CHAPTER ONE

INTRODUCTION TO Law
Introduction
Throughout the history of human beings, there are plenty of evidences that signify use of
violence by individuals and groups as a means of resolving disputes. To avoid such violence, the
only alternative that should be taken is some system of rules of order for the members of a
society. Without these rules, it is hard to imagine what it would like to live in a society. It is from
that perspective that we need to have laws.
1.1. Definition of the Law
Law is a difficult concept to define. Legal Scholars had advanced various explanations on the
subject in different times and tried to define it but in vain because satisfying definition has not
yet been found. The possible reasons for absence of universal definition canbe due to dynamic
nature of law and existence of different legal theories. Law is dynamic because it changes
when the social, political and economic aspects of the society changes. In addition, in law
school there are various theories which define law as per their perspective. For instance the
following different theories have defined law differently.
A) The natural law school
This is the oldest school which has significance in recent jurisprudence of law.
 According to natural theory law is universal
 Positive law should comply with natural law
 Man mad law to be considered as a law it should incorporate universal ethical and
moral standards
B) The positivist school
The positivists defined law as a command of the sovereign backed by sanction.
The positivists believe that there can be no higher law than nation’s positive law.
They believe that law is created by particular society at particular time.
Law and morality is completely separated.
C) Legal realism
 Legal realists oppose both natural law and positive law.
 According to legal realism laws made by a sovereign or natural law are dead
words.

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  Judges should tailor their decisions to take account of specific circumstances each
case .
 For legal realist’s law is judge made law.

For the purpose of business law, law can be defined as an enforceable set of rules established by
a government, federal, state or local to regulate the conduct of individuals and groups in a
society. A body of binding rules sufficient compliance of them is ensured by the mechanism
accepted by community is called law.
When people do not follow such rules, they are said to have violated the law. Individuals
injured by those who violate the law are provided with legal remedies in court of law, such as
requiring the wrong doer to either pay money damages or go to prison or in some cases both.
1.2. The Function of Law
Every time a law is created a person’s freedom to act is restricted in some way; at the same time
trying to settle disputes without resorting to law will produce chaos.
Given this dilemma, what purpose can a law legitimately serve without duly restricting a
person’s freedom?
Almost all legal theorists agree that law is an instrument of securing justice. The justice may
other be distributive or corrective. Distributive justice seeks to ensure fair distribution of social
benefits and burden among the members of the community. Corrective justice on the other hand
seeks to remedy the wrong. Law can also serve the following specific purposes.
A. Maintenance of Peace and Order: - the law lays down the rights and obligations of the
society including the consequence for the deviation of same. Accordingly, the law has the
force to control the society by its sanction which results in the prevalence of peace and order.
Peace is a state of tranquility- a condition in which no direct and unregulated violence is
exercised by one against the other. Order on the other hand is a situation whereby a human
conduct is predictable in any given situation.
B. Conflict Resolution: - in the day to day interaction of the society, conflict is inevitable. That
conflict may go against private or public interest. To resolve either of such conflicts the law
establishes a formal institution, i.e., court and informal institutions (Alternative Dispute
Resolution- e.g. mediation, arbitration, negotiation …) to provide a relief for the aggrieved
party.

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C. Social Maintenance: - the law usually devotes itself to maintain the values and customs of
the society whom it is regulating.
D. Social Transformation: - most changes in the history of any given society are injected using
law as a tool. The law shapes the society to a desired goal. This is done through discouraging
those practices which are detrimental and encouraging those which are helpful to the society.
1.3. Features of Law
The basic features of law are :
A. Law is General: - the law does not address to the specific person but to the society at large
and/or a specified group of individuals. The extent of its generality depends on whom the
law is made to be applicable. This feature of the law has two importance:
-it promotes uniformity and equality before the law
-it gives relative permanence of the law
B. Law is Normative: - Law does not simply describe or explain the human conduct it is made to
control. It is created with the intention to create some norms in the society. Law creates norms by
allowing, ordering or prohibiting the social behaviour. This shows the normative feature of the
law. Based on this feature, law can be classified as permissive, directive or prohibitive.
I. Permissive law: Permissive laws allow or permit their subjects to do the act they provide.
They give right or option to their subjects whether to act or not to act. Most of the time such laws
use phrases like:

- has/ have the right to

- is/are permitted/allowed to
- shall have the right
- shall be entitled to
- may
II. Directive law: Directive law orders, directs or commands the subject to do the act provided
in the law. It is not optional. Therefore, the subject has legal duty to do it whether s/he likes it
or not, otherwise, there is an evil consequence that s/he incurs unless s/he does it as directed
by the law. Directive law usually uses phrases like:

- must
- shall

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 - has/have the obligation
- is/are obliged to
- is/are ordered to
- shall have the obligation/duty

III. Prohibitive law: Prohibitive law discourages the subject from doing the act required not to
be done. If the subject does the act against the prohibition, an evil follows as the consequence of
the violation. All criminal code provisions are prohibitive laws. Prohibitive laws usually use
phrases like:

- must not;
- shall not;
- should not;
- no one shall/should

c) Sanction

Each and every member of a society is required to follow the law. Where there is violation the
law sanction would follow. Sanction according to Black’s Law Dictionary [Garner; 2004: 1368],
is a penalty or coercive measure that results from failure to comply a law. The main purpose of
sanction is to prompt a party (a wrong doer) to respond. In other words, sanction will make the
wrong doer to think that s/he made a fault and s/he should correct it. Sanction may be criminal.
Criminal sanction is a sanction attached to criminal liability [Garner; 2004: 1368]. If the fault
committed is defined by criminal law, the person will be liable to a sanction provided under the
criminal law.

D. Establishment in permanence: the coming into force of law presupposes at least

presumably, its indefinite existence in the future. It is un usual to fix time limit for the
application of law.

F. Intimacy with human behavior: law is a social norm and its ultimate concern is regulation
of human beings.

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H. law has strong institution: law is backed by established systems of the state .The institutions
can be legislative, executive and the judiciary.
1.4. Classification of Laws: -
It is a systematic grouping of laws so as to understand them easily. Law can be classified in all of
the following forms.
1. Private/ Public Laws
Private law regulates the acts which individuals do in their own names for their own individual
interest. It governs the relationship between individuals. E.g. Family law, law of succession, law
of contract
Public law on the other hand regulates the acts which individuals do in the general interest, in
virtue of a direct or immediate delegation emanating from the sovereign. It governs the
relationship which individuals have with the state/government. E.g. Constitutional law, Criminal
law, public finance law
2. International/ National Laws
International law in itself is divided as public and private international laws.
A. Public International Law- is the body of customary and conventional rules which are
considered legally binding by civilized states in their intercourse with each other.
Despite criticism against international law being considered as a law proper, it has
assumed great importance in modern world.
B. Private international law- is a law which governs individual relationships in the
international arena. E.g. if an Ethiopian and Kenyan concluded marriage in USA, the law
which governs such relationship is private international law.
National laws are laws (either private or public) that regulate state and citizen relationship within
the boundary of a particular state.
3. Substantive/Procedural
Substantive law is that which defines a right while procedural law determines the remedies.
Substantive law is concerned with the administration of justice seeks to achieve while procedural
law deals with the means by which those ends can be achieved. While the former deals with
rights and duties, the latter deals with the manner of enforcement of the former.
E.g. Substantive Procedural
-Law of contract Civil Procedure Law

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-Law of Succession Criminal Procedure Law
-Criminal law
-Property law
4. Civil/Criminal Law
Criminal law is a law which concerns itself with crimes and maintenance of peace and order by
prescribing some form of punishments. All laws beyond the reach of criminal laws are civil laws.
The two laws have different attributes in the court of law.
 Parties- in civil case, the parties are ordinary citizens or a government represented by
individual (Plaintiff-defendant). In criminal case, the parties are the government,
represented by the public prosecutor, and the accused.
 Interest at Stake- in civil case the interest at stake is private interest while in criminal
case it is a public interest which is at stake.
 Remedies- the civil case is there to compensate the victim unlike criminal cases which
are there to punish the offender.
1.5. Definition and nature of business law
Business law encompasses all of the laws that dictate how to form and run a business. This
includes all of the laws that govern how to start, buy, manage and close or sell any type of
business. It includes law of contract, law of sales, law of agency, law of negotiable instruments
and the like. It is not referred to a single brunch of law and it consists of rules that all businesses
should follow. It is part of private law which may be considered the foundation of business:
contract, sales, agency and business organization. Thus, business law is the legal framework
through which economic and business activities are conducted and regulated. In addition,
business law is very wide and complex due to increasing complexity in modern business world
The principles and rules of business law have been developed over the years to achieve certain
objectives, including the following;

 Ensuring orderliness in the various interactions and dealings

between parties to commercial contracts.
 Promotion of justice in commercial transactions through the
balancing of the conflicting interests of all the parties to
commercial contracts.

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  Provision of appropriate remedies where a party has suffered
injury due to the action or inaction of the other, example in cases
of breach of contract.
 Protection of certain classes of people like infants and illiterates
from being exploited or defrauded in a contractual relationship
because of their special circumstances.
 Promotion of trade and commerce within a particular society.

1.6. Sources of Law

We can define ‘sources of law’ in two ways
1. It may mean the formal source of law which confers binding authority on a rule and
converts the rule in to law. It is a form which a rule of law derives its source and validity.
It includes law making authority (the state therefore is the formal source of law),
procedure through which the law shall pass before it comes to existence, and
constitutional validity (that the constitution is the supreme law of the land). These
sources are constitution, statute, codes, legislations and the like.
2. It may also mean the material source of law which supplies the content of the laws.
Custom, religion, opinions of scholars, statutes, precedents al come under this category.
But among those material sources, some are regarded as authoritative by the law itself.
These sources include: Opinion of legal scholars (they speak with no authority), Precedent of
cases, Custom, articles, journals, books and the like.

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 CHAPTER TWO
The Law of Persons
Before dealing with any legal issue, the first question that should be asked is “are the parties to
this legal relationship subject to the (Ethiopian) law or not?” This is because, it is only subjects
who can exercise the rights and/or perform the duties stipulated in the Ethiopian laws.
2.1. The Concept of Persons
Person” can be defined as human beings or legal entities that are holder (or bearer) of rights, and
“personality” refers to all the attributes that have legal protection. Under article one of the civil
code person describes human person as “human person is the subject of rights from its birth to
death”. The phrase “subject of rights” (used in Article 1 of the Ethiopian Civil Code) obviously
implies corresponding duties as well, because the rights of any person apparently impose a
reciprocal duty on others to observe these rights. For example, a certain person’s rights with
regard to the privacy of correspondence or the inviolability of residence presuppose the duty of
others to respect these rights. Accordingly, there are two categories of persons:
A. Physical/Natural persons- are human beings: Articles 1 to 393 of the Civil Code deal with
natural (or physical) persons.
B. Artificial/Moral/Legal Persons- are entities of all kinds which are recognized by law as
holding rights and duties in the same way as human beings. These entities may include
companies and administrative agencies. It is only for the sake of convenience that such
entities are considered persons. In practical life, it would have been inconvenient to deal
with all, say thousand shareholders of a company, had the company not been considered
as a person. Article 394 ff provisions of the civil code deals with artificial persons.
2.2. Physical persons
2.2.1. Commencement of Physical Personality
Physical person begins personality in principle by birth and in exceptional situations during
conceptions.
A. Birth- Personality normally begins with birth. In its very first article, the civil code of
Ethiopia stipulates that a human being is a person (that he is the subject of rights and
duties) by virtue of birth.

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 However, the term birth is not defined under the civil code of Ethiopia. Because of
this, birth may be defined as the act of being wholly brought in to separate existence.
This acquisition of personality is the principle.
b) Conception: Sometimes, birth is not by itself a satisfactory criterion to confer one
personality. Assume that a father died while his wife is expecting a child. Now the
succession of the father opened. Are we going to ignore the interest of the merely
conceived child from succeeding his father since his is not born yet?
Absolutely not, the law provides that even if the principle is that personality begins
from birth, a merely conceived child may also be in a position to acquire personality.
As per article 2 of the civil code a mere conceived child acquires personality when
the interest so demands, born alive and viable. But these three conditions should
cumulatively be satisfies for the conceived child is entitled to this privilege.
First, the child interest so demands: The interest of the conceived child demands when the
child conceived while its interest affected that can be computed three hundredth day which
precedes his birth. In addition, there should be a property to be succeeded. For instance, it would
be in the interest of the child to be an heir to a succession of which the asset would exceed its
liabilities. The same is true if the child is to take material compensation in case his father died in
some accident.
Second, the child must be born alive: the child should be born with life.
The third condition to confer personality to a merely conceived child is that the child must
be born viable. This condition requires the child to live for 48 hours. This child is not viable if
he does not live for 48 hours. If the child lives for less than 48 hours, he does not acquire
personality. However, if the death of the child is not attributed to problems in his constitution, he
would be considered as a person despite his living for less than 48 hours. For example, if the
child died because of a car accident immediately after his birth, the law treats him as a person. If
all the above three conditions are met, the child is deemed to have been conceived on the 300 th
day which precedes his birth. There is no possibility of establishing that a child was conceived
more or less than 300 days before his birth.
2.2.2. Attributes of Physical Personality
A. Having of Rights and Duties- It is even a definitional attribute of physical persons.
Being a person is followed by having rights and duties. The rights may either be civil

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 such as right to life or right to enter in to a contract, or political rights which are related to
politics or state administration such as right to vote and to be elected.
B. Name-name is another characteristic of physical persons and it is regulated from articles
32-46 of the civil case. As far as the law is concerned, every person has a name by which
he will be identified from members of the society to carry the legal consequences of his
behavior for himself.
C. Residence and Domicile- A law is needed on residence and domicile because it is
necessary to localize individual, who are in most cases mobile and who could have been
difficult to find had it not been for the law. For example, it is at his place of residence that
a person contracts a civil marriage, pay his debts, gets his succession opened and
summons would be validly issued for him.
Residence is a place where a person normally resides. The law provides that everyone has
residence even if he has no dwelling. It is possible for the individual to have several residences in
which cases one may have a character of principal and the other/s will have a character of
secondary residence/s. The law provides that traders shall have the place where they carry on
their trading activity as their residence. Domicile is a stricter notion with specific characteristics
of which the essential one is the unity of domicile (that every person has only one domicile). The
concept of domicile under the Ethiopian law is only relevant for the purpose of private
international law.
2.2.3. Capacity of Physical Persons
As it is repeatedly pointed out earlier, an individual is subject of rights and duties as of the
day of his birth. This possession of rights and duties is not, however, sufficient to exercise them
per se. that is to say; a mere holding of right and duties is not enough by itself to enforce same.
Thus, there is difference between a mere fact of having rights and the fact of having the capacity
to exercise these rights. A child may, for example, have the right to own property and to dispose
his property by succession. But he has no capacity to sale or donates such property until he
attains a certain age.
Every person is capable under the law. That means all physical persons are presumed to have the
capacity to exercise their right. If someone wishes to establish the existence of incapacity, the
duty is incumbent on him to bring satisfactory evidence to that effect. It is therefore in

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exceptional circumstances that physical persons lack capacity. The following are the main
grounds for lack of capacity.
A. Minority: under the Ethiopian law, a minor is a person who does not attain the full age of
majority, i.e., 18 years. The policy behind making minors incapable under the law is the
fact that they are unable to make reasonable and mature decisions. In other words, the
law protected minors by making them incapable so that they would not be exploited by
others. Their right is exercised by their guardians and tutors. The incapacity of minors
will cease when the child attains majority age. Further, the court may emancipate minors
before they attain majority to make them capable under the law. in addition, these
categories of persons may perform daily activity, conclude marriage (16-18) when there
is good cause and collecting salary or wage from the labor relation who are attained 14
years and above.
b) Interdiction: It is a legal process where a court is asked to determine, from
testimony and other evidence presented, whether a person is unable, due to an
infirmity, to consistently make decisions regarding his person and/or his property, or
to communicate those decisions. It may be judicial or legal interdiction. Judicial
Interdiction- the ground for incapacity is mental illness followed by court decision
declaring a person to be unfit to make proper judgments. A person who is notoriously
insane is also considered to be incapable. Their rights are exercised by their guardians
and tutors. Legal Interdiction- the capacity of a person may also be limited on
account of the commission of crime. By way of punishment, some of the civil and
political rights of the persons may be limited making him incapable in that regard.
c) Physical Infirmity or Senility-Infirm persons are those persons that have such
physical defects or impairments such as inability to hear and see. Senile persons, on
the other hand, are those persons that are too old to make sound decisions. Generally,
such persons can claim the protection accorded to insane persons (article 340 of the
civil code).
d) Foreigners: under the Ethiopian law, foreigners are also incapable as regards
enjoyment of political rights and ownership of immovable properties (in principle).
2.2.4. End of Physical Personality

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The law provides that personality, that begins with birth ends with death. The second instance
when personality came to an end is when the person is declared absent. This is a situation where
by the court declared it when there is disappearance by a person, i.e., the fact that he is no longer
seen by other people and when there is complete lack of news about the person for a minimum of
two years. The effect of absence is that persons who have rights dependent on the death of the
absentee become final and effective. However, absence is not death in the full sense of the word
so that the court may require a guarantee or some other security against the eventual
reappearance of the absentee. As far as the termination of absence is concerned, it is either an
ascertainment that the absentee is alive or that he is dead that makes absence to cease
2.3. Juridical (artificial) personality
2.3.1 Commencement of artificial person
Civil associations acquire personality when they fulfill the requirements provided under article
408-414 of the civil code. Business organizations acquire personality by registration. Business
organizations companies can be formed based on article 312-314 of the commercial code.
Memorandum of association article 313(1-13) and article of association 314(1-3) is required
while established.
2.3.2. Attributes of personality
1. The ability to sue and be sued
2. The ability to own and administer property
3. The ability enter in to contract
4. The obligation to pay tax
5. Having name
2.3.3. Termination of artificial personality.
Artificial personality will terminate
 When it accomplishes the mission of its establishment
 Due to bankruptcy /declaration of bankruptcy by court
 Due to dissolution
 Expire of the time established
 When the activity carried by the business organization is considered illegal
by the government, etc.

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 CHAPTER THREE
BUSINESS AND BUSINESS ENTITIES
3.1. Definition:
Business is defined under 106 of the new commercial code of Ethiopia as follows: A business is
an incorporeal moveable consisting of all moveable property brought together and organized for
the purpose of carrying out any of the commercial activities specified in article 5 of the
commercial code.

The following features could be observed from this definition which is the basic characteristics
of business.

1. Business is incorporeal moveable property: business in intangible property which has no

physical existence.

2. Business is a combination of movable properties: i.e business arises out of combination of

several movable properties that are both tangibles and intangibles

5. Movable properties are organized to achieve a common objective: because of this business
is threaded as a single incorporeal property.
6. Business as incorporeal property exists only as privilege for persons who would qualify as
trader

3.2. Elements of business

The constituent elements of business are provided from art 109 to 111 of the commercial code by
away of illustrations. Art 109 Good will and incorporeal elements

1 A business consists of mainly of good will

2 A business may consist of other incorporeal elements such as
a) the trade name
b) the special designation under which trade is carried on
c) the right to lease the premise in which the trade is carried on
d) patents or copy right
e) such special rights attached to the business itself and not to the trader

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The incorporeal elements includes trade mark, trade name and industrial properties such as
patent, copy right, designs and models, business lease right, certain licenses and administrative
authorization attributable to the business rather than the person (Art 109).

The corporeal assets are made the materials, equipment’s and goods which are constantly change
in the course of business (Art 110).

A business shall normally not include the assets and debts of the trader, with the exception of the
right to the lease of the premises (article 111)

Protection of business

Protection of business means protection of the basic elements mentioned above. Protection of
business as property of a trade demands protection of good will and its protection. Good will is
the most important intangible element of business and this is needed to be protected by law and
under Ethiopian law (Art 112), good will results from the creation and operation of a business.

Article 113 preservation of good will

A trade may preserve his good will by instituting proceedings for unfair competition or by
setting up the legal or contractual prohibitions provided in Art 30,40,47,55,144,158,159,204,and
205 0f this code .

Article 114 is related to what situations constitute unfair competition and the remedies for that
protect business. Trade mark clearly designates the business the product or service and has to be
protected as property of the trade but they have to be registered to be protected (Art 115ff ).

Traders

Traders are defined under Article 5 of the commercial code as persons who professionally and
for gain carry on any of the activities enumerated in that article. The word “professionally”
indicates that in order to be considered as a trader, the person should perform a given activity
spending much time than any other activity. The word “for gain” in the provision is there to
signify that the person is expected to get his livelihood manly from the proceeds of the activity.
If the person is performing the activity for the sake of recreation, for example, he will be
excluded from being considered as a trader.

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Persons who professionally and for gain carry on any of the following activities
mentioned can be deemed to be a trader.

(1) Purchase of movables or immovable properties with a view to re-selling them

either as they are or after alteration or adaptation in retail or wholesale in a
domestic or, as the case may be, foreign market;
2/ Purchase of movables or immovable properties with a view to letting them for
hire;
3/ Agricultural and forestry development on land lawfully given to a right holder
for commercial purpose;
4/ Animal husbandry and production of animal products beyond small-scale
levels excluding persons entitled to use rural land under the law;
5/ Fishing and fish farming beyond small-scale levels;
6/ Warehousing activities in accordance with the Civil Code or other relevant
laws;
7/ Minining activities not performed by handicraftsmen,exploration,drilling and
production of feul oil or gas and related activities;
8/ Exploitation of quarries not by handicraftsmen for buildings, road or other
construction works;
9/ Exploitation of salt pans not by handicraftsmen;
10/ Foodstuff production, production conversion, adaptation and maintenance of
corporeal movable chattels, from such things as raw materials or semifinished
products not by handicraftsmen;
11/ Building, maintaining and cleaning of houses, buildings, roads and any other
construction works and parts of such construction works not by handicraftsmen;
12/ Embanking, leveling, trenching or draining carried out on an immovable
property of a third party not by handicraftsmen;
13/ Carriage of goods or persons including through postal services; packaging of
goods and carrying out related activities not by handicraftsmen;
14/ Capturing and supplying water in different ways;
15/ Transporting, disposing or recycling of any waste including solid and liquid waste not by

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handicraftsmen;

16/ Producing, distributing and supplying electricity, gas and compressed air including provision
of heating and cooling services;

17/ Repairing, washing and cleaning of movable and immovable things not by handicraftsmen;

18/ Publishing on paper media anything in whatever form by establishing a printing press and
publishing sound and video recordings by any method;

19/ Publishing of works through paper printing, phtographs, audio and audiovisual records or
television, radio, internet or any other means;

20/ Organizing public entertainment events and operating playgrounds and places of
entertainment for the use of the public;

21/ Operating trade fairs and related activties;

22/ Broadcasting programs by establishing radio and television stations;

23/ Operating news and any information transmission services;

24/ Operating communication services through wire or wireless means as well as using satellite
and internet technology;

25/ Organizing, providing or storing of information by using computer and software technologies
and

supplying it to the public through the internet and provision of space and computer for
customers to

access the information;

26/ Operating services categorized as commercial banking, investment banking, insurance,

financial and

related services and supporting services;

27/ Operating hotels, restaurants and food catering services, cafes, bars, night clubs and other
similar services;

28/ Organizing and coordinating meetings, festivities, parties and similar events on behalf of
others and

decorating venues for such occasions;

29/ Operating travel agencies and coordinating travels;

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30/ Operating beauty, fitness and hairdressing establishments, as well as all kinds of health
fitness services including any kind of physiotherapy and massage services;

31/ Provision of consulting, auditing or similar skill or knowledge related services beyond small
scale level

using scientific, technical and professional knowledge;

32/ Operating in an organized manner veterinary and human health services, diagnostic services
and

provision of consultation, follow up, and related services for maintaining health and prevention
of

illness not by handicraftsmen;

33/ Provision of educational services and transfer and dissemination of knowledge services not
by handicraftsmen;

34/ Operating business as a commercial agent, commission agent, commercial broker, stock
broker

and any kind of agency;

35/ Provision of security services be that personal or for property not by handicraftsmen;

36/ Operating any office support services including preparation of documents and duplication
services not by handicraftsmen

37/ Operating funeral and related services

The law provides that every trader operates a business. Business is an incorporeal movable
consisting of all movable property brought together and organized for the purpose of carrying out
any of the commercial activities specified under the law. Among other things these may include
good will, Trade name, Trade mark, the right to lease premises in which the business is done,
patents and copyrights, and such other special rights as attach to the business itself and not to the
trader. A business, however, is not the product of incorporeal elements only. It may also consist
of corporeal elements such as equipment or goods.
Trade may be carried out by a single individual or two or more persons. When the business
carried by a single individual is called sole proprietorship, while when a business carried by two
or more persons, the activity is a business organization.
Sole proprietorship

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A sole proprietorship is the legal form that a business man operating on his own can most easily
use for his business. The sole owner alone is responsible for all the contractual and other legal
obligations of the business. Many small businesses such as restaurants, florists and other retail
stores as well as business, professional and trades people offering a service to the public such as
hair dressers, medical doctors, accountants and carpenters use sole proprietorship.

Advantage of proprietorship
 Simplicity: it is relatively simple for a person to establish a sole proprietorship. He needs
only obtain a government business license. He is not required to comply with other
requirements which are only meant for business organizations.
 Low cost: it does not cost a lot to establish a sole proprietorship. For example, the fee for
a government business license is relatively small, no need to incur legal fees, as with a
partnership, or corporation, in drawing up a written agreement as there is only one owner
involved.
 High personal motivation: the fact that all the profits or losses accrue to the sole
proprietor alone means that such a person is highly motivated to ensure the success of the
business. The sole ownership of a business, with complete responsibility for its affair and
the fact of being one’s own boss, is a source of great personal challenge and satisfaction.
This is signified by the willingness or many sole proprietors to work extremely long days
and six days a week, often with little or no annual vacation, in their businesses.
 Quickness and freedom of action: the sole proprietor, having no partners to consult, can
make decisions very quickly should the need arise. He has also the freedom to make his
own decisions, good or bad. His freedom is restricted to some extent by various
government controls such as tax and labor laws. In general, however, the sole proprietor
form of business has fewer government restrictions than the other forms of business
ownership.
 Privacy: the sole proprietor is not required by law to publish his financial statements.
The privacy aspect of sole proprietorship is an important consideration when secret
formulae, processes, contracts or other confidential information are involved.

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  Ease of termination: the sole proprietor need not ask any one’s permission to terminate
his business activities. Furthermore, he does not need to advertise the fact in advance. He
merely stops doing business.
Disadvantages of sole proprietorship
 Unlimited liability: the owner’s personal assets such as house, furniture, car, and stocks,
may be seized, if necessary, to pay the outstanding debts of his business. Thus a person’s
life savings could be wiped out by a business failure.
 Limited talent: few people are good at everything. Yet the sole proprietor is responsible
for every aspect of the business buying, selling, manufacturing, financing, accounting,
advertising, personnel, customer relation, etc. Although he can employ other people to
help him, the ultimate responsibility is still his.
 Limited capital: he must raise all the funds required for his business. His investment is
limited to what he has saved and to what he can persuade others to lend him. Obviously
the bank will lend less to one person than it would to many.
 Lack of continuity: the business legally terminates on the death of the owner. Also the
sole proprietors’ absence through illness can quickly cause havoc. The sole proprietor is
lucky to find an employee who replaces him in his absence whom he can trust and afford
to pay.
3.3 Different kinds of Business Entities
A business organization is an association established through a memorandum of association by
persons who bring together contributions for the purpose of undertaking an economic activity in
cooperation and of participating in the profit made.
The key elements of the definitions are the following:
 A business is an association
 Two or more persons, physical or juristic, can be parties
 Intent to Join Together and Cooperate
 Contribution
 For the purpose of carrying out economic activities and
 Participating in the profits made

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The formation of most business organizations is not only required to be in writing, but also
would be completed only when the business organization in question is registered by commercial
registry.
There are seven different forms of business organizations recognized under the Ethiopian law
(article 174).
These are:
- General partnership
- Joint venture
- Limited partnership
- Limited liability partnership
- Share company
- Private limited company
- One-person private limited company
 For the sake of convenience, we can classify such forms in to partnerships and
companies.
All business organizations other than joint venture shall acquire legal personality upon
registration in the commercial register. A business organization shall have a name. Such
name may neither be contrary to the interests of another trader or business organization nor
contravene the law and public morality.
The formation of a business organization, except joint venture, shall be of no effect unless
established through a memorandum of association. Any provision giving all the profits to
only one or some of the members of a business organization shall be of no effect.
a) General partnerships (article 183-211 of the new commercial code)
A general partnership is a business organization in which the partners are jointly and severally
liable to third parties for partnership debts. Each partner has the right to share in the management
of the business and has unlimited personal liability for any partnership debts. The liability is both
joint and several. That is to say all the partners are together (or jointly) liable for the debts of the
partnership as well as being individually (or severally) responsible for all the partnership debts if
the other partners are unable to pay their portion.
 A general partnership should have a firm name in which the names of at least two
partners should appear.

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  If a person other than the partners allows his name to be included in the firm name, such
a person will be held liable as though he were a partner for the purpose of liability alone.
 A general partnership could either be commercial or non-commercial.
b) limited partnerships
A limited partnership has two types of partners: limited partners and general partners; at least
there should be one limited partner and one general partner for a partnership to be a limited
partnership. The general partners are those that are liable for partnership debts jointly and
severally. Limited partners are on the other hand, those partners who are liable only to the extent
of their contribution.
Limited partnership should have a firm name. But the firm name should only have the name of
the general partners. Otherwise, if a third party or a limited partner allows his name to be
included in the firm name, he will be jointly and severally liable like the general partners. A
limited partner cannot assume managerial post in the partnership because such exposure of the
limited partner to third parties can create a detrimental reliance by the third parties on the limited
partner who is liable only to the extent of his contribution.
There functions with in the business organization limited to :-
A limited partner may not be deemed to act as manager when he:
a) takes part in consultations in the firm;
b) deals with the firm;
c) investigates managerial acts;
d) gives advice and counsel to the firm;
e) gives permission to do acts outside the manager`s powers.
5/ Limited partners may be employed by the firm in non-managerial positions
c) Joint venture
These are the most amazing form of business organization. Unlike other business organization,
joint ventures are not required to be formed in writing, is not registered and publicized. Nor does
it have a legal personality. A joint venture is not disclosed to third parties and its main
advantages constitute in this.
As the liability of partners is unlimited, absence of divulgation of the partnership and the status
of members as partners is very important. The unlimited liability will come only when the
existence of a partnership is disclosed and the partner is known as a member. Otherwise, if the

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partnership remains undisclosed, then its liability will be born by the acting partner or the
manager.
d) Limited liability partnership
A limited liability partnership is a business organization formed by two or more persons to
render professional service and services complementary thereto in which the liability of partners
is limited to the amount of their contributions. “Professional service” shall, in the context of this
partnership, mean a service provided based on a professional license granted by an appropriate
organ.
The partnership has legal personality distinct from hat of the partners. The death, bankruptcy,
departure from the partnership or any other fact affecting the partners shall have no impact on the
existence, rights or obligations of the partnership.
The name of a limited liability partnership shall be as agreed by the partners and indicate the
purpose of the partnership. It may not adversely affect the interest of other traders, organizations
or the rights of third parties. The name of the partnership shall be followed by the words
“Limited partnership’’.
Advantages of partnerships
 More capital: a partnership pools the funds of a number of people; where as a sole
proprietorship has only the one owner’s money.
- An individual with a good business idea, talent or experience but no money can
often establish himself in business only by joining with someone else who does
have capital to invest.
- It is also normally easier for a partnership to obtain credit from suppliers or
borrow money from a bank than it is for a sole proprietor. This is because the
creditor or lenders can have security of the business and personal assets of several
persons for repayment rather than those of just one person.
 More talent: two or more persons by combining their energies and talents can often make
a success where one person lone would fail. This is particularly true when a business
demands variety of talents such as technical knowledge, financial skills, and sales ability.
 High personal motivation: as with the sole proprietorship the owners of a partnership
business know that all the profits will go to them. Consequently, they have every
motivation to make it successful.

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 Disadvantages of partnerships
 Unlimited liability: the general partner can be forced to sell his personal assets to pay
outstanding business debts. Further the liability is both joint and several.
 Possible management dispute: because a number of owner share the management of
the business, it is inevitable that occasional disputes will arise. If the disputes are
serious, they may even cause the early termination of the partnership.
 Limited capital: compared to companies
 Relatively frozen investment: it is not easy for a partner to sell his share of a
partnership to obtain cash to meet some sudden need. He must first obtain the
approval of the other partners for the transfer of ownership to a new partner. If this is
not forthcoming, the other partners must usually buy out the retiring partner’s share,
depending on the partnership agreement. However, this is a slow process.
 Lack of continuity: a partnership certainly does not have the continuity of a company
which continues to exist what eve the fate of the owners.
Companies
 A company is a business organization that is a legal person in its own right.
 Because of its separate legal existence, any debt incurred by it can be repaid only out of
its assets; there is no recourse to its shareholder.
 This is completely different from the sole proprietorship and partnership in which the
owners are legally responsible for all the obligations of the business and must therefore
satisfy any outstanding claims from their own personal funds.
 The Ethiopian law recognized two types of companies.
A) Share companies
 A share company is a business organization whose capital is fixed in advance and divided
in to shares and whose liabilities are met only by the assets of the company.
 A share company is established between persons that want to limit their liability to the
extent of their contribution.
 Share companies are required to be established with a minimum of five members and a
minimum capital of 50,000 birr.
 The management of a share company is held by a board of directors. As such unlike sole
proprietorship and partnership that are managed by an individual or group of individuals,

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 the management of a share company is conducted by an organ-board of directors which
must have 3-12 members.
 However most serious decisions are taken by a meeting of shareholders that meets
annually or as and when required in the year.
 Apart from the meeting of shareholders and the board of directors there is an organ of
auditors in share companies that controls the board.
B) Private limited companies
 A private limited company is simpler and more flexible form of a company.
 Like share companies, private limited companies are characterized by limited liability-all
members are liable only to the extent of their contribution.
 But the facts that make this company simple are as follows: from the very outset, it can
be established between only two persons and the maximum cannot exceed fifty members.
As to the requirement of capital, a private limited company can be formed with a
minimum capital of 15,000 birr. A private limited company is not required to be managed
by a board of directors; it can be managed by a single person or a group of managers. The
requirement of audit and shareholders meeting as well can be dispensed with in a private
limited company that does have less than 20 members.
C) One-person private company:
This kind of company is new introduction of the new commercial code. It is a business
organization incorporated by the unilateral declaration of a single person. The Company has its
own legal personality separate and distinct from that of the member. The member shall not be
personally liable for debts due by the company in so far as he has fully made his contribution.
The capital of a one-member private limited company shall not be less than 15,000 (fifteen
thousand) Ethiopian Birr.
A trader may convert his enterprise from a sole proprietorship into a one-member private limited
company. The trader shall, however, remain jointly and severally liable with the company for all
debts incurred prior to the formation of the one-person private limited company through
conversion. However; a one-member private limited company may not establish another one-
person private limited company. A one-member private limited company shall have a general
manager who may be the member of the company himself or another person. The general

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manager shall have the powers and duties of the manager of a private limited company under the
Code.
The dissolution of a one-person private limited company that has settled all its debts and
obligations shall result in the universal assignment of all the assets of the company to the
member without liquidation of assets taking place. The member shall be personally liable for all
the debts and obligations of the company if creditors appear after the dissolution has taken effect.
Advantages of companies
 Limited liability: unlike the sole proprietor and the partner who stand to lose part or all of
their personal assets if their business fails the shareholders of a corporation can lose only
his investment.
 Continuity of existence: since the company itself is really a legal person, separate and
distinct from its shareholders, its life is unaffected by the death or other misfortunes that
may befall any of the owners.
 Its existence can only be brought to an end if its charter expires or if its shareholders vote
to surrender the charter.
 Transfer of ownership: it is possible to transfer of ownership of a company from one
person to another person without much formality, unlike partnership.
 Professional management: The structure of a company with a board of directors permits
people to invest their money in business without themselves becoming involved in its
management. This feature is taken full advantage of in the share company where many
large businesses are operated with predominantly professional hired management.
 More capital: an extremely important advantage of the company is its suitability for
raising large amounts of capital. This is particularly true of share companies which can
have unlimited member of shareholders and can advertise the sale of its stocks and bonds
to the public. An investor know that his liability is limited whatever happens to the
company; he knows that the firm will continue whatever happens to shareholders; he
knows that he can easily sell his share of ownership should he need case; and he knows
that he does not himself need to spend time in management of the business.
 A private limited company is, however, relatively handicapped in its ability to raise long
term funds. It may sell its shares of capital stock to no more than 50 persons; it may not
advertise their sale to the general public.

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Disadvantages of companies
 Initial cost: to setup a company, it is necessary to pay a charter fee to the government and
to pay for lawyer’s service in handling the incorporation.
 Government Regulation: companies must, for example, maintain a set of books
specifying shareholders, directors, capital, and soon; keep certain books of account; have
annual shareholder’s meeting; and file annual returns with the government body.
 Privacy: Some forms of companies are required to furnish their shareholders with an
annual income statement and balance sheet. Many firms believe quite strongly that this
information helps their competitors and consider it highly detrimental to have to reveal
anything at all.
 Possibly less personal incentive: in share companies which are quite often large, the
president and department managers, or vice presidents, are usually paid employees.
Although they may have great personal ambition and dedication to the business, their
personal incentives and loyalty is rarely as strong as that of an owner.

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 CHAPTER FOUR
CONTRACTS LAW IN GENERAL
Contract law is most obviously the law relating to agreements or promises. It is primarily
concerned with agreements in which one party, or each party, gives an undertaking or promise to
the other. It governs such questions as which agreements the law will enforce, what obligations
are imposed by the agreement in question and what remedies are available if the obligations are
not performed. Thus, contract law is the law based on liability for breach of promises. However,
‘Contract law’ is also used to mean the whole collections of rules, which apply to contracts, and
these includes many rules, which are not contractual in the sense of being based on a promise to
do something.
Contract law is primarily concerned with supporting the social institution of exchange. However,
it is not as broad as the institution itself. An enormous proportion of our life is carried on the
basis of exchanges that are in some sense agreements, but many of them are not governed by
what is usually thought as contract law. Some agreements, such as domestic arrangements, are
not governed by law at all.

Definition of Contracts
Contract is an agreement between persons to perform a certain obligation agreed. It is a promise
of person to perform accordingly. Under the Ethiopian law, contract is defined under article
1675 of the civil code. It reads:
A contract is an agreement whereby two or more persons as between themselves create, vary,
or extinguish obligations of proprietary nature.
We will next consider the elements of such definitional provision.
 A contract is an agreement
The first essential element in a legally binding contract is the existence of an agreement or
“meeting of minds” between the parties involved. Being an agreement, a contract is not the paper
on which it may be written and signed- such paper is a means of proving that agreement was
expressed. However, all agreements are not contracts but all contracts are agreements.
 Two or more persons
Persons include both physical and legal persons. For the formation of contract, at least two
persons are needed.

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  Between themselves
Parties to a contractual relationship can bind and entitle only themselves, not outsiders. This is
known as privities of contracts. On the other hand, contract is a personal right (right exercised
against a specified person, i.e., the other contracting party) as opposed to real rights (a right in a
thing and exercised against the whole world).
 Create, vary, or extinguish
Contract is concluded not only for the purpose of forming new relationships with other persons.
It may also be concluded to vary (alter, change or modify) an existing obligation or extinguish of
the contractual relationship.
 Obligations of Proprietary nature
The obligation created by the parties should have an economic value. That is to say, it must be
expressed in terms of money. This excludes contracts of ‘statuses’ such as marriage since it does
not create obligation of proprietary nature.
4.2. Purpose of contract
The purpose of Contract law is primarily concerned with supporting institutions of exchange,
which is an enormous part of our life carried on the basis of that are in some sense termed as
agreement. Contract law has many purposes but the central one is to support and control the
millions of agreements that collectively make up the market economy, and hence operates in the
context of dispute resolution mechanism. Besides it empowers the parties to make agreements
that the law will enforce. It also enables parties to the contract to make exchanges that might
otherwise carry too great risk whether of disruption by some contingencies or default by the
other party. Accordingly, contract law in this respect is the most important which creates smooth
functioning of business transaction by creating certainty, predictability, and enforceability. In
general contract serves the following purposes: -
A. To ensure predictable market system: - when parties enter in to a contract, they will assume
respective obligations each other. That obligation is assumed by way of promise. If that promise
is not enforced legally, individuals would be discouraged to conclude contracts which eventually
results in the collapse of the market system. To ensure predictable market system, therefore, laws
governing contracts are needed.

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B. To ensure freedom of contract- contracts should be concluded without the dominance of one
party. If the party is forced to enter in to a contract, the law of contract protects his interest by not
recognizing such kinds of contracts.
4.3. Classification of Contracts
Contracts could be classified in many ways. But the major classifications are:
A. Adhesive/Consultative Contracts
In case of adhesive contracts, the terms of contract are given by one party to the other party. The
only option to the other party is either to accept or reject it. In this type of contract, there is no
negotiation as to the terms of the contract. E.g. cost sharing form (contract), insurance.
B. Onerous/ Gratuitous Contracts
Onerous contract is a kind of contract in which both parties assume rights and obligations. A
gratuitous contract is a contract in which only one party assumes obligation. Sell contract and
contract for donation can be examples of each kind of contracts respectively.
C. Intuit Personae/ Anonymous Contracts
The former are a contract made in consideration of the identity of the other person. This contract
needs the special capacity and quality of one party. Anonymous contracts are those contracts
made without due regard to the identity of the other person.
4.4. Elements for the formation of Contract
These are the requisites for the existence and validity of contracts. They are capacity, consent,
object, and form.
A. Capacity- to enter in to a contract, the contracting parties should have capacity. In
chapter two, we have considered that minors, judicially interdicted persons, physically
infirm and senile persons, and legally interdicted persons are incapable so that such
persons cannot conclude a valid contract.
B. Consent- this requires parties to conclude a contract in free and full consent. The free
and full consent of the parties expressed in terms of Offer and Acceptance.
1. Offer
An offer can be defined as a firm and precise proposal by one party to conclude a contract with
another party. When we say firm, it means that the party making the proposal has intention to be
bound by the contract. The word precise refers that the party has indicated the essential elements
of the contract. As such, an offer is a promise to enter in to a contract, on specified terms, as soon

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as the offer is accepted. The law provides that so long as it is precise the party can make an offer
even by signs or conducts. Offer should communicate to the specific beneficiary or offeree
except public promise.
Needless to mention the fact that business enterprises are always committed to attract customers
to their premises. They may do this by advertising their existence, as well as describing the
products they sell and prices they charge. The law is in a position to treat such acts as non offers.
They are only invitations to offer, not offer. The same is true if a seller displays a product in the
store- he is not considered as making an offer. This is only an invitation to offer and as such is
not capable of being accepted.
A person who makes an offer is known as the offeror. The person to whom an offer is made is
known as an offered. The offer prepared by the offeror may be time bounded or non-time
bounded.
Termination of offer
An offer can terminate by four events. These are:-
o Revocation- the offeror can revoke his offer at any time before the offeree knows or at
the same time the offeree knows of his offer. An offer that has been revoked does not
exist anymore and therefore cannot be accepted.
o Lapse- an offer lapses in one of two ways. First, if the offer contains a date up on which
it expires, it will no longer be alive after that date. Second, if the offer contains no expiry
date, it will lapse after the time the offeror can reasonably expect the other party to decide
on the offer which will depend on all circumstances of the case and eventually it is
speculative. Having this in mind, the offeror should consider specifying an expiry date
for his offer and thereby avoid the debate altogether.
o Rejection- an offer is automatically terminated when it is rejected by the offeree. Silence
is one form of rejection, in principle.
o Counteroffer- it is a form of rejection. In counter offer, the offeree is turning down the
offer and proposing a new offer in its place.
2. Acceptance
Acceptance is an agreement to the terms of the offer. It should be in exact conformity with the
terms of the offer. If the offeree changes any terms of the offer or adds new terms, there is no

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acceptance. Hence, it should be unconditional and unequivocal agreement by the offeree to the
proposals of the offeror. When the offeree accepts, the contract is said to be formed.
Communications of acceptance is expected and required. Offer and acceptance are commonly
expressed by signs normally in use and by conduct. So in principle silence does not amount to
acceptance. However, the principle that silence does not amount to acceptance suffers exceptions
stated as follows:
1. Duty to accept: acceptance is not required when a party bounded by law or by concession
granted by authority to enter in to a contract on terms stipulated on advance.eg. Public utilities
vital services such as postal service and telegraph transmission, public transport, supplies of
electric power and water etc.
2. Pre-existing business relation: when an offer to continue or vary an existing contract or to
enter into a subsidiary or complementary contract may be accepted by silence or Such shall be
the case where the offer is made in a special document informing the other party that the offer
shall be regarded as accepted if no reply is given within a reasonable period of time
Defects of consent
The following instances are generally cases where the party can invalidate the contract based on
vices of consent.
 Mistake- if one of the parties to a contract gives his consent by mistake it may be
invalidated. To invalidate a contract on the ground of mistake, the mistake has to
be decisive (Art. 1697 of the civil code) and fundamental (Art. 1698 of the civil
case). However, non-fundamental mistakes relating to the motive which led the
party to conclude a contract and arithmetical mistakes cannot be grounds to
invalidate a contract.
 Fraud- fraud is another ground of invalidating contracts which is concluded
based on cheating or deceit. To invalidate the contract on the ground of fraud the
party claiming invalidation has to prove that the other party resorted to deceitful
practices so that he would not have entered in to the contract had he not been
deceived.
 Duress- duress is the compelling of a party to consent to a contract by threats of
grave imminent harm to such party of his ascendants, descendants or spouse.

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  Lesion (unconsciousness): Contract depends on the concept of free market
economy where the parties can freely determine their obligation. Parties are
bargaining at arm’s length. This presupposes that both parties to a contract are
equal. However, such equality may be affected by individual want, simplicity and
business inexperience thereby giving the other party the opportunity to exploit
such weakness.
c. Object of the Contract
The object of contract is the obligation it creates. That obligation may be to give, to do, or not to
do. The law provides that the object of contract should be sufficiently defined, possible and
lawful and moral. Sufficient definition requires the parties’ obligation to be stipulated in
enumerative, unambiguous and clear manner not to make the contract of no effect. The
obligation of the parties has to also be possible humanly- it should not be impossible absolutely.
Further, if the object of the contract is unlawful and immoral, the contract will have no effect or
the contract is void i.e there is no obligation between the parties from the inception.
d. Form of Contracts
Form refers to the manner in which the contract is made. Under the Ethiopian law, form is not an
essential element of contracts because the principle is contract could be made in any form (oral,
written, conduct). But when the law requires form for some contracts, such form should be
observed to make the contract valid. Parties can also stipulate special form. When the law
requires written form, the contract has to be signed by the parties and should be attested by
witnesses. Such contracts that need to be in written form include contracts relating to immovable,
guarantee, insurance, contract of loan exceeding 500eth. Birr, contracts with public
administrations and any other contract which other law provide it should be formed in written
form.
4.5. Contract in absence parties
In certain circumstances, it might be important to know when and where a contract exists
between the parties. The principle that contracts exists when and where an offer is accepted is
not of much help in cases where there is time and place difference between the sending and
reception of acceptance. In this regard, there are two theories: the theory of dispatch and the
theory of reception. The former provides that a contract exists when and where an acceptance is
dispatched to the offeror. On the other hand, the theory of reception holds that a contract exists

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when and where the offeror receives the acceptance. The Ethiopian law of contracts adheres to
the theory of dispatch. Article 1692(1) provides, ‘a contract made between absent parties shall be
deemed to be made at the place where and time when the acceptance was sent to the offeror’.
When the telephone is involved in the transaction, Article 1692(2) provides, ‘a contract made by
telephone shall be deemed to be made at the place where the party was called’.
4.6. Effects of Contracts
Once a valid contract is formed, it will serve as a law for the contracting parties as it is binding.
This principle is known as ‘pactasuntservanda’, meaning agreements lawfully formed are
binding. The agreement of the parties should not however be in disregard of the mandatory
provisions of the law. The effect of contract normally involves either performance or non-
performance of the contract followed by the remedies for non-performance.
4.7.1. Performance of Contracts
Performance refers to the realization of the obligations assumed by the parties to the contract.
The performance of the contract must be made personally by the debtor if it is essential for the
creditor or is expressly agreed by the parties. In all other cases, a third party can be authorized to
perform the debtor’s obligation.
As far as the person to whom payment should be made is concerned, the person qualified to
receive payment is only the creditor, or somebody authorized by him or by the court or the law.
Payment made to incapable creditors or an unqualified person is not valid unless the debtor can
prove that the payment has benefited the creditor. Payment to unqualified person is also valid if
the creditor confirms it. When the debtor is not sure as to the identity of the person to be paid,
i.e., the creditor, he may release himself by depositing the amount due in court.
The creditor is entitled to receive the object that is agreed in the contract. He has the discretion to
refuse to accept another object even if such other object is of a greater value than the object
agreed. But the thing agreed by the contract is fungible; it is the right of the debtor to choose the
thing to be delivered. Fungibles are items expressed in the contract in general terms. For
example, if the obligation of the debtor is to deliver 100 quintals of teff, any teff (whether Gojjam
or Shewateff) which is not below average quality can be delivered by the debtor.
If the parties has provided interest but did not specify the rate, the law has its own default rules to
fix the interest rate to be 9% per annum. As to the place and time of payment, it has to be made
at the agreed place and time respectively. If no place was specified in the contract, payment has

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to be made at the principal residence of the debtor at the time when the contract is made.
Payment would be made forthwith or as soon as the creditor requires if no time was specified in
the contract. The debtor is bound by the law to bear the risk until the thing is delivered to the
creditor. But if the latter was in default to take delivery, the former shall bear no risk after that
time.
4.7.2. Non-Performance of Contracts
Conclusion of a valid contract does not by itself guarantee its performance for sure. Different
factors may lead the party either to refuse or unable to perform his contractual obligation.
 Remedies for Non-Performance
We have considered earlier that a contract lawfully formed binds the parties as though it were a
law. As such, if a party fails to perform obligations he agreed to perform in the contract, the
other party is entitled to invoke or apply certain legal remedies against the former. However,
before the party is hastening to avail himself of the legal remedies, he is in principle expected to
give notice for the other party carries out his obligations under the contract subject to the
instances which do not require him to give notice (read articles 1772-1775 of the civil code).
There are three kinds of remedies for non-performance. These are forced performance,
cancellation, and compensation which would be discussed next one by one.
A. Forced Performance- is the claim by the creditor for the debtor performs his contractual
obligation. But forced performance is only ordered if it is of special interest to the party
requesting it and such performance can be made by the debtor without affecting his
personal or physical liberty. The phrase ‘special interest’ conveys a message that the
creditor is only served or supplied by the debtor and there is no other person than the
debtor who can perform that obligation. On the other hand, to order forced performance,
it can be said that obligation to do affects personal liberty as opposed to obligations to
give which do not affect personal liberty.
B. Cancellation- cancellation is in principle the power of the court. A party may also be
entitled to cancel the contract in some cases.
 Cancellation by the Court (Art. 1784) - the aggrieved party may move the court
to cancel the contract when the other party did not perform his obligation within
the agreed period of time ant that non-performance should relate to the
fundamental provision of the contract.

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  Cancellation by a Party (Art. 1786-1789) – if parties, when entering in to a
contract, insert a clause on unilateral cancellation, a party is entitled to cancel the
contract when conditions for enforcing such clause is present. Unilateral
cancellation is also possible for a party if the other party did not perform his
obligation in the time stipulated in the default notice, in the given grace period or
within a specified period which the contract allows to be performed. A party is
also entitled to cancel the contract when the obligation of the other party is
impossible to perform or if such other party informs him in unequivocal manner
that he will not perform the contract.
C. Damages (Compensation) – compensation is money that is accrued to the person who is
affected by the non-performance of the debtor. The debtor may be made to pay this
compensation either apart from or in addition to the performance (enforcement) or
cancellation of the contract. However, the law provides that the party is not made to pay
damages if his non- performance is attributed to force majeure. Force majeure can be
defined as an occurrence which the debtor could normally not foresee and which prevents
him absolutely from performing his obligations (Read Art. 1792-1794).
4.8. Extinction of Contractual Obligations
In this section a brief devotion is made on the grounds which give an end to contractual
relationship.
A. Performance- when the parties perform their respective obligations, the obligation of the
parties is extinguished.
B. Cancellation or Invalidation- if one of the parties was incapable or his consent was
vitiated; the contract can be extinguished by invalidation. The same is true if the contract
is cancelled by the court or unilaterally. Invalidation is preceded by problems with the
formation of the contract. In cancellation the contract is validly formed but is affected by
non-performance. Cancellation and invalidation have retroactive effects.
C. Termination – a contract can also be terminated by the agreement of the parties. One
party may also terminate the contract unilaterally if both parties previously agreed for one
party terminate the contract by giving prior notice. The same is true if the contract is
concluded for an indefinite period of time. Termination will have only prospective effect.

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 D. Remission of Debt – is an act of forgiving a valid claim by the creditor. Remission of
debt is not however a unilateral act of the creditor. For remission of debt to take effect it
must be accepted by the debtor.
E. Novation – is a substitution of an old obligation by a new obligation. For novation to
take effect, the new obligation should differ from the original obligation on account of its
cause or nature.
F. Set-off – is a situation where by the debtor has a money claim or claims of fungible
things on the creditor at the same time the creditor has similar claim on the debtor. They
can simply set-off their claims. The debt should be liquidated and due for there to be set-
off.
G. Merger – is a situation whereby the position of the debtor and the creditor is merged
together in the same person.
H. Limitation of Actions – this is also one way of extinguishing contractual relationships in
which a party cannot bring action in court of law because he did not exercise his right in a
certain period of time. Unless the law stipulates otherwise, a party can bring such action
within ten years. After that time, his claim will be barred by period of limitation

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 CHAPTER FIVE

SPECIAL CONTRACT

Introduction

Special contracts are contracts which are governed by their own legal regime. However, when
the special laws have gabs the general principles of contract govern. There are various special
contracts under Ethiopia legal system such as agency, sale, insurance, guarantee, discount and
others. But for simplicity only agency, sale and insurance will be the main special contracts will
be discussed in this chapter.

5.1. Agency
5.1.1. Definition and Nature of the Law of Agency
In the day-to-day interactions of people to earn for livelihood and in almost every business
transaction, at least one of the parties is acting as an agent. A company, for example, concludes a
contract through the agency of its directors and employees. The same is true for partnership
which concludes contract through the agency of one of its partners or a firm employee. Even a
single trader may hire agents for the purpose of management or secretarial works. In short, the
agency relationship is a foundation stone of a business activity. It is a relationship that makes it
possible for businesses to conduct a wide range of transactions both nationally and
internationally.
Article 2199 of the civil code of Ethiopia defines agency as 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.
There are three ways of relationships among these parties. The first is the relationship between
the principal and the agent. The second relationship is between the agent and the person with
whom he concludes contract on behalf of the principal. This person is known as a third party or
an outsider. The third relationship is between the principal and the party with whom the agent
does business (the third party). Each of such relationships raises their own questions and the law
that is entrusted with the mandate of providing with the answers or which regulates such
relationships is the law of agency.

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5.1.2. Why do We Need Agency?
Businessmen could forward different justifications for their having agents. A few of such
justifications include:
A. Geographical Distance – to sell the products of his manufacturing in the other party of
the country, a manufacturer will appoint selling agents there.
B. The Need for Specialized Knowledge – the manufacturer (the principal) may not
necessarily have the expertise to handle a given matter. In such cases, he needs an agent
who is well acquainted in that field.
C. Unable to Perform a Work Single Handedly – the scale of complexity of a firm’s
operations may make imperative the delegation of part of the work to agents.
D. Desire not to be identified – the principal’s desire not to disclose his identity in a
business transaction may, for example, cause a business firm to use agents.
5.1.3. Methods of creating Agency
Like any other contracts, the agent-principal relationship is formed by offer and acceptance. The
person, usually the principal, offers to the other party for the formation of the relationship. If the
offeree accepts the firm and precise proposal of the offeror, the contract is said to be formed.
Agency could be created through actual authority, apparent authority, and agency by ratification.
5.1.4.Actual Authority – the law provides that actual authority may be inferred up on an
agent either expressly or impliedly.
a) Express Authority is the written or oral authority granted by the principal to the agent
and is an authority that the agent actually has. However, it is desirable to make the
contract of agency in written form. For one thing, it avoids disputes that may arise later
on. For another thing, it provides the agent with a written authorization to give evidence
of his appointment (Read Article 2184, 2185, 2186, 2195 (b) &2196 (1)).
b) Implied Authority is also an authority that the agent actually has but is present by
implications only.
An agent may have an implied authority in the following three instances.
 First, the implied authority can be inferred from the position the agent occupies. For
instance, a manager of a store will have an implied power related to the store that is not
specifically given by the written instructions of the principal.

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  Second, if a certain activity is reasonably necessary to carry out or implement the agent’s
express authority, the agent is impliedly authorized to perform that activity. For example,
an agent authorized to purchase equipments from another place on behalf of the principal
has an implied authority to arrange for the transportation of the goods to the home land
or to acquire insurance to cover any loss or damage to the goods while in transit.
 Third, an implied authority can also arise by virtue of a well recognized custom in a
particular trade or profession. In many parts of Ethiopia, for example, it is customary for
the seller to invite the person involved in the transaction (‘Fintir’). As such, the principal
would assume the cost of the invitation incurred by the seller agent.
Generally, contract of agency can be made in any form whether written or oral. If the agent is
appointed in a written authorization of the principal, the document is known as power of
attorney. However, where the act to be performed by the agent is under the law to be made in
prescribed form, such form can be complied with in conferring authority up on the agent. For
example, contracts relating to immovable need to be made in writing and be registered. If the
agent is authorized to purchase a house for the principal, the agency contract has to also be made
in writing and be registered.
5.1.4.Apparent Authority – sometimes an agent may have no actual authority (express or
implied). Still the principal can be made liable if the agent has at least an apparent authority.
An apparent authority is the authority that a third party would reasonably believe that the
agent has given the conduct of the principal. Here, the agent may exceed his actual authority
but if he acts within his apparent authority, he would bind the principal to a contract.
However, the principal will have an independent claim against the agent later. Third parties
would assume such apparent authority of the agent if the principal did not communicate the
revocation of the power of attorney. The same is true if the principal failed to ask the agent to
return the document evidencing the power of attorney or he misleads third parties in his
statements, behavior or failure to act as though the agent has authority. Apparent authority is
also referred to as agency by estoppels.
5.1.5 Agency by Ratification – is an agency relationship created when one party (the
agent) acts in the name of another (the principal) outside the scope of his authority
and later the principal opts to accept the activities performed by the agent. Once
ratified, the agent’s activity is assumed as it has been performed within the scope of

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 his power. The principal has also a right to repudiate the act of the agent so that the
latter would personally be liable for third parties.
5.1.6. Types of Agency Relationships
A. General/Special (Art. 2202-2206)
General agency is a contract of agency in which the power given to the agent is expressed in
general words. The law provides that if the principal indicates in the agency contract that the
agent shall represent him without showing the particular acts the agent is expected to perform, it
would only confer up on the agent authority to perform acts of management. Acts of
management are those acts done for the preservation and maintenance of property, leases for
terms not exceeding three years, the collection of debts, the investment of income, the payment
of debts, sale of crops, goods intended to be sold or perishable commodities.
Special agency on the other hand is the type of agency which is expressed in specific words.
Special authority is required where the agent is called up on to perform acts other than acts of
management.
B. Disclosed/Undisclosed (Art. 2189, 2172+2198)
Disclosed agency is that kind of agency in which the agent acts in the name of the principal. If
the agent acts within the scope of his power, the contract is deemed to have been concluded
between the principal and the third party. Accordingly, the principal is allowed to invoke the
vitiated consent of the agent against the third party. On the side of the third party, he can invoke
any fraud committed by the agent against the principal.
Undisclosed agency is that kind of agency the agent of which acts on his own behalf and he will
personally enjoy the rights or incur the liabilities deriving from the contract he made with third
parties. In this case, the principal and the third party will not have a direct claim each other. Both
will have their respective claims against the agent.
5.1.7. Rights and Duties in the Agency Relationship
Duties of the Agent
A. Fiduciary Duty – fiduciary duty is imposed on a person who has a special relationship of
trust with another which requires the agent to show what the law describes as ‘utmost
good faith’. This duty, inter alia, imposes on the agent to fully disclose information
which affect the agency to the principal (Art. 2208), not to make any benefit from the
transaction in to which he enters in pursuance of his authority without the principal’s

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 knowledge (Art. 2209) and to avoid any conflict of interest that affects the interest of the
principal (Art. 2187).
B. Duty to make Account – the agent should make account to the principal for all sums
received by him and all profits accruing to him (Art. 2210+2213)
C. Diligence as a Bonus Pater Familias – the agent should exercise the same diligence as a
bonus pater familias(good father) in carrying out the agency. He is expected to be more
careful as his own affair if not more (Art. 2211)
D. Personal Performance –the principle of the law is that the agent cannot delegate another
person because even he himself is a delegate. He may, however, be authorized or
required to delegate under certain circumstances.
5.1.8. Duties of the Principal
A. To Pay Remuneration – the principal is duty bound to remunerate the agent (Art.
2219+2220)
B. Reimbursement – the principal is also duty bound to reimburse the agent for the outlays
and expenses incurred by him (Art. 2221). The principal cannot decline to effect payment
even when the agent was unsuccessful and even the agent has a lien right on objects of
the principal until he is paid.
C. The duty to indemnify the indemnity: when the agent incurs liability while discharging
the tasks of the owner and has not committed any fault, the owner has a duty to cover
payments claim against the agent by third parties.
5.1.9. Termination of Agency
Contract of agency may be terminated either by the acts of parties or by the operations of the
law. By the acts of parties refers to the termination of agency by unilateral acts of parties or
through mutual consensus. The unilateral termination of agency means agency terminated either
by the principal or agent. When agency is terminated by the unilateral act of the principal is
called revocation while the unilateral termination of agency by the agent is called renunciation.
The principal can revoke the agency at his discretion and in principle the agent is entitled to get
compensation for any damage caused by the revocation. The agent may also renounce the agency
by giving notice to the principal of his renunciation. The agent is also made to pay compensation,
in principle, if the renunciation is detrimental for the principal.

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Law may be terminating contract of agency when the term of the contract expires, death or
incapacity of either the principal or the agent, bankruptcy or dissolution of the principal or agent
happens.
5.2. Contract of sale
4.2.1. Definition and Essentials of Contract of Sale
Article 2266 of the civil code is exclusively devoted to define a contract of sale. It reads:
A contract of sale is a contract whereby one of the parties, the seller, undertakes to
deliver a thing and to transfer its ownership to another party, the buyer, in consideration
of a price expressed in money which the buyer undertakes to pay him.
The first basic element stipulated in the definitional article is that sale is a contract. Being a
contract, all the requisites of valid formation of a contract that we have discussed in chapter three
should be fulfilled. Further, the law provides that the relevant provisions of contract in general
will also be applied for contract of sale without prejudice to special provisions that are only
meant for contract of sale.
On the other hand, for the existence and validity of contract of sale the seller should undertake to
deliver and transfer the ownership of the thing. The buyer is obliged to undertake to pay price.
Here the word ‘undertake’ signifies that it is not a must to perform delivery and transfer of
ownership or to pay price for the existence and validity of sale contract. It suffices both parties
promise to perform their respective obligations.
The price in the contract of sale should be expressed in money terms. This is to exclude barter
transactions from being considered as sale contracts. The price may be expressed in terms of any
convertible exchange.
The thing which the seller undertakes to deliver and transfer its ownership may either be a thing
which exists at the time of conclusion of the contract or it may be something which he will
produce after certain period of time.
5.2. 2 Performance of Contract of Sale
Performance of a contract is the realization of the respective obligations of the seller and the
buyer.
I Obligations of the Seller
A. Obligation to deliver the thing – delivery is the handing over of the thing and its accessories
in accordance with the contract. The phrase ‘in accordance to the contract’ implies that the time,

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place, and manner of delivery should be agreed by the parties. Failing such agreement by the
parties, the law has its default rules (Art. 2274- 2280).
B. Obligation to transfer ownership – duty to deliver the thing is discharged by handing over
of the thing. But the duty to transfer ownership remains intact even after delivery. A thief can
conclude a contract of sale and delivers the thing to the buyer. But he cannot transfer the
ownership of the thing since he has none.
Duty to transfer ownership is the duty of the seller in that he should warrant the buyer against
any total or partial dispossession which the latter might suffer in consequence of a third party
exercising a right he enjoyed before the delivery of the thing to the buyer. If the buyer risks
dispossession at the time of concluding the contract, the seller is not obliged to warrant the
former unless he has expressly declared to be bound or dispossession is due to the falling in of a
pledge made by the seller.
A warranty may also be either restricted or excluded provided that the seller did not commit
fraud or dispossession is due to the act of the seller. Unless the parties agree otherwise, such
provisions of restriction or exclusion of warranty will impose the seller only to return the price
thereby relieving him from paying different expenses, damages, not to mention the non-
cancellation of the contract.
D. Obligation to Warrant against Defects and Non- conformity
A thing is considered as non-conforming to the contract if the seller delivered to the buyer part
only of the thing sold or a greater or lesser quality than he has undertaken in the contract to
deliver. The same is true if the seller delivered a thing different to that provided in the contract
(e.g. TV to DVD) or a thing of different species (e.g. LG TV to Sony TV).
A thing is defective if it does not possess the quality required for its normal use or commercial
exploitation. Normal use warranties are meant to protect consumers. If a pen is brought which it
cannot write, it is warrantable. Commercial exploitation warranties are those which one invokes
them as a trader. If a pen is not able to be sold, it is defective so that warrantable. These qualities
need not be agreed by the parties.
A thing is also defective if it does not possess the quality for its particular use agreed by the
parties. Here, if the thing does not serve the agreed purpose (e.g. if the seller fails to deliver a pen
with a rubber) it is defective.

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Sometimes, a thing may serve the agreed purpose. But if it does not possess the specifications
agreed by the parties, it is still defective. E.g. if the parties agree for a pen with a rubber not to be
in plastic, the thing is defective if the seller delivers a plastic pen with a rubber. The seller is duty
bound to warrant such defects and non-conformities. The law recognizes three categories of
defects.
Defects that can be identified by customary examination (Art. 2291)
The buyer has some responsibilities to avail himself of warranties for defects that can be
identified by customary examination. First the examination has to be normal- based on the usage
of the place of examination. Second, he has to examine the thing without delay as soon as the
buyer has the opportunity. Third, the buyer is expected to invite the seller in due time to attend
the examination unless the thing is likely to perish.
Fourth, if the examination discloses defect or non-conformity, the buyer is obliged to notify same
to the seller without delay unless the seller has warranted the quality of the thing during a
specified period of time in which case it suffices to notify the seller before the expiry of such
period (and not without delay). If the buyer fails to live up to the expectation of these four
conditions, he forfeits his right to avail himself of the warranties unless the seller commits fraud.
Latent Defects (Art. 2293 (2))
These are defects of the thing existed at the time of the delivery of the thing but cannot be
identified by customary examination. These are defects discovered in the course of using the
thing. The buyer will be warranted so long as immediate notice is made up on discovery
Obvious Defects (Art. 2296)
These are defects which can be identified even without undergoing customary examination.
These are defects which the buyer could overlook them only as a result of gross negligence. For
obvious defects, the seller is not duty bound to warrant the buyer unless the seller has expressly
declared that the thing was free from defects or he has expressly warranted certain qualities.
The law provides that if the seller can prove that the buyer knew of the defects at the time of the
contract, he will not be liable on his warranty against defects even if the seller gives an express
warrant.
In addition of the seller has also the above three obligations, the seller has also additional duties
imposed on him by the contract of sale.

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II.. Obligations of the Buyer
A. Obligation to pay Price – the buyer is duty bound to effect payment agreed in the contract and
such duty will also include any arrangement necessary for the payment of price such as
guaranteeing the payment of price by accepting a bill of exchange.
B. Obligation to take Delivery - This obligation of the buyer has impact on risk taking. That is to
say, risk is transferred from the seller to the buyer up on delivery. Risk is also transferred to the
buyer from the date he is late in taking delivery when the sale relates to things which are not
fungibles.
The buyer has also obligations imposed up on him by the contract of sale.
III. common obligation of parties
-obligation to pay expense
-obligation to preserve the thing
5.3. Non- Performance of Contract of Sale
If the thing is not delivered to the buyer in accordance to the contract, he is entitled to demand
forced performance of the contract if it is of particular interest to him. The performance is of
particular interest to the buyer if purchase in replacement is not possible or such purchase cannot
be affected without inconvenience or considerable expense (Art. 2330). The seller is also given
the privilege to demand forced performance if compensatory sale is not possible or such sale
cannot be made without inconvenience or considerable expense (Art. 2333).
The other remedy for non-performance is either declaring or requiring the cancellation of the
contract provided that the defect or non-conformity should not be of minor importance.
The party of a contract of sale may also claim that the damage caused to him be made good by
way of damages (compensation) if the non-performance of his obligations of the other party is
detrimental to him. Hence, the possible remedies of non-performance of contract of sale are
forced performance, cancellation and damage.
5.3. THE LAW OF INSURANCE
5.3.1. Definition and nature of insurance
Needless to mention the fact that it is impossible to prevent occurrence of fire, theft, personal
injury and other hazards that may threaten a person or his business with damage. Taking the
financial loss, however, it is possible to spread these risks over many firms rather than make
them the burden of just one. This is done by means of insurance, where by a firm enters in to a

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contract (called policy) with an insurance company and in return for a periodic or lump sum
payment (called a premium) has all or most of any loss met by that company.
Under the Ethiopian law, insurance is defined under Art. 654 of the commercial code as follows:
Insurance is a contract where by a person, called the insurer, undertakes against
payment of one or more premiums to pay to a person, called the beneficiary, a sum of
money where a specified risk materializes.
To examine some of the elements of the provision, the fact that insurance is a contract should be
first underlined so that the essential conditions to form a contract should be fulfilled. Insurance,
in business terms, is exchanging of a present certain lesser risk (i.e payment of premium) for a
future uncertain higher risk. The parties to insurance contract are: the insurer which is the
insurance company. The person that has contracted for the insurance protection is the insured.
And the person, to whom any reimbursement for loss is to be paid, if other than the insured, is
the beneficiary. On the other hand, the law provides that it is only the risk that is specified in the
policy that makes the insurer liable, and no other risk. As far as form of the contract is
concerned, it should be made in writing so that the policy is expected to satisfy the formalities of
written contracts.
5.3.2 Principles of Insurance
a) The principle of indemnity
This principle emphasizes that insurance is a contract for compensation. That is to say, the
insured or the beneficiary is only entitled up to the amount of damage he has suffered. Thus, the
person is not allowed to make a profit out of an insurance contract. However, with insurance of
persons, the principle of indemnity is not there as loss of life or bodily injury cannot be
compensated.
b) The principle of risk
The idea behind this principle is that the intentional act of the beneficiary which causes the risk
cannot be insured. Accordingly, the risk should be the result of other events other than the
intentional act of the insured or the beneficiary in order to be covered by insurance.
C) The principle of causation
In order for a certain loss covered by insurance, this principle requires that the loss should be
caused by a risk that is specified in the policy. If the loss is not caused by the risk agreed by the
parties, it will not entitle the beneficiary to bring an action against the insurer.

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d)The principle of insurable interest
A person should have an insurable interest before he concluded any insurance contract. A person
is said to have an insurable interest over the subject matter of the insurance contract if he stands
to lose a legally protected interest when the thing is lost or damaged.
E.g A person who always travel to work by his neighbor’s car does not have the car as
an insurable interest.
e) The principle of utmost good faith
Since the insurer is promising to cover a loss occurred to the insured, it is a serious under taking
so that this principle requires the beneficiary or insured to exactly state the circumstances within
his knowledge and which are likely to assist the insurer to appreciate fully the risks he
undertakes to insure.
f). Doctrine of Subrogation
The doctrine of subrogation is a corollary to the principle of indemnity and as such, it applies
only to property insurances. According to the principle of indemnity, the insured can recover
only the actual amount of loss caused by the peril insured against and is not allowed to benefit
more than the loss he suffered. In case the loss to the property insured has arisen without any
fault on anybody’s part, the insured can make the claim against the insurer only. In case the loss
has arisen out of tort or fault of a third party, the insured becomes entitled to proceed against
both the insurer as well as the wrongdoer. However, since a contract of insurance is a contract of
indemnity, the insured cannot be allowed to recover from both and thereby make a profit from
his insurance claim. He can make a claim against either the insurer or the wrong doer. If the
insured chooses to be indemnified by the insurer, the doctrine of subrogation comes into play and
as a result, the insurer shall be subrogated to all the rights and remedies of the insured against
third parties in respect of the property destroyed or damaged.

j). Risk Must Attach

The next principle of insurance is that for a valid contract of insurance the risk must attach. If the
subject-matter of insurance ceases to exist (e.g. the goods are burnt) or the insured ship has
already arrived safely, at the time the policy is effected, the risk does not attach, and as a
consequence, the premium paid can be recovered from the insurers because the consideration for
the premium has totally failed. Thus, where the risk is never run, the consideration fails and

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therefore the premium is returnable. It is a general principle of law of insurance that ‘if the
insurers have never been on the risk, they cannot be said to have earned the premium.

h). Mitigation of Loss

When the event insured against occurs, for example, in the case of a fire insurance policy when
the fire occurs, it is the duty of the policyholder to take steps to mitigate or minimize the loss as
if he were uninsured and must do his best for safeguarding the remaining property. Otherwise,
the insurer can avoid the payment for loss attributable to the negligence of the policyholder. Of
course, the insured is entitled to claim compensation for the loss suffered by him in taking such
steps from the insurer.

i). Doctrine of Contribution

Like the doctrine of subrogation, the doctrine of contribution also applies only to contracts of
indemnity, i.e., to property insurances. Double insurance occurs where the same subject matter is
insured against the same risk with more than one insurer. If two different policies are taken from
the same insurer, it is not a case of double insurance. It will be termed as ‘full insurance.’ Under
double insurance, the same risk and the same subject matter must be insured with two or more
different insurers. In the event of loss under double insurance, the assured may claim payment
from the insurers in such order as he thinks fit, but he cannot recover more than the amount of
actual loss, as the contract of property insurance is a contract of indemnity.

Thus, the essential conditions required for the application of the doctrine of contribution are:

1. There must be double insurance

2. There must be either over-insurance or only partial loss

Distinguishing features of insurance

Insurance contracts have the following distinct legal characteristics that make them different
from other contracts. These are: -
1. An insurance contract is aleatory rather than commutative.
2. In contrast, other commercial contracts are commutative.
3. An insurance contract is a unilateral contract.
4. An insurance contract is a conditional contract.

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 5. In property insurance, insurance is a personal contract, which means the contract is
between the insured and the insurer.
6. The insurance contract is said to be a contract of adhesion.
5.3.4. Rights and duties of the parties
A. Duty of insurer
Among other things, the insurer is expected to pay the beneficiary when the risk specified in the
policy materializes. He is under a duty to guarantee the beneficiary against the risks specified in
the policy.
B. Duty of the insured
First, the insured is expected to pay the premium within the specified period he has agreed with
the insurer. It is also the duty of the insured person to declare exactly what is in his knowledge to
help the insurer appreciate the risks. The insured is under a legal duty no to conceal facts or
made false a statement. Even the insure person is expected to notify the insurer if there is any
increase of risk after the conclusion of the contract. Further it is expected of the insured to
communicated the insurer immediately as to any occurrence likely to render the latter liable.
5.3.5. Types of insurances
A. Insurance against damages
I. Insurance to objects: it is insurance against loss occurring to the property of a person. That
means the risk insured is that occurring to a property.
II. Insurance of liability for damages: in this case the risk insured is liability of a person to
another person. It is insurance against liability of a person.
B. Insurance of persons
I. Life insurance: the law defines life insurance as a contract where by the insurer under
takes against the payment of one or more premiums to pay to the subscriber or to the
beneficiary a specified sum on certain conditions dependent upon the life or death of the
subscriber or third party insured. Accordingly, life insurance may take either of the two
agreements. First is the case of insurance for the event of death in which a beneficiary
will be compensated when the insured person dies. On the other hand, the risk of living a
long life beyond a certain age is also regarded for insurance purposes s a risk on life since
old age due to a prolonged life brings diminished ability to work and earn one’s lively
hood.

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 II. Insurance against accident and illness: if the person insured suffered a bodily injury or
becomes ill, the compensation will be due. In insurance of illness the risk is the sickness
of the insured. The compensation will serve as a medical expense for the person

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 CHAPTER SIX
THE LAW OF NEGOTIABLE INSTRUMENTS
6.1 Definition and Nature of Negotiable Instruments
A negotiable instrument is a legal instrument that is signed evidencing a debt. Negotiable
instrument is the one, the property in which is acquired by one who takes it bona fide (in good
faith) notwithstanding any defect in title of the person from whom he took it. It is a document
incorporating a right to an entitlement in such manner that it be not possible to enforce or
transfer the right separately from the instrument.
These instruments have certain characteristics: -
1. Transference by delivery: The property in the negotiable instrument is transferred from
hand to hand by mere delivery or in some cases by delivery and endorsement.
2. Transferee not affected by defects of the transferor: The holder in due course derives
a superior title than the transferor and he take the paper free from any counter claims
which the drawer may have against the payee. This feature is referred to as negotiability.
The term negotiable describes the legal right that these written instruments possess to be
transferred by the payee to another party. Unlike the usual assignment of contractual
obligations, the transferor negotiation of such instruments is characterized by the absence
of any need to give notice of the assignment to the drawer even though he will be liable
to any new assignee.
3. Right of action: The holder of negotiable instrument is able to sue in his own name. An
assignee, however, can sue in the name of the assignor.
6.2 Types of Negotiable Instrument
There are three types of negotiable instruments recognized specially under the Ethiopian law.
1. Commercial Instruments: are negotiable instruments setting out an entitlement
consisting in the payment of a sum of money.
Eg. Bills of exchange, promissory notes, cheques
2. Documents of title to goods: are documents used in the ordinary course of business as
proof of the possession or control of goods or authorizing the possessor of the document
to transfer or receive goods there by represented. Examples:

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 - Warehouse receipt: is a document for goods stored in a ware house. It is issued by
the warehouse keeper to the owner of commodities and indicates the quality and
quantity of the products deposited with the warehouseman.
- Bill of Landing: is a document which evidences the receipt of goods by which the
master or owner of a ship acknowledges the receipt of goods which serves as a
document of title to the goods shipped.
3. Transferable securities: are instruments incorporating a right to an entitlement in a sum
of money which is not certain. Example!
- Share certificate: An instrument evidencing ownership of a share in a company.
The value of a share certificate depends on the profitability or future prospects of
the corporation; its market price depends on how much other willing to pay for it
based on their evaluation of those prospects.
- The same is true for insurance policies.
6.3 Forms of Transfer of Negotiable Instrument
Based on their forms of transfer, negotiable instruments can be grouped in to three:
1. Instruments to bearer: Instruments to bearer are transferred by delivery. The holder of
this instrument establishes his right to the entitlement as expressed in the instrument by
the sole fact of presentment of the said instrument. Ay person, even a thief, who has
possession of bearer instruments, can enforce the right on the instrument by merely
presenting the instrument.
2. Instruments in a specified name: are transferred by the entry of the name of the
transferee in the instrument or by the delivery of a new instrument in his name and by the
entry of such name in the register held by the person issuing the instrument. The holder
of such instrument establishes his right to the entitlement expressed on the instrument by
the fact of designation as beneficiary there in and in the register held by the person
issuing the instrument.
3. Instruments to order: such instruments are transferred by endorsement followed by
delivery of the instrument to the beneficiary under the contract. Such instruments contain
orders to pay a certain sum of money to or to the order of the endorsee. The holder of
such instrument establishes his right to the entitlement as expressed in the instrument by
uninterrupted series of endorsement.

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6.4 Commercial Instrument
5.4.1 Parties
1. Drawer of maker: The drawer of maker is the person who writes the instrument
originally in favor of others. In promissory notes, he is the person who promises to pay
the amount that is stated in the instrument. In a cheque, he is the one who draws the
cheque having deposit of money in a bank. In bills of exchange, he is the one who draws
the bill and delivers the first holder.
2. Drawee: The drawee is a person or party who is ordered to pay the money in the
instrument.
3. Payee: The payee is a person named as a beneficiary in a commercial instrument.
4. Holder: The holder may be any person who is legally entitled to the possession of the
negotiable instrument and to receive the amount there of. He is either the original payee
or the person to whom the instrument might have been delivered or endorsed.
5. Acceptor: The acceptor is a drawee who consents to effect payment when the maturity
date of the instrument is due. By accepting the bill, the dreawee of negotiable instrument
becomes one of the liable parties under a commercial instrument.
6.4.2 Major types of Commercial Instruments
A commercial instrument, an instrument that entitles its holder to claim a sum certain in money,
may either be a promise or an order. A promissory note is a promise while bills of exchange and
cheques are orders to another person to pay money to a third person.
Since commercial instruments are frequently used types of negotiable instruments, having the
brief picture of them is worthy of considering.
A. Promissory Notes
A promissory note is an instrument in writing containing unconditional undertaking signed by
the maker, to pay a certain sum of money only to, or to the order of a certain person i.e the
beneficiary, or to the bearer of the instrument.
In a promissory note, the drawer and drawee is the same person
B. Bill of exchange
- Is an instrument in writing containing unconditional order, signed by the drawer,
directing a certain person to pay a certain sum of money only to, or to the order of
a certain person or to the bearer of the instrument.

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 - Sometimes the drawee and payee may be a same person.
- The drawer may also make the bill payable to self when he wants to withdraw
money from the drawee himself. In this case the identities of the drawer and
payee are merged in one person.
- The maturity date bills of exchange for payment depends on at sight, at a fixed
period after sight, fixed period after date or at a fixed date.
C. Cheques
- A cheque is a particular type of a bill of exchange.
- It is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than as sight.
6.5 Dishonoring and Rights of Recourse
 Dishonor follows presentment. It is either the refusal of the drawee to accept the
instrument even if properly presented or the refusal of the acceptor of the bills of
exchange or a cheque or the maker of a promissory note, or a bill or cheque due without
presentment for acceptance, to make payment when it is presented for payment.
 The effect of dishonor of an instrument is to give the holder of the instrument the right to
take a legal action. This legal resource can be taken against all other parties liable to
make payment with respect to the instrument.
 In case of dishonor by non-acceptance, the holder has no right against the drawee as the
latter is no party to the bill. He can proceed only against the drawer and all other previous
endorsers.
 In the case of dishonor by nonpayment, however, the holder can sue the drawee, as by his
acceptance- the drawee has already become a party to the bill.
 The holder is also entitled to bring of recourse in case the bankruptcy of the drawee or the
drawer of a non-acceptable instrument is known.

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 CHAPTER SEVEN

BANKING TRANSACTIONS

7.1. Definition

The term bank refers to an institution that deals in money and its substitutes and provides other
financial services. Banks accept deposits, make loans, and derive a profit from the difference in
the interest rates paid and charged respectively. Some banks also have the power to create
money.

The Ethiopian commercial code fails to define what bank is. However, there are definition
provided other laws. For instance, according to Art 2 (12) of the Monetary and Banking
Proclamation No 83/1994, banking business means any operation involving receiving money on
deposit, lending money, receiving commercial instruments on deposit, accepting, negotiating/
transferring, discounting commercial instruments and other evidences of debt, and buying and
selling of gold and silver notes and foreign exchange. Similarly, Art 2 (2) of the Licensing and
Supervision of Banking Business Proclamation No 84/1994 defines banking business as:

“Any business involving acceptance of money on deposit, using such funds or deposits,
in whole or in part, for loans or investments on the account of and at the risk of the
person undertaking the business, purchasing, selling and deposit of negotiable
instruments (shares, bonds and other securities/ and checks, bills and notes, and buying
and selling of gold and silver bullions and foreign exchange).”

On the other hand, the term bank is defined, under Art 2(1) and (4) of the same proclamation, as
a share company whose capital is wholly owned by Ethiopian nationals and/or business
organizations wholly owned by Ethiopian nationals and which is registered under Ethiopian laws
and which has its head office in Ethiopia and licensed to undertake banking business by the
national bank of Ethiopia.

In addition to this, Art 4(2) of the same proclamation clearly prohibits foreign nationals and
business organizations from undertaking banking business in Ethiopia. The definition of a bank
and this provision exclusively reserve the banking sector to Ethiopian nationals or business
organizations wholly owned by Ethiopian nationals mainly on the ground of protection of

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domestic banks which are at an early stage of development, at least until they develop their
financial and manpower capabilities, to be able to compete with foreign banks which have
enormous financial strength, experience, technology and knowhow.

The historical development of banks had started since 1905 when “Abyssinia bank” was opened
in Ethiopia which was established based on the agreement signed between the Ethiopian
Government and the National Bank of Egypt, which was owned by the British. Currently, there
are different banks opened and operated throughout the country.

The principal types of banking in the modern industrial world are commercial banking and
central banking or national banks. A commercial banker is a dealer in money and in substitutes
for money, such as checks or bills of exchange. The banker also provides a variety of other
financial services. The basis of the banking business is borrowing from individuals, firms, and
occasionally governments—i.e., receiving “deposits” from them. With these resources and with
the bank's own capital, the banker makes loans or extends credit and invests in securities. The
banker makes profit by borrowing at one rate of interest and lending at a higher rate and by
charging commissions for services rendered

Another type of banking is carried on by central banks, bankers to governments and “lenders of
last resort” to commercial banks and other financial institutions. They are often responsible for
formulating and implementing monetary and credit policies, usually in cooperation with the
government.

Economic functions of banks

The existence of a strong and effective banking system is very important for the economic
development of a country.

 Banks through acceptance of deposit of money from persons who do not need it at the
present and lending it to persons who want it for investment, serve as financial
intermediaries thereby providing ideal source of fund for investment that is crucial in
increasing production, exports, creation of jobs and foreign exchange earnings of the
country.

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  Similarly bank lending to customers who need the money for consummation, purchase of
various goods and services, construction of houses, and education increases demand for
those goods and services, thereby encouraging producers and service providers to expand
their undertakings and increase production. Expansion and increase in production
requires employment of additional workers, thereby creating new jobs, encourage
producers and suppliers of raw materials to increase their production and supply.
 Banks also play a positive role in encouraging savings by providing an incentive to save
through payment of interest on deposits/savings and providing safety and security. Saving
is also an important source of future investment and the improvement of the living
standards of the society.
 The power of the national bank in fixing interest rates is particularly crucial in both
investment and saving. If the rate of interest fixed by the bank on deposits /i.e. the
interest banks pay on money deposited on saving and other accounts / is attractive, it will
encourage people to save their money rather than spend it. However, such interest should
not discourage people from investment and productive activities and turn them to rent
collection /potential investors may decide to deposit their money and collect interest/. If
the rate of interest charged by banks on money given on loan to borrowers is lower, it
may encourage potential borrowers and investors to borrow and invest, thereby
contributing their part in the expansion and increase of production of goods and services,
creation of employment opportunities, increase in exports and foreign exchange earnings
of the country.
 The existence of a network of banks covering all parts of a country facilities business
transactions in the country by making payments easier, safer and cheaper. Payment
through banks also avoids the risk of loss or theft of money.
7.2. Major banking transactions
Book IV Title III of the Commercial Code of Ethiopia, which deals with banking transactions.
But these provisions fail to define what banking transaction is. It simply list and describe The
major banking transactions mention are deposit, contract of current account, hiring of safes,
discount and credit transactions.

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 7.2.1. Deposit
Deposit may be of related to deposit of funds or deposit of securities. A deposit of funds is a
contract whereby a person agrees to deliver and transfer the ownership of specified amount of
money to a bank which agrees to repay them under the conditions agreed up-on in the contract or
on the demand of the depositor. The bank, as the owner of money deposited, has right to use it in
respect of its professional activities, i.e. the bank may lend it to its customers or invest it in areas
which are allowed by the national bank /Art 896/. The contract of deposit of funds is almost
identical to contracts of loan of money or other fungible things under Art 2471 of the Civil Code
of Ethiopia in which the borrower becomes the owner of the money or fungible he borrowed and
has the right to dispose of in any manner he wishes.

The contract of deposit of funds results in the opening of an account in the name of the depositor
by the bank in which the latter enters all transactions made with the depositor. The bank credits
the account of the depositor with all deposits made by the depositor and debits the account where
the depositor makes withdrawals or order payments to third parties. (Art 897).

The type of account opened may either be a current account in which the depositor has the right
to dispose of the deposit at sight or on demand. This type of account also is a check operated
account, i.e., the holder may demand repayment of part or the whole of the deposit by drawing a
check on the bank payable to himself or a third party. As the repayment may be demanded at any
time, this type of deposit does not bear interest. / Art 897, 898. /

The account may also be a saving account, which is interest bearing and the right of the depositor
to demand repayment may be limited. The insured may be prevented from withdrawing an
amount which is greater than a certain amount of money within a certain period or to give notice
of withdrawal. /Art 897, 98. / It may also be a time deposit or account in which the depositor
cannot demand repayment or withdrawal before the lapse of the agreed period of time. This type
of deposit normally bears interest at a rate agreed upon between the parties provided that it does
not exceed the maximum limit determined by the National Bank. Art 897, 898 (2). Where the
person has several accounts, each account shall operate independently unless the parties agree
otherwise. /Art 902/

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However, a contract of deposit of funds does not entitle the depositor to demand withdrawal of
an amount that is greater than the balance in his favor in the account. In other words, the right of
the depositor to demand repayment is limited to the amount of money held in account in his
favor and he does not have the right to overdraw his account without a special agreement to this
effect, which is one form in which banks give loan to their customers. /Art 899,945 of the
Comm. Code and Art 2471 Civil Code. /

Deposit of Securities: a contract of deposit of securities may be defined as a contract whereby

an owner or of securities (shares or stocks, government bonds and company bonds (debentures)
or other right holder agrees to deposit the securities with a bank which agrees to provide safe
custody and handle or manage them for consideration.
According to Art 912 and 914 of the commercial code, the bank which deposits securities has the
duty to handle the securities deposited and to collect interest, dividends, capital repayments
amortization and any other entitlements arising out of securities as soon as they can be claimed.
It also has the duty to deposit the money collected by entering them in the deposit account of the
depositor of the securities. From the definition provided above and the these provisions of the
code, we can understand, that this transaction is not a contract for deposit alone but a contract
which involves handling or management of securities by the bank including sale and purchase of
securities in the name and on behalf of the depositor, ( Art 912 and 913(2)).
Regarding degree of care expected of the bank, Art 913(1) provides that the bank must ensure
the custody of the securities and act in relation there to (handling and management) with due care
required of paid bailee, i.e., a person to whom goods are entrusted for specific purpose.

The bank must also take necessary measures and comply with formalities necessary to preserve
the rights, arising out of securities such as renewal of coupon and payment of stamp duty. The
bank must also notify, through registered letters, the depositor before making decisions which
involve several options, for instance, between receiving dividends on shares or to receive
additional stocks or shares issued in lieu of cash. However, the bank shall make a decision to on
one of the options where the depositor fails to give instructions within a reasonable period. (Art
915).where the contract of deposit of securities is terminated either by the decision of the
depositor, the bank has the duty to restore them to the depositor or his agent or his creditors, even
where the securities are registered in the name of a third party. Securities deposited by the

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usufractuary may be restored to the bare owner if the latter produces evidence of the death of the
former. / Art 916 and 917 of the Commercial Code/

7.2.2. Bank Transfers:

According to Art 903(1) of the Comm. Code, a bank transfer is a transaction whereby the bank,
upon the written order of the depositor /transferor, debits the account of the transfer and credits
the account of another depositor/the transferee with the amount specified in the instruction or
transfer order.

Bank transfer as defined by Art 903(1) may be internal where the accounts of the transfer and the
transferee are opened within the same branch or external where the accounts of the transfer and
the transferee are opened at two different branches of the same bank Art 904.

The transferor cannot order the bank the transfer of an amount which exceeds the balance
without a special agreement between the transferor and the bank under which the transfer under
takes to deposit the agreed amount within a period determined in advance. The transfer made
pursuant to this type of agreement is considered as a loan or overdraft provided by the bank to
transfer. / Art 905, 908, 899, 945 of the Commercial Code & Art 2471 of the Civil Code/.
Transfer order may be issued and communicated directly by the transfer to the bank for
execution or it may be issued by the transfer but handed over to the beneficiary to present it to
the bank for execution. /Art 906 /3/ and 907/1/
The transferee or the beneficiary of the transfer shall acquire the right of ownership/title/ to the
money to be transferred at the time when the bank debits the account of the transfer. And the
transfer may cancel the transfer at any time before his account is debited and before the
transferee acquires ownership right to the money. However, if the transfer order is
communicated to the bank by the beneficiary as agreed according to Art 907(1), the transferor
loses the right to cancel the order from the time the transfer order is issued and handed over to
the beneficiary. /Art 906 and Art 907(2)./ This is mainly because the issuance of the order and its
handing over to the beneficiary shows the existence of a valid contract formed by the acceptance
by the transferee of the offer made by the transfer to pay a certain amount of money which
cannot be cancelled by one party.

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Hence, the obligation for the performance of which the transfer order is issued should have been
extinguished by payment/performance according to Art 1806 civil code. However, contrary to
this general principle of contracts, Art 909 provides that obligations underlying the issuance of
transfer orders together with securities and collateral (if any) shall not be extinguished until the
account of the transferee is credited with the amount of money transferred.
7.2.3. Hiring of Safes
Banks take charge of their customers’ valuables like jewelry, negotiable securities, and
documents of title to properties, will, and deposit them, as they can be conveniently stored. Such
deposits are special in nature and thus do not fall under the general category of banks’ deposit.

The acceptance of valuables for safekeeping from their customers is one of the essential, though
subsidiary, services of banks. The right of a bank to render this service is recognized as a
legitimate banking transaction. Though deposit or storage companies can render the service as
well, the fact that the modern bank, for its own protection, is well equipped with safes and strong
rooms it particularly suitable for rendering this service.

Banks deposit their customer’s values in either of the following two ways:

1. By accepting the valuables for safe-custody or

2. By hiring out safe deposit boxes to their customers.
In the first case, customer's valuables are handed over to the bank either openly or in a sealed
cover box. The particulars of the deposit may be known to the bank in which case a record of
them will be made in the safe custody register. However, as it was said above, valuables
constitute special deposit and, as a matter of principle, special deposit should not be commingled
with the banks’ other deposits. Banks usually place the valuables in their safes together with
other deposits. This service is known as ‘safe - custody’.

Nowadays, safe-custody service is being abolished, because of the nature of the service in
increasing the liability of banks for the loss of customer's valuables; undoubtedly, the banks will
be held liable for their customers, as bailers will to their bailees. At present in correspondence
with their customers, banks usually avoid the term safe-custody’ preferring to use the term ‘safe-
deposit’.

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Under Ethiopian law, a contract of hire of a safe is defined as a contract whereby a bank agrees
to place at the disposal of the hirer a safe or a compartment of a safe for a specified period of
time on payment of a rent. The bank under this transaction has the duty to prepare a room where
the safes are to be kept called a strong room and prepare safes for the hirer, and take the
necessary measures to ensure the up keep and safe custody of safes. However, the bank is under
no obligation for the deterioration or damage of the contents of the safe. A person may hire a
safe in a bank to deposit valuables such as gold, silver, diamond (jewelries), important
documents such as title deeds, insurance policies, wills, inventions and works of art. However,
the hirer may not deposit things that are dangerous by themselves such as explosives,
inflammable things, narcotic drugs, guns and legal tender currency, which is supposed to
circulate, or deposited through contracts of deposit of funds and not in hired safe, as this puts the
money out of beneficial use. Violation of this prohibition is a ground for the cancellation of the
contract by the bank. /Art 922/

In addition to making sure that the safe and the strong room are not endangered by fire, water or
breach by unauthorized third parties, the bank must give immediate notice of the danger to hirers
and enable them to empty the content of their safes before the risk materializes. The bank has
this obligation even where the danger occurs outside working days and hours of business.
However, the bank is not required to give individual notices to each hirer. The bank may notify
the hirers by means such as local radio or TV stations or through public announcements. /Art
920/
The bank has also the obligation to allow the hirer or his agent to have access to the safe by
providing him with keys and identification cards during working days and of hours of business. /
Art 921/.The obligation of the hirer on the other hand is the obligation to pay the rent on time
and return the keys to the safe by emptying the contents of the safe upon termination or
cancellation of the contract. /Arts 919 and 923/1//
The contract of hire of a safe shall terminate as of right where the hirer fails to pay a rent within
a period of one month from the date of notice by registered letter given by the bank. Where the
hirer fails to pay a rent for a single term, the bank demands payment by a registered letter. The
contract shall terminate as of right where the hirer fails to pay the rent within a period of one
month from the date when the bank gave the notice, and the bank shall take possession of the

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safe at the end of the period of notice by calling the hirer to be present on the date and time fixed.
Where the hirer fails to appear on the fixed date and time or refuses to return the key and give up
his safe by removing his deposits, the safe shall be forced open in the presence of a court official
who shall draw up a descriptive report of the contents of the safe which shall constitute
conclusive evidence as regards all interested parties. /Art 923/2//
7.2.4. Contract of current accounts
“A contract of a current account is a contract whereby named correspondents agree to enter in an
account, by reciprocal and simultaneous remittances, debts arising out of transaction between
them and thus 'to substitute for individual and successive settlements of these transaction a single
settlement to be carried to the sole balance of, the account at its closure” article (925(1) of
com.code). However, if the parties agree to remits one corresponding party after the withdrawal
of other, then their agreement is not governed by the contract of current account. All debts
arising out of the business relations between the correspondents and which are not guaranteed.
by security by operation of law or under agreement are the subject of remittances into current
account, unless it ,has been agreed that certain of them shall be excluded by general or particular
stipulations. Debts guaranteed by security under agreement, accorded by one. Correspondent or
by a third party, may be entered in current account under a special and formal agreement
between the interested parties.

The contract of current accounts may be formulated for limited period or unlimited period of
time. A current account which has been opened without specifying its duration may be closed at
any time Ii£ a correspondent so desire, subject to the time limits for notice provided, customarily.
When the current account has opened for a limited period shall close at the expiry of the term or
easier by agreement between the correspondents. In addition, a current account shall be closed in
any event by the death of one or other of the correspondents or by his becoming legally
incapable or bankrupt.

The closure of a current account converts the statements at the date of closure in to a balance and
this balance is thereupon at call unless the correspondents have otherwise agreed or certain
transactions giving rise to remittances and not completed are of such nature as to modify the
balance.

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7.2.5. Discount
Discount is a contract whereby a bank agrees to pay to a holder of a commercial instrument or
security having a future date of payment an amount which is lesser than its actual value, against
the surrender of the instrument and the undertaking to repay the value of the instrument by the
holder where payment is not made at the maturity of the instrument. A bank discounts a
commercial instrument for consideration, which is the difference between the value of the
instrument and the discounted amount paid by the bank to the holder. /Art 941. /. On the other
hand, a holder of a commercial instrument agrees to receive an amount which is lesser than the
actual value of the instrument in most cases because he needs the money for immediate uses and
his rights in the instrument do not mature until a distant future date and he cannot get the money
he needs from other sources and the need does not allow him waiting until that date.
The amount of commission and interest charged by the bank which discounts the instrument
shall be calculated by taking into account the time remaining until maturity of the instrument and
the value of the instrument respectively. /Art 941/2/ and 942/
The bank, which discounts a commercial instrument or a security, shall acquire all the rights of
the beneficiary of discount on the instrument including the right to demand payment from the
person or persons who are liable on the instrument. In addition, where the bank receives the full
value of the instrument at maturity, the obligations arising out of discount shall be extinguished.
However, if the bank is not successful in its claim for payment at maturity, it will have two
alternative remedies, Art 944(1).
- It may proceed against parties liable on the instrument under Art 790 of the
commercial code, or the company which issued the share or bond, or
- It may proceed against the beneficiary of the discount on the of basis the contract of
discount (Art 941(1) and 943).

However, the right of the bank is limited to the amount of money it has paid to the beneficiary
plus commission, interest and expenses (944(2)).

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7.2.6. Credit transactions
Bank lending or credit services provided by banks are one of the most common and traditional
functions of banks which, if properly used, may play a vital role in a country's economic
development.
Art 2471 of the Civil Code, which also applies to loans provided by banks, defines a contract of
loan of money or other fungible things as a contract where by a party called the lender, under
stakes to deliver to the other party, the borrower, a certain amount of money or other fungible
things and to transfer to him the ownership thereof on the condition that the borrower will return
to him as much of the same amount and quality.
Contracts of loan of money or other fungible things are not subject to special form and may be
made in any manner. However, the contract or the repayment of loan of money exceeding five
hundred Birr has to be proven by producing documents such as receipts, accounts, registers and
so on. It may also be proven by confession of either party as to the existence of the contract of
loan or its repayment, or the oath taken in court by either party. Art 2472. However, where the
contract of loan is concluded between a bank and its customers, the contract of loan or its
repayment may be proven even by witnesses or presumptions /compare Art 2020-26 of the civil
code/. As we have seen in the definition of contracts of loan, loans under ordinary circumstances
are given by the lender by way of delivering the agreed amount of money at once. However,
under special circumstances the loan may also be given by allowing the customer of the bank to
overdraw his account up to the agreed amount for purposes of conducting his business. This type
of loan is given usually for traders as means of payment of their obligations. / Art 945. / An open
credit or overdraft loan may be given for limited or unlimited period of time, i.e. the bank may
allow the customer to over draw his account for a period of one year, for instance, and the
customer is expected to have the amount put at his disposal by the bank plus interest by the end
of the period. The bank has the right to cancel contracts of loan made for unlimited period at any
time. Similarly, the bank may also cancel the contract on the death, incapacity of the beneficiary,
or suspension of payment even where it is not established by a judgment of a court or because of
his gross negligence in the use of credit granted. /Art 946/
All types of bank loans are given following certain procedures:
The bank under all cases must assess the credit-worthiness of the customer by studying the
business and financial position of the customer, his credit history and finally by requiring a

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security or collateral in the form of mortgage or pledge. A bank may require a potential borrower
to mortgage a building, a motor vehicle, a business or his right to use urban land acquired by
lease if the amount of guarantee does not exceed the lease price paid by the holder.

A bank may also provide loan against pledge of chattels of various types or pledge of incorporeal
things particular claims, and securities documents of title to goods such as bills of lading,
warehouse goods deposit certificates.
Documentary Credits
A documentary credit is a credit provided to persons engaged in foreign trade particularly
importers who need to pay the price of goods in foreign exchange. This type of credit is required
because it is only banks which are allowed to handle and deal in foreign exchange and importers
are required to pay the price of goods imported from abroad through opening letters of credits.
So an importer who intends to import goods into the country has to apply to a bank to open a
letter of credit in which the seller of the goods is the beneficiary. Where the bank accepts the
application of the importer, it opens the letter of credit equivalent to price of the goods and
transmits or communicates it to its branch (if it has a branch at the place where the seller is
situated) or to a bank with which it has a correspondence. The correspondent bank, which has
received the letter of credit, shall notify the seller/beneficiary of the credit. And the
correspondent bank shall pay the price of the goods to the beneficiary of the credit after receiving
documents representing the goods such as an invoice, a bill of lading, a packing list and an
insurance policy covering risks associated with transportation (Where according to the contract
of sale insurance is the obligation of the seller) and after confirming that the documents
presented by the seller confirm with terms and conditions of the credit. The payment may also be
made to third parties such as holders of bills of exchange to whom the right to receive the part or
the whole of value of the letter of credit is transferred /Art 965,966. /

The correspondent bank which has paid the agreed amount to the seller or third parties to whom
the right to receive payment is transferred, shall send the documents it has received from the
seller to the opening bank and the opening bank will hand over these documents to the importer
after receiving the amount equivalent, in Ethiopian Birr, to the amount paid to the seller, interest
and service charge (commission) for the service provided. In the absence of a contrary

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agreement, the bank is entitled to the hold and dispose of the goods imported (represented by the
documents at its hand) and recover the amount of money it or its correspondent has paid plus
interest and service charge or commission. /Art 959/
Art 961 recognizes two types of document credits:
- Revocable credits, which credits do not constitute a binding agreement between the opening
bank and the beneficiary. Hence, it may be modified or cancelled by the opening bank at any
time by a notice communicated to the correspondent bank prior to payment or negotiation, or the
acceptance bills there under by the latter. A documentary credit is presumed to be revocable in
the absence of a provision that clearly specifies that it is irrevocable. / Art 962,961. /
And,
-Irrevocable credits: are credits, which, on the other hand, represent a definite undertaking
between the opening bank and the seller/beneficiary or good faith holders of bills of exchange,
drawn by the beneficiary. Hence, the bank is obliged to pay the money specified in the credit. /
Art 963. / This type of letter of credit may also be confirmed by the correspondent bank upon the
request of the opening bank, and where irrevocable letters are confirmed by the correspondent
bank / confirming bank/, a binding relation will be created between the beneficiary of the credit
and the correspondent bank and the latter will be liable on the letter of credit. /Art 964 /.

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