Law of Contract 1

Obligations in General

  • Introduction

    • This chapter introduces basic notions of obligations and contracts.
    • It will cover the concept of obligations, sources, types, meaning of contracts, historical development, and economic analysis.

  • The Concept of Obligation

    • Traces back to ancient Roman law.
    • Defined as a legally binding relationship where one party promises to perform some act.
    • Roman jurist Gay defined obligation as a means of personal claim to enforce rights, classifying it in terms of contract, quasi-contract, delict, and quasi-delict.
    • Pavel understood obligation as an undertaking to perform acts or render rights to non-Roman citizens, which was unilateral and discriminatory.
    • Justinian defined obligation as legally binding relations when Roman citizens undertake to perform acts in accordance with Roman law.
    • In general, obligation to:
      • Give or not to give
      • Do or not to do
      • Render rights to others to do something

  • Definition of Obligations

    • Black’s Law Dictionary: a legal or moral duty to do or not to do something.
    • Fredrick Pollock: synonym for duty.
    • Roman laws: ‘an obligation is the bond of legal necessity or vinculum juris which binds together two or more determinate individuals’.
    • John Salmond: something the law or morals command a person to do, enforced by sanction.
    • Modern legal systems lack a single definition.
    • French judges define it as a legally binding relation where a party must give, do, or not do something.
    • Ethiopian Civil Code uses the term without defining it, similar to French judges interpreting from the definition of a contract.

  • Sources of Obligations

    • Gay: Contract and beyond the contract (unjust enrichment, unlawful acts, physical injury/property damage).
    • French Civil Code:
      • Contract
      • Beyond the contract
      • Unlawful acts
      • Physical injury/material damage
      • Law
    • Ethiopian Legal System:
      • Art. 1675: Contractual agreements.
      • Non-contractual relationships (Art. 2027-2178).
      • Unlawful acts or causing physical injury/material damage (Art. 2027-2161).
      • Unjust enrichment (Art. 2162-2178).
    • Obligations arising from the law:
      • Unilateral obligations imposed on citizens without their consent.
      • Examples: paying income taxes, rendering military service, obligations of creditors/debtors, obligations of families to their children.

  • Types of Obligations

    • Based on the Nature of Activities:
      • Divisible obligation: Performance can be divided into parts. (e.g., A and B owe C 1,000 BIRR, each paying 500).
      • Indivisible obligations: Performance cannot be divided. Hence, partial performance is impossible.
      • Positive obligation: Obligation to do or to give something.
      • Negative obligation: Obligation not to do something (refrain from doing something). Example: company A agrees with company B not to produce or sell certain goods in the same market.
    • Based on the number of parties legally bound:
      • Unilateral obligation: Only one party is legally bound. Example: donations.
      • Bilateral obligation: Both parties are legally bound on equal terms.
      • Multilateral obligation: More than two persons undertake to perform an obligation.
        • Simple joint obligation: Parties are not jointly liable for the total debts; each debtor is liable for its own share, Art.1917 of the Ethiopian civil code is an exception.
        • Joint obligations: Debtors are jointly liable for the debt.
        • Several and joint obligations: Creditor may require all or one of the debtors to discharge the obligation.

  • The meaning of contract/contract law

    • Contract law relates to agreements or promises.
    • It governs which agreements the law will enforce, obligations imposed, and remedies available for non-performance.
    • Contract law is the law based on liability for breach of promises.
    • 'Contract law' also means the whole collection of rules, includes rules not based on a promise (e.g., remedies for fraud).
    • Contract law supports the social institution of exchange but is not as broad as the institution itself.
    • Anglo-American legal systems defines contract as a promises or set of promises for the breach of which the law gives a remedy or the performance of which the law recognizes in some way as a duty.
      • Not all promises create contracts; need specific definitions of a contract and its elements.
      • French civil code (article 1101): agreement to establish, vary, and extinguish rights and obligations.
      • Ethiopian Civil Code (Article 1675): agreement whereby two or more persons create, vary, or extinguish obligation of proprietary nature.

  • The purpose and scope of contract law

    • Concerned with supporting institutions of exchange in the market economy.
    • Purposes include supporting and controlling agreements, empowering parties to make agreements, and enabling exchanges that might otherwise carry too great a risk.
    • Creates smooth functioning of business transactions by creating certainty, predictability, and enforceability.
    • Nineteenth-century courts emphasized freedom of contract, reducing rules controlling contract power.
      • Libertarians suggest the law should enforce any agreement freely made, considering individuals the best judges of their own interest.
      • Others recognize that the market may not operate efficiently in cases of monopoly or lack of understanding.
      • Transformation has taken place and the modern law’s prime concern is with controlling domination and promoting fair exchange and co-operation.
    • The scope varies by country and legal system depending on the types of obligations they govern.
    • Contractual obligations arise from agreements between two or more persons.
    • A contractual obligation implies the existence of an ‘obligor’-the person who is legally under the obligation and the ‘obligee’for whose benefit the obligation exists.
    • Contract law may have general or special application.
    • Article 1676(1) of the Ethiopian civil code stipulated the application or scope of general contract to apply to contracts regardless of the nature thereof and the parties thereto.
    • Contract law may be applicable to extra-contractual obligations, unlawful enrichment obligation and so on.

  • Historical development of contract law

    • Traced back to ancient and classical Roman law.
    • The 19th century saw the rapid expansion of trade and industry.
    • There developed a body of settled rules which reflected and disputes from which they arose and the prevailing belief of the time
    • This rules and belief are affected by the dominant economic philosophy, the so called the laissez-faire individualism.
    • Freedom of contract and equality of bargaining power, were the assumptions.
    • Theoretical foundations led to codifications of contract laws across the world.
    • Over the years, equality of bargaining power had brought certain unnecessary results because parties to a contract do not necessarily have equality.
    • Minimum conditions for enforceable employment contracts.

  • The Economic Analysis of Contract Law

    • Provides a new paradigm into contract law in terms of both defining the concept and the economic function of contract & contract law.
    • If markets operate, resources gravitate to their most valuable uses, increasing societal wealth.
    • Individuals are rational maximizers of their own self-interests.
    • Basic economic function of contract law is to provide sanction for breach of promises.
    • A non- instantaneous or extended exchange creates uncertainty with regard to the conditions under which performance will occur exposing the parties to the risk.
    • An important function of contract law to enforce the parties’ agreed upon allocation of risk.

Formation of Contracts

  • Introduction

    • Consent is a declaration of intention to be bound by an obligation.
    • John Locke’s theory of social contract and Adam Smith’s laissez-faire gave political and economic justification for individual autonomy.
    • Through consent, an individual can determine his own fate (freedom of contract).
    • In contract, a person should know the obligation he is going to carryout and the benefit he is going to get / or lose.
    • Parties have to know means they have to define their obligations and agree to be bound.
    • It is impossible to claim that he has agreed unless a person clearly knows what rights and obligation are to be created, varied, or extinguish.
    • Unless a person clearly knows what rights and obligation are to be created, varied, or extinguish it is impossible to claim that he has agreed.

  • Non-Binding Agreements

    • Domestic or social agreements are not usually intended to be binding.
    • A binding contract is usually in the nature of a commercial bargain, involving some exchange of goods or service for a price.
    • Commercial agreements rebuttably presumed intent to create a contract.
    • Social, domestic, or family agreements rebuttably presumed no intent to create a contract.
    • The phrase “…agrees to be bound thereby…” in Art. 1679 implies the parties’ intention to take any controversies in relation to obligation to court thereby allowing the court to interfere in their relation.

  • Meeting of Mind (Art.1680)

    • Contract occurs when the minds of the offeror and offeree meet upon common object of the contract (consensus ad idem).
    • Meeting of mind is inferred from the objective appearance of offer and acceptance.
    • Parties are to be judged not by what is in their mind but by what they have said, written or done.
    • The law enforces the intention of the parties, protects the parties’ reasonable expectation.

  • Formation of contact involves the criteria that the state uses in order to determine whether or not it has to execute agreements of persons between themselves.

  • All contract involve the element of capacity, consent and object.

  • Capacity

    • Although human beings are subject to rights and duties from the moment of birth, to death some may not be entitled to exercise such rights and duties.
    • Minors and judicially interdicted persons cannot enter into a contract.

  • Consent (Art.1679-1710) 2.2.1 Communication of Consent (Art. 1681)

    • Consent is expressed either in the form of offer or acceptance.
    • Offer and acceptance are ways of communicating one’s own intention to be bound by an obligation.
    • These ways of communication are oral, written, signal and conduct.

  • Offer

    • Offer is laying down contents of would be contract i.e. indicating the respective obligation of each would be parties to the contract.
    • Offer contains three important elements , the content of the contract, the agreement of an offeror to be bound and request of the offeror to the offeree to be bound by the offer.
    • The person making the offer is called offeror.
    • Written declaration of offer is when all the elements of offer are reduced in writing on a paper or electronics and delivered to the offeree.
    • Oral commutation of an offer is when the offeror uses voice to tell to the offeree the contents of the offer and the offeree uses hearing (ears) to know what the offeror is communicating to him.
    • Signal communication is of two types: gesture and object placed to give information.
    • Communication of offer by conduct is when the offeror performs partly or wholly the obligation that he will perform if the contract is entered into.
    • In principle, an offer is binding on the offeror only if it is addressed to a specified person (Art 1687- 1688).
    • Non-Binding Declarations
      • Non-binding declarations include declarations of intent not made known to beneficiaries or advertisements.
      • Sending price lists or tariffs is not an offer.
      • Posting up price list/tariff and catalogue in a public place.
      • Display of goods for sale to the public

  • Sale by Auction (Art.1688)

  • Public Promise of Reward (Art 1689)

    • As stated above, a declaration of intention to be bound by specified obligation becomes an offer only if it is addressed to an identified person. An exception to this principle is public promise of reward.

  • Effects of Offer (Art.1690, 1691, 1693(1), 2055)

    • Binding from moment offeree knows it.
    • Cannot be changed by offeror for unjustified reason.
    • Offeror liable for material damage on offeree if offer is changed partially or totally.
    • Offer can be change or withdrawn before reaches.
    • It to be binding at earliest from the moment the offeree knew its content.
    • How Long does the Offer Bind ?
      • Offer binding for reasonable period (Art 1691).
      • Terminates upon offeree’s rejection (Art 1690(2).
    • Rejection of an offer is, either making modification to the content of the offer sending a “no” answer to the offeror.
      Therefore no logic for offeror to wait for an expiry of reasonable period once the offeree rejects the offer.

  • Acceptance (Art 1681-1685, 1689(1), 1694) (1893(3)

    • Declaration of intention to be bound by each content.
    • Any modification is rejection and alternative offer (Art.1694).

  • How Acceptance is Made

    • Can be made in writing, oral, sign, or conduct.
    • Signal communication usually requires the physical presence of both the offeror and the offeree at the same time and at the same place.

  • Duty to Respond (Art. 1682 -1685)

    • No duty to respond; silence not acceptance (Art. 1682).
    • Exceptions where offeree has duty to respond:
      • Duty to accept:- a law or contract may impose on the offeree the obligation to
    • Private Business Enterprises may also have a contractual relation with state agency to supply certain goods or provide services to the public.
    • Preexisting Contractual Relation.

  • Effect of Acceptance

    • General, it can be inferred from Art 1679 and 1693(2) that once an offer is accepted the offeree is bound by his word.
    • Art 1692(1) of the code has answer for this. It provides that acceptance becomes effective from the moment the offeree sends it to the offeror.

  • General Terms of Business

    • No party can be assumed to be bound by general terms of business which he did not agree to be bound with (Art 1685).

  • Negotiation vs. Consent (Art.1695)

    • Discussions for shaping content of contract; proposals not binding (Art 1695 (1)).

  • Defect in Consent (Art 1696 – 1710)

    • Either wrong information (mistake, false statement, fraud) or threat (duress, reverential fear, threat to exercise rights) or lesion.

  • Defect of Consent due to Wrong Information

    • Mistake, fraud, and false statements may lead an offeror or offeree to have wrong knowledge about the content of the contract.

  • Mistake (Art 1996- 1703)

    • Party misunderstands content of contract or identity of other party.
    • Mistake must be fundamental and decisive.
      Good Faith of Mistaken Party (Art.1702) / Reparation (Art.1703)
      Recommendation This writer proposes that Art 1697, 1698 and 1701 be deleted so that the meaning of Art. 1699 & 1700 would be clear. The above three articles over shadows the message of Art 1699 & 1700. Moreover talking about arithmetic mistake is misleading.

  • Fraud (Art 1704)

    • Intentional act of preparing false information or changing or modifying the content of the subject matter of the contract in a manner that cannot be noticeable by ordinary observation.
    • The fraud committed by the party to the contract or he knew or should have known the fraud or derived undue benefit.

  • False statement (Art 1705)

    • is untrue statement made knowingly (intentionally) or with out give being indifferent whether it be true or false (reckless) or negligently
      a. There is a special relationship between the liar contracting party and the mistaken party.
      This is in line that any person is free lie as much as possible unless that violates his morality or religious

    But if there is a third party for the action. The law recognizes with relation, this contract with false statement can be ground for validation of contract where
    B. Such special relation ship led the mistaken party to believe the statements of the other party. False statement made by third party to the contract can not be the cause of invalidation of contract.

  • Defect in Consent due to Threat (Art.1706-1709)

    • Duress (Art.1706 1707). / Duress by third Party (Art.1707)
      B. A Threat to Exercise a Right (Art 1708)
      c. Reverential fear (Art 1709)

  • Defect in Consent Due to Lesion (Art 1710)