict restriction not to do anything on the object of the
contract not only renders it unproductive but also denies
the holder the right to take necessary measures to protect
damage and depreciation and administer the thing.
167
 Acts of management
 In line with Article 1874 of the CC, despite certain
restrictions, the holder may exercise certain acts on the
object of the contract subject to condition.
 According to Article 1874, Acts of management done
prior who exercises the right shall remain valid where the
condition is fulfilled. Damage may be claimed where such
acts were done in bad faith.
 Acts of management are provided under Articles 2204
which include Lease for term less than three years, the
collection of debits, investment of income, discharge of
debts, are acts of management
 These two provisions are not exhaustive lists which
exclude other acts. Other acts may also be included by
analogical interpretation now that these lists are
illustrative lists.
168
 Acts beyond management with regard to the
object of the contract subject to condition(Art.1875)
 Acts beyond management are those acts made to affect the interest of
the party for whom performance will be made. They are acts made in
bad faith and are subjected to invalidation.
 Acts beyond management are provided under Article 2205 and includes
alienating or mortgaging real-estate, investing capitals, signing a bill of
exchange, effecting a settlement, giving consent to arbitration, making
donations or bringing or defending an action are acts beyond
management
 However, the invalidation of acts beyond management should not
prejudice the rights of 3 parties who have dealing with the actual holder.
rd

 The law protects the interests of 3 parties too. Art.1875(2).

rd

 Another point worth mentioning as related to Conditional contractual

obligations is about Unlawful, immoral or impossible conditions.
 In this regard, Unlawful, immoral or impossible conditions are regulated
by applying provisions relating to the impossible, unlawful or immoral
object of a contract, starting Art.1715-1716.
 Class Discussion:- Discuss in groups what it mean by Unlawful, immoral
or impossible condition by giving examples to each kinds of conditions.
169
 3. Alternative Obligations
 Another manifestation of parties’ freedom of contract is
their agreement for alternative obligations.
 Alternative obligation happens in a contract when the
debtor is to discharge one among different obligations.
 For instance, if Abeje, who is an engineer borrowed 2,000,
000 Birr from Merkebu and their agreement provides that
Abeje performs the obligation either by paying back the
money in cash or building a house for merkebu, Abeje has
the right to choose which one to perform.
 According to Article 1880, the debtor is released by
performing either of the obligations provided in the contract.
In the above example, Abeje is released by either paying the
money in cash or building a house which can be built by 2,
000,000 Birr.
 Dear students! Who, do you think, has a right to choose the
obligation to be carried out among the agreed alternatives?
Article 1881 has an answer to this question.
170
 Alternative Obligations…ctd
 Dear students! What do you think is the fate of performance
if one of the obligations becomes impossible? Article 1882
has an answer to this question . As per sub-article 1 of
Article 1882,if one of the obligations becomes impossible,
the debtor shall discharge the other obligation.
 On the other hand, As per sub-article 2 of the same article, if
the impossibility is owing to fault of the party that is not
entitled to choose, damage is required to be paid to the party
that is entitled to choose.
4. Earnest
 is an old and frequent practice which is considered to be
testament for the conclusion of a contract.
 As per Article 1883 of CC, the giving of earnest is the proof of
the making of the contract.
 There are, however, different positions as to whether earnest
entitles a party the right to terminate a contract unilaterally.
 When we see the position held by the Ethiopian law,
termination of promise guaranteed by earnest unilaterally is
possible upon certain limitations.
171
 Earnest…ctd
 As per Article1885(1), Unless otherwise agreed the party who has
given earnest may cancel the contract subject to forfeiture of the
earnest given by him.
 As per Article1885(2), Unless otherwise agreed, the party who
has received earnest may cancel the contract subject to
repayment of double of the amount received by him.
 As it can be easily inferred from the provision, a contract secured
by earnest can be cancelled unilaterally by either party. However,
as it can be seen from the sub provisions, the effect is not the
same for both parties Unless otherwise agreed .
 Dear students, what do you think happens to earnest if the
contract is performed? Article 1884 has an answer and stipulates:
Unless
- otherwise agreed the party who has received earnest
shall return it or deduct it from his claim where the contract is
performed.
 But what is controversial regarding earnest is the issue of
compensation upon non performance of the contract.Do you
think it is possible to claim compensation? If yes, in what amount ,
i.e. can one who has given earnest claim more than double of
what he has given as earnest if he can establish damage in this
effect? What about the one who received earnest in the same
situation?
172
 5. Penalty Clauses/ Provisions as to liability
 The Ethiopian law of contract has provided remedies of
non-performance as a gap filling ones. Nevertheless,
freedom of the parties to the contract to set aside such
gap filling provisions and provide their own is permitted.
 The parties can either extend or limit their liability subject
to the legal limitation of unconscionable contract.
 As per article 1886 of the CC, the parties can agree to
extend their liability even in the presence of force majuer.
 Contrary to this, they may also agree that one of them held
liable only upon committing a fault. Article 1887.
 Determining penalty by the parties to the contract helps to
encourage performance of the contract or in other words it
discourages non performance.
 Parties to the contract can fix penalty clause either in the
main contract or in a separate document.
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 Provisions as to liability
 However, freedom to fix the amount of damage (penalty) might on
the other hand create unconscionable contract (Lesion) which is
subjected to invalidation.
 Article 1710 shall, consequently, be applied to limit the extent of the
amount of damage at the time of non- performance of contract.
 If the penalty is terribly maximum and backed up by condition that
renders the party in unequal bargaining power, it is subjected to
invalidation on the account of unconscionable contract pursuant
to Article 1710(2) or to rectification pursuant to Article 1812.
 Dear students, what do you think is the fate of penalty clause in
case if the contract in which it is prescribed is invalidated?
 On the other hand, what do you think is the fate of the contract if
the penalty clause is invalidated?
 Article 1894 has a clear answer to this questions. As per this
provision:-
(1) A penalty shall be of no effect where the contract in which it is
prescribed is invalidated
(2) A contract shall remain in force notwithstanding that the penalty is
not valid.
 The validity of a penalty clause can be affected by the validity of
the main contract. Not Vice Versa.
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 Provisions as to liability…ctd
 Another important point regarding penalty clauses is that the aim of
inserting penalty clauses in a contract is not to give an option to the
contracting party either to perform or pay penalty, rather it is to
discourage non performance.
 In other words penalty clause should not be equated with earnest
which gives option to the parties either to perform or cancel the
contract upon paying the amount of earnest provided by the law or the
agreed amount of earnest.
 Students…! Do you think a creditor can require both performance and
penalty from the debtor? Look at Article 1890 which reads:-
(1) Unless otherwise agreed, the creditor may require the performance of a
contract which includes a penalty.
(2) He may not require both the enforcement of the contract and the penality
unless the penalty was provided in respect of delay or the non-performance
of collateral obligations.
 Students…! Do you see any problem between sub-article 1 and 2 do you
think they are contradicting each other or one is ppl and the other exception?
 As to my position, sub-article 2 is more feasible compared to sub-article 1
 Students…! Look at also Articles 1891 vs 1892(1) are they exception to one
another or contradicting each other?,
 How can we apply Article 1892(1) in the absence of agreement?Do you
think it possible to claim compensation in addition to penalty? Article
1892(2)?
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 Provisions as to liability…ctd
 Another point worth mentioning is variation of penalty provided
under Article 1893 which reads:-The agreed amount of penalty
due for non-performance may not be reduced by the court unless
partial performance has taken place.
 As per this article, the court can vary (reduce) the penalty clause if
there is partial performance. This seems to be justified on account
of securing justice…; Ordering the whole penalty while there is
partial performance is actually unfair which begs correction .
 Contrary to what is addressed under chapter 4, (the part
addressing non-performance of a contract) where there is
contractual liability in the absence of fault , here, the parties may
agree that they would be liable only where they commit a fault. See
Article 1887 in this regard.
 Parties to a contract cannot, however, exclude liability of non-
performance because of fault as it encourages deliberate breach of
contract.
 There is, however, an exception to Article 1887 under Article 1888
 Article 1888 (2):- The effect of such limitation of liability should be
only on the contracting parties.

176
 Chapter 6: Plurality of Debtors and/or
Creditors
Introduction
 So far, we were addressing contracts which involve only
single debtor and single creditor. Law of contract also
addresses contracts which involves several creditors and
debtors.
 The concept of plurality of debtors or creditors is treated as
solidary obligations in the civil law and as joint and several
obligations in the common law.
 The Civil law concept of solidary obligation and the
common law concept of joint and several obligations have a
common feature, i.e., the contract binds all obligors jointly
as well as severally for the performance of the total
obligation.
 Actually each party contracts a several promise to discharge
the total obligation in addition to contracting a joint promise
with the other.

177
 Joint and Several Liability in Case of Plurality of
Debtors

under the Ethiopian Law
As we addressed in the introduction part, an obligation is said to
be joint and several among the debtors when each debtor is
considered in his relation with the creditor as debtor of the entire
performance (as if he were the only debtor) or where both
debtors are jointly liable for the whole debt.
 In other words, each solidary debtor or both solidary debtors, in
so far as the creditor or creditors are concerned, is/are the debtor
(s) of the entire amount individually (severally) or jointly.
 Thus, each debtor is held liable until the obligation is fully
discharged.
 The principles of solidary obligation are provided under Articles
1896 & 1897 of the Civil Code.
 As per Article 1896,unless otherwise agreed or provided by law,
co-debtors shall be jointly and severally liable . This implies that
failing an express provision to the contrary, the very fact that
there are two or more debtors makes them jointly and severally
compelled to perform the obligation.

178
 Joint and Several Liability..ctd
 Unlike the foreign legislation such as French and German
which favors debtors, the Ethiopian Civil Code is in favor of
creditors regarding the point at hand.
 In joint and several liability of debtors, the creditor does not
have to divide his actions between the joint debtors: he has a
right to simply select the one most likely to be able to pay in
full and lets him later take the risk of getting refunded from
his co-debtors per Article 1908.
The effect of joint and several obligations on the
relations between creditor(s) and co-debtors
 All the effects, among debtors, derive from the principle that
each of the co-debtors, taken separately, is bound towards
the creditor so completely and absolutely as if he was the
only debtor.
 Since the co-debtors are bound one for the others and each
for all, for the entire debt, they must be considered in their
collective relations with the creditor as representing each
other. This representation benefits both the creditor and the
co debtors.
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 Joint and Several Liability..ctd
 In addition to those effects addressed so far, joint & several
liability of debtors produces the following effects too:-
A. Effect on Resjudicata
 Resjudicata is a ppl which prohibits a plaintiff from
bringing a court action for a second time against the
defendant on the case finally decided. See Art. 5 of CPC.
 Coming to resjudicata in cases of joint and several liability,
it does not work. As per Article 1898 of the CC,Proceedings
instituted against one of the debtors shall be no bar to
similar proceedings being instituted against the other
debtors.
 Theacontrario reading of Article 1898 implies that, the
creditor who has instituted a court action against one joint
debtor is prohibited from proceeding against the same
person. This is implied from the phrase "other debtors".

180
 B. Effect on Default notice
 As we know, a creditor who has a right to demand performance
from co-debtors is required to put the debtors in default to claim
rights arising from the non performance of the debtors unless it is
unnecessary according to Article 1775 of the Civil Code.
 A notice given to one is deemed given to all, and interrupts
limitation (see Article 1899 of the Civil Code).
 Thus, the notice sent to one transfers risks for all debtors.
C. Effect On void and voidable contracts
 Do you remember what void and voidable contract is from our
previous sessions?
 where the contract is void, any of the co-debtors can raise this
defense against the creditor(s). This defense is common defense
available to all.
 For instance, if the object of the contract is unlawful, immoral or
the contract doesn't fulfill the prescribed formality requirement,
any co-debtor can raise such defense.
 In addition to this, payment and limitation of actions are other
common defenses that are available to all the co-debtors. Article
1901
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 Joint and Several Liability..ctd
 On the other hand, where the contract is voidable this may
not be raised by all the co-debtors. It is only a debtor who
has the right to invoke invalidation of such contract that
may raise it as a defense. Accordingly, the defense is said
to be a personal one.
 For instance, if the contract suffers from defect in consent
or in capacity by one of the co-debtors, it is only this co-
debtor, who is mistaken, deceived, compelled, or incapable,
that can raise this defense.
 Effect of joint and several liability on void and voidable
contractsis provided under Article 1900. In this regard
sub-Article one seems to refer to void contracts while the
second sub Article relates to contracts which are voidable.

182
 D. Effects on remission of debt
 Remission is cancellation of debt by the creditor in favor of a
debtor.
 If the creditor remits the debt to all co-debtors, the obligation is
extinguished and all co-debtors are released.
 Where the creditor remits the debt to one of the co-debtors, then
all the co-debtors will benefit from such remission as they are
released from the obligation to the extent of the remitted debt.
Article 1902(1) addresses this point
 The creditor can make the remission to benefit only one of the
co-debtors and reserve his right against the others for the
remaining amount. In other words, he can collect from the other
debtor/s the remaining amount deducting the amount he has
remitted for one of the debtors.
 Theacontrario reading of Article 1902(2)implies that if the
creditor fails to specify that the debt is remitted for the exclusive
advantage of one debtor, remission made for such debtor
releases all co –debtors to the extent of the remitted debt.

183
 Joint and Several Liability..ctd
 There is, however, inconsistency between the two versions of
Sub-Article 3 of Article 1902. The English version erodes the
presence of shares among the debtor. The Amharic version on
the other hand, implies the presence of shares and thus in line
with the concepts of the other sub-articles. So, it prevails over the
English version which is confusing.
E. Effects on Novation
 Novation,as we shall address under chr7 , is to substitute a new
obligation for the original one.
 In the same way to that of remission, in case where the creditor
agrees with one of the co-debtors to substitute a new obligation
for the original one,(where novation occurs between one of the
co-debtors and creditor), all the other co-debtors will be released
from their obligation . ( Article 1903(1).
 As it is the case in remission of debt, the creditor may limit the
effect of the novation only to one of the co-debtors during which
the remaining co-debtors will remain liable to the creditor but their
liability will be reduced to the extent of the share of the co-debtor
who has agreed with the creditor,( Article 1903(2).
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 F. Effects on set off
 Set off, as we shall see under chr7, is the counterbalancing
of debt between the creditor and debtor. This is the situation
where the creditor himself is the debtor of his debtor in
another contract.
 Coming to the effect of joint and several liabilities on set off,
Article 1904 of the Amharic version clearly allows the co-
debtor who is owed by the creditor to invoke setoff. The two
versions of Article 1904 seems to have discrepancy. However,
the Amharic version seems appropriate for the same reason
discussed under Article 1902. It clearly addresses issue of
share.
 Thus, other co-debtors can plead set-off to the extent of the
obligation of the debtor who is owed by the creditor.
 The issue, however, is whether or not the other co-debtors
can invoke set-off on behalf of the other co-debtor. What do
you think?

185
 G) Effects on Merger
 Literally defined, merger is the combining of two things e.
g. 2 companies combined to form 1 company. Legally,
merger is the combining of two estates or titles to form a
single estate or title.
 As per article 1905 of the Amharic Version, If there is
merger, on the debt between one co-debtor and creditor,
the portion of the common debt that relates to one of the
co-debtors will no longer exist.
 For example, C, D and E are joint debtors of A for 3,000
Birr. A dies and C is his heir. Merger therefore happens
between A and C, the latter may request of D and E their
share in the contribution, or 1000 Birr each.
 As usual there is inconsistency between the Amharic and
English versions of Article 1905. the Amharic Version
seems appropriate.
186
 The Relation of the co-debtorsinter se
 is to mean the relation of the co-debtors as between themselves
or among themselves.
 where several debtors are bound jointly and severally for the
performance of one and the same obligation, they are duty bound
to promote the betterment of the condition of all of them.
 Accordingly, a debtor is required to abstain from doing anything
which might aggravate the situation of the other co-debtors. This
principle is incorporated under Article 1906 of the Civil Code.
 For instance, failure to raise defenses available to all co debtors.
In fact, failure to raise defenses available to all co debtors makes
the failing co debtor liable. Article 1906(2).
 The co-debtors will share the common debt after payment. After
the performance of the obligation, the obligation becomes
divisible among the co-debtors.
 Once the creditor has been paid, joint liability ceases and the
principle is that of the division of the debt between the debtors, on
an equal basis, unless otherwise provided (Article 1907).

187
 The Relation of the co-debtorsinter se…ctd
 Right of recourse: In so far as each debtor is liable to contribute to
the extent of his part in the common debt, a debtor who has paid in
excess of his share will be entitled to a right of recourse against the
remaining co-debtors for the excess amount as per-Article 1908.
 However, where one of the debtor's shares cannot be recovered, Sub
Article (2) of Article 1908 provides that such unrecovered amount is to
be repaid by the other co-debtors in proportion to their share.
Right of subrogation:- a debtor who has paid in excess of his share will
be entitled to a right of recourse against the other co-debtors who
have not yet paid their shares pursuant to Article 1908 of the Civil
Code.
 Such action is what is called the legal right of subrogation as a result
of which such paying debtor will be placed in the position of the
creditor to the extent of the amount paid by him to the creditor.
 In such cases, the creditor is legally required to hand over any
document and make available all information to the paying debtor to
enable the latter to claim from his co-debtors. Failure of this may raise
to his liability. Article 1909(3)

188
 Joint Creditors
 As regards joint creditors, even if Article 1910 seems to stipulate the
reverse of joint and several liability, the phrase “ unless otherwise agreed”
in the same provision and the articles (1911 and 1912) do not show any
opposite stipulation.
 The question that should be well addressed here is that what is the
purpose of articles (1911 and 1912) if the idea of joint creditorship is the
reverse idea of joint and several liability?
 In this regard there is no clear-cut answer but only arguments. Accordingly,
the first argument is that Article 1911 & 1912 of the Civil Code are
applicable only when there is agreement between creditors as to joint and
several entitlements.
 The second argument relates the applicability of Articles 1911 and 1912
with the concept of mutual representation or mutual agency even though it
is not clear on how such mutual representation is created without an
agreement.
 To my understanding, the applicability of Articles 1911 and 1912, which is
exactly the same with the concept of joint and several obligation of
debtors, should be based on agreement of joint creditors only which
seems feasible compared to the argument of representation.
 Thus the discussion on Articles 1911 and 1912 seems redundant since it
is exactly the same with the concept of joint and several liability despite
change of parties from co debtors to co creditors.

189
 Joint Creditors…ctd
 Still, Articles 1913-1916 which address issues of remission, novation, set
off, and ultimate sharing, respectively, are not in line with the ppl of joint and
several obligations.
 Firstly, as per article 1913, none of the joint creditors can remit the entire
debt without the consent of the others. Where remission of debt is made by
one joint creditor, the credit remains intact with regard to the other creditors.
The remission will be effective only as to the part of the joint creditor who
effected the remission.
 Secondly, similar to remission, a joint creditor does not have the mandate to
enter into a novation agreement with regard to the entire credit. Any
novation agreement made by a joint creditor will have effect only with
respect to the share of that creditor as per Article 1914 of the Civil Code.
 Thirdly, in case where the debtor becomes creditor of one of the co-
creditors, the debtor may invoke set off against the other co-creditors only
to the extent of the share of such creditor pursuant to Article 1915 of the
Civil Code.
 Lastly, where one of the co-creditors has collected the entire amount of the
debt from the debtor(s), he is held liable to the others for the share in the
obligation corresponding to them. A joint creditor who is paid more than his
share must then distribute the surplus between his co-creditors, in
proportion of their respective shares. Article 1916
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 Non Joint Obligations
 There may be situations where there is plurality of debtors and/or
creditors regarding an obligation that is not joint and several one. The
obligation may be either indivisible or divisible. Indivisible obligation is
treated under Article 1917 of the Civil Code and divisible obligation is
treated under Articles 1918 and 1919 of the Civil Code.
A. Indivisible obligations
 Indivisibility is generally a characteristic of the object of the obligation.
For instance, a car is indivisible if this is the object of the obligation.
The same applies to a given obligation to perform a service.
 where the obligation is indivisible, the debtor cannot execute the
obligation in part. In such cases, it is impossible for the debtor to
perform his obligation in part, but must be performed altogether.
 An obligation could be indivisible either by its nature or by the
operation of law or by the agreement of parties to the contract.
 Article 1917 provides that the provisions regarding joint obligations shall
apply by analogy to obligations which are indivisible owing to their nature.
 Indivisibility of an obligation has its own effects in case of plurality of
debtors and creditors.

191
 Indivisible obligations…ctd
 In terms of their effect indivisible obligations are the same with joint and
several obligations. Accordingly, the provisions dealing with jointly and
severally liable co-debtors is applicable for those co-debtors whose
obligation are indivisible by its own nature (see Articles 1896 through 1909
cum 1917 of the Civil Code).
B. Divisible obligations
 According to Article 1918,an obligation is said to be divisible where it is
neither joint nor indivisible.
 The principle underlying divisible obligations among several debtors is that
the debt is to be divided into as many fractions as there are debtors.
 In divisible obligation, there is no representation among the co-debtors.
 The following effects arise from the principle of divisible obligation:
 Firstly, each debtor is bound to pay, only his respective portion of the debt
which of course is not necessarily equal to that of the others, rather
depends on their contract or law in every case.
 Secondly, acts interrupting the period of limitation directed against only
one of the debtors cannot be asserted against the other debtors.
 Thirdly, the risk of insolvency of one of the debtors is assumed by the
creditor and not by the other debtors.

192
 Divisible obligations…ctd
 Fourthly, where the divisible obligation is accompanied by a penalty
clause, the penalty is incurred by the debtor who breaches the
obligation and only for the portion of the principal obligation for which
he is bound.
 Fifthly, the default of one of the debtors is absolutely without effect as
to others.
 Sixthly, the remission of the debt made to one of them is without
incidence on the others. The remission does not profit nor burden them,
because their obligation is divisible.
 Lastly, a novation agreement made between a creditor and a co-debtor
will release only such co-debtor, but no effect with respect to the other
co-debtors.
 In general, the effect of a divisible obligation is that each link to the
creditor is independent of the others and in this regard there are many
similarities between the effects of divisible obligations and the effects
of joint obligations provided under Articles 1913-1918

193
 Chapter 7: Extinction of Obligations
 Connotes the stoppage of an already existing obligation .
 Cumulative reading of Art.1806 & 1807 of the C.C takes:
i. Performance,
ii. Invalidation,
iii. Cancellation,
iv. Termination,
v. Remission
vi. Novation,
vii. Set off,
viii. Period of limitation of a contract, and
ix. Merger---------------------------------------- as grounds of extinction of obligation.
I. Performance of a contract
 is not only an effect of contract but also a ground of extinction of
obligation.
 Performance of the contract shall however be made according to
the terms of the contract and mandatory provisions of the law if it
shall extinguish contractual obligation.
194
 II. Invalidation of a contract
 As it is discussed under chapter 2, Invalidation of a contract happens when there
is defect in the formation of the contract (Defect in consent or Incapacity).
 The effect of invalidation is restitution(reinstatement or retrospective). The
contracting parties are put in the place where they were before the formation of
the contract.
 Sometimes compensation might be ordered when a contract is invalidated.
 The damages/compensation following from an invalidation of a contract aims at
putting the contracting parties in the place they would have been had the
contract not been formed/made.
 Under Ethiopian law of contract, it is not anyone who can request the
invalidation of a defective contract. It shall be the party who is affected by the
invalid contract that can invalidate the contract. Article 1808 (1)
 This is to protect the interest of the affected party. The other party who is not
affected is considered to have full information or rationality behavior. Hence,
there is no reason to help him by empowering him to invalidate the contract
 Representatives of the party, that is potential to be adversely affected by the
invalid contract might be in a position of enforcing the rights of the party.

195
 Invalidation of a contract…ctd
 Unless an invalid contract is invalidated, the contract is upheld and becomes
effective. Logically speaking, it seems that, even if invalid, the contract which is
not invalidated by court of law should be performed for otherwise the remedies of
non performance will be due. However, Article 1809 stipulates the reverse of this.
How do you see it? Don’t you think it is inconsistent with the ideas under Article
1808 and 1810?
 The other controversial point as regards invalidation of a contract is the
invalidation of a void contract as provided under Article 1808(2). As per this sub
“A contract whose object is unlawful or immoral or a contract not made in
article,
the prescribed form may be invalidated at the request of any contracting party or
interested third party”.
 The question is that if void contract is a contract which does not exist from the
very beginning, how can one invalidate something which does not exist? How can
we demolish a house that we have not built from the very beginning?
 Coming to the invalidation of voidable contract, the presence of invalid contract
does not necessarily mean that the contract will be invalidated and the obligation
will be extinguished.
 As we addressed under chapter 2 , voidable contract can be cured where the
party who is affected by defect in consent or capacity confirms the continuation
of the kt. In this regard, Article 1811 readsthe
“ party whose consent was vitiated
may waive his right to require invalidation where the cause which vitiated his
consent disappeared.” Article 1814 also deals with this point.

196
 Invalidation of a contract…ctd
 Moreover, the right to invalidate a contract is limited by lapse of a certain
period of time. Article 1810 connotes that a contract shall not be
invalidated unless an action to this effect is brought within two years from
disappearance of the ground for invalidation except, unconscionable
contract for which the starting point is the formation of the contract.
 If the ground for invalidation is a mistake, within two years from the
knowledge of the misperception , if the ground is duress, within two years
from the avoidance of the threat, and if the ground is incapacity, within two
years from the time the incapable becomes capable are the points where
counting starts.
 But regarding unconscionable contract, period of limitation starts to count
immediately after the formation of the contract and lasts only to two years
from that specific date. But the law is silent regarding the counting of
period of limitation if the injured is under age.
 But one point worth consideration regarding the period of limitation to
invalidate a contract is inconsistency between Articles 1810(1) and 1845,
the former provides 2 years while the latter provides 10 years? Shall we use
the term“unless otherwise provided by law” under Article 1845, to precede
Article 1810 over Article 1845? What about the redundancy?

197
 Invalidation of a contract…ctd
 The other gap of the law which worth consideration is the question which
periods of limitation (Art. 1810 or 1845) applied to void contract?
 The other point worth consideration in the invalidation is the interest of
3rd parties to the contract. In this regard, Article, 1816 provides that Acts
“
done in performance of a contract shall not be invalidated where the
interest of third parties in good faith requires”
III. Cancellation of a contract
 Another very important ground of extinguishing a contract is its
cancellation.
 Cancellation is making validly formed contract ineffective when there is
non-performance.
 It serves both as a ground of extinguishing a contract and remedy of non
performance (as addressed under chapter 4).
 Even if there exist some similarities between invalidation and cancellation,
the two concepts are not the same.
 To discuss the similarities first:-
 both invalidation and cancellation are the grounds to extinguish a
contract,
 both invalidation and cancellation are the grounds to claim
compensation,

198
 Cancellation of a contract…ctd
 Coming to the points of difference between invalidation and cancellation:-
 The first point of difference is their ground. Accordingly while the ground for
the invalidation of a contract is defect in the formation, the ground for the
cancellation of a contract is non performance.
 The second difference between invalidation and cancellation is in their effect as
related to compensation. In this regard, Even though the effect of both
invalidation and cancellation is restitution, cancellation additionally entitles the
party a compensation that rewards the benefit of contract. i.e., reinstatement +
entitlements to the compensation that rewards the benefit had the contract
been performed.
 In other words, while the compensation following from an invalidation of a
contract aims at putting a contracting party in the place he would have been
had the contract not been formed/made, i.e. restitution, the compensation
following from cancellation of a contract aims at not only restitution but also to
the entitlements had the contract been performed.
 This shows compensation for cancellation is more stringent when compared
to compensation for invalidation. i.e. in cancellation, compensation is paid not
only to restitute a party but also to entitle him benefit of a contract. This
shows that compensation for cancellation has both retrospective and
prospective effect.
 In this regard, Article 1815, which makes the effects of invalidation and
cancellation the same thing is a wrong provision which might be applied only
to invalidation. The phrasing“invalidation or cancellation” is wrong as they are
different concepts.

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 Cancellation of a contract…ctd

 Another point which makes Article 1815 meaningless as regards

compensation due to non performance of a contract is the presence of
Article 1790(1) which is rightly provided under the title of non
performance of a contract. In this regard please look at George
Krzeczunowicz’s analysis of the provisions at page139 of his book
(Formation and Effect of Contracts in Ethiopian Law).
 He concludes that in case of inconsistency Article 1790(1) should
prevail over Article 1815.
IV. Termination of Contract (ዉል ስለ ማስቀረት)
 is also one way by which obligation is extinguished.
 is making the contract ineffective starting from the time of
termination of the contract.
Similarities and differences between invalidation and
cancellation on the one hand and termination
 The similarities between termination and the other two (invalidation
and cancellation) is that all are the grounds to extinguish obligation.

200
 Termination of Contract…ctd
 The basic difference between z two categories is their effect and ground.
 In terms of effect, while the effect of Invalidation and cancellation is
retrospective even
[ though cancellation additionally entitles the party a
compensation that rewards the benefit of contract] , that of the termination is
prospective (forward looking).
 In terms of their ground while the grounds of invalidation and cancellation are
defects in the formation and non performance, respectively, the ground for
termination is neither defect in formation nor non performance rather the
agreement of the parties to the contract or court order.
 As per the definition of contract provided under Art.1675, agreement to
terminate a kt is a contract itself. i.e. for it reads,agreement to extinguish
obligation of proprietary nature.
 Based on these grounds, there are three types of terminations:
I. Bilateral Termination :- is putting an end to a contractual obligation by the
agreement of both parties. i.e. either by inserting bilateral termination clause in
the contract or by later agreement.
II. Unilateral Termination:- is made in two ways.
 The 1 one is by the effect of agreement, i.e. by inserting a unilateral termination
st

clause in the contract and when a condition which entitles unilateral termination
is fulfilled. The best examples are conditional contractual obligations, especially,
subsequent condition. In this regard, please correct both your notes and the
teaching material by substituting termination in the place of cancellation. See
Prof. Tilahun Teshome’s book (Basic Principles of Ethiopian Contract law ) p
157-160.
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 Termination of Contract…ctd
 The 2nd way of unilateral termination of a contract is by giving notice
in advance. The time of notice might be either fixed by law, by custom,
or reasonably by parties to the contract.
III. Judicial Termination: Court termination is the principle and
termination by the parties is an exception as parties shall not be
judges on their own case .
 The other important point in termination of a contract is that
termination of a contract should not affect the rights of third parties to
the contract. Look at the examples given by Prof. Tilahun at page158.
e. g sub contractors…
 Termination of a contract also better suits temporary nature of
obligations or contract. E.g. termination of employment contract
entered into for a certain period of time, termination of contract of
rents, termination of contract of service, termination of contract of
usufruct, termination of contract of agency etc.
 But one important thing that should not be ignored is the importance
of giving default notice in the above cases.
 In general , look at Articles 1819-1824 for Termination of contracts.
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 V. Remission of debt
 is also one way of extinction of obligation.
 is voluntary release of debtor of his obligation by the creditor.
 As per Art.1825, “Where the creditor informs the debtor that he regards
him as released, the obligation shall be extinguished unless the debtor
forthwith informs the creditor that he refused his debt to be remitted .”
 Dear students, why do you think the debtor may refuse the remission of
the debt?
 According to Article 1825 of the C.C the mere willingness of the
creditor to release the debtor by remission is not enough to make the
remission effective and result in extinguishing of obligation. The
willingness of the debtor to that effect is also required.
 However, the provision does not put express acceptance of the
remission as a mandatory requirement. The debtor shall object when he
is informed of the remission if he wants the remission not to be made.
Unless such protest is made the law seems to presume silence as
acceptance in the case of an offer to effect remission of debt to the
debtor.

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 VI. Novation
 is also another way of extinguishing an obligation.
 Novation is substitution of an existing obligation by new obligation in its nature
or object. Mere difference without substantial change either in the object or in
the nature does not amount to novation; rather it is variation in fact. Art.1826.
 For instance, change of place of the contract is not novation. In such case,
neither z nature nor z object of the original obligation is different. Change of
sugar by coffee is, however, novation as the object of the contract has been
changed/substituted.
 When original obligation is different from the substituted obligation in its cause
it is also considered to be novation.
 Suppose, for example, that Bekele owes Ayele Birr 20,000 for some goods he
purchased from him; it is agreed later in the new contract that Bekele will keep
the 20,000 Birr as a loan from Ayele. This is novation by change in the cause:
Bekele’s debt has the same object, but henceforth, it has a different cause.
Bekele owes Birr 20,000 because Ayele lent it to him, not because he purchased
the goods from him.
 Novation is required to be intentional so that it can have the desired
consequence in accordance with Article 1828. As per this provision,Novation
shall not occur unless the parties show the unequivocal intention to extinguish
the original obligation. Replacement of certain obligation with other obligation in
the absence of intention to make novation does not have the effect of novation.
 Read also Art. 1829 for the negative meaning of novation and Art. 1827 for
effects of novation.

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 Novation…ctd
 As per article 1827, Novation in its effect extinguishes not only the principal
obligating but also the accessory ones. Accessory obligations in pledge,
mortgage and personal guaranty are extinguished as the principal obligation
extinguished by novation.
VII. Set off
 is also among the grounds by which a contract is extinguished.
 happens when parties to the contract are creditors to each other in different
transactions. Article 1831
 Set-off can be made upon the fulfillment of certain conditions. These conditions
have been put as positive and negative conditions under Articles 1832 & 1833
respectively.
 The conditions that are provided in Article 1832 are.
(a) The debts shall be money debt or fungible things of the same species.
(b) The debts shall be liquidated/due.
 Set-off is not possible if someone owes in item and the other owes in money. Nor
is set-off possible when the debts are items unless the items are fungible things.
 However, there is exception to the requirement of “liquidation” of the debt.
According to Article 1841 even though one of the debt is not liquidated, the court
may decide that set-off has been made to the extent of the admitted amount.

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 Set off…ctd
 The other condition is that the debt shall be due at the time set-off is
required. The time when both obligations are required to be performed
shall be at the same time. If one of the debts is to be paid on September 1
and the other debt is to be paid on October 3, set-off cannot be made with
regard to these two debts on September 1 since both debts are not due by
then.
 This requirement protects the debtor who can be beneficiary of time limit.
The one who shall perform the obligation in October 3 is the beneficiary of
time limit and refusal of set-off is not to affect such contractant adversely.
 An exception to this requirement has been provided under Article 1834
dealing with period of grace. Granting of period of grace does not bar set-
off although the time in which payment shall be made is protracted by the
court order of period of grace.
 The other point regarding set off is that for the set off to occur, the debt
should not be necessarily equal always. Article 1836.
 As per Article 1837, Set- off shall not affect the interest of third parties.
 Moreover, set-off cannot be made in the absence of intention to do so.
Article 1838 provides that if the debtor fails to inform the creditor his
intention to effect set-off, set-off does not occur.

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 VIII. Merger
 Is another method by which an obligation is extinguished.
 As per Article 1842,Merger shall occur and the obligation shall be
extinguished where the position of creditor and debtor are merged in
the same person.
 The position of creditor and debtor are merged in the same person for
the reasons of succession, merger of companies, formation of
partnership and so on.
 Once the creditor and debtor become the same, performance of
obligation after merger is not actually realistic since performing
certain obligation towards one self is actually absurd.
 As is true in other grounds of extinction so far discussed, the rights of
third parties should not be affected by merger. Article 1843.
 Merger has certain peculiar characteristics, as obligation extinguished
by merger might revive in certain circumstances. E.g. when a person
who is declared absent returns or when a previously merged
organizations may split again. Article 1844

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 IX. Limitation of Action/ Period of Limitation
 Is also one and the last way of extinguishing an obligation.
 Making period of limitation a means of extinction of obligation creates
security of business transaction by avoiding uncertainty among parties to
the contract.
 It is important to first see what the concept of Prescription is before going
into the details of Period of limitation.
 Accordingly, "Prescription is defined as a manner of acquiring the
ownership of property, or discharging debts, by the effect of time, and
under the conditions regulated by law.“
 Period of limitation is one component of the broader concept of
prescription which , in turn, classified into liberative and acquisitive
prescription.
 Liberative prescription:- relieves (liberates) the beneficiary from certain
obligations (duties) after the expiry of certain period of time.
 Acquisitive prescription:- entitles the beneficiary with certain right after the
expiry of certain period of time. i.e., a party acquires certain right after the
expiry of certain period of time.
 where do you think limitation of actions/period of limitation falls?
 Limitation of actions/period of limitation falls under Liberative
prescription.
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 Limitation of Action/ Period of Limitation …ctd
 In liberative prescription, there can be limitation of right and
limitation of action. Limitation of right absolutely extinguishes the
right of the other party while limitation of action/period of limitation
extinguishes the right to bring action i.e. court action.
 For the purpose of Ethioian contract law, period of limitation is
provided under Article 1845, which reads:Unless provided by law,
action for performance of a contract, action based on non-
performance of a contract and action for invalidation of a contract
shall be barred if not brought within ten years.
 According to this provision “action for performance” refers to
bringing a court action to effect performance, “action based on non-
performance of a contract” refers to bringing court action aimed at
remedies of non-performance like damage, cancellation and even
forced performance, and “action for invalidation of a contract” refers
to bringing court suit to have a contract invalidated.
 Except for the controversial relation between Articles 1810 and 1845,
addressed so far, all the rest actions shall be barred unless brought
forward within ten years.
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 Limitation of Action/ Period of Limitation …ctd
 As related to period of limitation, there is a controversy whether it bars
right or action/suet only. In this regard, while some argue that it bars only
an action/suet, for instance, raising Article 1850 and the title itself, some
groups argue that in spite of the title, period of limitation bars rights after
10 years.
 The other important point regarding period of limitation is about
annuities (Beyegizew yemikefel). In this regard, Article 1847 provides that
“in respect of annuities, the period of limitation shall run from the day
when the first payment not made was due.”
 Regarding calculation of period of limitation, you are expected to read
Article 1848 in line with gap filling time provisions addressed under
chapter 5.
 The other important point regarding period of limitation is about
collateral claims provided under Article 1849 which reads Interests
“ and
collateral claims shall be barred where the principal claim is barred.”
 Read the rest provisions related to period of limitation Arts. 1851, 1852
and 1853 which addresses interruption of period of limitation , its effects
and special relation between the parties.
 Interruption of period of limitation is of a great importance for the
creditor as this prevents his right from being barred.
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 Chapter 8: Suretyship
Nature and Effects of Suretyship
Nature of Suretyship
 “Suretyship" is a contract by which a person binds himself to a creditor to
satisfy an obligation in case if the main debtor fails to satisfy (perform) it.
This person (whether natural or artificial) is called surety and he/she/it is
considered as a second debtor for the creditor.
 Suretyship, thus, involves a three party relationship of creditor, debtor and
surety.
 The obligation of the surety presupposes and depends upon the existence
of an obligation of a principal debtor.
 The ppl of suretyship is provided under Article 1920 which reads:-
Whosoever guarantees an obligation shall undertake towards the creditor to
discharge the obligation, should the debtor fail to discharge it.
 The fundamental advantage of suretyship is to make transactions much
easier by increasing the safety of the creditor entering such a secured
transaction.
 In suretyship, the creditor has in fact two (or more) debtors for the same
debt in which in case of a default of the main debtor, he can resort to the
guarantor(who is considered as a 2nd debtor).
 It is not only the creditor who can be benefited by Suretyship. It has
advantages for the debtor too. The debtor who produces surety gains
credibility and will be able to trade. 211
 Nature of Suretyship…ctd
 However, the advantages of suretyship for the guarantor are not evident.Can you
mention them?
 Suretyship supports the creation of new businesses and buttresses a developing
economy. It is furthermore a cheap way of curing credit, obtaining loans ... etc.
 Even though the suretyship is an accessory obligation to that existing between the
creditor and the debtor, the debtor is not a party to the suretyship. The suretyship
does not have to be known by the principal debtor. Article 1921. i.e. He should not
necessarily give his express consent to such suretyship, and it can even be
concluded without his knowledge.
 You should not confuse suretyship with other institutions such as warranty,
insurance and property securities such as pledge and mortgage.
 warranty is a written guaranty by the manufacturer promising to repair or replace a
purchased thing if it is defective
 Insurance is also d/t from suretyship in that in a contract of insurance, one party, the
insurer, undertakes to pay a second party, the insured or a person nominated by the
party for the loss occasioned by the happening of the specified event. In other
words, suretyship is a collateral contract while insurance is an independent original
contract involving only two parties owing obligations each other.
 When we come to property securities, just for the sake of your general knowledge,
security/surety might be classified into two, personal security/surety and real
security/surety or property securities, namely, pledge and mortgage.

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 Nature of Suretyship…ctd
 The scope of this chapter is on personal security/surety. Accordingly , when we
say suretyship under this chapter and course, it is to mean only personal
security/surety.
 Even if the Civil Code provisions dealing with suretyship are silent regarding the
form of suretyship contract, Article 1725 which addresses contracts for a longer
period of time stipulates that it should be made in a written form.
 Pursuant to Article 1727 of the Civil Code, a contract of guarantee needs
satisfaction of three elements: special document, signature of parties bound
and attestation of two witnesses.
 Since suretyship contract binds only the guarantor (i.e. since it is unilateral kt),
it is only the guarantor who should sign on the kt of guarantee in the presence
of two witnesses who also should sign on the document for the purpose of
better evidence.
 A contract of suretyship must be express. The essential rule is that a
suretyship may not be presumed, it has to be expressly given for the law does
not admit tacit suretyship.
 A suretyship must have limits and a maximum amount must be indicated, the
law requires that the contract of suretyship must specify the maximum amount
of which the surety will be held liable for. Article 1922(3). The sanction for
failure to fulfill this requirement is simply that the suretyship would be void.

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 Nature of Suretyship…ctd
 The provisions of the Civil Code dealing with suretyship equally applies
to guarantees for a person in the contract of employment.
 Would the surety be liable to pay interests and legal cost even beyond
the maximum amount fixed in the suretyship agreement?
 Article 1930 of the Civil Code states that unless there is agreement
otherwise, the surety is held to pay interests when the debt
guaranteed bears interest. But this extension of his obligation remains
limited to the maximum amount he has given his suretyship for.
 The scope of the suretyship may not exceed that of the principal
obligation Article 1924. Suretyship cannot exceed that which is due by
the debtor. The surety may undertake an obligation equal to or less,
but not greater, than that of the principal debtor.
 S uretyship is an accessory obligation; it does not stand by itself in the
absence of the principal obligation (kt). Pursuant to sub-Article (1) of
Art 1926 of the Civil Code, the fact that the principal obligation is
discharged results in the release of the surety. Similarly, where the
principal obligation is void, there cannot be any guarantee with respect
to such obligation, Article 1923.
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 Nature of Suretyship…ctd

 As per sub-article 2 of Article 1923, a contract affected by defect in

the formation cannot be guaranteed unless the guarantor/surety was
aware of such defect/s.
 Another very important point regarding suretyship is that it works not
only for the current obligation but also to future and conditional
obligations. In other words, it is not necessary that the debt to be
secured be presently in existence. Just as one can promise future
things, one can become surety for a future debt. Article 1925
 The scope of the suretyship may not be extended by the contracts
concluded between the principal debtor and the creditor after the
consent for the suretyship is once given. So, the guarantor's conditions
may not be worsened through a posterior agreement between the
principal debtor and the creditor.
 The code does not prohibit, on the other hand, the agreement tending
to reduce the extent of the guarantor's obligation, because it is
obviously in his favor (Art. 1928 (1)
 Suretyship may be applied to every obligation, whatever its object. But
in fact it is principally used to guarantee the payment of money debts.
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 Effects of Suretyship
 Suretyship produce effects between the Creditor and the Surety on the one
hand and between the Debtor and the Surety on the other.
1. Effects of Suretyship between the Creditor and the Surety
A. The moment for action
 Period of Limitation will probably be amongst the first line of defense of
the surety. As per Article 1929Proceedings instituted against the principal
debtor shall interrupt the period of limitation as regards the guarantor .
Thus, in this regard, the surety cannot benefit from the period of limitation.
B. Maturity of debt
 The surety may not be required to perform his obligation prior to the
maturity of the debt. (See Art. 1932(1) of the Civil Code).
 Apart from this, where the principal parties (the principal debtor and the
creditor )had agreed to a notice before the debt is due, such a notice has
to be served to the surety too. Art. 1932(2&3)
C. Effects of Suretyship in Simple suretyship and joint suretyship
I. Simple suretyship
 Simple suretyship is a suretyship in which a surety/guarantor is required
to perform an obligation only if the principal debtor failed to perform it.
In other words, the obligation of the guarantor is secondary obligation,
not primary/direct obligation.
 simple suretyship is a principle and joint suretyship an exception.
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 Effects of Suretyship…ctd
 The provisions of the Code dealing with simple suretyship are Articles 1934
through 1937 of the Civil Code.
 Article 1934, which reinforces Article 1920, provides that a guarantor shall not
pay the creditor unless the principal debtor fails to discharge his obligation.
 This indicates that the obligation of the simple guarantor subsidizes the
principal debtor. i.e it is only where the principal debtor fails to perform his
obligation that the guarantor is required to perform the obligation. Article 1920.
 Then, when is the principal debtor deemed to have failed to discharge
obligation? In this respect, we can think of three situations: Soon after
performance is due; after the debtor has been placed in default; after the
creditor brings action against the debtor and fails to obtain performance.
 Article 1934, which reinforces Article 1920, sets the principle of simple
guarantee. The main condition/ppl to obtain payment from the guarantor is the
non execution of contract by the principal debtor.
 Even if an action is brought against the guarantor following this procedure, the
guarantor could have appropriate defenses. The first defense, in this regard is
benefit of discussion as provided under sub-article 2 of Article 1934 and Article
1935. In the case of simple suretyship, the engagement of the surety is
subsidiary; he images himself to pay only if the principal debtor does not. The
idea is that he is not to pay simply because the main debtor arbitrarily refuses
to do so.

217
 Effects of Suretyship…ctd
 From the reading of Article 1935(1), we see that the benefit of discussion is
not automatic and has to be required by the guarantor when he is himself
sued. By availing himself of this benefit, the guarantor can compel the
creditor to first seize the property of the debtor.
 Additional conditions that should be fulfilled by the guarantor are provided
under Article 1936 which reads:-
(1) A guarantor requiring discussion shall indicate the debtor's assets to the
creditor and advance sufficient money for the costs of their discussion.
(2) He may not indicate such debtor's properties as are subject to litigation, or
situate outside the country of payment, or mortgaged as security for the
debt but no longer in the debtor's possession.
 As per sub article 1, the burden of identifying the debtor‘s property that can
be discussed and also covering the cost of discussion are on the guarantor.
 Obviously, the guarantor cannot exercise benefit of discussion where the
insolvency of the principal debtor has already been judicially established.
This is obvious since an insolvent does not have assets that can be
discussed.

218
 Effects of Suretyship…ctd
 What do you think would happen when the guarantor has successfully
managed to satisfy all the conditions necessary to exercise the benefit of
discussion?
 Where the guarantor has raised the benefit of discussion at the earliest possible
time, identified the debtor's properties that can be discussed, advanced the
costs for their discussions, the court will suspend the suit against the guarantor
and grant the creditor permission to institute fresh action against the principal
debtor pursuant to Article 278(2) of the Civil Procedure code.
 Accordingly, the consequences of the defense of the benefit of discussion are
the following:-
i. If the assets are sufficient for a total or part payment of the main debt, the
guarantor benefits accordingly and is discharged in part or totally of his
suretyship.
ii. If no money can be made from the debtor's assets, the guarantor has no
option but to pay the main debt, pending his action against the principal debtor.
iii. Art. 1937,Where the guarantor has indicated the assets as provided in Art.
1936 and has supplied sufficient money for their discussion, the creditor is
answerable to the guarantor, up to the value of the assets thus indicated, for
an insolvency of the principal debtor due to the creditor's failure to proceed.

219
 Effects of Suretyship…ctd
 Is joinder of the principal debtor and the guarantor possible in our legal
system?
 Even if our substantive law on suretyship is silent on this issue, it is
possible for the principal debtor and the guarantor to be joined in the
same suit pursuant to our procedural laws(i.e., Art 36 of cpc).
 The other defense of guarantor, which, of course, not special for simple
guarantor, is the possibility to raise the principal debtor's defenses. Article
1942 (1) of the Civil Code.
II. Joint suretyship
 The concept of joint guarantee is provided under Article 1933 which
readsWhere the person undertaking the guarantee described himself as
joint guarantor, co-debtor, or used equivalent terms, the creditor may sue
him without previously demanding payment from the debtor or realizing
his securities.
 Unlike in simple suretyship where the obligation of the guarantor is
secondary, the obligation of joint guarantor is primary and direct
obligation. Where the suretyship is joint, the creditor is entitled to proceed
against the guarantor without demanding payment from the principal
debtor.

220
 Effects of Suretyship…ctd
 In principle, pursuant to Article 1920 and 1934, every suretyship is
presumed to be simple. There can be joint guarantee only where the
person who becomes a surety expressly described himself as joint
guarantor by using words implying the same.
 The direct effect of joint guarantee is the deprivation of the surety of his
benefit of discussion.
 Joint guarantee is a dangerous situation for the guarantor, who may then
be required to pay for a debtor who still has some assets(since z guarantor
can not raise benefit of discussion).
D. Acceleration of action by guarantor
 address those things which should be done by the guarantor to minimize
the risk of paying to the creditor. Article 1938 and 1939.
2. Effect of Suretyship between the Debtor and the Surety
 occurs where the guarantor has paid the debt in place of the debtor
because of the latter’s failure to pay.
 When the surety pays the creditor, he is discharging the obligation of the
principal debtor. The principle is that the guarantor, who has paid the
creditor instead of the debtor, shall be indemnified by this debtor.
Accordingly, the guarantor is entitled to be indemnified by the principal
debtor.
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 Effects of Suretyship…ctd
 Do you think the guarantee given without the consent of the principal debtor
relives him from indemnifying the surety?
 The fact that the guarantee may be given without the consent of the principal
debtor does not relive him/her from indemnifying the surety what the latter paid
to the creditor. Article 1940(1)
 In exercising his right of indemnification, the surety enjoys two rights of action;
the right arising from the contract of suretyship and the right of subrogation,
which arises from the substitution of the principal creditor after paying him/her.
The first is called chirographic action while the latter is the right of subrogation in
which the previous guarantor becomes the new creditor of the debtor by
substituting the former principal creditor.
 The personal action of the surety arises from the contract of suretyship itself.
The action is based on the theory of implied mandate. Accordingly, this recourse
is open to the surety only against those debtors for whom he has become surety
and not against the other debtors.
 This personal action entitles the surety to claim the principal, interest, expenses
and damages if any.
 The principal is not just the amount of the debt paid. It includes every thing the
surety has paid in acquitting the debtor. Thus, as regards the surety, the interest
due to the creditor and paid by the surety is considered as forming the principal
of his payments, so that they in turn produce interest.

222
 Effects of Suretyship…ctd
 In addition to interests, the surety is entitled to be indemnified for all
damages (including costs) he suffers as a result of the debtor's fault or
negligence. In this respect, see Articles 1940 (2) and (3) and Article 1941
CC.
 There are two kinds of subrogation: conventional and legal subrogation. As
the terms imply, conventional subrogation is achieved by the agreement of
the parties, whereas legal subrogation is achieved by the effect of the law.
 The surety is entitled to legal subrogation because he is the one who, being
bound for others for the payment of the debt, had an interest in discharging
it. Legal subrogation is provided under Articles, 1944 and 1971 of the CC.
o The details on rules of subrogation will be addressed in the 9th chapter,
ahead.
Protection of Guarantor's Action Against Debtor
 Addresses the ff concerns:-
i. Duties of a creditor,
ii. Securities obtained from principal debtor (Recourse before payment),&
iii. Loss of Right )

223
 I. Duties of a creditor
 The creditor who has been paid has a duty to ensure that, as far as possible,
the guarantor enjoys an effective action against the debtor. Three situations
are provided for:
1. Article 1945 of the Civil Code:- The creditor shall hand over the documents of
title to the guarantor who pays him and perform such formalities as will enable
the guarantor to exercise his remedy and realize the securities available to the
creditor.
2. Article 1946 of the Civil Code:-The guarantor, shall be relieved of his obligation
towards the creditor where the guarantor's subrogation to the rights,
mortgages and liens of the creditor can no longer be effected owing to the
creditor's act or omission. For instance, where through his negligence, the
creditor let a mortgage expire. So before paying, the guarantor has a right to
check that the subrogation in the rights of the creditor is still possible.
3. Article 1947 of the Civil Code:-Debtor's bankruptcy
(1) Where the debtor becomes bankrupt the creditor shall prove in the bankruptcy.
(2) He shall inform the guarantor of the bankruptcy as soon as he is aware of it.
(3) Where the creditor fails to comply with these rules, he shall lose his rights
against the guarantor to the extent of the latter's loss resulting from such failure

224
 II) Securities obtained from principal debtor
(Recourse before payment)
 The surety who has paid to the creditor has a right of recourse against
the debtor for indemnification.
 The guarantor, who is informed of a serious chance that the principal
debtor is not going to pay, may take protective measures through
securities demanded of the debtor, even before any payment is made
to the creditor. Three situations are limitatively mentioned under
Article 1948.
The guarantor, even before he has paid, may take action against the
debtor and demand securities from him where:
(a) the debtor has been given notice to pay his debt;
(b) the debtor has been declared bankrupt;
(c) either by reason of the losses the debtor has suffered or as result of a
fault committed by him, the guarantor runs a considerably greater risk
than when he undertook the guarantee.
III. Loss of Right
 The general principle is that upon payment the surety has a right of
recourse against the debtor. However, there are two situations in
which the surety loses his right against the debtor.
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 Loss of Right …ctd
 The first exception is where the indemnity claim has lapsed. The
guarantor has a duty to set up all available defenses of the debtor he
reasonably knew of. If not, he is debarred from indemnification by the
debtor. Article 1942 of the Civil Code. You may compare Article 1942 with
1940(3)
 The second exception to the principle is the case where a second
payment is made by the debtor (Article 1943 of the Civil Code).
Plurality of Guarantors
 The idea of a plurality of guarantors is that the risk of suretyship is spread
over several persons. Three situations can be considered:-
i. Counter guarantor
ii. Secondary guarantor and
iii. plurality of simple and /or joint guarantors.
I. Counter Guarantor
 Is the mechanism whereby the main guarantor is protected by having
himself a guarantor.
 In suretyship, counter guarantor appears only for the benefit of the
guarantor, not for the benefit of the creditor.
 This counter-guarantor will only step in where the main guarantor has
been called to pay for the principal debtor. 226
 Counter Guarantor…

 It must be noted that, there is no relation(nexus) between the counter

guarantor and the creditor. Since the counter guarantor appears only for
the benefit of the guarantor, not for the benefit of the creditor, he involves
only between the principal debtor and the guarantor.
 Article 1949 of the Civil Code which governs counter guarantors state that,
“[t]he counter guarantor guarantees towards the guarantor the
effectiveness of his indemnity claim against the principal debtor.”
 How do you understand the phrase "guarantees the effectiveness of
indemnity claim against the principal debtor"? Does this mean that the
counter-guarantor agrees to act so that the debtor pays the guarantor, or
simply undertakes to pay in his (debtor’s) place?
 In fact, both duties seem enforceable.
 What are the relations between guarantor and counter-guarantor? Can
counter-guarantor, for instance, impose discussion of assets of the main
debtor, where it is possible, although the guarantor has not required it?
 The answer should appear to be positive: the counter-guarantor must
benefit of all the particular advantages of the main guarantor, even if this
seems against the will of main guarantor.

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 II. Secondary Guarantor
 Unlike with the counter guarantor where he appears only for the benefit of
the main guarantor; not for the creditor, secondary guarantor appears for
the benefit of the creditor.
 Unlike with the counter guarantor where there is no relation between the
creditor and the counter guarantor, there is a relation between the creditor
and the secondary guarantor for the latter stands for the sole benefit of
the creditor.
 Compared to counter guarantor where the creditor can challenge only the
principal debtor and the main guarantor, in secondary guarantor, the
creditor can challenge, not only the debtor and main guarantor, but also
the secondary guarantor.
 So, we see that the creditor is more secured in secondary guarantor than
counter guarantor because he has wider option with secondary guarantor
than counter guarantor. Accordingly, we have longer chain in secondary
guaranty than in counter guaranty.
 Article 1950 of the Civil Code, which deals with secondary guarantors
reads:
1) A person [the creditor] may stand surety not only for the principal debtor but
also for his guarantor.
2) The secondary guarantor shall be in the same position towards the guarantor as
a simple guarantor is towards the principal debtor.
3) Merger between the principal debtor and the guarantor shall not extinguish the
creditor's right of action against the secondary guarantor.
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 Secondary Guarantor…ctd
 In respect of the secondary guarantor, both the principal debtor and his
guarantor are considered as principal debtors. Accordingly, unless the
creditor exhausts all his remedies against the principal debtor and the
main guarantor, the secondary guarantor shall not be held liable.
 Since both the principal debtor and the main guarantor are considered
as principal debtors in their relation to the secondary guarantor, he can
be indemnified from either or both of them in case he paid to the
creditor without seeking benefit of discussion.
 His action against the simple guarantor is justified pursuant to Article
1950(2). His action against the principal debtor is justified, for the latter
is the one who should bear the ultimate burden of the debt as he
benefited from it.
 Even if the law is silent, from the normal rules for suretyship, it follows
that the secondary guarantor who paid the creditor is subrogated in the
rights of the creditor against both the debtor and the main guarantor.
Plurality of Simple and/or Joint Guarantors
 A creditor may seek and obtain guarantees from more than one person
in respect of the indebtedness of one principal debtor. This is the
situation whereby the creditor wishes to spread his risk over several229
persons acting as guarantors for the same debt and for the same debtor.
 Plurality of Simple and/or Joint Guarantors…ctd
 This situation is governed under Article 1951 of the Civil Code.
Art. 1951. -Plurality of guarantors.
(1) Where several persons became at the same time guarantors of the same
debtor in respect of the same debt, each of them shall be liable as simple
guarantor for his share and as secondary guarantor for the shares of the
others.
(2) Where the guarantors entered into their undertakings by successive acts, he
who bound himself in the second place shall be held liable as secondary
guarantor of the guarantor who bound himself before him
(3) Where the guarantors expressly bound themselves as joint guarantors either
with the principal debtor or as between themselves, each of them shall be
answerable for the whole debt, subject to contribution from the others
proportionate to their shares.
 As per Article 1951(1) , the creditor has to divide his action in as many actions
as there are guarantors, which is called benefit of division, and ask the
appropriate amount from each b/c a guarantor shall not be compelled to pay
the debt of his co-guarantor if the latter can pay himself. But if not, liable as
2ry
 What Article 1951(2) tries to address is when guarantors granted security at
different time.
 Article 1951(3) affords the maximum protection to the creditor because he
can ask the whole debt from one guarantor only. E.g. he can demand the
whole debt from the one who can pay him so that the latter initiate several
actions against his co-guarantors.
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 Relationship between/among Co-sureties
 When there are several sureties for the same debtor in respect of the
same debt, the one who pays the creditor is entitled to contributions from
the others.
 The basis of contribution is payment by surety of more than his share and
equity.
 Under our law, Article 1951 provides that guarantors who are either
severally, or jointly and severally liable for the same debt and who stand
as surety for the same debtor at the same time are entitled to
proportionate contribution.
 The other point worth consideration as regards the relationship between
co-sureties is that a co-surety who paid the creditor can demand
contribution from his co- sureties only after the creditor is fully paid.
 This is because there could be a situation where he can still be liable for
the creditor if he has not been fully paid. So, to exactly know their shares,
co –sureties are expected to wait until the whole debt is discharged.
 The other point worth consideration as regards the relationship between
co-sureties is that a co-surety who paid the creditor even if he has valid
defenses, which might relieved him from payment, loses his right of
contribution from his co-surities.
231
 Relationship between/among Co-sureties…ctd
 Still, another point as regards the relationship between co-sureties is that you
should bear in mind that the claim of contribution is not limited only to the
principal/actual share only; rather extended to costs incurred and legal interests.
 Last but not least, even though the law is silent it can be argued that because of
the ppl underlying the benefit of division and contribution between the co-
sureties, the security held by one co-surety should be deemed to have been held
for the benefit of all the co-sureties.
 However, if the security have been prejudiced or destroyed by the surety, the co-
sureties will be relieved of their obligation to contribute to the extent of the
value of the property so prejudiced or destroyed.
Extinction of Suretyship
 As suretyship is a contract, it can be concluded that most of the grounds of
extinguishing a contract, discussed under chapter 7, are the grounds to
extinguish suretyship.
 Accordingly, payment, novation, remission, set off, merger, period of limitation,
nullity of the principal obligation etc are the grounds to extinguish suretyship.
 Just to see the grounds one by one briefly:-
 The first ground to extinguish suretyship is payment/performance. Even if the
effect of surety might be continued some time between the principal debtor and
his guarantor or between the co-guarantors, payment to the creditor
extinguishes suretyship. The creditor is entitled to only one payment for
otherwise he would be liable by law of unlawful enrichment.

232
 Extinction of Suretyship…ctd
 The second ground of extinguishing suretyship is novation.
 As we have addressed under chapter 7, Novation is substitution of an
existing obligation by new obligation in its nature or object.
 Accordingly, if the creditor and the principal debtor agrees to substitute
the existing (guaranteed) obligation with a new obligation, such new
agreement extinguishes the suretyship.
 For instance, if the object of the existing contract which is guaranteed was
soap and later the creditor and the debtor agreed to substitute with sugar,
suretyship extinguishes. But this should not be construed as the former
guarantors cannot be guarantors for the new obligation if they are willing
to do so.
 Thirdly, a voluntary remission by the creditor to the debtor discharges the
surety as well, since the remission of the main obligation also
extinguishes the accessory obligation.
 However, remission to a surety/guarantor alone does not discharge the
principal debtor as the creditor is considered to have abandoned only the
security, but not the primary obligation.
 Fourthly, set-off extinguishes suretyship when the creditor and principal
debtor are indebted to each other. In fact, the surety/ies can raise set off as
a defense against the claim of the creditor.
 But the question is what if the amount to be set off is not equal, is the set
off of whatever amount extinguishes surety as a whole or the surety is
relieved only by the amount of set off made?
233
 Extinction of Suretyship…ctd
 The 5th ground of extinguishing suretyship is merger. As per Article 1842,
Merger shall occur and the obligation shall be extinguished where the
position of creditor and debtor are merged in the same person. Regarding
suretyship, there are three possible cases of merger.
 The 1st case is merger of debtor and creditor. Accordingly, a merger of
debtor and creditor extinguishes the principal obligation and the accessory
suretyship obligation .E.g. if the debtor is the heir of the creditor and the
creditor dies.
 The 2nd case is merger of surety and creditor. merger of surety(guarantor)
and creditor extinguishes the obligation of suretyship but does not
extinguish the principal debtor’s obligation.E.g. if surety dies and the
creditor is his sole heir or vice versa.
 The 3rd case is merger of debtor and surety. In the same way to the 2nd
case, merger of debtor and surety does not extinguish the main obligation
of the debtor but extinguishes the obligation of suretyship. This is because
the pwerson cannot be his own surety
o However, the merger which takes place when the principal debtor and his
surety become heirs for one another does not extinguish the creditor's
rights against a sub-surety of the surety.“
 The 6th ground of extinguishing suretyship is nullity of the main obligation.
i.e., if the main obligation is void, the accessory contract of suretyship is
also void. However, in cases where the principal obligation is voidable, the
contract of suretyship may or may not be invalidated. See Article 1926 (3)
and 1923.
 The 7th ground of extinguishing suretyship is period of limitation. 234
 Extinction of Suretyship…ctd
 The 8th ground of extinguishing suretyship is where the creditor has
accepted a payment in the form of an immovable or any good, even if
he is later dispossessed (Article 1927 of the Civil Code). The creditor,
not the surety, bears the risks of the thing accepted in payment.
 The last but important ground of extinguishing suretyship is where the
creditor, without special permission given by the guarantor, has
granted a delay (prolonged time) to the debtor (Article 1928 (2) of the
Civil Code).
 This is because the creditor is extending on the back of the guarantor
the delay during which he is held liable.
 An extension of time for performance or payment, granted by the
creditor to the debtor, is an alternation of the original obligation which
is considered prejudicial to the surety. Thus, the prolongation of the
time granted to the principal debtor without the consent of the surety,
operates as discharge of the latter from his obligation.

235
 Chapter 9: Third Parties in Relation to
Contracts
Introduction
 Both in civil law and common law legal systems, the ppl is that contracts
shall produce effects only as between the contracting parties. The same is
true as regards Ethiopian Contract law (Article 1675cum 1952(1)).
 In spite of this ppl, there may be exceptions in which case a contract may
produce effect(whether negative or positive) on third parties. This chapter
discusses such exceptions or situations.
 The 1st exception, in this regard, is that of promises and stipulations
concerning third parties, whereby a party to the contract sets out that the
contract will have effect on a third party.
 The 2nd exception is where the right of a contractual party is assigned to a
third party.
 The 3rd exception addresses the reverse situation where a liability may be
assigned to a third party.
 And the final exception concerns the special situation of the heirs of the
parties and the protection of creditors of contractual parties.
1. Promises & Stipulations Concerning Third Parties
 It is legally possible that persons may conclude a contract by reserving a
right to substitute a third party in their place or by promising that a third
party will commit a certain act or omit from performing an act. It is also
possible to make contractual stipulations for the benefit of third parties.

236
 Promises & Stipulations Concerning Third Parties…ctd
 The contracting parties may provide in their agreement that a future third
party may become part of their contract. Three situations are considered
by the Civil Code. The third party:
 may be substituted to a contracting party,
 will become the debtor of the contract, and
 will become the creditor of the contract.
The option to substitute a third party
 As per Article 1953, [A]t the time of the making of a contract, a party may
reserve the option to substitute for himself another person assuming the
rights and obligations under the contract.
 It should be noted that the identity of the third party to be substituted is
not required at the time of the formation of the contract. In fact, such a
third party may be perfectly unknown to the other party and we can also
imagine that he is still unknown to the party stipulating such possibility.
 Another remark is that such an option is open both to the creditor and to
the debtor. Each side can introduce a clause of this type and it is
theoretically possible that the parities actually performing the contract are
not the parties who concluded it.
 The advantage of the possibility opened by Article 1953 is to introduce
flexibility in the choice of partners. It corresponds to a great number of
modern transactions, where the identity of the person who will perform
the contract is irrelevant, and what matters is only the quality of the work.

237
 Promises & Stipulations Concerning Third Parties…ctd
 It enables a person who does not have the adequate facilities or equipment to
perform the contract to substitute himself a person better equipped.
 It makes it possible to contract secretly in the name of a person who does not
want to be known to the other party until the contract is concluded.
 One may also consider the potential of the provision to introduce a third party
to perform part of the contract concluded, as a co-debtor, or as often in
construction cases, as a sub-contractor. For instance, a builder concludes a
contract for the construction of an entire house, but reserves the possibility to
substitute himself an electrician for the electrical installation.
 The effect of the contract where the substitution effected within 3 days or not
is provided under Article 1954 of the Civil Code.
 Sub Article 1 states that where the third party is substituted within the
following three days from the formation of the contract, the contract will
produce effect as between the third party substituted and the other party. In
this respect it can be said that the person who reserved the option of
substituting another person for himself is the agent of the third person.
 As per sub Article 2, where the appointment/substitution is not made within
three days, the contract shall be effective as between the parties who made it.

238
 The promise for third party
 As per Article 1955, “A person may stand promisor for a third party by
promising an act or omission by the said third party”.
 Even if the provision looks very vague, its idea seems that a current
contracting party may enter into temporary kt with another current
contracting party who promises to conclude future permanent kt with 3rd
party and a current contracting party , i.e., the one who is concluding a kt
with the promisor believes that the 3rd party, in turn, promises an act or
omission.
 The point here is there are two contracts in such promise; the temporary
or current kt concluded b/n a contracting party and the promisor and
permanent but future kt between the promisor and the 3rd party.
 The effects of such promise are provided under Article 1956 that reads:
(1) Where the third party ratifies the promise concerning him, the person who
stood promisor shall be released. Means, where the third party concludes
a kt with the promisor, the person who stood promisor (i.e., a contracting
party with the promisor) shall be released.
(2) Unless otherwise agreed, such person shall not guarantee the proper
performance of the contract. ‘Such person’ refers to [the person who
stood promisor i.e., a contracting party with the promisor]
(3) Where the third party does not ratify the contract, [i.e., when he fails to
conclude a kt with the promisor] the person who stood promisor for him (i.
e., a contracting party with the promisor) shall be liable towards the other
contracting party[the promisor] for the damage resulting from the non-
performance of the contract. 239
 Stipulation for the benefit of a third party
 Art.1957 and the following of the CC open the possibility for two
contracting parties to conclude a kt for the benefit of a third party. A best
example here is life insurance for the benefit of 3rd party.
2. Assignment of Rights and Subrogation
Assignment of Rights (መብትን ስለ ማስተላለፍ)
 The assignment of right is a transfer of the right to the performance of the
contract.
 The principle of assignment of rights is provided under Article 1962 of the
Civil Code which reads:[A] creditor may assign his rights to a third party
without the consent of the debtor, unless such assignment is forbidden by
law or the contract, or is barred by the very nature of the transaction.
 Thus, an assignment is a contract concluded between the assignor and the
assignee, whereby the assignor transfers his rights under the contract or
part of it to the assignee.
 It must be noted that the consent of the debtor is not required for an
assignment to be valid. The debtor is normally indifferent (uninterested) to
an assignment because it only changes the beneficiary of his performance
or payment and not the scope of such performance or payment. This may
be the reason why the debtor is not informed of the assignment of rights.
240
 Types of Assignment
 There are two types of assignments; an onerous assignment and gratuitous
assignment.
 An assignment of right made for consideration is said to be an onerous
assignment. This consideration(economic benefit) which can either be in kind or
in cash or both, is furnished by the assignee for the assignment of the right.
 A gratuitous assignment, on the other hand, is a voluntary transfer of the
creditor's right to the assignee which is made without consideration. In such
cases, the assignor gets no economic benefit.
 In case of assignment of rights, warranty may or may not be required
depending on the form of the assignment.
 Article 1964 (1) of the Civil Code provides that the assignor has to guarantee the
existence of the right at the time of the contract when the assignment is made
for consideration.
 As per Article 1964 (2), the assignor does not guarantee the solvency of the
debtor.
 However, the situation is entirely different where the assignment is made
gratuitously in which case the assignee should not expect any legal warranty
(Article 1964(3).
 Article 1966 deals with the valid defenses the debtor have against the assignor
and assignee.

241
 Subrogation
 Subrogation is the situation where a right with all its accessories is
transferred from one person to the other.
 In case of subrogation, there are three persons: subrogor (z original
creditor), subrogee (the new creditor who is subrogated on the right of the
original creditor), and the debtor.
 The mechanics of subrogation involve the substitution of the subrogee
to the position occupied by the subrogor, who is a creditor of the principal
debtor. The subrogee is then able to exercise the rights of the creditor-
subrogor after he has effected the subrogation by payment of the debt.
 Thus, subrogation can be said is a situation where an obligation
extinguished with regard to the original creditor by payment which he has
received from a third person. Thus, subrogation always accompanies
payment.
Types of Subrogation
 Generally, subrogation is classified into two: conventional (contractual)
subrogation and legal subrogation. Conventional or contractual
subrogation is, in turn, divided into two: subrogation by the creditor and
subrogation by the debtor.

242
 I. Conventional (contractual) subrogation
 is a subrogation created by a contract concluded between the subrogor
and the subrogee by payment by the subrogee to the subrogor.
A. Subrogation by the creditor:
 The most frequent form of contractual subrogation is where the creditor
subrogates to his rights the third party who has paid him the debt (Article
1968 of the Civil Code).
 The third party is thus exactly transferred into the position of the creditor
and is granted to refunded by the original debtor.
 The contract of subrogation must be express and must provide that the
subrogation takes place at the time of payment.
B. Subrogation by the debtor
 is a subrogation effected by agreement between a debtor and a third party
who lends him money or fungibles for the purpose of paying the his
(debtor's) creditor. Then, the creditor's rights against the debtor are
transferred to the third party[who paid him], without the consent, or even
against the will, of the original creditor. Articles 1969 and 1970.
II. Legal subrogation
 Is subrogation by the operation of the law, without the necessity of any
agreement at all.
243
 Legal subrogation…ctd
 In legal subrogation cases, the law recognizes a special interest of the
payer in the extinguishment of the other person's debt.
 Article 1971 provides three situations where there could be legal
subrogation:
1) payment by a person bound with another or on behalf of others, i.e.,
subrogation as co-debtor or guarantor.
2) payment by a person who is owner of a property or who enjoys the rights of
lien, mortgage or pledge, i.e., Subrogation as holder of sureties &
3) other cases of subrogation provided by law.
 In essence, legal subrogation does not differ from the conventional type
as both are based upon payment of the debt or obligation to the creditor
and their effect is the same. Accordingly, a legal subrogee as well as a
conventional subrogee is subject to any defenses which were available to
the debtor against the original creditor.
Effect of subrogation and assignments
 Articles 1973 and following of the Civil Code state the consequences
common to assignments and subrogation. Accordingly, The assignment or
subrogation to a right entails:
 the right to exercise the liens, securities and accessory rights attached to it,
with an exception in respect of a pledge.
 The original creditor has a duty to cooperate to ensure as much as possible
that the assignee or subrogee has the best chances of being paid by the
debtor.
244
 3. Delegation and Assignment of Obligations
 Unlike assignment of rights, what is delegated is obligation; Thus, in
case of delegation, the debtor may delegate performance of his
duties to a third person. On the other hand, rights arising out of a
contract with its corresponding duties can be transferred to a third
person by way of assignment of obligation, estate,.
A. Delegation of Obligations
 Delegation is the act by which a person delegates the performance
of his obligation to a third person.
 The ppl of delegation is provided under Article 1976 of the civil code,
which reads: “A debtor may with the consent of the creditor, or
without such consent in cases provided by law or usage, delegate to
another the performance of his obligations.”
 There are three persons in cases of delegation. These are: the
delegator, the person who makes the delegation (i.e., the original
debtor); the delegatee, the creditor; and the delegate-debtor, the
third party who is delegated and becomes a debtor (i.e., the new
debtor).
 In case of delegation of obligation, in principle, unlike assignment of
rights, the debtor has to ask the creditor to accept a third person as
his debtor, who consents to bind himself to him. The change of
debtor could be very detrimental to the creditor, this is why the
latter's consent is required as a rule.
245
 Delegation of Obligations…ctd
 The Ethiopian law, however, reserves cases where usage or the law itself allows
such substitution of debtors without the consent of the creditor.
 In the delegation of ogligations, most often, the delegator is the creditor of the
delegatee and delegation is a means whereby he (the delegator ) frees himself
from his obligations towards the delegatee.
 The economic importance of delegation is that it simplifies transactions and
obtain, by means of a single act, the same result as if two payments will be made
successively, one by the delegate debtor (delegatee) to the delegator the other
by the delegator to the delegate(the creditor).
Types of delegation and their consequences
 Delegation of obligations may be perfect delegation or imperfect delegation.
 Perfect delegation is the case in which a creditor who has been provided with
sufficient securities by the delegate debtor releases the original debtor. In such
cases the creditor has no right over the original debtor after delegation.
 In perfect delegation, the creditor consents to release the delegator(the original
debtor) except for the insolvency of the delegate debtor at the time of delegation,
not after the delegation has been made. If it is after the delegation, the creditor
has no right to demand performance from the original debtor. Article 1981(2).
 Imperfect delegation, on the other hand, is the case in which the creditor who has
consented to delegation still retains his right against the original debtor in case if
the delegate debtor fails to pay him. Article 1977 gives recognition for imperfect
delegation.

246
 Types of delegation and their consequences…ctd
 In the case of imperfect delegation, the relationship of the original
debtor vis-a-vis the creditor is that of a simple guarantor and a creditor.
The creditor retains his right against the original debtor but he may not
demand satisfaction from the original debtor before demanding
performance from the delegate debtor (see Article 1977(2) of the Civil
Code).
Effects of Delegation on Third Parties
 Third parties who have secured the debt of the original debtor by their
property or guarantors (personal securities) will not be liable towards
the creditor upon delegation unless they consented it. Art. 1982.
 So, the delegation extinguishes the obligation of the security unless the
security re-consented to be bound. This is because, they have given a
surety in respect of the first contract; the one linking the creditor to the
original debtor and cannot be presumed to have extended it to benefit
the delegate debtor.
B. Assignment of Obligation
 Can be taken as a special forms of delegation of obligation and
addressed by Articles 1983 to 1985 of the Civil Code , which all rest on
the same idea of an amalgamation of estates which include both
assets and liabilities. Article 1984, which deals with
amalgamation(merger) is more clear to understand the point at hand.
247
 4. Heirs and Creditors of the Parties
 The last instance in which contract produces effect [on third parties] is
upon heirs and creditors of the parties.
 The heirs of the contracting parties may be accorded the right to acquire
rights and duties from a contract made by the deceased by the mere fact
that they are heirs. This is clearly governed by Articles 1986 and 1987 of
the Civil Code.
 Similarly, creditors are accorded with certain rights so as to make them
able to enforce their rights. These rights include preservatory measures
and revocation, among others. Such rights are provided under Articles
1988 through 1999 of the Civil Code.
A. Heirs of the Parties
 Heirs of the parties continue the person of the deceased if they have
accepted the succession. As per Article 1986“The heirs of a person shall
be substituted for him in contracts to which he was a party, unless the
contrary was stipulated or flows from the nature of the contract.”
 In respect of stipulations for third party beneficiaries (as addressed under
Articles 1957 and following) the heirs of such a party are entitled to the
performance of the obligation considered, if the deceased had already
accepted the stipulation but dies before receiving the performance. Article
1987.

248
 B. Creditors of the Parities
 When it is said creditors of the parties, it means that the creditors of
parties to a contract (creditors of the creditor or creditors of the debtor)
by another contract. It is the concept of plurality of creditors because of
contracts concluded with different creditors by the same debtor.
 Creditors of the parties can be taken as a special category of third
parties in respect of the contracts made by their debtor. i.e., One
creditor considers another cerditor as third party
 The ppl here is that the debtor should not conclude a contract if he
cannot adequately secure the performance of the contract. Article 1988,
which talks about attachment is all about property security.
 As per Article 1988, a creditor has a general right to attach and have
sold any asset belonging to the debtor in order to get paid. However,
certain assets cannot be attached essentially the basic living
commodities and tools of the debtor's trade (seeArt.404 CPC).
Agreements entered into by the debtor
 The mere fact that someone is a debtor of another does not totally
preclude him from entering into agreements regarding his property.
Article 1989

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 Creditors of the Parities…ctd
 Exceptions, in which Article 1989 will not apply:
 Article 1990 of the Civil Code which deals with preferred creditors (secured
creditors). Preferred creditorship may arise from a contract or from the law.
 The second important exception is that of simulation. Simulation is defined
by Article 1994 of the Civil Code as the case where the debtor enters a
simulated contract with a third party, i.e. a contract which was not intended
to be carried out.
 The simulated act is the apparent/unhidden act, whilst the reality of the
situation is in a hidden act, called the counted deed or back letter. For
instance, the debtor shows the contract of sale for a car at 10,000 birr,
when the counter-deed was in fact for 100,000 birr just for the sake of tax
evasion.
 Every simulation presupposes the concurrence of two contradictory
agreements, to which it is impossible to give a cumulative effect with
regard to the same person.
 The parties did not intend to be bound by the apparent act or the simulated
contract, rather they intend to be bound by the hidden non simulated act. As
per Article 1991(2) of the Civil Code, it is the counter-deed or secret
contract which alone is given effect.

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 Creditors of the Parities…ctd
 There are third parties against whom the secret agreement will not be
effective and others against whom the apparent act is not admissible.
 For those third parties against whom a secret agreement is not admissible,
they should be able to rely on apparent acts as these are the only
agreements known to them. That is why Article 1991(2) clearly states that
counter deeds shall bind contracting parties only. Thus, in all cases where
the production of counter deed would entail unfavorable result as to those
good faith third persons, the apparent act alone is observed.
 On the other hand, for those third persons against whom the apparent act
is not effective, their right is put under Article 1994.
Rights of the creditors of the parties
 The following are rights of creditors of the parties.
i. Preservation measures, Article 1992
ii. Exercise of debtor's right or oblique action:-
 One clear instance where the creditor may be entitled to take preservatory
measures is through an action called an oblique action or otherwise
called exercise of the debtor's rights.

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 Rights of the creditors of the parties…ctd
 One stage further is where the creditor seeks to avoid the impoverishment
of his debtor, there again because such impoverishment diminishes the
scope of the security offered to the creditor.
 The origin of the impoverishment is indifferent, provided the risk is there;
it may be that the debtor is unaware of the risk, incompetent, absent or
simply negligent.
 The oblique action is the necessary consequence of the principle
incorporated under Article 1988(1) of the Civil Code, "the debtor's property
is the common pledge of his creditors."
 This general right of the creditor would be exposed to too many causes of
loss or diminutions if the debtor could without any consequence let his
patrimony perish. By lack of care or by negligence he would bring about
his insolvency, or at least would accept a creeping impoverishment, which
at the end would affect his creditors.
 The law thus affords creditors a means of preserving the debtor's
patrimony, a kind of supervision.
 The action is based upon the psychological observation that a debtor on
the verge of insolvency often becomes discouraged and fails to manage
him patrimony with the customary prudence.

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 Rights of the creditors of the parties…ctd
 The oblique action's chief purpose is to prevent the debtor from
negligently allowing his valuable rights to extinguish. In cases of
oblique actions, creditors do not act in their own name, directly, against
the debtors of their debtor.
 The creditor can take oblique action upon the fulfillment of certain
conditions so as to avoid his intervention in the personal affairs of the
debtor:
 The first condition is that the creditor must secure court authorization
to take the oblique action(Article 1993(1)).
 The second condition is that the creditor should prove risk of
impoverishment of the debtor is real and that the impoverishment is
such that it jeopardizes the payment of the debt.
 The actions included in the oblique action are intended to apply only to
the actions having pecuniary object.
 The oblique action is available to any creditor, without distinction
between secured or unsecured, privileged or unprivileged. The very
fact that a person is a creditor, entitles him to such action, subject, of
course, to the conditions laid down by the law.
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 III. The Paulian or Revocatory Action
 The Paulian or revocatory action is an action given to creditors to obtain
the revocation of acts done by their debtor in fraud of their rights.
 The creditor will have to prove the fraud to his rights and thus obtain the
annulment of the disputed agreement. Article 1995 of the Civil Code
opens the right to what is called "actio paulian"
 An act is deemed to a fraud, in the meaning of Article 1996 of the Civil
Code, when it was intentionally made by the debtor so as to become
insolvent, or with the intention of becoming insolvent. For instance, the
debtor sells his properties to a friend for a very low price.
 Note here that the action is brought by the defrauded creditor in his own
name and not as a representative of his debtor as in Article 1993.
 T o succeed in his revocatory action against the debtor's act, the creditor
should satisfy the court by proving two cumulative conditions:
i. That the act have caused a prejudice to him.And
ii. That the prejudice is known by the debtor because fraud strictly
speaking consists in the intention to harm.
 Regarding the effects of the revocatory action, the prime object of the
revocatory action is to make reparation to the creditors for the damage
they have suffered by the fraud committed against them by the debtor.
 Paulian action benefits only those creditors who took the action.
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 Chapter 10: Proof of Contracts
Evidence in General
 Evidence is sth w/c serves to prove or disprove z existence or non
existence of an alleged fact. The party who alleges the existence of a
certain fact has to prove its existence and the party who denies its
existence has to prove its non existence.
 Evidence can also be defined as something presented before the court
of law for the purpose of proving or disproving an issue under question
(disputed fact ).
 In other words, evidence is the means of satisfying/persuading the
court of law the truth or untruth of a disputed fact between the parties
in their pleadings.
 However, certain fact/thing is said to be an evidence iff it is brought
before a court of law or any institution with a judicial or quazi judicial
power.
 In general, it can be concluded that Evidence is the “Key” which a court
needs to render a decision. Without evidence there can be no proof
and no valid decision.
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 Evidence in Contracts
Burden of proof and admissibility of evidence
 Burden of proof (Latinonus probandi ) is the obligation to prove allegations which
are presented in a legal action.
 The rule, in civil cases such as contracts, is that the one who complains certain
fact should prove it by producing relevant evidence.
 The burden of proof also applies to negative assertions. E.g., producing an
evidence to prove that the debtor is not performing his obligations.
 In both cases, be it positive or negative assertion, burden normally lies upon the
claimant who alleges some contention against others. In most cases he will be a
plaintiff.
 Now look at Article 2001.
 However, if the defendant admits the allegation of the plaintiff but raised
counterclaim, the burden of proof as to existence of facts raised as defense
shifts to the defendant. This is what Sub-Article 2 of Art. 2001 affirms.
 In deciding as to what type of evidence to be produced, the guiding principle
resides in the relevancy and admissibility of facts. These two principles are
limbs of law of evidence governing what types of facts to be adduced to prove
alleged facts.
 When it is said an evidence must be relevant, it means that it must have a
capacity to make a fact in issue be more or less probable. Since the function of
evidence is to enable the court know what is really true, facts expected to
demonstrate this reality should have direct or indirect connection to the point of
dispute. See Articles 263 of the CPC & 137 of the CrPC.

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 Burden of proof and admissibility of evidence…ctd
 Even though relevancy is the prerequisite for facts to be admitted as evidence, it
is not the ultimate license. Rather, there are situations which may render
relevant facts inadmissible for policy reasons.
 From this, we understand that relevance of evidence is narrower in scope when
compared to admissibility of an evidence the final facts the courts depend upon
to render decision. In other words all relevant evidences are not admissible
evidences but all admissible evidences are relevant evidences.
 So, evidences screened by the rules of admissibility would be admissible be it
written, oral, presumptions, or admission of the party according to rules and
prescribed forms ( Art. 2002).
 However, Art. 2003 is an exception to the inclusive rule discussed under article
2002. Art. 2003. Contracts to be in writing.
“Where the law requires written form for the completion of a contract, such
contract may not be proved by witnesses or presumptions unless it is
established that the document evidencing the contract has been destroyed,
stolen or lost.”
 Written evidence is normally used interchangeably with documentary evidence.
Letters, contract, deeds, licenses, certificates, tickets, or other writings are
documentary/written evidences.
 You can read articles 2005ff CC or law of evidence course for the details
regarding written type of evidence.

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 Burden of proof and admissibility of evidence…ctd
 But one another point worth noting as related to the written evidence is
THE BEST EVIDENCE RULE. According to this rule the person who
produces a written evidence before a court of law should produce the
original document, not its copy, unless the law permits otherwise.
The Role presumptions
 As provided under Article 2002 CC, presumptions are also considered as
one type of evidence. For instance, Article 126 of the federal Family Code
provides a presumption that “A child conceived or born in wedlock has the
husband [of his mother] as father.”
 presumptions can be rebutable presumptions or irrebutable presumptions.
While rebutable presumptions are presumptions which can be rebutted by
producing the opposite evidence, irrebutable presumptions are those
presumptions which cannot be rebutted by producing any kind of evidence.
 The above example is a typical example of rebutable presumption
because it might be rebutted by invoking Article 168 of the same code by
proving decisively that the alleged father have had no sexual intercourse
with the mother during the period between the 300 and 180 day before
th th

the birth of the child.

 An example of irrebutable presumption is presumption of innocence.

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 Presumptions of Payment
 As addressed herein above, presumptions are one means of proof and
resolving disputes. By presumption of payment it means presumption of
payment or performance by the debtor to the creditor.
 The party in whose favor the presumption is taken need not produce
evidence in support of his allegation. However, the opponent party can
produce evidences to disprove the presumption.
 The civil code provides 4 instances in which presumption of payment
should be taken. They are:
1) Handing over of evidencing documents (Art.2020 of the C.C ): When
the creditor hands over to the debtor documents of title evidencing the
existence of the debt, presumption of payment takes place.
2) Creditor’s entries (2021 C.C): Entries (a piece of writing or note) made
by the creditor in the contractual document which indicates that the
debtor has paid his debt and which tends to release the debtor from
his/her obligation raises the presumption of payment.
3) Prior or Concomitant Debts (2022):- The idea of Sub-Art. 1 is that if the
debtor is indebted to the creditor with different debts at different time
and if the creditor issues a receipt for the last month’s payment without
any indication in the text as to unpaid debts, the law presumes that all
the debts preceding such period are already paid. Sub-Art. 2 is clear.
4) Period of time related presumptions (Arts.2023 and 2024):- These
presumptions of payment are taken if the creditor fails to accept the
payment/performance by the debtor within legally specified time period.
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