buss.law for coops.pptx

ARBAMINCH UNIVERSITY
SAWLA CAMPUS
Power Point on Business Law For the Collage of Business And
Economics, specifically for the Department of Cooperative
Accounting and Auditing
Credit Hour: 3
Academic Year: 2020/21
Semester: II
Prepared By
Mr. Berhanu. G. LLB, Candidate of LLM

Chapter-One Introduction to Business
law
• Definition of law
• What is law?
Defining the term ‘law’ is not an easy task because
the term changes from time to time and different
scholars define the term variously. Definition of the
term may vary due to the different types of purposes
sought to be achieved. Definitions given to the term
law are as many as legal theories.
According to Black’s Law Dictionary [Garner; 2004:
900] law consists of rules of action or conduct. These
rules are issued by an authority. In addition, these
rules have binding force and are obeyed and followed
by citizens. Sanction or other legal consequence may
help the law to be abided by citizens.

• Jurists have defined law differently from different
point of views. (Refer Ethiopian business law
module for further details)
Even though there is no a universally acceptable
definition of law, mainly law is defined as :
• a system of rules, usually enforced through a set
of institutions. It shapes politics, economics and
society in numerous ways and serves as a primary
social mediator in relations between people.
• the body of rules recognized and applied by the
state for governing the conduct of people in their
dealings with one another.

• the system of rights and obligations which the state
might force. State, in order to maintain peace and
order in the society, formulates certain rules of
conduct to be followed by the people. These rules of
conduct are called laws
• For the sake of your business law class, however,
consider the following generalized definition of law
as, “law is a bundle of rules (constitution,
Proclamation, Regulations or directives) enacted by
the state (made by the legislature (House Peoples
Representatives), implemented by the executive (the
Council of Ministers) and interpreted by the judiciary
(Courts)) to govern the behaviors of its members”.

• In general, law may be described in terms of legal
order tacitly or formally accepted by the society and
enforced. A body of binding rules sufficient
compliance of them is ensured by some mechanism
accepted by community is called law.
• Common features of law:
1. Generality: Law is a general rule of human conduct
.Laws do not specify the names of specific persons
or behaviors.
• It also implies that a law is applicable to all similar
cases, and it does not leave others and govern
some.

2. Normative : Law doesn’t only describe a behavior but
also takes a position. For example the position of the
law towards rape is prohibition.
• Law is not a factual statement (description is not in
the nature of law); it is rather a prescriptive tool
which purports to shape human behavior in the
future.
• Law prohibits, directs or permits a certain behavior.
3. Law is enacted by the Legislator. Every rule cannot
be considered as a law.
• It must be enacted by an authoritative body which
has a constitutional power to do so.

4.Law is permanent :
• In principle, there is no law which is enacted for a
specific period of time.
• A frequently changing law creates social instability
and more prone to losing legitimacy.
• Generally, law is to be established in permanence
and a time frame would be fixed only in exceptional
circumstances (e.g. in the case of state of
emergency)
5.Law is backed by sanction: Sanction according to the
Black’s Law Dictionary is a penalty or coercive measure
that results from failure to comply with a law.
• The main purpose of sanction is to prompt a party (a
wrong doer) to respond .

6.Law Enforcing Institutions:
• The state is constituted by centrally established
institutions of legislature, executive and judiciary
entrusted with the tasks of law making, law
enforcement and interpretation of laws respectively.
The combined operation of these organs sanctions
the law by a strong force
Functions of the Law
What functions does law have in your localities?
What purposes it serve to society?
i. Maintaining Peace, Order, Security and Stability
ii. Law as a means of Dispute settlement

iii. Law as a means of Social change: Law enables us to
have purposive, planned, and directed social
change. Flexibility of law provides some measure of
discretion in law to make it adaptable to social
conditions.
iv. Bringing Efficiency, Harmony and Balance in the
Functioning of the Government Machinery; How?
v. Fighting Harmful Traditional Practices;
vi. Protect and Encourage Innovative and New Ideas;
vii. Law may also be used as a tool to encourage
investment . Explain?

Sources of Law
• Where does the judge obtain the rules by which they
decide cases?
The Constitution
Statutes (Proclamations or legislations) : Refer
art.55(1) & 52 FDRE Constitution
Treaties: Refer art.9(4) of FDRE Constitution
Regulations: these are rules issued by the council of
ministers by virtue of a delegation made to it by the
House of Peoples Representatives. Refer to art. 76 of
the FDRE constitution.
Directives: are issued by individual government
offices or administrative agencies, such as,
Ministries, Commissions, Authorities, Agencies and
Bureaus and so on.

 judicial precedents (Decision of Courts or case law)
 custom; In Ethiopia, custom apply only where the law refers it
or judges interprets the law.
 Doctrines; Gaps which are not covered by law are called the
legal lacunae. Then, what do you think is expected of the judge
when s/he is encounters a legal lacunae? Should the judge
close the case or should he entertain it in the absence of any
legal rule? The answer to this question depends on whether the
law is civil or criminal law.
 Religious Rules ; are given effect to govern the social behavior
of man alongside with legal norms. Refer to article 34 (5) of the
FDRE Constitution, refer to article 26 (1) of the Revised Family
Code
• Is it legitimate for judges to refer religious rules while
entertaining the case?

Classifications of Law
Why categorization of law is necessitated?
• Public versus Private Law;
• Civil and Criminal Law;
• Substantive and Procedural law;
• Federal and State laws;
• Domestic and International Law

Dispute resolution Mechanism
Do you think it is wise to file every case to a court
to get a judgment? What are the advantages and
disadvantages of court litigation and ADR?
There are two ways of solving a dispute:
i. judicial settlement of dispute (Court litigation)
and
ii. extrajudicial settlement of dispute, or
Alternative Dispute Resolution Mechanisms
(ADR).

Advantages of ADR
 Savings in legal costs and time
 Confidentiality
 Convenience
 Flexibility of process
 Preservation of relationship and lack of animosity
 Suitability for multi-party disputes
 More creative solutions that better suit parties particular
solutions
The most known Kinds of ADR are as follows:
Negotiation: there is no 3rd party involved in the process.
Mediation: there is neutral 3rd party involved in the
process.
Arbitration

Chapter Two -The Law of Persons
Introduction:
• Law governs behaviors. But what are these
subjects of the law? The law only governs its
subjects. And it is only persons which are the
subjects of the law.
• In order to operate business first of all a being
should make sure that it is considered as a
person. Business cannot be operated by a non-
person. Every acceptable thing before the eyes of
the law begins from personality.

2.1 Meaning of the term person
A person is a being or an entity that possesses rights
and duties or is a subject of rights and duties before
the eyes of the law.
Persons are the substances of which rights and
duties are the attributes.
It is only persons who can have a right and assume a
legal obligation.
Personality in law refers to the authority which is
given by law to be considered as a person and hence
to have a right and assume an obligation. If one is
the subject of rights and duties it is a person and the
process is called personality.

• There are two kinds of persons:
i. Natural or Physical Persons &
ii. Artificial or Juristic Persons, Legal persons
The second type of personality is given to the
entities which don’t have material existence.
2.2. Acquisition of Artificial Personality
Mechanisms of acquisition include:
 issuance of a particular legislation;
carrying out registration; and
conditions of publicity.

2.3. Attributes (characteristics) of personality
I. Having a name
II. A person may sue or be sued in its own name
III. A person may administer and own a Property. A legal
person acquires rights and incurs liabilities through the
acts of its human agents (representatives) in accordance
with the provisions governing agency.
• Article 216(1) of the Commercial Code
• A business organization acquires rights and incurs liabilities
by its agents in accordance with the provisions governing
agency.
• Article 2189(1) of the Civil Code
• Contracts made by an agent in the name of another within
the scope of his authority (power) shall be deemed to have
been made directly by the principal.

IV. A person can enter in to a contract
V. Obligation to pay taxes
2.4. Personality of Physical Persons
• 2.4.1. Acquisition of Physical Personality
• Article 1. Principle
The human person is the subject of rights from its birth to its death.
• Article 2. Child merely conceived. The Exception
A child merely conceived shall be considered born whenever his interest ~o
demands, provided he is born alive and viable.
• Article 4. Viable or not viable child.
(1) A child shall be deemed to be viable where he lives for forty eight hours
after his birth, notwithstanding any provision to the contrary.
(2) A child shall be deemed to be not viable where he dies less than forty-
eight hours after his birth.
(3) The presumption laid down in sub-article (2) may be rebutted by proving
that the death of the child is due to a cause other than a deficiency in his
constitution.

2.4.2. Capacity of Physical Person
• Enjoyment and exercise of rights are not the
same.
• To enjoy rights means to have, to hold rights. A
physical person enjoys rights, holds rights or is
the subject of rights starting from the time of
birth. And the law presumes capacity. Article 192
of the civil code states that:
• Art. 192. - Rule of capacity
Every physical person is capable of performing all
the acts of civil life unless he is declared incapable
by law.
• So the law presumes that every physical person is
capable of exercising a right.

2.4.3. Incapacity of Physical Persons
• Incapacity of physical person is an exception to the
rule that every physical person is presumed to be
capable of exercising a civil acts. Art.-Proof of
disability
(1) capacity is rule/ is presumed and incapacity is an
exception
(2) Any person who alleges the disability of a physical
person shall prove that such person is under a disability
• In the Ethiopian civil code there are two kinds of
incapacity: General & Special…

i. General incapacity: is based on the age or mental
condition of persons or on sentences passed upon
them;
A/ Minors : Article 215 of the revised Federal Family
Code defines persons regarded as minor. It states:
“A minor is a person of either sex who has not attained
the full age of eighteen years”
Although the minor is incapable for entering into
contracts for most of activities of human life, certain
contracts may be regarded as binding upon the minor.
1. Contracts for the performance of acts of everyday
life:
2. Contract for employment:

• person that may assist or represent the minor are
categorized into two.
a. Guardians: represent the minor in respect to his
personal matters, Article 216 (1) of the revised
Family code provides:” matters concerning
personal interests like contracting marriage,
education, medication, determining residence,
shaping social contact and correspondence or
any other acts or contracts other than economic
interest ( property relations)

b. Tutor: Article 216(2) of the revised family code
states: “In matters concerning his pecuniary
interest means an economic interest.
• In all matters relating to economy the minor has
to be represented by the tutor”. According to
Article 36 of the FDRE constitution, everything
decision relating to the child must be done by
taking into account “the best interest of the
child.”
• The minor may acquire capacity in two ways:
attainment of a majority and emancipation.

B/ Judicially Interdicted Persons
• These individuals don’t understand the
consequences of their action due to their mental
condition. So the law steps in to protect the interests
of persons with mental problem as a consequence of
insanity, infirmity, senility and the like. Just like
minors, they need guardians and tutors to exercise
their rights. Why?
C/ Legal interdiction
• This kind of incapacity emanates from the law due
to the commission of a certain crime. They need
tutors but not guardians to exercise their rights and
discharge their duties. Why?

ii. Special incapacity: is based on nationality.
2.4.4. The End of Incapacity of Physical Persons
Incapacity on account of minority terminates
where minor reaches the age of majority(18 years
old); or even before the reach of 18 years old
through emancipation process up on grant of
dispensation of not more than two years by
ministry of justice, art.7 RFC.

Incapacity due to Judicial interdiction ceases up
on withdrawal of interdiction by the court which
passed it.
Incapacity due to Legal interdiction terminates up
on serving sentence or by amnesty or grant of
pardon by the government per law.
1.5. End of physical personality
Personality of physical persons come to an end
by:
1. Death &
2. Declaration of absence by the court. How?

Chapter-Three
Law of Contract
• 3.1. Law of Obligation
• Law of obligations is a law that requires persons to do, to
give or not to do something.
• There are two basic sources of an obligation. These are:
i. Law: These obligations are imposed by law .
 These obligations do not require your consent or agreement
for their existence.
 They are simply there because the law maker wanted them
to exist for whatever public good it had in mind. For
instance,
The obligation to pay income tax
The obligation to compensate the victim of one's wrong
The liability of an employer for the action of his
employee

ii. Contract: obligations here exist if the parties consent to
it.
Some of these obligations are:
The obligation of the buyer to give the price to the seller,
the obligation of the employee to work for the employer:
and
 the obligation of the borrower to repay the money he
took from the lender:
The law has important roles to play; it gives recognition
to these obligations, requires the parties to perform them
and provides solutions in case one of the parties, motivated
by different reasons, refuses to perform.

• 3.2 Definition of contract
• Art. 1675 of the Ethiopian Civil Code. It states
that:
• "A contract is an agreement whereby two or more
persons as between themselves create, vary or
extinguish obligations of a proprietary nature".
• (Note: those in different colors indicate
definitional elements of contract.)

The law regulates contracts in two ways.
i. By providing non-derogatory legal provisions/
requirements
ii. By setting permissive contractual provisions/rules
which have gap filling role. Parties are free to
determine whatever they like on such regard but
the law steps in so as to fulfill the contract should
the parties fail to do so.
Formation of a valid (legally acceptable) contract
requires the fulfillment of four essential elements.
These are: capacity, consent, object and form.
Refer article 1678 of the civil code,

3.3.1. Capacity:…
3.3.2 Consent : is a defect-free mutual agreement. Here, there
must exist agreement by parties on the details/scope of the contract
and willingness to do so and to be bind by the undertaking.
• Intentio obligandi (intention to be bound) must be objectively
understandable from the undertaking.
3.3.2.1 Vices of consent: are defects that vitiate the validity of
consent.
 The vices of consent limits the parties to contract from giving their
consent freely & in full knowledge of the subject matter of the
contract or to undertake the obligations to be discharged in the
contract.
• Concerns psychological issue;

continued…
• Unconscionable contract: lesion is an economic vice
consisting in the discrepancy between the real value of
the obligations subscribed and their contractual
valuation(Refer Art. 1710 of the Civil Code).
• The sanction of a vice of consent is relative
nullity(invalidation). To do this, the existence of vice have
to be invoked & established by the party affected, and
decided by the court.
• The mere fact that the vice exists does not automatically
nullify the contract.
• Defects in consent includes: mistake, fraud and duress.

1. Mistake: Mistake is normally an erroneous belief
about a certain state of affairs.
• 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.
• To invalidate contract mistake must be both :
Decisive& fundamental

• Decisive mistake: it is the mistake that made
one of the parties consent to the contract. If the
mistake is negligible, it will not invalidate the
contract.
• If we assert that "Had it not been for the mistake,
the mistaken party would not have consented to
the contract", the mistake is decisive and may
invalidate the contract given the other requirement
is met
• 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).

E.g.1. For example, a person intended sale contract but in fact
entered into service contract, or agency is mistaken for
employment contract or usufruct for lease, loan for donation etc.
E.g.2. Abebe bought a shoe believing that it is Italian product
although it is Turkish product.
E.g.3. Shewaye bought a house from Alem for 100,000 dollar
although Shewaye thought that the price was indicated in Euro.
 Due to the existence of decisive & fundamental mistake, the
mistaken party is entitled to claim invalidation of the contract
& the other party, if he doesn’t know or wouldn’t have
known the existence of mistake, is entitled to claim for
reparation.

• The decisiveness of the mistake should be determined by
court taking into account the surrounding circumstances
and subjective conditions of the mistaken party.
• Example:-Abebe and Alemu agreed that Abebe sales a
product of Alemu in Awassa town and the monthly
payment was birr 5000. Alemu thought that such contract
was employment contract but it was in fact agency
contract.
• Fundamental Mistake (Art 1998) – A mistake is
fundamental when a person misunderstands the object of the
contract or the person with whom he has entered into the
contract.
• mistake is fundamental when it related to the object or
nature of a contract or identity of the contracting parties.
Nature of contract refers to types of contract.

2. Fraud : Fraud by definition is misrepresentation of material
facts to induce a person into a contract. It is not all fraud that
invalidates a contract.
• For fraud to exist, in addition to the false statement, there
must be a deceitful action (practice) such as forgery of
documents, or fake signature, etc
• It also mean making things or document to give wrong
information. Such act is done in order to obtain consent of a
person to a contract. The practice of mixing up banana with
butter, red ash with pepper, milk with water are fraudulent
acts. Fraudulent act may be accompanied by false statement.
• A defrauded party can demand invalidation of contract where:
A/ the fraud led him to commit decisive error (Art 1704(1).
B/ the fraud was committed by the party to the contract or he
knew or should have known the fraud or derived undue benefit.

• A mere false statement by itself may not invalidate a contract.
However , the contract may be invalidated by the existence of a
mere false statement where there is a confidential relationship
among the contracting parties(relations that depend upon
confidence, trust and loyalty among the people concerned.) For
instance, relations between close relatives, agent and principal,
and the insurer and the insured are considered to be
confidential relations.
• Fraud may come from one of the contracting parties or by a
third party.
3. Duress (Art.1706 1707):
 Duress is warning the party that unless he enters into a certain
contract certain harm will be done to him.
• 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.

 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.
b/ The harm is on the person himself, spouses or his ascendant
or descendants.
c/ The harm is on person, life, property, and honor.
d/ The party believes that the harm will happen if he does not
consent to the contract
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. For example, a simple kissing on a lip or slap
on a face are not serious harms.

f/ The harm is imminent : that is the harm is going to happen
soon and a party does not have time to think of another option to
avoid the happening of the harm except by consenting to the
contract. For example, if a lady receives a letter that warns her to
sign a contract or face rape.
g/ The threat must impress a reasonable person.
 Duress by third Party (Art.1707). Duress may be committed
by contracting party or third party to the contract. The right of
a party to claim invalidation is absolute i.e. he can claim
invalidation no matter who threatened him to enter into a
contract (Art 1707 (1). Moreover; the other party cannot raise
his unawareness of the duress as a justification to avoid
invalidation.

3.3.3. Object of Contracts
According to article 1678 of the Civil Code, "no valid contract
shall exist unless the object of the contract is sufficiently defined,
is possible and lawful ...”
By "object" one must not be confused with a thing,
movable or immovable, concerned by the contract.
• The object (obligation) undertaken in the contract may
take one of three broad forms: to do, to give, and not to
do.

• Obligations are themselves divided into two
subcategories.
i, obligation of result in which a definite end is to be
achieved under the contract,
ii, obligation of means in which a party undertakes to
do his/her best to achieve the result without
guaranteeing the achievement of an outcome.
The general requirements that must be obeyed are
three:
1.The object of the contract must be defined;
2.The object of the contract must be possible;
3.The object of the contract must be lawful and moral.

3.3.4. Form of Contracts: Form is outward
appearance of the contract, and so the way the will
of the parties becomes apparent.
• No special form is required of parties when they
conclude a contract art.1719 civil code, and
thus, freedom of contracting parties to determine
the form of contract is upheld in principle.
Why do the law intervene in freedom of parties in
time of determining the form of the contract?
The law prescribes certain kinds of contracts to
be finished in written form, be signed & attested
by two witnesses to be valid.

Solemn contracts : are those for which a special
form of validity is prescribed by law. In such
cases, until the agreement is reduced into
written form and signed by the parties, there
does not exist a valid contract but ‘a mere draft’
(Article 1720).
 Examples of contracts required by law to be in
written form for their validity:
Contract relating to immovable
Contract with public administration (Art 1724)
Contract of guarantee (Art 1725 (a)
Contract of insurance (Art 1725 (b)
Contract of marriage
Partnership contract… etc,.

3.4. Effects of contract
The two major principles of contract are freedom of contract
and sanctity of contract.
Sanctity of contract indicates that parities are bound by their
agreement.
There is Latin saying “pacta sunt servanda’ which means that a
person is bound by his words. There is also an equivalent
Ethiopian proverb, ‘failure to keep a word is worse than losing
a descendant’.
However, contract is binding not only morally but also legally.
Effects of contract are:
i. Interpretation;
ii. Performance; and
iv, Remedy for non-performance

3.4.1. Performance of Contractual Obligations
• Performance of contract means fulfilling one’s own obligation
as agreed.
 So the major questions during performance are:
1. Who Performs Contract (Art. 1740)
• The contract can be performed by the debtor, his agent or by
person authorized by court or law (Art. 1740(2).
• 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.
• Generally, creditor should accept performance either from the
debtor, his agent or person authorized by the court of law
unless he proves that personal performance of the contract is
essential to him.

2. Who May Receive Payment (Art. 1741-1744)
• Payment should normally be made to the
creditor or his agent (Art. 1741). However;
payment may be made to a tutor, liquidator, or
trusted (Art. 1741).
• Payment made to incapable person one or to
unqualified is invalid unless the debtor
establishes the following cases:
i. Payment benefited the real creditor
ii. Payment confirmed
iii. Payment to a person with a valid title

3. What to Perform (Art. 1745 – 1751)
4. Place and Time of Performance
5. Currency
6. Legal Interest rate(1751)
7. Appropriation of payment (Order of payment ) (Art. 1752-
1754)
• If a person is unable to pay the whole debt (principal,
interest and cost) at one time, the part payment made by the
debtor shall be appropriated firstly to the cost; secondly to
the interest; and finally to the principal (Art. 1752).
8. Expenses
• Performance of contractual obligations usually entails
expenses which most of the time expected to be discharged
by the debtor.

3.4.2. Non-performance of Contracts
Non-performance of a contract refers to the failure of either
one or both of the parties to perform contractual obligations in
conformity with the terms of the contract and the law.
 The breach of a contractual obligation exists in the following
cases:
 when a party totally fails to carry out the obligation,
 if he makes fundamentally defective performance, or
 makes a delayed performance(e.g. partial performance)
 Offering performance at a place other than the place agreed up
on by the parties or at a place fixed by law also constitutes non-
performance.
 Delivering a thing that non-conform to the contract or
 Delivering a defective thing also amount to the breach of
contract.
 An interruption of a successive delivery also amounts to non-
performance

Default Notice
The creditor before proceeding to exercise (invoke)
the remedies of non-performance should fulfill one
more legal formality in that s/he should put the debtor
at default or give the debtor a default notice.
The purpose of giving default notice is to remind
(warn) the debtor that his obligations are due and it
is time to perform his obligation or otherwise the
creditor will resort to exercising the legal remedies.
• Giving of notice also begins the calculation of
interest against the debtor.
• It also begins the calculation of damages for delay
in favor of the creditor.

Cases where notice is unnecessary:
i. In case of an omission type of obligation: where
the obligation of the debtor was to refrain from
certain acts or doing something.
ii. the debtor assumed to perform an obligation
which the contract allows to be performed only
within a fixed period of time (a compulsory-date)
and such period has expired; e.g., A Birth Date
iii. In case the parties have expressly agreed on the
contract that notice is unnecessary
iv. In case of Anticipatory Repudiation (breach).

Legal Remedies of Non-Performance
The Ethiopian law of contract generally recognizes the
following three remedies against non-performance:
1. Forced (Specific) Performance of the contract
• The court shall not award specific performance of a
contract up on compliant and in favor of the creditor
unless:
i. It is of a special interest to the party requiring it- that the
creditor cannot acquire similar performance from other
sources or the performance of the obligation was the very
reason of the creditor to enter in to the contract. And
ii. The contract can be enforced without affecting the personal
liberty of the debtor. Only proprietary interest shall be
affected not personal liberty of the debtor.

3.4.2.2. Cancellation
This may take place either by court judgment (judicial
cancellation) or the unilateral act of the creditor.
Unilateral cancellation
Cases where unilateral cancellation is possible:
a. Where the provisions of the contract allow the
creditor to do so.
b. Where the performance of the contract becomes
impossible.
c. Where there is anticipatory breach.
d. Where mandatory period of performance expires.
The second period is grace period.

Judicial Cancellation
• To the situation that the judiciary (the court) is
vested with the power to render a final and
definitive declaration of cancellation producing
full legal effects. There are certain borderline
cases which may be easily remedied to uphold the
contract such as partial performance, defective
performance and delayed performance.
• cancellations call as a rule for judicial decision,
and that the court is never compelled to sanction
contractual defaults by ordering cancellation.

• Thus, the submission of a cancellation case to the
court helps to avoid the rush to create contractual
instability by the parties and to make only warranted
cancellations.
• In making its decision regarding to cancel a contract
or not, the court should have regard to the interest of
the parties, the requirements of good faith or whether
the breach of the debtor is related to the fundamental
provision of the contract.
The “fundamentality” of the breach needs to be proved
in the sense that the non performance affects the very
basis of the contract which would have led a reasonable
person not to inter a contract.

3. Compensation or Damages
This remedy may be claimed in addition to (additional) either of the
above remedies or independently.
Nature of Contractual Damages
• Contractual damages are characterized by the absence of a fault
requirement. That means, the plaintiff is not expected to prove
the fault of the defendant in order to obtain damages and the
defendant cannot exculpate him/herself by establishing his
faultlessness.
 Exceptions to the rule of absence of fault requirement to pay
damages-(proof of fault is required to be compensated )
i. the defense of force majeure: Force majeure is a circumstance
that is unforeseen and makes performance absolutely
impossible. If the non performance is due to force majeure
case, there is no liability to pay compensation.

i. the contract relates to obligations of means
ii. If the contract is gratuitous one: contracts made
for the exclusive advantage of one party, or
contracts which create unilateral obligation.
Contracts of donation and deposit are good
examples.
 In such contracts, the debtor is free from the
payment of damages of non-performance
unless he commits grave fault.
 Extent of Damages: Contractual damages is
equal to the normal damages that is expected
to result from the non-performance.

Normal damages/presumed damages: is damage
that is fixed by the court by taking into account the
circumstances surrounding the non-performance of
contract.
• The amount of this presumed normal damage may be
less than or could exceed the actual damage(Lesser
damages or Greater damage)
Actual damages: Is the damage that is certainly
proved by the injured party based on evidence.
Generally, the court awards damages in the amount
normally presumed to occur, but this amount may be
decreased or increased if it is proved by the parties that
the actual damages caused by the non-performance is
less or greater than the normal damages as the case
may be.

3.5 Extinction of Obligations
1. Proper Performance: Refer article 1806 of the civil
code
2. Invalidation of the Contract: …happens due to the
existence of the problem of formation relating to
incapacity or defect in consent.
The legal effect of invalidation of a contract is
Reinstatement of the parties to the position which
would have existed had the contract not been
made. Refer to articles 1808-1818 of the civil code.
3. Cancellation of the Contract: Contracts subject to
cancellation have problems related to non-
performance.
It has also the effect of reinstatement/restoration.

4.Termination of a Contract: contractual relationships
may be terminated up on mutual agreement or by
unilateral action. A party may unilaterally terminate a
contract by taking advantage of “a Termination Clause”
made in the contract to effect that the parties or one of
them may terminate the contract on notice. (Refer to
articles 1819-1824 of the civil code)
5. Remission of Debt: a contract of debt would be
extinguished in favor of the debtor where the creditor
informs the debtor that he (creditor) regards him
(debtor) as released and the debtor is in agreement to
the proposal submitted to him for the remission of the
debt. (refer to article 1825 of the civil code)

6. Novation: an obligation shall be extinguished
where the parties agree to substitute therefore a
new obligation which differs from the original one
on account of its object or nature.
For instance, an obligation to pay may be changed
to an obligation to render a service. However, the
parties to a novated obligation shall show
unequivocal intention to extinguish the original
obligation. (Refer to articles 1826 – 183o of the civil
code)

7. Set-Off: where to persons owe debts to one
another set-off shall occur and the obligation of
both persons shall be extinguished.
However, off-set shall not occur unless both debts
are money debts or the debt relates to certain
quantity of fungible things and both debts are
liquidated (certain in amount and uncontested) and
fully due (matured or eligible).
•Set of shall occur to the extent of the lesser
amount and it does not occur in case of the
negative conditions of set-off mentioned on article
1833 of the civil code. (Refer to articles 1831-1841
of the civil code)

Merger or Confusion: merger shall occur and the obligation
shall be extinguished where the positions of the creditor
and debtor are merged or confused in one of the
contracting parties.
For example, imagine that an only son was the debtor of
his own father (creditor) and before the time of payment of
the debt the father died unfortunately leaving the
succession to his only son.
9. Period of Limitation/limitation of action:
 A period of limitation is a duration (period) within which
a legal action must be brought before legal organs.
 If they do not invoke their rights and demand remedies
within the time specified by law, they are likely to lose
their rights to bring a suit against the persons that might
have violated their rights.

With few exceptions period of limitation applies
for all legal claims.
Criminal law has a number of periods of
limitation, extra-contractual laws do have their
own periods of limitation and so do the laws of
contract.
The law of contract provides the maximum period
of limitation for contractual claims. The maximum
duration is ten (10) years for all kinds of issues
such as remedies for non-performance or
invalidation for defective contracts.

But a number of shorter periods of limitation are
provided by different laws. Some of them are:
1. In the Labor Proclamation, the period of
limitation is three months for claim of
reinstatement and six months for claim of wages
(or any kind of remuneration or payment that is
due to a worker).
• Reinstatement is a sort of forced performance
remedy in which the employer is required to take
the employee back to work.
2. Under insurance contract, the period of
limitation is two (2) years

Chapter-Four
Sale contract
Covered in your Assignment!

Chapter Five
The Law of Agency
Introduction
 An agency relation ship exists when one party, called the
agent, agrees to represent or act for another party, called
the principal. Agency is the way a person does legally
binding act by the instrumentality of another person.
 Agency is a fiduciary relation that exists between two
persons so that one shall act on the behalf and subject to
the control of the other. Fiduciary relation means that
the relation ship is one involving trust and confidence. In
a principal-agent relation ship a legal bond will be
created between the parties so that the agent will act on
behalf of and instead of the principal in negotiating and
transacting business with the third parties.

5.1 The Need for Agency:
a. It helps to overcome limitation (constraints) of time and place:
b. It helps to overcome lack of business knowledge or experience
c. It is a tool to overcome the pitfalls of incapacity
5.2. Sources of Agency : Law & contract are the two main sources
the power of agency.
1. Agency by the operation of the Law
a) Agents of Minors
b) Representation of Persons under legal or judicial Interdiction
c) unauthorized agency/agency of necessity
d) Curator: the court may appoint an agent to administer the
property.

2. Contract (refer to article 2266 of the civil code)
5.2. Contractual Agency in Ethiopian Law
5.2.1. Definition and Formation
• Article 2199- Definition.
Agency is a contract whereby a person, the agent,
agrees with another person, the principal, to
represent him and to perform on his behalf one or
several legally binding acts .

• Unless the law demands the contract of agency to
be in writing, it need not be made in writing or
registered.
• If the act the agent is required to perform is
necessitated to be in writing, the agency as well
must be established in writing.
• The form of agency depends in effect upon the
form of the juridical act to be carried out.
• If the juridical act can be performed orally, the
agency created orally is valid. But if the legally
binding act must be made in writing, the agency
must be in that same form.

5.2.2. Scope and Authority of an agent
Scope of agency refers to the extent of the power or
the authority given to the agent.
It is up to the parties to decide the scope of the
authority of the agent.
It is difficult to determine the exact power of the
agent. The reason may be the parties' negligence
or ignorance to stipulate each and every term in
their agency relationship.

 There are two classes of agency under the law: General agency
and special agency.
I. General Agency
It is an agency expressed in general terms. Such agents are agents
who are in general authorized to represent the principal. such
agents are only authorized to perform acts called Acts of
Management on behalf of the principal. (Refer to article 2203-04 of
the civil code)
The following are some examples of acts of management:
I. Acts done for the maintenance or preservation of property;
ii. Lease for terms not exceeding three years;
iii. The collection of debts that are matured or eligible;
iv. The discharge of debts;
v. The investment of income; and
vi. The sale of crops or goods intended to be sold or perishable
commodities.

II. Special Agency
It is an agency whereby the agent is authorized to
transact or deal with specific business affairs of the
principal. (Refer to articles 2205-07 of the civil.
A special power of agency is required to carry out the
following activities:
i. Alienation or mortgage of immovable property;
ii. The investment of capital
iii. Sign bill of exchange
iv. Make donation
v. Effect a settlement; and Defend an action on behalf
of the principal.

5.3. Principles of Agency :
Principle: “He who does a thing through another does it himself.”
what does this refer?
For this principle to hold true, the Ethiopian law requires the
fulfillment of two conditions:
a. Name of the principal: The name of P must be mentioned by the
agent to bound the former in the contract concluded with 3rd party.
Art. 2189-Complete agency
1. Contracts made by an agent in the name of another within the
scope of his power shall be deemed to have been made directly by the
principal
2. The principal may avail him self of any defect in the consent of the
agent at the time of the making of the contract.
3. Any fraud committed by the agent may be set up against the
principal by the third part that entered in to the contract with z agnt

b. Power of the agent: Where an agent acts within ambit of power
entrusted by the principal, a direct contractual relationship emerges
out between the principal and the tired party. Exceptions:
a. Ratification : p is in full freedom either to accept or reject
transactions done with 3rd party by agent beyond the scope of
power.
b. Agency by necessity
 Though agent has acted on behalf of the principal without
authority to do so, the law compels the principal to accept the act.
The considerations here are good faith and the interest of the
principal (or simply necessity).
 Article 2194 of the Civil Code states that the agent shall not be
liable where he acted in good faith not knowing the reason by
which his authority had come to an end.

Art. 2195 –Liability of principal
The principal shall be jointly liable with the agent
where;
(a) He informed a third party of the existence of the
power of agency but failed to inform him of the partial
or total revocation of such power or
(b) He failed to ask the agent to return the document
evidencing the power of attorney and failed to seek a
judicial decision to the effect that such document was
revoked; or
(c) He caused in any other manner in particular by his
statement, behavior or failure to act, a third party to
believe that the person with whom he was dealing was
authorized to act on behalf of the principal.

5.4. Rights and Duties of Parties to the Contract of
Agency
1.Duties of an agent
A. Duty to follow Instruction of the principal
B. Duty of care and diligence Article 2211 demands
the agent to make the representation as a good father.
C. Duty to remit sums and make report.
D. Duty to avoid conflict of interest
The agent should represent only the interest of his
principal.
Article 2187 of the Civil Code permits invalidation of
the contract that is in conflict with the interest of the
principal.

E. Duty not to delegate (personal performance is necessary)
Exceptions (art. 2215 of the Civil Code)
i. The nature of activity. (if it cannot be fully operated by
the agent)
ii. Consent of the principal for the appointment of sub-
agent.
iii. Emergency situation preventing representation by the
agent (Article 2216 of the Civil Code).
2. Duties of the principal
a. The duty of remuneration: remuneration is a commission
paid to the agent for the activities exercised by him.
b. The duty of Reimbursement: it is the main duty of the
principal to advance to the agent the sums necessary or
entirely the resources needed for the proper performance of his
activities.

C. The duty of Indemnification (release the agent from
liabilities if he acted within his agency power)
5.5. Termination of agency
The agency relationship may be ended by two ways: by
act of the principal or agent and by operation of law .
1. Termination by act of the principal or the agent
A. Revocation
The principal is always free to fire out the agent. If the
agent because of the revocation suffers loss, he can
demand compensation.
B. Renunciation by the agent: this is the action of the
agent where he renounces or resigns his office
voluntarily. Yet, the agent is required to give notice to
this effect (refer to article 2229 of the civil code)

2.Termination by operation of law
Refer articles 2230 and 2232 of the Civil Code
a)Expiry of the duration of agency
b)Achievement of Object
c)Death, incapacity or bankruptcy of an agent or
principal

Chapter-Six
Law of Insurance
•Covered in your
Assignment!

Chapter Seven
Law of Business and Business Organization
7.1. Traders: Defined
 Traders, pursuant to Article 5, are persons who professionally and
for gain carry on any of the activities (an enterprise or business)
mentioned in this article.
 This provision has two key elements:
I. the general condition: it consists in the existence of an enterprise
or business, of a profession, and the goal of realizing profits
• It says that one who operates a business has to do so
professionally (as his/her principal calling). Hence, one who
operate a business as a par time or in his/her leisure does not
count as a trader.
II. the special condition: is such that the person carries out any of the
activities enumerated in article 5 as the business object.

 One cannot be a trader without operating a business or an
enterprise. Article 125(1) stipulates that “Every trader
operates a business.”
 All persons who operate a given task for profit may not
necessarily be regarded as a trader. Articles 6-9 of
commercial code exclude farmers, fishermen and
artisans from the scope of the Code’s applicability
(definition of trader).
 Persons who operate agriculture, cattle breeding,
maintaining pasture land, fisheries, persons who operate
any kind of activities in a handicraftsman level cannot be
taken as traders.

• In exceptional cases persons who operate agriculture,
cattle breeding or forestry development may be
taken as traders. E.g. If a certain farmer sells products
of agriculture outside the usual business practice, he
or she may be taken as a trader. Same is true if a
farmer feeds cattle on resources other than the land
he/she uses or exploits will be assumed as a trader.
• A hand craftsman not to be taken as a trader should
operate the activity independently without affiliation
of any one, the number of employees or the
apprentices shall not exceed three.
• If a person uses auto power, he/she may not be
taken as a handicraftsman.

7.2. Obligations of traders
A. The obligation to keep books and accounts.
B. The obligation to be registered.
C. The obligation to obtain business license.
7.3. Definition and Elements of Business
Article 124 of the Commercial Code defines business as
“An incorporeal movable consisting of all movable property
brought together and organised for the purpose of
carrying out any of the commercial activities specified in
Art.5 of comm. Code.”

(1) A business consists mainly of a goodwill (reputation)
A business may consist of other incorporeal elements such as:
a. the trade-name;
b. the special designation under which the trade is carried
on;
c. the right to lease the premises in which the trade is carried
on;
d. patents or copyrights;
e. such special rights as attach to the business itself and not
to the trader. (Emphasis added)
 In general , the term “business” embraces tangible and
intangible assets, including tools, equipments, raw
materials, goods in stock, good will, trade name, trade mark,
patent, copy right, and the right to lease of the premises.

• But, immovable properties cannot form part of the
business. Hence, the land or buildings which form of the
business premises and the fixtures on such premises are
not the part of the business, even though they are owned
by the trader himself.
• Thus, the business is a res, thing, or object over which a
person can exercise property rights, including ownership,
usufruct, and lease.
• Some of the important incorporeal ingredients of a
business are: good will, trade name, trade mark, patent
and copyright.

7.4. The Right to Operate Business
 Ethiopia Constitution guarantees the right to operate
business. It provides under Article 41:
Economic, Social and Cultural Rights
1. Every Ethiopian has the right to engage freely in
economic activity and to pursue a livelihood of his choice
anywhere within the national territory.
2. Every Ethiopian has the right to choose his or her means
of livelihood, occupation and profession.

7.5. Types of Business Operation in Ethiopia
In Ethiopia a business or an investment may be
carried out in any one of the following forms.
a) by an individual operating as a sole
proprietorship;
b) by two or more persons in a partnership
agreement; and
c) by a foreign company registered or incorporated
abroad.

7.5.1. Sole Trader
• A sole trader is a business carried on by an individual acting in an
independent way.
• The business operation will be treated as personal assets and
liabilities of the owner.
• The owner is the ultimate employer and manager, regardless of
whether he or she lives in the country.
• This is the simplest way to set up a business.
• A sole proprietor is fully responsible for all debts and obligations
related to his or her business. A creditor with a claim against a sole
proprietor has a right against all of his or her assets, whether
business or personal. This is known as unlimited liability.
• A sole proprietorship is the cheapest and easiest form of business.
• Under a sole proprietorship, the entrepreneur is the owner as well
as the manager of the business.

The sole proprietorship terminates by law upon the death
of the sole proprietor.
7.5.2 Business Organization
 Article 210 of the Commercial Code defines a business
organization as “any association arising out of a
partnership agreement.” A partnership agreement,
pursuant to Article 211 of the Code, is “a contract where
by two or more persons who intend to join together and
to cooperate undertake to bring together contribution
for the purpose of carrying out activities of an economic
nature and of participating in the profits and losses
arising out thereof ,if any.”

• The main elements in the definition of Bo’s
are the following:
(i) A Partnership agreement is a contract
(ii) Two or more persons, physical or juristic, can
be parties
(iii) Intent to Join Together and Cooperate
(iv) Contributions
(v) For the purpose of carrying out economic
activities
(vi) Participating in the profits and losses arising
out thereof

7.6. Common provisions: rules of law that apply to all
business organizations
a. Formation: Form, registration and license requirements
must be respected, except a joint venture.
b. Legal personality: Except joint venture, a business
organization has an independent legal existence.
c. Agency : Bos need a human person (workers, managers,
vice-presidents, and so on) to represent them and make
juridical acts.
d. Sharing profits and Losses

7.6.5. Dissolution of a business organization
I. By law: the expiry of period or the term will
dissolve the association by law.
II. By agreement
III. By court: Whenever there is a good cause(such
as serious failure of a partner to discharge his
duties and incapacity of a partner to carry out
his duties due to infirmity or permanent illness)
the court may dissolve a business organization
by the application of any interested party.

7.7. Forms of Business organization in Ethiopia
The Commercial code of Ethiopia defines six forms of
business organizations that are legal persons, except
one. These are:
1) Ordinary partnership: this type of Bos is not
considered as Commercial business organization and
is not authorized to undertake trade activities. If it
carries out a trade activity, it will automatically be
considered as a general partnership.
2) Joint venture,
3) General partnership,
4) Limited partnership,
5) Share company, and
6) Private limited company.

Chapter-8 Law of Negotiable Instruments(N.I)
8.1 Definition of N.I
 The word negotiable means transferable by delivery‘ and
the word instruments‘ means a written document by which
a right is created in favor of a person. Thus, the term
negotiable instruments literally refers to a document
containing rights that can be transferred by delivery.
 Article 715(1) of Ethiopian Commercial Code any document
incorporating a right to an entitlement in such a manner that
it is not possible to enforce or transfer the right separately
from the instrument.
 Negotiable instruments are issued or negotiated based on
other contracts. For instance, a person may issue a bill of
exchange to repay the money he has borrowed from the
payee, the company issues a share certificate or debenture
certificate …etc.

The rights that could be incorporated in
negotiable instruments may be rights for payment
of money arising out of various contracts such as
the contract of loan, sale, lease, or any other
contract performed by payment of a certain
amount of money.
Such rights may also arise from ownership in
companies or loan made to the government or to
a share company. The rights that are incorporated
in negotiable instruments may be rights to receive
goods under voyage or deposited in a warehouse.

8.2 Nature and Purpose of Negotiable Instruments:
 Negotiable instruments represent one form of property
rights, i.e., exercised over incorporeal things ―chose in
action such as rights of an inventor arising out of a grant
of a patent in respect of his invention, rights of a
copyrights holder, rights of a trader in respect of his
trademark, trade name and goodwill are instances of
chose in action.
 A corporeal movable property/ ‘a chose in possession‘
which represent property rights exercised in relation to
objects which have material or physical existence and
hence can be perceived by the senses such as a book, a
table or a watch. A holder of this type of property right
must have actual possession of the object to exercise
rights arising there from.

Negotiable instruments also represent one kind of
contract as every instrument embodies a contract. As
contracts, the requirements necessary for the
formation of a valid contract must be fulfilled for
issuance of a valid and enforceable negotiable
instrument.
 Hence, parties must be capable to sign the
instrument; it must be made in written form and be
signed (art.733/4 commercial code); parties must
express their consent free from defect; and the
object must be legal, moral, plain, sufficiently
defined, and possible.
The main purpose of negotiable instruments is
facilitation of commercial transactions.

8.3 Forms of transfer
The two main features which distinguish N.I from
other documents evidencing rights such as a title
deeds, whose transfer does not transfer the rights
they establish are:
A. The fact that the rights incorporated in negotiable
instruments may be transferred by the transfer of
the instrument and
B. the fact that a person may not exercise or enforce
them unless he is in possession of the
instrument/Refer to Art 1185 and 1195 of the Civil
Code/

8.4 Types of Negotiable Instruments
1. Transferable Securities
Securities are negotiable instruments incorporating
rights for payment of money. The sources of such
rights may be investments made in companies or
loans provided to the government or its subdivisions
through purchase of government bonds and treasury
bills or to companies through the purchase of
debentures.
2. Documents of Title to Goods
These are negotiable instruments containing rights of
ownership over goods that are being transported or
goods which are warehoused and which enable their
holders to receive such goods.

3. Commercial Instruments
Commercial instruments are negotiable
instruments incorporating rights for payment of a
specified amount of money. They are issued and
negotiated on the basis and with the purpose of
performing an obligation that can be performed
by payment of a certain amount of money.
Hence, they are used as a substitute for money.
These are bills of exchange, promissory notes,
checks, travelers‘ checks and warehouse goods
deposit certificates as the types of commercial
instruments recognized under the Ethiopian law.

I owe
A lots of thanks for your patient
Attendance & Attention!

Answer the following questions briefly:
1. All contracts are agreements but the reverse
held not true. Explain (5%)
2. List and discuss the legal remedies available in
case of non-performance of contract (5%)

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